The performance of NZ exporters: Some firm-level evidence

Richard Fabling

Motu Public Policy Seminar, December 2007

Outline

Motivation Theory NZ data & results Future work

Motivation

Concerns about NZ export performance: “Exports have grown little in volume or value over the last 30

years, and our performance is well behind that of similar OECD countries”

“Export Year 2007 is part of the Government’s wider Economic Transformation Agenda to forge an export-led, high wage economy”

“Exporting helps businesses: Expand their customer base, potentially boosting sales,

productivity and profits Achieve the scale needed to attract investment and reach their

full potential Pick up new skills and expertise, and stay ahead of market

trends Become internationally competitive, helping to protect their

domestic business from imported competitors Create a long-term plan for their future.”

www.exportyear.govt.nz

Theory

Figure 2 - Greenaway & Kneller (2007)

Implications of model

Wide variety of firm performance (assumed) Self-selection into exporting Persistence in exporting Exporters achieve greater scale Resource reallocation towards exporters raises

aggregate productivity Explains relationship between trade & growth Other effects on firms from exporting?

EG, higher productivity growth through learning-from-exporting – not assumed in model

Empirical literature strong on self-selection hypothesis, mixed (weak) evidence on learning

Focus of export policy

Reduce threshold for entry into exporting Cover sunk costs (eg, NZTE Market Development

Grants, 541 recipients, $36.3m) Reduce trade barriers (eg, MFAT Policy Advice &

Representation: International + Other Countries $220.2m)

Help firms raise productivity => self-select into exporting

Eg, NZTE Capability Building Grants (366 recipients, $3.2m)

R&D tax credit ($158m) Many economies do these things – which

of them work?

How NZ research helps

Ex-ante How does the economy work? Is there a problem that policy could solve?

Ex-post Did this policy work? How could it be improved?

This work in the nature of the former approach, but evaluations are underway!

First, to be useful, researchers need data…

The Longitudinal Business Database

Longitudinal Business Frame (LBF) GST/Business Activity Indicator (BAI) Financial accounts (IR10) Company tax returns (IR4) Linked Employer-Employee Dataset

(LEED) aggregates Customs merchandise trade Government programme lists Sample surveys (AES, BOS, Innovation,

R&D, BPS, BFS)

Benefits of the LBD

Coverage Includes roughly all “economically significant”

firms in NZ (~700K private-for-profit firms) Panel dimension

7yrs (2000-6), ~450K active firms in any year, ~50K entrants/exits

More performance metrics Exporting by good-destination; profitability;

productivity Huge potential for firm-level research Some industry restrictions in work

presented today

Papers this presentation draws on

Fabling & Grimes (2007a) “Do exporters cut the hedge? Who hedges, when & why”, NZAE’07

Fabling & Grimes (2007b) “Over the hedge or under it? Exporters’ Optimal and Selective Hedging Choices”, NZESG presentation/paper in prep.

Fabling et al. (2007) “Some rise by sin, & some by virtue fall: Firm dynamics, market structure & performance”, NZAE’07

Fabling & Sanderson (2007) “Peter Piper picked a peck of pickled peppers & packed them off to Portugal: Firm-level patterns in merchandise trade”, NZAE’07

Greenaway & Kneller (2007) “Firm heterogeneity, exporting and foreign direct investment”, Econ J, v117, pp134-161

International Study Group on Exports & Productivity (2007) “Exports & productivity: Comparable evidence for 14 countries”, in prep.

Manufacturing value-added (2005)

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0.35

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0.45

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0.55

0.60

0.65

0.70

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0.80

6.5 7.5 8.5 9.5 10.5 11.5 12.5 13.5 14.5 15.5

Log value-added

Den

sity

/pro

po

rtio

n

All manufacturers

Exporters

Proportion of manufacturers exporting

Where does expansion come from?

Manufacturing labour productivity (2005)

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0.35

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0.55

0.60

6.5 7.5 8.5 9.5 10.5 11.5 12.5

Log labour productivity

Den

sity

/pro

po

rtio

n

All manufacturers

Exporters

Proportion of manufacturers exporting

Cross-country comparison

Proportion exporting (20+ employment) 14 country average 64%; NZ 56/65%

Sales per employee level differences (controlling for firm effects, industry, size, average wage)

14 country average 7%; NZ 1.4/2.8% Longitudinal results point towards self-selection Hard to identify effect of entry on growth, though

often a small number of observations Level difference less with proper measure of

value-added & control for capital inputs 7 country average 3.4%; NZ ?%

Manufacturing multifactor prod. (2005)

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0.05

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0.35

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0.45

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0.55

0.60

4.5 5.5 6.5 7.5 8.5 9.5 10.5

Log multifactor productivity

Den

sity

/pro

po

rtio

n

All manufacturers

Exporters

Proportion of manufacturers exporting

Manufacturer LP by export & FDI status

0.0

0.1

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0.8

7.4 7.6 7.8 8.0 8.2 8.4 8.6 8.8 9.0 9.2 9.4 9.6 9.8 10.0 10.2 10.4 10.6 10.8 11.0 11.2 11.4 11.6 11.8 12.0 12.2 12.4 12.6

Labour productivity

Den

sity

Domestic-owned non-exporting manufacturing companies

Domestic-owned exporting manufacturing companies

Foreign-owned non-exporting manufacturing companies

Foreign-owned exporting manufacturing companies

It’s a tough world out there

Survival function for firm export spells

Currency risk a cause of attrition?

Destination - Australia (1st by value)

NZD

USD

AUD

OTH

Destination - US (2nd by value)

OTH

USD

AUD

NZD

Destination - Japan (3rd by value)

OTH

NZD

AUD

USD

Destination - China (4th by value)

USD

AUD

OTH NZD

Destination - UK (5th by value)

NZD

OTH

USD

AUD

Theory

Optimal hedging (imperfect markets) Eg, financial distress costs, underinvestment

costs, scale, managerial risk aversion/ governance, convex tax schedules

Selective hedging Sensible if exporter has information comparative

advantage Estimation

Exporters to Australia Monthly Jun 2000-Mar 2006 Test both theories simultaneously Two stage selection model – only observe hedging

behaviour for firms with foreign currency exports

Share of AUD exporters hedging

Number of AUD exporters by month

0

50

100

150

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500

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06/00 09/00 12/00 03/01 06/01 09/01 12/01 03/02 06/02 09/02 12/02 03/03 06/03 09/03 12/03 03/04 06/04 09/04 12/04 03/05 06/05 09/05 12/05 03/060.82

0.84

0.86

0.88

0.90

0.92

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0.96

0.98

1.00

1.02

1.04

1.06

1.08

1.10

1.12

1.14

1.16Num ber of AUD exporters that don't hedgeie, N(H1=0)

Num ber of AUD exporters that hedgeie, N(H1>0)

Deviation of AUD from 3yr m oving average (RHS)(ie, AUD3)

Preliminary results

Hedging experience, diversification, scale + Firm hedged previously, 1/(time since last hedge) - NZD exports/sales, (non-AUD fx exports)/sales + No. of markets exported to + No. of countries imported from + Member of multi-enterprise group

Financial distress; under-investment risk: - Quick ratio + Interest expenses/EBIT + Intangible assets/total assets

Ownership (- Foreign-owned or SOE) Exchange rate (expected negative effect)

Future work - international

LBD has huge potential. Planned work… Determinants of export entry & exit at both

the firm and the relationship level Impacts on firm performance Extension to other forms of international

engagement (eg, foreign ownership) Identification of service exporters BOS’07 – currently in the field (April 08)

Trade & local labour market characteristics Evaluation (first study next week) Other differences in export business

practices (BOS)