Participation in export markets is often viewed as a prerequisite for economic growth in developing countries. For example, in a report on the East Asian miracle, the World Bank (1993) pointed to export-oriented economic policies as a key factor behind the region’s rapid economic development. While cross-country studies document a positive relationship between trade and growth performance (Sachs and Warner, 1995; Edwards, 1998; Frankel and Romer, 1999), there is substantial controversy over whether exporting causes economic growth, or whether the causation runs the other way – from economic growth to exporting (Rodriguez and Rodrik, 2001; Irwin and Terviö 2002).
One can pose an analogous question at the level of individual firms – does exporting cause a firm to become more productive and improve its sales and profit growth? This question is difficult to answer by simply observing the correlation between exports and firm performance in existing datasets, because exporting may be the consequence (and not the cause) of high firm productivity (e.g., Melitz 2003). It is easy to imagine ways in which export status could be correlated with firm characteristics that directly influence firm productivity growth. For example, dynamic firm managers may be more aggressive in entering export markets and also be more adept learners or more aggressive in making productivity-enhancing investments. The fundamental problem is that non-exporters are different from exporters in a variety of unobservable ways. To establish the causal impact of exporting on firms, one might imagine running a randomised experiment assessing the impact of exporting on firms by randomly assigning shocks to export demand across firms.
Evidence from the Asian crisis
In recent research, coauthors and I exploit a natural experiment – Chinese exporting during the Asian financial crisis – that in key respects approximates the randomised experiment just described (Park, Yang, Shi, and Jiang, forthcoming). In June 1997, the devaluation of the Thai baht led to speculative attacks on many other currencies worldwide. While the Chinese yuan remained pegged to the US dollar, many important destinations for Chinese exports experienced currency depreciations due to the crisis (both nominal and real). For instance, between 1995 and 1998, the Japanese, Thai, and Korean currencies depreciated in real terms against the US dollar by 31%, 32%, and 43%, respectively. At the other extreme, the British pound and the US dollar experienced real appreciations against the yuan, by 14% and 7%. Because the exchange rate changes varied so widely, two observationally equivalent firms faced very different export demand shocks if one happened to export its goods to Korea and the other exported to the UK.
The Chinese case is particularly interesting for studying the effect of exporting on firm outcomes, because in recent years, China’s export growth has been phenomenal, driving it to become one of the world's largest exporters. From 1990 to 2000, Chinese exports nearly quadrupled from US$88 billion to US$330 billion.1 Over this period, China’s export growth rate was the sixth highest in the world. There also is evidence that during the 1990s the technological sophistication of Chinese exports increased substantially (Schott, 2006; Rodrik, 2006). Another advantage of studying China in our research is that the country did not suffer from a currency crisis itself during the Asian financial crisis, but rather experienced relatively stable economic policies and economic performance during the 1995-2000 period.
Our analysis uses longitudinal data in 1995, 1998, and 2000 collected by China’s National Statistical Bureau on firms with some amount of foreign investment.2 For each firm, we construct an exchange rate shock measure specific to that firm, which is the average exchange rate change of a firm’s export partners weighted by the firm’s export destinations in 1995 (prior to the Asian financial crisis). We focus on changes in exports driven by these exchange rate shocks.3
Using this approach, we ask whether and how instrumented changes in exports affect measures of firm performance. We find that increases in exports are associated with improvements in total factor productivity, as well as improvements in other measures of firm performance such as total sales and return on assets. Our estimates indicate that a 10% increase in exports causes productivity improvements of 11% to 13%, nearly one-eighth of the mean productivity improvement from 1995 to 2000 in our sample.
Additional results provide suggestive evidence that the association between increases in exports and productivity improvements reflects “learning by exporting,” for example via inflows of advanced technology or production techniques from overseas export customers. We find that changes in exports are more positively associated with productivity improvements in firms exporting to destinations with higher per capita GDP, which presumably have more advanced technologies.
1 US dollar figures are real, base 1995.
2 We are restricted to analyzing only firms with some foreign investment participation because the data necessary for the analyses are not available for purely domestically-owned firms.
3 The econometrics involves using the firm-specific exchange rate shock (and interactions with pre-shock firm characteristics) as instruments for the firm’s change in exports from before to after the crisis. Because the timing and pattern of devaluations due to the crisis were unforeseen, this instrumental variable approach plausibly satisfies the requirement that the instrument be uncorrelated with the ultimate outcomes of interest except via the channel of interest (the change in exports). An attractive aspect of this approach is that exchange rate shocks are firm-specific, so we can control for province-sector fixed effects and thus rule out bias from unobserved changes affecting specific sectors in each region.
Edwards, S. (1998). Openness, productivity, and growth: What do we really know?, Economic Journal 108: 383-398.
Frankel, J. and D. Romer (1999). Does trade cause growth?, American Economic Review, 89(3): 379-399.
Irwin, D. and M. Terviö (2002). Does trade raise income? Evidence from the twentieth century, Journal of International Economics, 58: 1-18.
Melitz, Marc (2003), “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, Vol. 71, No. 6, November, pp. 1695-1725.
Park, Albert, Dean Yang, Xinzheng Shi, and Yuan Jiang (forthcoming), “Exporting and Firm Performance: Chinese Exporters and the Asian Financial Crisis,” Review of Economics and Statistics.
Rodriguez, F. and D. Rodrik (2001). Trade policy and economic growth: A skeptic's guide to cross-national evidence,” in Bernanke, B. and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, MIT Press, Cambridge, MA.
Rodrik, Dani (2006). What’s so special about China’s exports?, NBER Working Paper 11947.
Sachs, J. and A. Warner (1995). Economic reform and the process of global integration, Brooking Papers on Economic Activity 1995(1): 1-118.
Schott, Peter (2006). The relative sophistication of Chinese exports, NBER Working Paper.
World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy. Washington DC: Oxford University Press.
Sunday, 29 March 2009
Exporting and firm performance...
On five questions on diversification, I note the importance of export diversification in increasing economic growth. Right on cue, a new article from Vox EU presents evidence from a natural experiment – demand shocks experienced by Chinese exporters due to the Asian financial crisis – which suggests that exporting improves firm performance.