International trade and performance of firms: Unraveling export, import and productivity puzzle

• We explore the linkage between trade participation and productivity performance.
• Exporters, importers and both way traders are more productive than others.
• More productive firms self-select themselves in exporting and importing.
• The learning effects of importing on labor productivity growth are found to be valid.
• R&D efforts are more effective for improvement in labor productivity rather than TFP.

This article explores the linkage between trade participation and productivity performance for a sample of Indian manufacturing firms over the period 1994–2006. We consider two yardsticks of productivity, namely total factor productivity (TFP) and labor productivity for analysis purpose. As far as the labor productivity is concerned, the results indicate that exporters, importers and both way traders are more productive than others. Although, overall our results are somewhat mixed and indicate for a weak inter-link between trade and productivity, but the result appear to be more favorable for the export channel of trade as it clearly indicates that exporting leads to productivity improvement over time. There are also some statistical evidences to conclude that more productive firms self-select themselves in the exporting as well as importing market. The learning effects of importing on productivity growth turn out to be more favorable for labor productivity than TFP. Finally, the results clearly highlight the positive effect of R&D efforts of firms on labor productivity in the Indian manufacturing.