Trade liberalization and ‘export response’: Whither complementary reforms?

Abstract

What enables Ecuadorian manufacturing firms to start exporting? And what are the determinants of the share of total sales exported by a firm, once the decision of becoming an exporter has been made? We apply a Heckman selection model to the Ecuador's Investment Climate Survey (ICS) to investigate supply-side constraints to export performance at the firm level. We estimate export propensity (the probability of exporting) and export intensity (the share of total sales that are exported). The application of the Heckman selection model to a rich dataset as the ICS is a major contribution as previous applications of the Heckman selection model used much limited datasets, limiting the range of hypotheses to be tested. Furthermore, other studies on export performance based on ICS data use either Tobit or Probit models, incurring important methodological limitations. We find robust and stable relationships for export propensity and intensity with firm size, import of inputs, labor regulations, in-house R&D, quality certification, Web use, and foreign ownership. Capacity utilization and trade with the US positively affect export intensity, while trade within the Andean Community has the opposite effect in our outcome variable. No significant relationship was found with the infrastructure variables.

Keywords:

• Ecuador
• exports
• innovation
• foreign networks
• business environment
• firm level

JEL Classifications:

• F1
• F2
• O3

Acknowledgements

The views are expressed here are those of the authors and do not represent the opinions of the World Bank, or of its Executive Directors, or of the countries that they represent.

Notes

 1. For instance, power outages affected 86% of manufacturing firms in Ecuador and cost 7% of sales of exporting firms in 2003. Current financial intermediation by the private sector corresponds to only 15% of GDP, roughly half the volume before the financial crisis. Customs clearance for exports takes on average 8.7 days, three times longer than Honduras and Guatemala, also lower middle-income countries. An R&D share of GDP of 0.1%, inferior to that of Colombia and Peru – close competitors in the US market – indicates a poor capacity to absorb and use technology.

 2. The overall concentration index of Ecuador's exports increased from 36.5% to 543% between the 1995–1999 and the 2005–2006 periods, with the top five export products (oil, banana, seafood, prep. Fish, and flowers) reaching 81% of the total value of exports.

 3. The US is Ecuador's main trade partner and source of foreign direct investment. Negotiations of a FTA between Ecuador and the US stalled in recent years. Colombia and Peru – Ecuador's close competitors – are trying to achieve a bilateral trade agreement with the US through the negotiations.

 4. Additionally, we control for industry-specific effects on firms' export performance, which aim at capturing price and demand effects, and for region-specific effects, which aims at capturing agglomeration effects.

 5. Pavitt (1984) identifies four industry patterns of technological change: (i) supplier dominated, (ii) specialized suppliers, (iii) scale intensive, and (iv) science based.

 6. Wood and furniture is the omitted category for industry.

 7. For example, some industries may have several exporters because there are more firms in the ‘large’ size category.

 8. Pichincha is the omitted category for region.

 9. These variables were included only in the export intensity equation because they were only observed among firms that exported in 2002 (i.e. Export propensity = 1).

10. The creation of these infrastructure variables was done by dividing the number of days a firm faced interruptions in energy, telecommunications, and transportation services by 365 days.

11. See Table A4 in the Appendix for a detailed description of the sample. The sample was divided into three size categories (small, medium, and large), based on total employment in 2001. Nine outliers were omitted, whose size was above 500 employees in 2001.

12. In contrast to other studies in the literature, our innovation variable is not statistically significant. This might be related with the quality of information collected by the ICS. Innovative firms are more intensive in capital, which is not compatible with the Ecuadorian production factor (i.e. capital and labor) endowment.

13. Acquiring information on foreign markets and networking with possible foreign buyers also represent sunk costs to the firm.

14. If instead of using the Heckman selection model, a Tobit model was used to estimate export intensity, capacity utilization would have a negative sign, as can be seen in Table A6.

15. For other countries, empirical studies, such as Roberts and Tybout (1997) and Bernard and Wagner (1997), found persistence in exporting by firms.