The Role of Foreign Technical and Professional Services in Learning by Exporting Hˆale Utar University of Colorado, Boulder

April 9, 2011

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Motivation Learning by exporting is often thought to happen via the buyer-supplier link Most recent evidence direct attention to differences in the degree of market developments as a one potential channel of learning. (African exporters (Van Biesebroeck (2006)), Slovenian exporters De Loecker (2007) ) The complementarities between productivity enhancing investment and firms’ exporting status has also been in focus as one potential channel of feedback. (Aw, et al. (2005), Bustos (2005), Melitz and Constantini (2007), Atkeson and Burstein (2008)) We still do not fully know the feedback effects from exporting on the future development in firm productivity

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Motivation

To what extent do firms learn by exporting and what are specific channels through which export may lead to productivity improvement? In this paper: I

Using data from Chile, look for an evidence for learning by exporting through the link between domestic exporters and foreign technology and service suppliers

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Chilean Exporters

Carlo Pietrobelli (1988) conducts a detailed survey among a sample of Chilean exporters: Buyers supply I I I

advice on product design to 81 % of the sample firms how to adopt the product to export markets to 12 % of them assistance to production technology design and adaptation to 19 % of the firms

Many Chilean exporters buy FTS to improve their in-house capability mainly from Germany, USA, Italy, Japan and Denmark.

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Chilean Exporters: Who are their customers? In case of Denmark, wholesale trade firms constitute about 60 percent of the Danish customers. Table: Distribution of Danish Buyers across Types Year

% of Wholesale Trade Firms

% of Retail Trade Firms

% of Manufacturer Firms

1993 1994 1995 1996 1997 1998 1999 2000

60 55 62 56 58 59 62 59

8 6 5 9 13 6 6 5

24 31 28 32 23 31 25 26

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Foreign Technical and Professional Services If new technologies diffuse from foreign to domestic markets through firm contacts in the foreign market, then exporting firms may improve their productivity because they have a better chance of absorbing foreign technology and information by accessing foreign technical and professional services (FTS). Through this channel technology and information diffuse from foreign technical service markets towards domestic firms which consume the services provided by the foreign technical and professional service producers by virtue of their presence in the foreign markets. FTS: These services may include foreign technical training and assistance, technological license purchases, management consulting services, computer and related services, and maintenance and repair of equipment services.

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Data the Annual National Industrial Survey (ENIA), the sample period: 1990-1996 It covers the universe of Chilean manufacturing plants with 10 or more workers. Data on (value added, sales, employment, wages, investment, depreciation, energy and materials usage, domestic service expenditures as well as expenditure on foreign technical services) International licensing agreements include: technical assistance, managerial assistance, component and equipment supply, patent rights, trademark rights (Contractor (1985)) Capital (machinery, building, and vehicles) constructed using perpetual inventory method, kt+1 = (1 − δ)kt + it with using 1979-1996.

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Linkages between FTS Access and Export

♦ More than 50 percent of plants that purchase FTS are also exporting. Possible Explanations I

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FTS access makes it easier for firms to find customers in the foreign market (not confirmed) FTS purchase results in future productivity improvement which then results in a higher probability of paying the sunk entry costs of exporting (not confirmed) Exporters have better access to foreign technical service market through their customers located in the foreign market

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Visual Inspection: Chemical Industry

0.35 export starters export starters with fts export starters with no fts

0.3

0.25

0.2

0.15

0.1 −1

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export time

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2

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Preliminary Analysis: Characteristics of Exporters versus FTS receivers Export Premium: XP

xist = β0

XP

+ β1

XP

I(XPist ) + β2

lnlist +

X

γt Y eart +

t

X

ηs Industrys + ist

s

FTS premium: FTS

xist = β0

FTS

+ β1

FTS

I(F T Sist ) + β2

lnlist +

X

γt Y eart +

t

X

ηs Industrys + ist

s

Export and FTS premium: XP F

xist = β0

XP F

+ β1

XP F

I(F T Sist ) ∗ I(XPist ) + β2

lnlist +

X t

γt Y eart +

X

ηs Industrys + ist

s

xist : characteristics of plant i at period t in industry s I(XP ): export dummy I(F T S): FTS dummy l denotes total labor Hˆ ale Utar (Univ of Colorado)

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Characteristics of Exporters versus FTS receivers Firm Characteristics Value added per worker Average Wage Average Blue Collar Wage Average White Collar Wage Capital per worker Investment per worker Employment N on−P roductionW orkers T otalW orkers Executives&Administrators T otalW orkers

No of Observations (max/min)

β1XP 0.385 0.223 0.150 0.269 0.631 0.563 1.266 0.035n 0.132 32060/18365

β1F T S 0.448 0.263 0.169 0.168 0.382 0.437 1.076 0.460 0.330 32060/18365

β1XP F 0.525 0.326 0.203 0.206 0.532 0.543 1.609 0.549 0.448 32060/18365

Firms with FTS are smaller than exporters, in general Firms that engage in both activities have similar characteristics as exporters with the exception of workers’ composition Exporters may build capacity to absorb foreign knowledge via FTS. Hˆ ale Utar (Univ of Colorado)

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Methodology Average effect of exporting on firms’ productivity: E(µ1it − µ0it |ST ART XPi = 1) = E(µ1it ) − E(µ0it ) µ1it : productivity of firm i, t periods after starting to export µ0it : productivity of firm i at the same period if the firm should have not started to export Construct a counterfactual (if the firm should have not started to export) based on the characteristics of firms which choose to start exporting. Use the propensity score to construct a matched sample instead of matching firms directly by their covariates Given the propensity score, a binary outcome, X (decision to start exporting) and S (a set of covariates) are independent, so all participants have the same value of P(s) are comparable or ”balanced” (Rosenbaum and Rubin (1983)) Hˆ ale Utar (Univ of Colorado)

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Methodology Estimate Propensity Score P r(ST ART XPi,0 ) = φ(h(.)) where φ denotes the logistic c.d.f. and h() is a starting specification which includes all the covariates. Also included 3-digit industry dummies and year dummies. Match Firms within 2 digit industries and at each time period Construct Diff-in-Diff Estimators X 1 X 1 (µit − wij µij ) βSt = S Nt i∈S j∈C(i)

where S = {XP, XP F, XP N F }, and C(i): a set of control plants matched to plant i XP: all firms that start exporting XPF: all firms that start exporting with accompanied FTS access XPNF: all firms that start exporting without accompanied FTS access Hˆ ale Utar (Univ of Colorado)

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The Impact of FTS Access on Learning by Exporting Outcome: Productivity Year Passed After Exporting

βXP (Exporters) NT NC βXP F (Exporters with FTS) NT NC βXP N F (Exporters with no FTS) NT NC Hˆ ale Utar (Univ of Colorado)

1 0.008 (0.032) 740 1977 0.286 (0.076)∗∗∗ 161 422 -0.069 (0.034)∗ 579 1555 FTS

2 0.012 (0.046) 406 1036 0.304 (0.102)∗∗ 98 242 -0.081 (0.050) 308 794

3 0.055 (0.058) 306 755 0.370 (0.115)∗∗ 85 202 -0.066 (0.065) 220 553 April 9, 2011

4 0.139 (0.067)∗ 217 520 0.414 (0.133)∗∗ 66 149 0.019 (0.076) 151 371 14 / 19

The Results

Exporters learn (improve their productivity after exporting) I

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Exporting firms are 0.8 % more productive in the first year, and they are 14 % more productive on average than non-exporters after 4 years of exporting. No significant positive productivity effect of starting to export if firms do not have access to FTS after exporting.

But only the ones with FTS access learn

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The Impact of FTS Access on Learning by Exporting Outcome: Productivity Growth Time 1 βXP 0.059 (Exporters) (0.023)∗ NT 738 NC 1971 βXP F 0.087 (Exporters with FTS) (0.043) NT 161 C N 422 βXP N F 0.051 (Exporters with no FTS) (0.027) NT 577 NC 1549 Hˆ ale Utar (Univ of Colorado)

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2 0.048 (0.036) 406 1036 0.149 (0.062)∗ 98 242 0.015 (0.045) 308 794

3 0.047 (0.044) 306 755 0.145 (0.070) 85 202 0.010 (0.055) 220 553

4 0.059 (0.052) 217 520 0.250 (0.107)∗ 66 149 -0.024 (0.064) 151 371

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The Results

Productivity growth (w.r.t. their pre-export productivity level) of exporters are found to be about 6 % higher than non-exporters after 1 years of exporting (complementarities) I

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Productivity growth of exporting firms with FTS access are 8.7 % more in the first year, and they have 25 % more productivity growth on average than non-exporters after 4 years of exporting. No significant productivity effect of starting to export if firms do not have access to FTS after exporting.

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The Impact of FTS Access on Learning by Exporting Outcome: Output Growth Time βXP (Exporters) NT NC βXP F (Exporters with FTS) NT NC βXP N F (Exporters with no FTS) NT NC Hˆ ale Utar (Univ of Colorado)

1 0.089 (0.024)∗∗∗ 751 1995 0.088 (0.047) 161 419 0.090 (0.028)∗∗ 590 1576 FTS

2 0.087 (0.041)∗ 412 1053 0.202 (0.067)∗∗ 98 243 0.051 (0.050) 314 810

3 0.137 (0.049)∗∗ 316 789 0.233 (0.078)∗∗ 87 216 0.100 (0.060) 229 573

4 0.169 (0.057)∗∗ 227 539 0.286 (0.089)∗∗ 68 153 0.119 (0.072) 159 386

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Concluding Remarks Using the Chilean Data (1990-1996) with the unique feature of reporting establishment-level expenditure on foreign technical assistance/training and license fees the analysis shows that I

I

controlling for firm characteristics that may affect exporting decision, there exists a weak evidence of learning by exporting, confirming previous literature once the effect is decomposed into different components, we see that all learning by exporters in Chile during the sample period can be attributed to the firms with FTS link

The results presented here suggest that in order to improve our understanding of feedback effects of exporting, we need to look into particular learning channels. I

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foreign financial markets may be another channel through which developing country exporters can benefit service market liberalization which opens up domestic markets to foreign service providers may have an important productivity spill-over into manufacturing

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