Investments, export entry and export intensity in small manufacturing firms
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Investments, export entry and export intensity in small manufacturing firms Stephen Esaku1 Received: 4 October 2019 / Revised: 27 March 2020 / Accepted: 14 April 2020 © Associazione Amici di Economia e Politica Industriale 2020
Abstract We analyze the effect of investment in physical capital on the firm’s choice to enter the export market and increase export intensity. We specifically examine the hypothesis that firm-level investment facilitates small firms to initiate exporting and increase their export intensity. Using propensity score matching techniques, the results we find are remarkable. First, we find that firm-level investments in physical capital significantly increase the probability of export market entry among small firms. Second, we show that small firms that investment significantly increase the probability of expanding their exports, as observed in the high export intensity. This implies that firm-level investment is a substantial component in the firm’s choice to export and may be another channel through which small firms can access export markets despite the presence of sunk entry costs that act as a barrier to entry. Third, we show that firms that invest above the industry average investment level stand the highest probability of entering the export market and expanding their export sales. Moreover, we also find that exporting experience significantly influences the firm’s choice to invest, probably as a measure of upgrading production technology. At the policy level, we observe that export subsidies should be directed at addressing capacity and technology related constraints as these have hampered export entry and export intensity among small firms. Keywords Treatment effects model · Investments · Exports · Firm performance · SMEs JEL Classification C21 · E22 · F1 · L25 · L26
* Stephen Esaku [email protected]; [email protected] 1
Department of Business and Management, Cavendish University Uganda, Box 810, Soroti, Kampala, Uganda
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Vol.:(0123456789)
Journal of Industrial and Business Economics
1 Introduction There is a growing body of theoretical literature examining the behavior of heterogeneous firms that trade. The Melitz (2003) model establishes that participating in foreign trade generates high export entry rates among the large and more productive firms while at the same time lowering the probability of entry for the less productive ones. Consequently, any additional exposure to trade for the whole industry would induce further intra and inter-firm reallocation of resources towards the most productive firms. Relative to the more productive firms, the less productive ones remain to serve the domestic markets and those that venture into the export markets find themselves unable to survive longer in these markets (Melitz 2003; Roberts and Tybout 1997). This is a clear indication that firm-level efficiency is an important element in the firm’s decision to enter and exit international markets. Following the intuitive study by Bernard and Jensen (1999), several empirica
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