Does the Export Market Matter? A Literature Review

Megaregional Agreements

Overall, the current trend for many countries is to come together into regional blocs that are significantly larger in trade and investments. These larger blocs are commonly referred to as megaregional trade agreements. Over the past few years, three major megaregional trade agreements have been under negotiation: 1. The Transatlantic Trade and Investment Partnership between the

EU and the US 2. The Trans-Pacific Partnership between the United States and 11 countries in the Pacific Rim 3. The Regional Comprehensive Economic Partnership, which brings together the 10 members of the Association of Southeast Asian

Nations (ASEAN) with six other countries in Asia and the Pacific, including India.

On the implications for Sub-Saharan African countries, there is a legitimate concern about market loss and trade diversion. These megaregional trade agreements could erode preferences and increase competition for African countries in Asian markets.

The next section looks empirically at how trading with different partners at different levels of development affects Sub-Saharan African manufacturing firms.

Does the Export Market Matter? A Literature Review

Aw and Hwang (1995) and Bernard, Jensen, and Lawrence (1995) pioneered the literature on firm-level characteristics and export market participation. Scholars have sought to explore whether exporting enterprises have higher performance characteristics relative to nonexporters.

Empirical studies on exporting and performance have been carried out for several high-income countries (Belgium, Denmark, France, Germany, Ireland, Italy, Portugal, Spain, Sweden, the United Kingdom, and the United States). However, there has been relatively little empirical work using firmlevel data on African firms. The studies that have been done tend to concentrate on a small number of countries. Examples include Mengistae and Pattillo (2004) for Ethiopia, Ghana, and Kenya; Bigsten et al. (2004) for Cameroon, Ghana, Kenya, and Zimbabwe; Van Biesebroeck (2005) for Burundi, Cameroon, Côte d´Ivoire, Ethiopia, Ghana, Kenya, Tanzania, Zambia, and Zimbabwe; and Bigsten and Gebreeyesus (2009) for Ethiopia.

These studies find that exporters generally perform better than nonexporters. The positive productivity premium for exporters can be explained through two alternative but not mutually exclusive hypotheses: selfselection and learning by exporting.

In the self-selection hypothesis, the causality runs from productivity to exports. The most productive firms “self-select” into the export market, in the sense that they raise productivity before (not after) their entry into

foreign markets. The additional costs of selling goods in foreign countries constitute an entry barrier that less successful firms cannot overcome. This self-selection hypothesis is tested empirically by looking at performance characteristics in the period before exporting. Empirical results for manufacturing exporters in Germany (Bernard and Wagner 1997), the United Kingdom (Girma, Greenaway, and Kneller 2002), and the United States (Bernard, Jensen, and Lawrence 1995) show that the exporters have significantly faster employment, shipment, and productivity growth than the nonexporters.

Learning by exporting is the alternative hypothesis to self-selection, and the causality runs now from exports to productivity. Exporters gain knowledge flows and productivity advantages through contact with international competitors and customers. Firms participating in international markets are exposed to more intense competition and must improve faster than firms that sell their products domestically only. This is tested empirically by looking at performance characteristics of exporters compared with nonexporters in the period following their entry into export markets. The empirical results vary on the impact of exporting on enterprise performance. Aw and Hwang (1995); Bernard, Jensen, and Lawrence (1995); Bernard and Wagner (1997); and Clerides, Lach, and Tybout (1998) fail to find any evidence to support the learning-by-exporting hypothesis. By contrast, studies on Canada (Baldwin and Gu 2003), Sweden (Hansson and Lundin 2004), and the United Kingdom (Girma, Greenaway, and Kneller 2002) do find evidence to support the hypothesis that exporting boosts the productivity of the exporters examined.

Lately, empirical studies have started to look at firms’ exports broken down by destination regions or countries. These studies apply the standard approach used in empirical studies on the exporter productivity premium when investigating the relationship between exports and productivity by destination country or region. The productivity gains from exporting, if they exist, are likely to depend on the characteristics of the destination countries. There is a strong belief that selling in high-income country markets generates more learning opportunities, thanks to the advanced technologies used, compared with exporting to LMICs. Using a data set of Slovenian firms, De Loecker (2007) finds that new exporting companies enjoy significant productivity gains with respect to nonexporters and even greater gains for firms exporting to high-income countries. Another study, by Park et al. (2010) on Chinese firms, shows that exports increase productivity and that these gains are stronger for firms exporting to countries that are more developed.

Another strand of the literature goes deeper in this investigation, by inquiring about the sources of exporting firms’ high productivity. How firms reach their ex ante productivity advantage is examined by some recent theoretical contributions in the field (Costantini and Melitz 2008).

In this chapter, technological inputs are the key variable that entails firm heterogeneity and specifically the differences in efficiency between exporters