Technology and costs in international competitiveness: From countries and sectors to firms

This paper examines the microfoundations of the determinants of international competitiveness. It does so within the broader “technology gap” perspective whereby wide technological and organizational differences ultimately shape the patterns of trade within sectors across countries and their dynamics. First, we take stock of the incumbent evidence on the relation between cost-related and technological competition at country and sectoral level. The overall picture indeed suggests that the countries' sectoral market shares are mainly shaped by technological factors while cost advantages/disadvantages do not seem to play any significant role. But within any sector, within any country, firms widely differ. Hence the question: does this property apply also at a micro level? Here, we first propose a heuristic model based on a generalized Polya urn process yielding such a property and, then, empirically attempt to identify the underlying dynamics at the firm level using a large panel of Italian firms, over nearly two decades. Results show that also at micro level in most sectors investments and patents correlate positively both with the probability of being an exporter and with the capacity to acquire and to increase exports, whereas labour costs show a negative effect only in some sectors. The result is reinforced when separating the short- and long-run effects, highlighting the predominant impact of technological proxies and basically the irrelevance of wage costs.