metadata: authors: 0: author: Lederman, Daniel
1: author: Olarreaga, Marcelo
2: author: Payton, Lucy
count: World
docna: 0: docna: Export promotion agencies revisited
docty: Policy Research Working Paper
theme: Other trade and integration
majtheme: Trade and integration
subtopic: Markets and Market Access,Trade Policy,Export Competitiveness,Access to Markets,International Trade and Trade Rules,Rules of Origin,Trade and Services,Trade and Multilateral Issues
teratopic: Private Sector Development,Macroeconomics and Economic Growth,International Economics and Trade,Finance and Financial Sector Development
abstracts: cdata!: The number of national export promotion
            agencies has tripled over the past two decades. Although
            more countries made them part of their export strategy,
            studies criticized their efficacy in developing countries.
            The agencies were retooled, partly in response to these
            critiques. This paper studies the impact of today's
            export promotion agencies and their strategies, based on new
            survey data covering 103 developing and developed countries.
            The results suggest that on average they have a
            statistically significant effect on exports. The
            identification strategies highlight the importance of EPA
            services for overcoming foreign trade barriers and solving
            asymmetric information problems associated with exports of
            heterogeneous goods. There are also strong diminishing
            returns, suggesting that as far as export promotion agencies
            are concerned, small is beautiful.
repnme: repnme: Export promotion agencies revisited
display_title: Export promotion agencies revisited
listing_relative_url: /research/2009/11/11341158/export-promotion-agencies-revisited
topicv3: Trade m1326924 698,Trade in Services m1326928 780,Trade Policy m1327640 776,Market Access Issues m1504225 2609,Export Promotion m1504271 2566
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Private Sector Development,Macroeconomics and Economic Growth,International Economics and Trade,Finance and Financial Sector Development
no_of_pages: 31
model_extractions: WPS5125 Policy Research Working Paper 5125 Export Promotion Agencies Revisited _Daniel Lederman Marcelo Olarreaga Lucy Payton_ The World Bank Development Research Group Trade and Integration Team & Office of the Chief Economist Latin America and the Caribbean Region November 2009
Policy Research Working Paper 5125

# **Abstract**

The number of national export promotion agencies has tripled over the past two decades. Although more countries made them part of their export strategy, studies criticized their efficacy in developing countries. The agencies were retooled, partly in response to these critiques. This paper studies the impact of today's export promotion agencies and their strategies, based on new survey data covering 103 developing and developed countries. The results suggest that on average they have a statistically significant effect on exports. The identification strategies highlight the importance of EPA services for overcoming foreign trade barriers and solving asymmetric information problems associated with exports of heterogeneous goods. There are also strong diminishing returns, suggesting that as far as export promotion agencies are concerned, small is beautiful.

This paper— is a joint product of the Trade and Integration Team, Development Research Group, and Office of the Chief Economist, Latin America and the Caribbean Region—is part of larger efforts in both departments to study the how the structure of trade affects development. Policy Research Working Papers are also posted on the Web at http://econ. worldbank.org. The author may be contacted at dlederman@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
**Export Promotion Agencies Revisited**<sup>_∗_</sup>

Daniel Lederman<sup>_†_</sup> Marcelo Olarreaga<sup>_‡_</sup> Lucy Payton<sup>_§_</sup>

> _∗_ We are grateful to Bruce Blongien, Celine Carr`ere, Patrick Gaul ́e, Luis Guasch, William Maloney, Thierry Mayer, Nicholas Maystre, Richard Newfarmer, Guillermo Perry, Kamal Saggi, Mathias Thoenig, Philip Williams, Luc de Wulf, two anonymous referees, as well as the Co-Editor Gordon Hanson, and seminar participants at CERDI in Clermont Ferrand, the ITC meeting of Export Promotion Agencies in Rotterdam, the LACEA meetings in Bogota, the Paris School of Economics, the University of Geneva, and the World Bank for helpful discussions and constructive suggestions. We are also thankful to Hamid Alavi, Grandford Banda, Huot Chea, Fernando Hernandez-Casquet, Nouridine Kane Dia, Lolette Kritzinger-van Niekerk, Eric Mabushi, Eric Manes, Nicolas Maystre, Luis Montoya, Ben Naturinda, Patricia Noda, Boniperti Oliveira, James Philips, Guillermo Perry, Claudia Ramirez, Irving Soto, TG Srinivasan, and Alejandro Tapia, for their help and assistance with the implementation of the survey. The views expressed here are those of the authors and should not be attributed to The World Bank or any of the institutions with which the authors are

> _†_ Development Research Group, World Bank, Washington, DC 20433, USA; Tel: (202) 473-9015; Fax: (202) 522-1159; e-mail: dlederman@worldbank.org.

> _‡_ University of Geneva, 40 bd du Pont d’Arve, 1211 Geneva 4, Switzerland, and CEPR, London, UK; e-mail: marcelo.olarreaga@unige.ch

> _§_ Boston Consulting Group, Devonshire House, Mayfair Place, London, W1J 8AJUK, UK; e-mail: payton.lucy@bcg.com.
# **1 Introduction**

In 1985, in the midst of the highest levels of hyperinflation ever recorded in the history of the Bolivian economy, President Victor Paz Estenssoro proclaimed that the country was in its death throes and that it could survive only by exporting more of its production. Thus, the phrase ”export or die” was coined. As part of the reform package –whose cornerstone was macroeconomic stabilization– an export promotion agency (EPA) was created (INPEX).

Bolivia’s search for development through exports is not exceptional. The first EPA –still existing– was created in 1919 in Finland, and in the mid-1960s they became a popular instrument to boost exports and reduce trade deficits, under the auspices of the International Trade Center (ITC, a joint UNCTAD-GATT multilateral organization). By the early 1990s their efficiency began to be questioned (Keesing and Singer, 1991 and 1991a). EPAs in developing countries were criticized for lacking strong leadership, being inadequately funded, hiring staff which was bureaucratic and not client oriented, and suffering from government involvement.<sup>1</sup> As a result, many development institutions withdrew their support to EPAs.<sup>2</sup> Part of the blame for the failure of the early EPAs was put on the import substituting trade regimes that prevailed at the time. Overcoming such a strong anti-trade bias was probably too much to ask of any specialized agency.

However, more than a decade later, the trade environment has significantly changed in the developing world and some EPAs under the auspices of the ITC have evolved in the direction suggested by Hogan, Keesing and Singer (1991) in their influential piece.<sup>3</sup> Prominent development economists now recommend the creation of adequately funded EPAs in Africa to overcome the costs and risks of entering unfamiliar and demanding international markets (Helleiner, 2002). Our objective is to assess the efficacy of EPAs by estimating the effect of

> 1Similar critiques emerged for EPAs in developed countries; see Kotabe and Czinkota’s (1992) study of sub-national EPAs in the United States.

> 2Of the 73 export promotion agencies in developing countries surveyed for this paper only 21 had some budgetary support from multilateral donors in 2005, and in only 11 agencies the budgetary support from multilateral donors represented more than 25 percent of the total budget. In the case of one Sub-Saharan African agency, more than 75 percent of its budget in 2005 came from multilateral donors.

> 3That is, there is more private sector involvement, larger funding, and a stronger organization and leadership.

1
today’s EPAs on national exports.

The objectives of EPAs are to help exporters understand and find markets for their products. The services offered by EPAs can be divided into four broad categories: 1) country image building (advertising, promotional events, but also advocacy); 2) export support services (exporter training, technical assistance, capacity building, including regulatory compliance, information on trade finance, logistics, customs, packaging, pricing); 3) marketing (trade fairs, exporter and importer missions, follow-up services offered by representatives abroad); and 4) market research and publications (general, sector, and firm level information, such as market surveys, on-line information on export markets, publications encouraging firms to export, importer and exporter contact databases).

The economic justification for government involvement in export promotion is based on the theory of asymmetric information and other market failures. There are important externalities associated with the gathering of foreign market information related to consumer preferences, business opportunities, quality and technical requirements, etc. Private firms alone will not provide foreign market information, as companies hesitate to incur research and marketing costs that can also benefit competitors. The same applies to pioneer exporters, who make a considerable investment in attempts to open foreign markets, cultivating contacts, establish distribution chains and other costly activities that can be used by their rivals (Hausmann and Rodrik, 2003). The uncertainty associated with trading across markets with different regulations has also been put forward as a justification for export insurance schemes supported by the public sector.<sup>4</sup> The argument for public funding of EPAs would ideally be based on an assessment of the social costs and benefits associated with the activities of the EPA. Social benefits are likely to be larger than the social costs if there are large positive externalities associated with higher current exports across firms, sectors or time and within the exporting country.<sup>5</sup>

> 4See Greenaway and Kneller (2005) for a recent survey of the literature on trade and externalities. For a more skeptic view, see Panagariya (2000).

> 5Note that some of these externalities may travel across borders. It is clear that some of the benefits from export promotion activities can be captured by consumers in the importing country for whom search costs are reduced. This undermines the case for national government funding of export promotion programs and calls

2
It should be clear that program evaluation of EPAs on economic welfare grounds is difficult if not impossible. Thus often –if not always– evaluations of EPAs stop short of an assessment based on welfare grounds, and focus on the more modest objective of assessing whether exports have increased or whether new markets have been opened. This paper is no exception. Our goals are twofold: first, to determine whether EPAs are having an impact on exports; and second, to identify the activities and institutional structures of agencies that are positively correlated with exports.

As far as we know, there has been no cross-country statistical analysis of the impact of EPAs on exports. The exception is perhaps Rose (2007), who estimates the impact of embassies or consulates on bilateral trade using a gravity model. Rose argues that as communication costs fell, foreign embassies and consulates have lost much of their role in decision-making and information-gathering, and therefore are increasingly marketing themselves as agents of export promotion. In a sample of twenty-two exporting countries –of which eight are developing countries– and around 200 potential trading partners, he finds that for each additional consulate abroad, exports increase by 6 to 10 percent.

But EPAs are not consulates. In order to assess their efficiency we undertook a world survey of national EPAs to gather information on their objectives, activities and institutional structure. We then econometrically explore the effect of EPA budgets on exports, as well the impact of different institutional structures, objectives and activities of EPAs on exports.

The evidence suggests that on average EPAs have a positive and statistically significant effect on national exports, after correcting for sample-selection and omitted-variable biases, as well as reverse causality. The identification strategies clarify the mechanisms through which EPA services can stimulate national exports. EPAs seem to be be particularly effective when they are most needed, namely, when exporters face onerous trade barriers abroad, and when a large share of the export bundle is composed of heterogeneous goods. Nonetheless, there are notable decreasing returns to scale in resources devoted to export promotion. Thus, as far as EPAs are concerned, small is beautiful.

for multilateral interventions.

3
Regarding EPA’s institutional arrangements, objectives and activities associated with their effects on exports, our results suggest the following. EPAs should have a large share of the executive board in the hands of the private sector, but a large share of their budget should be publicly funded. The proliferation of small agencies within a country leads to an overall less effective program. However, we found no statistically significant evidence regarding the allocation of EPAs’ expenditures across different activities or types of firms targeted by EPAs (small versus large or established exporters versus non-exporters).

The rest of this article is organized as follows. Section 2 describes our global survey of EPAs and provides some descriptive statistics to help understand the objectives, activities, and institutional structures that exist in EPAs around the world. Section 3 describes the econometric strategy. Section 4 discusses the empirical results, and section 5 concludes.

# **2 Survey of EPAs: Summary Statistics**

During the summer and fall of 2005 we conducted an eighteen-question survey of EPAs around the world.<sup>6</sup> Through the ITC website (www.intracen.org/tpo) we obtained a database with contact information. We complemented this list with the help of World Bank country economists who provided contact information for national EPAs. We contacted agencies or Ministries in 116 countries, and 92 answered our request (of which 4 responded that they could not respond). Each of the 88 surveys that we received was followed up with phone conversations to confirm and clarify some of the answers. The list of 88 agencies appears in the Appendix Table.

The survey contains five parts: i) institutional structure, ii) responsibilities of the agency, iii) the strategies followed, iv) resources and expenditures, and v) activities and functions. Below we provide summary statistics by region.

> 6The survey is available from the authors upon request.

4
# **2.1 Institutional Structure**

Around 10 percent of agencies surveyed are fully private; another 5 percent are joint public private entities. The bulk of the agencies –62 percent– are semi-autonomous entities reporting to a Ministry or the Office of the President or the Prime Minister. The reminder –23 percent of the agencies– are sub-units of a Ministry, and therefore subject to government hiring regulations and pay scales.

Within the 73 agencies that reported having an executive board, on average half the seats in the board –53 percent to be precise– represent the private sector.

Finally, 80 percent of the agencies are either the only export promotion agency in the country or are clearly the largest and most important, although there are significant public and private agencies working in closely related areas. This includes umbrella organizations in which all private sector associations are members. In 20 percent of the countries surveyed there are 2 or more agencies of equal importance.

# **2.2 Responsibilities**

In terms of responsibilities, we explored whether the agency in charge of export promotion activities was exclusively dedicated to export promotion, and if not, we asked the degree of priority granted to export promotion within the agency. In high-income OECD countries and in the Middle East and North Africa (MENA) export promotion is the top priority of the agencies in almost 70 to 80 percent of the countries. In LAC and SSA only half of the agencies report export promotion as the top priority.

# **2.3 Objectives**

The main objective pursued by 60 percent of the agencies surveyed is to increase aggregate exports, no matter which sector or how big or small the export volumes. Around 18 percent of agencies aim to promote non traditional exports only, and around 20 percent target specific sectors. Around 2 percent attempt to develop industrial clusters, and other objectives.

5
# **2.4 Resources and Expenditures**

The average budget of EPAs surveyed is around 0.11 percent of the value of exports of goods and services, with a standard deviation of 0.35 and a median of 0.04 percent. The region with the largest average budget is Latin America and the Caribbean (LAC) at 0.17 percent of exports. It is followed by countries in Eastern Europe and Asia (EEA) at 0.12 percent, and then MENA, Sub-Saharan Africa (SSA), and the OECD with average budgets of around 0.09 to 0.10 percent of exports.

Regarding funding sources, around 52 percent of the agencies obtained more than 75 percent of their budget from public funding; 2 percent of the agencies obtained more than 75 percent of their budget from private funding; 3 percent of the agencies obtained more than 75 percent of their budget from selling their services (customer fees); and 2 percent of the agencies obtained more than 75 percent of their budget from either multilateral or bilateral donors. Thus, public funding seems to predominate as a source of funding. Three quarters of the agencies surveyed had no private funding, and half had no income associated with the selling of their services. When they reported some income, it represented on average less than 10 percent of their budget.

# **2.5 Activities and Client Orientation**

As mentioned, we considered four main activities: 1) country image building; 2) export support services; 3) marketing; and 4) market research and publications. The largest share of EPA budgets is generally spent on marketing and market research and publications. Another item which shows a large median –but also a much larger variance– is other activities not related to export promotion, except in the OECD, where the bulk (more than 75 percent of them) spent less than 10 percent on activities not related to export promotion. At the opposite end, in SSA other activities not related to export promotion represent between 10 and 25 percent of the budget of most agencies (at the median). The importance of export support services is also much larger in SSA than in other regions.

In terms of client orientation, the data cover the percentage of expenditures spent on large 6
versus small and medium size firms, and established versus new and occasional exporters. A very small share of total expenditure is spent on large firms, whereas a relatively large share is spent on established exporters. Thus, in all regions the focus of the agencies is on small and medium size firms that are established exporters.

In terms of representation abroad, 41 percent of the agencies have offices abroad (22 percent of the agencies in SSA, 33 percent of the agencies in MENA, 35 percent of the agencies in LAC, 47 percent in EEA and 67 percent in the OECD). In most regions agencies spend a small amount of their budget on offices abroad, with the exception of the OECD where on average 39 percent of the EPA budget is dedicated to offices abroad.

# **3 Empirical Framework and Identification Strategies**

Our objective is to disentangle the effects of export promotion agencies, their structure, responsibilities, strategies, resources and activities on overall exports in order to understand what works and what doesn’t. The first step is to explore whether there is any correlation between export promotion budgets and exports. Figure 1 provides a plot of exports per capita on EPA budgets per capita. There is a clear positive correlation between these two variables. Figure 1 also provides the predicted value obtained from the corresponding locally weighted regression ( _lowess_ ), which provides us with some _prima-facie_ evidence of which are the agencies that are under-performing in terms of exports per capita given their budgets.<sup>7</sup> For example Rwanda(RWA) would be expected to have a higher level of exports given the budget of its EPA (under-performer), whereas the Irish agency (IRL) would be expected to have a lower level of exports (over-performer).

There are three clear problems with the correlation discussed above. First, the sample might be biased. It is restricted to agencies that answered the survey, even though we had a perhaps surprisingly high 76 percent response rate.<sup>8</sup> Second, other factors could be correlated

> 7An in depth and robust analysis of each agency performance is beyond the scope of this paper and would need to be tackled through agency-specific studies. In this paper, we limit the scope to averages across groups and variables.

> 8Even with such a high response rate, it may still not be a representative sample.

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with both exports and EPA budgets, which will also result in spurious correlations between the two variables of interest. Third, the direction of causality might go from exports to the EPA budgets, as countries with higher exports might tend to provide more generous funding to their EPAs than other countries.

The estimation of a Heckman selection equation, which explains why some countries were not surveyed, and why some agencies did not answer, addresses the potential selection bias (Heckman, 1979). Our experience collecting contact information for EPAs helped us identify variables that should be part of this selection equation. It was clear that obtaining contact information for the relevant agency in poor and small economies was difficult, and even when we did, it was difficult to get them to answer the survey. So GDP per capita and GDP are part of the selection equation. Aid per capita also seemed to be an important selection variable because many of the poorest agencies were substantially funded by bilateral and multilateral donors. More formally, the selection equation that explains the latent variable _zc_<sup>_∗_,which</sup> captures the likelihood of obtaining a response to the export promotion survey in country _c_ , is given by: where _ξ_ is a vector of parameters and **x** _c_ is a matrix of independent variables determining the probability that the EPA in country _c_ answered the survey. The latter includes explanatory variables of the export equation (see below), except the budget of the EPA and the activities of the agency that help us identify the export equation, plus the log of GDP, the log of aid per capita discussed above, and regional dummy variables. The two exclusion restrictions are aid per capita and GDP. Admittedly, economic size and aid per capita (our exclusion restrictions) may be correlated with exports. However, the coefficient on aid per capita is not statistically significant after controlling for the presence of EPAs in the export equation. This suggests that it is a valid exclusion restriction.

8
Regarding the endogeneity of export promotion, we control for numerous determinants of exports that may be also correlated with export promotion budgets. The control variables are: GDP per capita, an index of trade restrictiveness imposed on imports, an index of trade restrictiveness faced by each country’s exports in the rest of the world, volatility of the exchange rate, an indicator of the regulatory burden that measures the average number of days it takes to comply with all necessary regulations to export goods, the geographydetermined trade to GDP ratio, and regional dummies for EEA, LAC, MENA, SSA, and the OECD. We also estimated specifications with infrastructure variables (share of paved roads, main telephone lines per capita) and indexes of institutional quality (ICRG indexes) as control variables. These are highly collinear with GDP per capita and were not statistically significant. Moreover, in some cases they significantly reduced our sample. Since this paper is about what works in terms of export promotion, and these variables did not affect qualitatively our results on export promotion, we do not report these specifications.

The basic export equation to be estimated is then: where the _β_ s are parameters to be estimated. _Exp/popc_ are exports per capita in country _c_ , and _Bud/popc_ is the budget of the EPA per capita in country _c_ . _GDP/popc_ is GDP per capita measured as the average for the period 2000-2004 in 2005 constant U.S. dollars from the World Bank’s World Development Indicators. _Tc_ is an index of trade restrictiveness imposed by country _c_ on its imports from the rest of the world, _MAc_ is an index of market access restrictions imposed by the rest of the world on exports of country _c_ , and both are borrowed from Kee, Nicita and Olarreaga (2009). _V olc_ is the volatility of the exchange rate in country _c_ , measured by the coefficient of variation of the dollar to local currency exchange rate during the period 2000-2004 obtained from the World Development Indicators. _Regc_ is the number 9
of days it takes to comply with export regulations and procedures from Djankov, Freund and Pham (2009). _F_ & _Rc_ is the geography-determined trade to GDP ratio provided in Frankel and Romer (1999), which was estimated using a trade gravity framework where only geographic variables were used as explanatory variables of bilateral trade flows.<sup>9</sup> _DummiesR_ are regional dummies, and _ec_ is the standard white-noise error. When testing for what works and what doesn’t in EPA modalities we add to (2) the variables discussed in section 2.

To address reverse causality or any remaining unobserved heterogeneity that may lead to omitted variable bias, we instrument EPA budgets. First, we use the number of years to the next election. The idea is that close to election time governments may be willing to increase expenditures for political purposes. We will check for non-linearities in this relationship, because governments with distant elections may also lack incentives to balance the budget as they are not likely to be penalized in the immediate future. The second instrument is the number of years since the creation of the EPA. It is not clear how the longevity of an EPA affects the size of its budget. On the one hand, experienced EPAs could have larger budgets as they become rooted in the government’s institutional structure, and its staff become more knowledgeable and influential in budgetary decision making. On the other hand, one of the critiques of the previous generation of EPAs is that they were not adequately funded, and there may be some hysteresis in the corresponding budgets. Again, to capture any potential non-linearity in the relationship we also include as an instrument the square of the number of years since the creation of the EPA.

A concern with the use of the number of years since the EPA was created as an instrument is that it may be correlated with exports per capita. If an EPA is established when exports reach a sufficiently high level (reverse causality), and if this threshold has been increasing over time as world markets became more integrated, then the number of years since the EPA was created may reflect a lower level of exports. To address this issue, we also present results where we control for the level of exports over GDP at the time of the creation of the EPA. If

> 9That is, EPAs cannot influence the geographic components of trade, such as geographic distance and common borders between trading partners, but their budget may be correlated with the geography-determined trade to GDP ratio as countries with larger trade flows might provide better funding to their EPAs.

10
the mechanism described above is present, then this correction should increase the magnitude of the estimated coefficient on the EPA expenditures variable while the coefficient on the incidence of exports over GDP at the time of the creation of the EPA should be positive.

We pursue two alternative identification strategies that use the mechanisms through which EPAs affect exports to try to address the endogeneity problem. If EPAs have an impact on exports, they are likely to have a larger impact when they are most needed. When would that be? We offer two alternatives mechanisms. First, EPAs might be most effective when market access barriers in the rest of the world are high and need to be circumvented. A positive and statistically significant coefficient in the interaction of ln _MAC_ and ln _Bud/popc_ would allow us to identify this mechanism. One concern with this strategy is that exporters could affect importers trade policies through multilateral and bilateral trade preferences, but our measure of trade policy restriction is mainly driven by technical regulations and sanitary and phitosanitary measures which are rarely and inefficiently addressed in multilateral and bilateral trade agreements (see Kee, Nicita and Olarreaga, 2009). Moreover, these are areas where EPAs can help through on-shore export support services that help domestic firms understand the technical requirements in the rest of the world.

Second, exports of heterogeneous goods, which are more likely to be affected by asymmetric information, a barrier that can be overcome with the assistance of EPAs. For example, EPA services might not be needed to export oil or other commodities. Thus a negative and statistically significant coefficient on the interaction of EPA expenditures with a variable that captures the degree of homogeneity in the export bundle would imply that EPAs are more likely to help when the export bundle of a given country has a larger share of heterogeneous goods. To implement this identification strategy, we follow the approach pioneered by Rajan and Zingales (1998) by estimating (2) at the product level (4 digits of the SITC rev. 2 classification),<sup>10</sup> and add as an explanatory variable Rauch’s (1999) dummy for homogeneous goods. Rauch (1999) classified goods on the basis of whether they were traded in an exchange (organized), had prices listed in trade publications (reference), or were brand name products 10For each country and each four digit SITC product, we use average exports during 2000-2004, and divided per capita as in (2).

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(differentiated). The homogeneous goods category includes products that are traded in an exchange and those that are reference priced.<sup>11</sup> The interaction of the homogeneous good dummy with the the budget of the EPA identifies the asymmetric information problem that EPAs can help resolve.

# **4 Results**

The result from the estimation of (1) and (2) are shown in Table 1 for the whole sample and for developing countries using OLS and a Heckman-selection correction. Across all specifications the EPA budget has a positive and statistically significant effect on exports. The coefficient is not statistically different across estimators or samples, which suggests that there is little heterogeneity in the impact of EPAs on exports per capita.<sup>12</sup> Note however, that the selection parameter _λ_ is statistically different from zero in both samples suggestions that sample selection is an issued to be addressed in both samples.

The elasticity is around 12 percent which is slightly higher than the range of estimates by Rose (2007), which suggest that the presence of a consulate or embassy engaged on export promotion leads to a 6 to 10 percent increase in exports. Also, note that this is not a welfare calculation, and such “returns” may be consistent with a welfare loss associated with EPA’s activities, as discussed earlier. Moreover, a point estimate of 0.12 suggests that there are strong diminishing returns to scale. Consequently, large expansions of EPAs budgets may not be desirable.

Regarding the other explanatory variables, GDP per capita (ln _GDP/pop_ ) has a positive and statistically significant sign in all specifications suggesting that richer countries, with stronger and better institutions –including trade institutions– export more. The restrictive11 Rauch provides a liberal and a conservative classification of homogeneous goods and we will be reporting results for both in the next section. The conservative classification has 495 goods classified as homogeneous out of 1189 SITC rev. 2 4 digit goods, and the liberal classification includes 533 goods.

> 12We also estimate the equation in the first column using a Poisson estimator and a robust regression estimator to correct for Jensen-inequality biases in the coefficients (Santos-Silva and Tenreyro, 2007), outliers or other forms of heteroscedasticity. Results are qualitatively the same and not statistically different from the ones reported here. They are available upon request.

12
ness of the exporting country import regime (ln _T_ ) does not seem to affect export performance, suggesting that general equilibrium effects are not a strong determinant of exports.<sup>13</sup> In contrast, the restrictiveness faced by exporters (ln _MA_ ) in the rest of the world strongly reduces exports across all specifications with a slightly higher coefficient for developing countries, but the differences are not statistically different from zero. Exchange rate volatility (ln _V ol_ ) also has a negative impact on exports, although it is statistically significant only before correcting for sample bias.<sup>14</sup> The number of days necessary to comply with export regulation in the exporting country has a negative, but generally insignificant impact on exports. The geography component of the trade to GDP ratio as provided in Frankel and Romer (1999) is always positive and statistically significant.

In both selection equations, size and aid per capita –our exclusion restrictions– have a positive and statistically significant coefficient. Thus, larger countries receiving large amounts of aid were more likely to be in our sample, probably reflecting the agencies’ capacity to answer the survey.

As previously discussed, the results in Table 1 might suffer from reverse-causality and omitted-variable biases. To address these concerns, the first column of Table 2 provides instrumental variable estimates, where the number of years since the creation of the EPA and the number of years to the next election, as well as their squared terms are used as instruments. The second column corrects for sample selection bias. The last two columns reproduce the results of the first two columns, but controlling for exports over GDP at the time of the creation of the EPA.

The interesting result from these 2SLS regressions is that the coefficient on EPA budgets

> 13This result also suggests that in the early 2000s contrary to what was observed by Keesing and Singer (1991a) in the 1980s, the main constraint to exports is no longer the anti-trade bias of the import regime.

> 14The lack of a significant effect of nominal exchange-rate volatility on exports is consistent with results reported by Tenreyro (2007). This author shows that estimates of the effect of volatility on exports are quite fragile in the context of the gravity model of trade. The intuitive argument is that on the one hand, volatility reduces trade as it might act as friction against international transactions (i.e., by raising the costs of trade). On the other hand, exchange-rate fluctuations can offer profit opportunities for traders. Hence the net effect might be ambiguous. Also, the existence of financial instruments that help agents protect themselves against risk would also support the view that volatility might not have significant deleterious effects on international trade

13
declines considerably in the first two columns relative to those presented in Table 1, although the differences are not statistically significant. One potential explanation for this is reverse causality: EPA budgets tend to rise with exports.<sup>15</sup> The coefficients are still positive and statistically different from zero, regardless of whether we correct for sample-selection bias. The point estimates are now within Rose’s (2007) range of 6 to 10 percent.

Regarding the control variables, the log of GDP per capita, the log of trade restrictiveness in the rest of the world, and the log of geography-determined trade to GDP ratio are the most robust determinants of exports per capita across specifications. Exchange-rate volatility always has a negative sign as expected, but it is never statistically different from zero.

To validate the instruments, we report the Hansen J-test of over-identifying restrictions, with the null hypothesis being that the instruments are uncorrelated with the error term. The test has a p-value of 0.23 and consequently implies that the exclusion restrictions are valid. Nevertheless, as argued earlier, the number of years may be correlated with exports in the presence of reverse causality and heterogeneity in threshold effects at the time of the creation of the EPA. Thus in the last two columns we control for exports over GDP when the EPA was created. The coefficient on EPA budgets is still positive and statistically significant. The coefficient on the exports to GDP ratio at the time of creation is positive and statistically significant, while the coefficients on EPA budgets is higher than the ones reported in the first two columns, although they not statistically different. This indicates that the number of years since the EPA was created may be negatively correlated with exports at the time of EPA’s creation as argued earlier. More importantly, results are robust to this alternative specification.

> 15Note that only a handful of countries in our sample report explicitly taxing exports to finance EPA’s budget, but other mechanisms, such as political economy considerations, can explain this.

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# **4.1 Alternative Identification Strategies**

We explore two alternative identification strategies that draw on different mechanisms through which EPAs may affect exports.<sup>16</sup> The first explores whether the impact of EPAs is stronger when exporters face strong trade barriers abroad. The idea is that EPAs help exporters circumvent these barriers through exporter support services that provide technical assistance to exporters on technical regulations and other requirements in foreign markets. This mechanism is captured by the interaction of EPA budgets with the degree of foreign market access restrictions.

The first two columns of Table 3 show the results with and without the sample-selection correction. They confirm the intuition that the effect of EPA is more notable when market access barriers are high. The relevant interaction term has a positive and statistically significant coefficient. Note also that the coefficient on EPA budgets is still positive and statistically significant as well. The size of this coefficient is significantly larger than the ones reported in Table 1, but it only captures the partial effect of EPA budgets on exports. The derivative of the left hand side with respect to ln _BUD/pop_ and evaluate at the mean of ln _T_ (which is equal to -2.4, which is also its median) reflects the total effect. It is equal to 0.140 with a standard error of 0.035 in the first column and 0.148 in the second column with a standard error of 0.031, both of which are not statistically different from the ones reported in Table 1. More importantly, the effect of EPAs rise with the severity of barriers to access to foreign markets, thus providing valuable information about the mechanisms through which EPAs may be working.<sup>17</sup> 16The endogeneity issue could further be tackled with a differences-in-differences estimator, but this requires panel data. There are at least two problems with this. First, the agencies of the 1980s were apparently a very different animal from the agencies of today, and different agencies have reformed at different times. This heterogeneity of the impact of EPA on exports across time would not be captured by a differences-in-difference approach. Also, some of our explanatory variables are only available for the early 1990s. This is the case of the trade restrictiveness index and the market access trade restrictiveness index which are borrowed from Kee, Nicita and Olarreaga (2009).

> 17We also tested whether EPAs would be more efficient when facing larger geographic barriers abroad. We did not have strong priors on this issue, because it is not clear how EPAs could help exporters overcome geographic barriers. In any case, the interaction of EPA budgets with the Frankel and Romer variable yielded negative but statistically insignificant results. We also used a theoretically derived measure of market potential by Mayer (2008), but again the interaction term was statistically insignificant. Perhaps EPAs help overcome

15
The second mechanism we explore is whether EPAs help overcome asymmetric information affecting exports of heterogeneous goods. The specification presented in the third column of Table 3 uses Rauch’s conservative classification of homogeneous goods and the last column the liberal classification. The interaction between the homogeneous good classification and EPA budgets is negative in both cases, suggesting that an increase in EPA budgets has a smaller effect on exports of homogeneous than on heterogeneous goods, as expected. The rest of the variables have the expected signs, with the exception of the volatility of exchange rates (again, see Tenreyro (2007) for an explanation).

Two additional issues are raised by the specification presented in the last two columns of Table 3. First, the right-hand-side variable varies by country and product, whereas the only explanatory variable that does so is the interaction variable. Consequently the regression errors may be correlated across countries or product categories. Second, unobserved heterogeneity could be a source of biased estimates. Table 4 shows results where national exports per capita at the SITC 4-digit level are explained by SITC 4-digit and country fixed effects in addition to the interaction of EPA budgets with either Rauch’s conservative or liberal measure of homogeneous goods. We also provide adjusted estimates of the standard error, namely White robust errors, clustered by country and clustered by SITC 4-digit products. The interaction is negative and statistically significant, regardless of how standard errors are computed, thus suggesting that EPAs may be more efficient when economies need to overcome the asymmetric information associated with a large share of heterogeneous goods in the export bundle.

# **4.2 What Works, What Doesn’t?**

To explore the type of institutional structures, strategies, and activities that are more efficient we added to our basic specification in (2) some of the variables discussed in section 2. Results using OLS, 2SLS and a 2-step Heckman estimators are presented in Table 5. Some words of caution are appropriate before discussing these results. First, the sample has been reduced to 52 observations due to the fact that many agencies did not answer all questions in the policy-induced barriers to trade but not geography.

16
survey. Second, some of these additional variables may also be endogenous and therefore the coefficients should be interpreted as nothing more than conditional correlations.

The top of the table shows the estimates for the variables in (2), which are qualitatively similar to the ones in Tables 1-3. EPA’s budget per capita, GDP per capita, and the geographydetermined trade to GDP ratios have a positive and statistically significant effect on exports per capita in both samples. The trade restrictiveness of the rest of the world faced by exporters and the volatility of the exchange rate have a negative and statistically significant effect on exports per capita in both samples. In contrast with earlier results, the burden of export regulations has a negative and significant effect on exports per capita.

The bottom of the table reports estimates for the additional variables capturing EPA modalities. In all regressions, exports increase with the share of the EPA executive board seats that are held by the private sector. But there is also weak evidence that exports also increase with the share of EPA funding coming from the public sector (although this effect is significant only when we use the 2SLS estimator). This suggests that agencies that are directed by the private sector, but have public funding are the best performers. After all, the rationale for export promotion is about externalities, and it may be difficult to raise private sector funding when benefits are diffuse.

The proliferation of agencies dedicated to export promotion within a country (”Degree of decentralization of agencies”) is negatively correlated with exports. A single and strong EPA seems to be more effective than multiple agencies with overlapping responsibilities.<sup>18</sup> Note, however, that the OLS coefficient is not statistically significant.

The allocation of expenditures between country image, export support services, marketing and market research do not have any statistically significant correlation with exports. We also have no evidence regarding EPA targeting of large versus small firms, nor about targeting established exporters versus non exporters. The same is true for the presence of EPA representation offices abroad or the overall strategy of the EPA (sectoral focus versus broad

> 18This is a discrete variable that takes the value 1 if there is only one EPA in the country, 2 if there is one large, but many small agencies, 3 if there are two mayor agencies and several small, and 4 if there are more than two large agencies and several small agencies.

17
export objectives).

# **5 Concluding Remarks**

In their influential study of export promotion agencies in the 1980s, Hogan, Keesing, and Singer (1991) argued that EPAs in developing countries were not effective, because they lacked strong leadership, had inadequate funding, were too bureaucratic, were not client oriented, and had heavy government involvement. Moreover, they also had to overcome strong anti-export biases induced by trade policies.

Over the last decade, the structure and activities of EPAs changed in the direction suggested by Hogan, Keesing and Singer, under the auspices of the International Trade Center in Geneva. Also, trade policies became more export-oriented. Our estimates suggest that today’s EPAs are effective in terms of having an impact on national exports. Our point estimate suggests that a 10 percent increase in EPA budgets at the mean leads to a 0.6 to 1 percent increase in exports, after correcting for selection and endogeneity biases. More interestingly, EPAs seems to be more effective when they can help circumvent trade barriers abroad or asymmetric information associated with a large share of heterogeneous goods in the export bundle.

Regarding what works and what doesn’t, our estimates suggest that EPAs with a large share of the executive board in the hands of the private sector, but a large share of public sector funding, are associated with higher national exports than other countries. In other words, full privatization of EPAs may not be ideal. A single strong EPA rather than the proliferation of small agencies within countries is also positively correlated with exports.

Last but not least, words of caution are warranted. First, regarding the methodology used to derive these conclusions, cross-country regressions cannot fully capture the heterogeneity of policy environments and institutional structures in which agencies operate. Case studies are needed provide more specific policy advice. Second, the relatively large average “returns” to EPA expenditures do not provide a justification for those budgets on welfare grounds, 18
as these will need some measurement of the externalities and net benefits associated with export promotion. Moreover, higher returns may be obtained by investing those resources in improving the overall business climate (e.g., infrastructure, education, etc.). The analyses discussed herein, however, do provide guidance about EPA’s institutional design, objectives and activities. Finally, the evidence of diminishing returns to scale in EPA budgets suggests that small is beautiful when it comes to EPAs.

# **References**

- [1] Djankov, Simeon, Caroline Freund, and Cong S. Pham (2009), “Trading on time”, _Review of Economics and Statistics_ , forthcoming.

- [2] Frankel, Jeffrey and David Romer (1999), “Does trade cause growth?”, _American Economic Review_ 89(3), 379-399.

- [3] Greenaway, David, and Richard Kneller (2005), “Firm Heterogeneity, Exporting and Foreign Direct Investment: a survey”, Research Paper Series Globalization, Productivity and Technology, Nottingham University.

- [4] Hausmann, Ricardo, and Dani Rodrik (2003), “Economic Development as Self Discovery”, _Journal of Development Economics_ 72(2), 603-633.

- [5] Heckman, James (1979), “Sample Selection as a Specification Error”. _Econometrica_ 47(1), 53-161.

- [6] Helleiner, Gerald K. (2002), _Non-traditional Export Promotion in Africa: Experience and Issues_ , Palgrave MacMillan.

- [7] Hogan, Paul (1991), “Some Institutional Aspects of Export Promotion in Developing Countries”, in Paul Hogan, Donald Keesing, and Andrew Singer eds., _The Role of Support Services In Expanding Manufactured Exports in Developing Countries_ , Economic Development Institute, World Bank.

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- [8] Hogan, Paul, Donald Keesing, and Andrew Singer (2001), _The Role of Support Services In Expanding Manufactured Exports in Developing Countries_ , Economic Development Institute, World Bank.

- [9] ITC (1998), _Trade Promotion Strategy in Developing Countries: A Guide to Key Issues_ , International Trade Centre UNCTAD/WTO, Geneva.

- [10] ITC (2000), _Redefining Trade Promotion: The Need for a Strategic Response_ , International Trade Centre UNCTAD/WTO, Geneva.

- [11] Kee, Hiau Looi, Alessandro Nicita and Marcelo Olarreaga (2009), “Estimating trade restrictivenesss indices”, _Economic Journal_ 119(534), 172-199

- [12] Keesing, Donald B., and Andrew Singer (1991), “Assisting manufactured exports through services: new methods and improve policies”, in Paul Hogan, Donald Keesing, and Andrew Singer eds., _The Role of Support Services In Expanding Manufactured Exports in Developing Countries_ , Economic Development Institute, World Bank.

- [13] Keesing, Donald B. and Andrew Singer (1991a), “Development assistance gone wrong: failures in services to promote and support manufactured exports”, in Paul Hogan, Donald Keesing, and Andrew Singer eds., _The Role of Support Services In Expanding Manufactured Exports in Developing Countries_ , Economic Development Institute, World Bank.

- [14] Kotabe, Massaki and Michael R. Czinkota (1992), “State government promotion of manufacturing exports: a gap analysis”, _Journal of International Business Studies_ 23(4), 637-658.

- [15] Panagariya, Arvind (2000), “Evaluating the Case for Export Subsidies”, Policy Research Working Paper #2276, World Bank.

- [16] Rajan, Raghuram and Luigi Zingales (1998), “Financial development and growth”, _American Economic Review_ 88, 559-586.

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- [17] Rauch, James R. (1999), “Networks versus markets in international trade”, _Journal of International Economics_ 48, 7-37

- [18] Rose, Andrew K. (2007), “The Foreign Service and Foreign Trade: Embassies as Export Promotion”, _World Economy_ 30(1), 22-38.

- [19] Santos-Silva, Joao, and Silvana Tenreyro (2006), “The log of gravity”, _Review of Economics and Statistics_ 88(4), 641-658.

- [20] Tenreyro, Silvana (2007), “On the Trade Impact of Nominal Exchange Rate Volatility”, _Journal of Development Economics_ 82, 485-508.

21
|**ntries**<br>kman<br>Selection_a_<br>0.467<br>( 0.392 )<br>-0.020<br>( 0.487 )<br>0.716<br>( 1.347 )<br>-0.344<br>( 0.291 )<br>0.017<br>( 0.028 )<br>-0.126<br>( 0.453 )<br>0.663_⋆⋆_<br>( 0.267 )<br>0.761_⋆⋆_<br>( 0.260 )<br>-19.019<br>( 7.416 )<br>Yes<br>0.000<br>88<br>63<br>0.697_⋆_<br>( 0.381 )|gnifcance at the 10<br>the joint signifcance|ically diferent from|
|---|---|---|
|**loping cou**<br>Hec<br>Export eq.<br>0.126_⋆⋆_<br>( 0.061 )<br>0.710_⋆⋆_<br>( 0.242 )<br>-0.195<br>( 0.231 )<br>-1.625_⋆⋆_<br>( 0.502 )<br>-0.199<br>( 0.217 )<br>-0.009<br>( 0.014 )<br>0.481_⋆⋆_<br>( 0.177 )<br>-5.094_⋆⋆_<br>( 2.292 )<br>Yes<br>0.000<br>88<br>63<br>0.697_⋆_<br>( 0.381 )|stands for si<br>Wald test of|When statist|
|**Deve**<br>OLS<br>0.118_⋆⋆_<br>( 0.035 )<br>0.573_⋆⋆_<br>( 0.159 )<br>-0.117<br>( 0.127 )<br>-1.686_⋆⋆_<br>( 0.387 )<br>-0.206_⋆_<br>( 0.111 )<br>-0.012<br>( 0.009 )<br>0.598_⋆⋆_<br>( 0.115 )<br>-3.862_⋆⋆_<br>( 1.365 )<br>Yes<br>0.000<br>64<br>64<br>0.938<br>NA|level; and _⋆_<br>e report the|the sample.|
|**es**<br>man<br>Selection<br>0.467<br>( 0.392 )<br>-0.020<br>( 0.487 )<br>0.716<br>( 1.347 )<br>-0.344<br>( 0.291 )<br>0.017<br>( 0.029) )<br>-0.126<br>( 0.452 )<br>0.663_⋆⋆_<br>( 0.267 )<br>0.761_⋆⋆_<br>( 0.260 )<br>-1.051<br>( 7.416 )<br>Yes<br>0.000<br>103<br>78<br>0.769_⋆_<br>( 0.416 )|the 5 percent <br>an estimator w|s a problem in|
|**All countri**<br>Heck<br>Export Eq.<br>0.122_⋆_<br>( 0.065 )<br>0.838 _⋆⋆_<br>( 0.254 )<br>-0.194<br>( 0.247 )<br>-1.319_⋆⋆_<br>( 0.489 )<br>-0.187<br>( 0.239 )<br>-0.007<br>( 0.013 )<br>0.423_⋆⋆_<br>( 0.166 )<br>-5.063_⋆⋆_<br>( 2.432 )<br>Yes<br>0.000<br>103<br>78<br>0.769_⋆_<br>( 0.416 )|ignifcance at <br><br>of the Heckm|ich selection i<br>rected.|
|OLS<br>Log of Budget per capita<br>0.116_⋆⋆_<br>(ln _Bud/pop_)_a_<br>( 0.032 )<br>Log of GDP per capita<br>0.706 _⋆⋆_<br>(ln _GDP/pop_)<br>( 0.152 )<br>Log of Trade restrictiveness<br>-0.109<br>(ln _T_)<br>( 0.128 )<br>Log of Trade restrictiveness in ROW<br>-1.308_⋆⋆_<br>(ln _MA_)<br>( 0.340 )<br>Log of Forex volatility<br>-0.193_⋆_<br>(ln _V ol_)<br>( 0.111 )<br>Days to comply with export<br>-0.011<br>regulation (ln _Reg_)<br>( 0.007 )<br>Log of geo-trade/GDP ratio<br>0.519_⋆⋆_<br>(ln _F_&_R_)<br>( 0.098 )<br>Log of GDP<br>(ln _GDP_)<br>Log of Aid per capita<br>(ln _Aidc_)<br>Constant<br>-3.76_⋆⋆_<br>( 1.269 )<br>Regional dummies_b_<br>Yes<br>_P −value_ of F or Chi-squared Wald-test._c_<br>0.000<br>Number of observations<br>79<br>Number of uncensored<br>79<br>R-squared<br>0.945<br>_λd_<br>NA|_a_ Standard errors in parenthesis are white robust. _⋆⋆_stands for s<br>percent level.<br>_b_ The regional dummies are LAC, OECD, EEA, MENA, and SSA.<br>_c_ In the case of OLS regressions we report the F-test and in the case<br>|of all coefcients.<br>_d_ The selection parameter _λ_ (Mills ratio) captures the extent to wh<br>zero, this suggest that there is a sample bias that needed to be cor|

22
**Table 2: Two-stage-least-square estimates**<sup>_a_</sup>

||2SLS<br>|2SLS<br>Heckman<br>|2SLS<br>|2SLS<br>Heckman<br>|
|---|---|---|---|---|
|Log of Budget per capita<br>|0.043<sup>_~~⋆~~_</sup>|0.052<sup>_~~⋆⋆~~_</sup>|0.089<sup>_~~⋆~~_</sup>|0.095<sup>_~~⋆⋆~~_</sup>|
|(ln _Bud/pop_)<sup>_b_</sup>|( 0.022 )|( 0.019 )|( 0.045 )|( 0.044 )|
|Log of GDP per capita<br>(ln _GDP/pop_)|0.820<sup>_⋆⋆_</sup><br>( 0.146 )|0.978<sup>_⋆⋆_</sup><br>( 0.135 )|0.848<sup>_⋆⋆_</sup><br>( 0.130 )|0.951 <sup>_⋆⋆_</sup><br>( 0.143 )|
|Log of Trade restrictiveness<br>|-0.158<br>|-0.274<sup>_⋆⋆_</sup><br>|0.043<br>|-0.047<br>|
|(ln _T_)|( 0.142 )|( 0.127 )|( 0.134 )|( 0.123 )|
|Log of Trade restrictiveness in ROW<br>(ln _MA_)|-1.255<sup>_⋆⋆_</sup><br>( 0.348 )|-1.316<sup>_⋆⋆_</sup><br>( 0.285 )|-0.921<sup>_⋆⋆_</sup><br>( 0.294 )|-0.969<sup>_⋆⋆_</sup><br>( 0.257 )|
|Log of Forex volatility<br>(ln _V ol_)|-0.160<br>( 0.155 )|-0.163<br>( 0.145 )|-0.109<br>( 0.125 )|-0.109<br>( 0.120 )|
|Days to comply with export<br>regulation (ln _Reg_)|-0.013<sup>_⋆_</sup><br>( 0.008 )|-0.009<br>( 0.007 )|-0.008<br>( 0.007 )|0.005<br>( 0.006 )|
|Log of geo-trade/GDP ratio<br>(ln _F_&_R_)|0.525<sup>_⋆⋆_</sup><br>( 0.181 )|0.403<sup>_⋆⋆_</sup><br>( 0.085 )|0.431<sup>_⋆⋆_</sup><br>( 0.084 )|0.363<sup>_⋆⋆_</sup><br>( 0.079 )|
|Log of Exp/GDP at time<br>of EPA creation|||0.272<sup>_⋆⋆_</sup><br>( 0.076 )|0.224<sup>_⋆⋆_</sup><br>( 0.071 )|
|Constant|-4.759<sup>_⋆⋆_</sup><br>( 1.372 )|-6.476<sup>_⋆⋆_</sup><br>( 1.173 )|-4.351<sup>_⋆⋆_</sup><br>( 1.340 )|-5.425<sup>_⋆⋆_</sup><br>( 1.353 )|
|Regional dummies<sup>_c_</sup>|Yes|Yes|Yes|Yes|
|_P_-value of Chi-squared Wald-test|0.000|0.000|0.000|0.000|
|Number of observations|78|102|74|102|
|Number of uncensored|78|77|74|73|
|R-squared<br>|0.952|0.961|0.967|0.970|
|_λ_<sup>_d_</sup>|NA|0.944<sup>_⋆⋆_</sup><br>|NA|0.530<sup>_⋆⋆_</sup><br>|
|||( 0.258 )||( 0.200 )|

> _a_ All regressions used a 2SLS estimator. EPA’s budget per capita is instrumented using the number of years since the EPA was created and the number of years to the next election, as well as their squared terms. Estimates for the first stage regression are provided in the Auxiliary Regressions Appendix that is available on-line or upon request from the authors. In the case of the Heckman estimates we also correct for sample selection bias, using a two step approach.

_b_ Standard errors are in parenthesis; _⋆⋆_ stands for significance at the 5 percent level; and _⋆_ stands for significance at the 10 percent level.

> _c_ The regional dummies are LAC, OECD, EEA, MENA, and SSA.

> _d_ The selection parameter _λ_ (Mills ratio) captures the extent to which selection is a problem in the sample. When statistically different from zero, this suggest that there is a sample bias that needed to be corrected.

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# **Table 3: Alternative identification strategies: disentangling the mechanisms**

||**Overcoming **<br>OLS|**MA barriers**<br>Heckman|**Overcoming **<br>Conservative<sup>_b_</sup>|**heterogeneity**<br>Liberal<sup>_b_</sup>|
|---|---|---|---|---|
|Log of Budget per capita|0.491<sup>_⋆⋆_</sup>|0.550<sup>_⋆⋆_</sup>|0.054<sup>_⋆⋆_</sup>|0.055<sup>_⋆⋆_</sup>|
|(ln _Bud/pop_)<sup>_a_</sup>|( 0.158 )|(0.133)|( 0.003 )|( 0.003 )|
|Log of GDP per capita<br>|0.764<sup>_⋆⋆_</sup><br>|0.917<sup>_⋆⋆_</sup><br>|0.775<sup>_⋆⋆_</sup><br>|0.775<sup>_⋆⋆_</sup><br>|
|(ln _GDP/pop_)|( 0.148 )|( 0.141 )|( 0.031 )|( 0.031 )|
|Log of Trade restrictiveness|-0.136|-0.234<sup>_⋆_</sup>|- 0.469<sup>_⋆⋆_</sup>|-0.469<sup>_⋆⋆_</sup>|
|(ln _T_)|( 0.119 )|( 0.111 )|( 0.037 )|( 0.037 )|
|Log of Trade restrictiveness in ROW|-1.180<sup>_⋆⋆_</sup>|-1.180<sup>_⋆⋆_</sup>|-2.600<sup>_⋆⋆_</sup>|-2.599<sup>_⋆⋆_</sup>|
|(ln _MA_)|( 0.319 )|( 0.270 )|( 0.068 )|( 0.068 )|
|Log of Forex volatility|-0.192|-0.188<sup>_⋆_</sup>|0.090<sup>_⋆⋆_</sup>|0.090<sup>_⋆⋆_</sup>|
|(ln _V ol_)|( 0.123 )|( 0.109 )|( 0.008 )|( 0.008 )|
|Days to comply with export|-0.008|-0.003|-0.008<sup>_⋆⋆_</sup>|-0.008<sup>_⋆⋆_</sup>|
|regulation (ln _Reg_)|( 0.008 )|( 0.007 )|( 0.002 )|( 0.002 )|
|Log of geo-trade/GDP ratio|0.524<sup>_⋆⋆_</sup>|0.420<sup>_⋆⋆_</sup>|0.407<sup>_⋆⋆_</sup>|0.407<sup>_⋆⋆_</sup>|
|(ln _F_&_R_)|( 0.093 )|( 0.082 )|( 0.022 )|( 0.022 )|
|Interaction Budget and|0.164<sup>_⋆⋆_</sup>|0.188<sup>_⋆⋆_</sup>|||
|Trade Restrictiveness in ROW|( 0.069 )|( 0.060 )|||
|Interaction Budget and<br>|||-0.015<sup>_⋆⋆_</sup>|-0.016<sup>_⋆⋆_</sup>|
|Homogeneous good dummy<sup>_b_</sup>|||( 0.004 )|( 0.004 )|
|Constant|-3.996<sup>_⋆⋆_</sup>|-5.476<sup>_⋆⋆_</sup>|-24.68<sup>_⋆⋆_</sup>|-24.68<sup>_⋆⋆_</sup>|
||( 1.213 )|( 1.109 )|( 0.327 )|( 0.327 )|
|Regional dummies<sup>_c_</sup>|Yes|Yes|Yes|Yes|
|_P −value_ of F or Chi-squared Wald-test.<sup>_d_</sup>|0.000|0.000|0.000|0.000|
|Number of observations|78|103|58540|58540|
|Number of uncensored|78|77|58540|58540|
|R-squared|0.957|0.965|0.373|0.374|
|_λ_<sup>_e_</sup>|NA|0.832<sup>_⋆⋆_</sup>|NA|NA|
|||( 0.230 )|||

> _a_ White robust standard errors are in parenthesis; _⋆⋆_ stands for significance at the 5 percent level; and _⋆_ stands for significance at the 10 percent level.

> _b_ This is Rauch dummy for homogeneous goods (see Rauch, 1999). The third column Rauch conservative definition of homogeneous goods and the fourth column the more liberal definition.

> _c_ The regional dummies are LAC, OECD, EEA, MENA, and SSA.

> _d_ For OLS estimates we report the F-test and for Heckman estimates we report the Wald test on the joint significance of all coefficients.

> _e_ The selection parameter _λ_ (Mills ratio) captures the extent to which selection is a problem in the sample. When statistically different from zero, this suggest that there is a sample bias that needed to be corrected.
# **Table 4: EPAs and exports of homogeneous goods: controlling for unobserved heterogeneity**

|Conservative def.|Liberal defnition|
|---|---|
|Interaction EPAs Budget and Homogeneous good dummy<sup>_a_</sup><br>-0.047|-0.046|
|(ln _Bud/pop_*Homo)<sup>_b_</sup><br>( 0.003 )|( 0.003 )|
|[ 0.010 ]|[ 0.010 ]|
|_{_ 0.006 _}_|_{_ 0.006 _}_|
|SITC 4 digit dummies<br>Yes|Yes|
|Country dummies<br>Yes|Yes|
|_P −value_ of F -test.<br>0.000|0.000|
|Number of observations<br>60923|60923|
|R-squared<br>0.619|0.620|

> _a_ This is Rauch dummy for homogeneous goods (see Rauch, 1999). The first column uses Rauch conservative definition of homogeneous goods and the second column the more liberal definition.

> _b_ White robust standard errors are in parenthesis ( ); Standard errors clustered by country are in squared brackets [ ], and standard errors clustered by SITC 4 digit product are in curly brackets or braces _{ }_ .
**Table 5: EPAs: what works, what doesn’t?**<sup>_a_</sup>

||OLS|2SLS<br>2|SLS + Heckman|
|---|---|---|---|
|Log of Budget per capita|0.064|0.089<sup>_⋆⋆_</sup>|0.072<sup>_⋆⋆_</sup>|
|(ln _Bud/pop_)<sup>_b_</sup><br>Log of GDP per capita<br>(ln _GDP/pop_)<br>Log of Trade restrictiveness<br>(ln _T_)<br>Log of Trade restrictiveness in ROW|( 0.064 )<br>0.669<sup>_⋆⋆_</sup><br>( 0.206 )<br>-0.132<br>( 0.215 )<br>-1.366<sup>_⋆⋆_</sup>|( 0.026 )<br>0.477<sup>_⋆⋆_</sup><br>( 0.189 )<br>-0.176<br>( 0.196 )<br>1.504<sup>_⋆⋆_</sup>|( 0.022 )<br>0.577<sup>_⋆⋆_</sup><br>( 0.164 )<br>-0.212<br>( 0.167 )<br>-1.605<sup>_⋆⋆_</sup>|
|(ln _MA_)<br>Log of Forex volatility<br>|( 0.587 )<br>-0.350<sup>_⋆⋆_</sup><br>|( 0.460 )<br>-0.384<sup>_⋆⋆_</sup><br>|( 0.432 )<br>-0.366<sup>_⋆⋆_</sup><br>|
|(ln _V ol_)<br>Days to comply with export<br>|( 0.164 )<br>-0.024<sup>_⋆_</sup><br>|( 0.153 )<br>-0.032<sup>_⋆⋆_</sup><br>|( 0.130 )<br>-0.030<sup>_⋆⋆_</sup><br>|
|regulation (ln _Reg_)<br>Log of geo-trade/GDP ratio<br>(ln F&R)|( 0.016 )<br>0.398<sup>_⋆⋆_</sup><br>( 0.145 )|( 0.010 )<br>0.336<sup>_⋆⋆_</sup><br>( 0.106 )|( 0.008 )<br>0.305<sup>_⋆⋆_</sup><br>( 0.094 )|
|Executive Board seats|0.535<sup>_⋆_</sup>|0.631<sup>_⋆⋆_</sup>|0.545<sup>_⋆⋆_</sup>|
|to private sector<br>Degree of decentralization of<br>|( 0.288 )<br>-0.169<br>|( 0.235 )<br>-0.217<sup>_⋆_</sup><br>|( 0.199 )<br>-0.262<sup>_⋆⋆_</sup><br>|
|agencies devoted to exp. prom.<br>Share of agency budget spent|( 0.122 )<br>0.029<br>|( 0.119 )<br>0.092<br>|( 0.093 )<br>0.081<br>|
|on non-export promotion activities<br>|( 0.073 )<br>|( 0.060 )<br>|( 0.049 )<br>|
|Strategy focuses on non|0.038<br>|0.062<br>|0.028<br>|
|traditional exports or sector specifc<br>Share of EPA funding coming from<br>public sources<br>Share of country image activities|( 0.095 )<br>0.087<br>( 0.054 )<br>-0.055|( 0.072 )<br>0.102<sup>_⋆⋆_</sup><br>( 0.046 )<br>-0.069|( 0.066 )<br>0.055<br>( 0.042 )<br>-0.062|
|in EPA’s expenditure|( 0.088 )|( 0.076 )|( 0.070 )|
|Share of marketing activities|-0.020<br>|0.014<br>|0.013<br>|
|in EPA’s expenditure|( 0.070 )|( 0.068 )|( 0.054 )|
|Share of research activities|0.013|0.009|-0.035|
|in EPA’s expenditure|( 0.116 )|( 0.102 )|( 0.076 )|
|Share of export support serv.|0.029|0.008|0.016|
|in EPA’s expenditure|( 0.074 )|( 0.063 )|( 0.055 )|
|Share of large clients|0.001|-0.001|-0.017|
|in EPA expenditure|( 0.084 )|( 0.084 )|( 0.071 )|
|Share of established exporters<br>|-0.010<br>|-0.059<br>|-0.065<br>|
|in EPA expenditure<br>EPA has representation|( 0.049 )<br>0.012|( 0.045 )<br>0.233|( 0.040 )<br>0.213|
|ofces abroad<br>Constant|( 0.186 )<br>-3.091<br>( 1.841 )|( 0.177 )<br>-1.607<br>( 1.711 )|( 0.163 )<br>-2.224<br>( 1.414 )|
|_P_-value of Chi-squared Wald-test<br>Number of observations<br>_λ_<sup>_c_</sup>|0.000<br>52<br>NA|0.000<br>52<br>NA|0.000<br>52<br>0.706<sup>_⋆⋆_</sup><br>( 0.284 )|

> _a_ The first column reports OLS results; the second column 2SlS and the third column reports 2SLS that also correct for sample selection. Regional dummies included in all regressions.

_b_ White robust standard errors are reported in parenthesis; _⋆⋆_ stands for significance at the 5 percent level; and _⋆_ stands for significance at the 10 percent level.

> _c_ The selection parameter _λ_ (Mills ratio) captures the extent to which selection is a problem in the sample. When statistically different from zero, this suggest that there is a sample bias that needed to be corrected.

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# **Appendix Table: Sample Coverage**

|**Country**<br>Albania|**Name of the Agency**<br>ANE|**Region**<br>EEA|
|---|---|---|
|Algeria|ALGEX|MENA|
|Armenia<br>Atli|ADA<br>Atd|EEA<br>OECD|
|usraa<br>Austria<br>|usrae<br>Austrian Trade, Austrian Federal Economic Chamber<br>|OECD<br>|
|Bangladesh<br>|EPB<br>|EEA<br>|
|Belize<br>Bolivia|Belize Trade & Investment Development Service<br>CEPROBOL|LAC<br>LAC|
|Botswana|BEDIA|SSA|
|Brazil|APEX-Brasil|LAC|
|Bulgaria|BSMEPA|EEA|
|BurkinaFaso|ONAC|SSA|
|<br>Cbdi|EtPtiDttMiitfC|EEA|
|amoa<br>Chile<br>|xpor romoon eparmen, nsry o ommerce<br>PROCHILE<br>|LAC<br>|
|China<br>Colombia|CCPIT<br>ProExport|EEA<br>LAC|
|Costa Rica|Procomer|LAC|
|Cote d’Ivoire|APEX-CI|SSA|
|Czech Republic<br>Denmark|Czech Trade<br>TradeCouncilofDenmark|EEA<br>OECD|
|Dominica<br>DiiRbli|<br>DEXIA<br>CEIRD|LAC<br>LAC|
|omncan epuc<br>Ecuador<br>|-<br>CORPEI<br>|LAC<br>|
|Egypt, Arab Rep.<br>El Salvador|ExpoLink<br>Exporta El Salvador|MENA<br>LAC|
|Estonia|Enterprise Estonia|EEA|
|Fiji|FTIB|EEA|
|Finland<br>France|Finpro<br>UBIFRANCE|OECD<br>OECD|
|Germany<br>|BFAI<br>|OECD<br>|
|Ghana<br>Grenada<br>|GEPC<br>Trade & Industry Unit, Ministry of Finance<br>|SSA<br>LAC<br>|
|Guatemala<br>Guyana|AGEXPRONT<br>GO-INVEST|LAC<br>SSA|
|Honduras<br>Hong Kong, China|FIDE<br>HKTDC|LAC<br>EEA|
|Hungary<br>Iceland|Hungarian Investment and Trade Development Agency<br>TradeCouncilofIceland|EEA<br>OECD|
|Ireland<br>Israel<br>|<br>Enterprise Ireland<br>Israel Export & International Cooperation Institute<br>|OECD<br>MENA<br>|
|Jamaica<br>Jordan|JAMPRO<br>JEDCO|LAC<br>MENA|
|Kenya|Export Promotion Council|SSA|
|Latvia|LIDA|EEA|
|Lebanon<br>Lesotho|IDAL<br>TradePromotionUnit|MENA<br>SSA|
|Lithi|<br>LDA|EEA|
|uana<br>Malawi<br>|MEPC<br>|SSA<br>|
|Malaysia<br>|MATRADE<br>|EEA<br>|
|Malta<br>Mauritius|Malta Enterprise<br>Enterprise Mauritius|MENA<br>SSA|
|Mexico<br>Moldova|Bancomext<br>MEPO|LAC<br>EEA|
|Morocco<br>Mozambiue|CMPE<br>IPEX|MENA<br>SSA|
|q<br>Netherlands<br>|EVD<br>|OECD<br>|
|Nicaragua<br>Niger<br>|APEN<br>ANIPEX<br>|LAC<br>SSA<br>|
|Norway<br>Panama|Innovation Norway<br>National Direction of Investment & Export Promotion|OECD<br>LAC|
|Paraguay<br>Peru|PROPARAGUAY<br>Prompex|LAC<br>LAC|
|Portugal<br>PtRi|ICEP Portugal<br>CidCiEti|OECD<br>LAC|
|uero co<br>Rwanda<br>|ompana e omerco y xporacon<br>RIEPA<br>|SSA<br>|
|Senegal<br>Serbia and Montenegro<br>|ASEPEX<br>SIEPA<br>|SSA<br>EEA<br>|
|Sierra Leone|SLEDIC|SSA|
|Slovak Republic|SARIO|EEA|
|Slovenia<br>SouthAfrica|TIPO<br>TISA|EEA<br>SSA|
|<br>Spain|ICEX|OECD|
|Sweden<br>Switzerland<br>|Swedish Trade Council<br>OSEC Business Network Switzerland<br>|OECD<br>OECD<br>|
|Taiwan, China<br>Tanzania|TAITRA<br>Board of External Trade|EEA<br>SSA<br>|
|Thailand<br>Trinidad and Tobago|Department of Export Promotion<br>TIDCO Limited|EEA<br>LAC|
|Tunisia<br>Turkey|FAMEX<br>IGEME|MENA<br>EEA|
|Uganda<br>United Kingdom<br>|Uganda Export Promotion Board<br>UKTI<br>|SSA<br>OECD<br>|
|Uruguay<br>Venezuela, RB<br>Vietnam|Uruguay XXI<br>BANCOEX<br>Vietrade|LAC<br>LAC<br>EEA|
|West Bank and Gaza|Paltrade|MENA|
|Yemen, Rep.<br>Zambia|Yemen Export Supreme Council<br>EBZ|MENA<br>SSA|

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