Testing the linkages between trade and productivity growth

We examine the effect of trade on productivity growth using data from nine
manufacturing industries across twelve OECD countries over the period 1978-1997.
Since causality between productivity growth and trade share runs both ways,
geographical characteristics of countries are used to instrument for average bilateral
trade volumes over the 20-year period. In addition, to exploit the time-series nature
of the data, we construct a panel data set and employ dynamic panel data
techniques. After controlling for industry-specific heterogeneity, our results indicate
that increased exposure to trade, in particular higher import volumes, exerts a
positive influence on industries’ productivity growth. However, the effect is rather
small.