Thursday, August 21, 2014
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The Golden Mean of Export Promotion

WASHINGTON – Economists sometimes describe a country as having a “Goldilocks” economy, because it has achieved moderate, sustainable growth rates that are “neither too hot nor too cold, but just right.” They might also seek Goldilocks’s views on export-promotion policy.

Export promotion might appear to be a virtuous exercise, regardless of whom it supports. Some government agencies, such as the United States’ Small Business Administration and National Export Initiative, target small firms that are most in need of help. Others, as in Brazil or South Korea, select large companies that are best placed to make profits.

There are good arguments for and against both approaches. Small firms need support, because they lack the knowledge and experience needed to operate abroad. They may not wish to invest alone in know-how that their competitors can easily replicate. Moreover, they usually lack the necessary finance, and often find that their local bankers – unable to distinguish between a realistic market-entry strategy and wishful thinking – are unwilling to lend.

But, though small companies’ needs may be great, the reasons why many remain small may have little to do with their limited export capabilities. Instead, they may suffer from low productivity, poor product quality, bad customer service, or any of a host of other internal constraints. Helping such firms to access foreign markets might do little to alleviate their fundamental weaknesses (which may have constrained their export potential in the first place). The result is that export support is often wasted.

By contrast, large firms may not need the extra export support, because they have already established a presence in foreign markets. In fact, successful exporters tend to be part of an exclusive group of “superstar” companies. A recent study by Caroline Freund and Martha Denisse Pierola that examined export patterns in 32 countries found that the top 1% of exporters account for more than half of all (non-oil) exports, while the top 5% account for almost 80%. Because these large exporters already have the access to finance and information that is needed to succeed in foreign markets, any additional state aid is merely a gift.

There is, however, a third way. Export promotion is most effective when it combines the virtue of helping needy smaller enterprises with the pragmatism of supporting well-resourced larger companies. And that optimal balance can be found among medium-size enterprises.

Medium-size firms are often on the verge of breaking into foreign markets, requiring just a nudge to get them across the border. Many of them are highly productive, but their profits do not quite cover the fixed costs of exporting. Similarly, a potential exporter may be prevented from succeeding abroad by a single operational constraint, such as outdated IT systems or weak market-research capabilities. Removing such obstacles is where export promotion has the greatest impact.

Avoiding the extremes in export promotion is supported by recent research into Tunisia’s FAMEX matching-grant scheme. The FAMEX study found that, compared to a control group, the scheme’s beneficiaries – half of which had fewer than 50 employees – initially enjoyed faster export growth and greater diversification across regions and products. After three years, these firms remained more diversified, but their growth rates and exports were no higher than those of the firms in the control group.

When the firms were divided into three categories – small (fewer than 20 employees), medium (20-99), and large (100 or more) – the results were striking. Four years after receiving FAMEX assistance, exports of the small firms in the study had declined by 65%, (possibly because their rapid diversification came at the expense of longer-term growth), while exports of the large firms were only marginally higher (by 6%). But medium-sized firms’ exports grew by 57% over the same period.

More research is needed to test this hypothesis in other markets and under different conditions. It may be that company size is an arbitrary or irrelevant variable. Product quality (which is hard to measure) or domestic market share may prove more pertinent when determining which “marginal” companies to support.

But even these limited results raise the question of whether current export-promotion policies are as effective as they could be. Goldilocks may be best known for her great moderation; but her true insight was her willingness to learn through experimentation.

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