Introduction Model Data Basic facts Empirical analysis Conclusion

Not so different from non-traders:Trade premia in Middle East and North Africa

David C. Francis1 Helena Schweiger2

1WB

2EBRD

IEAMexico City, 23 June 2017

Introduction Model Data Basic facts Empirical analysis Conclusion

Motivation

It is firms - not economies - that compete in global markets

Productivity and size premia: Exporters (Wagner 2007, 2012for reviews) as well as importers (Amiti and Konings 2007,Kashara and Lapham 2013) tend to be more productive andlarger than their non-trading counterparts

MENA is often regarded as poorly integrated, trading wellbelow its potential, but there are many low-level, small scaleexporters (Jaud and Freund 2015)

Introduction Model Data Basic facts Empirical analysis Conclusion

Research question and contribution

Question

Are traders in MENA different from non-traders? Are theydifferent from traders elsewhere?

Contribution

1 Unique, comparable firm-level dataset covering more than 80middle-income economies with information on bothperformance measures and firm characteristics

2 Analyse trade patterns for manufacturing and service sectorfirms

Introduction Model Data Basic facts Empirical analysis Conclusion

Background of MENA’s poor integration

Several tariff rates in the region remain high, declines havebeen less dramatic than elsewhere and at times selective

Non-tariff measures (NTMs) have been selectively applied andused as further tools for protection

Several governments subsidise exporting activity, often aimedat SMEs

Introduction Model Data Basic facts Empirical analysis Conclusion

Model predictions

Based on a generalised Melitz (2003) model, we have followinggeneralisable predictions:

1 Firms that trade are expected to be both larger and moreproductive than non-traders.

2 Under specific conditions, these premia are smaller or evennegative. Circumstances where several trading firms operateat or near the productivity (size) threshold for entering tradingmarkets will be characterised by lower (or non-existent)premia. (Schroder and Sørensen, 2012)

3 The relative costs of trading direction (exporting or importing)matter; complementarity between importing and exporting isexpected to result in higher premia for two-way traders.

Introduction Model Data Basic facts Empirical analysis Conclusion

Preview of the results

Positive size premia for MENA exporters and importers, butsmaller than in other, comparable economies

Positive productivity premia for large MENA exporters, butsmall-scale exporters are no more productive thannon-exporters

Positive productivity premia for importing manufacturers, butno size or productivity premia for manufacturers that engagein exporting only

Introduction Model Data Basic facts Empirical analysis Conclusion

Enterprise Surveys

EBRD-EIB-WBG Middle East and North Africa EnterpriseSurvey (MENA ES) and World Bank Enterprise Surveys formiddle-income developing economies across five regions

Representative sample of the formal private sector firms withat least 5 employees for more than 80 economies

Stratified random sampling, stratified by firm size, sector ofactivity and region within each economy

Almost 55,000 interviews conducted between 2009-14, ofwhich 31,844 with manufacturing and 23,024 withservice-sector enterprises

MENA ES: Djibouti, Egypt, Jordan, Lebanon, Morocco,Tunisia, West Bank and Gaza, Yemen

Introduction Model Data Basic facts Empirical analysis Conclusion

High proportion of exporting firms, but most ofthem are SMEs

Figure: AllFigure: SMEs (<100employees)

Introduction Model Data Basic facts Empirical analysis Conclusion

Many small player exporters, but few superstarexporters, and lower median export sales volumes

Manufacturing Services

Region Superstar Big player Small player Superstar Big player Small player

MENA 34,192,480 3,212,753 94,175 5,722,864 941,487 192,252Non-MENA 43,501,980 4,788,233 761,854 8,226,154 1,827,788 468,482

Introduction Model Data Basic facts Empirical analysis Conclusion

Not all exporters in MENA are different fromnon-exporters

Exporters as a group are different from non-exporters, but therelationship falls apart when differentiating exporting firms bytheir export sales volume

Introduction Model Data Basic facts Empirical analysis Conclusion

Low proportion of young (up to 5 years old) firmsamong exporters

Consistent with greater barriers to entry

Introduction Model Data Basic facts Empirical analysis Conclusion

Manufacturers are heavily reliant on imports,particularly large manufacturers

Figure: All Figure: By firm size

Introduction Model Data Basic facts Empirical analysis Conclusion

High proportion of two-way traders

Trader type (%)

Region Non-trader Two-way trader Export only Import only

MENA 28 20.6 5.1 42.7Non-MENA 31.2 12.3 4.3 46.7

Manufacturers in MENA are reliant on import, yet they facesubstantial restrictions in the form of higher tariffs as well asnon-tariff restrictions

Lack of local, quality inputs may limit the expansion ofefficient firms

The higher cost of importing may render the choice to beginimporting only advantageous to those firms that also enter theexport market

Introduction Model Data Basic facts Empirical analysis Conclusion

Foreign-owned firms are more likely to engage intrade, but their proportion is low

Foreign ownership can give firms access to technology,product upgrading and investment

In MENA, 8.7% of firms have at least 10% foreign ownership,compared with 10% elsewhere

Introduction Model Data Basic facts Empirical analysis Conclusion

Estimation model

Baseline cross-economy specification:

lnYisc = β0 +∑

r∈M,NM

β1,rTRADEiscr

+∑

r∈M,NM

β2,rCONTROLSiscr +C∑

c=1

γcDc +S∑

s=1

γsDs + εisc

Y Outcome (log of PFTE or LP)i Firms Sectorc Countryr Region (MENA, Non-MENA)M MENANM Non-MENATRADE Dummy variable equal to 1 if a firm exports or imports; 0 otherwiseCONTROLS Vector of control variables

Introduction Model Data Basic facts Empirical analysis Conclusion

Estimation model: Differentiation

Differentiation by exporter type:

lnYisc = β0 +∑

t∈SP,BP,SS

∑r∈M,NM

β1,rtTRADEiscrt

+∑

r∈M,NM

β2,rCONTROLSiscr +C∑

c=1

γcDc +S∑

s=1

γsDs + εisc

t - trader type: SP - small player, BP - big player, SS - superstar player

Differentiation by trader type:

lnYisc = β0 +∑

d∈TW ,XO,MO

∑r∈M,NM

β1,rdTRADEiscrd

+∑

r∈M,NM

β2,rCONTROLSiscr +C∑

c=1

γcDc +S∑

s=1

γsDs + εisc

d - trade direction: TW - two-way traders, XO - firms that only export, MO - firmsthat only import

Introduction Model Data Basic facts Empirical analysis Conclusion

Exporter size and productivity premia

Trade premia are calculated as exp(β1−1) ∗ 100

Manufacturing Services

Exporter premium Log(PFTE) Log(LP) Log (PFTE) Log (LP)

MENA 72.1*** 10.3 10.6 21.2Non-MENA 140.4*** 29.2*** 21.9*** 20.0*Adj. Wald test (p-value) 0.003 0.303 0.511 0.963

Notes: Based on simple OLS using survey-weighted observations. PTFE=permanent full-time employees.LP=labour productivity (total revenue per permanent full-time employee, in 2012 US dollars, winsorised at1%. All regressions control for foreign ownership, firm age, economy and sector FE. Additional controls:LP (columns 1 and 3), log PFTE (columns 2 and 4). ***, ** and * denote statistical significance at the 1,5 and 10% levels, respectively.

Introduction Model Data Basic facts Empirical analysis Conclusion

Exporter size and productivity premia by exportertype

Manufacturing Services

Log (PFTE) Log (LP) Log (PFTE) Log (LP)

Superstar premiumMENA 870.2*** 524.4*** 355.7*** 375.5***Non-MENA 811.7*** 447.0*** 227.5*** 393.9***Adj. Wald test (p-value) 0.866 0.747 0.430 0.929

Big player premiumMENA 189.4*** 122.4*** 65.7*** 86.8***Non-MENA 294.5*** 104.3*** 48.1*** 74.6***Adj. Wald test (p-value) 0.037 0.635 0.579 0.765

Small player premiumMENA -4.2 -41.4*** -24.8*** -18.4Non-MENA 36.2*** -20.6*** -9.7 -26.6**Adj. Wald test (p-value) 0.004 0.041 0.238 0.677

Notes: Based on simple OLS using survey-weighted observations. PTFE=permanent full-time employees.LP=labour productivity (total revenue per permanent full-time employee, in 2012 US dollars, winsorised at 1%.All regressions control for foreign ownership, firm age, economy and sector FE. Additional controls: LP (columns1 and 3), log PFTE (columns 2 and 4). ***, ** and * denote statistical significance at the 1, 5 and 10% levels,respectively.

Introduction Model Data Basic facts Empirical analysis Conclusion

Two-way traders size and productivity premia

Log (PFTE) Log(LP)

Two-way premiumMENA 128.0*** 82.4***Non-MENA 217.1*** 50.4***Adj. Wald test (p-value) 0.033 0.321

Export only premiumMENA 31.4 17.7Non-MENA 109.5*** 62.5***Adj. Wald test (p-value) 0.037 0.230

Import only premiumMENA 36.7** 86.3***Non-MENA 29.0*** 34.5***Adj. Wald test (p-value) 0.681 0.052

Notes: Based on simple OLS using survey-weighted observations.PTFE=permanent full-time employees. LP=labour productivity (total rev-enue per permanent full-time employee, in 2012 US dollars, winsorised at1%. All regressions control for foreign ownership, firm ageeconomy and sec-tor FE. Additional controls: LP (column 1), log PFTE (column 2). ***, **and * denote statistical significance at the 1, 5 and 10% levels, respectively.

Introduction Model Data Basic facts Empirical analysis Conclusion

Sensitivity analysis

Results are robust to:1 Alternative specifications where we control for average labour,

capital and input costs per worker2 Using the same sample across all specifications3 Removing one MENA economy at a time from the sample

(though there are some differences between premia withinMENA and premia in non-MENA middle-income countries)

Introduction Model Data Basic facts Empirical analysis Conclusion

Conclusion

Findings on exporter premia are consistent with:1 Several firms being near the exporting threshold2 Clustering in the productivity distribution of firms:

Exporters may be constrained or unwilling to expand, or mayhave an incentive to continue exporting despite beinginefficientNon-exporters near the entry thresholds may face incentives,uncertainty or distortions discouraging them from enteringforeign markets

3 Distortions in the market, including barriers to and incentivesfor entering export markets

Introduction Model Data Basic facts Empirical analysis Conclusion

Conclusion (cont.)

Findings on importer/trader type premia are consistent with:1 Barriers in the form of higher tariffs, NTMs and time it takes

to clear customs2 Gains from better access to foreign technology and

participation in supply chains as well as access to inputs ofbetter quality or at a lower cost than those available indomestic markets

3 Selectively applied regulations and procedures

Policy implications:1 Firms would benefit from greater openness to international

trade and more effective customs and trade regulations,including reduced cost of entry for all firms

2 Importing should not be viewed solely through the lens of tradedeficits and foreign exchange reserves

Introduction Model Data Basic facts Empirical analysis Conclusion

Thank you for your attention!

schweigh@ebrd.com