Export Premia and Sub-Contracting Discount: Passive Strategies and Performance in Domestic and Foreign Markets
27 Pages Posted: 6 Dec 2007 Last revised: 22 Feb 2008
Date Written: November 20, 2007
Abstract
This paper contributes to the literature on firms' productivity and exporting decisions by analysing the role played by organizational choice aspects. Rather than setting up a vertically integrated structure, manufacturers may act as subcontractors in both domestic and foreign markets, and produce to satisfy the requirements of other firms. A very simple model is presented where the most productive firms self-select into exporting, while the least productive ones work as sub-contractors serving the domestic market only. These predictions are tested using a sample of Italian firms observed in the 1998-2003 period. The results of our estimates highlight a ranking of firms consistent with a priori expectations, and provide a clear indication that passive exporters (i.e. using sub-contracting in foreign markets) display lower TFP values as compared to direct exporters. Moreover, only the latter category exhibits higher pre-entry productivity levels and growth rates as well as higher post-entry TFP growth rates. Such findings are consistent with both the self-selection hypothesis and the learning by exporting explanation.
Keywords: Export Premia, Sub-contracting Discount, Total Factor Productivity, Firm Heterogeneity
JEL Classification: D21, F13, F14
Suggested Citation: Suggested Citation
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