So how does this export-market restructuring impact on aggregate productivity growth? Before addressing this issue, it is important to consider the interaction of firms, industries and aggregate productivity growth. A rapidly growing body of research has sought to provide micro evidence on the role of resource reallocations for productivity growth (c.f. Bartelsman and Doms, 2000, for a survey of the literature). Here resource reallocations can comprise intra-firm reallocations (as firms become more efficient over time), inter-firm reallocations (as less efficient firms lose market shares) and entry and exit (assuming that new firms are more productive than those that exit). Some of the representative studies include Baily et al. (1992), Olley and Pakes (1996),
70 In addition, the negative impact of exit on firm efficiency is also captured in Bernard and Wagner (1997) and Clerides et al. (1998).
the US; Disney et al. (2003) for the UK. These are mostly based on some form of decomposition of an index of industry-level productivity. For instance, Olley and Pakes (1996) examine the dynamics of productivity in the US telecommunication-equipment industry over three decades, and show that since 1975 most of the productivity growth in the industry has increased as a result of reallocations of resources, particularly the high exit probabilities for plants in the lower end of the productivity distribution.
Nevertheless, none of the above-mentioned studies covers the effect of exporting on industrial restructuring and thus aggregate productivity, which has merely started to catch attention in more recent studies, say for the US, UK, Canada and Sweden. This more recently developed literature is reviewed below.
The United States
Motivated by the empirical evidence of the effect of trade on productivity, Melitz (2003) develops a theoretical model, allowing for heterogeneous firms, to study trade, intra-industry reallocations and their impact upon aggregate productivity. In a general equilibrium setting, the model shows how trade liberalisation induces only the more productive firms to participate in export markets whilst simultaneously forcing the least productive ones out of the market. Here the additional sales gained by more efficient firms as well as the exit of the least efficient ones jointly contribute to reallocations of market shares towards the more productive firms and this eventually leads to aggregate productivity gains. In doing so, profits are also equally reallocated towards more productive firms. This model highlights an important transmission channel for understanding the interaction between firms and industry performance, drawing on the notions of sunk entry costs as well as firm-level heterogeneity. Above all, it is crucial to treat firms differently due to the fact that the impact of trade is distributed differently across firms with differentiated levels of productivity.
That is, the trade-induced reallocation effect amongst heterogeneous firms generates changes in a country’s aggregate productivity, which cannot be explained by models based on representative firms (as in the conventional neoclassical models).
in Bernard et al. (2005). In a similar fashion, they show how the interactions of firms, industries and countries can affect the way economies respond to globalisation, again within a general equilibrium setting incorporating monopolistic competition and heterogeneous firms. However, they take a different approach in that they concentrate on comparative advantage. Their model generates a number of novel predictions about the impact of falling trade costs on job turnover, aggregate productivity and the welfare gains obtained through reallocations of resources. First of all, intra- and inter-industry reallocations of resources brought about by trade liberalisation improve average industry productivity and sectoral firm output, but relatively more so in industries with a comparative advantage than in those with comparative disadvantages. Secondly, these trade-induced reallocations also lead to considerable job turnover in all industries, with ultimately net job creation in comparative advantaged industries and net job destruction in comparative disadvantaged ones. Thirdly, the creative destruction of firms taking place in all sectors in the steady state, but this is more highly concentrated in comparative advantage industries vis-à-vis comparative disadvantage ones. Lastly, the productivity gains from creative destruction, which is associated with heterogeneous firms, magnify ex ante comparative advantages and therefore constitute a new channel for welfare gains, as trade costs fall.
This model distinguishes itself from that developed by Melitz (2003) principally in that it allows for different results across industries and countries with comparative advantages. For instance, the importance of firm self-selection varies with the complex interactions of country and industry characteristics; and the strength of gross job flows and the extent of steady-state creative destruction all differ across industries and countries.
Lastly, Bernard and Jensen (2004b) provide an empirical study of trade-induced aggregate productivity growth, utilising micro data for US manufacturing. It is shown that foreign exposure does indeed foster productivity growth for firms, industries and manufacturing as a whole. In particular, increased export opportunities are associated with both intra- and inter- industry reallocations (from less efficient plants to more efficient ones), accounting for 40% of TFP growth in the manufacturing sector, half of which is explained by an
intra-as well intra-as the fintra-aster growth rates found in exporters (in terms of employment and output) offer an additional reallocative channel for explaining aggregate productivity growth. Limitations of this study are that market entry and exit are not considered; and that all plants in the dataset existed throughout the period of study. Thus, there is no comparison of the relative importance of ‘creative destruction’, and most importantly how trade interacts with market entry and exit.
The United Kingdom
Emerging evidence on industrial restructuring has shown that UK productivity growth is increasingly due to a market selection process, in which more productive entrants replace less productive establishment whilst high productivity incumbents gain market shares (c.f. Oulton, 2000; Disney et al., 2003). In particular, the study by Disney et al. suggests that between 1980 and 1992, 50% of labour productivity growth and 80-90% TFP growth could be explained by what they term external restructuring effects (i.e. the impact of market entry and exit as well as inter-firm reallocations in market shares). Given the importance of the impact of industry restructuring on productivity growth in the UK, Criscuolo et al. (2004) extend Disney et al.’s (2003) analysis to cover the UK manufacturing for the 1980-2000 period. Unfortunately, it is not possible to assess the contribution of exporters for the UK, in terms of restructuring effects due to lack of data. The innovative feature of this study is their attempt to explain entry/exit restructuring effects in terms of the contribution of globalisation, and thus how the latter impacts on aggregate productivity growth.
They show that the reallocations of resources (through entry and exit) affect aggregate productivity to an increasingly large extent – roughly 25% of productivity growth could be accounted for by this net entry effect from 1980-1985 and this amount went up to around 40% of labour productivity growth from 1995-2000. They then go on to show that globalisation (as measured by sectoral import penetration and the use of ICT) is important in determining the share of net entry in explaining labour productivity growth in UK manufacturing.
However, these results suffer from a high level of aggregation and co-linearity problems, precluding any precise estimates of what proportion of aggregate productivity growth is due to import penetration effects.
Finally, a limited amount of micro evidence on trade-induced productivity growth is available for some other countries. For instance, Baldwin and Gu (2003) find exporters accounted for almost 75% of productivity growth in Canadian manufacturing during the 1990s (even with less than 50% employment), 28% of which was accounted for by export-market entry (of both existing and new entrants). Moreover, Falvey et al. (2004) also show that exporting has a sizeable effect on industry productivity growth using Swedish manufacturing data, in terms of increasing market shares for higher productivity exporters.
5 Chapter 5: An Empirical Analysis of the Exporting-Productivity Nexus at the Firm Level
The literature reviewed in Chapter 4 suggests a number of ways in which exporting, the successful exploitation of overseas markets, can contribute to the firm’s performance at the micro level. In particular, firms that start exporting have to overcome barriers to international markets (i.e. sunk entry cost), and therefore invest in resources and capabilities that provide them with the ability to compete effectively in overseas markets (i.e. absorptive capacity). Thus they achieve higher productivity levels as a prelude to exporting; consequently, there is a self-selection process whereby enterprises that enter export markets do so because they have higher productivity prior to entry (relative to non-entrants).
This also raises the issue of whether exporting itself leads to further benefits through ‘learning-by-exporting’. The empirical evidence (as reviewed in Chapter 4) provides significant support for the ‘self-selection’ hypothesis but much less support for the ‘learning-by exporting’ hypothesis.
It is worth noting that although this thesis concentrates on the productivity-exporting linkage at the micro level, undoubtedly, it also needs to acknowledge another equally important (if not more) channel for exporting to contribute to productivity growth at the aggregate level. Indeed, irrespective of whether firms self-select into international markets and/or become more productive post-entry, dynamic restructuring of the economy (including growth of firms and entry/exit) results in larger market shares for the most efficient (and usually larger) firms that export, and this has a sizeable impact on boosting aggregate productivity. There is growing evidence (both theoretical and, to a more limited extent, empirical) that internationalisation has a positive impact on aggregate productivity growth. In a recently published study using the FAME data, Harris and Li (2008) have, for the first time for the UK, decomposed the aggregate productivity growth and documented a considerable contribution of exporting (in terms of dynamic competition effects, entry and exit and within firm productivity growth) to national productivity. It follows that the aggregate impact of exporting is no longer the focus of this thesis.
instance, substantial evidence of the benefits from international trade provides the UK government with a rationale for intervention to help firms develop their exporting activities when there are market failures (DTI, 2006). These benefits are largely linked to the higher productivity of exporters, which then contribute to overall UK productivity growth through various channels, such as the entry of higher productivity exporters (e.g. the ‘born-global’ companies as discussed in Chapter 1, pp.22-26); existing exporters becoming more productive over time and/or intra-industry and inter-industry resources being reallocated to higher productivity exporters; and the shutdown of lower productivity firms − both exporters and more likely non-exporters with the lowest productivity level, as predicted by some recent theoretical models (Bernard et al., 2003; Melitz, 2003). These different channels through which exporters can affect (productivity) growth are likely to call for different policy responses from the government, if some are more important than others. For example, if existing exporters achieve higher productivity prior to exporting, with little further gains post-entry, then policymakers might want to target support to potential rather than actual exporters (Greenaway and Kneller, 2007), and/or ensure that policies do not hinder market processes both through intra-firm reallocations and market entry and exit (Hoekman and Javorcik, 2004).
There has to date been little micro-based evidence for the UK that quantifies the importance and contribution of exporting to overall UK productivity growth, although Harris and Li (2008) have recently decomposed productivity growth in the UK to show that exporters do indeed experience faster productivity growth than non-exporting firms and therefore contribute more to national productivity growth. More importantly, as far as the present analysis is concerned, there have only been a limited number of econometric studies for the UK that have considered both whether exporters are ‘better’ than non-exporters, and whether there is any post-entry productivity improvement to exporters (e.g. Girma et al., 2004; Greenaway and Kneller, 2004; Greenaway and Yu, 2004). These analyses have used data from the FAME and OneSource databases based on returns firms have to make to Companies House in the UK, but there are a number of issues that arise from the use of these data, for example, the limited coverage of manufacturing sector only, and that the samples used in statistical analysis are
over-sampled71.
Thus a major aim of this chapter is to use (where possible) appropriate data sources from the ARD and FAME to shed light on the following issues:
to quantify the extent to which exporters have higher TFP, when compared to non-exporters. As all other analyses undertaken in this chapter, this initial analysis takes into account firms in all market-based sectors (instead of manufacturing only as in most other work on this topic), paying special attention to the diverse patterns of productivity in distinct industry sectors;
to assess the extent to which productivity growth within firms may be stimulated by exporting, through organisational learning, economies of scale, etc. In terms of structural dimensions, this part includes investigation of possible productivity effects of learning which may occur as a result of preparation for entering overseas markets, as well as looking at productivity effects which may occur following overseas market entry, and effects on medium to longer term productivity trajectories.