Maria Bas
email: bas@pse.ens.fr.

Philippe Aghion

Karolina Ekholm

Hugo Hopenhayn

Thierry Mayer

Nina Pavcnik

Xavier Ragot

James R Tybout

Thierry Verdier

Juan Carluccio

Gregory Corcos

Ivan Ledezma

Trade, technology adoption and wage inequalities: theory and evidence

Keywords: F10, F12, F41 firm heterogeneity, trade reforms, technology adoption, skill premium, plant panel data Firm heterogeneity, trade reforms, technology adoption, skill premium, plant panel data. JEL Classication: F10, F12 and F41

This paper develops a model of trade that features heterogeneous rms, technology choice and dierent types of skilled labor in a general equilibrium framework. Its main contribution is to explain the impact of trade integration on technology adoption and wage inequalities. It also provides empirical evidence to support the model's main assumption and predictions using plant-level panel data from Chile's manufacturing sector (1990-1999). The theoretical framework oers a possible explanation of the puzzling increase in skill premium in the developing countries. The key mechanism is found in the eects of trade policy on the number of new rms upgrading technology and on the skill-intensity of labor. Trade liberalization pushes up export revenues, raising the probability that the most productive exporters will upgrade their technology. These rms then increase their relative demand for skilled labor, thereby raising inequalities.

1 Introduction his pper onsiders numer of oservtions desried in the empiril literture on interntionl trdeD nmelyX @IA gloliztionY @PA rms in the sme industry re heterogeneousY @QA the inrese in wge inequlities in unskilled lorEintensive ountriesY nd @RA foreign tehnology trnsfers to developing ountriesF rde lierliztion took ple in most developing ountries in the IWVHs nd the erly IWWHsF his proess enompssed the redution of unilterl import tris nd nonEtri rriers nd the development of ilterl nd multilterl trde greements mong ountries in the sme regionF everl empiril studies onrm the existene of heterogeneous hrteristis mong rms in the sme industryF hey demonstrte tht exporters re more produtiveD lrgerD more intensive in skilled lor nd more pitlEintensive thn rms selling only to the domesti mrketF oerts nd yout @IWWUAD gleridesD vh nd yout @IWWVAD fernrd nd tensen @IWWSD IWWWD PHHRAD fernrd nd gner @IWWVAD ullivn @IWWUAD ewD ghung nd oerts @PHHHAD nd ury @PHHPA ll nd tht exporters perform etter thn nonEexportersF here is lso empiril evidene of growing wge inequlities etween skilled nd unskilled lor due to higher proportion of skilled workers within industries following trde reforms in unskilled lorE intensive developing ountriesF e redution in import tris rings down the reltive prie of imported intermedite nd pitl goodsD rising the reltive demnd for skilled lor I F he seond explntion fouses on how foreign ompetition impts on nl goodsF rde lierliztion inreses the numer of foreign ompetitors nd enourges domesti rms to dopt high tehnology or ondut skillEised tehnologil hnge P F his pper9s min ontriution to the existing literture is to investigte trdeEindued tehnologE il hnge in generl equilirium frmework of heterogeneous rmsF e xed tehnology doption ost nd oth skilled nd unskilled lor re introdued into model of monopolisti ompetition nd heterogeneous rms to explin the eets of trde on tehnology hoie nd wge inequlitiesF he mehnisms y whih trde poliy ets the reltive demnd for skilled lor nd skill premium hve een lrgely studiedF wo types of rguments n e identiedD depending on whether they fous minly on the eets of interntionl trde or on tehnologil hngeF fernrdD edding nd hott @fA @PHHTA developed twoEsetor model using the reksherEyhlinE muelson frmework nd introduing heterogeneous rms in eh setorF he min dierene with our frmework is tht we fous on the reltionship etween trdeD tehnology hoie nd wge inequlitiesF he key mehnism explining the rise in wge inequlities in our model is sed on the existene of xed skillEised tehnology ostF sn this modelD the level of skill intensity required y rms is determined y their endogenous deision to upgrde tehnologyD while the level of skill intensity in the f model is 1 Gasparini and Acosta (2002) and Bustos (2005) on Argentina, Sanchez-Paramo and Schady (2003) on Argentina, Chile, Colombia and Mexico, Verhoogen (2006) on Mexico and Muendler et al. (2003) on Brazil all nd evidence of a positive correlation between skill premium and foreign technology acquisition in all sectors following trade liberalization.

2 Behrman, Birdsall and Szekely (2000) on 18 Latin American countries, Thoenig and Verdier (2003) on France, Attanasio, Goldberg and Pavnick (2004) on Colombia, Muendler et al. (2003) on Brazil all nd evidence supporting this argument. P exogenously determined Q F he seond type of rgument is sed on skillEised tehnologil hnge @fgAF hese models hve een developed minly y eemoglu @PHHQA nd hoenig nd erdier @PHHQAF snterntionl trde prompts innovtion nd fgD therey rising the reltive demnd for skilled lor nd hene the skill premiumF he model presented in this pper fouses on dierent nd omplementry hnnel sed on tehnology doption to explin the reltion etween trde lierliztion nd wge inequlitiesF ome theoretil studies link oth rgumentsX trdeEindued skillEised tehnologil hngeF ikholm nd widelfrt @PHHSA explore the impt of trde lierliztion on reltive returns to skilled nd unskilled lorF rde openness inreses the mrket ess of rmsD reting inentives to upgrde skillEintensive tehnology nd rising the skill premiumF o investigte the eets of trde on tehnology hoieD our model introdues rms tht re heterogeneous in terms of their produtivity ginsF he model developed in this pper is lso losely relted to eple @PHHSAD who develops trde model of homogeneous rms nd heterogeneous skillsF sn eple9s modelD rm heterogeneity is n endogenous result of the distriution of skilled workers nd tehnology hoieF rde redues the reltive xed osts of high tehnology nd thus inreses the shre of skilled lor nd the skill premiumF nlike eple @PHHSAD the rms in our model re heterogeneous even efore they strt produing nd eh rm employs oth skilled nd unskilled workersF rde lierliztion enourges tehnology doption in unskilledEintensive setorsD therey rising their skilled lor demndF enother importnt deprture from eple9s model is tht we tke into ount the eets of the skill premium on rm9s deisionsF fustos @PHHSA expnds on welitz @PHHQA nd eple @PHHSA to explin the skill upgrding prompted y tehnology doption tht follows the implementtion of trde reforms in developing ountriesF sing ergentinen rm level dtD she nds empiril evidene supporting the rgument of trdeEindued skillE ised tehnologil hngeF sn the theoretil frmeworkD fustos onsiders neither the rm9s entryEexit proess nor the rellotion of resoures mong rms or the impt of reltive wges on prie indexes nd other ggregte vrilesF gonverselyD s develop generl equilirium model tht onsiders the impt of the skill premium on ggregte vriles nd on the seletion proess into the domesti nd foreign mrketsF sn order to hrterize the dierenes etween rms in the sme industryD we introdue rm heteroE geneity in keeping with welitz @PHHQAF roweverD his model is sed on the ssumption of homogeneous lorF he introdution of dierent types of skilled lor nd skillEintensity dierenes etween rms enles us to explin the eets of trde integrtion on the skill premiumF e introdue two soures of rossEplnt produtivity vritionF he rst is n exogenous riksEneutrl produtivity ftorD whih is drwn from ontinuous distriutionF he seond is n endogenous skilledElorEugmenting produtivE ity ftorD whih is inryF he highEprodutivity vlue of this ftor is ville to rms tht re willing to py xed tehnology doption ostF rde lierliztion hnges the sope for prots in the domesti nd foreign mrketsF he redution 3 Some studies focus on outsourcing as the main mechanism explaining the rise in skill premium in industrialized and developing countries. See Feenstra and Hanson (1999, 2000). Q of vrile trde osts mkes low produtivity rms worse o nd high produtivity rms etter oD s shown y welitz9s model @4seletion eet4AF pollowing the implementtion of trde reformsD the inrese in export revenues rises the proility tht the most produtive low tehnology exporters will upgrde their tehnologyF hese rms inrese their reltive demnd for skilled lorD therey rising the skill premiumF he ltter eet is eneil to lowEtehnology rms ompred with highEtehnology rmsF ine the inrese in the skill premium is seond order eetD the 4net eet4 of redutions in trde fritions on oth the extensive mrgin of trde nd the extensive mrgin of tehnology is positiveF vstlyD we provide empiril evidene in support of the theoretil model9s min ssumption nd preditions sed on plnt level pnel dt from ghile9s mnufturing setor for the period IWWHEIWWWF e rst estimte trnslog ost funtion to test the ssumption of skillEised tehnologyF e then test the preditionsX @IA whether trde ost redution enourges exporters to upgrde their tehnology nd @PA whether these exporters hve higher reltive demnd for skilled lor following trde lierliztionF his is done using spei dt on export rriers t industry levelF he rest of the pper is strutured s followsF etion P shows how the model is set upF etion Q presents the min theoretil ndingsF etion R presents the empiril estimtionsF etion S ontins the onlusionF 2 Setup of the model

2.1

Closed economy equilibrium

Households Consumption

he representtive household llotes onsumption from mong the rnge of domesti goods @jA produed using low tehnology @ l A nd those produed using more dvned nd skillEised tehnology @ h AF he stndrd gi utility funtion @gA represents the onsumer preferenesF he elstiity of sustitution etween low nd high tehnology goods is > IX C a here is ontinuum of rmsD eh produing dierent rnge of goodsD in monopolisti ompetitionF rodution requires two dierent types of lorX unskilled @l i A nd skilled @h i A inelstilly suppliedF reterogeneous rms with dierent produtivity levels @'A re introduedD in keeping with welitz @PHHQAF e dopt gi prodution tehnology tht omines skilled nd unskilled lor to produe outputF Y i a ' @@a h h i A C @l i A A 1 i a fl; hg a h a fI; sg s > I @PFeA R he susript 4l4 represents rms produing with low tehnology nd 4h4 those using high tehnologyF he oeient 4a h 4 represents the eieny of high tehnologyD orresponding to skilled lorF he elstiity of sustitution etween the two types of lor is a I I : e ssume tht skilled nd unskilled lor re imperfet sustitutesD hene H < < I nd I IF here re three types of xed osts in losed eonomyX @IA xed sunk entry ost @f E AD tht rms hve to py to enter the mrket @eFgF osts to develop lueprintAY @PA xed perEperiod ost @fA tht ll rms inurD suh s tht ssoited with investment in lol distriutionY nd @QA xed perE period tehnology doption ost @f t AD whih represents investment in new nd more dvned skillEised tehnologyF o mke the model trtleD ll xed osts re mesured in units of imported pitl nd their prie is normlized to oneF wo groups of domesti rms n e identied in losed eonomy equiliriumX @IA low produtivity rms without enough prots to ssume the xed tehnology osts @N l AY nd @PA the most produtive rmsD whih hve quired new tehnology @N h AF he rstEorder ondition of monopolisti rms is suh tht pries reet onstnt mrkEup over mrginl ostF sn this modelD mrginl osts n e divided into n intrinsi produtivity term @'A nd the unit ost of prodution @c l or c h AD whih reets the rtio of skilled @w h A to unskilled @w l A wges pid y the rmF Low technology rms (N l )

High technology rms (N h ) @QFeA p l a

I c l 'i p h a I c h 'i @RFeA c l a @w l A 1 C @w h A 1 1 c h a @w l A 1 C w h a h 1 1 @SFeA r l a P p l I R r h a P p h I R r l a r h c h c l I r h a r l c h c l I @TFeA l a p l Y l w l l l w h h l f h a p h Y h w l l h w h h h f f t l a r l f Goods Market Equilibrium @UFeA Y i a C i
for i a fl; hg righEtehnology rms hve to py xed tehnology doption ost @f t AD ut hve lower mrginl ost sine skill eieny 4a h > I4 redues the unit ost @c h AF xote tht 4a h 4 is not heterogeneousD sine ll rms tht upgrde their tehnology redue their unit ost y the sme proportionF iven if two rms hve the sme produtivity levelD the revenues of the rm using the more dvned tehnology re higher thn those of the lowEtehnology rm @c l > c h A r l < r h AF reneD rms tht deide to upgrde tehnology inrese their revenues y c h c l I F ytherwiseD the rm employs low tehnologyD where a h a IF he introdution of heterogeneous rms in terms of produtivity levels determines the endogenous tehnologil sttus of the rmsF ynly the most produtive rms n swith to high tehnology nd eome even more eientF he term c h c l represents the reltive unit ost of skilled lor nd is determined y oth the skill premium !@ w h w l A nd skill eieny 4a h 4F his reltive skilled lor unit ost is n inresing funtion of the skill premium @ c h c l @! > H sine H < < I @ee eppendix IAF

c h c l a @!A 1 CI @!A 1 C@a h A 1 1 @VFeA S 2.4
Firm's decisions 2.4.1 The decision to exit or stay and produce pirms hve to py sunk entry ost to enter the mrket efore they know wht their produtivity level will eF intrnts then derive their produtivity 4'4 from ommon distriution density g@'A; with support H; I nd umultive distriution G@A R F ine there is xed prodution ost @fAD only those rms with enough prots to py this ost n produeF he prots of the mrginl rm tht deides to sty nd produe re equl to zeroX l @' £ l A a HF he vlue 4' £ l 4 is the produtivity uto to produeF

r l @' £ l A a f A ' £ I l a f c I l © @WFeA here © a P I R I I 2.4.2
The decision to adopt high technology sf rm deides to sty in the mrket one it hs reeived its produtivity drwD it my lso deide to upgrde its tehnology to redue its unit osts on the sis of its protilityF ynly suset of the most produtive rms will swith to high tehnology sine the xed tehnology ost is higher thn the xed prodution ostF he rms tht do will e those whose inrese in domesti revenues due to their doption of high tehnology enles them to py the xed tehnology ostsF he ondition to quire the new nd more dvned tehnology is given yX

h @' £ h A a l @' £ h A r h @' £ h A r l @' £ h A a f t A ' £ I h a ft c 1 h c 1 l © @IHFeA
he produtivity uto for tehnology upgrding is represented y 4' £ h 4F his vlue is the minimum produtivity level for the mrginl rm le to dopt high tehnologyF fy omining eqution @WFeA with @IHFeAD we otin ' £ h s n impliit funtion of

' £ l F ' £ h ' £ l I A ' £ h a ' £ l ft f 1 1 c h c l I I ! 1 1 @IIFeA BBB o ensure tht ' £ h > ' £
l D we hve to ssume tht the mortized vlue of the xed tehnology ost is muh higher thn the xed prodution ostF he prtitioning ondition tht sustins the losed eonomy equilirium is writtenX ft

c h c l 1 I > f @II9FeA F 2.
5 Aggregation he distriution of the produtivity levels of lowE nd highEtehnology rms is represented y l @'A nd h @'AD respetivelyF hereforeD l @'A is the onditionl distriution of g@'A on ' £ l ; ' £ h while h @'A is the onditionl distriution of g@'A on ' £ h ; IA : l @'A a g@'A G@' £ h A G@' £ l A if ' £ l < ' i < ' £ h @IPFeA Y h @'A a g@'A I G@' £ h A if ' i > ' £ h @IQFeA 4 These functions are dened in the following section.

T here I G@' £ l A nd I G@' £ h A represent the exEnte proility of suessful entry nd the exE nte proility of hving produtivity drw higher thn' £ h : hese distriutions dene the weighted verges of the rms9 produtivity levels s funtions of the utosF e ' l I I G@' £ h A G@' £ l A ' £ h ' £ l @'A I g@'Ad' @IRFeAY f ' h I I I G@' £ h A I ' £ h @'A I g@'Ad' @ISFeA f ' h represents the exEnte weighted verge produtivity level of highEtehnology rms efore they deide to dopt the tehnologyF he exEpost produtivity verge of highEtehnology rms hs to tke into ount the inrese in the rms9 eieny due to the quisition of the more dvned tehnology tht llows them to redue their unit osts nd rise their mrket shres y this term c h c l I sine r h @f ' h A a r l @f ' h A c h c l I : hereforeD the weighted verge produtivity index of the eonomy @f ' T A represents the mrket shres of ll the rmsF he lowE nd highEtehnology verge produtivity levels nd the ggregte produtivity index dene ll the ggregte vriles @see eppendix

IAF f ' T I a I N N l @ e ' l A I C N h c h c l I @f ' h A I ! @ITFeA 2.6
Labor Market Equilibrium and the Skill Premium foth skilled nd unskilled lor re ssumed to e perfetly moile ross rms in ountryF elthough rms hve dierent lor demnds depending on their produtivity levelD ll rms py the sme skilled nd unskilled wgeF his mens tht there is unique skill premium in ountryD whih is determined y the ggregte skilled nd unskilled lor demndsF pirms9 skilled nd unskilled lor demnds re determined y prot mximiztionF fy plugging eqution PFe @prodution funtionA into eqution TFe @prot funtionAD the prot mximiztion proess yields the following reltionship etween skilled lorD unskilled lor nd the skill premiumX hi li a ! 1 1 @a h A 1 for i a fl; hg a h > I ifi a h @IUFeA pirms produing with more dvned skillEised tehnology will hve higher reltive skilled lor demnd thn rms using low tehnologyF sn monopolisti ompetitionD rms ntiipte their nl demndF lugging eqution IUFe into PFe nd then into the goods mrket equilirium eqution @UFeA yields the rms9 skilled nd unskilled lor demnds S F l i a Ci ' c

1 1 i @w l A 1 1 @IV:AA h i a Ci ' c 1 1 i @w h A 1 1 @a h A 1 @IWFeA
here C i is the demnd for good 4i4 produed with low @lA or high @hA tehnologyD nd c i is per unit ostF he overll ntionl demnd for unskilled nd skilled lor is determined y ggregting the rms9 individul demnds @see eppendix IAF L d a ' £ h ' £ l N l l l @'A l @'Ad' C I ' £ h N h l h @'A h @'Ad' @PHFeA 5 By using the price rule given by equation 3.A, inserting 7.A (goods market equilibrium) into 6.A. (prot function), and plugging equation 18.A (labor demands) into 17.A and then into 6.A, we nd that : l = r l f = p l Y l w l l l w h h l f U H d a ' £ h ' £ l N l h l @'A l @'Ad' C I ' £ h N h h h @'A h @'Ad' @PIFeA he skill premium @!A is determined y the equlity etween ggregte reltive skilled lor demnd nd supplyF

H s L s a H d L d A ! a g@ H s L s ; a h ; N l ; N h ; f ' h f ' l A H s L s a ! 1 1 2 IC@a h A 1 N h N l g ' h f ' l 1 A IC N h N l g ' h f ' l 1 A 3 @PPFeA where A a c h c l 2 @!A 1 CI ! a h 1 CI 3 1 2.7
Closed Economy Equilibrium Conditions nlike welitz9s modelD the equilirium produtivity uto level@' £ l A depends on the skill premiumD whih is determined y eqution PPFeF sn this modelD thereforeD the equilirium vlue of ' £ l is determined y three onditionsX the free entry ondition @piAD the zero uto prots ondition @gA nd the lor mrket lering ondition @vwgAF he vlue of ' £ l t equilirium will then pin down the rest of the model9s vrilesF

The Free Entry Condition (FE)X efore entering the mrket nd knowing their produtivity levelD rms lulte the present vlue of verge prot ows to deide whether to enter the domesti mrketF ell rms exept the mrginl rms ern positive protsF reneD verge prot level e is positiveF es in welitz @PHHQAD e v is the present vlue of the verge prot owsX e v a I taH @I A t e ! nd v E is the net vlue of entry given y T X v E a @I G@' £ l AA e v f E a I G@' £ l A e f E F pi sttes tht the vlue of entry is equl to zeroF FE: v E a H A e a f E @I G@' £ l AA @PQFeA

The Zero Cuto Prot Condition (ZCP)X lso determines reltion etween verge prots nd the produtivity level of the mrginl rmF ZCP: e a l l @ e ' l A C h h @f ' h A @PRFeA Assumption 1: Productivity draws are distributed according to a Pareto distribution g @'A a k@'minA k @'A k+1 with a lower bound ' min and a shape parameter k (see Appendix 1)F Proposition 1: Under Assumption 1 and the partitioning condition (eq. 11'.A), there exists a unique equilibrium cuto (' £ l ) determined by ZCP, FE and LMC.

Proof. V Proposition 2: Under Assumption 1 and the partitioning condition (eq. 11'.A), ' £ l is a decreasing function of the skill premium but the aggregate relative skilled labor demand does not depend on ' £ l and therefore the skill premium is independent of this cuto. U @' £ l @ c h c l < HF Proof. See Appendix 1 his implies tht n inrese in the reltive skilled lor unit ost @ c h c l AD due to n inrese in the skill premium @ @ c h c l @! > HAD redues the produtivity utoF reneD n inrese in the skill premium enets the lest produtive unskilledEintensive rmsF his uto @' £ l A then determines the tehnologil uto level @' £ h A using eqution @IIFeAF Proposition 3: Under Assumption 1 and the partitioning condition (eq. 11'.A), the technological cuto (' £ h ) is an increasing function of the relative skilled per unit cost and of the skill premium. An increase in the relative skill per unit cost reduces the number of rms producing with high technology skilled biased: @' £ h @ c h c l > HF Proof. See Appendix 1

The Capital Market ConditionX imported pitl is required to py xed entry osts nd proE dution nd tehnology doption ostsF st is supplied inelstilly y the rest of the world under the ssumption tht pitl mrkets operte independently from lor mrkets V F sts prie is normlized to oneF he pitl mrket lering ondition is

W X K a N l f C N h @f C f t A C N E f E @PSFeA
The Global Accounting conditionXestlishes tht the sum of unskilled nd skilled revenues nd the pitl used to pid xed osts is equl to the ggregte revenue of the eonomy @RAF w h H C w l L C K a R @PTFeA R a Ne r nd e a e r f f t h F he totl numer of rms is otined y using the verge prot to otin verge revenue nd plugging it into this ondition @eqF PTFeAF N a w h HCw l LCK @e CfCft h A @PUFeA 2.8

Open economy gountries re symmetri in the open eonomy equiliriumF eggregte vriles @priesD onsumption nd revenuesA re equivlent in oth ountriesF o there re no dierenes in the nottion of vriles for home nd foreign ountriesF sn n open eonomy equiliriumD there re two dierent ses depending 7 In the general case, the aggregate relative skilled labor demand depends on the average productivities and thereby on the cutos. There is a unique solution (!,' £ l ) determined by the intersection between Free Entry-ZCP condition and the Labor Market Condition. In this case the impact of trade variable costs is ambiguous. Therefore I assume the Pareto distribution to get an analytical solution of the equilibrium cuto.

8 If we assume that xed costs are paid with skilled and unskilled labor, this will complicate the calculation and the skilled premium will be a function of the production productivity cuto.

on the reltion etween the xed tehnology ost @f t AD xed @f x A nd vrile trde osts @A nd the reltive skilled lor unit ost @ c h c l AF he rst se represents n eonomy where xed tehnology osts re sustntilly higher thn xed nd vrile trde ostsF nder these onditionsD there re three groups of rmsX @IA the lest produtive rms selling only on the domesti mrket nd produing with low tehnology @N dl AY @PA exporters produing with low tehnology @N xl AY nd @QA the most produtive rms ple of exporting nd upgrding their tehnology @N xh AF sn the seond seD xed nd vrile trde osts re higher thn the xed tehnology ostF ell exporters produe with high tehnology nd there re two dierent types of domesti rmsF ine the ghile dt ptterns t the rst se etter @see etion RAD we only derive the equilirium for this se IH F 2.9

Set-up of the open economy equilibrium 2.10 Households Consumption qoods produed y domesti rms n e trded or not nd produed using low or high tehnology depending on the rm9s protilityF he representtive household llotes onsumption from mong set of domesti goods produed with low tehnology @ dl A nd two dierent sets of foreign imported vrieties produed with low @ xl A nd high tehnology @ xh AF gonsumers preferenes re represented y the stndrd gFiFF utility funtionX C a imilr to the losed eonomy equiliriumD the prodution funtion using skilled nd unskilled lor is repE resented y gi funtion given yXY i a ' @@a h h i A C @l i A A 1 for i a fdl; xl; xhg @PFfA ynly the most produtive exporters will e le to swith to high tehnologyF ine high tehnology is skilled isedD the rms tht quire this tehnology will hve greter skilled lor eieny @a h > IA nd lower mrginl ost @c h < c l AF wore produtive rms hve lower unit osts nd re therey le to set lower pries nd hve higher revenues s well s greter protsF

1.Non exporters -Low Technology (N dl ) @QFfA p dl a I c l 'i @SFfA r dl a P p dl I R @RFfA c l a @w l A 1 C @w h A 1 1 @TFfA dl a p dl Y dl w l l dl w h h dl f a r dl f 2.Exporters -Low Technology (N xl ) 3. Exporters -High Technology (N xh ) p xl a p dl @I C A r xh a P p dh @ICA I R r xl a P p dl @ICA I R r dh C r xh a r dh h I C @I C A I i dl C xl a r dl IC@ICA 1 f f x dh C xh a r dh IC@ICA 1 f f x f t
Goods Market Equilibrium @UFfA C i a Y i for i a fdl; dhg Y C i a Yi @ICA for i a fxl; xhg 10 The derivation of the second open economy equilibrium is available in the author's PhD dissertation.

IH qiven tht unit osts @c l ; c h A re independent of produtivity levelsD note tht eqution @RFfA in the open eonomy senrio is identil to @RFeAF he reltive unit osts remin unhnged @eqution VFf a VFeAF 2.12 Firm's decisions 2.12.1 Production and Export decision foth the deision to enter the mrket nd to produe remin unhnged reltively to the losed eonomy equiliriumF he mrginl rm tht deides to sty is the one whose prots re equl to zeroX

dl @' £ dl A a H A r dl @' £ dl A a f A ' £ I dl a f c I l © @WFfA
imilr to welitz @PHHQAD the trdility ondition implies tht only rms with operting prots tht oset the mortized xed export ost per period @f x AA will e le to exportF he zero uto prots ondition to enter the export mrket is given yX

xl @' £ xl A a H A r xl a f x A ' £ I xl a f x @I C A I c I l © @IHFIFfA
he export produtivity uto is represented y 4' £ xl 4F his vlue orresponds to the produtivity level of the mrginl rm le to enter the foreign mrketF gomining @WFfA nd @IHFIFfA leds to the denition of ' £ xl s n impliit funtion of ' £ dl X

r xl @' £ xl A r dl@ ' £ dl A a fx f A ' £ xl a ' £ dl fx f 1 1 @I C A @IIFIFfA 2.
12.2 The decision to adopt High Technology qiven thtD in this seD the xed tehnology osts re higher thn the trde ostsD rm will never nd it protle to swith to high tehnology nd deide not to exportF hereforeD only suset of exporters will upgrde to high tehnologyF hey will e those exporters whose inrese in domesti nd export sles due to their doption of high tehnology will enle them to py the xed tehnology ostsF his ondition is given

yX dh @' £ xh A C xh @' £ xh A a dl @' £ xh A C xl @' £ xh A r dh @' £ xh ACr xh @' £ xh A r dl @' £ xh ACr xl @' £ xh A a f t A ' £ I xh a ft IC@ICA 1 c 1 h c 1 l © @IHFPFfA he produtivity uto to quire high tehnology is represented y 4' £ xh 4F he vlue of @' £ xh A s funtion of @' £ dl A is given y @WFfA nd @IHFPFfAX ' £ xh a ' £ dl ft f 1 1 c h c l I I ! h I C @I C A I i ! 1 1 @IIFPFfA
he spei ondition for the prtitioning of rms y export nd tehnology sttusD whih ensures tht

' £ xh > ' £ xl > ' £ dl isX ft IC@ICA 1 c h c l 1 I > @I C A I f x > f @II9FfA
II his ondition estlishes tht dopting high tehnology is more expensive thn exporting nd therey suggests tht only the most produtive exporters n upgrde their tehnologyF he weighted produtivity verge of eh group of rms @ f ' dl ; f ' xl ; g ' xh A is dened using the sme type of weighted verge funtion dened in equtions IPFe EITFe @eppendix P detils the ggregtionAF

2.13

Labor Market Equilibrium and the Skill Premium sn the open eonomy equiliriumD exporters produing with low nd high tehnology will inrese their skilled nd unskilled lor demnd to produe for the foreign mrketF hese demnds re determined similrly to @IVFeA nd @IWFeAD tking into ount the domesti demnd for nl goods @C dl ; C dh A nd the exporting rms9 foreign demnd for nl goods @C xl ; C xh AF iqution IUFe remins unhnged @IUFeaIUFfAF

l xi a CxiCC di ' c 1 1 i @w l A 1 1 @IVFfA h xi a CxiCC di ' c 1 1 i @w h A 1 1 @a h A 1 @
IWFfA here i a fl; hg a h > I if i a h vike @PHFeA nd @PIFeAD the overll ntionl demnd for unskilled nd skilled lor is determined y ggregting the rms9 individul demndsF rereD we hve to tke into ount rms produing in the domesti mrket nd oth types of exporting rms @see eppendix P for presenttion of the ggregte demndsAF

L d a ' £ xl ' £ dl N dl l dl @'A dl @'Ad' C ' £ xh ' £ xl N xl l xl @'A xl @'Ad' C I ' £ xh N xh l xh @'A xh @'Ad' @PHFfA H d a ' £ xl ' £ dl N dl h dl @'A dl @'Ad'C ' £ xh ' £ xl N xl h xl @'A xl @'Ad'C I ' £ xh N xh h xh @'A xh @'
a N dl f C N xl @f C f x A C N xh @f C f x C f t A C N E f E @PSFfA w h H C w l L C K a R @PTFfA N a w h HCw l LCK e CfCfx xl C@fxCftA xh @PUFfA
3 The model's ndings: the impact of trade liberalization his setion looks t the impt of trde lierliztion on rms9 deisionsF he redution in vrile trde osts ets oth the extensive mrgin of trde @the numer of exportersA nd the extensive mrgin of tehnology doption @the numer of highEtehnology rmsAF rile trde osts et rms9 deisions in numer of wysF he rst two mehnisms re the seletion eets in the domesti nd foreign mrketsD s presented y welitz @PHHQAF he entry of the most produtive foreign exporters onto the domesti mrket redues ll the rms9 domesti protsD prompting the exit of the lest produtive rmsF rde integrtionD on the other hndD rises export prots nd hs positive impt on the extensive mrgin of trdeF Proposition 5: Under Assumption 1 and the partitioning condition of open economy (eq. 11'.B), average domestic prots of low technology rms are an increasing function of trade variable costs, while average export prots are a decreasing function of trade variable costs: @ l l @f ' l A @ > H Y @ xl xl @g ' xl A @ < H. Proof. See Appendix 2 his model sets out to introdue yet nother hnnel sed on the eets of trde on the extensive mrgin of tehnology doption nd its impt on the skill premiumF he inrese in export protility retes inentives to upgrde tehnologyF herefore the most produtive lowEtehnology exporters dopt high tehnology nd rise their reltive demnd for skilled lorF Proposition 6: Under Assumption 1 and the partitioning condition of open economy (eq. 11'.B), both the aggregate relative demand of skilled labor and the skill premium are decreasing functions of trade variable costs: @@ H L A d @ < H A @! @ < H Proof. See Appendix 2 he lst trde lierliztion hnnel is the skill premium eetF sn the generl equiliriumD n upturn in the skill premium hs dierent impt on rms9 deisions depending on their intensity in skilled 12 Both conditions have to take into account trade costs. IQ nd unskilled lorF roweverD this is seondEorder eet stemming from the inrese in the extensive mrgin of tehnology indued y seletionF he lowEtehnology unskilledEintensive rms enet from the redution in the reltive unskilled lor wge @skill premium ppreitionA ompred with the most produtiveD skilledEintensive workersF Proposition 7: Under Assumption 1 and the partitioning condition of open economy (eq. 11'.B), average prots of low technology rms are an increasing function of the relative skilled per unit cost and thereby, of the skill premium, while average prots of high technology rms are a decreasing function of the skill premium: @ l l @f ' l A @ c h c l @!A > HY @ xl xl @g ' xl A @ > H Y @ xh @ g ' xh A @ c h c l @!A < H Proof. See Appendix 2 ypposite fores et oth the prodution nd tehnology utoX @IA the foreign ompetition nd export seletion eetD nd @PA the skill premium eetF sn order to determine whih eet domintesD s run simultions of the impt of trde vrile osts redution on the equilirium produtivity uto tking into ount the vritions of the skill premium @ee eppendix P nd QA IQ F nder the spei prtitioning onditionD the eets of trde reforms re quite unmiguousF qiven tht the inrese in skill premium is seondEorder eetD the net eet of trde reforms on the produtivity uto is negtive @qrph I in eppendix QAF he impt of vrile trde osts is unmiguous nd positive for the extensive mrgin of trdeF xew unskilledEintensive rms nd it protle to strt exportingF vstlyD the net eet of trde lierliztion on the extensive mrgin of tehnology is lso positiveF he inrese in export protility osets the inrese in the skill premium @qrph PAF Compared to a model of homogeneous rms, this model predicts that: (1) e redution in vrile trde osts enourges only those who re lredy exporters to upgrde their tehnologyY (2)ynly the new highEtehnology exporters inrese their reltive demnd for skilled lorF 4 Empirical evidence 4.1

Data and descriptive analysis his setion provides some evidene in support of the theoretil model9s preditions nd key ssumptionD nmely tht dvned tehnology is skill isedF his evidene drws on dtse of ghilen plnts provided y the ixse urveyD omprehensive mnufturing ensus overing ll plnts with more thn IH employees from IWUW to IWWW IR F qiven tht ghile is developing ountry highly dependent on imported pitl equipment nd intermedite inputsD we onsider tht the most pproprite proxies for high tehnology re foreign tehnology mesuresF hese mesures omprise expenditure on imported 13 In order to nd the equilibrium value of the skill premium, I used the "FindRoot" command of Matematica which uses a root-nding algorithm. The results remain robust for dierent parameters values well established in the literature (See Appendix 3) 14 The data used covers value-added, investment in capital equipment, imported inputs, foreign technology assistance, skilled and unskilled labor, and the share of skilled and unskilled labor in the wage bill. Export sales are reported from 1990 onwards. The plants' TFP is estimated by Bas and Ledezma (2007) based on the semi-parametric estimations by Levinsohn and Petrin (2003). Several specic sector-level deators (Isic-3dig Rev2 1992) are applied to value-added, technological measures, materials and investment. IR inputs nd foreign tehnologil ssistne @peAF le S @eppendix RA summrizes the vriles nd dt requirementsF e use two mesures of vrile trde osts from the rde nd rodution htse @orld fnk nd gissAF he rst is mesure of export order eets t the twoEdigit industry level etween ghile nd its min trding prtners @IWWHEIWWWAD estimted y fs nd vedezm @PHHUA using grvity model sed on pontgn eD wyer nd igngo @PHHSAF he seond is n verge of import tris t the threeE digit industry level @IWWIEIWWWA set y ghile9s min trding prtnersF he verge redution of export order eet in the period is PH7 nd the one of verge import tri is U7 @pigure RD eppendix RA IS F le T @eppendix RA summrizes the rms9 min hrteristis @QDWHH plnts per yerAF ixporters @QI7A re lrger IT D more produtive @higher pAD more skilled nd pitl intensive nd use more pe nd imported inputs thn nonEexporters @TW7AF roweverD the perentge of nonEexporters using pe @Q7A nd imported inputs @II7A is very lowF he fetures of the open eonomy equilirium desried in the previous setion t the desriptive evidene for the se of ghileF sn order to test the ssumption of heterogeneous rms in terms of produtivity levelsD we estimte the impt of export sttus @ontinE uingD newD swithers nd exiting exportersA on the plnts9 pF le U @eppendix RA reports on these ndingsF yne we hve ontrolled for initil sizeD phs nd nnil onstrint inditors @olumn RAD only ontinuingD new exporters nd swithers re more produtive thn those rms tht sell solely on the domesti mrketF emong the exportersD the most produtive re those tht exported throughout the entire periodF gontinuing exporters re PV7 more produtive thn nonEexportersD while new exporters nd swithers re IU7 more produtiveF hose rms using foreign tehnology re more produtive @QI7A thn the ones using domesti tehnology @olumn SAF yur nlysis of growth in the reltive skilled lor demnd nd skill premium uses the deomposition pproh developed y whin nd n eenen @IWWVA @les V nd W eppendix RAF prom IWUW to IWWWD the reltive demnd for skilled lor rose PH7 t the threeEdigit industry levelF his inrese is entirely explined y the withinEindustry vritionF he etween inditor is negtive nd extremely smll IU F huring the det risis @IWUWEIWVTAD skill intensity rose to QU7 t the twoEdigit industry levelF e full PT7 of this inrese is explined y the within estimtorD while only II7 is explined y the etween inditorF sn the IWWHsD there ws lso rise in the reltive demnd for skilled lorD whih is entirely explined y the within estimtorF imilr ndings hold for reltive skilled wges in ll periodsF

4.2

Testing the assumption: foreign technology skill-biased ine we only hve dt on the ost of skilled nd unskilled lor @wge ill shreAD there is n endogeneity issue etween the reltive skilled lor demnd nd the skill premiumF e therefore use the minimiztion ost funtion pproh insted of gi pproh to test whether foreign tehnology is omplementry 15 Latin American countries, the European Union and the USA. Since there is no data available on taris in 1994 and 1997, we take the average of 1991-1993 and 1996-1999. 16 Size classication: large rms have more than 150 workers, medium rms have more than 50 and up to 149 workers and small rms have more than 10 and up to 49. 17 Similar results hold at 2 digit industry level and at the rm level IS with skilled lor IV F sn this frmeworkD rms minimize the ost of oth skilled nd unskilled lor ssuming tht pitl stok is qusiExedF he trnslog ost funtion isX @sAS it a I C y ln@

V A it A C k ln@K it =V A it A C T @TECH it A C s IND C t Y EAR C it
hependnt vrile S it is the shre of skilled workers in the wge illY K is the stok of pitlY V A is vlueEddedY igr is tehnology inditor equl to one if the rm reports hving used imported inputs or peY nd it is n unoserved omponentF es in previous literture @see whin nd n eenen @IWWVA nd vnik @PHHPAAD we onsider tht pitl nd vlueEdded re not eted y the urrent wge ill shre of skilled workersF sn the se of pitlD this is relisti ssumption sine lthough investment ould e orrelted with the reltive demnd for skilled lorD investment in the urrent period does not enter the pitl stok until the new periodF sndeed pitl stok will e independent of the unoserved shoks tht inuene the wge ill shre of skilled workersF sn the se of vlueEddedD this vrile is orrelted with the shre of skilled lorF o ddress this issueD we lso use the lgged vlueEdded in the estimtionsF pinllyD we do not onsider the skill premium due to the endogeneity issuesF ine it is very hrd to nd good instruments for the reltive wge of skilled lor nd this is eyond the sope of the present setionD we introdue threeEdigit industry nd yer dummies insted of reltive wgesF sntroduing plnt xed eets ontrols for size eetsF he oeient of interest is T F sf igr is omplementry with skilled lorD we expet positive nd signint oeientF le I presents the ndings of the xedEeet regressions for the entire period @IWUWEIWWWA for the full smple @olumn IA nd three suEsmples of trde orienttion @export orientedD import ompeting nd nonEtrde setor IW AF efter ontrolling for plnt heterogeneityD industry nd yer inditorsD the oeient of the tehnology inditor is positive nd highly signintF he vlue of T is higher for the rms selling on the foreign mrket @PFV7A thn for the importEompeting nd nonE trde rms @IFR7 nd IFQ7AF sing rm level dt of ergentinD fustos @PHHSA nds tht the growth of tehnology spending hs positive impt on the hnge in skilled upgrding for ll rmsF e then run similr regressions using dt on export sles for IWWHEIWWWF e dd four dummy vriles to eqution @sA to indite the export sttus of the plnts @ontinuingD newD exiting exporters nd swithers PH A AF he omitted vrile in this regression orresponds to nonEexporting rmsF le P presents the ndings of yv regressions with ruert hite stndrd errors lustered t plnt levelF he rst olumn shows tht tehnology ws omplementry with skilled lor in the IWWHs @IPFU7AF e then ontrol for the plnts9 produtivity levels in the previous period nd their foreign sttus @phs inditorA PI Fsn olumns QD R nd SD we introdue the export sttus of the rmsF he wge ill shre of skilled lor is higher for ll exporting rms ompred with nonEexportersF woreoverD the results of 18 The author's PhD dissertation also estimates the log of the relative demand for skilled labor derived from equation 17.A 19 Three-digit industry level plants with more than 15% of exports in their total production are classied as exportedoriented plants, while those with over a 15% import penetration indicator are classied as import-competing plants. The rest are considered to be non-trade plants. See Pavcnik (2002) for further details concerning this classication. 20 See the classication in Table 5 in Appendix 4 21 To control for the presence of multinational rms, a dummy variable equal to one is introduced when the percentage of foreign capital is higher than 50% IT olumn Q show tht ontinuing exporters @VFR7A hve higher skill intensity thn new exporters @RFV7AD exiting exporters @S7A nd swithers @R7AF hen we ontrol for pst produtivity levelsD the oeients re still signint ut the vlues re lowerF le I nd P out here 4.3 Testing the predictions of the model Prediction 1: The impact of trade liberalization on technology adoption sn the theoretil modelD there re three groups of rmsX @IA lowEtehnology domesti rms @the lest produtiveAD @PA lowEtehnology exportersD nd @QA highEtehnology exporters @the most produtiveAF he model9s rst predition onerns the impt of trde lierliztion on the extensive mrgin of tehnology doptionF e redution in vrile trde osts enourges ontinuing exporters to swith to more dvned tehnologyD while the lest produtive exporters do not hve enough prots to upgrde their tehnologyF his predition is tested y estimting the impt of redution in export rriers on the growth in foreign tehnology expenditure using the following frmeworkX @ssA lnT ECH it a I C P @ExportA C Q @BXA C R @BX £ ExportA C c Z it C it here igr is foreign tehnology expenditureY f is the export rrier @or verge import tris mong ghile9s min trding prtnersA t twoE @threeEA digit industry levelD whih vries ross timeY export is vetor of the dummy vriles inditing the export sttus of the plntsY nd Z it is vetor of the ontrol vriles PP Fhe omitted tegories re nonEexportersD the yer IWWH @IWWIA nd setor PW @QWHA @other industriesAF iqution @ssA disentngles the growth in foreign tehnology expenditure due to hnges in trde osts depending on the export sttus of the rmF e re minly interested in the estimtes of the vetor oeient R F hese re the oeients of the intertion terms etween export rriers nd export sttusF e negtive nd signint oeient is expetedD mening tht redution in trde osts triggers greter inrese in foreign tehnology expenditure y exporters ompred with nonEexportersF he results of the estimtion of eqution @ssA y yv with stndrd errors lustered t plnt level re presented in le QF he rst three olumns of le Q present the results with the export order eetD while the lst three olumns re sed on the verge import trisF sn olumns I nd QD we ontrol y initil rm size nd pitl intensityF ithin the sme industryD lredyEexporting rms hve higher level of foreign tehnology thn nonEexporters fter redution in trde rriersF le Q out here hese results might e pturing other ftors tht ould et the hnge in foreign tehnology spending suh s multintionl rms or nnil lierliztionF sn order to ontrol for these two possile 22 The control variables are plant size (measured by sta numbers in the initial year), capital intensity in the initial year, an FDI indicator and one of the credit constraints. "Financial" is a dummy variable equal to one if the plant reports having paid a loan tax in year "t" indicating that they are not subject to nancial constraints. Industry aliation (three-digit ISIC level) and year dummies are also introduced.

IU ompeting explntionsD we introdue n inditor of phs in the previous yer @olumns P nd SA nd nnil inditor @olumns Q nd TAD whih identies plnts without redit onstrintsF xot surprisinglyD the oeients of phs @HFSUUGHFSSVA nd redit inditors @HFPUUGHFPWRA re positive nd signintF roweverD fter ontrolling y mens of these lterntive explntions the oeients of the intertion terms etween ontinuing exportersD the export rriers re still negtive nd signintF he verge redution of export order eet in the period is PH7 nd the one of verge import tri is U7F hereforeD ompred with nonEexportersD ontinuing exporters rise their foreign tehnology expenditure fter trde lierliztion from rnge of R7 @intertion with f in olumn QA to U7 @intertion with tris in olumn TAF sing dierent empiril speition @without intertions etween export sttus nd export rE riersAD fustos @PHHSA lso tests the impt of rms9 export sttus on tehnology spending for ergentinF he nds tht oth new nd ontinuing exporters hve higher level of tehnology spending thn non exporters nd tht the hnge in tehnology spending is only signint for new exporters @RQ7A PQ F sn reent workD fustos @PHHUA shows tht the redution of frzilin9s tris inreses tehnology spending of ll ergentinen rms y HFPH log pointsF por oth suEsmples of non exporters nd exporters in the rst yerD she nds tht rms upgrde tehnology fter the redution of export trisF por the se of ghileD when we introdue spei intertions etween rms9 export sttus nd export rriersD we nd tht only ontinuing exporters upgrde tehnologyF Prediction 2: The impact of trade liberalization on the relative skilled labor demand his model lso predits thtD fter trde lierliztionD exporters produing with high tehnology will rise their reltive demnd for skilled lorF ine more dvned tehnology is omplementry with skilled lorD exporters tht upgrde tehnology following trde reform will lso upgrde skilled lorF he seond predition posits tht exporters tht dopt high @foreignA tehnology inrese their reltive demnd for skilled lor following redution in vrile trde ostsF e test this predition using similr methodology to tht used in the previous setionF e estimte the eet of redution in vrile trde osts on the reltive demnd for skilled lor y rm export sttusF @sssA ln Hit Lit a I C P @ExportA C Q @BXA C R @BX £ ExportA C S Z it C e it he dependnt vrile is the numer of skilled workers over unskilled workers ones Hit Lit D f is the export rrierD 4ixport49 indites the export sttus of plnts nd it is vetor of the sme plnts9 hrteristis of the previous regressions PR F le R reports the estimtions of eqution @sA y yv with ruer hite stndrd errors lustered t plnt levelF efter ontrolling for the plnt9s initil produtivityD pitl intensity nd foreign sttusD redution in export rriers hs signint positive eet on ontinuing exporters9 reltive demnd for skilled lor ompred with nonEexporters @olumns Q nd TAF 23 When there is a signicant reduction of export barriers (as in the case of Argentina at the beginning of the nineties) the theoretical framework also predicts that new exporters upgrade technology. Bustos's ndings conrm this prediction. 24 TThe omitted categories are non-exporters, the year 1990 (1991) and the sector 29 (390) (other industries).

IV hierenes in skill upgrding etween exporters nd rms selling only on the domesti mrket inrese s export rriers dereseF he trdeElierliztionEindued inrese in the reltive demnd for skilled lor y ontinuing exporters ompred with nonEexporters rnges from P7 @with oth export rriers mesuresAF his mgnitude is similr to the ndings of fustos @PHHSA for ergentinF sn her empiril speition @without export rriersAD she nds tht oth ontinuing nd new exporters inrese their skill intensity fster @IFP perentge pointsA thn never exporting rmsF le R out here 5 Conclusions his pper explores the hnges in the extensive mrgin of tehnology doption nd its eet on wge inequlities following trde lierliztionF he mehnism is sed on the impt of the tehnologyE upgrding deision on the reltive demnd for skilled lor nd hene on the skill premiumF sn terms of poliy implitionsD redution in vrile trde osts rises the numer of rms selling rod nd enourges the most produtive rms to swith to high tehnologyF his enhnes the reltive demnd for skilled lor nd oosts the skill premiumF he min ontriution of this pper to the existing literture is to propose generl equilirium model tht links trdeD rms9 tehnology hoie nd wge inequlities in frmework of heterogeneous rmsF his theoretil frmework lso explins the extensive empiril evideneX rms selling on foreign mrkets re not only more produtiveD ut lso use modern tehnologies nd re more skillEintensive thn rms selling only on the domesti mrketsF e provide evidene in support of the model9s key ssumption nd preditionsD drwing on plnt level pnel dt for ghile9s mnufturing setorF The The relative skill per unit cost is n inresing funtion of the skill premium @eqution VFeAX

@ c h c l @! a I ¡ c h c l 1 1 I 4 @ 1 A@!A 1 1 h @a h A 1 I i h @!A 1 C@a h A 1 i 2 5 @ c h c l @! > H sine @a h A 1 I > H nd H < < I
AggregationF sing prie rule @eqF QFeA nd plugging it into the ggregte prie index yieldsX

P I a I I @c l A I N l @ e ' l A I C N h c h c l I @f ' h A I ! a N 1 1 p @f ' T A hereX p @f ' T A a I c l f ' T f ' T I a I N N l @ e ' l A I C N h c h c l I @f ' h A I ! Aggregate Revenu R a N l ' £ h ' £ l r l @'A l @'Ad' C N h I ' £ h r h @'A h @'Ad' R a N l r l @ e ' l A C N h r l @f ' h A c h c l I here r h @f ' h A a r l @f ' h A c h c l I R a N 4 N l N r l @ e ' l A C N h N r l @f ' h A c h c l I 5 | {z } r@ f ' T A a Nr @f ' T A
Averages productivities assuming Pareto distributionF sn keeping with welitz nd qhironi @PHHSA nd welitz nd yttvino @PHHSAD we ssume tht produtivity drws re distriuted ording to reto distriution g @'A a k@'minA k @'A k+1 with lower ound ' min nd shpe prmeter k indexing the dispersion of produtivity levels mong rmsF ine s ssume tht ' min a I nd the ondition tht ensures nite men of rm size is k > IF he umultive distriution funtion is G@' i A a I 'min 'i k F

Average productivity of rms producing with low technology PI e ' l ' £ l h I @A k+ 1

I k i 1 1 if ' £ l < ' < ' £ h here a h k k @ IA i 1 1 a ft f 1 1 c h c l I I ! 1 1
Average productivity of rms producing with high technologyF f

' h ' £ h if ' > ' £ h Determination of probabilities:F l a I I G@' £ h A I G@' £ l A a I ' £ ' £ h k h a I G@' £ h A I G@' £ l A a ' £ ' £ h k
Labor Market ConditionX lugging rms9 nl good demnds @IFeA into @IVFeA nd @IWFeA nd using @RFeA to express c l ; c h D rms9 demnd of skilled @h l ; h h A nd unskilled lor isX

l i a P pi C ' ! a h 1 C I 1 @IVFe9A Y h i a P pi C 'a h a h ! ¡ 1 C I 1 @IWFe9A
here i a fl; hg a h > I if i a h lugging rms9 pries @QFeA into @IVFe9A nd @IWFe9A nd then into ggregte skilled nd unskilled lor demnds using @PHFeA nd @PIFeAD we otin the ggregte reltive demnd for skilled lor @PPFeAF Proof of Proposition 1: Determination of closed economy equilibriumF Proof. vwg @PPFeAD pi @PQFeA nd g @PRFeA onditions jointly determine the equilirium uto level @' £ l AF sn order to otin this utoD we plug into eqF PRFe the verges produtivitiesD the tehnology uto @eqF IIFeA nd the proilities using ssumption IX

f E @I G@' £ l AA a I N h I h N l ' £ h ' £ r l @'A l @'Ad' C N h I ' £ h r h @'A h @'Ad' i Nf N h f t i epling N l a l N; N h a h N; r l a ©c I l ' I i ; r h a ©c I h ' I i Y © a P I R I I f E @I G@' £ l AA a h © h l c I l e ' l I C h c I h f ' h I i @f C h f t A i sing eqution @WFeA to determine © a f c I l ' £I l
; so s to express verge prots s funtion of the produtivity utoD yieldsX

' £k l f E a l f ' l ' £ l I C h c l c h I f ' h ' £ l I I ! f h f t ! ' £ l a 4 f f E @A I C 4 c h c l I I ! k 1 ft f E ft f k 1 h @A I I i 5 f f E 5 1 k @PVFeA
ine the reltive skilled lor unit ost c h c l depends on the skill premiumD equtions PVFe nd PPFe @vwgA determine the equilirium prodution utoF PP Proof of Proposition 2: e prtilly dierentite eqution PVFe with respet to c h c l @!A D in order to nlyze the impt of n exogenous inrese in the skill premium on the produtivity utoF rtilly dierentiting @PVFeA we nd @' £ l @ c h c l @!A < H F @' £ l @ c h c l @!A a @ IA ' £k l

¡ 1 k I c h c l I I ! k 1 I c h c l ft f E ft f k 1 h @A I I i ! @PWFeA @' £ l @ c h c l @!A < H sine c l ch ¡ I > I nd @A I > I Proof of Proposition 3: rtilly diereniting @IIFeA with respet to c h c l @!AD we nd @' £ h @ c h c l @!A > H @' £ h @ c h c l @!A a ' £ h ' £ l 4 @' £ l @ c h c l C ' £ l c h c l I I ! I c h c l 5
@QHFeA e n demostrte tht @' £ h @ c h c l @!A > H sine the term in rkets in @QHFeA is positiveF lugging @PWFeA @' £ l @ c h c l @!A into @QHFeAD the term in rkets in @QHFeA n e expressed s followsX

' £k l > c h c l I I ! k 1 ft f E ft f k 1 h @A I I i ! sing @PVFeAX f f E h @A I I i > H his result holds sine f f E > H nd @A I I > HF sndeedD @' £ h @ c h c l > H
7 Appendix 2: Open Economy Equilibrium

Averages productivities assuming Pareto distributionF dl @'A a

g@'A G@' £ xl A G@' £ dl A if ' £ dl < ' i < ' £ xl @IPFfA xl @'A a g@'A G@' £ xh A G@' £ xl A if ' £ xl < ' i < ' £ xh @IQFIFfA xh @'A a g@'A I G@' £ xh A if ' i > ' £ xh @IQFPFfA
Average productivity of low technology rms (non exporters and exporters) e ' l ' £ dl h I @"A k+ 1

I " k i 1 1 here a h k k @ IA i 1 1 @IRFfA " a ft f 1 1 c h c l I I ! h I C @I C A I i ! 1 1
Average productivity of non exporters rms producing with low technology

f ' dl I I G@' £ xl A G@' £ dl A ' £ xl ' £ dl @'A I g@'Ad' a ' £ dl h I @#A k+ 1 I # k i 1 1 if ' £ dl < ' < ' £ xl here # a fx f 1 1 @I C A Average productivity of exporters producing with low technology PQ @ f ' xl A I I G@' £ xh A G@' £ xl A ' £ xh ' £ xl @'A I g@'Ad' a ' £ xl h I @A k+ 1 I k i 1 1 if ' £ xl < ' < ' £ xh here a " IC f fx 1 1
Average productivity of high technology rms (exporters) g ' xh

I I I G@' £ xh A I ' £ xh @'A I g@'Ad' ' £ xh if ' > ' £ xh @ISFfA Determination of probabilities l a I " k Y x a ' £ dl ' £ xl k a # k Y dl a ¢ I # k £ Y xl a ' £ dl ' £ xl k ' £ dl ' £ xh k a ¢ # k " k £ xh a ' £ dl ' £ xh k a " k
sing prie rule dened in eqution QFf nd plugging it into ggregte prie index yields

P a N 1 1 p @f ' T A here p @f ' T A a I c l f ' T f ' T I a I N N l @ e ' l A I C N xh @g ' xh A I c h c l I h I C @I C A I i C @I C A I N xl @ f ' xl A I ! @ITFfA
Labor Market Condition lugging rms9 nl good demnds @IFfA into @IVFfA nd @IWFfAD individul demnd for skilled @h xl ; h xh A nd unskilled lor @l xl ; l xh A y exporting rms with low nd high tehnology isX

l xi a P p di C ' h I C @I C A I i ! a h 1 C I 1 @IVFf9A h xi a P p di C 'a h h I C @I C A I i a h ! ¡ 1 C I 1 @IWFf9A
ixporters hve to hire oth types of workers to produe for oth domesti nd foreign mrketsF lugE ging pries @QFfA into @IVFfA nd @IWFfA nd then into ggregte skilled nd unskilled lor demnd using @PHFfA nd @PIFfAD we otin the ggregte reltive demnd for skilled lor @PPFfAD whih determines the skill premiumF

H s L s a ! 1 1 P T R IC@a h A 1 " N xh g ' xh 1 1+(1+) 1 N dl g ' dl 1 +N xl g ' xl 1 1+(1+) 1 # A IC N xh g ' xh 1 1+(1+) 1 N dl g ' dl 1 +N xl g ' xl 1 1+(1+) 1 A Q U S @PPFfA
' l A C xl xl @ f ' xl A C xh dh @g ' xh A C xh @g ' xh A f E I G@' £ dl A a f l f ' l ' £ dl I C xl g ' xl ' £ dl I @I C A I C xh g ' xh ' £ dl I c h c l I h I C @I C A I i ! f C x f x C xh f t
pollowing similr steps to those in the losed eonomy equiliriumD we otinD in this seX

' £k dl f E a f c h c l 1 IC@ICA 1 I @A 1 " k ( 1) C fx 1 () k+ 1 1 k @A 1 # k " k 1 C f @A 1 I 1 ft " k fx # k @PVFfA l dl @ e ' l A a f I f I @"A kC I f xl xl @ f ' xl A a f x @A I ¢ # k " k £ h I @A k+ 1 I k i # k f x xh @g ' xh A a xh dh @g ' xh A C xh @g ' xh A a " 1 k c h c l 1 f 1 IC@ICA 1 1 " k f t
Proof of Proposition 5: The impact of trade variable costs on average protsF rtilly diereniting l l @ e ' l Awith respet to @ l l @f ' l A @ a k @ IA f I @"A kC P @" @ > H @" @ a " h @I C A C @I C A

i P R I C @ c h c l @ @ICA C@ICA c l c h 1 I Q S > H hen jIj > @ c h c l @ @ICA C@ICA c l c h 1 I
A @" @ > H A @ l l @f ' l A @ > H e redution of trde vrile osts inreses foreign ompetition nd therey redues domesti prots of low tehnology unskilled intensive rmsF rtilly diereniting xl e xl @' xl A with respet to @ xl e @' xl A @ a kf x @A I h I @A k+ 1

I k i ¢ # k I @# @ C " k I @" @ £ C f x @A I ¢ # k " k £ @ @ 2k+ 2 k @ IA@ k IA k@ k ( 1) IA I k 2 ! iA @# @ > H iiA @" @ > H iiiA @ @ a K IC@ICA 1 1 1 @ICA 2 P R I @ICA 1 CI I C @ c h c l @ @ICA 1 c h c l 1 I c h c l Q S < H ine K a ft fx 1 1 c h c l I I ! 1 1
> HY @ c h c l @ < HY I @ICA 1 CI < I A @ @ < H PS e n demostrte tht @ xl e @' xl A @ < H: pirstD the rst term is negtive sine @# @ > H nd @" @ > H nd the seond term is lso negtive sine @ @ < H D

¢ # k " k £ > H nd k @ IA k I ¡ > k k @ IA I
¡ : e redution of trde vrile osts inreses export prots of low tehnology exportersF rtilly diereniting xh e @' xh Awith respet to @ xh e @' xh A @ a @" @ " k I kf t I

I h I @ c h cl A 1 i ! C @I Af (1+) +(1+) c h c l 2 4 IC @ c h c l @ (1+) +(1+) c h c l 3 5 1 c h c l
" k +1 IC@ICA 1 1 ine I h I @ c h cl A 1 i > I the rst term is negtiveF he seond term will e lso negtive sine @ > IA nd when jIj > @ c h c l @ @ICA C@ICA c h c l :

Proof of proposition 6: The impact of trade costs reduction on the aggregate relative skilled labor demand. fy plugging into the eqution @PPFfA the verge produtivity levels nd the numer of rms @solved using the reto distriutionAD the ggregte reltive skilled lor demnd n e expressed s followsX

H d L d a ! 1 1 ICa 1 h AX ICAX ! hereX X@A a " k+ 1 1+(1+) 1 I @#A k+ 1 C# k " k h 1 () k+ 1 1 k i # 1 IC@ICA 1 Y A a c h c l 2 @!A 1 CI ! a h 1 CI 3 1
xote tht "@A; #@A; @A re lso funtions of : hese vriles re dened in the previous setionF o determine whether the ggregte reltive skilled lor demnd is deresing funtion of vrile trde ostsD we rst nlyze

H d L d s funtion of F iA lim X3I H d L d @A a ! 1 1 a 1 h iiA lim X3H H d L d @A a ! 1 1 iiiA lim X3 1 A H d L d @A a I pirst we demostrte tht X@A > H under the prtitioning onditionX ft IC@ICA 1 c h c l 1 I > f x @I C A I > f
he numertor of X@A is positive @c l > c h nd > IAF woreoverD under this prtitioning ondition the denomintor will lso e positive sineX (1)

f x @I C A I > f I > f fx k ( 1) 1 I @ICA k @ IA I @#A kC I > H PT (2) ft c h c l 1 I IC@ICA 1 > f x @I C A I f fx k 1 I IC k > f ft k 1 c h c l I I ! h I C @I C A I i ! k 1 # k " k > H (3) ft c h c l 1 I IC@ICA 1 > f x @I C A I I kC I > H nd I k > H
reneD X@A is positive nd onsequently H d L d is n inresing funtion of X@AF hen we nlyze X@A for a H nd a ID we n demostrte tht X@HA > X@IA:F nder the prtitioning ondition of se ID X@A is deresing funtion of X @X @ < H: sndeedD redution of will inrese X@A nd the rise in X@A will inrese H d L d F hereforeD the ggregte reltive skilled lor demnd is deresing funtion of trde vrile osts X @@ H L A d @ < HF ine the reltive skilled lor supply is xedD redution in vrile trde osts will push up the ggregte reltive skilled lor demnd nd hene rise the skill premiumF @! @ < HF Proof of Proposition 7: The impact of the relative skilled labor cost ( c h c l @!A) on average protsF rtilly diereniting the dl @ e ' l A l with respet to c h c l @ dl @f ' l A l @ c h c l @!A a k @ IA f I @"A kC P @" @ c h c l > H @" @ c h c l @!A a f t f1+(1+) 1

1 1 c h c l 1 I 1 c h c l > H
en inrese in the skill premium mens redution of the reltive wge of unskilled lor nd n inrese of the reltive per unit ost of skilled lorF his ppreition of c h c l enets the lest produtive unskilled intensive rms rising their domesti protsF

rtilly diereniting xl xl @ f ' xl A with respet to c h c l @ xl xl @g ' xl A @ c h c l @!A a @" @ c h c l kfx h 1 k+ 1 1 k i " k+1 @A 1 C fx# k " k @A 1 @ @ k @ IA k+ 2 @I k A k k 1 @I k+ 1 A I k 2 ! here @ @ c h c l @!A a f t fx1+(1+) 1 1 1 @ICA c h c l 1 I 1 c h c l > H
sn the seond termD the term in rkets is equl to @ @ 2k+ 2 k @ IA@ k IA k@ k ( 1) IA I k 2 > H ine @" @ c h c l @!A > HY @ @ c h c l @!A > H A @ xl xl @g ' xl A @ c h c l @!A > H en inrese in c h c l @!Aenets unskilled intensive exporters rising lso their export protsF PU rtilly diereniting xh @g ' xh A with respet to c h c l @ xh @ g

' xh A @ c h c l a @" @ c h c l k" k I 4 kC@ IA" 1 f 1 k c l c h 1 IC@ICA 1 1 C I 5 C @I A" 1 k f 1 c l c h
IC@ICA 1 1 ine @" @ c h c l @!A > H; k > I D > I nd c l c h > I; oth terms re negtiveX @ xh @ g ' xh A @ c h c l < H he ppreition of the skill premium nd therey of the reltive skilled per unit ost hurts the most produtive skilled intensive rms deresing their domesti nd export protsF

The impact of the relative skilled labor cost on the productivity cutos

' £k dl f E a B@ c h c l ; A C G@ c h c l ; A C f h @A I I i fx # k @PV9FfA
here B@ c h c l ; A a f @A I " kC I c h c l

I h I C @I C A I i I ! G@ c h c l ; A a f x @A I ¢ # k " k £ h I @A k+ 1 I k i " k f t
rtilly diereniting @PVFfA with respet to c h c l @!A yields @' £ dl @ c h c l @!A a ' £(1 k) dl k I f E @B @ c h c l @!A C @G @ c h c l @!A ! @IA rtilly diereniting B with respet to c h c l yields @B @ c h c l @!A a k C I @" @ c h c l @!A f c h c l 1 IC@ICA 1 I 1 " k +2 C @I AIC@ICA 1 " k+ 1 f@A 1 c h c l 1 IC@ICA 1 I c h c l e n prove tht @B @ c h c l @!A < H sine @" @ c h c l @!A > H Y k > I nd > I: @PA rtilly diereniting G with respet to c h c l yields @G @ c h c l @!A a @" @ c h c l @!A k

P R fx 1 () k+ 1 1 k 1 h " k+1 # k " i C f t Q S C fx# k " k @A 1 @ @ 2k+ 2 k @ IA@ k IA k@ k ( 1) IA I k 2 ! ine @"
@ c h c l @!A > HY @ @ c h c l @!A > H A @G @ c h c l @!A > H foth f nd q depend on the skill premium nd this vrile is determined in the lor mrket equilirium @eqution PPFfAF e run simultions of the equilirium prodution uto whih show @B @ c h c l @!A > @G @ c h c l @!A nd thus @' £ dl @ c h c l @!A < H PS F 25 These results remain robust for dierent parameters values well established in the literature: Consumers' elasticity of substitution: = 3 / 4 (Bernard et al., 2004); the elasticity of substitution between factors in the production function = 2 /2,5 ( =0,5/0,6) (Acemoglu ,2002); Pareto shape parameter k= 3,4 / 5. Following Bernard, Redding and Schott (2004): fe= 1 / 3; f = 0,1 / 0,4; fx= 0,1 / 0,5 and ft= 0,8/ 2. PV @QA rtilly diereniting @IIFIFfA with respet to c h c l yields @' £ xl @ c h c l @!A a @' £ dl @ c h c l @!A fx f 1 1 @I C A ine low tehnology exporters re unskilled intensive rmsD the eet of the reltive skilled per unit osts @nd of the skill premiumA on the extensive mrgin of trde @' £ xl A is similr to the impt on the extensive mrgin of prodution @' £ dl AF en inrese of the skill premium @the redution of the reltive unskilled wgeA redues the prodution nd export utoX @' £ dl @ c h c l @!A < H A @' £ xl @ c h c l @!A < H: @RA rtilly diereniting @IIFPFfA with respet to c h c l yields

@' £ xh @ c h c l @!A a ' £ xh c h c l c h c l P R I C @' £ dl @ c h c l @!A c h c l c h c l ' £ dl Q S > H epling @' £ dl @ c h c l @!A Y eqF PVFfX ' £k dl f E > " @B @ c h c l (!) C @G @ c h c l (!) # c h c l c h c l k nd @' £ xh
@ c h c l @!A > H:he most produtive high tehnology rms will suer from n inrese in the skill premiumF

The net impact of trade variable costs on the productivity cutos rtilly diereniting @PVFfA with respet to ; tking into ount @ c h c l @ D yields @' £ dl @ a ' £(1 k) dl k I f E h @B@A @ C @G@A @ i @IA rtilly diereniting B @A with respet to yields @B @ a @ kC IA" k+ 2 @" @ f@A 1 hh @ c l ch A 1 IC@ICA 1

i I i 1 C @I Af @A 1 " k +1 c h c l 1 I IC@ICA 1 @ICA C @ c h c l @ IC@ICA 1 c h c l ! ine @"
@ > H nd k > I the rst term is negtiveF he sing of the seond term depends on the elstiity of reltive per unit ost of skilled lorF he simultion results show tht @B @ < H: @PA rtilly diereniting G @A with respet to yields @G @ a kf x @A I h I @A k+ 1

I k i ¢ # k I @# @ C " k I @" @ £ C f x @A I ¢ # k " k £ @ @ 2k+ 2 k @ IA@ k IA k@ k ( 1) IA I k 2 ! C k"f t @" @
e n demostrte tht @G @ < H: pirstD the rst term is negtive sine @# @ > H nd @" @ > H F he seond term is lso negtive sine @ @ < H D

¢ # k " k £ > H nd k @ IA k I ¡ > k k @ IA I ¡ :
pinllyD the lst term is positive sine @" @ > H; ut under the prtitioning ondition this term is smller thn the other two @ee simultion resultsD eppendix QAF PW ine @B@A @ < H nd @G@A @ < H D indeed @' £ dl @ < H: e redution of trde vrile osts @tking into ount the impt of on c h c l @!AA inreses foreign ompetition nd indues the exit of the lest produtive rms @rising the prodution utoAF @QA rtilly diereniting @IIFIFfA with respet to yields

@' £ xl @ a fx f 1 1 h ' £ dl C @' £ dl @ @I C A i > H
sn order to see if j' £ dl j > @' £ dl @ @I C A we reple @' £ dl @ : ine ' £k dl f E > @ @B @ C @G @ A@ICA k ; indeed we n prove tht @' £ xl @ > H:e redution of trde vrile osts llows the most produtive domesti rms to enter the foreign mrketF @RA rtilly diereniting @IIFPFfA with respet to yields @' £ xh @ a ' £ xh I @ICA C@ICA C @' £ dl @ I ' £ dl ! > H epling @' £ dl @ Y eqF PVFfX ' £k dl f E > @ @B @ C @G @ A@ICA C@ICA k ;indeed we n prove tht @' £ xh @ > H: e redution of trde vrile osts llows the most produtive low tehnology exporters to upgrde tehnologyF QH 8 Appendix 3: Simulations results 2004): f e =1/2; f=0,1/0,2; f x =0,2/0,3 and f t =0,9/1,25; a h = 2/3. 9 Appendix 4: Empirical results pigure R out here QI

Proof of Proposition 4 :

 4 Determination of the open economy equilibriumF vike in the losed eonomy equiliriumD vwg @eqF PPFfAD pi nd g onditions jointly determine the equilirium uto levelF lugging in the g ondition the following vrilesX f ' dl ; f ' xl ; g ' xh ; l ; xl xh nd ' £ xl ; ' £ xh D we otin the prodution uto level s funtion of the skill premium nd the prmeters of the modelF PR e a l dl @ e

""

  Foreign competition effect" dominates over the "skill premium effect": the least productive firms exit the market. Graph 2: The net effect of a reduction of on the extensive margin of technology xh * Extensive margin of technology": a reduction of trade frictions increases market shares and profits of all exporters allowing new firms to adopt high technology. The increase in export profitability compensates the negative impact of the raise in the skill premium on the technology adoption decision. Partitioning condition: Parameters values: These results remain robust for different parameters values well established in the literature: (Bernard et al., 2004); 0.5/0.6 (Acemoglu ,2002); k =3,4/5. Following Bernard, Redding and Schott (

Figure

  Figure 4 (a): Evolution of export barriers between Chile an its main trading partners (UE, USA and latin American countries)

  in the losed eonomy equiliriumD we otin n nlytil solution for the produtivityD tehnologil nd export utos using reto distriution of produtivity drws @see eppendix PAF he equilirium level of the produtivity uto is determined y the piD the new g nd vwg onditionsD just s in the losed eonomy equiliriumF pi remins unhngedF nder the g ondition for the open eonomy equiliriumD we hve to tke into ount the verge prots of lowE nd highEtehnology exporters II F

	ZCP=FE	' £ dl a f@a h ; !; f E ; f; f x ; f t ; ; A
	LMC	H s L s a H d L d	A ! a g@ H s L s ; a h ; f; ; f x ; f t ; A
	Proposition 4: Under Assumption 1 and the partitioning condition of open economy (eq. 11'.B),
	there exists a unique costly trade equilibrium cuto (' £ dl ).
	Proof. See Appendix 2
	Capital Market and Global Accounting ConditionsX IP
	K
				Ad'	@PIFfA
	he ggregte reltive skilled lor supply nd demnd jointly determine the skill premiumF
		H s L s a H d L d	A ! a g@ H s L s ; a h ; N dl ; N xl ; N xh; f ' dl ; f ' xl ; g ' xh A @PP:BA
	2.14	Open Economy Equilibrium Conditions
	FE: e	a f E @I G@' £ dl AA	@PQFfA
	ZCPXe a dl @ f ' dl A dl C xl dl @ f ' xl A C xl @ f ' IP

es xl A C xh dh @g ' xh A C xh @g ' xh A @PRFfA 11 The variables " l ; xh ; xl ; x" represent the probabilities of being a low technology rm ( l ), an exporting high technology rm ( xh ), an exporting low technology rm ( xl ) and nally an exporting rm (x)(See Appendix 2).

  eF fFD tF iton D tF fF tensen tF nd F uortum @PHHQAF Plants and productivity in international tradeD he emerin ionomi eviewD WQD IPTVEIPWHF U fernrd eF fFD F edding nd FuF hott @PHHTAD Comparative Advantage and Heterogeneous FirmsD xfi orking per IHTTVFV fustos @PHHSAD "The Impact of Trade on Technology and Skill Upgrading Evidence from Argentina"D orking per gis nd niversitt ompeu prF W fustos @PHHUAD "Multilateral Trade Liberalization, Exports and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinean Firms"D orking per gis nd niversitt ompeu prF IH ikholmD uF nd uF rF widelfrt@PHHSAD "Relative wages and trade-induced changes in technology" D iuropen ionomi eviewD ilsevierD volF RW@TAD pges ITQUEITTQD eugustF II peenstr nd rnson @IWWWAD "The impact of outsourcing and high-Technology Capital on wages: Estimates for the United States, 1979-1990" D urterly tournl of ionomisD IIR @QA D ppF WHUE WRHF IP peenstr nd rnson @PHHHAD "Global Production Sharing and Rising Inequality: A survey of Trade and Wages" D in ghoiD iDu nd rrrign @edsFA rndook of snterntionl rdeF flkwellX mldenD weDppF IRTEIVSF IQ pontgneD vFD F wyer nd F igngo @PHHSAD Trade in the Triad: how easy is the access to large markets?gndin tournl of ionomisD olF QVD xoF RD IRHPEIRQHF IR ropenhyn @IWWPAEntry, Exit and Firm Dynamics in Long Run EquilibriumD ionometriD vFTHD ppFTPIETSQF IS whin F nd tF n eenen@IWWVAD Technology And Changes In Skill Structure: Evidence From Seven Oecd CountriesD he urterly tournl of ionomisD olF IIQD xoF RD ges IPISEIPRRF IT welitz wF @PHHQADThe impact of Trade on Intra-Industry Reallocations and Agregate Industry Pro-ductivityD ionometriD vol UI@TAD ITWSEIUPSF IU wuendler wF eF nd gF rF gorseuil @PHHQADWage gaps, capital and skillsD mimeo niversity of gliE forniD n hiegoF IV vnik xF @PHHPADWhat explains skill upgrading in less developed countris? FxfiF IW nhezErmo gF nd xF hdy @PHHQAD O and Running? Technology, Trade, and the Rising Demand for Skilled Workers in Latin AmericaD orld fnk oliy eserh orking per QHISFshingtonD hgX orld fnkF PH PH hoenig nd erdier @PHHQAD"A Theory of Defensive Skill-Biased Innovation and Globalization"D he emerin ionomi eviewD ol WQD x QF PI erhoogenD iF @PHHTAD Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector: Theory and Evidence from an Exchange-Rate ShockDgi hisussion pers with numer TQVSF PP eple @PHHSADA Simple Model of Firm Heterogeneity, International Trade, and WagesD tournl of snterntionl ionomisD PHHSD volF TSD issue ID pges IEPHF 6 Appendix 1: closed economy equilibrium

	References
	I eemoglu @PHHQADPatterns of skill premiaD eview of eonomis tudies UHD ppF IWWEPQHF
	P eost F nd vF qsprini @PHHPADCapital Accumulation, Trade Liberalization, and Rising Wage
	Inequality: The Case of ArgentinaD ionomi hevelopment nd gulturl ghngeD volume SSD pF UWQ
	VIPF
	Q ettnsio yFD uF qolderg nd xF vnik @PHHRAD Trade Reforms and Wage Inequality in ColombiaD
	tournl of hevelopment ionomisD URD ppF QQIEQTTF
	R ew fFnd qF ftr @IWWWAFWages, Firm Size and Wage Inequality: How Much do Exports Mat-
	ter? sn hF fF eudretsh nd F hurikD edsFD snnovtionD sndustry ivolution nd imploymentF
	gmridgeX gmridge niversity ress XIQESTF

S fs nd vedezm @PHHUAD "Market access and the evolution of within plant productivity in Chile'D giifo orking per xoF PHUUD giifo qmrF IW T fernrd

Table 1 :

 1 Fixed Effects regression. DV: Wage bill share of skilled labor(1979-1999) Huber White Standard errors clustered by firm. The intercept is not reported * p < 0.10, * * p < 0.05, * * * p < 0.01

		Full Sample	Export Oriented	Import Competing	Non Traded
	ln VA(t-1)	0.035***	0.034***	0.038***	0.036***
		(0.001)	(0.002)	(0.002)	(0.003)
	ln K VA(t-1)	0.011***	0.011***	0.015***	0.007***
		(0.001)	(0.002)	(0.002)	(0.002)
	TECH ind	0.018***	0.028***	0.014***	0.013***
		(0.003)	(0.006)	(0.004)	(0.005)
	Plant Ind,	YES	YES	YES	YES
	ISIC 3 dig and
	Year Ind
	Number of Obs	43003	16923	15027	11026
	R.Sq.	0.316	0.262	0.230	0.392
	Note:

Table 2 :

 2 Dependant variable: Wage bill share of skilled labor(1990-1999) Huber White Standard errors clustered by firm. The intercept is not reported * p < 0.10, * * p < 0.05, * * * p < 0.01

		[M 1]	[M 2]	[M 3]	[M 4]	[M 5]
	ln VA(t-1)	0.010***	0.010***	0.007***	0.039***	0.039***
		(0.002)	(0.002)	(0.002)	(0.003)	(0.003)
	TECH Ind	0.127***	0.124***	0.100***	0.064***
		(0.006)	(0.006)	(0.006)	(0.006)
	Foreign Ind		0.072***	0.054***	0.040***
			(0.014)	(0.014)	(0.013)
	cont exp			0.084***	0.040***	0.039***
				(0.009)	(0.009)	(0.009)
	new cont			0.048***	0.022**	0.023**
				(0.011)	(0.010)	(0.010)
	switchers			0.040***	0.017**	0.018**
				(0.009)	(0.008)	(0.008)
	stop exp			0.052***	0.033**	0.032**
				(0.015)	(0.015)	(0.015)
	TFP(t-1)				0.094***	0.093***
					(0.005)	(0.005)
	TECH Ind(t-1)					0.065***
						(0.006)
	FDI Ind(t-1)					0.042***
						(0.013)
	ISIC 3 dig and	YES	YES	YES	YES	YES
	Year Ind
	Number of Obs	19376	19376	19376	18612	18612
	Adjusted R-Sq.	0.191	0.195	0.208	0.262	0.262
	Note: QP

Table 3 :

 3 Prediction 1: The impact of TL on Technology Spending. Dependant variable: Log of TechnologySpending (1990-1999)

		BX 1	BX 2	BX 3	Tariffs 1 Tariffs 2 Tariffs 3
	Border Effect Exporter	0.107	0.105	0.180*
	BX	(0.073)	(0.091)	(0.102)
	cont*BX	-0.165** -0.205**	-0.195*
		(0.083)	(0.100)	(0.101)
	new*BX	-0.144	-0.140	-0.123
		(0.105)	(0.128)	(0.132)
	stop*BX	-0.100	-0.142	-0.159
		(0.118)	(0.147)	(0.197)
	switchers*BX	-0.080	-0.046	-0.035
		(0.089)	(0.109)	(0.104)
	Tariff X				0.398**	0.372*	0.383*
					(0.186)	(0.202)	(0.200)
	cont*TX				-0.943*** -0.948*** -0.946***
					(0.190)	(0.211)	(0.210)
	new*TX				-0.377	-0.401	-0.425
					(0.248)	(0.271)	(0.259)
	stop*TX				-0.970*** -0.937***	-0.939**
					(0.347)	(0.362)	(0.370)
	switchers*TX				-0.178	-0.152	-0.304
					(0.214)	(0.243)	(0.236)
	cont exp	1.233*** 1.397*** 1.267*** 2.645***	2.688***	2.590***
		(0.359)	(0.425)	(0.429)	(0.434)	(0.481)	(0.478)
	new cont	1.316*** 1.303**	1.188**	1.605***	1.638***	1.644***
		(0.456)	(0.540)	(0.558)	(0.561)	(0.611)	(0.590)
	switchers	0.792**	0.686	0.536	0.871*	0.808	1.053*
		(0.381)	(0.451)	(0.429)	(0.494)	(0.567)	(0.550)
	stop exp	0.853	1.070*	1.075	2.633***	2.587***	2.500***
		(0.528)	(0.631)	(0.851)	(0.791)	(0.828)	(0.833)
	Employment initial	0.941*** 0.920*** 0.904*** 0.950***	0.929***	0.913***
		(0.037)	(0.041)	(0.041)	(0.038)	(0.041)	(0.041)
	K L initial	0.265*** 0.236*** 0.254*** 0.265***	0.240***	0.260***
		(0.038)	(0.043)	(0.040)	(0.040)	(0.044)	(0.041)
	FDI Ind (t-1)		0.646*** 0.577***		0.614***	0.558***
			(0.116)	(0.118)		(0.122)	(0.127)
	Financial Ind (t-1)			0.277***			0.294***
				(0.076)			(0.078)
	TFP initial			0.549***			0.548***
				(0.058)			(0.060)
	ISIC 3 dig and	YES	YES	YES	YES	YES	YES
	Year Ind
	Number of Obs	9500	6704	6619	8393	6468	6383
	Adjusted R-Sq.	0.352	0.355	0.396	0.354	0.359	0.400
	Note: Huber White Standard errors clustered by firm in parentheses
	Note: The coefficient of the intercept is not reported. Import Tariffs of Chile were dropped

* p < 0.10, * * p < 0.05, * * * p < 0.01 QQ

Table 4 :

 4 Prediction 2: The impact of TL on the relative skilled labor demand. Dependant variable: Skilled over unskilled labor(1990-1999)

		BX 1	BX 2	BX 3	Tariffs 1 Tariffs 2 Tariffs 3
	Border Effect Exporter	-0.003	-0.011	-0.008
	BX	(0.015)	(0.019)	(0.021)
	cont*BX	-0.090*** -0.089** -0.102***
		(0.030)	(0.037)	(0.038)
	new*BX	-0.017	-0.011	-0.026
		(0.035)	(0.042)	(0.045)
	stop*BX	0.001	-0.031	-0.031
		(0.051)	(0.064)	(0.069)
	switchers*BX	-0.028	-0.030	-0.034
		(0.028)	(0.032)	(0.033)
	Tariff X				0.053	0.051	0.059
					(0.039)	(0.043)	(0.043)
	cont*TX				-0.302*** -0.285*** -0.319***
					(0.072)	(0.082)	(0.082)
	new*TX				-0.104	-0.139	-0.162
					(0.090)	(0.103)	(0.104)
	stop*TX				-0.179	-0.242	-0.268*
					(0.131)	(0.147)	(0.147)
	switchers*TX				-0.057	-0.044	-0.050
					(0.075)	(0.082)	(0.081)
	cont exp	0.395***	0.358**	0.331**	0.655***	0.593***	0.599***
		(0.131)	(0.157)	(0.161)	(0.169)	(0.193)	(0.193)
	new cont	0.145	0.086	0.107	0.279	0.330	0.348
		(0.148)	(0.173)	(0.186)	(0.202)	(0.234)	(0.236)
	stop exp	-0.018	0.091	0.032	0.372	0.495	0.498
		(0.215)	(0.261)	(0.281)	(0.298)	(0.333)	(0.333)
	switchers	0.182	0.177	0.152	0.173	0.131	0.110
		(0.114)	(0.128)	(0.131)	(0.167)	(0.182)	(0.181)
	TFP initial	0.148*** 0.161*** 0.164***	0.118***	0.124***	0.130***
		(0.014)	(0.016)	(0.016)	(0.014)	(0.016)	(0.016)
	FDI Ind (t-1)		0.219*** 0.172***		0.137**	0.097*
			(0.059)	(0.058)		(0.056)	(0.055)
	Tariff M			-0.270***			-0.311***
				(0.038)			(0.034)
	K L initial			0.084***			0.074***
				(0.009)			(0.009)
	ISIC 3 dig and	YES	YES	YES	YES	YES	YES
	Year Ind
	Number of Obs	25992	18587	18587	22341	18204	18204
	AAdjusted R-Sq.	0.093	0.093	0.103	0.123	0.125	0.133
	Note: Huber White Standard errors clustered by firm in parentheses
	Note: The coefficient of the intercept is not reported

* p < 0.10, * * p < 0.05, * * * p < 0.01 QR

Table 5 :

 5 Variables description Dummy variable equal to one if the firm does not export at the beginning of the period and starts exporting afterwards Stop exporting Stop exp Dummy variable equal to one if the firm exports at the beginning of the period and stops exporting afterwards Switchers Switchers Dummy variable equal to one if the firm enters and exits the foreign market more than once Border Effect Exporter BX Export barriers at 2 digit industry level estimated by Bas and Ledezma (2007).

		[Variable]	[Data]
	Employment	E	Total labour
	Skilled labor	H	Non production workers: employees paid by
			commissions, administrative stuff, subcontract
			employees and other non production employees.
	Unskilled labor	L	Production workers
	Skill intensity	H/E	Non production workers over total labour
	Relative skilled labor demand	H/L	Non production over production workers
	Wage rate of skilled labor	Wh	Wages paid to non production workers over
			the number of non production workers hired
	Wage rate of unskilled labor	Wl	Wages paid to production workers over the
			number of production workers hired
	Wage bill shared of skilled labor	S	Wage bill of non production workers over total
			wage bill of production and non production workers
	Value Added	VA	Sales minus variable inputs deflated by sectoral
			level deflators (Isic-3dig Rev 2 1992)
	Capital labour ratio	K/L	Capital stock over total workers
	Total Technology spending	TECH	Exdpenditures of imported inputs and FTA
	Total factor productivity	TFP	Total factor productivity estimated using Levinsohn and
			Petrin methodology in Bas and Ledezma (2007)
	Financial Indicator	Financial Ind	Dummy variable equals to one if the plant reports
			having paid a loan tax in year "'t"'
	Foreign Direct Investment	FDI Ind	Dummy variable equal to one if the firm
			has more than 50% of foreign capital
	Continuing exporters	Cont exp	Dummy variable equal to one if the firm
			exports during the whole period
	New exporters	New cont

Table 6 :

 6 Summary Statistics by ExportStatus (1990-1999)

		[Exporters]	[Non Exporters]
	Number of Firms	31% (1196)	69% (2704)
	Continuing exporters	12%
	New exporters	7%
	Stop exporting	3%
	Switchers	9%
	Size %
	Large (more 150 workers)	40%	6%
	Medium (50-149 workers)	36%	20%
	Small (10-49 workers)	24%	74%
	TFP (Mean)	2740 (176)	1149 (23)
	Employment (Mean)	202 (4)	55 (0.61)
	Skill intensity (Mean)	0.30 (0.003)	0.25 (0.001)
	Capital Intensity (Mean)	7838 (225)	2593 (46)
	FTA (%)	14%	3%
	Import share of inputs expenditure (%)	53%	11%
	Type of Ownership Foreign	11%	1%
	Note: Standard errors of means are reported in parentheses.

QS

Table 7 :

 7 Exporter Premia: TFP by export status. Dependant variable: TFP Huber White Standard errors clustered by firm in parentheses Note: The coefficient of the intercept is not reported * p < 0.10, * * p < 0.05, * * * p < 0.01

		M1	M2	M3	M4	M5
	cont exp	0.429***	0.294***	0.293***	0.282***	0.208***
		(0.036)	(0.041)	(0.044)	(0.044)	(0.044)
	new cont	0.284***	0.208***	0.190***	0.176***	0.109**
		(0.043)	(0.044)	(0.046)	(0.046)	(0.046)
	switchers	0.258***	0.200***	0.187***	0.173***	0.133***
		(0.033)	(0.034)	(0.035)	(0.035)	(0.034)
	stop exp	0.128*	0.043	-0.001	-0.014	-0.049
		(0.068)	(0.070)	(0.074)	(0.074)	(0.071)
	Employment initial		0.089***	0.072***	0.057***	0.025*
			(0.013)	(0.014)	(0.014)	(0.014)
	FDI Ind(t-1)			0.160***	0.161***	0.140**
				(0.057)	(0.057)	(0.055)
	Financial Ind (t-1)				0.112***	0.075***
					(0.021)	(0.021)
	TECH Ind					0.313***
						(0.025)
	ISIC 3dig IND	YES	YES	YES	YES	YES
	Year IND
	Number of Obs	25990	25990	18588	18588	18588
	Adjusted R-Sq.	0.367	0.372	0.397	0.400	0.415
	Note:

Table 8 :

 8 Decomposition of Relative Demand of Skilled labor (H/L)

		[Total]	[Between]	[Within]	[Within/Total]
			1979-1999
	Industries at 2 digit	0,079	-0,014	0,093	1,182
	Industries at 3 digit	0,202	-0,005	0,206	1,023
	Firms	0,227	0,068	0,158	0,697
			1979-1986
	Industries at 2 digit	0,377	0,110	0,267	0,708
	Industries at 3 digit	0,238	-0,033	0,272	1,140
	Firms	0,317	0,173	0,143	0,452
			1990-1999
	Industries at 2 digit	0,056	0,001	0,055	0,983
	Industries at 3 digit	0,068	0,002	0,066	0,969
	Firms	0,044	-0,083	0,127	2,846

Table 9 :

 9 Decomposition of Relative Skilled Wage

		[Total]	[Between]	[Within]	[Within/Total]
			1979-1999
	Industries at 2 digit	0,014	-0,008	0,022	1,549
	Industries at 3 digit	0,324	0,041	0,283	0,873
	Firms	1,518	0,464	1,054	0,694
			1979-1986
	Industries at 2 digit	0,127	0,002	0,124	0,980
	Industries at 3 digit	0,518	-0,010	0,528	1,020
	Firms	0,752	0,339	0,412	0,548
			1990-1999
	Industries at 2 digit	0,157	-0,038	0,195	1,245
	Industries at 3 digit	0,563	-0,295	0,858	1,524
	Firms	0,639	0,100	0,539	0,843
			QT

The number of rms producing with low technology (N l = l N), those producing with high technology (N h = h N) and the number of new entrants (N E = N 1 G(' £ l ) ) are determined by the total number of rms and the probabilities which depend on productivity cuto levels. W