What do we know about South African exporters from micro-data?

Neil Rankin

July 2009

African Micro-Economic Research UmbrellaSchool of Economic and Business Science

University of the WitwatersrandJohannesburgSouth Africa

Outline - Why exports?

- Three generations of trade models

- Some stylised facts about firm-level exports

- What do we know about South African exporting?

- Some policy thoughts

Why exports?

- Increases the potential market for local products, increasing revenues and potentially employment

- Diversifies away from the domestic market

- Potentially a channel for technological transfer and thus lower domestic prices and/or better quality goods

- Specialisation and increased productivity

- Source of foreign exchange

- Pays for imports

- May reduce macro-economic instability

- Historically, rapid economic growth associated with rapid growth of manufactured exports

Three generations of trade models

1) Classical models of trade

- Heckscher-Ohlin- Endowments

- Ricardian- Technology

- These explain trade at the country level

2) New trade theories

- Market structure (monopolistic competition)- Taste for variety- Transport costs- Increasing returns to scale

- Explains trade at the industry level

Three generations of trade models

3) Firm-level or new, new trade theory

- Actually data show a large degree of heterogeneity in export behaviour at the firm-level

- New trade theory does not fully explain this

- Models of Melitz and others- Firm heterogeneity (often in productivity)- Monopolistic competition- Transport costs

- More productive firms are able to overcome transport costs to compete in export market

Some stylised facts about firm level exports

- Wide degree of heterogeneity

- Exporting is a minority activity

- The typical exporter exports very little

- The bulk of exports is actually accounted for by a small number of firms

- Exporting is state-dependent

- Exporting is highly correlated with size

- Exporters pay more

- Exporting is related to importing

What do we know about exporting in a South African context?

- Lack of data, particularly panel data, means that we do not know as much as we know for other countries.

- Export participation and propensity

- Export destination

- Exporting and productivity (the determinants of exporting)

- Exporting and market structure

- Exporting and importing

- Exporting and employment

Export participation and the amount exported

- Aggregate export performance is merely the sum of the export levels across South African firms.

- The same aggregate amount of exports can be achieved by a small number of firms exporting a large amount of output or a large amount of firms exporting a very small amount.

- What is the case in South Africa and how does it compare to other countries?

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Ghana Kenya Tanzania Nigeria South Africa Total

Figure 1: Export propensity: by country and size

Source: Rankin (2005)Notes: Export propensity is defined as the percentage of observations in that size category that are of exporting firms.Small < 20 employees; medium 20–74; large >75. There are no small South African firms in the sample. These observations are for firms over time thus a firm will be represented by each year it is in the sample.

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South Africa

Senegal

Kenya

China

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% of firms exporting

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South Africa

Kenya

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Hangzhou

Shenzen

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Poland

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Malaysia

Exports as % of sales

Figure 2: Comparative export participation rates and amounts exported.

Source: World Bank (2005)

Figure 3: Percentage of output exported: by country and size

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Notes: Small < 20 employees; medium 20–74; large >75.There are no small South African firms in the sample.Source: Rankin (2005)

Figure 4: Distribution of the percentage of output exported if a firm exports – African firms

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% of output exported

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All except South Africa(n=357)South Africa (n=104)

Total (n=461)

Source: Rankin (2005)

Destination of exports

- International markets often mentioned as important – UK (24%), US (20%), Namibia (19%)

- But data suggests that participation in regional markets is more common

- ‘Vent-for-surplus’ argument – regional market is an extension of the local market.

- Firms unlikely to participate in both markets – only 13% of firms include both International and African markets in their top three destinations

Destination of exportsFigure 3. Kernel density function of the proportion of output exported by export destination (SADC)

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Neighbours only International onlyBoth

The determinants of export participation

- Focus has been on the exporting-efficiency link.- Are firms more productive prior to exporting, or do they become more productive once exporting?

- On balance the self-selection argument seems to be more common.

- South Africa- Exporters out of SADC more productive (Rankin, 2002)- 2008 dataset suggests that regional exporters are more productive, but may be related to market power (Rankin and Schöer, 2009a)- Do South African exporters learn by exporting? (Coming soon)

The determinants of export participation

- However, exporting-size link is more robust.

- Why?- Not disguised efficiency effect

- Not sunk costs – size remains important even when lagged exporting (a proxy for sunk costs) is included.

- Not time-invariant firm-specific effects (Rankin, Söderbom and Teal, 2006)

- Rather something else.- market size?

- recurring costs that only large firms can overcome?

The determinants of export participation

Exporting and Size

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Non-Exporter Region International Both

The amount exported (exporting and market structure)

- No robust results from the data. It is all firm specific.- A simple model (Blattner (1973))

Figure 2: Exporting firm with market power in the domestic market

Source: Adapted from Blattner, 1973

DForeign

DDomestic

MC

MRDom

AC

Quantity

Price

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Exporting and market structure(Rankin and Schöer, 2009a)

- Number of competitors is linked to export destination

- International-only exporters more likely to be monopolists

- Regional-only exporters more likely to have 1 to 5 competitors

- Regional-only exporters are more capital intensive

- Lumpy capital investment

- Allocative vs economic efficiency

- Tension between size required to be successful in the export market and market structure

Exporting and importing

- Related- Currently, Lawrence Edwards (UCT) working in this area

Export Export region

only

Export international

only Export both Non-importers 21% 12% 5% 5% Importers 51% 21% 7% 23% Total 39% 17% 6% 15%

Exporting and employment

- Rankin and Schöer (2009b)

- Work on other countries indicates that exporters pay more, but this may be because they employ different people.

- South African data suggests that the types of people employed differs by export destination – SADC-only specialists are more likely to employ younger males

Exporting and employmentFigure 2. Kernel density functions of ln(monthly wages) by export destination

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All SADC-onlyInt-only Both

Exporting and employment

- After controlling for firm and worker characteristics, these differences in wages persist

- Workers in firms that export only to SADC earn significantly less than non-exporters

- This is also related to specialisation (10-32% earn 20% less; 33%+ earn 35% less)

- Workers in firms that export to the international market earn significantly more (at least 15%)

- What explains this?

- Product quality which is correlated with underlying skills/productivity of worker

Some policy thoughts

1. More firms exporting or existing exporters exporting more?

- In comparison to other African countries more South African firms export but in general export a smaller amount

- In comparison to the ‘peer group’ (Malaysia, China), fewer firms export and export less

- Seems better to concentrate on increasing volume rather than participation

- Related issue is that one needs to think about the underlying population of firms. Seems like there are relatively few firms in the ‘middle’. These are the potential exporters

Some policy thoughts

2. Regional markets as stepping-stones to international markets?

- Seems unlikely

- Markets seem distinct (product quality issues)

- Other African data suggests little transition from African-only exporters into International exporters

- Defensive exporting?

- Exporting when they outgrow local market or to retain domestic market power

- Not to say regional market unimportant

Some policy thoughts

3. Macro-economic and policy stability and exporting

- Key

- Models with sunk costs (Dixit, 1989, Baldwin and Krugman, 1989) suggest that uncertainty matters

- Firms only enter if discounted stream of future profits outweighs the stream of domestic profits by the amount of the sunk costs

- Need a ‘premium’ for this

- Large shock may encourage firms to enter exporting

- However, response to shocks depends on group of firms ‘almost’ exporting

- Exchange rate devaluation

Some policy thoughts

4. Productivity and exporting

- Data does not really allow us to get at productivity issue – with no price data mark-ups and productivity are confused

- Existing research does seem to suggest that the most efficient firms do not have as large market share as they should

- Potential factors limiting this:- Competition- Bargaining structure- Crime- Transport costs and infrastructure limit competition- Regulations- Imports

- Policies need to focus on improving business environment and allowing productivity to be key determinant of firm survival, growth and thus exporting