Modelling Productivity Effects of Trade Openness: A Dual Approach

A cost function framework is used to model the productivity effect of trade openness in terms of cost saving. The idea of ‘cost saving’ is closer to the entrepreneur's view of productivity. An entrepreneur would expect a reduction in the cost of production if trade openness brings any benefits to their firm. The output-enhancing (primal) productivity effect of openness is obtainable from the cost-saving (dual) productivity effect through the cost-output link. The cost-function framework also enables us to investigate whether trade openness induces firms to adopt a technology that is biased towards the use or saving of any factor of production. An empirical exercise based on time series data for the Australian two-digit manufacturing industries reveals significant cost-saving and output-enhancing productivity effects of trade openness. Trade openness is biased towards the saving of labour and the use of capital. These results are quite insensitive to the choice of alternative measures of openness.