Studies on Firm-Level Exports and Technological Capabilities

There is growing interest within the literature on applied international trade and that on innovation and learning on the study of the export behavior of enterprises in developing countries. Key aspects of the theoretical literature and selected empirical studies are surveyed below.

The analysis of export performance of firms in developing countries—which has roots in the neo-Heckscher-Ohlin model and the neotechnology theories—is a relatively recent development in the applied international trade literature. This literature suggests that the theoretical determinants of comparative advantage, which are traditionally recognized as industry-level factors,³ can also operate at the firm level (see, for instance, Lall, 1986; Kumar and Siddharthan, 1994; Bhaduri and Ray, 2004). Conditions of imperfect markets with widespread oligopoly as well as differences in technologies, learning, and tastes underlie the notion of firm-specific advantages. It follows that almost all the theories of comparative advantage can be firm-specific, determining not only which countries will enjoy a comparative advantage in international markets but also which firms can exploit that comparative advantage better than others. Incorporating the notion of firm-specific advantages somewhat modifies the predictions of the theories of international trade as follows.

1. There are country-specific and industry-specific advantages which apply to all firms equally.
2. Within this, some advantages will be firm-specific since certain managerial, organizational, marketing, and other skills will be peculiar to each firm as will production methods, technologies, and experience-based know-how.

A related strand of literature, drawing on innovation and learning processes in developing countries, emphasises the acquisition of technological capabilities as a major source of export advantage at the firm level (see Lall, 1992; Bell and Pavitt, 1993; Pietrobelli, 1997; Ernst et al., 1998; Rasiah, 2004). This literature underlies the difficult firm-specific processes involved in building technological capabilities to use imported technology efficiently. The central argument is that firms have to undertake conscious investments in search, training, engineering, and even research and development, to put imported technologies to productive use. Furthermore, capability building rarely occurs in isolation and involves active cooperation between firms and support institutions for technology and export marketing. Hence, differences in the efficiency with which firm-level capabilities are created are themselves a major source of competitive advantage.

It is challenging, however, to measure inter-firm differences in technological capabilities in developing countries. In the last decade or so, studies have begun to develop a simple summary measure of technological capabilities by ranking the technical functions performed by enterprises (see the pioneering work on Thailand by Westphal et al., 1990). The ranking procedure integrates objective and subjective information into measures of a firm’s capacity to set up, operate, and transfer technology. The typical approach is to highlight the various technical functions performed by enterprises and to award a score for each activity based on the assessed level of competence in that activity. An overall capability score for a firm is obtained by taking an average of the scores for the different technical functions. As discussed below, the overall capability score (often referred to as a technology index or TI) has proved robust in statistical analysis of export and technological performance.

The available empirical studies have generally confirmed the importance of the theoretical determinants of comparative advantage at the firm level in developing countries. Multiple OLS or Tobit regressions were run relating export achievements to particular enterprise characteristics (including capital intensity, skill intensity, advertising, firm size, foreign ownership, R&D, and technological capabilities).

Representative econometric studies on firm-level export performance in Latin America, Asia, and Africa can be highlighted. Wilmore (1992) tested the hypothesis that foreign ownership had a positive effect on exports across Brazilian firms. He found that foreign ownership was highly significant (at the 1% level) and positive in sign while firm size and advertising were also significant and positive. More recently, Rasiah (2003) examined the hypothesis that foreign firms are endowed with higher export and technological capabilities than local firms, focusing on electronics firms in Malaysia and Thailand. The positive sign and significance of a foreign ownership dummy, R&D expenditure, and skills confirmed the hypothesis.

In a study of Indian engineering and chemicals firms, Lall (1986) found evidence for technological determinants of enterprise exporting. Foreign equity was found to be significant in chemicals, licences were highly significant in engineering (1% level), and R&D was significant in both industries (but with opposite signs). Likewise, Bhaduri and Ray (2004) reported that technological capability, R&D effort, and firm size were determinants in Indian pharmaceutical and electrical/electronics firms. A foreign ownership dummy was positive and significant (10% level) in pharmaceuticals indicating that foreign firms are better exporters than domestic firms. Wignaraja (1998) found that skills (average wage) and technology (share of quality control manpower in employment) influenced firm-level exporting in Sri Lankan clothing and engineering firms. In a study of Mauritian clothing firms, Wignaraja (2002) found that foreign equity and technological capabilities were statistically significant (1% level) and positively associated with firm-level export performance.

Meanwhile, cross-section econometric work on the determinants (e.g., firm size, market orientation, foreign equity, entrepreneur’s education, technical manpower, and training) of a TI has yielded some interesting results. Westphal et al. (1990) examined the determinants of different TI’s in Thai electronics, biotechnology, and materials technology enterprises. In a regression of a production TI, they found that firm size was significant (10% level) and positive. Romijn (1999) used TI’s based on the manufacturing complexity of products on engineering firms in Pakistan. In her best two regressions, firm size was significant (1% level) and positive. Search for information, external technical assistance, and improvements made to products are also all significant and positive. Finally, in a study of factors affecting TI’s in Kenyan garment and engineering enterprises, Wignaraja and Ikiara (1999) reported that firm size, foreign equity, and entrepreneur’s education were all significant (5% level) and positive.

The above studies also indicate that firm-level export performance (and technological capability building) in developing countries is affected by national policy and institutional factors. The list of possible policy and institutional factors is quite long and their interactions are often complex. In general, an outward-oriented development strategy, a conducive investment climate, investment in technical skills, and supportive science and technology institutions are among the key factors which encourage firm-level export and technological performance.

Download this Discussion Paper [ PDF 248KB| 18 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.