Introduction

Increasing attention is focusing on the study of the behavior of export firms in developing countries, drawing on the literature of applied international trade and that on innovation and learning. One of the fastest growing strands of literature has focused on the relationship between firm-level export performance, foreign ownership, and the acquisition of technological capabilities. This literature has been empirically led through case studies and econometric analysis, with contributions including Lall (1986, 1987) on India, Kumar and Siddharthan (1994) on India, Bhaduri and Ray (2004) on India, Wilmore (1992) on Brazil, Pietrobelli (1997) on Chile, Westphal et al. (1990) on Thailand, Ernst et al. (1998) on East Asia, Rasiah (2003, 2006) on Malaysia and South Africa, Deraniyagala and Semboja (1999 on Tanzania, Wignaraja (1998, 2002) on Sri Lanka and Mauritius, and Rasiah (2004) on Africa, Asia, and Latin America.

Sri Lanka—South Asia’s earliest reformer—is an interesting example of a developing country that has pursued an outward-oriented foreign direct investment (FDI) strategy since 1977 to expand exports. The more liberal FDI regime¹ stimulated the entry of foreign firms and clothing exports rapidly grew (amounting to 66% of manufactured exports in 2000–2005). Empirical studies on the clothing industry, largely at the macro and sectoral levels, have focused on trends and determinants of FDI inflows in Sri Lanka.² Few studies, however, have attempted to examine the links between exports, ownership, and technological activity at the firm level in the Sri Lankan clothing industry. A lack of firm-level data and the need for costly firm surveys have hampered investigation of these issues. The handful of case studies of clothing firms and small sample econometric analysis highlight two findings: (a) foreign firms are better exporters than domestic firms; and (b) technological capabilities and human capital approaching international best practice levels are important determinants of export advantage (Lall and Wignaraja, 1995; Wignaraja, 1998; Deraniyagala, 2001; Chandrasiri, 2003; and Knutsen, 2004). These preliminary yet striking findings require empirical verification and further analysis using larger samples of firms. Such a study can also contribute to policy debates in Sri Lanka (and elsewhere in the developing world) over the role of ownership in the clothing industry in a post-MFA context and appropriate investment policies.

Building on the literature on firm-level exports and technological capabilities in developing countries, this paper examines characteristics besides foreign ownership that influence a firm’s export behavior (including technological capabilities, human capital, size, and geographical location). As a proxy for technological capabilities, the paper considers a simplified technology index based on five technical functions performed by firms. It also analyzes the determinants of the technology index (e.g., firm size, age, share of professional workers, training, and R&D). The sample used here is a large one (205 clothing firms) and the survey was conducted in 2004. Section 2 reviews the relevant recent literature. Section 3 presents the data and econometric results. Section 4 concludes the paper.

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