“Self-selection” and “path dependence”: evidence for Russian exporting manufacturing firms

1. Research University - Higher School of Economics “Self-selection” and “path dependence”: evidence for Russian exporting manufacturing firms Victoria Golikova, victoria@hse.ru Ksenia Gonchar, kgonchar@hse.ru Boris Kuznetsov,bkuz@bk.ru Institute for Industrial and Market Studies Center for Economic Development Research-Higher School of Economics 4th Joint Conference: „A Comparison of Industrial Structure and Economic Policy in China and Russia“ Wuhan, People's Republic of China PRC 21– 24 September 2011 1

2. Structure of the presentation Motivation Background facts on Russia’s foreign trade Research hypotheses Data description and descriptive statistics Models and methodology Results and conclusions

3. Motivation (1) On the macro-level in the globalized world foreign trade is one of the major drivers of economic development and economic growth. To great extent it shapes the structure of the national economy. On the micro-level foreign trade is expected to provide competitive pressures and new business opportunities for firms, due to the access to new markets and technology transfers. On the other hand, in any economy some firms do export and some do not. While economic theory has revealed some explanations, still the relationship between exporting activity and firms’ characteristics is still widely debated in the literature, including the debates on the causality, i.e. direction of this link.

4. Motivation (2): Related literature Melitz (2003) and others developed a theoretical model of monopolistic competition with heterogeneous firms and explained why exporting firms are larger and more productive that non-exporting firms. Starting from paper of Bernard and Jensen (1999), many authors have studied the link between productivity and exports and found that firms participating in export markets became more productive before they entered the World market. Self-selection hypothesis has been empirically tried for transition countries (Damijan et al. 2004). Yang and Mallick (2010), using data from Chinese manufacturing firms, found evidence both for an export premium and self-selection.

5. Motivation (3): Evidence for Russia Opposite to other transition countries globalization seems to have ambiguous effects on Russian manufacturing firms. While some papers (Wilhelmsson and Kozlov, 2007) confirm self-selection and show positive impact on productivity for exporting firms, other works (De Rosa, 2006) using the same data found evidence of path-dependence pattern, i.e. export activity is mostly driven by previous export experience and firm’s size but not by other characteristics. In this paper using data from the two rounds of survey conducted in 2005 and 2009 we try to reveal the differences between types of exporters and non-exporting firms. And, in particular, we check self-selection and path-dependence hypotheses.

6. Background information about manufacturing exporting in Russia • Liberalization of foreign trade in Russia in early 90-s created opportunities for firms to enter foreign markets. Nevertheless for a number of reasons there were relatively few manufacturing firms which used this opportunity during the transformational shock of the 90-s. Most of export (beside raw materials) was along the traditional supply chains to former Soviet republics (later CIS countries). • At the stage of economic growth (1999-2008) share of exporting firms somewhat grew, but the share of export in the firms’ output stayed much lower than in most of transition countries, even among large and medium sized firms. • Thus, the questions are widely discussed till now: • Is this due to low competitiveness of Russian firms? • Is this due to unfavorable business climate and institutional barriers to export? • Or the reasons lay in the lack of competences and export traditions?

7. Background: low share of manufacturing in Russian export Source: WTO. International trade statistics 2009 http://www.wto.org/english/res_e/statis_e/its2009_e/its09_trade_category_e.htm

8. Export and Import Dynamics in Russia in 1994-2009 ($ bln) Export Import

9. Export and Import Growth by Selected Industries Metals Chemicals Machinery Textile Source: Rosstat data, 2011

10. Sales market structure by industry Source: HSE survey data, 2009

11. Changes in % of firms with different share of export (2004-2009) Source: HSE Survey data: 2005, 2009

12. Research hypotheses Hypothesis 1 More productive and larger manufacturing firms self-select to enter and continue operating in export markets. Hypothesis 2 New exporters are more likely to self-select on the grounds of higher productivity than are continuing exporters. Hypothesis 3 Destination of trade (to either developed or CIS countries) matters: exporters to the CIS are more likely to follow the traditional path-dependent mode of foreign trade and are less likely to self-select on productivity grounds than exporters to developed countries

13. Data description • First round of the Survey: • Conducted in Autumn 2005 for Russian Ministry for Economic development in cooperation with the World Bank; • 1002 large and medium size firms surveyed in 8 2-digit manufacturing sectors and in 49 regions of Russia • Second round of the Survey: • Conducted in Spring 2009 for Russian Ministry for Economic Development; • 957large and medium size firms surveyed in 8 2-digit manufacturing sectors and in 48 regions of Russia • Panel - 499 firms (surveyed twice) NB: Small (less than 100 employees) and very large companies (over 10 000 employees) were not included in the sample 13

14. General approach • To verify H1 and H2 we divide the sample by 4 groups of firms: • Continuing exporters – firms which reported export both in 2005 and 2009 (NB: we presume those forms to export continuously) • De-novo exporters – firms which reported no export in 2005 but some in 2009 • Former exporters – firms which reported export in 2005 but reported no export in 2009 • Non-exporting firms – no export reported in both rounds • To verify H3 we divide the sample in three groups by destination of export in 2009: • Firms with some export outside of CIS • Firms exporting exclusively to CIS • Non-exporting firms • Those groups are used as dependent variables in multinominal regressions

15. General approach(2): determinants We use lagged value of ratio of firm’s labor productivity measured as value added per employee and the sector average reported by the official statistics to check the self-selection hypothesis. We use log of number of employees in 2005 to catch the size effects We expect exporting firms to produce goods that are competitive in price and quality and we presume that those firms that have experience in dealing with strong competition inside the country are more likely to compete successfully in the international market. We control for foreign owners and for the state as an owner as well as to be a part of a large holding company. One additional factor that we presume may be important is the age of a firm by dividing them into three groups: those which existed (were established) before 1992, created between 1992 and 1999 and the rest of the sample. For the second model where the geographical destination of exports is a dependent variable we use the same list of independent variables. In both models industries are controlled for. 15

16. Distribution of firms by past and present export activity

17. Geography of export flows (% of firms )

18. Some descriptive statistics

20. Path dependence: Variables and Econometric approach Exp_status – reflects export activity in both rounds of the survey, LP – an indicator of labor productivity Size – the size of firms as measured by the number of employees Comp05 – an indicator of competition pressure Foreign – indicates a foreign shareholder State – indicates a government share in the ownership structure Holding – indicates that a firm is part of larger integrated group of companies Age – period of establishment of a firm Ind – dummy variable for 8 two-digit manufacturing industry codes T-1 indexes show the lagged variables that we measure for the previous period of observation. We use multinominal logit regression with non-exporting firms as a reference group

21. Results for path-dependence hypothesis Note: Base category is non-exporting firms. +p<0.1, *p<0.05, ** p<0.01, *** p<0.001. Industrial dummies are included in both models but not reported in the table.

22. Results for self-selection hypothesis

23. Discussion of the results The first finding from our analysis is that Russian exporting firms most probably self-select into the exporting markets prior to beginning exporting: both de-novo and continuing exporters are more productive than are non-exporters and firms that cease exporting. But: the estimated effects are larger for continuing exporters; this result most probably reflects the fact that continuing exporters entered the international markets while more productive than non-exporters and they maintain this advantage while exporting. Contrary to our expectations, we do not find a significant impact from past competition on the propensity to export. We find that, while the sign of foreign ownership is positive for de-novo exporters, it is insignificant. This result is probably due to the relatively small number of foreign-owned firms in our sample. The presence of the state in the ownership structure has a significant negative impact on the probability for a firm to enter export markets.

24. Discussion of the results (2) Being a member of a holding company does not compensate for the low-scale economy. It may be attributed to the fact that exporting functions in the holding companies are delegated to the larger members or to the entities that control the value added chain. The findings also show that scale effects are always significant, though new exporters are smaller in size and the scale factor is of a lower significance as compared to the group of continuing exporters. The time of a firm’s establishment is significant only for de-novo exporters: these are generally firms that were established after the start of the economic transition during the 1990’s. To summarize, our findings show that new exporters are likely to be larger, privately-owned and more productive prior to exporting than firms serving the domestic market. De-novo exporters are relatively smaller than continuing exporters, are more often foreign-owned and report lower competition pressure than continuing exporters and firms that never exported. The de-novo exporters were generally established between 1992 and 1999. We did not find evidence for the path-dependence hypothesis: the timing of a firm’s establishment is not significant for CIS-exporters. A higher productivity level is required for firms serving both types of foreign trade, and the path-dependence argument for those firms exporting to the CIS is no longer relevant. Other factors do not seem to be significant except for the negative sign of the state-ownership dummies for CIS exporters. 24

25. Discussion of the results (3) We did not find evidence for the path-dependence hypothesis: the timing of a firm’s establishment is not significant for CIS-exporters. A higher productivity level is required for firms serving both types of foreign trade, and the path-dependence argument for those firms exporting to the CIS is no longer relevant. Other factors do not seem to be significant except for the negative sign of the state-ownership dummies for CIS exporters. 25

26. Conclusions This paper was motivated on one hand by a rich theoretical and empirical literature regarding the factors that allow firms to enter external markets and, on the other hand, by the fact that Russian manufacturing, even during the economic growth of the pre-crisis period, failed to significantly increase its exports. We found out that self-selection for export exists in Russian manufacturing. It terms of policy advice it may mean that it’s useless to facilitate export activity as such, at least before the restructuring and modernization together with tighter competition provide for higher efficiency of Russian manufacturing firms. We did not find any support for path-dependence hypothesis: a higher productivity level is required for firms serving any destination of foreign trade.

27. Conclusions This paper was motivated on one hand by a rich theoretical and empirical literature regarding the factors that allow firms to enter external markets and, on the other hand, by the fact that Russian manufacturing, even during the economic growth of the pre-crisis period, failed to significantly increase its exports. We found out that self-selection for export exists in Russian manufacturing. It terms of policy advice it may mean that it’s useless to facilitate export activity as such, at least before the restructuring and modernization together with tighter competition provide for higher efficiency of Russian manufacturing firms. We did not find any support for path-dependence hypothesis: a higher productivity level is required for firms serving any destination of foreign trade. 27

28. Conclusions(2) An unexpected result is the negative impact of competition level on the propensity for exporting among de-novo exporters. We presume that this effect is due to a high level of specialization (low product diversification) for many Russian manufacturing firms. This specialization makes the Russian domestic market too small for an efficient scale of production and creates incentives to move to new (external) markets. However, this hypothesis needs to be more thoroughly verified. While we have some indication on what features should the firm has to start exporting, there is another interesting question of how the fact of export change the firm itself. In other words, can we find the “learning-by-exporting” effects? And do those affects depend on the destination of export, length of exporting history and other factors. 28

29. Thank you For your attention