Exports versus FDI in German Manufacturing : Firm Performance and Participation in International Markets

This paper tests some of the predictions of recent advances in trade theorythat have focused on different trade patterns of firms within the samesector. Helpman, Melitz and Yeaple (2005) develop a model in whichinnate productivity differences between firms determine the degree ofinternational engagement of firms: The least productive firms produce forthe domestic market, better performers engage in export activities, and thetop firms establish foreign subsidiaries. Using German firm-level data from1996 to 2002, we test this prediction using non-parametric methods, byexamining the distribution functions of the three subsets of firms forstochastic dominance. Rather than just comparing first moments, thistechnique allows us to compare productivity over the entire distribution.Our results show robust support for the prediction from theory.