The recent literature on trade and firm heterogeneity highlights the importance of productivity gains from trade-induced selection and reallocation. Many developing and fast growing economies that are progressively opening up to trade are characterized by a significant presence of State-Owned Enterprises (SOEs) next to Private-Owned Enterprises (POEs). Can we still expect the same gains through the same channels in economies with a strong presence of SOEs? Which features of SOEs are key in shaping the effects of trade liberalization? We explore these questions first by introducing SOEs in a model of trade with firm heterogeneity. The model shows that the inefficiencies produced by SOEs can hinder the reallocation process and potentially reduce the productivity gains from trade. We test the predictions of the model using a new dataset of Vietnamese firms, and assess the effects on Vietnam’s 2007 access to the WTO. The standard selection effect triggered by trade liberalization is confirmed for private firms, while it is silent for SOEs. Moreover, we find that, as result of multilateral trade liberalization, productivity increases in POE-dominated sectors, and less so or not at all in SOE-dominated sectors. Our estimates suggest that WTO entry is associated with an increase in average productivity of 6.2 percent in the period 2005-2013. Finally, we show that the overall productivity gains would have been more than 40 percent larger if SOE-dominated industries had been replaced by POE-dominated industries. Our results suggest that SOEs represent a large
obstacle to trade-induced efficiency gains.
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