The World Economy (2008) doi: 10.1111/j.1467-9701.2007.01087.

Oxford, World TWEC 2008 0378-5920 Original XXX CONTRIBUTION RICHARD Economy The UK Articles HARRIS Author OF Journal AND EXPORTING QIAN compilation CHER LI Blackwell Publishers Ltd. 2008 Blackwell Publishing Ltd

Evaluating the Contribution of Exporting to UK Productivity Growth: Some Microeconomic Evidence

Richard Harris and Qian Cher Li
University of Glasgow

1. INTRODUCTION

MERGING evidence on industrial restructuring using micro-based data from the Annual Respondents Database (ARD) has shown that UK productivity growth is increasingly the result of a market selection process, in which more productive entrants replace less productive establishments whilst high productivity incumbents gain market share (Oulton, 2000; Disney et al., 2003a). In particular, the study by Disney et al. suggests that between 1980 and 1992, 50 per cent of labour productivity growth and 80 90 per cent total factor productivity (TFP) growth could be explained by what they term external restructuring effects (i.e. the impact of market entry and exit as well as inter-rm reallocations in market share).1 Using comparable data and a similar approach, Harris (2004) reports that over the 199098 period, the growth in manufacturing TFP did not substantially benet from incumbents improving or a reallocation of market share from worse to better plants; rather TFP beneted mostly from the

The authors wish to thank UKTI for sponsoring this project and two anonymous referees for their helpful comments. However, all views expressed are solely the responsibility of the authors. This work contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queens Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates.
1 Note, and anticipating the results we present below, Disney et al. (2003a) use a different decomposition approach to the one used here. They also cover a different (non-overlapping) time period, and their data source is the ARD (rather than FAME).

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churning of plants whereby plants with higher TFP entered and those with below-average TFP were more likely to exit. None of these previous studies have considered the role of exporting rms in contributing to productivity growth. Exporters are usually larger rms, with higher productivity, higher capital intensity, faster growth and a more skilled workforce (see Baldwin and Gu, 2004; Girma et al., 2004; and Greenaway and Kneller, 2004, for recent evidence). Nevertheless, microeconomic evidence on the exportingproductivity relationship still remains inconclusive, particularly on the existence of productivity gains post-export market entry. As noted in a recent survey:
the micro and macro evidence on exporting and growth would appear to be inconsistent: there is weak evidence of a causal relationship between exports and productivity growth at the rm level but a strong correlation at the aggregate level (Greenaway and Kneller, 2005).

However, this evidence is very likely to be reconciled when considering interrm reallocations of resources towards more productive rms, which inter alia we consider here. Until now it has not been possible to assess the contribution of exporters to UK aggregate productivity levels and growth, particularly in terms of restructuring effects, due to data limitations.2 Consequently, and as noted in DTI (2006), there has to date been little evidence, particularly for the UK, that substantiates the overall benets from international trade, and therefore providing a rationale for government intervention to help rms develop their exporting activities. However, in this study we are able to use a (weighted) FAME database to consider, for the rst time, the contribution of exporters to aggregate productivity growth. We have constructed a dataset that distinguishes rms that enter and exit the database (separately from those that are taken over by others as part of mergers and acquisitions), and employed the approach taken by Haltiwanger (1997) to decompose measures of productivity into various components that represent the impact of resource allocations across surviving exporters and non-exporters as well as the impact on productivity of the entry and exit of rms. We consider both labour and total factor productivity, with the TFP measure being preferred since it takes into account all factor inputs other than labour in the production process. Labour productivity may increase because of greater outsourcing or capital deepening, as rms substitute intermediate inputs and capital for labour, while the efciency with which all inputs are used may not necessarily increase (and possibly may even decline). In summary, we show that in aggregate (and covering all sectors) exporting rms contributed more to overall UK productivity growth than non-exporting
Note the Annual Respondents Database (ARD), the primary source of UK micro-data, does not contain information on exporting activities.
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rms (i.e. 2.32 per cent compared with 1.55 per cent per annum in terms of labour productivity, and 1.27 per cent relative to 0.81 per cent per annum in terms of TFP). This is made up of both intra-rm productivity improvements and inter-rm reallocations of resources towards more productive exporting rms (which includes the impact of rm entry and exit). Such external restructuring is especially important in the non-manufacturing sector, suggesting overall that government policy aimed at boosting exporting needs to take account of the different channels through which productivity growth occurs across different sectors. A major contribution of this paper lies in the dataset used: to obtain data that are representative of the population of rms operating in the UK (for all marketbased sectors), our analysis is based on a weighted FAME dataset using weights compiled from the ARD (at the three-digit industry SIC by ve size-band levels), as the unweighted FAME database is unrepresentative of small- to medium-sized enterprises and therefore cannot produce results that can be generalised to the UK level. The rest of the paper is structured as follows. In Section 2, we briey review the literature related to export-market dynamics and the linkage between exporting and aggregate productivity growth. In Section 3 we describe the weighted FAME dataset used for this study and highlight some data issues. This is followed by a discussion of methodological issues associated with productivity decomposition, together with our results (Section 4). The last section concludes.

2. EXPORTING, MARKET DYNAMICS AND AGGREGATE PRODUCTIVITY: EVIDENCE FROM THE LITERATURE

From a policy perspective, it would seem that there is substantial international evidence of the benets from international trade which, at least in part, should provide a rationale for government intervention to help rms develop their exporting activities (for the UK see especially Chapter 3 in DTI, 2006).3 These benets are largely linked to the higher productivity of exporters, which leads to higher overall UK productivity growth through some or all of the following: (i) exporters achieving relatively higher productivity before they begin selling overseas which results in them having higher productivity growth post-entry (the so-called self-selection effect see below); (ii) exporting rms becoming more productive over time through a learning-by-exporting effect; (iii) intra-industry (i.e. inter-rm) resource reallocations for rms that remain in operation in a
3 The further issue of whether there are grounds for policy intervention only in the case of market failures or whether intervention is justied in more general terms is also relevant but discussed elsewhere (see Harris and Li, 2005).

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certain period away from non-exporters to higher productivity exporters; (iv) the entry of higher productivity exporters, i.e. new rm start-ups that immediately or very soon sell to international markets (what have been called born global companies in the literature see Oviatt and McDougall, 1995, and the review of this literature in Harris and Li, 2005); and (v) the shutdown of lower productivity rms (which may be exporters but are more likely to be non-exporters who have the lowest levels of productivity of all, causing them to exit rst). The contribution of (i) + (ii) is the within (or intra-) rm effect of higher productivity exporters contributing to higher overall UK productivity growth because they internally improve their levels of efciency and/or innovativeness; whereas (iii)(v) are concerned with external restructuring due to the reallocation of resources between rms that remain in operation throughout and/or through creative destruction (cf. Schumpeter, 1950). The earliest studies concerned with the relationship between exports and productivity growth (and thus the debate on export promotion policies) used a macroeconomics approach, from the conventional HeckscherOhlin model to new trade models.4 However, these macroeconomics-oriented models, arguably, only provide a limited understanding of rms exporting behaviour and thus have a limited role in informing policy, which is to a considerable extent targeted at individual rms. In contrast, the last decade has seen a surge of interest in studying the microeconomic evidence, taking into account the importance of heterogeneity amongst rms. This emphasis on the rm-level evidence has been partly triggered by the availability of data at rm and/or plant level, as well as recent developments in the use of theoretical modelling and econometric techniques to exploit these usually more intricate micro-data. a. An Intra-Firm Perspective: Exporting and Firm Performance Research on the exportingproductivity relationship was initially empirically driven, and it is universally found that exporting is positively associated with rm performance (for recent surveys of the literature, see Greenaway and Kneller, 2005, 2007; Lpez, 2005; Wagner, 2007). Nevertheless, despite this positive linkage, there is still much controversy about the causal direction of this link, which is often examined empirically by testing two competing but not mutually exclusive hypotheses, viz. self-selection and learning-by-exporting.5 Underlying the self-selection hypothesis are the notions of sunk cost and rm-level heterogeneity. Since international exposure is associated with more
4 5

For a review of macroeconomic evidence on trade and growth, see Lpez (2005). In particular, Greenaway and Kneller (2005, Table 1) and Wagner (2007, Table A1) provide summaries of empirical ndings on the exportproductivity nexus and the causality issue using rm-level data.

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intensive competition, rms that internationalise are forced to become more efcient so as to enhance their survival characteristics. Additionally, the existence of sunk entry costs means exporters have to be more productive to overcome such barriers to entry before they can realise expected prots, and these xed costs have been incorporated into recent theoretical modelling, such as those undertaken by Clerides et al. (1998), Bernard et al. (2003) and Melitz (2003), who maintain that exporting rms need to be more productive before entering the export market in order to overcome the sunk costs of entering overseas markets. Notably, and perhaps more importantly from a policy perspective, it has been argued that rms do not naturally consider exporting just because they have reached a certain necessary productivity threshold; in fact, such selfselection could be a conscious decision, involving a purposeful improvement of productivity as a planned strategy to enter export markets (Lpez, 2004, 2005). For instance, Lpez (2004) develops a simple model in which forward-looking rms need to invest in new technology in order to become exporters, and the adoption and assimilation of this technology require them to be more productive to begin with. Ample empirical evidence has conrmed that this is indeed the case: in more than 30 studies reviewed in Greenaway and Kneller (2005), covering a wide range of countries, self-selection is universally found to be important. The other direction of this causality concerns the learning effect associated with exporting: the exposure to more competitive international markets intensies rm performance, and therefore gives productivity a further boost, due to knowledge accumulation, technology transfer, competition effects and the like. If this fails to hold, there are important policy implications if better rms do self-select into export markets, and exporting does not further boost productivity, then export promotion policies could simply be a waste of resources (involving large-scale dead-weight and possibly even displacement effects given that rms that export usually also sell to domestic markets).6 The learning-by-exporting proposition has, in general, received less support in the literature, with only signicant learning effects found in particular groups, such as younger exporters (Baldwin and Gu, 2003, 2004, for Canadian manufacturing; Greenaway and Yu, 2004, for the UK chemical industry), exporters in small, open and highly exportoriented economies (Hansson and Lundin, 2004, for the Swedish manufacturing sector), or rms serving advanced, high-wage export markets (Damijan et al., 2005). It is worth noting that the paucity of evidence on this learning effect could in large part be due to methodological issues involved when testing for the

Robust empirical evidence shows that exporters tend to sell very small fractions of their output abroad (Roberts et al., 1995; Aw et al., 1997).
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productivity effect of exporting, such as sample selectivity.7 The latter suggests that participants in export markets may possess certain characteristics (e.g. superior human capital, greater absorptive capacity) such that they would achieve higher productivity compared with non-participants even if they did not enter export markets, and thus productivity growth is correlated with the decision to participate in global markets (but is not caused by selling in international markets). Nevertheless, signicant post-entry productivity gains in exporting rms have been reported in recent studies that overcome problems of selectivity bias, such as Girma et al. (2004) who employ matching techniques and UK manufacturing data, and Harris and Li (2007a) who use three distinct approaches (instrumental variable, control function and data-matching techniques) applied to all market-based sectors in the UK. b. An Inter-Firm Perspective: Export Market Dynamics and Aggregate Productivity Self-selection and the learning-by-exporting hypotheses reviewed above have attempted to assess only the linkages between exporting and within-rm productivity growth. Since entry (and exit) in export markets inherently involves changes in market shares, and thus industrial restructuring, in order to evaluate or justify trade-promotion policies it is equally important to look at the impact of rm-level exporting on intra- or inter-industry reallocations of resources and therefore aggregate productivity growth. This approach provides a holistic view of the interaction of rms, industries and the aggregate economy. In the context of exports, the process of entry and exit in export markets differs from market entry and exit in the conventional sense, since rms can continue to produce for the domestic market.8 Moreover, as discussed above, entrants to export markets invariably have to achieve superior performance before they enter and could be rewarded with even better performance after they penetrate foreign markets. Export market dynamics have been modelled in recent studies by incorporating intra-industry heterogeneity. General empirical ndings in the trade literature
7

See Harris and Li (2007a) for a discussion of the sample selectivity issue in the context of evaluating the exportproductivity relationship; and more generally, Blundell and Costa Dias (2000) and Heckman and Navarro-Lozano (2004) for reviews of this issue and various solutions. 8 Meanwhile, a persistent transition in and out of exporting has been observed by Bernard and Jensen (2004a) a high degree of re-entry by former exporters and a high propensity to stop exporting in former non-exporters. There are at least two competing views to explain this persistence the sunk costs argument (i.e. exporting begets exporting) and heterogeneous attributes (certain rms are more export-oriented). Bernard and Jensen attempt to identify the roles of both sunk costs and plant heterogeneity and conrm the signicant presence of both. Nevertheless, it remains unanswered as to how rms acquire these characteristics that facilitate their entry into foreign markets.
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tend to suggest that the determinants of a rms entry decision include trade liberalisation (Baldwin and Gu, 2004), sunk entry costs (Das et al., 2001; Bernard and Jensen, 2004a; Girma et al., 2004); some rm-level characteristics such as size (Aw and Hwang, 1995; Roberts and Tybout, 1997; Bleaney and Wakelin, 2002; Gourlay and Seaton, 2004); the rms experience, including ex-ante success (Bernard and Jensen, 1999; Greenaway and Kneller, 2004; Kneller and Pisu, 2007); export spillovers (Aitken et al., 1997; Greenaway et al., 2004); and foreign networks (Sjoholm, 2003). In addition, the exit decision depends mainly on industrial characteristics such as the level of sunk costs, and the minimum productivity or efciency needed to secure non-negative prots (Das et al., 2001; Bernard and Jensen, 2004a). The impact of export market dynamics on productivity has been studied in an emerging strand of recent theoretical literature, seeking to explain empirical ndings and then generating testable predictions. Bernard et al. (2003) show that trade liberalisation expands the market shares of the most productive rms by providing them with large export markets, while at the same time such liberalisation forces rms at the lower end of the productive efciency distribution to quit as international competition intensies. Similarly, in a seminal paper, Melitz (2003) develops a forward-looking model of steady-state trade with heterogeneous rms and imperfect competition to show that trade liberalisation increases a countrys imports and erodes domestic sales and prots. Firms at the higher end of the productivity distribution expand their export sales more than they contract their domestic sales; whereas those non-exporters at the lowest end of the productivity distribution have to contract or quit. Consequently, this model generates a prediction that exporting provides an additional channel for productivity gains whereby export market dynamics act to increase aggregate productivity, as better rms expand their market share and the worst rms contract or exit.9 A more recent development in the theoretical modelling in this regard is provided in Bernard et al. (2007). Their approach differs from Melitzs model in that they focus on comparative advantage. It is found that intra- and inter-industry reallocations of resources brought about by trade liberalisation improve average industry productivity and sectoral rm output, but relatively more so in industries with a comparative advantage than those with comparative disadvantages.10

In addition, Helpman et al. (2004) provide an extension of Melitzs model to include foreign direct investment (FDI) as another strategy of rms international expansion. Their model assumes the (xed) costs differ amongst domestic rms, exporters and multinationals, in conjunction with rm-level heterogeneity in productivity. 10 Additionally, their model also has implications for job creation and welfare gains associated with the creative destruction of heterogeneous rms leading to reallocations of resources.
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Empirically, the effect of transitions into and out of export markets on business performance is often captured by the notion of an export premium, which measures how much a rms performance changes when it exports (e.g. Bernard and Jensen, 1999, for the US; Aw et al., 2000, for Korea and Taiwan; Silvente, 2005, for the UK). More specically, the studies for the US, Korea and Taiwan conclude that when rms switch from being non-exporters to becoming exporters, their performance improves, while switching from being exporters to being domestically-oriented rms retards their performance. Likewise, Silvente looks at a sample of UK small rms over a seven-year period, showing that there are symmetric effects on the export premium between entrants and those exiting new exporters enjoy considerable gains while those exiting from overseas markets suffer signicant losses in terms of employment, wages, sales and productivity growth rates.11 Another strand of the empirical literature compares productivity amongst distinct sub-groups of exporting rms as well as domestic non-exporters. As Bernard and Jensen (2004b) report, in US manufacturing new entrants into export markets are rewarded with a surge in TFP, especially during the rst year postentry, and thereafter their productivity path becomes atter, following that of continuous exporters (although with signicantly lower productivity levels). In contrast, those that exit from exporting are characterised by a substantial deterioration in productivity to eventually resemble the at growth trajectory of continuous non-exporters. In particular, they nd increased export opportunities are associated with both intra- and inter-industry reallocations in the US, accounting for 40 per cent of TFP growth in the manufacturing sector, half of which can be explained by an intra-industry reallocation of economic activities. Thus, the higher productivity levels as well as the faster growth rates found in exporters (in terms of employment and output) offer an additional reallocative channel for explaining aggregate productivity growth.12 For Canada, Baldwin and Gu (2003) point to a negative impact for those that exit, arguing that the ebb and ow induced by international competition culls some participants from export markets. The least successful entrants have to withdraw to domestic markets and then lag further behind those that continue serving foreign markets. That is, productivity growth is lower for quitters than continuers, and substantially lower when compared to new entrants to export markets.13 Thus, changing export status is indeed associated with considerable
The results from these studies control for the impact of covariates, such as size and industry effects. 12 Nevertheless, this study does not consider market entry and exit all plants in the dataset exist throughout the period of study. Thus, there is no comparison of the relative importance of creative destruction, and most importantly how internationalisation interacts with market entry and exit. 13 In addition, the negative impact of exit on the rms efciency is also captured in Bernard and Wagner (1997) and Clerides et al. (1998).
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uctuations in productivity. Overall, they nd exporters accounted for almost 75 per cent of productivity growth in Canadian manufacturing during the 1990s, 28 per cent of which was accounted for by export market entry (both existing and new entrants). In contrast with the well-documented evidence available for the US and Canada, there seems to be a paucity of evidence worldwide on aggregate productivity growth in the context of international trade. Only a limited amount of evidence of trade-induced productivity growth is available for other countries. For example, Hansson and Lundin (2004) decompose overall manufacturing productivity growth in Sweden into within-rm and reallocation effects. They discover that reallocations due to increased exporting positively impact on aggregate productivity growth, which is then counteracted by reallocations attributed to changes in domestic shipments. Falvey et al. (2004), again using Swedish manufacturing data, nd that exporting has a sizeable effect on industry productivity growth, in terms of increasing market share for higher productivity exporters. None of the above studies, however, use nationally representative data that covers all market-based sectors, to look at the contribution of exporting via intra-rm, inter-rm and market churning effects. We do this using UK data for 19962004, as set out in the following sections.

3. DATA ISSUES

The FAME dataset used for this study includes all rms operating in the UK that are required to make a return to Companies House, covering every sector of the market-based economy. It contains basic information on rm-specic characteristics, such as turnover, intermediate expenditure on bought-in goods, services, materials, employment, assets and, most importantly, overseas sales. We started with over 7,000,000 records covering the period 19962004,14 and then omitted all those that lacked the required data (especially on exporting activities). The result was an unbalanced panel covering 81,819 rms with 326,906 observations for 19962004. In this panel, nearly 23 per cent of the rms are observed throughout the nine-year period. The resulting FAME dataset (containing the nancial information required) is severely biased towards large enterprises, and is thus unrepresentative of UK rms. To obtain a representative distribution, we treat the rms in the FAME

We therefore have reason to believe that we observe almost all relevant rms who have to make a Companies House return during this period.
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dataset as a sample of the ARD population,15 and consequently weight the FAME data to produce a database that is representative (by industry and rm size) of the population of rms operating in Great Britain.16 Specically, we use aggregated turnover data from the ARD subdivided into ve size-bands (based on turnover quintiles17) and three-digit industry SICs (resulting in 757 sub-groups).18 We then aggregate the FAME data into the same sub-groups, so that we can calculate weights using ARD total turnover data divided by the comparable data from FAME.19 Table 1 presents the results from weighting the FAME data, using the weights derived from the (three-digit by ve size-bands) turnover data from the ARD. The unweighted data from FAME are dominated by the largest rms (dened as rms with turnover of 7.2 million or above); this sub-group accounts for over 97 per cent of total turnover. Weighting the FAME data produces a distribution across sizebands that is comparable to that obtained when using the ARD. This is conrmed in the nal column in Table 1 the ratio of FAME to ARD turnover by size-band is within a margin of 10 per cent. There is a suggestion that even weighted, the FAME data slightly underestimate the contribution of the smallest rms (and correspondingly overestimate the importance of the largest rms), but these differences are not likely to unduly impact on our decomposition of productivity growth using these weighted data. Further information on the construction of our weighted FAME dataset and the export market dynamics is provided in Harris and Li (2007b). Next, the FAME data for 1996 and 200420 are subdivided into (i) those rms that existed throughout 19962004; and (ii) those that rst appeared after 1996
For a detailed description of the ARD (available at the ONS), see Oulton (1997), Grifth (1999) and Harris (2002, 2005). Analysis using this database for the UK covers a range of areas but not exporting, due to its lack of information on exports. The counterpart to the ARD in the US is the Longitudinal Research Database (LRD) for US manufacturing provided through the US Bureau of Census. This US database has been merged with information on exports at the enterprise level to allow studies to be undertaken on the impact of exporting on aggregate productivity growth (see, for example, Bernard and Jensen, 2004a). Other countries have also compiled similar merged databases (e.g. Baldwin and Gu, 2003, for Canada). 16 Efforts have also been made to actually merge FAME into the ARD, but this has been largely unsuccessful. (See Harris and Li, 2007b, Ch. 2, for details.) 17 Note these are based on dividing the FAME data into ve equally sized groups based on constant-price turnover data, in order to obtain the cut-off points for each size-band. 18 Where there are fewer than 10 enterprises in any sub-group, these data are not used, in order to ensure that the ONS data do not potentially disclose condential information. This results in the loss of some 4 per cent of the total turnover available in the ARD. Note the ARD data have been weighted to produce population totals for turnover for each size-band by industry (see Harris, 2005, for a discussion of weighting the ARD data). 19 Note we do not weight the FAME data for 34 industries (by three-digit SIC2003), thus allowing each observation to represent itself; because the FAME data have better coverage in terms of total turnover than the ARD (because certain industries such as some of nancial services are not included in the ARD), or (very occasionally) the data do not match the ARD data by size-band within the industry. These 34 industries (out of a total of 215 industries covered) account for just 2.9 per cent of total FAME turnover. 20 Only these two years are needed to decompose productivity growth for 19962004.
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or could not be located in 2004.21 The second group comprises all the rms that had experienced some form of changes during the period considered. We then disaggregate this change group into various sub-groups using information on when the rm was rst and last observed in the database during 1996 2004, and the year the rm was incorporated. Details of constructing each sub-group are provided in Table 2.
TABLE 1 GBa Turnover (m) in 2003 Based on FAME and ARD by Size-Bands Size-Band b FAME Unweighted <44 44 to 227 >227 to 1,184 >1,184 to 7,244 >7,244 All (1) 26.9 380.7 3,578.5 49,683.9 1,988,609.3 2,042,279.4 % 0.0 0.0 0.2 2.4 97.4 100.0 Weighted (2) 460.1 7,969.6 60,892.8 198,417.1 874,543.9 1,142,283.4 % 0.0 0.7 5.3 17.4 76.5 100.0 (3) 509.7 8,509.4 63,751.8 200,988.3 812,157.0 1,085,916.2 0.0 0.8 5.9 18.5 74.8 100.0 ARD % FAME ARD (2) (3) 90.0 93.5 95.5 98.7 107.5 105.0

Notes: a Unweighted FAME data cover the UK. b Size-bands are in 000. Source: ARD and FAME databases.

TABLE 2 Construction of Sub-Groups in FAME Criteria Observed Observed + Year Observed + Year Observed + Year in both 1996 and 2004 in 2004 but not 1996 of incorporation > 1996 in 2004 but not 1996 of incorporation < 1997 in 1996 but not in 2004 of incorporation < 1997 Sub-Group Continuing rm Opened post-1996 Merger/acquisition Closed before 2004 Na 12,897 (18.7) 17,038 (24.7) 11,322 (16.4) 27,638 (40.1)

Note: a Number of rms observed in FAME database (weighted using ARD weights); gures in parentheses are column percentages.

As previously stated, we started with more than 7,000,000 records from FAME; and we calculate which rms belong to the various sub-groups in Table 2 using this full dataset (i.e. we attempt to avoid interpreting births and deaths of rms based on entries and exits to and from a dataset that does not cover the population of relevant rms).
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The main issue in dividing the change group into the various sub-groups is that rms observed in 2004 but not in 1996 could be either start-ups or subsumed into other rms through acquisition or merger. We differentiate between these two sub-groups based on the year of incorporation reported for the rm: those that were started in 1996 or earlier are not taken to be new start-ups but rather rst observed post-1996 as part of a newly merged venture.

4. METHODOLOGY AND RESULTS

In order to calculate the total factor productivity, we rstly estimate an augmented production function as follows: yit = 0 + E eit + Mmit + K kit + T t + Xit + t, (1)

where y, e, m and k refer to the logarithms of real gross output, employment, intermediate inputs and capital stock in rm i in time t.22 Notably, we have also included a vector of variables, X, that determine TFP.23 Hence, TFP in growth terms is dened as (dropping subscripts): ln TFP = % T + 6 % E % M % K . (2)

As shown in equation (2), our preferred approach to estimating TFP is to directly include the factors determining output (and thus TFP) into the production function, since this avoids any problems of inefciency and omitted variable bias associated with estimating a two-stage model based on typically a growth accounting approach.24 In short, since TFP is dened as any change in output not due to changes in factor inputs, these determinants should be included directly into the model (equation (1)) that determines TFP. Equation (1) has been estimated for 16 separate industry groups using panel data for 19962004 and the generalised methods of moments (GMM) systems approach available in STATA 9.2 (Arellano and Bond, 1998), taking account of

22

With reference to variable denitions in the FAME dataset, output is dened as turnover, intermediate inputs as cost of sales less remuneration, and capital stock as tangible assets, all in 000 (2000 prices). 23 Full details and results are provided in Harris and Li (2007b, Ch. 3). Given data availability, X comprised the exporting status of the rm, and which industry and region it belonged to. 24 See Harris (2005) for a detailed discussion of the measurement issues surrounding TFP, such as inefcient estimates (Newey and McFadden, 1999, Sec. 6), the omitted variable problem (Wang and Schmidt, 2002) in a two-stage model, and the endogeneity of inputs and outputs in a production model.
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both self-selection and endogeneity issues.25 Having obtained estimates of TFP at rm level, the index of aggregate productivity in year t as well as its growth between t and t k is dened as a geometrically weighted average of individual rm-level productivity in the economy: ln Pt =

it ln Pit
i

ln Pt = ln Pt ln Ptk ,

(3)

where it is the share of gross output for rm i in period t for the economy (in 2000 prices), and P measures productivity (labour productivity26 or TFP). Following Haltiwanger (1997) and Foster et al. (2001), the decomposition of productivity growth recognises that there are rms continuing in operation between t and t k, new rms entering for period t and rms exiting that contributed to productivity in t k. Thus productivity growth between t and t k ( ln Pt) is dened as: (i) Continuers: within-rm (ii) Continuers: between-rm (iii) Continuers: cross-rm

itk ln Pit + (ln Pitk ln Ptk ) it + ln Pit it +

(iv) Entering rms (v) Exiting rms (4)

it (ln Pit ln Ptk ) itk (ln Pitk ln Ptk ).

Here the rst term shows the productivity impact of resource shifts within rms that are open in both t and t k, depending on how important such rms are in the base year (in terms of their shares of output in the economy). Term (ii) also concerns continuing rms, but measures the impact of changing output shares across rms weighted by the rms ranking in the economy in the base year. There might be a presumption that the highest ranked rms in the base year would increase their market shares, denoting a positive redistribution of resources. However, term (ii) is complemented with term (iii) the covariance effect that considers whether increases in productivity correspond with increasing
25

Full details and results are provided in Harris and Li (2007b). Note, to account for endogeneity we instrument the model using lagged values of all the endogenous variables plus two additional instruments: the age of the rm and whether it possessed any non-zero intangible assets (accumulated through R&D, advertising, etc.). These additional instruments are also included to identify the model and thus overcome the self-selection problem surrounding which factors determine who exports (where age and non-tangible assets are highly signicant) separately from what factors determine TFP (where age and non-tangible assets are not signicant). 26 Here labour productivity is dened as a rms gross output per employee in 2000 prices.
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market shares. Lastly, terms (iv) and (v) denote the contributions of entering27 and exiting rms, both measured with respect to the economy average in the base year. Note, term (v) is expected to be negative (if exiting rms have lower productivity), and thus this term is preceded by a negative sign to allow for a positive impact on aggregate productivity. Equation (4) has been applied at the total economy level, allowing resources to be reallocated across industries as well as rms, but separately for exporters and non-exporters.28 We have also undertaken analyses separately for the manufacturing and non-manufacturing sectors, given that exporting is usually more prevalent in manufacturing (and thus it is of interest to see how the two sectors differ in terms of their contributions, via exporting, to productivity growth). Table 3 reports the output shares (the i) for the various sub-groups in 1996 (t k)

TABLE 3 Output Shares, All Market-Based Sectors, 19962004 Continuing Firms (t k) (a) Manufacturing Non-exporters 8.3 Exporters 47.5 All 55.8 (b) Non-manufacturing Non-exporters 23.6 Exporters 20.3 All 43.9 (c) All sectors Non-exporters 19.6 Exporters 27.4 All 47.0 Continuing Firms (t) 11.3 52.6 63.9 19.9 21.1 41.0 17.9 28.6 46.5 Takeovers/ Mergers (t) 5.8 14.8 20.6 21.0 10.3 31.3 17.4 11.4 28.8 Entering Firms (t) 5.5 10.0 15.5 15.5 12.2 27.7 13.1 11.7 24.8 Exiting Firms (t k) 6.7 37.5 44.2 33.2 22.9 56.1 26.3 26.7 53.0

Note: Manufacturings share of real gross output in 1996 and 2004 was 26.0 per cent and 23.8 per cent, respectively. Source: Tabulations from weighted FAME.

27

As explained earlier (Table 2), entrants in the FAME database are separated into rms that opened post-1996 and rms that were merged/acquired. 28 Given that equation (4) is used separately for each sub-group, with respect to within-rm effects and entering/exiting rms, this is the correct approach since it involves internally consistent disaggregations of the data. However, our approach implies that the between-rm effects are separate for each sub-group, and there is no allocation of resources between them. This is unlikely to be strictly true (although barriers to exporting do exist and seem to be substantial). Allowing for interactions will involve more covariance terms and the decompositions become signicantly more complicated. This is something for future consideration.
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and 2004 (t).29 Notably, the shares of entering (including mergers or acquisitions) and exiting rms over the period are large (whichever sub-sector of the economy is considered), which in part is due to opening and closures being cumulative and the longer the span between t k and t, the greater the effect of churning.30 It is also shown in Table 3(c), covering all sectors, that exporting rms contributed a signicant amount of total output in terms of continuing rms, but much smaller amounts in terms of mergers or takeovers. However, these gures for all market-based industries hide differences that exist between the manufacturing and non-manufacturing sectors; for continuing rms, output shares are much higher for exporters (denoting there are both relatively more exporters, and they tend to be larger rms). In addition, the smaller shares of output for mergers and takeovers was particularly prevalent for manufacturing non-exporters, and this sub-group also accounted for relatively much smaller output shares of new entrants and rms that ceased production. Table 4 produces initial relative productivity indices for the sub-groups, conrming that exiting rms tended to have the lowest productivity levels for both exporters and non-exporters (although this is less pronounced for exporters in manufacturing), and new rms exhibited relatively high productivity, particularly for exporters (although again manufacturing exporters are an exception).31 Firms taken-over/merged in both manufacturing and non-manufacturing also had relatively high productivity (especially if they were also exporting), while nonmanufacturing rms in this sub-group also had high capital intensities (given the much higher labour productivity indices relative to those for TFP). Exporting rms that were in operation throughout 19962004 not only had relatively high productivity in 1996, but experienced a large growth in productivity much higher than the average for all continuing rms. Overall, Table 4 conrms that exporting rms are more likely to have higher productivity than non-exporters, whichever sub-category we consider. Table 5 and Figure 1 demonstrate that the TFP distribution of exporters dominates that of non-exporters for each sub-group of rms.32 Using the KolmogorovSmirnov test available in STATA (version 9), we are able to reject

29

Note, estimates of productivity growth are known to vary over the business cycle as utilisation of factor inputs vary; however, 1996 and 2004 were neither peaks nor troughs during what was a relatively stable period of growth in the UK (average GDP growth was 2.7 per cent and 3.2 per cent per annum, in 1996 and 2004, respectively). 30 Although dealing with the 1980 92 period, Disney et al. (2003b, Table 6) also report large shares for entrants and exiting rms. 31 Care needs to be taken when interpreting these relative indices, since they are simple arithmetic means that take no account of the relative size of each rm contributing to the overall mean value reported. 32 Separate results for manufacturing and non-manufacturing, while not presented, produced a very similar outcome to these results covering all market-based sectors.
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CONTRIBUTION OF EXPORTING
TABLE 4 Relative Productivity, All Market-Based Sectors, 19962004 Exiting Firms (t k) (a) Manufacturing Labour productivity Non-exporters 0.55 Exporters 0.92 All 0.76 Total factor productivity Non-exporters 0.71 Exporters 1.04 All 0.89 (b) Non-manufacturing Labour productivity Non-exporters 0.71 Exporters 1.34 All 0.86 Total factor productivity Non-exporters 0.83 Exporters 1.14 All 0.90 (c) All sectors Labour productivity Non-exporters 0.71 Exporters 1.16 All 0.86 Total factor productivity Non-exporters 0.79 Exporters 1.12 All 0.90 Entering Firms (t) Takeovers/ Mergers (t) Continuing Firms (t k)

227

Continuing Firms (t)

1.39 0.95 1.13 0.89 1.03 0.97

0.96 1.24 1.22 0.79 1.19 1.00

1.16 1.13 1.14 0.93 1.03 1.00

1.85 1.66 1.71 1.01 1.28 1.21

0.90 1.78 1.09 0.99 1.52 1.11

1.12 4.00 1.75 1.01 1.49 1.12

0.96 1.31 1.08 0.99 1.18 1.06

1.02 1.38 1.14 1.09 1.46 1.22

0.96 1.58 1.12 0.95 1.39 1.07

1.13 2.77 1.59 0.96 1.40 1.09

1.00 1.20 1.09 0.96 1.15 1.05

1.12 1.47 1.29 1.06 1.42 1.23

Note: Productivity indices are relative to calculated index in 1996 for all rms, based on equation (3) (for each sub-sector considered). Source: Tabulations based on weighted FAME data.

TABLE 5 Two-Sample KolmogorovSmirnov Tests on the Distribution of TFP by Sub-Groups, 1996 and 2004 Sub-Group Difference Favourable To: Exporter Continuing rms (t) Mergers/takeovers (t) Entering rms (t) Exiting rms (t k) 0.020 0.021 0.022 0.024* Non-Exporter 0.247** 0.269** 0.276** 0.243**

Note: ** Denotes null rejected at 1% level; * null rejected at 5% level. t = 2004; t k = 1996. Source: Calculations based on weighted FAME data.
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FIGURE 1 Productivity-Level Differences between Exporters and Non-Exporters in Various Sub-Groups, 1996 and 2004

the null hypothesis that the distribution is favourable to non-exporters, conrming that exporters have a productivity distribution to the right of non-exporters. Only for rms that exited before 2004 is there some evidence of some signicant cross-over for the two sub-groups (at high values of the empirical cumulative distributions). Based on the decomposition of productivity growth set out in equation (4), Table 6(c) shows rstly that in aggregate, and covering all sectors, exporting rms contributed more to overall UK productivity growth than non-exporting rms (i.e. 2.32 per cent compared with 1.55 per cent per annum in terms of labour productivity, and 1.27 per cent relative to 0.81 per cent per annum in terms of TFP33), even though Table 3 shows that in 2004 exporters produced 51.7 per cent of all market-based output. This faster growth was due to relatively better performance in nearly every category in Table 6(c), except that exporting rms that exited had relatively high productivity, resulting in a negative impact on aggregate productivity levels. With respect to the TFP results in Table 6(c), aggregate productivity for exporters benets from a large contribution from continuing rms improving
33

In percentage terms, this amounts to 60.8 per cent of aggregate TFP growth is due to exporters; the latter account for 59.9 per cent of labour productivity growth.
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TABLE 6 Decomposition of Productivity Growth, All Market-Based Sectors, 19962004 (cf. equation (4)) Total (a) Manufacturing Labour productivity Non-exporters 1.02 Exporters 3.51 All 4.53 Total factor productivity Non-exporters 0.07 Exporters 1.61 All 1.67 (b) Non-manufacturing Labour productivity Non-exporters 1.76 Exporters 1.85 All 3.62 Total factor productivity Non-exporters 1.05 Exporters 1.23 All 2.28 (c) All sectors Labour productivity Non-exporters 1.55 Exporters 2.32 All 3.87 Total factor productivity Non-exporters 0.81 Exporters 1.27 All 2.09 Within Between Covariance Mergers/ Takeovers Entering Exit

0.15 1.70 1.85 0.03 0.83 0.86 0.31 0.34 0.65 0.04 0.27 0.31 0.19 0.19 0.00 0.04 0.42 0.46

0.03 0.36 0.39 0.03 0.01 0.04

0.14 0.75 0.89 0.03 0.62 0.64

0.03 0.40 0.37 0.17 0.32 0.15

0.23 0.06 0.17 0.08 0.04 0.05 0.20 0.88 0.68 0.00 0.64 0.64 0.07 0.66 0.59 0.06 0.48 0.42

0.50 0.37 0.87 0.29 0.18 0.11

0.33 0.08 0.25 0.12 0.03 0.09

0.24 0.45 0.69 0.09 0.22 0.31

0.30 1.79 2.08 0.05 0.52 0.57

1.41 0.84 0.57 0.75 0.39 0.36

0.25 0.03 0.27 0.09 0.01 0.08

0.20 0.47 0.68 0.07 0.30 0.38

0.26 1.45 1.71 0.07 0.48 0.41

1.10 0.49 0.62 0.74 0.39 0.35

Note: Figures show the percentage increase per annum. Source: Tabulations based on weighted FAME data.

their productivity, while there is little redistribution of resources across exporters that remain open throughout. The covariance term also indicates that large continuing exporters in 1996 experienced increases in productivity and increasing market shares. Exporters that had either entered or been taken-over/merged also contributed about 38 per cent each of the overall (1.27 per cent per annum) increase in aggregate productivity. In contrast, most of the TFP improvement for non-exporters (around 91 per cent of the total) was attributable to lower productivity rms exiting, rather than from internal improvements or the positive impact of new rms (or takeovers/mergers). The labour productivity results in Table 6(c) are broadly similar for exporters, although the contribution to aggregate growth was dominated by the contribution
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of rms that had merged/been taken over (accounting for over 62 per cent of the per annum improvement). For non-exporters, there was a relatively large negative within-rm effect, implying that continuing rms that were relatively large in 1996 had experienced declines in labour productivity between 1996 and 2004. In other respects, the results are similar to those for TFP. Table 6 also produces results when decomposition of productivity growth is undertaken separately for manufacturing and non-manufacturing rms.34 Concentrating on the TFP results, it can be seen that overall growth per annum was signicantly lower in manufacturing (1.67 per cent compared to 2.28 per cent per annum in non-manufacturing), due to the poor performance of manufacturing rms that did not export. The latter mostly reects the lower TFP contribution of rms that merged or were taken over, while new rms also contributed negatively to overall growth. In contrast, manufacturing exporters experienced signicant intra-rm productivity gains (0.83 per cent per annum), with additional gains for large exporting rms that were also increasing their market shares (i.e. a covariance effect of 0.62 per cent per annum); while both intra-rm and covariance effects were much smaller for non-manufacturing exporters. Other signicant differences between exporting rms in manufacturing and non-manufacturing were the overall negative impact of churning in manufacturing (with a net contribution of 0.14 per cent per annum), while new exporters in nonmanufacturing contributed signicantly to overall growth in this sub-group. Finally, Table 7 compares our TFP results with those obtained in other studies (as discussed in Section 2). Because of the different methods used, the gures for various countries and time periods are not strictly comparable; for example, Bernard and Jensen (2004b) and Hansson and Lundin (2004) used balanced panel data that do not allow for entry and exit effects. Nevertheless, the table does show that overall exporters do account for a larger proportion of productivity growth than do non-exporters in both manufacturing (cf. the US, Canadian and Swedish gures) and in all market-based sectors (in the UK). However, lack of comparable information means it is not possible to provide any evidence on whether productivity growth was mostly due to intra-rm improvements or external restructuring. The only study (not included in Table 7) that started with a similar approach to ours was Falvey et al. (2004), for Swedish manufacturing (198094). They used the Haltiwanger-type approach to decompose TFP growth by industries but did not separate out exporters. Rather, they regressed the net entry and between-rm contributions (by industry) on export growth (across industries) and interpreted the results as showing the relationship between
34

These gures cannot be added together to get overall growth across the UK. However, Table 3 shows that manufacturings share of real gross output throughout the period was around onequarter of total market-based output, which is approximately the weight needed to combine the gures for manufacturing and non-manufacturing to achieve the overall UK totals.
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TABLE 7 Decomposition of Productivity Growth, Various Studies

CONTRIBUTION OF EXPORTING

Bernard and Jensen (2004b), Table 8 Data and period Sector Decomposition methodology Methodological features US LRD, 1983 92 Manufacturing Within and between effects only Uses balanced panel so excludes entry and exit

Hansson and Lundin (2004), Table 10 Sweden, 1990 99 Manufacturing Within and between effects only Uses balanced panel so excludes entry and exit TFP (% p.a.)

Baldwin and Gu (2003), Table 13 Canadian ASM, 1974 96 Manufacturing Within + between and entry only Assumes exits replace entrants (thus no separate role for exits) Labour productivity (% of total)

Harris and Li (current), Table 6a UK FAME, 19962004 All market-based sectors Within, between, covariance, entry (mergers and new rms separately), and exits Uses unbalanced panel weighted to ensure representative of population of UK rms TFP (% p.a.)

Productivity measures TFP Main results: (% p.a.) Non-exporters Exporters Total

Within Between Total Within Between Total Within+Between Entry Total Within Between Entry Exit Total 0.76 0.48 0.28 1.5 4.2 2.7 3.6 0.9 2.7 0.04 0.16 0.13 0.74 0.81 0.07 1.07 1.14 4.0 2.1 6.1 79.3 18.0 97.3 0.42 0.29 0.96 0.39 1.27 0.83 0.59 1.82 5.5 2.1 3.4 82.9 17.1 100 0.46 0.45 0.83 0.35 2.09

Note: The covariance term is added to between, and mergers/takeovers is added to entry from Table 6 to obtain the results in Table 7.

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exporting and productivity growth. However, they ignore intra-rm effects and the covariance term (in the Haltiwanger decomposition), and mostly their regression results are statistically insignicant; but they do nd evidence to suggest that export growth raises overall productivity growth through its positive effect on the entry of new rms.

5. CONCLUSIONS

Knowing the contribution of exporting to productivity growth is important; for example, evidence of the benets from international trade can support the UK government when designing policies to help rms develop their exporting activities (DTI, 2006). We have shown that exporting leads to productivity gains within rms (conrming the self-selection and/or learning-by-exporting hypotheses in the exportingproductivity literature), while additionally showing the importance for UK aggregate productivity growth of inter-rm reallocations of resources towards more productive exporting rms. Such external restructuring was especially important in the non-manufacturing sector, suggesting that government policy aimed at boosting exporting needs to take account of the different channels through which productivity growth occurs across different sectors. Despite some limited micro evidence of trade-induced aggregate productivity growth for countries like the US, Canada and Sweden, to the best of our knowledge this paper presents the rst set of results that assesses the contribution of exporters to UK aggregate productivity growth between 1996 and 2004, taking into account restructuring effects. Firstly, and concentrating here on the results across all market-based sectors, we are able to show that exporting rms contribute a signicant amount to the total output of the UK economy, partly due to their relative size and particularly their better productivity. We have conrmed that exiting rms tend to have the lowest productivity levels for both exporters and non-exporters, and new entrants exhibit relatively high productivity ( particularly for exporters). Firms that have been taken over/merged also have relatively high productivity (especially in conjunction with exporting), and high capital intensities. Exporting rms in operation throughout 19962004 not only had relatively high productivity in 1996, but experienced a large growth in productivity, much higher than the average for all continuing rms. Overall, these results conrm that exporting rms are more likely to have higher productivity than non-exporters, whichever sub-category of rms we consider. Based on a decomposition of productivity growth we are able to show that, in aggregate, exporting rms experience faster productivity growth than nonexporting rms and therefore contribute more to overall productivity growth. That is, there is a large contribution from continuing rms that exported; and within productivity gains for exporters were relatively large between 1996 and
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2004, with little redistribution of resources across exporters that remained open throughout. Our results also show that continuing exporters that were initially large and experienced increases in productivity also experienced increasing market shares. Exporters that entered global markets after 1996 through being either taken over or merged, or as new start-ups, also contributed about 38 per cent each of the overall growth in aggregate productivity. In contrast, most of the productivity (labour or TFP) improvement for non-exporters is attributable to the contribution of lower productivity rms exiting, rather than internal improvements or new rms entering with high levels of productivity.

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