The Effects of Trade Liberalization on Industry Productivity

The aim of this paper is to investigate the effect of trade liberalization on the productivity of the industrial sector in Iran using the translog cost function and SUR method, for the period 1974-2006. So far, no research in Iran has examined the concept of trade liberalization by using the cost function. Therefore this method is very creative; using a microeconomic theoretical basis to study the effects of a macro phenomenon. In this study, the dual theorem is used. In such a way that the effect of trade liberalization has been studied from the two aspects of cost and production. The results of this study show that one percent increase in the volume of trade through trade liberalization, on the one hand, will increase industrial production by %0.47 (primary effect of productivity), and on the other hand, will decrease the cost of production by %0.26 (the dual effect of productivity). Moreover the analysis of industry input demand functions shows that moving towards a freer trade regime causes the firms to adopt such production methods that save energy and raw materials, and tend to increase the use of labor and capital.