In this paper, we examine the impact of services sector inputs on the export performance of downstream industries in transition economies. This paper looks at firm specific factors that affect the export performance of manufacturers in transition economies as well. Consistent with the results in existing research, we find that firm specific characteristics such as the introduction of new products, investment in research and development, employment of advanced technologies, and employee skills are key drivers of export performance in the manufacturing sectors of transition economies. Introduction of new products and services, investment in research and development as well as employment of advanced technologies (high-speed, broadband internet connection) increase the competitiveness of the manufacturing firms in global markets and thus improve export performance.

Keywords: services inputs, transition economies, export performance, manufacturing industry 

Exporting is an important type of economic activity that many consider crucial to the growth of productivity, and living standards. The experience of the East Asian tigers provides   evidence that exporting is an important component of the growth strategy in emerging markets (The World Bank, 1996). Ensuring a favorable environment for exporting thus represents one of the key challenges for transition economies on their path to economic development.

Discussions of factors that determine success of export performance have been ongoing for many years. Both the factors that are under the firm control and external factors have been studied extensively in the academic literature. However, the role of services sector as one of the external factors in promoting exporting performance of downstream sectors remained relatively unstudied. The existing research of the consequences of services sector liberalization is limited mainly to the analysis of the impact of services sectors on the on the productivity in downstream industries (Arnold, Javorcik and Matoo, 2011; Arnold, Matoo and Narciso, 2006; Esschenbach and Hoekman, 2006; Fernandes and Paunov, 2012).

In this paper we extend the existing research by emphasizing the relationship between the services sectors and the export performance of downstream industries. In particular, the objective of the study is to explore the impact of services inputs on export performance of manufacturing firms in transition economies.

The results of the study are intended to improve our understanding of the consequences of services sector policy, and thus it extends the existing theoretical framework. However, the findings of the current research are important not only for theoretical but also for practical considerations. They provide grounds for the recognizing one of the main determinants of manufacturers’ export performance in transition economies. In that way, the research contributes to the ongoing political debate on economic development issues and provides insights for targeting of public policies.

This paper focuses on the role of the services sector in influencing export performance of manufactures in transition economies. The literature indicates that countries in transition can benefit from increased exports. An increase in exports might boost productivity through “learning by exporting” of individual companies. Or it may allow additional imports of high tech products. Either avenue would stimulate economic growth.

Though the productivity-export link has been studied very extensively in recent years, some aspects of this relationship remain relatively unexplored.  For instance, the now large heterogeneous firms’ literature initiated Melitz (2003) assumes that the more productive firms are the ones that export.  He assumes there is a fixed cost in selling in export markets and only the more productive firms will choose to export, while less productive firms will decide to serve the domestic market.  However, the productivity of firms can be caused by factors external to the firm and which are not under its control. The recent empirical research of the relationship between exporting and external factors influencing productivity is focused mainly on the study of the effects of business climate variables. For instance, Clarke (2005) in a study of African exporters finds that in addition to enterprise characteristics, policy-related variables also affect export performance. In particular, the author suggests that restrictive trade and customs regulations and poor customs administration can discourage manufacturing enterprises from exporting. Balchin and Edwards (2008) find that the business climate is closely associated with firm-level manufacturing export performance in Africa. The empirical evidence on the effects of business climate and infrastructure on manufacturers’ export supply capacity is also documented in (Escribano and Guasch, 2005; Dollar et al., 2006; Iwanow and Kirkpatrick, 2008; Portugal-Perez and Wilson, 2010 ).

Similarly, liberalization of the services sectors can be considered as one of the external factors that positively influences costs and productivity of downstream firms’ and thus promotes their export activities. Services can be considered a factor of production along with labor, capital and other inputs. The enhancement of services inputs can reduce production costs, increase the marginal productivity of other inputs and raise output. The impact of services sector liberalization on the productivity in downstream sector is well documented in academic literature (Arnold, Javorcik and Matoo, 2012; Arnold, Matoo and Narciso, 2006; Esschenbach and Hoekman, 2006; Fernandes and Paunov, 2011). These studies indicate that the availability of high-quality and low cost services contributes to the reduction of costs and increase of productivity of downstream manufacturing firms. Taking into account the fact that services sector efficiency is an important determinant of manufacturing firm productivity and productivity is an important determinant of  exporting, one may hypothesize that services sector liberalization through the improvement of productivity can increase exports of the firms in downstream industries.

Again relying on Melitz, services sector liberalization can positively influence not only the export intensity of manufacturers but also their decisions to participate in export markets and the number of export markets that they serve. Thus, theory suggests that a more efficient services sector through increasing the productivity of firms and reducing the fixed costs of exporting can boost the number of firms in downstream industries that “self-select” into export markets. Thus, services sector liberalization, by increasing the efficiency, variety and quality of services markets, can then increase exports.

Though theory indicates that better services should increase exports (both intensively and extensively), the empirical links are not well studied. Further, those studies that do exist are based on African or Latin American data, so there is a lack of literature based on transition country data.  In this research we try to fill this gap by examining the relationship between performance of services sector and export performance of manufacturing firms in transition economies. 

Based on the literature review, the main research hypothesis of the study can be formulated as follows: the enhancement of services sector positively and significantly influences both the decision of manufacturers to participate in  export markets (“extensive margin”)and their export intensity in any market (“intensive margin”).

In order to test the research hypothesis and to estimate the impact of services inputs on export performance of manufacturers we use the panel data regression model. The main source of the data for the research is the micro-level unbalanced panel data from the Enterprise Surveys database (Business Environment and Enterprise Performance Survey (BEEPS) Panel)[1].  To measure services sector performance, the two kinds of indicators were employed in this paper. First one includes the subjective measures of individual manufacturers as to how much of an obstacle for their business they consider the performance of the following three service sectors: electricity, telecommunications and finance. Another type of variables employed in this study was EBRD policy reform indices (EBRD 2009) which reflect the overall liberalization of services sector.

However, some issues can arise while estimating the model. First, since the export share is a truncated variable, a sample selection bias issue can arise while estimating the model. The second problem is related to potential endogeneity of service input variables as well as some other independent variables. To deal with selection bias problems the two-stage estimation process will be employed in this study (Heckman, 1979; Helpman et al., 2008; Shepotylo, 2009).  First, we formulate a model for the probability of exporting. At the second stage, we correct for self-selection by incorporating a transformation of the predicted individual probabilities or the inverse Mills ratio  (obtained from the first stage probit regression estimation) as an additional explanatory variable to the panel regression equation. To address the problem of endogeneity of the services input variables, which are very likely to be correlated with the individual specific effect, the export intensity equation will be estimated by applying Hausman-Taylor IV estimation procedure (Hausman and Taylor, 1981).

The detailed description of the study results is reported in the following papers (Berulava, 2011; Berulava, 2012; Berulava, 2016). Generally, the key finding of the study is that improvement in the services sectors would enhance the export performance of manufacturers in transition economies. In particular, the study results suggest that reducing constraints and obstacles originating from inefficiencies in electricity, telecommunication, infrastructure and banking will encourage export performance of downstream industries. Thus, advancing liberalization reforms in telecommunications, electric power, railway transport, road transport, and water distribution sectors as well as in banking sector will stimulate expansion of export activities of manufacturers. Our results also suggest that services reform impacts more strongly on the intensity of existing exporters than it does in encouraging new exporters or new export markets.

This paper looks at firm specific factors that affect the export performance of manufacturers in transition economies as well. Consistent with the results in existing research, we find that firm specific characteristics such as the introduction of new products, investment in research and development, employment of advanced technologies, and employee skills are key drivers of export performance in the manufacturing sectors of transition economies. Introduction of new products and services, investment in research and development as well as employment of advanced technologies (high-speed, broadband internet connection) increase the competitiveness of the manufacturing firms in global markets and thus increase exports as a share of sales.

We find that the firm’s size and foreign investment do matter as well. These factors significantly and positively affect not only the decision to export, but also export intensity of manufacturers. Large firms have more advantages in accessing to finance, which is necessary to establish distribution networks in foreign markets. Generally larger firms have more resources for the investment necessary for attaining of competitive advantage globally.  This is especially true for transition economies.  Foreign ownership, in turn, facilitates transfer of advanced managerial expertise, skills and technologies that makes the firm more competitive in international markets. We also find that other factors such as trade facilitation, regulatory quality, the degree of competition, membership in European Union also positively affect exports.

The results of the study have several policy implications. The first insight is that an efficient service sector infrastructure represents a strategic and underexploited resource of export enhancement that can be influenced by policy makers. To stimulate export performance of manufacturing industries policy makers must emphasize further reforms and liberalization of their services sectors. These reforms must be focused on providing adequate access to services for downstream industries and thus on reducing their costs of doing business.  Moreover, government should create favorable conditions for attracting foreign direct investments and encourage investments in innovation, research and development, employment of advanced technologies. A final policy point is that reducing trade related costs, through trade and customs procedures facilitation, would also increase exports. Private entrepreneurs should also expect that that their investments in innovation, research and development, employee skills and advanced technologies will be beneficial for their export activity.

In summary, the results of this study provide information for policymakers and stakeholders that will facilitate elaboration of policy interventions aimed at improvement of export performance of manufactures in transition economies. 

References

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