Trade Preferences, Economies of Scale and Dynamic Productivity Upgrading in African Manufacturing Firms: The Production Technology–Institutional Context Nexus

Abstract

Economic justification for the idea that a trade preference incentive can, through its enhanced market facility, bring about dynamic productivity gains to beneficiary firms is rooted in the logic of economies of scale. Under the assumption that this scale driven efficiency does not accrue randomly to firms, this paper argues that striking the right kind of complementarity between attributes of production technology and those of the institutional environment is the key to realizing it. Precisely, a framework is presented in which a production technology with strong potential for internal (firm level) economy requires availability of highly skilled and competent professionals in the management of large scale concerns for successful appropriation. On the other hand, if the potential for scale economy is revealed to be strong only at external (industry) level, then success in actualizing it would ultimately be determined by the efficiency of socioeconomic support structures that obtains in the wider macro level environment. Empirical support for these claims is demonstrated in the responses of African manufacturing firms to the trade incentives of African Growth and Opportunity Act Scheme.

Keywords:

• Trade preference
• Economies of scale
• Productivity
• Manufacturing
• Production technology
• Institution

Notes

See World Trade Organization (WTO) document WT/G6/2/195.

See United Nations Conference on Trade and Development (UNCTAD) (2003) for discussion.

This Agreement had previously enhanced the competitiveness of AGOA beneficiaries in the donors' markets by imposing a regime of quota restrictions on the export of third country competitors' products to the same market.

This is what Moses Abramovitz calls social capability. For detail exposition, see Abramovitz (1995). “The elements of social capability”, in Koo, P. H. and Perkins, D. H. (eds.), Social Capability and Long-Term Economic Growth. London: Macmillan Press.

See www.agoa.gov

See http://www.agoa.info/

Export Processing Zones Authority (2005). Kenya's Apparel and Textile Industry (2005). Available at: http://www.investmentkenya.com/index.php?option=com_docman&Itemid=&task=doc_download&gid=4

For reasons of comparability, one would have expected the Asian countries of India and China to be the appropriate comparator choice. But we reason that being denied access to large market for a long time under the MFA quota would have had a negative impact on their productivity and as such revealed performance may not be a true reflection of potentials. The African country of Mauritius, which prior to AGOA showed some level of competence in international competitiveness and unlike India and China was not denied access to market, is therefore considered a fairly suitable proxy for what frontier productivity performance would most likely look like.

The World Bank in conjunction with partners around the world has been carrying out enterprise surveys since 2000. These surveys are administered at firm levels and utilize standard methodology. The questionnaires are designed to reveal information on various aspects of firm performances including productivities. For more information on the data such as sampling technique, questionnaire coverage and others see:  http://www.enterprisesurveys.org

These samples were obtained from data collected and supplied by the World Bank and are available at:  www.enterprisesurveys.org

Because apparel is a labour intensive production technology there would be little knowledge to spill. Furthermore, some other studies have revealed that neither labour-market pooling nor technological spillovers appear to be important sources of external economies in Kenya (see for instance, McCormick, 1998).