Global Links Raise Asian Countries' Productivity

"Firms in which foreigners have a substantial ownership share have markedly higher productivity than those that are domestically owned."

In East Asia, particularly among the least-developed countries, companies that compete in export markets and firms with foreign ownership exhibit much higher levels of productivity than other enterprises, an indication of the benefits that can accrue to relatively poor countries as they integrate into global markets. This is the central finding of new research by Mary Hallward-Driemeier, Giuseppe Iarossi, and Kenneth Sokoloff, who consider the effects of greater openness on East Asian economies in Exports and Manufacturing Productivity in East Asia: A Comparative Analysis of Firm-Level Data (NBER Working Paper No. 8894).

Their analysis of detailed data from some 2700 manufacturing enterprises in five East Asian countries (Indonesia, Korea, Malaysia, the Philippines, and Thailand) reveals "substantial advantages in productivity associated with firms that are, in various senses, more 'open' to the rest of the world." Specifically, this includes companies with significant foreign ownership, outside auditors, and "those that choose to focus on the export market."

For example, the study finds that in four of the five countries (the data for Malaysia were inconclusive) "firms in which foreigners have a substantial ownership share have markedly higher productivity than those that are domestically owned." The authors note that their conclusion supports a long-standing hypothesis that foreign ownership often brings with it "a greater ability or incentive" to implement new management or technological changes that improve productivity.

Hallward-Driemeier, Iarossi, and Sokoloff are particularly interested in whether the decision to participate in export markets prompts gains in productivity. Other studies have contended that it's not the export opportunity that drives companies to improve productivity. Rather, they have argued that the connection one notices between productivity and exports is merely a by-product of the fact that more efficient companies fare better in global markets.

But Hallward-Driemeier, Iarossi, and Sokoloff uncover a much stronger link in which the lure of valuable export opportunities becomes the key motivation to become more productive. Utilizing information on what firms were doing during their first year of operations, they find "firms that explicitly target export markets consistently make different decisions regarding investment, training, technology, and selection of inputs and thus raise their productivity."

The authors discover that the enhanced productivity associated with these factors is particularly striking in the least-developed economies, such as Indonesia and the Philippines, countries that only recently have begun to develop a broad industrial base capable of competing in export markets. They note that in these countries the productivity gains made by export-focused enterprises stand-out because markets segmented by conditions such as differentiated products and high internal transportation costs have allowed companies that make less productive use of very similar inputs to continue in operation. "When local or regional markets are not well integrated, a circumstance typical of less-developed countries, inefficient firms can survive because they are insulated from competition with more efficient enterprises," the authors state. They observe that the magnitude of the productivity advantage of firms that were established as exporters over those that focused on domestic markets was inversely related to the level of development: highest in Indonesia and the Philippines, next highest in Thailand, small but significant in Malaysia, and virtually nil in much more developed South Korea (where domestic markets are "quite integrated" with global markets).

The study concludes that, for policymakers, be they in the United States or East Asia, "the message would be that it is the least developed economies that have the most to gain from measures that would broaden the markets they face." The authors believe their conclusions "provide support for the notion" that expanding export opportunities for less-developed countries, such as through reductions in the trade barriers they face, "would lead more entrepreneurs to focus on the export market, and thus to increases in overall manufacturing productivity."

-- Matthew Davis

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