Trade Development Briefing Note Issue 7, November 2011 68932 What are the determinants of export success? Analyzing firm-product-destination export survival rates in Lao PDR Key messages exports (67 percent) comes from complex firms exporting 30 or more New analysis of firm-level customs data from the Lao PDR shows that different products. export flows in value terms are dominated by large firms supplying the same products to the same markets from one year to the next 1. New While the majority of Lao exports are classified as offering limited exports tend to be small in value and short-lived, suggesting that while opportunities for diversification, the share of exports offering high there is significant experimentation and discovery, firms have only lim- potential for future diversification is rising. The scope of expansion ited capacity to stay in markets once a new entry is made. Regression into a wider range of products is an important area where the data can analysis indicates that the probability of export survival is higher among shed light. This is especially relevant to Lao PDR as the country is fac- firms that specialize in particular products (and to a lesser extent desti- ing a major challenge to manage the risks associated with concentration nations), and lower among firms that lack focus attempting to export of exports in the natural resources sectors (see Record and Nghardsay- multiple products to multiple markets. Agglomeration of exporters in the sone (2009) for more). same destination with the same product is also beneficial, a positive externality that could benefit from policy intervention. The results sug- Analysis of trends across the years of available data suggests that gest that export promotion policy should focus on providing in-market while there is considerable experimentation by exporters, it is the support for firms that have already made the step of discovering a new flows of incumbents that dominate. In Figures 2, the data is used to export product or destination, but perhaps require support to stay in that look at the relationship between transaction numbers and USD value for market. exports. Each FPD unit is classified as either having a new firm, a new product or a new destination (meaning present in the data for the first Research suggests that analyzing the length of export spells can time) or continued from the previous year. What the table shows is that provide valuable information for policymakers. Most approaches to there is a considerable amount of experimentation: 40 percent of FPDs studying export competitiveness tend to focus on measuring volume in any one year are new. However, in dollar terms, the incumbents growth and diversification, however there is a third important dimen- dominate, accounting for on average over 80 percent of the value of sion—survival and sustainability. Given that traditional export promotion exports in the three years of data. The sharpest drop when comparing policy has tended to focus primarily on diversification (i.e. helping would- numbers of export transactions to export value is seen in the shares of be exporters find new markets and develop export-ready products), exports by new firms. This would suggest that new exporters in Lao such efforts may not yield significant results if flows of new products and PDR tend to start on a very small scale. destinations are not surviving in sufficient numbers. Therefore, knowing who exports and for how long can be very helpful information to support Figure 2: On average 40 percent of annual Lao exports are new (i.e. new firm, policy for robust export growth. new product or new destination) when measured in terms of number of export transactions (firm-product-destination triplets)… ...however, when measured in New analysis of data from the Lao PDR customs Department re- terms of export value (USD millions) the share of new transactions drops to aver- ports transactions for the entire population of Lao exporters during age less than 20 percent and it is the continued exporters (same firm, same prod- the period 2005-10. It is a rich dataset, including information on the uct to the same destination) that dominate checkpoint used, special status, tariff exemptions, date of transaction, detailed product code, export license number, destination and value in US dollars and Lao kip. Firm names have been discarded to preserve anonymity. The detailed and disaggregated nature of the data shows firms, the products they export and destinations to which they export, providing unique firm-product-destination triplets (FPDs). The data al- lows for a descriptive understanding of exporters and regression analy- sis of the determinants of their survival. Figure 1: Around two-thirds of Lao exports in value terms are accounted for by large multi-product exporters (30 or more different products) Source: World Bank calculations based on Lao PDR customs data Export spells for new firms, products and destinations tend to be very short. Close to half of all firms and products and close to three quarters of FPD units last only one year. Table 1 shows how many of the units that start together in one year make it through to subsequent years. Reading horizontally, for example, one sees that of the 329 firms that were exporting in 2006, only 206 (or 62.6 percent) of them were still active the following year. Vertically, one sees that of the FPDs that are active in 2008, 1,764 of them are new, 399 of them had appeared in Source: World Bank calculations based on Lao PDR customs data 2007 and 127 in 2006. Overall, only around 10 percent of the FPDs last through all of the four years of the dataset. Churning and realignment of Large multi-product exporters account for around two-thirds of product and destination portfolios within firms is happening at a very total Lao exports in value terms. One way of looking at the perform- rapid pace. ance of exporters is to measure the number of different products that each firm exports annually over time. Figure 1 shows yearly shares and period averages for 2006-2009 for firms that export just 1 product, 2-29 1 Stirbat, Liviu, Richard Record and Konesawang Nghardsaysone (2011) ‗Exporting from a small assessment of firm-product-destination survival products and over 30 different products. A surprisingly large share of landlocked economy: an Paper No.5695, Washington, DC: The World Bank.rates in Lao PDR‘, Policy Research Working Compared to other developing countries, Lao exporters actually are positive spillover effects from the activities of competitors that are survive better in the short term but appear to then “learn� more similar to external economies of scale. Moreover, the coefficient of mar- slowly. Another way of presenting the data reveals the ―learning‖ proc- ket attractiveness is not statistically significant, something one can inter- ess, whereby firms that survive up to a certain date have a higher chance pret as a possible effect of a landlocked geography with high trade facili- of continuing. These results are shown in Figure 3 for the 2006 cohort. tation costs: being stuck with a few destinations, regardless of their ap- Lao rates are compared with those available for four African countries peal, simply because of their proximity. This effect is noticeable in the from Cadot et al. (2010). Despite different data spans and periods, all data for other landlocked countries. countries have similar slopes in the early stages. For firms, Laos starts from the highest rate (65 percent), but by the fourth year they are all in Table 1: Survival rates by cohort - absolute numbers (left) and percentage of initial the 70-80 percent range, meaning that Lao firms learn at a slower pace. cohort size (right) For products, Laos starts off with a very high rate (~75 percent, compared Firms 2006 2007 2008 2009 Firms 2006 2007 2008 2009 to 10 percent for Malawi) and then level off rapidly. A cautious conclu- 2006 329 206 139 105 2006 100% 62.6% 42.2% 31.9% sion, given the short time period, is that Lao firms improve their survival rates at a relatively slower pace, albeit starting from higher levels. 2007 228 135 101 2007 100% 59.2% 44.3% 2008 273 115 2008 100% 42.1% Figure 3: New firm survival rates for Lao firms are within the range of values for comparator countries (left chart) but products appear to survive at a higher rates 2009 248 2009 100% (right chart) FPDs 2006 2007 2008 2009 FPDs 2006 2007 2008 2009 2006 738 256 127 82 2006 100% 34.7% 17.2% 11.1% 2007 957 399 215 2007 100% 41.7% 22.5% 2008 1764 525 2008 100% 29.8% 2009 1484 2009 100% Source: World Bank calculations based on Lao PDR customs data In terms of policy conclusions, the evidence suggests that export promotion activities should focus on helping existing exporters with a strong track record diversify into additional markets. Export promo- tion is one tool that has been used to help firms reach larger markets outside of their borders. It is in this area that the most interesting conclu- sions emerge. The analysis suggests that focused firms, specializing in a limited range of products, are more likely to see sustained export flows. Reducing the marginal costs of entering new markets for such firms is Source: For Lao PDR, World Bank staff calculations based on Lao PDR customs thus a low risk bet with potentially high returns. data; for African countries, Cadot, et al (2010) Secondly, the analysis indicates that export promotion policy What are the key determinants of export survival in the Lao PDR? should focus on providing in-market support for firms that have Regression analysis of the probability of survival against a number of already made the step of discovering a new destination. Exporters exporter characteristics helps us to understand more about the determi- that have already met the initial costs of export discovery may need sup- nants of survival. Transactions are aggregated to annual totals for unique port to meet destination market standards, establish distribution networks FPDs and the starting year is when the FPD first made its appearance in and thus reach critical mass. Such carefully targeted support may help to the dataset. In the absence of direct measurements, one can use several increase the probability of survival after the initial entry into a new market. counts as proxies for characteristics of firms, products or destinations such as: References  The attractiveness of the destination – the number of firm-product  Besedes, Tibor, and Thomas Prusa (2006) "Ins, Outs and the Dura- pairs that are exported to that destination. tion of Trade." Canadian Journal of Economics, 104.  The agglomeration effect at the destination – the number of firms  Brenton, Paul, and Richard Newfarmer (2007) Watching more than that cater to the same product-destination pair; one would expect the discovery channel: export cycles and diversification in develop- either a negative impact from competition (survival of the fittest) or a ment. Washington, D.C.: The World Bank. positive effect from synergies (the cost of discovery is shared among exporters and their odds of surviving are improved).  Cadot, Olivier, Leonardo Iacovone, Ferdinand Rauch, and Denisse Pierola (2010) "Success and failure of African exporters‖, Policy  The firm‘s experience with the product – the number of destinations Research Working Paper No.5657, Washington, DC: The World to which a firm sends a particular product; and with the destination – Bank. the number of products sent by a firm to that destination.  Record, Richard, and Konesawang Nghardsaysone (2009) "Export  The firm‘s level of diversification: the total number of products ex- dynamics and diversification in the Lao PDR." Country Economic ported by a single firm; the number of destinations served by one Memorandum background paper, The World Bank. firm and the number of industry sectors in which one firm is export- ing.  Stirbat, Liviu, Richard Record and Konesawang Nghardsaysone (2011) ‗Exporting from a small landlocked economy: an assessment There is a very strong positive impact of having experience in gen- of firm-product-destination survival rates in Lao PDR‘, Policy Re- eral, particularly experience with the product (i.e. if it is already ex- search Working Paper No.5695, Washington, DC: The World Bank. ported to other countries). Such firms have a deeper understanding of  Volpe, Martincus Christian, and Jeronimo Carballo (2008) "Is export the demand for their product and are thus better at placing it in willing promotion effective in developing countries? Firm-level evidence on markets in a sustainable way. Conversely, there is a penalty for lacking the intensive and the extensive margins of exports." Journal of Inter- focus in a core product/industry – equivalent to a firm that is ―shooting in national Economics, 89-106. the dark‖ by trying out many combinations with high failure rates: too many products, serving too many markets, being active in too many sec- tors. Another finding is that exporting firms benefit from the positive externalities of agglomeration. An important and rather surprising fact that appears in the data is that firms benefit when others do the same: the agglomeration of exporters serving the same market with the same product has a large positive impact on survival rates. This means there For further information, please contact: World Bank Office, Vientiane Produced with resources from the Trade Development Facility Poverty Reduction and Economic Management Multi Donor Trust Fund, financed by the Government of Aus- Patou Xay, Nehru Road tralia, the European Union and the German International Coop- Information contained in this briefing note reflects the Vientiane, Lao PDR eration Agency, and administered by the World Bank. views of the authors, and not necessarily those of the t: +856 21 414209 World Bank Group or the donors to the Trade Devel- f: +856 21 414210 Visit us at http://www.worldbank.org/lao/trade opment Facility Multi Donor Trust Fund. e: laoinfo@worldbank.org