Firm Survey Findings

Drawing on the findings of surveys of 609 exporting firms in five East Asian countries in 2007–2008, this section briefly addresses four key questions on the Asian noodle bowl effect: Are FTA preferences being used? What are the benefits and costs of FTAs? Are multiple ROOs a burden on SMEs? And, is there enough support for domestic firms to utilize trade preferences under FTAs? The individual country papers contain the more detailed information and analysis that trade and industry specialists would find interesting.⁸

The firm surveys mainly used a random sampling technique to select the firms.⁹ The sample was located in the following East Asian countries: Japan (38 firms); Singapore (75 firms); Korea (120 firms); Thailand (221 firms); and Philippines (155 firms).¹⁰ Table A2 [ PDF 11.3KB | 1 page ] shows the breakdown of the sample by sector, firm size, and ownership. Over one-third of the sample (38%) belongs to the electronics sector, around a quarter (25%) to the automotive sector, and less than one-fifth (17%) to the textile and garment sector. The remaining 20% are in chemicals and pharmaceuticals; metals and machinery; and food processing. SMEs (with 100 or fewer employees) make up a relatively high proportion of the sample (39%), while large firms (with 101 to 1,000 employees) and giant firms (with over 1,000 employees) account for 46% and 15%, respectively, of the sample. Foreign-owned firms make up 40% of the sample and 60% are domestic firms. A questionnaire was used to collect the firm-level information through faceto- face or telephone interviews. This technique tends to generate more accurate information than questionnaires either emailed or posted to respondents.

Like other tools of empirical analysis, firm survey-based research may have limitations. These can arise from different sources, including the sampling methodology adopted, the appropriate sample size to reflect industry population characteristics, the design of questionnaires, the method of administering questionnaires, and the accuracy of data processing. Nonetheless, in the absence of official published data, well-designed and administered firm surveys are perhaps the only source of actual data that can provide invaluable insights on the impact of FTAs on firms in East Asia.

3.1 Use of FTA Preferences

The question of whether FTA preferences are being used in the East Asian countries surveyed is critical to the debate on the effectiveness of East Asian FTAs. An overarching indicator of the effectiveness of East Asian FTAs is the use made of preferences by business. Previous country- and industry-level studies suggest that FTA preference utilization rates (based on shares of export value enjoying preferences) are low in East Asian countries and that FTAs are not actually used.¹¹ Accordingly, FTAs are held to be discriminatory and a drain on scarce trade negotiation capacity in developing countries (Bhagwati 2008). This section provides firm-level evidence on preferences use by the sample firms, an analysis of factors associated with FTA use, and impediments to FTA use.

3.1.1 Utilization of FTA preferences.

East Asian exporting firms tend to utilize FTA preferences more intensively than conventionally thought and may even increase the utilization rate. Although data on shares of export value enjoying preferences were not available from the enterprise surveys, it was possible to estimate utilization of FTA preferences based on the incidence of firms that actually use FTA preferences (i.e., the share of sample firms in a given country). Figure 1 [ PDF 16KB | 1 page ] shows the share of firms that use or plan to use FTAs. Use of preferences in the five surveyed countries is higher than expected based on the results of the few existing studies. Of the 609 East Asian sample firms, around 22% (135 firms) use FTA preferences. Viewing the 135 East Asian FTA users by sector reveals that automotive firms use FTAs more intensely than electronics or textiles and garments firms.¹²

A distinct pattern of FTA use by firms is visible across countries. Japanese firms (29%) are the highest users of FTA preferences—from an albeit small sample—followed by Thai firms (25%). In contrast, firms in Korea (21%), the Philippines (20%), and Singapore (17%) make less use of FTAs. When East Asian firms' future plans on FTA preferences are also included, a significantly higher level of private sector interest in FTAs is indicated. Around 44% (267 firms) of all East Asian firms use or plan to use FTA preferences, which is double the figure for FTA use. The country-level figures—Korea (54%), Japan (47%), Thailand (46%), Philippines (41%), and Singapore (28%)—confirm heightened plans for FTA preference use in Korea, the Philippines, and Thailand, but only limited preference use in Singapore.

The differing patterns of FTA use among the East Asian firms can be explained by a variety of macro- and firm-level factors.

3.1.2 Macro-level factors

At the macro-level, the relatively high FTA use in Japanese firms may be linked to two factors: (i) a sophisticated industrial structure based on giant, MNCs which are the centre of regional production networks and trading through FTAs; and (ii) a dense network of private sector industry associations and public trade support institutions that provide various services for business adjustment to FTAs. High FTA use by Thai firms is due to the country's emergence as a regional production hub particularly in the automotive sector, a magnet for export-oriented FDI (including from Japan) and strong emphasis on FTAs as a tool of trade policy.

More limited use of FTAs in Korea may be explained by the country's late entry to FTAs in 2004, an initial focus on FTAs with smaller economies (e.g., Chile and Singapore) and low margins of preference. The Philippines firms' usage figure can be attributed to the country's overwhelming export concentration in electronics (with low MFN tariff rates), a heavy reliance on AFTA, and limited experience with bilateral FTAs. The relatively low FTA use by Singaporean firms seems surprising given its strategic geographic location, the high export-orientation of industries, the large number of implemented FTAs, and the extensive outreach programs. Part of the answer may lie in an open trading system and low tariff margins that would mitigate the need for using FTAs with major trading partners.

3.1.3 Firm characteristics: users and non-users of FTA preferences

Table 4 [ PDF 13.7KB | 1 page ] reports means and t-test results on the difference in mean values for various firm characteristics, including the number of employees, age, foreign ownership, awareness of FTA provisions, and business response to FTAs. The comparison considers users and non-users of FTA preferences', grouped by country. Korea is excluded from the t-tests as data were not available from the survey. The number of firms is indicated in parentheses for each category.

First, probably the most striking difference between users and non-users, is that there is a significant difference in firm-size in all four countries. Japan stands out for its base of large MNCs and the average employment for Japanese FTA preference users is 30,104 workers, while this number is 1,098 in Singapore, 591 in Thailand, and 395 in the Philippines. Average employment in non-users is 7,020 in Japan, 291 in Thailand, 269 in the Philippines, and 142 in Singapore. Accordingly, a classic firm size effect is an underlying pattern of FTA preference use in the four countries. The results suggest that using FTAs entail large fixed costs—e.g., learning about FTA provisions, tailoring business plans to complex tariff schedules, and obtaining certificates of origin—and larger firms are better able to muster the requisite financial and human resources to address these issues than small firms.

Second, FTA preference users in Thailand and the Philippines are significantly older than nonusers, though Japan seems to be an exception in this regard. The average number of years a firm has existed for users in Thailand is 22.3, while for non-users it is 18.6 years. On average, users in the Philippines are 17.3 years old while non-users are 12.5 years old. As firms with experience are regarded as enjoying greater accumulated knowledge of FTAs and ROOs, firm age is considered to be positively associated with FTA preference use. Accordingly, the evidence seems to support the notion of learning by doing in using FTAs.

Third, FTA preference users in Japan and Thailand have significantly higher foreign equity than non-users; the Philippines seems to be an exception in this vein. On average, users in Japan have 9.8 times more foreign equity than have non-users, while users in Thailand have 1.5 times more foreign equity than non-users do. Access to the marketing know-how of their parent companies—including dealing with multiple tariff schedules and ROOs—makes foreign affiliates better placed to use FTAs than domestic firms.

Fourth, detailed awareness of FTA provisions significantly differs between users and non-users of FTA preferences in Japan, Singapore, and Thailand. FTA users in Japan have higher awareness levels (64%) than do users in Thailand (49%) and Singapore (46%). Firms in the Philippines are generally unaware of FTA provisions, with only 7% of FTA users firms indicating awareness (Wignaraja, Lazaro, and de Guzman 2009).¹³ FTA texts are complex legal documents and successful users tend to seek (or hire) legal expertise to improve understanding of business implications of agreements.

Fifth, looking at business responses to FTAs—measured by percentage of firms who changed or may change business plans in response to FTAs—a significant difference is observed between users of FTA preferences in all four countries and non-users. Interestingly, Thai business generally has a high business response to FTAs, with 80% of users and 51% of nonusers that changed or may change business plans.

3.1.4 Impediments to FTA preference use.

The majority of the East Asian firms do not currently use FTA preferences and the reasons for this are not widely known. Table 5 [ PDF 15.1KB | 1 page ] ranks enterprise responses about various impediments to using FTA preferences. Although response rates to this question varied across countries, nonuse of FTA preferences is explained by several factors—a lack of information, small preference margins, delays and administrative costs with ROOs, and non-tariff measures (NTMs) in FTA partners.

The largest and most complete datasets are from the Philippines (134 responses) and Korea (120 responses), which is useful as both are relatively low users of FTA preferences. In the Philippines, a lack of information on FTAs is the most important impediment to using AFTA preferences (70% of responses).¹⁴ Issues relating to ROOs—delays and administrative costs and confidentiality of information required by origin forms—are collectively second (43%). A third impediment is the use of other schemes such as export processing zones (EPZ) and the Information Technology Agreement (ITA)¹⁵ for electronics, which also provide incentives for exporters (27%). Other impediments to using FTAs in the Philippines include: arbitrary classification of product origin (also known as "rent-seeking"), small margins of preference, too many exclusions, and NTMs in partner countries. In Korea, low margins of preference (36%) and a lack of information (34%) are both major reasons for non-use of FTAs. Delays and administrative costs linked to ROOs and NTMs seem less important in Korea.

Thailand is a relatively high user of FTA preferences. Of the 36 Thai firms that responded to the issue, NTMs in FTA partners is indicated as the most important impediment (36% of responses). This is followed by too many exclusions (25%), delays, and administrative costs relating to ROOs and small margins of preference.

The Japan and Singapore cases provide limited insights on the range of potential impediments to FTA use.¹⁶ The available information suggests that delays and administrative costs—likely relating to ROOs—show up as a major impediment in both countries. Small margins of preference are also emphasized by Singaporean firms. Meanwhile, confidentiality of information seems less important in both countries.

3.2 Benefits and Costs of FTAs

As FTA use is higher than traditionally expected in the five East Asian countries, a closely related issue is what are the benefits and costs of the FTAs that firms use or do not use? Preferential tariffs are often mentioned as a benefit of FTAs while increased competition from imports—or the entry of foreign investors—is viewed as a cost. Could it be that the costs of FTAs are perceived by firms to outweigh the benefits or vice versa? To shed light on the benefits and costs of FTAs, this section examines the types of FTAs that firms use and perceived benefits and costs of major FTAs in effect.

3.2.1 Ranking East Asian FTAs by Importance.

AFTA, ASEAN+1 FTAs, and other major bilateral FTAs are regarded as useful by firms. Figure 2 shows the ranking of the region's FTAs judged by actual and potential use in Japan, Singapore, Thailand, and the Philippines, thereby indicating the business importance of the various FTAs. It is worth noting that these figures probably understate actual FTA use in the four countries as some firms were reluctant to reveal which FTAs they have used. Furthermore, Figure 2 [ PDF 14.5KB | 1 page ] does not include the responses from Korean firms. Bearing these qualifications in mind, the findings highlight the key role of AFTA and ASEAN+1 FTAs in facilitating the region's business activity. The largest number of firms (67 firms) selected AFTA—East Asia's oldest plurilateral FTA—as an agreement they were actually using or planning to use most.¹⁷ Another 29 firms chose the ASEAN-PRC FTA (in effect since 2005), reflecting that the PRC is one of the fastest growing areas of interest to businesses. Meanwhile, some firms selected newer ASEAN+1 FTA's— for instance, 14 firms indicated the ASEAN-Japan CEPA (signed in April 2008 and implemented in December 2008).

The findings also highlight the importance of some bilateral FTAs. Forty-eight firms selected the Japan-Thailand EPA (in effect since November 2007) and another 17 firms the Thailand- Australia FTA (in effect since January 2005). As an indication of the pull of the US market, 30 firms selected the US-Thailand FTA (still under negotiation) and another 5 chose the Singapore- US FTA (in effect since January 2004). In an environment of spreading FTAs since 2000, the pivotal role of ASEAN's FTAs in the region's business activity and the growing importance of bilateral FTAs in improving ties with large markets (e.g., Japan, the US, and Australia) are underlined.

3.2.2 Perceived Benefits and Costs of FTA Use

Table 6 [ PDF 12.7KB | 1 page ] summarizes enterprise perceptions of benefits and costs of four major FTAs in effect in East Asia. These include: two plurilaterals involving ASEAN (AFTA and the ASEAN-PRC) and two bilaterals with Thailand's major trading partners (the Japan-Thailand EPA and the Thailand- Australia FTA). Strikingly, East Asian firms typically report more benefits than costs from these four FTAs. The most important benefits include wider "market access" that results in higher export sales and "preferential tariffs" that encourage imports of intermediate inputs. Meanwhile, the main costs are increased competition from imported products and documentation relating to FTA preference use. Minor differences between FTAs are visible on the magnitude of benefits and costs. Under AFTA, for instance, market access and preferential tariffs are both perceived as equally key benefits by firms while market access is the major benefit of the Japan-Thailand EPA.

3.3 Burden of Multiple ROOs for SMEs

It is often suggested that FTAs in East Asia have complicated rules about the origin of goods that qualify for lower tariffs (Cadot, de Melo, and Portugal-Perez 2007; Manchin and Pelkmans- Balaoing 2007; World Bank 2007). This has triggered concerns about what the attendant rules and administrative procedures would imply for the cost of doing business. Multiple ROOs in overlapping FTAs are said to pose a severe burden on SMEs, which are less able to meet such costs. The discussion in Section 3.1 suggested that ROOs are one of several impediments to using FTAs in East Asia. This section probes the issue further and focuses on whether multiple ROOs are indeed a burden for SMEs. It also provides an econometric analysis of firm-level explanations for the findings and enterprise views on the benefits of harmonized ROOs in East Asian FTAs.

3.3.1 Business Costs of Multiple ROOs

It is useful to understand the nature of firm-level adaptation to the imposition of ROOs in FTAs in order to gauge business costs.¹⁸ In the case of Korea, for instance, a large automobile firm undertook three tasks: (i) created a dedicated team to handle ROOs; (ii) built a computer system for sourcing inputs, analyzing production processes and ROOs; and (iii) constructed a verification system to check compliance with ROOs. Such direct costs appear to be manageable and not prohibitive to exporting. Thai firms typically estimate that these costs would be less than 1% of total export sales, including wages of specialized manpower (for dealing with customs documentation and technical adaptation), costs of changing production processes, and the purchase of computer systems.

Are these costs significant? Figure 3 [ PDF 12.6KB | 1 page ] provides enterprise perceptions of whether dealing with multiple ROOs in the region's FTAs would significantly add to business costs. Of the 465 respondents, 27% of firms said that multiple ROOs do significantly add to business costs. Singaporean firms had the most negative perceptions (38%) while Korean firms have the least (15%). In between are: Japanese (31%), Philippines (28%), and Thai (26%) firms. Clearly inter- country variations in ROO perceptions exist.¹⁹ The share of firms that have negative perceptions about multiple ROOs are higher than those reported for Japanese firms by JETRO (2007) and Takahashi and Urata (2008). Nonetheless, even our findings seem to indicate that, at the present level of FTAs in effect, multiple ROOs impose only a limited burden on firms in East Asia.

The percentage distribution within firm sizes of perceptions of whether multiple ROOs would add to business costs for Japan, Singapore, Thailand, and the Philippines is shown in Figure 4 [ PDF 15.7KB | 1 page ]. Our expectation was that SMEs, with their limited capacity to deal with the burden of multiple ROOs, would complain the most. The evidence, however, suggests that while firms of all sizes complain about multiple ROOs, giant firms (with over 1000 employees) have the most negative perception. Of all giant firms in the four countries, 42% indicated that dealing with multiple ROOs significantly adds to business costs. This compares with 26% for all large firms (101 to 1000 employees) and 25% for all SMEs. At country-level, the figure for giant firms varies from 60% in the Philippines to 36% in Thailand, and that for SMEs from 27% in the Philippines to 20% in Japan. The results—which appear to run counter to conventional wisdom about the relationship between firm size and the burden imposed by multiple ROOs—present a puzzle for researchers.

3.3.2 Econometric Evidence on Business Perceptions of Multiple ROOs

What explains the puzzle of perceptions of ROOs by firm size? To explore this issue, an analysis of influences on perceptions of ROOs was conducted using a Probit model. More specifically, the econometric analysis focuses on the factors that influence whether or not multiple ROOs significantly add to business costs.²⁰ Apart from firm size (proxied by number of permanent employees), five explanatory variables were included: age (years since establishment), a dummy variable for foreign ownership, a dummy for exports to multiple markets, a dummy for awareness of FTA provisions, and a dummy for business responses to FTAs. In addition, three country dummy variables were also added to the Probit model to capture country-specific influences. To the best of our knowledge, this is the first econometric model on firm-level perceptions of ROOs. Korea is excluded from the regression analysis as data were not available from the survey.

Table 7 [ PDF 17.9KB | 1 page ] summarizes the results of the econometric analysis where the binary dependent variable is enterprise perceptions of whether or not dealing with multiple ROOs significantly adds to business costs. The Pseudo R² is as expected for cross-section studies. The results should be judged as tentative as possible simultaneity bias—due to, for example, possible endogenous choice of business plan change—has not been taken care of. Nonetheless, the findings underline the critical links between larger, established firms and the probability of expressing concerns about the burdens of multiple ROOs.

First, the number of permanent employees and age have positive and significant impacts (10% level), indicating that larger, older firms are more likely to express concerns about ROOs. Second, the dummy variable for exports to multiple markets has significant (5% level) and positive impacts. This suggests that firms with export experience with multiple markets—and hence multiple FTAs—are more likely to express concerns about business costs of multiple ROOs than firms that export to a single market or use a single FTA. Third, the dummy variable for change in business plans is highly significant (1% level) and positive. This indicates that firms that are more responsive to FTAs are more likely to complain about multiple ROOs. Accordingly, larger, older firms that tend to export to multiple markets and change their business plans in response to FTAs, are likely to complain about issues of multiple ROOs. In other words, less-established SMEs that do not tend to export to multiple markets (nor use many FTAs) do not have much to complain.

Furthermore, the dummy variable for foreign equity also has significant and positive impact (10% level) indicating a link between foreign ownership and the probability of complaining about multiple ROOs. Foreign firms tend to express concerns about multiple ROOs.

Awareness of FTA provisions and the country dummy variables do not have significant impacts. Further work at country-level using larger enterprise samples may be useful to verify these cross-country regression results.

3.3.3 Harmonized ROOs and Alternative ROOs

It is natural to hold the view that the adoption of harmonized ROOs in East Asian FTAs creates large benefits. Figure 4.B [ PDF 15.3KB | 1 page ] shows the share of firms that are in favor of harmonized ROOs in the five East Asian countries. Of 549 respondents, 43% see benefits from such harmonization. Singaporean firms, which perceive the largest burden from multiple ROOs, also have the largest share in favor of harmonized ROOs (57%) while Japanese firms have the smallest (29%). Over 40% of firms in Korea, Thailand, and the Philippines also favor harmonized ROOs.

The percentage distribution within firm sizes of those in favor of harmonized ROOs is provided in Figure 5 [ PDF 15.3KB | 1 page ]. Data on Korea were not available. Typically, large and giant firms in the four East Asian countries seem to recognize the benefits of harmonized ROOs more than SMEs. Accordingly, 51% of all large firms and 46% of all giant firms are in favor of this measure, as compared with only 32% of all SMEs.

Firms in the four East Asian countries were also asked about their preferred ROOs. Flexibility seemed to be emphasized with 52% of 143 respondents wanting the option to choose between a value added rule and a change in tariff classification (CTC) rule.²¹ Another 29% chose the CTC rule only and 19% the value added rule. Giant firms are particularly in favor of being able to choose between ROOs because they use FTAs more and encounter multiple rule issues. The surveys suggest that firms are supportive of alternative ROOs (or co-equal rules) for the same product for several reasons: (i) if they cannot reach the value content requirement, having another ROO enables them to avail of FTA preference; (ii) as the application for the value content rule may require disclosure of confidential information on costs, suppliers and many firms are often reluctant to divulge such information; and (iii) some ROOs may be better aligned with the technology and production process of particular industries.

3.4 Institutional Support for Exporting Under FTAs

In order to successfully trade under FTA preferences, firms have to acquire information about specific provisions in agreements—e.g., tariff preferences, liberalization schedules, ROOs, and investment rules—and upgrade their capabilities to take advantage of them, including developing appropriate regional sourcing strategies and efficient systems for ROOs administration. A wide-range of support services are required to help enterprises use FTA preferences effectively and generally adjust to FTAs. The five East Asian countries have institutional support systems—made up of government agencies and business associations, which provide information, training, technical advice, and other services—of varying degrees of comprehensiveness and quality.²² This section analyzes whether there is enough support for domestic firms to trade under FTAs. It examines whether the sources of support are used for trade through FTAs, whether the take-up rate of support services and quality of support are high enough, and what additional services are required for trading under FTAs.

3.4.1 Sources of institutional support

Table 8 [ PDF 13.6KB | 1 page ] shows enterprise responses on the sources of institutional support—from the public and private sector—used for trading through FTAs, by country. Public sector sources include ministries, customs departments, and export/investment promotion agencies while private sector sources include business associations, chambers of commerce, trade lawyers/private consultants, and business counterparts. A broad pattern is visible on the mix of public and private provision of support services by the development stage of an economy.

Firms based in Japan, Singapore, and Korea (the three high-income economies) seem to rely more on private sector sources of support than those in Thailand and the Philippines (the two middle-income economies). Accordingly, private sources are used by 73% of respondents in Korea, 51% in Japan, and 45% in Singapore compared with 37% in the Philippines and 26% in Thailand. Part of the explanation for these differences may lie in higher levels of per capita income reflecting better functioning markets for support services, including those for exporting through FTAs. Private provision of support services through business associations and chambers of commerce, for instance, also tends to be higher in high-income economies. In middle-income economies with less well-functioning markets and weaker private institutions, enterprises tend to rely on public sources. Ministries appear to be used more (59% in Thailand and 33% in the Philippines) than other public sources.

3.4.2 Use and Quality of FTA Support Systems

A related issue to the support system one is the extent to which firms have participated in consultations on FTAs. Government agencies and business associations in East Asia organize periodic consultations with business firms on the specific provisions of FTAs prior to official FTA negotiations. The available evidence from Thailand points to relatively high participation rates in consultations with government and business associations—around 49% of respondents said that they had participated in consultations with government agencies prior to official FTA negotiations and around 46% in consultations with business associations. The figures are lower for the Philippines—19% for consultations with government agencies and 23% for consultations with business associations.

Some impressions on use and the quality of three specific types of FTA support—online information, business consulting services, and support for issuing certificates of origin—in the two high-income countries (Japan and Singapore) is provided in Table 9 [ PDF 13.1KB | 1 page ]. Unfortunately, comparable information was not available for Thailand and the Philippines. Overall use of these services seems relatively low in both countries. For instance, usage rates for online information on FTAs were 21% in Japan and 15% in Singapore. Usage rates for support on issuing certificates of origin were 15% in Singapore and 11% in Japan. Business consulting services, however, are used relatively more in Japan than in Singapore. Nonetheless, firms in both countries seemed relatively satisfied with the quality level of such services—the rankings for quality of services range from 2.7 to 3.2 for the three services in Japan and 3.7 for two services in Singapore.

3.4.3 Demand for Support Services

Alongside this picture in the two high-income countries, a significant demand remains far more support for firms exporting through FTAs in the middle-income countries. Table 10 [ PDF 13.1KB | 1 page ] provides respondents' views on types of services demanded by all firms and by SMEs in Thailand and the Philippines.

The main services demanded seem to be: more information on the implications of FTAs on business, more awareness training on concluded FTAs, upgrading of technical standards and quality and adoption of electronic data interchange; financial support for upgrading technology and skills and enhanced consultations during FTA negotiations were also emphasized. Issues such as more surveillance on NTMs in FTA partner country markets and improved extension services for SMEs are likely to become more important in the future as more FTAs take effect in the region.

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Comment(s)

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1. manuel a cardenas
   (posted 20 April 2009 / 10:52:18 PM)
   
   Chile maybe is a unique country because it has suscribe the greater quantity of agreements of free commerce. The net effect is that it has develop faster in the latin american region.
   The problem with the small business is not with the agreements signed, the problem is the lack of opportune information given with the tools that the information technology can give. The governments have to construct the adequate tools in order that the small business can get the adequate information for their needs and benefit with agreements as the big business does.