Vietnam Development Forum – Tokyo
SeminarJanuary 12th, 2008

Entry Costs andHeterogeneous Characteristics of Firms
in the Decision to Export:
Empirical Evidence
from Firm-Level Data in Vietnam
Nguyen Hiep
Hiroshi Ohta
Graduate School of International Cooperation Studies (GSICS)
Kobe Univeristy

Research Motivations
New strand of international trade study“New” new trade theory(Heterogeneous-firm trade theory)-Starting: mid-90s [Bernard & Jensen (1995)]-Getting popular: early 2000s [Melitz (2003)]

Firms in trade theories?
Standard (classical, neoclassical or new)trade theories: representative firm;identical or homogeneous firms.

In the real world of int’l trade+ In almost every industry/sector, there arefirms involving in export/ import activities.
+ In an industry:- Not all firms export/ import- Firms that export/import are different
from those who do not- Even among trading firms, there aredifferences in many aspects

Î “New” new trade theories+ New trade theory:- National economy:a system of interaction between firms- Monopolistic competition- Product differentiation- Increasing returns to scale+ “New”:
Firms are not homogenous
but heterogeneous.

If firm heterogeneity treated, what can beexpected?
+ Explain in more detail (especially themechanism) what have been explainedby classical, neoclassical and new trade
theories (trade patterns and tradewelfare effects).
+ Explain what have not been explained byprevious theories (firm dynamics ininternational
tradeandnew
contributions in trade pattern andwelfare analysis).

Two recent concerns:(i) International trade & growth: Trade may
induce reallocation of scarce resources
toward the most efficient use.
+ Trade-induced cross-industry reallocationÍ Standard trade theories+ Trade-induced within-industry reallocation+ Trade-induced within-firm improvement
Í “New” new trade theories(ii) Firm-oriented trade policies
Trade promotion policies…

Whatalready observed
literature?

inthe“Exceptional
exportperformance”
or“superiority of exporters”: At a
moment in time, exporters are“superior” to non-exporters[In- Higher productivity- Larger size (employment, capital, output)- Higher wage and labor quality- Higher technology intensity, capital intensity- Member of multi-plant network, etc.
developed countries & some developing
countries].

Causality? Two hypotheses:(1) Self-selection:
Better firms self-select into export markets.
(2) Learning-by-exporting:Exporting makes firms better.

Research Objectives+To

contribute an evidence from adeveloping country to the selfselection hypothesis of the new strandof study in international trade with firm
heterogeneity.
+ To examine exporting behaviors of firms inVietnam+ To contribute some hints for trade policy
implications in Vietnam

Empirical literature on self-selection(productivity-exporting relation for illustration)* Self-selection exists:
Roberts & Tybout (1997):
Colombia
Aw et al. (1997, 2000):
TaiwanBaldwin & Gu (2003):
CanadaArnold & Hussinger (2005):
Germany
Alvarez & Lopez (2005):
ChileVan Biesebroeck (2005):
9 countries in sub-Saharan Africa* No evidence for self-selection:
Clerides et al. (1998):
MexicoCastellani et al. (2002):
Italy
Bernard & Jensen (2004):
USA
Hansson & Lundin (2004)
SwedenBigsten et al. (2004):
Cameroon, Ghana, Kenya, Zimbabwe

Theoretical support
Roberts and Tybout (1997) [Partial equilibrium analysis]
Melitz (2003) [General equilibrium analysis]
Helpman et al. (2007)
Bernard et al. (2007)…
With firm heterogeneity and trade costs, exposure to trade
will induce- only the most productive firms to enter the export
market- some less productive firms to continue toproduce only for domestic customers- the least productive firms to exit

Theoretical background for estimation
Dynamic model of exporting with entry costs[Roberts and Tybout (1997)]:

Profit from exports of firm i at time t

π~it ( X t , Z it , qit* −1 ) = pit qit* − cit ( X t , Z it , qit* −1 | qit* ) − N (1 − Yit −1 )q it* :Profit-maximizing level of exports

p it :Export pricec it :Variable cost
X t , Z it :Factors affecting costs
Y it :Export status; equal to 1 if export and 0 otherwise
N :Entry cost
+ sunk entry costs Î heterogeneity becomes important+ sunk entry costs Î dynamic in making decision

Theoretical background for estimation(cont.):
Firm chooses*is{q }

∞s =t

(to maximizeΠ it ( X t , Z it ) = Et ∑s =t δ s −t (π~isYis )∞)The value function of the firm(~ Y + δE [V (.) | q *Vit (.) = max
πit ittit +1it*qit)

The condition of exporting decision⎧1 if p it q it* + δ E t [Vit +1 (.) | q it* > 0 ] − δ E t [Vit +1 (.) | q it* = 0 ]⎪Yit = ⎨ ≥ cit ( X t , Z it , q it* −1 | q it* ) + N (1 − Yit −1 )⎪ 0 otherwise⎩

Empirical framework
Estimating the effects of sunk entry costs and firm
characteristics on the probability of a firm to be anexporter (the decision to or not to export); exportintensity not treatedÎ Binary choice non-structural approach⎧1 if γ X t + β Z it − N (1 − Yit −1 ) + u it ≥ 0Yit = ⎨⎩ 0 otherwise

Z it: Vector of firm-specific characteristics

Xt: Vector of exogenous factors

uit: Error termData+ "Productivity & the Investment Climate Enterprise
Survey of Vietnam” (PICS) in 2005 of the World Bank.
+ 1,150 firms of manufacturing sector (17 industries)+ Face-to-face interviews with managers, employees, …
General information (ownership, establishment year,industry, location); sales and supplies (revenue, directexport share, year first exported); labor relations(employee number and compensation); production,expenses and assets+ Retrospective basis Î panel data of 2002 to 2004
+ 5.6% of 20.5 thousands manufacturing firms in 2004
+ Exporters ( direct exports of >=10% of total sales): 34%

Estimation Specification(1) Exporter’s superiority: Derive differences between
exporters and non-exporters: exporter premium inrevenue, productivity, size, input intensity, labor skill
and age.
Exporter premium ≡ [(Z it*exp orter− Z it*non −exp orter) / Z it

*non − exp orter] *100(i) Simple exporter premium ≡ (eα1 − 1) *100
via estimating

ln Z *it = α 1Yit + uit(ii) Conditional exporter premium≡ (e β1 − 1) *100

*lnZ
via estimating
it = β 1Yit + β 2 Z it + β 3T + β 4 D + vit

Estimation Specification (cont.)(2) Determinants of the decision to or not to export:
Some considerations before choosing specifications(i) Binary dependent variable Î logit, probit or linear
probability models(ii) Three main issues in the model of export decision:- Significant effects of unobserved characteristics
Î unobserved effects- Persistence in export decision due to sunk costs
Î lagged dependent variable- Two-way relationship between export decision and firm
characteristics Î simultaneity problem(iii) Short panel data

Estimation Specification (cont.)
Estimation equation:

Yit = λ1Yit -1 + λ2 Z it −1 + λ3T + λ4 D + ε i + ηit
Three specifications:+ Probit model in pooled data set, ignoring unobserved
effects+ Heckman’s (1981) random effects dynamic probit
model (preferred model)+ Random effects probit model in no-status-switch subsample

Variables
Table 2

VARIABLE DEFINITION

Variable

Definition

Exporter

1 if exporter (>=10% of total sales exported), 0 if non-exporter

Revenue

Total sales

TFP

Total factor productivity

Labor

Total number of permanent & adjusted temporary employees

Labor Productivity Value added/Labor
Capital

Total net-book value of machinery and equipment

Wage

Total labor payment/Labor

Age

Number of years in business, ( 2004 minus foundation year)

Age Squared

Age squared

Capital Intensity

Ratio of total net-book value of machinery and equipment tototal employees

Foreign

Foreign-owned firm, (>=10% of foreign capital)

DummiesIndustry, location and year dummies

Variables (cont.)
Total factor productivity (TFP):Approaches to choose from: Parametric (OLS), semiparametric [Levinsohn and Petrin’s (2003) or Olley
and Pakes’ (1996) ] and non-parametric (DEA)
estimators.
Levinsohn and Petrin’s (2003) approach employed:+ Elimination of “transmission bias” caused by“simultaneity”[TFPisunobservable
toeconometricans but not to firm’s managers (at least
part of this knowledge). This knowledge may
influence the choice of inputs];+ Availability of intermediate inputs, used as proxy
for the knowledge of the firm about productivity;Two-stage estimation of production function(Cobb-Douglas)

TFˆPt = exp(vt − βˆl lt − βˆk kt )Table A.1:

COEFFICIENTS OF PRODUCTION FUNCTION

Industry

Labor

CapitalObs.

Food and Beverage

0.40***

0.24*

489

Textiles

0.51***

0.52**

185

Garments

0.68***

0.32**

183

Leather

0.40**

0.74**

64

Wood & Wood Products

0.45***

0.30*

348

Paper

0.32**

0.51**

164

Chemical & Chemical Products

0.79***

0.54**

175

Rubber, Plastic and Non-metallic Products

0.48***

0.39

183

Metals and Metal products (50 employees or less)

0.48***

0.46

119

Metals and Metal Products (over 50 employees)

0.56***

0.27*

176

Machinery and Equipment

0.42***

0.54*

175

Construction Materials

0.48***

0.30***

248

Others

0.49***

0.38***

322

Variables (cont.)+ Values of Zit presented in level relative to industry
mean to alleviate industrial heterogeneity, after
adjusted to real 2002 terms by appropriate priceindices+ All industry, region and year dummies included+ Export status in 2002 derived from export
experience by 2002
+ Lagged export status as an dependent variable toestimate the role of entry costs.
+ Capital as a proxy for firm size
+ Average wage as a proxy for labor skill+ Both age and square of age included to test
deterioration of experienceResults and discussion
Table 3

DIFFERENCES BETWEEN EXPORTERS & NON-EXPORTERS
SimpleExporterPremium (%)

Standarderrors
and t-stat.

Conditional
ExporterPremium (%)

Standard
errorsand t-stat.

Revenue

285.380.0669***51.55

0.0384***

TFP

28.66

0.0613***16.390.0408***

Labor
Productivity-1.91

0.0418-11.520.036***Labor

313.800.0496***158.56

0.0521***

Wage

3.29

0.02814.50

0.0283

Capital227.520.0736***150.580.0726***

CapitalIntensity-20.050.0556***-44.680.0405***

Age

33.17

0.0466***

14.57

0.0527**

VariableNote:***, **, and * indicate significance at 1%, 5%, and 10% levels,

respectively;

“Superiority” of exporters inmanufacturing sector in Vietnam
Exporters:- Larger in size (revenue, employment and capital)- More experienced in business- More productive (in term of TFP)
Exporters’ production:- More labor-intensive- Lower in value added per employeeNostatistically significant evidence for thedifference in average wage (proxy for labor skill)Table 4
Variable

PROBABILITY MODEL OF EXPORTING (Dependent: Z-score)
(1)

(2)

Exportert-1

3.26***

1.99***

Ln(TFPat-1)-0.13*

-0.12

(3)

(5)

(6)

3.23***

1.87***-0.18**-0.65***

-0.18

0.12

Ln(LaborProductivityat-1)
Ln(Capitalat-1)(4)

0.12***

0.38***

0.80***

0.14***

0.79***

0.85***

Ageat-1

0.08

-0.06

0.40**

0.07

0.37*

0.43**

Age Squaredat-1

-0.06

-0.01

-0.20*-0.06-0.23**-0.21**-0.12**-0.31***-0.76***-0.09**-0.36***-0.76***

Wageat-1

0.05

0.12

0.14*

0.07

0.32**

0.20**

Foreign

0.24

1.70***

2.39***

0.28

2.39***

2.60***

Industry dummies

includedincluded

includedincludedincludedincludedRegion dummies

includedincludedincludedincludedincludedincludedYear 2004

0.45***

0.50***-0.16

0.46***

0.57***-0.16

Constants-1.96***-2.04***-0.61-2.00***-2.52***

-0.82

1601

3051

1526

1635

3051

1558

Capital Intensityat-1

Observations

Entry costs and firm characteristics in the decision
to export(1) Lagged export status: (+)Î Exporting last year is a good predictor of exporting thisyear; important role of sunk costs; relevant in the caseof Vietnam;(2) Lagged TFP: Not statistically significant
Î No evidence of self-selection in term of TFP; (Facts inemerging economy? or diversification of markets andproducts?)(3) Lagged value added per employee: (-)Î Characteristics of export processing service?

Entry costs and firm characteristics in the decision
to export (cont.)(4) Firm size: (+)Î Larger firms are more advantageous in exporting;(5) Capital intensity: (-)Î Labor-intensive producers have higher probability tobe exporters;(6) Average wage: (+)Î Firms with more skilled labor have higher export
probability(7) Age: (+); and age squared: (-)Î Experienced firms are more likely to export, but
experience deteriorates over timeEntry costs and firm characteristics in the decision
to export (cont.)(8) Foreign ownership: (+)Î Foreign firms are more likely to be exporters;(9) More export-oriented industries: Garments, Leather,Textiles, Food and Beverages, Wood and Wood
Products
Less export-oriented industries: Paper and Paper
Products, Chemical and Chemical Products; Metaland Metal Products;(10) More chances for firms to export in 2004 than in2003Concluding remarks
A contribution of evidence in the study of international
trade with firm heterogeneity from a developing
country with fast track of trade liberalization;
An interpretation of real situation in export activities inVietnam.
Policy implications.
For further research: Determinants of export extent
decisions; export behaviors in different foreign
market structure or export products; or learningby-exporting?

Thank you for your attention!