Production Efficiency and the Extensive Margins of U.S. Exporters: An Industry-level Analysis

Using data from 85 NAICS 4 digit-level industry classifications that span the years 2004–2008, we evaluate whether productivity differentials, which have been shown to determine the decision of firms to export, affect the extensive margins of trade at the industry-level (i.e., the number of firms within an industry that engage in exporting). We use a stochastic frontier production function to derive a time-varying, industry-specific measure of technical efficiency. Employing a multi-level mixed effects model and accounting for the variance structure of the data (i.e., destination markets, industries, and time), we examine the average effect of an increase in industry-specific technical efficiency on the number of firms involved in exporting and the corresponding industry-specific deviations. Our results show that higher levels of industry-specific technical efficiency correspond with larger numbers of firms involved in exporting implying the importance of giving due consideration to approaches that focus on improving technical efficiency. Additionally, a much larger increase is observed among small-sized firms than for medium- or large-sized firms. We discuss the implications of the observed deviations, particularly for policy makers interested in increasing the extensive margins of their nations’ trade.