|FDI upstream manufacturing|0.007|0.007*|0.007**|
|---|---|---|---|
||(0.005)|(0.003)|(0.003)|
|FDI upstream services|0.117***|0.001|-0.001|
||(0.014)|(0.011)|(0.011)|
|Sector time trend|Yes|Yes|Yes|
|Firm FE|Yes|Yes|Yes|
|Year FE|Yes|Yes|Yes|
|Observations|1477|648|648|
|Firms|322|137|137|
|T-testfor input tariffcoefficients|0.000|0.019|0.091|

Note: The table reports the estimates of linear regressions. Standard errors clustered at the sector level are reported in parenthesis. All independent variables are lagged one period. In columns 5 and 6, large firms are those in the top quartile of the distribution of sales. All specifications control for FDI in own sector (lagged). Significant at *10%, **5%, ***1%. Results refer to the entire period. Results for the 2014-2017 period are reported in table A1 of the Appendix.

In principle, duty-exemptions or refunds are available for exporters of any size. In practice, securing them is costly for firms due to administrative burdens, and they take time to be processed, adding financial costs. Indeed, a pilot survey conducted online of 80 firms in the textile and apparel sector, complemented with six focus group discussions, revealed that, for the Manufacturing Under Bond (MUB) and Duty Tax Remission for Exporters (DTRE) schemes – two of the available dutyexemption schemes – the time it took for Customs to approve applications was less than 60 days for 40 percent of respondents, and more than 60 days for 60 percent of respondents. The time it takes for approvals to be processed, and for refunds to be paid, even after applications have been approved, induces some firms to opt out of the mechanism or rely on domestic intermediates in the first place.<sup>19</sup> Because the process to secure exemptions is not only lengthy but also complex (for example, the aforementioned pilot survey revealed that the number of documents required by an application were, at the time of the survey, 12 for MUB and 20 for DTRE), it is likely that these schemes favor larger firms, which can devote resources for this purpose, or in general firms with greater expertise and capacity. The administrative burdens associated with claiming (and receiving) duty exemptions are essentially a relatively fixed cost. This means the average administrative cost of claiming duty exemptions tends to decrease as firm size increases. Indeed, almost 75 percent of _customs_ duty exemptions are claimed by the largest 100 firms (World Bank 2019b). In addition, to benefit from a customs duty exemption, a firm needs to import its inputs directly, which is more likely for large and internationally connected exporters.

Our results in column 2 and 3 of Table 11 are consistent with the above evidence, since within the exporters’ group, it is smaller and domestic-owned firms that benefit from reduced input tariffs, which is consistent with these type of firms opting out of the exemption mechanism. To get a sense of the size of these ‘smaller’ publicly listed exporters, we look at their average sales and compare them to average sales of firms in Pakistan. In this paper, ‘smaller exporters’ are defined as those in the bottom third quintile of the distribution of sales. These exporters employ about 100 fewer employees than larger exporters.<sup>20</sup> They exported on average about 760 million PKR in 2017, which is close to the

> 19 The survey evidence is only anecdotal. A total of 80 firms in the textile and apparel sector were interviewed in early 2019 through an online platform. See World Bank (2019b) for a discussion of the survey results.

> 20 Based on available employees’ data, smaller exporters employ about 330 employees on average versus an average of 480 employees for larger exporters. According to the State Bank of Pakistan, SMEs have up to 250 employees.

20