Markups of Exporters and Importers: Evidence from Hungary

In this paper, we study the relationship between different proxies of firm-level markups and trade status, using balance sheet information linked to detailed trade data from Hungary between 1995 and 2003. We find that importing is strongly positively correlated with markup measures, both across and within firms. We argue that this correlation can reflect three channels: self-selection, higher physical productivity resulting from access to a larger variety of inputs, and quality upgrading based on high-quality imported intermediate inputs. We present evidence for the relevance of the third channel by showing that importers' markup premium is higher when inputs arrive from developed countries, and that importing is correlated with higher-quality (price-adjusted revenue) exports. We find no robust evidence for exporter premium when controlling for importing. We argue that the non-existent exporter premium might result from the stronger competition in export markets relative to domestic markets.