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