Export performance requirements

Export performance requirements represent only one of a wide range of policy measures that have been applied by countries to promote export-led growth with the involvement of inward FDI.

Other measures include various incentives, tariff cuts, efforts to upgrade the physical and technical infrastructure (not least in the form of EPZs), human resource development and various trade facilitation measures (see, for example, UNCTAD, 2002). This should be kept in mind when assessing the role and impact of export performance requirements.

From a theoretical perspective, it can be argued that, under perfect competition, if a firm is able to export competitively, it would do so on its own initiative to maximize its profits. Requiring it to export more than it deems profitable, would imply a need for some form of compensation (WTO, 1998). Given that firms may be operating in less than perfectly competitive conditions characterized by market segmentation and information asymmetry, export performance requirements have sometimes been applied to remedy sluggishness on the part of TNCs to seize export opportunities, as well as to deal with restrictive business practices (Moran, 1998). In countries that have embarked on an import substitution approach,

export performance requirements have also frequently been employed to counterbalance an anti-export bias. By making market access contingent on exporting, for example, TNCs might be induced to reconsider the orientation of their activities in favour of exporting.

There are examples of such government interventions having led some "first mover firms" to establish new export platforms, and that has triggered similar decisions by other firms in the same industry (Moran, 1998). Some theoretical studies have concluded that, in the presence of oligopolistic behaviour and tariff distortions, export performance requirements can benefit host countries by reducing payments to foreign owners, reducing output in excess supply and by shifting profits to locally owned firms (Rodrik, 1987; Greenaway, 1991).

A detailed analysis of United States and Japanese FDI in a sample of 74 countries in seven broad branches of manufacturing over the 1982-1994 period found export performance requirements to be effective in increasing the export-orientation of foreign affiliates to third countries (Kumar, 1998, 2002a). Among the countries studied in this analysis, export performance requirements seem to have helped Malaysia succeed in expanding its manufactured exports, especially of electronic components where it now commands 10 per cent of the world market (chapter IV). In Chile too, export performance requirements were found to be useful in diversifying the country’s export base (chapter II). In South Africa, export requirements form an integral part of the Motor Industry Development Programme, which appears to have been successful in promoting an internationalization of the South African automotive industry (chapter V). Similar efforts to boost exports from the textile industry, however, have been less successful. The fourth case differs somewhat from the other three. In India, export performance requirements associated with various incentives schemes and EPZs do not appear to have been particularly effective in encouraging foreign companies to set up export-oriented production. Meanwhile, some domestic-market seeking FDI, for example in the food and the automotive industries, have complied with export requirements that were imposed as a condition for market

access, resulting in some favourable externalities to the host economy in the form of long-term vertical trade linkages as well as diffusion of new technology. Furthermore, exports have continued even after the mandatory requirements expired, suggesting that companies involved have discovered new profit centres through export performance requirements (chapter III).

Other countries have also made use of various export performance requirements in their industrialization strategies. China, for example, successfully pushed foreign enterprises to export through such requirements imposed at the time of entry (Rosen, 1999).²¹ In Brazil, Mexico and Thailand, export requirements were successfully used for triggering a burst of export-focused investments in the automotive industry (Moran, 1998, pp. 53-62). In the mid-1980s, the Government of Thailand started imposing similar requirements on foreign affiliates to push them to export. That prompted the Japanese automobile producers to think of integrating Thailand into their global production networks. The development of an internationally competitive automotive parts industry in the country also attracted investments by global companies such as General Motors, DaimlerChrysler and Ford. Thailand has emerged as South-east Asia’s main automotive hub, with a production capacity of one million vehicles. It exported 170,000 vehicles in 2001, making it the third largest exporter of automotive products in Asia after Japan and the Republic of Korea.²²

It is worth noting that the more successful examples of the use of mandatory export requirements are mostly related to those developing countries with fairly large domestic markets, which gave their governments a relatively strong bargaining position vis-à-vis

21 The proportion of exports by foreign affiliates in total manufactured exports has steadily increased over the 1990s to 45 per cent. Foreign affiliates now account for over 80 per cent of China’s high technology exports (UNCTAD, 2002).

22 Honda and Toyota have recently added second shifts with Honda announcing sourcing of Honda City for the Japanese market from Thailand and Toyota, making Thailand a global production base for pick-up trucks (Financial Times, 6 December 2002).

foreign investors. The empirical evidence suggests that mandatory export performance requirements have been useful in moving TNCs from import substitution investments mainly in large markets to full-scale plants integrated into their regional or global supply networks.

While the ability to link export performance criteria to domestic market access is likely to be less feasible in smaller economies, the process of globalization and market integration is also eroding the bargaining power of large countries in many industries. In the cases of Chile, Malaysia and South Africa, export performance requirements were closely linked to fiscal incentives or equity ownership advantages and were perceived by investors more as a positive inducement to take advantage of host-country comparative advantages than as a burden. For example, the electronics TNCs that invested in Malaysia did so from the outset mainly to supply regional and global markets, meaning that exports might have increased even in the absence of the requirements. Still, the incentives granted to export-oriented projects may have contributed to attracting and expanding such investments in Malaysia.