Trade liberalisation, firm dynamics and export participation in Sub-Saharan Africa

Abstract

Advocates of trade liberalization argue that it has the advantage of introducing variety of products and economies of scale in production (Krugman, 1979; 1980). The standard trade model (Melitz, 2003) greatly centers on firm heterogeneity which gives explanations why firms serve heterogeneous markets (some serve the domestic market while others become exporters) even within narrowly defined industries. Firm-level data in both developed and developing countries shows compelling evidence suggesting that firm export participation is a rare activity and firms involved in international trade constitute a small fraction of firms across many countries (Bernard, Jensen, Redding and Schott, 2007). Taken together, the above facts suggest that exporting is a costly venture undertaken by the large and more productive firms. However, some empirical evidence has shown that exporters are not generally large and productive (Eaton et al., 2008) and that firm selection into the export markets can also be the result of deliberate endogenous effort by firms to increase firm-level investments (Rho and Rodrique, 2016) and reorganize the management of the production processes (Blum et al., 2011). In this thesis, I have examined trade liberalization, firm dynamics and export market participation in the context of five selected Sub-Saharan African countries (Ghana, Kenya Nigeria, South Africa and Tanzania); using a unique dataset of Sub-Saharan African manufacturing firms. This study is different from previous studies in Sub-Saharan Africa in that most previous studies were country specific (Bigsten and Gabreeyesus, 2009; Granér and Isaksson, 2009; Njikam and Cockburn, 2011) among others. Studies examining Sub-Saharan Africa are scarce due to lack of data or incomplete data (Borel-Saladin, 2017; Austin et al., 2017). This thesis exploits the availability of data in five Sub-Saharan countries, spanning fourteen years, to examine the above topic. Using propensity score matching techniques and regression analysis, I provide explanation to three research questions: (1) how important are sunk costs in shaping export entry of new entrants? (ii) What explains the presence of small and low productivity firms in the export markets, (iii) What is the impact of trade liberalization on firm productivity in Sub-Saharan Africa? The main results show that: (i) Sunk costs of exporting are significant and influence the firm‟s decision to enter the export market and large firms are more productive and grow at faster rates before export market entry. (ii) Although firm productivity differences can be explained by self-selection factors as one channel, firm-level investment holds the key to a possible explanation to why small firms, with low productivity, venture into the export markets. (iii) Liberalizing trade enhances firm-level productivity in the traded sector with industries (textile, and food and bakery) regarded as more labor intensive, benefiting the most. These results are robust to the use of other measures of trade liberalization, like index of openness and trade freedom index. Overall, although the standard trade model by Melitz (2003) is tractable in explaining most of the features observed in firm-level data, it omits crucial conscious efforts of firms to increase their probability of entering the export markets. At the policy level, exporting per se may not result into welfare gains unless it is followed by the right policies that promote rather than restrict trade.