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We investigate the effect of the rise in product market competition, measured by the increase in Chinese exports to Mexico and the US on the productivity of Mexican plants between 1994 and 2007. We use detailed panel data on Mexican manufacturers matched with trade data at the product level. Using quantity-based estimates of plant-level productivity, we identify the effect of increased foreign competition on Mexican plants. We find robust evidence of a heterogeneous effect, with foreign competition causing initially low-productivity plants to fall farther behind their peers. We focus on within-plant reallocation of output as an intermediate mechanism. All plants reallocate production towards existing higher revenue products increasing skewness of within-plant sales distribution, but along the extensive margin, both within and across plants, the selection mechanism in terms of product dropping and plant exit appears impaired. However, initially high-productivity plants experience a high degree of product churning in response to competition by introducing new products while their low-productivity peers maintain the status quo. Interesting differences also emerge in terms of the types of products being introduced with initially low-productivity plants substantially less likely to introduce products closer to their comparative advantage or with higher potential for productivity-enhancement, possibly contributing towards such plants’ loss in productivity.
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