Does exporting increase business productivity?

Recent decades have seen large resources flow into aid-for-trade and market access initiatives in developing countries. For example, the WTO’s Aid-for-Trade Initiative has secured $48 billion in annual commitments from donors to help developing countries overcome trade-related constraints. The aim of these interventions is to bring about growth and reduce poverty. Central to this goal is the belief that exporting improves the productivity of firms, a mechanism referred to as learning-by-exporting (Clerides et al 1998, de Loecker 2007). However, we know very little about whether these policy initiatives improve firm performance, and if so, through what mechanisms (e.g. see Cadot et al 2011).

There are two central challenges in identifying the causal effects of exporting. First, more productive firms select into exporting, making it hard to disentangle higher productivity due to exporting from self-selection. The second challenge is that analysts typically lack detailed information required to isolate changes that occur within firms due to exporting. Instead, they rely on residual-based measures that confound productivity gains with changes in product specifications, product mix, markups and input costs.

A randomised control trial in Egypt

To navigate these challenges, we have just completed a randomised control trial on rug manufacturers in Egypt to examine the channels through which exporting affects the performance of firms (Atkin et al 2014). To our knowledge, this is the first attempt to generate exogenous firm-level variation in the opportunity to export, and, coupled with very detailed data collection, allows us to identify the causal impacts of exporting on firm performance.

Specifically, we provided a subset of small rug producers the opportunity to export handmade carpets to high-income markets. To provide this opportunity, we partnered with a US-based non-governmental organisation and an Egyptian intermediary to secure export orders from foreign buyers through trade fairs and direct marketing channels. With orders in hand, we surveyed a sample of several hundred small rug manufacturers located in Fowa, Egypt. A random subsample of these firms was provided with an initial opportunity to fill these orders by producing 110m2 of rugs (approximately eleven weeks of work). As in any standard buyer-seller relationship, firms were offered subsequent orders provided they were able to fulfil the initial orders to the satisfaction of the buyer and intermediary.

We then ran periodic surveys to collect data on both treatment and control firms. In addition to measures of quantities and prices for both outputs and inputs, our production-line level data allowed us to record detailed specifications for the rugs being produced at the time of each survey round. We also collected direct measures of product quality along 11 dimensions from a skilled quality assessor who visited each firm in each survey round. These quality measures capture a combination of both specifications and hard-to-codify characteristics that depend on the technical skill of the firm, such as how flat the rug lies on the floor or how sharp the corners are. We also captured information flows between buyers, the intermediary and producers that include transcripts of buyer feedback and the content of discussions between the intermediary and the producers. Together, these data allow us to address directly the measurement challenges in assessing how exporting affects firm performance.

Results

We find that the opportunity to export raises firm profits by between 15 and 25%, depending on the profit measure. The substantial increase in profits is interesting, particularly given the mixed impacts the literature has found when exploring supply-side interventions (e.g. credit access or business training; see McKenzie and Woodruff 2013), and are suggestive that demand-side constraints might be important for firm growth. These increases in profits are accompanied by large improvements in product quality, even though productivity (as measured by rug production per worker hour) falls.

These findings are suggestive of quality upgrading where buyers in high-income countries demand high quality rugs that are slower to produce. However, this quality upgrading can occur with or without learning. Firms may have always known how to produce higher quality goods but there wasn’t sufficient demand from the domestic market to do so (so that exporting induces a movement along the production possibilities frontier). Alternatively, the upgrading and profit increases may come in part from learning-by-exporting; increases in the efficiency of firms at producing either rug quantity or quality. That is, does exporting induce an outward shift in the production possibilities frontier?

Learning by exporting

We document learning-by-exporting in four steps. First, both quality and productivity rise after adjusting for product specifications (as noted above, without adjusting for product specifications, productivity falls). If there was no learning-by-exporting, there would be no difference between treatment and control firms that are making similar rugs. Second, at the end line, we asked all firms in our sample to manufacture an identical domestic rug using identical inputs and a common loom in a workshop that we leased. The rugs that treatment firms produce received higher scores along every quality metric and were more accurate in terms of the desired size and weight; moreover, treatment firms do not take longer to produce these rugs despite their higher levels of quality. Again, treatment and control firms would be statistically equivalent if there was no learning. Third, we document that quality and productivity evolve over time, suggestive of learning curves. Fourth, we draw on correspondences between foreign buyers and the intermediary, and on discussions between the intermediary and producers, to document that our results come, in part, from knowledge flows. In particular, treatment firms improve quality most along the particular quality dimensions that are discussed during meetings with the intermediary.

Taken together, the evidence indicates that learning-by-exporting is present in our data. Given that this learning is induced by demand for high-quality products from high-income foreign buyers, these changes would likely not have occurred as a result of increased market access to domestic markets.

As is the case in any randomised control trial, we are cautious to generalise our findings too broadly. However, we believe that two features of this study—random assignment of export status and detailed surveys that allow us to unpack the changes occurring within the firms—contribute to our understanding of the impacts of trade on the developing world.

References

Atkin D, A Khandelwal and A Osman (2014). “Exporting and Firm Performance: Evidence from a Randomized Trial”, CEPR Discussion Paper 10276.

Cadot O, A Fernandes, J Gourdon and A Mattoo, (2011). Impact Evaluation of Trade Interventions: Paving the Way, The World Bank.

Clerides S, S Lach, and J Tybout, “Is Learning by Exporting Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco”, Quarterly Journal of Economics, 113, 903-947.

De Loecker (2007). “Do exports generate higher productivity? Evidence from Slovenia,” Journal of International Economics, 73, 69–98.

McKenzie, D and C Woodruff (2013): “What Are We Learning from Business Training and Entrepreneurship Evaluations around the Developing World?” The World Bank Research Observer.

Published in collaboration with Vox EU 

Author: David Atkin is an Assistant Professor of Economics at the University of California Los Angeles. Amit Khandelwal is an Assistant Professor of Finance and Economics at Columbia University’s Graduate School of Business. Adam Osman is an Assistant Professor of Economics at the University of Illinois at Urbana-Champaign.

Image: A container ship departs Burrard Inlet in Vancouver, British Columbia March 6, 2009. REUTERS/Andy Clark.