Wednesday, 25 March 2009

Another reason to like trade

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 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.

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.
So what Park, Yang, Shi and Jiang find is that exporting improves firm performance. So we have yet another reason to like trade.


Matt Nolan said...

Could this be taken as effectively supporting of merchantilist type policies.

As the goal is to maximise exports? But it is also to try and focus on domestic production - to drive learning by doing type behaviour. Implying that there would be pressure to restrict imports.

This is really what China has been doing with its devalued exchange rate. I'm all for supporting trade - but this study isn't really indicating that healthy trade is good persee.

Paul Walker said...

Insofar as max export implies max imports then that is good, but it isn't support for merchantilist type policies, since those policies tried to max exports and *min* imports.

Matt Nolan said...

But the paper only looks at max exports - and makes an argument based on learning models. As a result, it is relatively easy to turn the case into a max export, min import case if you believe learning by doing is important.

Furthermore, their empirical evidence is based on China - which was enforcing merchantilist policies (by devaluing their currency). As a result, someone could definitely take this result as favourable to merchantilism.

Of course - the big cost of merchantilism occurs when everyone is doing it, as we have a prisoner's dilemma ...

Paul Walker said...

"But the paper only looks at max exports - and makes an argument based on learning models. As a result, it is relatively easy to turn the case into a max export, min import case if you believe learning by doing is important."

But why would you want to max exports and min imports when this would make you worse off? After all importing increases the choice set. I don't see why an increase if firm productivity due to expanding export results in you wanting to cut out imports. This result would have to be imposed from outside the model.

Matt Nolan said...

But the whole empirical model is based on a set of countries that were following merchantilist policies.

Controlling your currency is merchantilist - it does reduce imports, and that is the example they are looking at. We can't just assume that this is a case where they are looking at maximising the volume of trade - as the exchange rate is a control variable that is being used to max exports at the cost of imports.

Paul Walker said...

Thee is debate over exactly what China was trying to achieve with its exchange rate policy but I don't think that their policy changed over the period of the study so it should be a fixed effect. Thus the changes we see in the study should be due to other factors.