Productivity and International Trade: Firm Level Evidence from a Small Open Economy

This paper presents a comprehensive description and analysis of the international trading activities of firms based on novel and detailed Swedish data. We provide robust evidence of selection operating from market to market which is consistent with that low productive firms are confined to markets with low productivity thresholds. We further show that selection also applies to the number of products traded. There is a substantial heterogeneity among exporters and importers in terms of the number of markets they trade with and in terms of the number of products they trade. Productivity premiums increase in the number of markets and the number of products traded, respectively. Firms that both export and import (i.e. two-way traders) are more productive than firms that only export or only import. This finding can be explained by that two-way traders are deeply engaged in the international division of labor and employ inputs based on frontier knowledge and technology in their production process, which increase their productivity and success on export markets.