Exports and Skills: The impact of destination in a middle income country

Globalization - Trade

In the last few years there were a burgeoning number of studies showing the relationship between exporting and firm’s performance. These studies were mostly inspired by the pioneering work by Bernard and Jensen (1999) for the United States, which finds that exporting firms are large, more productive, more capital intensive and pay higher wages. This work prompts up empirical tests for other countries as well as the development of theoretical models.

This bloom in empirical studies was accompanied by the development of theoretical models to explain these results. One of the first well known models was developed by Melitz (2003) who introduces firm heterogeneity. This model was followed by several types of further extensions. Among these extensions Eaton et al. (2008) suggest that the relationship between firm performance and exporting depends on the destination of exports.

Matsuyama (2007), Verhoogen (2008), and Bustos (2011) provide further extensions suggesting different mechanisms by which exporting to high income countries requires higher levels of skills or human capital. Matsuyama (2007) and Bustos (2011) suggests that what matters is exporting “per se”, with exporting firms adopting better technologies and using more skilled labour due to the role of different tasks that are needed in order to export, which are skilled intensive. Thus, these authors focus their explanations on the supply side -technology-. On the other hand, Verhoogen (2008) argues that exporting (by the most highly productive firms within an industry) causes quality upgrading, which is skilled intensive, increasing so the demand for skilled labour by exporting firms and rising wage inequality.

Brambilla et al. (2012) provide a unified theory that integrates the various channels –supply and demand- linking skilled labour utilization and exporting to high income destinations, i.e. incorporating differences among exporting markets. For Uruguay the studies that analyse the impact of trade on labour market are scarce, and so far there are no studies that analyse the effect of the destination of exports on the demand for skilled labour.

In a recent work we analyse the links between exports, skills and wages taking into account the destination of exports. As we comment above the theoretical literature argues that exporting to high-income countries leads to quality upgrading that is skill intensive and which requires skill intensive additional services.

We test this theory using a panel of Uruguayan manufacturing firms for the period 1997-2006. We use data from two main sources: data at the firm level from the Instituto Nacional de Estadisticas (INE) and data on value and destination of exports by firms provided by the Direccion Nacional de Aduanas. The panel of Uruguayan manufacturing firms provides information on gross output, value added, sales, capital, exports, intermediate consumption discriminated in various items, number of workers which is further discriminated in non-production and production workers, professionals and technicians, wages, industry affiliation and exports, among other variables.

The data from the Encuesta de Actividad Economica provided by the Instituto Nacional de Estadisticas (INE) was merged with data from the Direccion Nacional de Aduanas, so we have the destination and value of exports at the firm level for each firm over the period considered. In this way we know for each firm whether it has exported, how much and to where. Then we classified the countries of destination in high and middle and low income countries according to the OECD classification.

We analyse skills defined as non-production workers in total employment and professionals and technicians in total employment and average wages. As explanatory variables we test a dummy equals to one for exporting firms, export intensity, and exports to high-income countries. We control for time dummies and industry dummies and firm size define as the natural logarithm of firm’s sales using OLS models to analyse associations, and Instrumental Variable Generalised Method of Moments (IV-GMM) to analyse causal relationships. There are at least three endogenous variables in our model: the exporting status of the firm; export intensity of the firm (share of exports in total sales), and the share of exports to high income countries in total exports. The challenge to achieve identification is to find good instruments. To construct the instruments we follow Brambilla et al. (2012) strategy, using the devaluation of our main trading partners: Brazil in 1999. In this way we can track changes in skill utilization for a given firm, given its exogenous response in exports and export destinations following the devaluation of the major trade partners of Uruguay1.  In Chart 1 we present the evolution of the value of exports by destination for the period analysed.

Chart 1: Exports by destination (% of total exports in value)
Exports by destination

Source: based on data of the INE and Dirección Nacional de Aduanas

Our results seem to indicate that contrary to previous studies for developed and other middle income economies such as Mexico (Verhoogen 2008) and Argentina (Brambilla et al. 2012), exports to high income countries do not translate in a higher demand in skills and wages for the Uruguayan case, while exports in general do. This last finding is in line with the empirical results obtained by Matsuyama (2007) and Bustos (2011) who argue that what matters is exporting “per se”.

In order to pose some further explanation for these puzzling results we classified industries according to their R&D intensity in low and high R&D intensive industries. We find that exports to high income countries are mainly from sector with low R&D intensity, and mostly “commodities” with low scope for vertical differentiation. Then it follows that the productive structure and specialization of the country, characterised by sectors of low technological content, with low value added and low sophistication, can be at the heart of these results, or in Hausmann et al. (2005) words “what we export matters.”

A brief overview of the structure of exports by type of good and destination shows that exports targeted to Argentina has a higher content of value added. In fact exports to Argentina concentrate mainly in transport equipment, plastic products, paper, and chemical and textiles. On the other hand exports to the EU, the NAFTA and the rest of the world are mainly food products, such as meat, rice, soy, dairy products, wood, leather and wool, i.e. are commodities in nature, with low scope for vertical differentiation. In this regard exports to Brazil are also similar to those exported to developed countries: mainly food products with low value added.

Furthermore, recently a new literature on export quality measured by unit values goes to the other extreme by arguing that the important variance across countries in differences of quality within narrowly defined product categories, rather than the products themselves. In this regard, the dynamics of quality (measured by the growth of export unit values) potentially offers insights into the drivers of economic growth by acting as a proxy for the accumulation of underlying factors of production that yield high-quality goods and perhaps greater productivity (Maloney and Lederman, 2012).

Thus, in our research agenda is to analyse further the interaction of “where” and “what” to provide a sound explanation for these results.

1. For details on the instruments see: http://www.iecon.ccee.edu.uy/dt-04-14-exports-and-skills-the-impact-of-destination-in-a-middle-income-country/publicacion/410/es/

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