Second Draft (October 2006)

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1 Second Draft (October 2006) The Emergence of New Successful Export Activities in Argentina 1 Alejandro Artopoulos, Daniel Friel, Sebastián García-Dastugue, and Juan Carlos Hallak Universidad de San Andrés Index 1. Introduction Theoretical Framework... 2 a. Export business model versus domestic business model... 3 b. Discovery and pioneer... 5 c. Diffusion General Findings Identification of Potential Discoveries a. Quantitative analysis using Argentine foreign trade data b. Qualitative selection of discovery sectors Choice of Sectors for Case Study, Methodology, and Data Sources a. Choice of sectors for case study b. Case study methodology and data sources c. Strategy for analysis of comparators (counterfactual) Case Studies in Four Argentine Sectors Case I: Light Ships Case II: TV Programs Case III: Wine Case IV: Wooden Furniture Policy lessons References Tables Gabriela Yu and Alejandro Molnar provided outstanding research assistance. This paper is part of the project The Emergence of New Successful Export Activities in Latin America, sponsored by the Inter-American Development Bank.

2 1. Introduction To be written at the end of the project. 2. Theoretical Framework Hausmann and Rodrik (2003) and Hausmann, Rodriguez-Clare, and Rodrik (2004) henceforth HR argue that the emergence of new economic activities in developing countries is characterized by a substantial degree of uncertainty about production costs. This uncertainty is only resolved in a particular country once the new activity is actually carried out in that location, even if it has been performed in other countries for years. Then, for a new activity to emerge, a pioneer needs to embark on a costly venture of uncertain outcome. This venture might be successful, but it might also turn out not to be profitable. HR argue that, in addition to the risk involved, another factor hampers pioneering activity. Even if the uncertainty turns out to be favorably resolved, knowledge of the successful outcome could be easily transmitted to other firms who might imitate the pioneer, dissipating the rents he has generated. From a social perspective, there is a problem analogous to the standard dilemma found in the patents literature: finding the extent of patent protection that optimally balances the trade-off between incentives for invention and early diffusion. As opposed to this standard dilemma, however, when the invention in question is the discovery of a new activity s production costs in a particular country, it is not possible to resolve this trade-off through the patent system because such knowledge simply cannot be patented. As a result, HR assert that developing countries suffer below-optimal discovery activity, as the potential monopoly rents of pioneers which would induce them to invest in those activities is rapidly dissipated by the early entry of imitators. In this study, we apply the HR theoretical framework to analyze the emergence of export activity in four economic sectors in Argentina. In particular, we consider industries that export differentiated products, and in which a substantial fraction of the exports is targeted to high-income countries. The HR framework is in principle suitable for analyzing emerging export activity in such products from a developing country, like Argentina, to developed countries. Argentina has a reasonably diversified industrial base and several well-established firms in most industrial sectors, which have been operating (even occasionally exporting) for decades. However, its exports have historically been concentrated on agricultural and industrial commodities. In particular, exports of differentiated products have been rare. Producing and selling this type of products in foreign markets is a markedly different activity than producing and selling them in the 2

3 domestic market. As such, before starting it, this activity is subject to uncertainty about production costs. 2 To the extent that the nature and outcome of the risky investments that a pioneer makes to find out all the implications of an export venture is observable to other firms, who can then imitate, his private returns will be lower than the social returns he generates. As in the HR framework, such a market failure will induce below-optimal investment by pioneers. In this section, we present a refined version of the conceptual apparatus of the HR framework. Based on the findings of our case studies, we provide this framework with more specificity. Our proposed refinement enables us to better characterize the emergence of new export activity in our selected sectors. We first argue that generating sustainable export growth requires a firm to adopt a set of business practices that is substantially different from the set of practices that allows it to compete successfully in the domestic market. We call the two sets of business practices the export business model and the domestic business model, respectively. Then, we define discovery, pioneer, and diffusion to be consistent with the theoretical framework we use. a. Export business model versus domestic business model A firm in a developing country that attempts to succeed in foreign markets in particular those of highincome countries needs to implement substantial changes in its business practices. We categorize those changes into two broad groups: product upgrade and marketing upgrade. The specific elements that are crucial for characterizing product and marketing upgrade are not necessarily identical for every sector. However, many of those elements described next are shared by some or all of the industries included in our study. Product upgrade Consumers in different countries often have idiosyncratic or specific needs and preferences. In the case of developed countries, they also tend to demand products of higher quality, which typically have more sophisticated designs, are made of better materials, or are less likely to malfunction. Because of the different characteristics of consumer demand in foreign countries, domestic producers in developing countries who attempt to enter foreign markets need to upgrade their products and manufacturing 2 We argue later that exporting, as a new activity, is subject to additional layers of uncertainty that go largely beyond uncertainty about production costs. 3

4 practices to satisfy the higher quality standards and/or specific needs and preferences of the markets they target. Product upgrade then imposes several requirements on domestic firms. First, they need to upgrade and customize the design of their products, which implies the capability of mapping the specificity of foreign consumers needs and the higher quality standards into their design and product development processes. This adjustment might involve subcontracting these activities to third parties or developing the capability inside the firm (e.g. hiring specialized designers). Second, firms need to upgrade the production process to meet the higher quality standards of developed countries. Meeting this requirement might impose the need to train workers or hire new ones with the proper qualifications. It sometimes also imposes the need to implement quality control methods. Finally, firms also might require that suppliers and service providers upgrade their products/services to accompany their own upgrade, which often involves deepening customer-supplier relationships. Marketing upgrade Product upgrade is neither sufficient nor the first stage to be able to successfully export to a foreign (developed-country) market. Marketing upgrade is also essential. Even for upgrading their products as described above firms need first to be capable of understanding the preferences and needs of foreign consumers. While firms are naturally embedded in an environment in which the knowledge of what domestic consumers need is easily obtained, they lack analogous knowledge about foreign consumers. Firms also need to understand the nature of competition in foreign markets in order to define positioning strategies. While their accumulated experience allows them to predict competitors and consumers reactions to their own strategies in the domestic market, this experience is usually of little use to determine the appropriate positioning of their products in the foreign market. Firms also need to elaborate a branding strategy in the case of branded products. In the domestic market, which is often small relative to the size of foreign markets, brand recognition might have resulted from the firm s long presence in the market. Entering foreign markets, in contrast, requires a well thought out brand positioning strategy since competition in those markets is usually more intense. In addition to focusing on the end-customer, firms need to understand the structure of distribution networks in the export market in order to choose and develop the distribution channels most appropriate for reaching consumers in their target segment. They also need to understand the needs, requirements, incentives, and constraints of their distributors, who are their next-tier customers. Addressing their needs 4

5 and requirements (e.g. timely delivery, quality consistency, packaging requirements) is a key factor for gaining access to foreign distribution channels. Failure to conform to the channel s requirements might be interpreted as a signal of non-reliability and risk the continuity of the business relationship with the channel. Efforts to satisfy the requirements of distributors is distinctively important for exports to developed counties since the negotiating power of distributors in those countries is often larger than the negotiating power of domestic distributors (potentially due to their larger scale and larger set of potential suppliers). In addition, there needs to be a good fit between the domestic firm and the foreign distributor. For example, large distributors might have more access to retail outlets but fewer incentives to make specific investments to foster sales of a small supplier. Lastly, in some sectors firms need to implement post-transaction elements of customer service specific for the foreign market. Repair and maintenance, for example, requires mobilizing resources in each of the targeted foreign markets to establish the necessary network of service providers. Whether product and marketing upgrade are implemented or not is the distinguishing feature between two contrasting business models: the export business model and the domestic business model. Transitioning between those business models requires that firms undergo both product and marketing upgrade. Our categorization of the multiple changes in business practices required to successfully export into these two categories has the sole purpose of simplifying our characterization of the differences between the two business models. However, product and marketing upgrade are inextricable components of the implementation of a successful export business model. In particular, the term business model employed here attempts to emphasize the fundamentally intertwined nature of the two upgrades. b. Discovery and pioneer It could be hypothesized that, among the many components of product and marketing upgrade, there is a single one that is crucial for a particular industry s export success. In this hypothetical case, discovery could be defined in a narrow sense. For example, a discovery could be finding that a specific modification to the product design dramatically increases its acceptance in the targeted market or realizing that on-time delivery is a baseline requirement. However, our case-study findings indicate that there is seldom such a silver bullet. In contrast, we find that there are several changes that need to be orchestrated to develop a sustainable business in a foreign market. Even though the relative importance of the different components of product and quality upgrade varies across industries, our case studies show that several elements of upgrade need to be present at the same time in order to succeed in a foreign market. Consequently, we 5

6 adopt a broader definition of the term: we define discovery to be the implementation of a successful export business model for the first time in a given country. Firms that fail to satisfy jointly the required upgrades might still be able to complete exports sporadically or do so on a more regular basis if they export to other developing countries. However, they will not be able to achieve profitable, substantial, and sustainable exports to developed countries. This type of exports require improvements and adaptations in the firm s way of conducting business that need to happen simultaneously. Our definition of discovery is associated with exports of this latter type, which are the focus of this study. We define the pioneer to be the individual (or firm) who makes the discovery, i.e. who first implements a successful export business model. The discovery might come about as a combination of the pioneer s actions and elements of luck. On the one hand, part of the implementation of a successful export business model might result from the pioneer imitating foreign firms. For example, he can imitate a product design or the way foreign firms relate to distributors. On the other hand, a discovery might be due in part to the successful outcome of an investment made under uncertainty or even to mere coincidence. Discoveries in Hausman and Rodrik (2003) have precisely these two components; pioneers imitate the products of foreign firms and also are lucky to uncover low production costs for those products in their countries. However, those two elements do not fully characterize how discoveries come about. First, the ability to implement a successful export business model can also stem from an information advantage held by the pioneer as a consequence of his experience in the domestic market or in foreign markets in related or unrelated activities. Second, a successful export business model can be developed in part through a lengthy process of experimentation and learning, along which the outcome of specific decisions and investments provides the pioneer with valuable information that helps him make subsequent choices. As we will discuss later, these last two elements appear to be crucial. 3 c. Diffusion There are two relevant aspects of diffusion. One is the diffusion of particular elements that constitute product or marketing upgrade. The other is the diffusion of the knowledge that a successful export business model does exist, even if some or all of its elements are unknown. [This part needs to be fleshed out in more detail]. 3 Our stress of information advantage and experimentation and learning as factors facilitating discovery implies a potential tension between the standard connotation of the word discovery and the scope that we give it in this study. Subject to this caveat, we keep this terminology to maintain consistency with the original HR framework. 6

7 3. General Findings (very preliminary) When domestic producers assess the potential profitability of an export venture before discovery and diffusion have taken place in their industry, they face various sources of uncertainty. On the one hand, they face uncertainty related to the need to upgrade their products. For example, they may not know the costs associated with improving product quality. Those costs might include implementing quality control methods, obtaining or training workers with the proper qualifications or finding the right suppliers and third-party service providers for the sourcing of parts, raw materials or services that are necessary for the upgrade. On the other hand, producers face uncertainty related to the need to marketing upgrade. For example, they might be uncertain about their ability to design or adapt their products to match countryspecific requirements, i.e. the appeal of their products to foreign consumers; moreover, they might be uncertain about which countries to target. Producers might also be uncertain about the cost of improving their logistics capabilities to ensure consistent deliveries or about their ability to find the appropriate distribution channel to reach each targeted market. More generally, each of the dimensions along which firms need to upgrade product and marketing described in the previous section implies a potential source of uncertainty. Furthermore, they are often unaware of the necessity to upgrade along some of those dimensions. We find that marketing upgrade is the most important source of uncertainty. In order to reduce uncertainty, firms need to gather information. They also need to know where and how to obtain such information when they do not have it. The information that firms have and the knowledge at their disposal about how to obtain it that stems from their domestic operation is substantially more relevant for product upgrade than for marketing upgrade. Marketing upgrade requires information about the intricacies of foreign markets that domestic firms (typically) do not possess at all. They need to understand the preferences of foreign consumers, make positioning and branding decisions, find appropriate distribution channels, understand the needs and the business practices of distributors, and mobilize resources for postsale services. However, they seldom have sufficient information about how to satisfy these requirements. In the domestic market, firms rely upon intuition, experience, frequent contact with consumers and distributors facilitated by geographical proximity, and embeddedness in the local culture. These are powerful tools for marketing domestically but are not effective for marketing in foreign environments. This is not the case for product upgrade, which is less of an insurmountable challenge. In part, this is due to a closer similarity between the nature of the information and knowledge required for product upgrade and that required for domestic production than is the case for marketing. It is also in part because the 7

8 information and knowledge required for product upgrade tends to be of a more codifiable nature, available in manuals, trade magazines, or transmitted in educational institutions to technicians, specialists, and professionals whom domestic firms are more capable of promptly identifying. In contrast, marketing requirements such as understanding the needs and preferences of foreign consumers or understanding the way of doing business in the foreign country are less easy to codify. 4 The degree of uncertainty associated with the profitability of a potential export venture before discovery and diffusion have taken place is in general large enough to prevent domestic firms from embarking in a serious effort to upgrade their products and marketing practices. Under such uncertain environment, they at most follow a much more limited export strategy such as attending a trade fair, contacting a foreign distributor, or advertising their products in a foreign outlet. However, in our case studies we do not find instances in which this strategy leads to a sustained and substantial presence in foreign markets. In fact, this type of export experience often terminates not long after it has started. In our case studies, the pioneer is an individual who had superior information and knowledge about how foreign markets operate. This advantage was crucial for significantly narrowing the degree of uncertainty regarding the profitability of an export venture. The substantial reduction in the scope of uncertainty provided the pioneer with the incentives to invest in developing an export business model. In two of the four industries we study (light-ships and TV programs) the pioneer is a newcomer to production. In a third one (wooden furniture), the (potential) pioneer 5 is not even a producer. The first two cases are strikingly similar. In both of them, the pioneer was first an importer. The import activity, which involved regular trips abroad and frequent contact with foreign agents, spontaneously promoted their socialization in their relevant business communities. This socialization allowed them to gather explicit information about the existence of new products (e.g. TV formats) as well as tacit knowledge about the specificities of foreign needs and preferences and the way of conducting business within those communities. Once having this information and knowledge, the challenge to produce goods that could be successfully marketed abroad seems to have been relatively easy to overcome, even for individuals who had no previous production experience. It was their marketing knowledge that gave them incentives to invest in product upgrade. In contrast, the production ability of pre-existing producers, which was presumably larger than that of newcomers, was not sufficient to induce them to invest in marketing upgrade. 4 Our claim here contrasts with a large literature emphasizing the non-codifiable nature of production knowledge. In the industries we study, however, access to production knowledge does not appear to act as a relevant bottleneck for export success. 5 As we explain later, in this sector we have not been able to determine yet which of two candidates is the pioneer. 8

9 In the case of wooden furniture, one of the potential pioneers was a commercial agent. This commercial agent had spent three months in the United States as a teenager. After working as a sales representative for a domestic firm, this agent decided to become an independent intermediary between U.S. distributors and domestic producers. In fact, his story is intertwined with the story of the second potential pioneer that we are considering in this sector, as it was he who intermediated in that firm s first foreign sales. Moreover, he was largely instrumental in connecting that firm with foreign designers. The connection was key for allowing this firm to produce new designs that matched U.S. tastes. As in the previous cases, marketing information and knowledge proved to be crucial. The reasons why such an intermediary appears in this industry while it did not in the previous two sectors is still unknown to us. It is possible that structural characteristics of this industry (e.g. contractual facility leading to vertical disintegration) explains the appearance of a specialized commercial agents. We are still investigating this issue. Finally, the wine industry is the only one among our case studies in which one of the largest domestic producers also becomes a pioneer. This pioneer, as in the previous cases, had a substantial exposure to foreign cultures. First, he earned a doctorate degree in Economics in the United States. Then, he spent a year in California as a Visiting Professor at Berkeley, which allowed him to witness the transformation of the wine industry in that state and socialize with the wine community in Napa Valley. However, some factors that are specific to the wine industry also played a role in narrowing down the scope of uncertainty that he faced relative to the case of large producers in other industries who did not pioneer export activity in their sectors. First, the wine industry in Argentina has been one of the largest in the world for decades; in particular, it is a common understanding in the industry that Argentina has a comparative advantage in this sector. Second, Chile underwent a dramatic transformation that spurred remarkable export growth in this industry prior to Argentina. The Chilean experience provided a visible benchmark for assessing the potential profitability of the export business in a similar country. Both the presence of a clear comparative advantage and the successful experience of a proximate neighbor substantially reduced the degree of uncertainty about whether the implementation of a successful export business model was feasible in Argentina. These factors, together with the distinctive characteristics of the pioneer, might explain why in this sector the pioneer is an incumbent as opposed to a newcomer. We have not yet encountered any indication that the prospects of diffusion deterred pioneer s investment relative to a benchmark in which diffusion did not occur. Our interviews with pioneers indicate that the decision environment that they recall at the time of investing in discovery activity (i.e. developing an export business model) did not include the concern that diffusion might deplete their profits. On the contrary, pioneers in some cases seem to have explicitly induced diffusion. A potential explanation for 9

10 this counter-intuitive behavior might be that pioneers in occasions benefit from diffusion to other competitors. First, consumers often identify country of origin as one of main characteristics of foreign products. Therefore, a pioneer might benefit from the existence of other exporters who can help install brand recognition for the country as a whole (wine). Second, pioneers might benefit from the appearance of other exporters as they increase the demand for specialized infrastructure and specialized (high-quality) intermediate inputs and services (light ships). Third, economies of scale in the costs of international transactions appear to be relevant in some industries; pioneers might benefit from the diffusion to producers of similar products that help them diversify the portfolio of products they offer in foreign markets (wooden furniture). The policy implications of this finding are less clear. Whenever there is diffusion, there are social rents that the generating agent typically does not appropriate. In those cases, it is seldom the case that a policy inducing the attainment of the social optimum is actually implemented. For example, patent systems provide incentives for invention but maintain diffusion below optimal levels. In our case, diffusion of the discovery certainly implies discovery activity below the optimal level. However, our analysis does not shed any light about which policies might implement the social optimum. In contrast, a policy implication suggested by the (preliminary) results of our case studies is that the patent-system compromise, which induces discovery by restricting diffusion, might be a harmful policy as it might deter rather than induce discovery activity. 4. Identification of Potential Discoveries (not updated since previous draft) (This section has not been updated since the previous draft. It needs to be revised in accordance with the contents and terminology of the rest of the paper) Our choice of discovery sectors is the result of combining a quantitative analysis of country-level foreign-trade data at finely defined categories with a qualitative analysis based on previous knowledge and familiarity with the evolution of the industrial base in Argentina. The statistical analysis allows us to identify sectors that pass a set of quantitative criteria that we consider all discovery cases should satisfy. The knowledge and familiarity with the Argentine industry allows us to introduce qualitative considerations in the choice of sectors. 10

11 a. Quantitative analysis using Argentine foreign trade data Even though some quantitative criteria, such as export growth, are clearly among those that should play a prominent role in the identification of discovery sectors, it is not a priori obvious what is the most appropriate set of selection rules that should be used for that purpose. Establishing relevant criteria involves choosing among plausible alternatives for the level of aggregation that defines a sector and the time period over which export growth is measured. It also involves choosing among selection rules based on different threshold levels for sectoral export volumes, export growth rates, and share of extra-regional exports. A sector is usually defined to be a set of activities that share common elements, such as requiring similar type workers and management skills, using a similar technology, or targeting similar customers. For the purpose of this study, a sector should be more precisely defined to be a set of activities that share the same crucial uncertainties about production or marketing costs, such that the revelation of those costs for the pioneer firm diffuses to other firms performing those activities. We take this ideal definition as our guiding principle for choosing the level of aggregation at which to assess sectoral export growth and for fine-tuning the precise scope of sectors that we characterize as discoveries. We start with a database of Argentina s exports at the 6-digit level of the Harmonized System (HS). There are 5427 HS 6-digit categories. We then aggregate data at the 4-digit level and use this level of aggregation to conduct the statistical analysis of sectoral export growth. Aggregation at the 4-digit level reduces the number of sectors to In the majority of cases, we think that 4-digit categories more closely match the ideal definition of sectors discussed above. For example, Furniture is a 4-digit category that includes 6-digit categories Wooden Kitchen Furniture and Wooden Bedroom Furniture. Both should be analyzed together rather than in isolation, as we discuss later. The choice to use 4-digit aggregates is made notwithstanding our acknowledgement of the fact that in many cases we do not have a clear sense of how to map our ideal definition into actual HS categories, while in other cases we are certain that this definition does not map properly into 4-digit aggregates. Therefore, we look carefully at all 6-digit categories in selected 4-digit aggregates and also look at 6-digit categories in non-selected 4- digit aggregates when we have a priori knowledge about the outstanding export performance of products in the narrower categories. We define the relevant time period for assessing export growth as the change between the average of and the average of After decades of protectionism, Argentina initiated a consistent 11

12 process of unilateral trade liberalization in the late 1980s, which was mostly completed by the early 1990s. 6 The nominal average tariff decreased from 37% in 1985 to 12% in 1991 while most non-tariff barriers were removed. Argentina was also a founding a member of Mercosur, which started in 1991 and included a transition period that finalized in 1995 with the formation of a customs union. In addition to substantial unilateral and regional trade liberalization, other structural transformations took place simultaneously, including the removal of restrictions to FDI, the liberalization of the capital account, and a drastic privatization and de-regulation program. The combined effect of these reforms had a significant impact on the evolution of Argentina s exports. Export growth, which averaged 2.97% annually in the period (in constant U.S. dollars), averaged 5.89% in the period However, export growth was also influenced by the evolution of the real exchange rate and the instability of macroeconomic conditions. After the hyperinflation episode of 1989, the real exchange rate underwent a period of substantial appreciation (before and during the Convertibility Program launched in 1991), which was only reverted after the devaluation of the peso in December The effect of trade liberalization and other reforms on the evolution of total country exports might mask the fact that these policies can also generate huge disparities in export growth across sectors. For example, the action of comparative advantage alone might spur substantial export growth in some sectors while not in others, even in the absence of discovery activity. Given that the processes of trade liberalization and structural reform in Argentina extended until the mid-1990s, any reasonable long term period that we might use to identify discoveries will necessarily include sectoral export growth due to forces unrelated to discovery. Since by 1991 the unilateral liberalization process was mostly completed, we choose as our reference period attempting to minimize the confounding effect of trade liberalization and other reforms on the identification of export growth driven by discovery while maintaining a time frame of analysis of reasonable length. Averaging over four years at both ends has the sole purpose of preventing exceptional peaks sometimes driven by measurement error from dominating our measure of export growth. Our quantitative selection criteria method is the following. First, we impose a minimum threshold for exports of US$ 10 million in 2005, which we consider reasonable to exclude sectors that have no sufficient economic significance. This amount represents 0.025% of total Argentine exports and 0.091% of industrial manufacturing exports in that year. This criterion leaves 267 out of digit sectors. Second, we rank the remaining 267 sectors according to export growth between and , and select only those in the top 40 percentiles. This threshold is conservative, but it has the 6 A drastic program of trade liberalization was implemented in the late 70s but lasted only a few years. 12

13 advantage that it keeps in the list non-outstanding 4-digit sectors that might include 6-digit categories with outstanding export performance. Applying this criterion narrows the list to digit sectors. Finally, among the 106 sectors, we select only those sectors that shipped more than one third of their total exports outside of Mercosur and associated nations (Bolivia, Brazil, Chile, Paraguay and Uruguay) in The rationale for this selection rule is that export growth based on shipments to Mercosur is likely to be primarily driven by forces other than discovery. In particular, the drastic decrease in tariffs and trade barriers within Mercosur induced a substantial increase in intra-regional trade based on comparative advantage and scale economies. In addition, quality upgrading is less likely to be a requirement for exporting to Mercosur countries while information and marketing costs to access those countries are significantly lower (as is also the uncertainty surrounding their levels and effectiveness). Among the remaining digit sectors, only 60 ship more than one third of their exports outside Mercosur. These are then the sectors that pass all quantitative thresholds. As a result, our quantitative analysis results in 60 4-digit sectors with the potential to be discovery cases. b. Qualitative selection of discovery sectors The selected 60 4-digit sectors have export performance indicators that we consider are necessary in any discovery case. However, satisfying these quantitative thresholds is not sufficient. Out of the selected 60 sectors, for 38 sectors we have a strong presumption that it is not discovery that drives export growth. These sectors are listed in Table 1. There are various possible determinants of export growth unrelated to discovery. First, outstanding export growth can be driven by the increasing exploitation of a country s comparative advantage. In Argentina, drastic trade liberalization and de-regulation starting in the late 1980s induced the emergence of new exporting sectors, most of which are intensive users of agricultural or mineral resources that are abundantly available in the country. In column 5 of Table 1, these sectors are marked with a symbol *. Examples among this group are Milk and cream, concentrated or sweetened (sector 0402) mostly powder milk and Copper ores and concentrates (sector 2603). Second, many of the high exportgrowth sectors produce industrial commodities used as intermediate inputs in the production of other products. These goods are differentiated, if at all, along only a few dimensions. Therefore, they are easy to export as long as they are offered at market prices; uncertainty about the foreign marketability of the product is absent. Still, in these cases discovery could involve the resolution of uncertainty about production costs. However, these are in general capital-intensive and large-scale-production sectors in which production costs can be predicted with more accuracy than in most other sectors. Moreover, firm- 13

14 specific efficiency gains are usually related to tacit learning within the plant or the organization that is not easily transferred to other firms. These sectors are marked with a ** in column 5. Natural polymers NESOI in primary forms (sector 3913) and Alloy steel NESOI in ingots, other primary forms & semifinished products (sector 7224) are examples in this category. Finally, there are sectors that we do not consider discoveries for other specific reasons. Three categories of motor vehicles (8702, 8703, 8704) are excluded because their exports are subsidized by preferential import licenses, Nuclear reactors (sector 8401) is excluded because it is only one government-owned firm that exports, and Reaction initiators and accelerators and catalyst preparations NESOI (sector 3815), Turbojets, turbo propellers and other gas turbines and parts (sector 8411), Aircraft (sector 8802) and X-ray apparatus (sector 9022) are excluded because registered exports correspond to sales of used equipment, previously imported. Sectors in this last group are marked with a ***. After conducting our quantitative and qualitative analyses, we obtain a list of 22 sectors. These are sectors with outstanding export growth performance and with no visible characteristic allowing us to discard them as discoveries. They are listed in Table 2. We are familiar with the structure and recent evolution of some of these sectors. However, being able to determine whether successful discovery actually occurred in each of them would require a deeper investigation, which will be feasible to conduct in a longer time period. In addition to this list, we also consider as potential discoveries some sectors with outstanding export-growth performance that are not captured by our statistical method either because they are services and thus are not included in trade statistics (Production of TV Programming, Software Services, and Call Centers) or because they are included in non-selected 4-digit categories (Light-Ship Building). Next we discuss our choice of case studies. Among the sectors we are most confident in characterizing as discoveries, we think that the four sectors we propose to focus on combine a varied set of features which study can significantly enrich our understanding of discovery processes. 5. Choice of Sectors for Case Study, Methodology, and Data Sources (not updated since previous draft) (This section has not been updated since the previous draft. It needs to be revised in accordance with the contents and terminology of the rest of the paper) a. Choice of sectors for case study 14

15 We choose four sectors for case study: Production of TV Programs, Wood Furniture, and Light-Ship Building and Wine. One of the main reasons for selecting this group of sectors is that they differ from each other along several dimensions. Thus, they can generate broader lessons as a group than possible alternative choices. First, these sectors belong to different broadly-defined economic activities: Services (Production of TV Programs), Agriculture-based Manufacturing (Wine), Traditional Manufacturing (Wood Furniture), and Non-traditional Manufacturing (Light-Ship Building). Second, the key elements that characterize the discovery in each case have interesting differences. In the case of Light-Ship Building, one of these key elements is the identification of a successful export strategy combining quality upgrading and the establishment of permanent commercial representations in relevant foreign markets. In the case of Wines, a key element is the ability of firms to guarantee the quality of (own or by third parties) grape production. In the remaining two cases, a crucial element is the necessity of adapting product design to meet market-specific requirements, even though in different ways; while in Wood Furniture this adaptation is attained by subcontracting design to foreign firms who are sensitive to local tastes, in Production of TV Programs it is attained by expurgating T.V. programs of their local content, extracting their essential characteristics so that they can easily be adapted to other local or regional markets. Other differences between the sectors are also salient. Export growth is led by well-established producers previously focused on the domestic market in Wine and in Wood Furniture. Export growth is led by newcomers to the production activity whose original target is the export market in Light-Ship Building and Production of TV Programs. Labor skill requirements are highly technical and specialized in Production of TV Programs and Light-Ship Building. Labor skill requirements are lower and more general in scope in Wood Furniture and (maybe) Wine. b. Case study methodology and data sources We define the unit of analysis as the industrial sector, as it is in the sector where the process through which the pioneer discovers the new export opportunity and the discovery diffuses to other actors occurs. Consequently, the case studies include all organizations (pioneer and imitator firms, other firms, government agencies and ONGs) that were part of the discovery-diffusion process under study. In order to collect data from the many organizations involved in each case, we develop a case-study protocol. This protocol includes open-ended questions to be used for interviewing entrepreneurs and the other firms and support (governmental and non-governmental) organizations incumbent to each case. For each of the case studies, we collect data to produce a time line for the discovery-diffusion process. The 15

16 timeline for each sector includes all relevant events in the discovery-diffusion process. For every event in the timeline, we collect both perception-based and hard data from the relevant actors and/or key informants. Analyzing the chronologic sequence of events, we expect to avoid idiosyncratic risks associated with case-study research such as self-selection bias of key informants. At each event present in the timeline, we include the following data: a characterization of the pioneer s business, including business uncertainties, investments/discovery, organizational structure; the pioneer s relationships with other firms and organizations; the business environment of each of the firms related to the pioneer (including customers, suppliers and imitators); and the macro-economic environment of both the pioneer s location and that of the target market. These data together with quantitative data for exports provide a consistent, reliable and unbiased characterization of the discovery-diffusion process of each of the sectors. c. Strategy for analysis of comparators (counterfactual) Two elements should be present in every export success story. First, there should be underlying conditions that favor the activity of a sector in a particular country. For example, in the famous case of Bangladesh s growth of apparel exports, the main condition is the wide availability of inexpensive unskilled labor. We call the presence of these favorable underlying conditions comparative advantage. Comparative advantage is thus defined at the sector level. Second, the presence of underlying conditions is not sufficient to guarantee export growth. There has to be a discovery. As opposed to comparative advantage, discoveries happen at the firm level and only afterwards are spread onto the sector. The strategy we envision for counterfactual analysis takes these two elements into account. For each sector chosen as a discovery case we would identify a comparator sector. The latter would have similar characteristics to the former, except for the key underlying conditions that we identify as relevant determinants of comparative advantage. For example, in the case of Light-Ship Building, a comparator could be the production of motorcycles, probably similar in mechanical complexity, but lacking the background of a tradition of wide-spread consumption in the country. Then, we would find a comparator firm within each sector. Here, we would search for evidence about the importance of the key elements of discovery we highlight by looking for a firm with similar characteristics to the pioneer but which failed to perform the relevant investment. The specific details of this exercise would depend on the particular sector and on the particular elements in the discovery that we deem crucial to emphasize. At this point, we are still working on identifying those elements. Finding transparent comparator cases might not be feasible in all cases, but we will do our best effort to do it. 16

17 6. Case Studies in Four Argentine Sectors Case I: Light-Ship The development of Argentina s light-ship building industry started at the beginning of the twentieth century, with the arrival of British immigrants with an interest in nautical sports. The inflow of these immigrants and the clubs and sports activities they established contributed to creating a consistent domestic demand for light-ships, leading to the appearance of local producers. A domestic light-ship building industry has therefore existed for decades in Argentina, and has in fact made early attempts to export. These export efforts were isolated and lacked continuity, however, compared to the trend observed over the last decade. Light-ships are defined for the purposes of this study as those weighing up to 15 tons within 4- digit category HS 8903 (yachts & other vessels for pleasure, etc.; row boats, etc.). The value for the weight threshold is largely arbitrary, and the decision to establish it in terms of weight is motivated by data availability since the basic measure of ship size in the industry is length rather than weight 7. The sector case study specifically focuses on motorboats, as these account for most growth in exports of light-ships and appear to allow for a closer analysis in the terms of the theoretical framework of Hausmann and Rodrik (2003). Nevertheless, export outcomes for the sailboat industry (the other main component of the light-ship building industry) are briefly reviewed at the end of this section. The extent of export growth over the past 10 years can be quantified both in terms of volumes and export destinations. In terms of volume, exports declined from US$ 2.6 million in 1991 to a low of US$ 252 thousand in 2000, and since then have grown almost 40-fold to US$8.0 million in The path of total exports is shown in Figure I.1 8. The most outstanding characteristic observed here is the sustainability of considerably high growth rates since 2003: almost 200% in 2004 and 80% in The overall pattern of export growth (as described below) is robust to small changes in the threshold, but not if the weight restriction is entirely lifted. This is because the position also includes large luxury yachts, and there is one firm in Argentina that has been conducting sales of these vessels (which have very high unit-values) intermittently throughout the 1990s. Ships in this weight class have a high degree of imported components, including both ship parts and a customized interior design. The weight restriction is intended to exclude this type of ship. 8 Although the figure clearly shows explosive export growth, the official 6-digit statistics presented here are not as informative as they are for other sectors because industry sources claim that under-invoicing is widespread. This claim can be confirmed by checking U.S. websites that post advertisements for used Argentine boats: the prices quoted on some used boats are higher than the export price recorded by customs when the boat was new. Consequently, 6-digit statistics do not accurately capture the size of the sector's overall exports. 17

18 Figure I.1. Light Ship Exports (in u$s) 8 7 <15K Figure I.2 shows exports broken-down by destination. Prior to 2002, approximately 55% of motorboat exports went to the US and the remaining 45% to Mercosur, while exports to Europe exceeded all the other destinations after Exports to Europe reached 60% of all exports in 2005, and drove most of the growth over the period. On the other hand, exports to the US declined and on average represented 6% of units sold. As we will describe later, this outcome is part of the learning process of Argentine exporters, as most firms directed their initial export attempts at the US market and later reoriented their efforts to specific markets within Europe. Figure I.2. Motorboats Exports per destination (in units) to Mercosur To US to Europe to Latin-America

19 Figure I.3 breaks down export figures by firm. Compañía Constructora de Embarcaciones (CCE) was the first firm to achieve substantial motorboat exports after Other producers followed CCE in latter years. The owner of CCE, Luis Loṕez Blanco, was the first to undertake substantial exporting efforts and is now the largest exporter in an industry that has grown to attain almost US$ 10 million according to official statistics. Figure I.3. Light Ship Exports by Firm (in US$) I M C O P E S A S. A. A S T I L L E R O S B R A M A D O R S. R. L. M A R I N E S U R S. A. A S T I L L E R O R E G N I C OL I S. A. I. C. A. P M R S E R V I C E S S. R. L. Y A C H T S. A. J. B O A T S S. R. L. C O N S T R U C T O R A N A V A L D E L P L A T A S A L A T I N Y A C H T S S. A. H E R I B E R T O T O M A S S A N C H E Z K L A S E A S. A. C O M P A N I A D E B A R C O S S A. A L T A M A R Y A C H T S. A. C C E 2005: 80% 94-05: 51% The light-ship building industry includes not only motorboat manufacturers but also builders of sailboats, which have also undergone sustained export growth. Both segments cannot be considered as the same for the purpose of this study because there are important differences in production processes, commercialization and the characteristics of the final product. Both industries do share some common ground, however, in terms of raw materials, suppliers and commercialization for the domestic market, so there are manufacturers that produce both products. Sailboat exports have followed a similar path to the one described for motor boats. Exported volumes grow abruptly after 2002, as shown in Figure I.4, with Europe and Asia as the main export destinations. As with motorboats, the share of exports to the US also declined after 2002, despite being the main 19

20 destination in the earlier period. The firm Río Tecna S.R.L. was the first to achieve substantial and sustained sailboat exports, followed and eventually surpassed by Compañía de Barcos S.A. Figure I.4. Sailboat Exports by Firm (in US$) 1,8 1,6 1,4 1,2 1 0,8 OCEANTECH S.A. RIO TECNA SRL. ASTILLEROS BRAMADOR S.R.L. J.BOATS S.R.L. COMPANIA DE BARCOS SA. 0,6 0,4 0, At this point, it should be noted that the relevance of the sailboat industry to this case study is still to be determined, as well as its potential interactions and reciprocal influences with the motorboat industry. Main Exporters in Argentina As it has been mentioned, Mr. López Blanco (CCE) was the first in achieving a non-negligible amount of motor boat exports. On the following years, other firms were able to follow this same path, resulting in a more diversified situation nowadays. Figure I.5 represents the share of exports by firm for That CCE is still the main exporter (19% of units sold) in 2005, but there are other relevant players in the industry, namely: Altamar Yacht (13%) and Klase A (11%). These two firms not only played an important role during 2005, but also their share of exports appears to be sustainable since their entry in 2003, as shown in Figure I.3 (this is not the case of Constructora Naval del Plata and that s the reason for not mentioning it here although it is responsible for 11% of units exported in 2005). The argentine 20