Exporting And Firm Performance: Evidence From Egypt
Amit K. Khandelwal
This Draft: November 2014
We conduct a randomized control trial that generates exogenous variation in the access to foreign markets for rug producers in Egypt. Combined with detailed survey data, we causally identify the impact of exporting on firm performance. Treatment firms report 15-25 percent higher profits and exhibit large improvements in quality alongside reductions in output per hour relative to control firms. These findings do not simply reflect firms being offered higher margins to manufacture high-quality products that take longer to produce. Instead, we find evidence of learning-by-exporting whereby exporting improves technical efficiency. First, treatment firms have higher productivity and quality after accounting for rug specifications. Second, when asked to produce an identical domestic rug using the same inputs, treatment firms receive higher quality assessments despite no difference in production time. Third, treatment firms exhibit learning curves over time. Finally, we document knowledge transfers with quality increasing most along the specific dimensions that the knowledge pertained to.
Exporting And Firm Performance: Evidence From Egypt – Introduction
Recent decades have seen large resources flow into “Aid-for-Trade” and market access initiatives in developing countries. For example, the WTO Aid-for-Trade Initiative has secured $48 billion in annual commitments from donors to help developing countries overcome “trade-related constraints”. The aim of these interventions is to bring about growth and reduce poverty. Central to this goal is the belief that exporting improves the productivity of firms, a mechanism referred to as learning-by-exporting (Clerides et al. 1998, de Loecker 2007). Many analysts believe that such learning processes are required to generate growth beyond the gains generated by static trade models (Grossman and Helpman 1993, Harrison and Rodriguez-Clare 2010).
Despite their pervasiveness, we know very little about the efficacy of these policy initiatives in improving firm performance, and if they are effective, what mechanisms drive these improvements (Fernandes et al. 2011). There are two central challenges in identifying potential causal effects of exporting. First, more productive firms select into exporting (Bernard and Jensen 1999, Melitz 2003). This selection has plagued attempts to identify empirically the impact of exporting on firm performance because what appears to be higher productivity among exporters may simply be self-selection. The second difficulty is that researchers typically lack detailed information required to isolate changes that occur within firms due to exporting. Instead, the literature uses residual-based measures, such as TFP, which also capture changes in product specifications, product mix, markups and input costs (de Loecker and Goldberg 2014).
This paper conducts a randomized control trial (RCT) on rug manufacturers in Egypt to examine the channels through which exporting affects the performance of firms. To our knowledge, this is the first attempt to generate exogenous firm-level variation in the opportunity to export. The random assignment into exporting directly addresses the first challenge: selection of firms into exporting. Specifically, we provided a subset of small rug producers the opportunity to export handmade carpets to high-income markets. To provide this opportunity, we partnered with a US-based non-governmental organization (NGO) and an Egyptian intermediary to secure export orders from foreign buyers through trade fairs and direct marketing channels. With orders in hand, we surveyed a sample of several hundred small rug manufacturers, firms with 1 to 4 employees, located in Fowa, Egypt. A random subsample of these firms was provided with an initial opportunity to fill these orders by producing 110m2 of rugs (approximately eleven weeks of work). As in any standard buyer-seller relationship, firms were offered subsequent orders provided they were able to fulfill the initial orders to the satisfaction of the buyer and intermediary. Prior to our study, only a small number of firms had ever knowingly exported their products. Hence, we interpret our experimental design as providing non-exporting firms with the opportunity to export to high-income markets.
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