Export Survival and Comparative Advantage

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1 Export Survival and Comparative Advantage (Work in progress) Regional Seminar on Export Diversification, October 27-28, 2010 Bolormaa Tumurchudur, UNCTAD Miho Shirotori, UNCTAD Alessandro Nicita, UNCTAD

2 Overview Export growth can be boosted By exporting more of existing products (at the intensive margin) By exporting more new products (at the extensive margin) By fewer failures of exports (at the sustainability margin) Extensive margin growth is more important than intensive margin growth Hummels & Klenow (2005), Pham & Martin (2007), Brenton & Newfarmer (2007, 2009) Durations of export relations are very low: median export spell length is one to two years Besedes & Prusa (2006), Nitsch (2007) Therefore the key element to achieving higher export growth are longer bilateral trade-relationships and higher survival rates of those. However product churning is necessary to select core products It is important for the design of export-promotion policies to search for robust and policy related determinants of export survival.

3 Research question What is the role of comparative advantage in Export Duration?

4 Outline Overview Literature on Export Survival Determinants How to define the product with Comparative Advantage? Export duration: Prima-facie evidence Survival Analysis Results: Stratified Cox PH Model estimation Conclusion

5 Empirical Studies on Export Survival Seminal work of Besedes & Prusa (2006a) Nitsch (2009) - using 10 year panel of German Imports he found that gravity variables influenced the duration of trade flows Fugazza & Molina (2009) extended the panel of bilateral flows between 96 countries using, as regressors, gravity variables and time required for export procedures as proxies for fixed costs. Obashi (2009) found that vertical relationships have lower hazard rates than the exports of final goods and that they are less sensitive to trade costs Growing number of papers have used firm-level datasets: Gorg et al. (2008) have found that longer survival for products located close to the firm s core competencies and to the country s comparative advantage by using Hungarian firm level data, Carballo & Volpe (2008) studied how diversification strategies affect survival of firm level activity by using Peruvian firm level data.

6 Role of Comparative advantage in Export Survival: How to define the product with comparative advantage? Identify comparative advantage of a product is one way of providing guidance of supporting a particular sector (pick winners) However as the traditional measure Balassa s RCA index defines country s current trade pattern, it cannot be used UNCTAD developed an alternative approach by building a recent database on Revealed Factor Intensity Indices at the Product Level. It extended the PRODY index developed by Hausman, Hwank and Rodrik (2005) to Revealed Factor Intensities.

7 Revealed Factor Intensity Indices Methodology inspired by Hausmann, Hwang & Rodrik (2007) RFII for each traded good is calculated as a weighted average of the factor abundance of the countries exporting that good. Weights are a variant of Balassa s RCA indices RFII k ( t) = { k i, h i l i } e i, X ω = i i i k k i i i / X ω e i k ( X / ) k X i

8 Distance to Comparative Advantage Eucleadean distance between the vector of the country s endowments and the vector of the product revealed factor intensity We standardized the absolute differences between the product factor intensities and the country s factor endowments to have zero mean and unit variance. D ck = std ˆ 2 2 ( kc kk ) + std( hc hk ) + std( lc lk ˆ ˆ ) 2 k h, l c, -country s human capital, capital and land endowments c c kˆ k, hˆ k, lˆ k -revealed factor intensities of product k

9 Export duration: Prima-facie evidence Distribution of Export duration, uncensored observations Percent Export duration, in years time at risk Incidence rate No. Of subjects Median duration Whole sample 23'417'160 17% 7'819'052 2 Northern countries 15'323'754 16% 4'785'047 2 Developing Countries 7'906'207 19% 2'932'031 2 LDCs 187'199 35% 101'974 1 DCs and LDCs by regions Africa 1'003'121 25% 434'223 1 Americas 1'955'757 23% 766'385 1 Asia 5'134'528 18% 1'833'397 2 Asian by region Eastern Asia 1'741'382 13% 543'764 2 Pacific Asia 22'379 32% 11'199 1 South Asia 1'008'432 21% 394'696 1 Southeast Asia 1'737'659 20% 649'231 2 Western Asia 624'676 19% 234'507 2

10 Export duration and Comparative advantage: Prima-facie evidence VEN BRB MLT VEN MLT BRB VEN IRQ CYP SLE MLT IRQ TTO IRN BRB BRB BRB TTO MLT BHR CYP MLT PRT ISR SEN JAM JOR NOR CYP MLT ISR IRL DOM MYS CRI TUR CYP DOM IRN BRB ISL MEX MLT JAM JOR VEN KOR CYP CRI ISLNOR MEX ISL FIN JOR IRL IRL MYS VEN SLE VEN JOR HUN MLT MEX IRL POL DZA JOR TTO GRC FIN IRQ CRI BRA IRN GRC CYP ISR ISR MLI POL HUN PRT ISR VEN ISR THA PRT TTO MEX TTO POL PHL VEN IRLISL COL PHL SLE CHL MYS IDN FIN IRL DZA JAM THA HUN NOR TUR JOR SWE ISR GRC TTO DZA IRL KOR ISL MLI JAM TUR PAN IDN EGY JPN IRN ECU KOR HUN NOR TUR JAM MEX ECU EGY FIN MEX BRA POL SLV BRA GRC SGP ISL PRT POL CHN ZAF COL DNK FIN KOR PRT NOR KOR GRC CHE DOM DNK GRC ESP IRN DZA ISL BRB TTO IRQ COL MYS PAN MEX PAN KOR JPN HUN CYP BRA NER TUR ISR IRN SWE SGP FIN FJI PHL AUT NOR SLE KOR EGY IRL DZA CHL HUN JOR BRA SWE TUR CHL MEX DNK NOR JPN SGP IRQ ECU DNK PAN CAN POL BHR TUN CHL BHR SLV CHE ESP CAN BHR SWE BHR FIN POL DNK GRC BRB BRA CYP AUT CRI THA IND ZAF NZL SWE NZL CAN PAN NZL ESP ZAF IND MYS ESP CRI AUT PHL URY COL JAM AUT CRI DOM CRI COL HUN CHL KOR NZL PRT CHN ARG POL TUN CAN CHL SWE DZA BRA PRT JPN CANGRC ZAF ESP SWE DNK CAN TUN DZA IRQ ZAF TUR IDN DNK NLD MYS ECU ARG ESP HUN AUT HND ESP COL JPN PAN COL ZAF FIN GBR NLD PRT CHE SYR PER THA ITA ZAF AUT JPN URY AUT TUR DNK MUS CHL IDN NOR TTO SLV PAN SYR URY THA FRA CHN ARG THA JOR IND ITA TUN CAN CHE ZAFSGP DOM MYS CHE JPN ITA CHE CHN ZWE ARG JPN BHR NLD EGY TGO CHL TUN CHN ARG AUS CHE ESP SGP SLE IND BRA IRN PHL ISL MYS DZA CHN AUS NZL FRA NIC GBR ARG SGP SWE NZL EGY GBR NZL AUS GTM HND AUS FRA URY DEU SLV SGP NZL AUS GBR DOM SLE CRI IDN NLD RWA SEN NER ITA NLD TUN BHR CHN BHR SLV CHE ITA DEU EGY DEU FRASEN PAN CAN HND URY NLD URY NLD IDN EGY GBR ZWE IND NIC FJIGTM DEU PHL URY CHN ECU ITA KENSEN SGP COL IND GBR ARG AUT FJI GBR FRA NER HND PER URY GTM ITA PHL AUS PER FRA NER KEN USA NIC FRA ARG FRA USA NIC ZWE SYR FJI IND MLI NLD USA MUS ITA CMR SYR GTM DEU KEN FJI USA HND KEN GTM THA KEN IRN JAM DEU UGA DEU TUN IRQ THA USA SLV LBR ECU SYR NIC ECU ZMB GBR GTM IND CMR RWA SEN DEU AUS PER RWA SLV GHA CMR TUN AUS NIC GHA RWA ECU CAF TGO MOZ SLV GTM PHL USA IDN SYR SEN GTM GMB CMR MUS USA LKA MUS TGO UGA ZWE RWA LBR MLI GHA ZWE JAM PAK KEN SLE PRY RWA CAF LKA PER HND UGA MUS USA IDN PER ZWE ZAR FJI KEN PER EGY PER BOL KEN PAK DOM MUS HND PNG TGO ZMB LBR HND UGA GMB PAK ZMB PRY BOL BOL NIC RWA LKA GMB BOL BOL GHA LBR BEN ZAR DOM BEN SYR MOZ PRY ZMB ZWE GMB ZAR MWI SYR BEN PAK NIC TGO UGA ZAR LKA MLI NPL LBR LKA FJI COG MOZ LBR CMR NPL SLE MLI COG BOL CAF PRY LKA GMB ZWE SDN ZMB PAK LBR TGO COG CMR PRY MUS COG PRY BEN PAK MOZ MOZ CAF NPL UGA GHA PRY ZMB PNG COG BEN GMB LKA SDN MUS UGACOG BGD MWI PAK CAF BOL RWA NPL PNG BEN NPL BOL PNG ZMB IRQ GHA NPL GHA CAFMWI FJI NER SDN BGD BGD SEN SDN BGD ZAR MWI PNG MWI PRY COG TGO LKA NER GMB PNG GMB NER PAK PNG COG BEN BGD PNG NPL ZAR CMR MLI MOZ NPL BGD ZMB CMR CAF NER MLI MOZ LBR GHA BEN MOZ MWIZAR MWI BGD BGD SEN SDN MWI ZAR CAF SDN UGA SDN TGO SDN Average duration Average distance (mean) spell_lengh Fitted values ARG AUS AUT BEN BGD BHR BOL BRA BRB CAF CAN CHE CHL CHN CMR COG COL CRI CYP DEU DNK DOM DZA ECU EGY ESP FIN FJI FRA GBR GHA GMB GRC GTM HND HUN IDN IND IRL IRN IRQ ISL ISR ITA JAM JOR JPN KEN KOR LBR LKA MEX MLI MLT MOZ MUS MWI MYS NER NIC NLD NOR NPL NZL PAK PAN PER PHL PNG POL PRT PRY RWA SDN SEN SGP SLE SLV SWE SYR TGO THA TTO TUN TUR UGA URY USA VEN ZAF ZAR ZMB ZWE Average duration, Average distance, 1994 (mean) spell_lengh Fitted values

11 Survival Analysis: Introduction Allows us to focus on the long-term sustainability of trade relationships Export duration represents the number of years during which country c exports k products to its partners Allows us to deal with non negative survival times and their skewed distributions Allows us to deal with censored observations Start of study, 1993 End of study, 2003 censored censored

12 Survival Analysis Examine the relationship between survival times distribution and some covariates of interest. Non parametric: Kaplan Meier Survival Estimation Semi-parametric: Cox Proportional Hazard Model Database on bilateral trade flows from exporters (26 North countries, 49 DCs and 18 LDCs) Distance to comparative advantage (UNCTAD data on Revealed Factor Intensity Indices at the HS 6 digit level)

13 Non-parametric Analysis: Kaplan Meier S ˆ( t) = t j t n j d n j j The probability that a trade relationship will survive longer than time t Kaplan-Meier survival estimates analysis time High distance Low distance Kaplan-Meier survival estimates analysis time DCs North LDCs

14 Semi-parametric Cox Proportional Hazard Model The Cox Proportional Hazard regression model is given by h t X = h( t)exp( X β X p p β ) The predictors, X 1,...X p are assumed to act additively on log h t x. log h t x changes linearly with the β s. The effect of the predictors is the same at all times t. Makes no assumption about the form of h (t) The Stratified Cox Model allows the form of the underlying hazard function to vary across levels of stratification variables. h t X, Z = j = h j ( t)exp( Xβ ), j = 1,... C (number of levels in Z)

15 Estimation results: Comparative Advantage Stratified Cox Proportional Hazard estimation All Northern Countries DCs LDCs Asia Initial export (log) 0.964*** 0.972*** 0.948*** 0.952*** 0.945*** (-9.14) (-7.53) (-9.11) (-4.45) (-6.37) Distance (log) 1.093*** 1.091*** 1.087*** 1.175*** 1.062*** (14.49) (12.19) (6.61) (4.57) (3.69) Market Diversification (log) 0.271*** 0.230*** 0.318*** 0.526*** 0.260*** (-14.94) (-10.52) (-11.17) (-5.13) (-10.73) Product Diversification (log) 0.293*** 0.388*** 0.199*** 0.568*** 0.182*** (-9.11) (-5.09) (-10.47) (-3.29) (-9.22) Observations 7,819,052 4,785,047 2,932, ,974 1,833,397 Robust z statistics in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% Fixed effects are controlled by stratifying at exporter, importer and product Clustered by reporter β ln(10) 1 = Ln(10) 1 = = 0.227

16 Estimation results: Export Diversification Stratified Cox Proportional Hazard estimation Model 1 Model 2 Model 3 Model 4 Model 5 Initial export (log) 0.962*** 0.964*** 0.964*** 0.966*** 0.964*** (-8.48) (-9.14) (-9.18) (-8.49) (-9.18) Distance (log) 1.161*** 1.093*** (23.62) (14.49) (0.9) (1.35) (0.9) Market Diversification (log) 0.271*** 0.269*** 0.266*** 0.269*** (-14.94) (-14.97) (-14.81) (-14.97) Product Diversification (log) 0.293*** 0.294*** 0.291*** 0.294*** (-9.11) (-9.11) (-8.99) (-9.11) Distance (log)*market Diversification(log) 1.067*** 1.069*** 1.067*** (10.53) (10.71) (10.53) Distance(log)*Product Diversification(log) 0.979*** 0.976*** 0.979*** (-3.41) (-4.25) (-3.41) Stratified by Exporter yes yes yes yes yes Importer yes yes yes yes yes Product (HS 6 digit) yes yes yes yes yes Clustered Exporter yes yes yes yes yes Importer Observations 7'819'052 7'819'052 7'819'052 7'045'032 2'527'787 Robust z statistics in parentheses * significant at 10%; ** significant at 5%; *** significant at 1%

17 Conclusions Median export duration is 2 years for the whole sample ( obs) Initially large exports will have longer duration Robust negative relationship between the distance to comparative advantage and the export survival. Further robustness check using Parametric Survival (Duration) Models

18 Thank you very much

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