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Firm-Level Determinants of
Export Performance:
Evidence from the Philippines
45th Annual Meeting Philippine Economic Society
14 November 2007
Ma. Teresa S. Dueñas-Caparas
Research Background
Export activity as a driver of economic growth
Research work dealt with the contribution of export
to growth, understanding the factors affecting trade
performance (exchange rate and productivity), and the design of industrial and trade policies
Macroeconomic setting
Research Background
Emergence of firm-level studies
All firms face the same macroeconomic condition YET they respond and perform differently in their export behavior
If so, then, there must be firm-specific characteristics that significantly affect its performance in the world market.
Research Thrust
Identify firm-level characteristics
on Philippine manufacturing firms Issue
No firm-level studies have been
conducted for the Philippines Value-added
Trade Paradigms
Trade pattern is largely explained by comparative advantage (Ricardo, Hecksher-Ohlin)
Assumptions were relaxed and extended to increasing returns to scale and oligopolistic structure.
Neo-technology trade theorist emphasized the role of innovation in creating markets and conferring cost
advantages
Trade Paradigms (cont’d)
Technology and knowledge are considered part of the production function and technological differences of nations determine export activity (Posner 1961, Vernon 1966).
Shortcomings;
Model predicts technologically-advanced nations will export new products
No dynamics for technological catch-up
Learning mode not incorporated
Insufficient treatment of technology
Capability Approach (Schumpeterian)
Salient features;
Innovation is an important determinant of
competitiveness
Firms carry out innovative activities
Importance of monopolistic and oligopolistic market structures (large firms)
Continuous search and learning process that can
have varying results
Advocates building technological capability
Export Performance and
Technological Development
Sector
Annual Growth, % (1985-98)
Patents Exports
Computing and data processing 109.0 33.8
Electricity and electric power 2.8 24.8
Electronics and components classes 97.2 62.4
Optics/ photography 30.4 (7.4)
Communications and networking 95.0 14.8
Electronics, Physics 42.9 25.2
Pharmaceuticals 34.2 38.1
Surgery-body care-cosmetics 62.6 8.3
Source: Montobbio and Rampa, 2005.
Critical Observations
Sectors which offered technological opportunities show the largest improvements in world export shares
(causality not tested)
With technological advancement, structural changes
occur mainly dominated by medium-high technology products
Evolution of trade theory is accompanied by different
approaches in understanding trade performance.
Trade Performance (Firm-level)
Significant role of the entrepreneur
Knowledge and learning process
Mastering technology is costly and firm-initiated
(source of comparative advantage)
Requires capital accumulation complemented by
technological capability measures
Important task: identify determinants of export
performance, design appropriate policies
Firm-level Studies
(Developed and Developing Countries)
Author Research Issue Result
Montobbio and Rampa, 2005
(LA and Asian firms)
Analyze the impact of structural change on the
sectoral distribution of export activities
FDI, technological specialization, skills and R&D
affect export activities;
Structural change affect growth trajectories
Bleaney and Wakelin, 1999
(British firms)
Factor/s affecting trade performance
Technologically innovative activities measure by R&D
expenditures
Sterlacchini, 2001
(Italian firms)
- do- Firm size
Lefebvre and Lefebvre, 2001
(Canadian SMEs)
-do- Import activities, R&D expenditures, distribution
access, knowledge intensity and firm size
Firm-level Studies
(Developed and Developing Countries)
Author Research Issue Result
Alvarez, 2002
[Chile]
Factor/s affecting trade performance
Productivity, firm size, human capital, foreign technical licenses
Sarpong and Wolf, 2004
[Ghana]
- do- Firm age and firm size
Van Dijk, 2002
[Indonesia]
-do- Sectoral variation;
Relative size, foreign affiliation,
firm age
(common factor);
Skilled labor differs across sector,
R&D for mature industries
Wignaraja, 2002
[Mauritius]
-do-
Technological
capability index
Technological index and foreign ownership
Philippine Setting
Philippine Trade Performance
Notable performance of the Philippine products in the
world market
Dramatic drop in export share of traditional exports,
rise of non-traditional export goods
Fundamental weakness in the export structure, i.e.,
concentrated on three products-import dependent and
weak backward/forward linkages
Resulted in productivity gap where export growth is not
translated to output growth
Philippine Trade Performance
Country
Growth in Crisis, %
(1997-98)
Growth Post-crisis, %
(1999-2000)
GDP Export GDP Export
Korea (0.9) 1.0 9.8 15.5
Singapore 4.8 (6.2) 7.9 12.4
Thailand (6.1) (1.5) 4.2 13.5
Indonesia (4.2) 0.8 2.8 15.0
Philippines 2.4 19.8 3.6 13.8
Source: Asian Development Bank.
Philippine Trade Studies
Author Research Issue Result
Pante and Medalla
1990
Evaluated trade and industrial programs
Reforms were selective in revitalizing the country; lowered
protection but did not alter the biases against export and
agriculture
Medalla, Tecson, Bautista, Power and
Associates
1996
Do policy reforms matter?
Efficiency issues in the industry
Export-oriented industries were efficient but structural
weaknesses remain
Yap
1999
Link between trade patterns and competitiveness in the
manufacturing sector
No empirical link established; stressed the dichotomy between
domestic manufacturing and export sector
Lall
2000
Export performance and competitiveness
Competitive base is narrow, low technological activities, weak
technical support for domestic firms
Research Gap
Need to have a deeper understanding on trade
performance and role of technology variables in the
Philippine setting
Provide empirical evidence to the rising literature on
firm-level export performance in developing countries
Conceptual Framework
(Determinants of Export Performance)
Firm size “to compete globally, you have to be big”; capable of bearing large investment and high risks associated with exporting
Firm age Ambiguous effect
Older firms may have accumulated stock knowledge but younger
firms are more flexible
Human Capital Strongly related with technological capabilities where skills and education are preferred features for the foreign market
Research and development expenditure
Associated with technology and knowledge acquisition
Training Enhances learning and accumulates additional skills which can improve productivity
Foreign Ownership Access to superior production, technology, management know-how, and network
Capital intensity Past innovations and knowledge are embodied in the capital good
Conceptual Framework
(Sectoral Variation-Pavitt Taxonomy)
Firm Category
Determinants of Technological Trajectory
Measured Characteristics
Core Sector Source of Technology Source of Process
Technology
Relative Size of
innovating firm
Supplier-
dominated
Agriculture, housing,
private services, traditional
manufacturing
Suppliers, research
extension services,
bog users
Suppliers Small
Scale-intensive Bulk materials like steel
and glass, assembly like
automobile
Product engineering,
suppliers, R&D
In-house; suppliers Large
Specialized
supplier
Machinery and equipment Design and
development users
In-house; consumers Small
Science-based Electronics, electrical
machineries, chemicals
R&D, public science,
production
engineering
In-house; suppliers Large
Source: Pavitt 1984.
Empirical Model
Empirical Model
Source of Data: ADB Investment Climate Survey conducted in year 2002 covering Philippine manufacturing firms, (1) food and food processing (2) textiles (3) garments and (4) electronics and electrical machinery
Selected firms on random basis using stratified simple random design
Total of 716 firms were surveyed across key urban areas, frequency weight is applied to make it representative across the population size
Empirical Model
Variable Definition Measure
EXPORTP2 Export propensity Export/sales
RSIZE Relative firm size No. of employees in firm j/total no. of
employees in sector I where firm j belongs
RSIZE2 (relative firm size)2
SKILLED Skilled manpower Share of skilled workers to total workers in
firm j
RNDSALES00 R&D expenditure Share of R&D expenditure to total sales in
year 2000
TRAINING Skill training Dummy variable where 1= firm offers training,
0=otherwise
MNC Foreign affiliation Dummy variable where 1=firm has foreign
equity participation more than 505,
0=otherwise
CAPINTENSITY Capital intensity Capital stock/labor cost
AGE Firm age Year 2003-operating year of the firm
AGE2 (Firm age)2
Empirical Model
Sectoral estimations were conducted; sectors (2)&(3) were lumped as one.
Dependent variable 0 < EXPORTP2 < 1
Use of ordinary least squares estimation is inappropriate because it fails to recognize the limits of the variable definition while TOBIT estimation fails to recognize endogenous variables bound by zero or positive by definition (censored dataset).
ADB dataset is estimated using generalized linear model (GLZ) with Logit as the link function.
Descriptive Statistics, CPBI 1999
Sector No. of
Establishments
Total
Employment
Value of
Output (P)
Food
(% share)
1,427
(19.2)
212,707
(19.5)
P443,424,756
(25.2)
Clothing
(% share)
1,303
(17.5)
199,376
(18.3)
P85,007,408
(4.8)
Electronics
(% share)
878
(11.8)
283,889
(26.0)
P513,845,489
(29.2)
Others
(% share)
3,842
(51.6)
393,856
(36.1)
P716,407,618
(40.7)
Philippines 7,450 1,089,837 P1,758,685,271
Descriptive Statistics, ADB Survey 2002
Activity Food Clothing Electronics Total
Non-exporter;
EXPORTP2=0
204 156 31 391
Partial exporter;
0<EXPORTP2<1
32 48 24 104
Full exporters;
EXPORTP2=1
5 88 58 151
Missing information
52 54 35 141
Total 241 292 113 646
“Cleaned firms” 189 238 78 505
Key Observations-Food Sector
Food processing firms Average years of
operation is 23 years
85% of the
survey sample are non-exporters
Only 9 firms have
foreign affiliation
Six of the 9 firms
are exporters
Key Observations-Clothing Sector
Clothing firms Only 30% of
the sample are full exporters
Only 52 firms have
foreign affiliation
Oldest firm is 79 years old;
Average age is 15 years
Firms w/o foreign
affiliation are non-exporters
Key Observations-Electronics Sector
Electronic firms Majority of the
surveyed firms are exporters
Youngest firm
is only 2 years in operation
Exporting firms
have foreign affiliation
Oldest firm is
operating for 56 years
Mean and (Standard Deviation)
Variable Food Clothing Electronics
RSIZE 0.4 (0.01) 0.3 (0.0) 0.9 (0.2)
SKILLED 57.4 (0.3) 79.1 (0.2) 82.4 (0.2)
RNDSALES00 0.7 (0.03) 0.7 (0.05) 0.7 (0.04)
TRAINING=1;
EXPORTP2>0
8% 9% 48%
MNC=1;
EXPORTP2>0
3% 17% 58%
CAPINTENSITY 4.5 (10.9) 2.6 (8.3) 6.2 (22.6)
AGE 23 (20) 17 (13) 15 (10)
Estimation Results (z-values in parenthesis)
Variable Food Processing Clothing Electronics
Constant -4.7 (-6.2) -1.8 (-4.3) -8.3 (-2.5)
RSIZE 18.1 (0.2) 295.3 (2.2)*** 372.8 (0.5)
RSIZE2 -147.52 (-0.2) -9885.1 (2.4)*** -3734.9 (-0.4)
SKILLED 3.4 (1.6) -0.3 (-0.6) 1.3 (1.5)
RNDSALES00 -54.8 (-1.2) -10.1 (-3.7)*** 275.5 (3.45)***
TRAINING 1.1 (-0.8) 0.5 (0.5) 2.77 (4.9)***
MNC 1.2 (3.5)*** 5.8 (3.3)*** 2.94 (4.2)***
CAPINTENSITY -0.0 (-0.6) -0.0 (-0.04) 0.2 (3.1)***
AGE -0.6 (-1.0) 0.1 (1.8)*** 0.4 (1.5)
AGE2 0.0 (1.4) -0.0 (-1.5) -0.01 (-1.7)***
NO. OF FIRMS 189 238 78
Analysis and Explanation: Food Sector
Food processing firms
Only MNC affiliation
has significant
effect on export
performance
Few firms have foreign
affiliation, spillovers
not likely evident
Marginal effect: for every
1% increase in foreign equity,
Export performance will
Increase by 6%
Only few firms
are exporters;
Inconclusive results
Analysis and Explanation: Clothing Sector
Clothing firms
MNC and AGE
have positive influence
implying foreign interest
And firm maturity
are important;
Scale economies
and vintage effect
Size variables are significant,
Inverted U-shape
implying non-linear effects
of size (Wagner 2001)
Export performance in
relation to firm size has an
optimal point, beyond
which benefits are
not positive
R&D variable significant
But opposite sign;
Subcontracting is the
Source of technology
Analysis and Explanation: Electronic Sector
Electronic firms
R&D, Training, MNC
and capital intensity are
positive and significant
factors affecting
export performance
Empirically confirms the
predictions of capability
literature for high
technology firms in
developing countries
Partly confirms capital-labor
complementarity where
higher capital intensity
requires skilled employees
Non-linear effect of AGE
is significant; cumulative
effects of learning
and experience does
not matter beyond the
threshold level
Recap
Determinants of export performance on the
Philippine manufacturing firms, 2002
Factors were identified guided by the capability literature
Sectoral variation is stressed
ADB Firm-level survey
Major Findings
Influence of foreign affiliation is similar across the three sectors—positive and significant—suggesting foreign interest is a good source of knowledge and technology
R&D activity, improvement of human capital and capital intensity are important factors for science-based firms.
Firm size has an inverted U-shape across all sectors, but significant only for the clothing firms.
Firm age has a non-linear influence on electronics while vintage effect is suggested for the clothing sector.
Why are some firms better exporter than others?
Foreign interest
Skill development
Capital accumulation
Age
Size
Export
performance
Key Points
Research highlights the importance of
firm-level characteristics in determining
export performance; and
Underscores the relevance of foreign direct investment in the firm’s pursuit of
increasing and/or sustaining global
competitiveness.
Firm-Level Determinants of
Export Performance:
Evidence from the Philippines
45th Annual Meeting Philippine Economic Society
14 November 2007
Ma. Teresa S. Dueñas-Caparas