Understanding the importance of firm heterogeneity in a liberalised trade environment : a case study of South African footwear manufacturers.
Traditional trade theories, such as the Ricardian and Heckscher-Ohlin models, posit that comparative advantage determines a country’s industrial structure in a liberalized trade environment. However, developments in contemporary trade theory challenge the central tenants of this approach. Ricardian and Heckscher-Ohlin models assume that industries are comprised of homogeneous firms that can be modeled using a representative firm. Under this conception, industrial evolution is driven by comparative advantages. However, empirical evidence of post-liberalisation industrial change indicates that industrial performance is significantly more variable than predicted by traditional models. Even within industries, firms exhibit markedly divergent performance. The new trade theory of heterogeneous firms thus argues that there are fundamental differences between firms, even within narrowly defined industries, and these differences drive a post-liberalisation churning process that results in the reallocation of capital and labour within an industry. This study takes an innovative approach. Instead of comparing productivity across a large sample of firms in different industries, it uses a case study to examine, in depth, the differences between firms within a particular industry. The industry selected for the study is the South African footwear manufacturing sector. The study employs qualitative research techniques to interrogate the applicability of the new trade theory of heterogeneous firms and, importantly, to investigate the scope for constructive development policy. It finds that there are marked differences between firms in the South African footwear manufacturing sector, and provides evidence that these differences matter. Additionally, it finds evidence of intra-industry reallocations in the period following trade liberalisation. These findings are significant in that they emphasise that in a liberalised trade environment, individual firms possess agency that allows them to develop a competitive advantage that may run contrary to the comparative advantage of the country in which they operate. These findings are helpful in developing a more accurate understanding of trade liberalisation dynamics, and they support the argument for industrial policy support in strategic industries.