Many studies emphasise the importance of export growth in economic development, but there is an unanswered question: does exporting increase economic growth or does growth increase exports? A question which a recent natural experiment – demand shocks experienced by Chinese exporters due to the Asian financial crisis – may help answer. It short the evidence suggests that exporting improves firm performance.
While a number of studies have documented a positive relationship between trade and growth performance, there is still debate over whether exporting causes economic growth, or whether the causation runs the other way, that is, economic growth causes increased exporting.
There is 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? Unfortunately this is a difficult question to answer by simply observing the correlation between exports and firm performance. This is because exporting may be the consequence of high firm productivity but it could also be the cause of it.
Dean Yang has an article at VoxEU.org which looks at this issue, he asks Does exporting improve firm performance? Yang writes
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.In recent research, Park, Yang, Shi, and Jiang forthcoming, a natural experiment – Chinese exporting during the Asian financial crisis – is exploited since in key respects it approximates the randomised experiment suggested above. Yank explains
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.Their study uses longitudinal data in 1995, 1998, and 2000 collected by China's National Statistical Bureau on firms with some amount of foreign investment. Park, Yang, Shi, and Jiang construct an exchange rate shock measure specific to each firm in their data set. This measure is the average exchange rate change of a firm’s export partners weighted by the firm's export destinations in 1995, that is, prior to the Asian financial crisis. They look at changes in exports driven by these exchange rate shocks. Yang continues,
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.So what Park, Yang, Shi and Jiang find is that exporting improves firm performance. So we have yet another reason to like trade.
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.
- 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.