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Besedes and Prusa (2011) show that developing countries are often unable to deepen and maintain their trade relationships. Exports from industrialized countries typically last longer than exports from developing countries, owing notably to the relatively long lifespan of machinery exports. Besedes and Prusa (2006b) generalize this result, finding that the hazard rate (the probability of “dying,” in terms of the trade spell) is 23 per cent larger for homogeneous goods than for differentiated ones. On a firm level, Görg, Hanley and Strobl (2008) and Iacovone and Javorcik (2010) find evidence for greater export survival for products close to firms’ core competencies. Indeed, evidence seems to suggest that excessive costs associated with exporting are a major factor inhibiting firms’ success. The costs can be of administrative nature, including, for example, the ease of doing business in a country (Fugazza & Molina, 2009). But such costs can also be informational in nature.

Cadot et al. (2011) find strong evidence for positive national spillover effects (information network externalities) due to the existence of other firms exporting the same product to the same destination. These effects may have a variety of causes, the most obvious being that one would expect established business relations with the export market to make it easier for new firms to market their products. On the one hand, it should be easier for an entrant to identify potential customers. On the other hand, customers already doing business with a country’s exporter can rely on experience with a country’s products, which arguably builds up trust. Using a panel of 460 British manufacturing firms, Kneller and Pisu IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy (2007) find that the frequency of firms indicating such issues as barriers to exporting declines with the experience of firms in export markets. As we will see later, governments can take an active role in reducing these additional costs associated with exporting, facilitating firms’ entry and survival in exporting activity.

Productivity Gains

Another case for export promotion drawing from the literature on firms in international trade is that competitive pressures raise average industry productivity, sorting out less productive firms and encouraging entry and survival of high-productivity firms (see, for example, Pavcnik, 2000, or Tybout, 2003). These competitive pressures need not necessarily be due to trade liberalization; in fact, Aghion, Dewatripont, Du, Harrison and Legros (2011) show that industrial policies such as subsidies and tax holidays—but also tariffs—can yield productivity gains and thus have a net positive impact, as long as competition within the targeted sector is preserved or increased. An adequate design of such “competition-friendly” industrial policy would, for example, entail that subsidies be given to all firms within a sector, avoiding picking winners. However, trade-friendly policies appear to have benefits that go beyond reducing the risk of political capture as described above: lowering tariffs on input goods is associated with large productivity gains in firms (see, for example, Goldberg, Khandelwal, Pavcnik & Topalova, 2010, or Amiti & Konings, 2007). These benefits support the notion that trade can be a vehicle for international R&D spillovers, in that countries importing intermediate and capital goods can benefit from R&D done in the exporting country (Harrison & Rodríguez-Clare, 2009).

Input tariffs affect productivity through a number of potential channels, including learning about foreign technology, expansion in the variety of intermediate inputs available to production, and availability of higher-quality intermediate inputs (Bernard, Jensen, Redding & Schott, 2011). Moreover, exporters in both developing (Alvarez & López, 2005) and developed (Bernard, Jensen, Redding & Schott, 2007) countries are typically more capital- and skill-intensive than non-exporters. This finding is difficult to square with “old” trade theory, which stresses comparative advantage as a determinant of trade flows and predicts such differences among countries, rather than within them. From an exportpromotion point of view, it would be interesting to know in which way causality runs. If exporting firms learn by doing, there would be a clear case for export promotion. And indeed, a few studies do confirm differential productivity growth between exporters and non-exporters, notably in developing countries (see Van Biesebroeck, 2003, and De Loecker, 2007). Bustos (2011) finds evidence in Argentinian firm-level data that entry into exporting induces firms to upgrade their technologies, and Van Biesebroeck (2003) finds similar effects on sub-Saharan African manufacturing firms.

From a development perspective, the most important finding is probably that learning from exporting is most likely in technologically backward countries and among less productive firms (Harrison & Rodríguez-Clare, 2009).

Export Promotion Policies

Export promotion policies in general involve all measures and programs aimed at assisting current and potential exporters in penetrating foreign markets, as well as export subsidies, reduced tax rates on exporting firms’ earnings, favourable insurance rates, advantageous financial conditions, or variations in the exchange rates (Belloc & Di Maio, 2012). As it is impossible to review them in their entirety, we will briefly review the empirical evidence for a few key instruments of export promotion.

Export subsidies can come in many disguises, including direct export subsidies, duty drawback schemes that offer a refund of duties paid on imported inputs that are incorporated in exports, and tax preferences for exporting firms.

IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy Such policies have been credited with contributing to the export success of rapidly industrializing Asian countries, complementing tariff protection with a necessary vent for output (Noland & Pack, 2003). More recent evidence on their use shows mixed results: while direct export subsidies rarely pass a cost-benefit analysis, duty drawbacks and tax exemptions have slightly more positive effects, especially for small and medium enterprises (Belloc & Di Maio, 2012).

Theoretically, as Harrison and Rodríguez-Clare (2009) have pointed out, the advantage of export subsidies over tariffs is threefold. First, export subsidies tend to ensure that firms are subject to the discipline of the international market, forcing them to become more productive. But the same should be true for firms selling in the domestic market, as long as there are no trade restrictions present that would distort domestic prices. Rapidly industrializing Asian countries have often used export subsidies in conjunction with protection of the domestic market. This has allowed them to offset losses in international markets with “superprofits” on the protected domestic market, while competition in the international market ensures that the firm does not suffer from loss of cost discipline (World Bank, 1993). It seems that the creation of such a “vacuum environment” has been crucial for the take-off of these firms, a condition that usually only technological leaders enjoy through patent protection (Dosi, 1988). In this context, Shapiro (2007) highlights that there has been a fundamental change in the understanding of the importance of “rents”: “The acknowledgement that rents are at the heart of technological change and not simply politically derived is ubiquitous in the theoretical and empirical literature that focuses on the microfoundations of development” (Shapiro, 2007, p. 10). These views closely relate to the “self-discovery” market failure we described earlier, stressing that the ability to appropriate such rents is a precondition for pioneers to undertake risky investments in underdeveloped areas.

Second, export subsidies effectively limit the scope of support to exporters, which are the most productive firms. Yet there is in principle no reason why only the most productive firms should be supported, unless there are important barriers that prevent low-productivity firms from becoming high-productivity firms. In this case, an optimal policy should target removal of those barriers. A number of non-trade-related but complementary factors have been found to inhibit firm productivity growth, including rigid labour markets, underdeveloped infrastructure and barriers to firm entry (Chang, Kaltani & Loayza, 2005).

Third, domestic markets may be too small to allow the protected industry to reap the full extent of Marshallian externalities, and thus export subsidies may help increase an industry’s market share. But Harrison and RodríguezClare (2009) argue that rather than sheer size, sophistication of domestic demand is more important, as this will be the criterion upon which success in foreign markets will depend. The label “export quality” is often used as an indicator for product sophistication in developing countries. Hence the export orientation of infant industries will help develop a certain degree of product sophistication that would be hard to acquire by selling to the domestic market only.

Nevertheless, export subsidies today are tightly regulated by the WTO and are permissible only for least developed countries and countries with a per capita GDP below US$1,000.

Special economic zones (SEZs) are another instrument that has proven successful in Asian states and has been emulated worldwide over the years. But a comprehensive review is still missing, and, apart from success stories in China and Mauritius, anecdotal evidence and country studies are inconclusive about the optimal conditions for the success of SEZs in terms of increasing countries’ exports and economic growth. In particular, SEZs seem to remain relatively secluded from other areas in a country, preventing technology transfer and knowledge spillovers (Belloc & Di Maio, 2012). Interestingly, Amsden (2004) argues that the success of SEZs in Asian states lay elsewhere. There, SEZs came in the form of export-processing zones or free trade enclaves, enabling participating firms to acquire their imported IISD REPORT JUNE 2013 2013 The International Institute for Sustainable Development © Industrial Policy for a Green Economy inputs duty-free in exchange for an obligation to export all their output. These special economic zones did not directly create either backward or forward linkages with domestic industry, nor did they substantially facilitate technology transfer in an immediate way. But they managed to create employment, and rising wages ultimately helped create a domestic market for other manufactures.

Finally, export promotion agencies are becoming more and more popular across the world. In fact, the number of export promotion agencies has increased by a factor of three over the last 20 years (Lederman, Olarreaga & Payton., 2010). Generally, it does appear that export promotion agencies have a positive effect on countries’ exports. Kang (2011) argues that the activities of the Korean Trade Promotion Corporation have been critical to the country’s export development. He estimates that each increase of 10 per cent in the budget of its overseas offices leads to increased Korean exports on a magnitude of 2.45 to 6.34 per cent. Using a larger set of data from several countries, Lederman et al. (2010) estimate a $40 increase in exports for each $1 of export promotion by the median export promotion agency.

Volpe Martincus, Estevadeordal, Gallo and Luna (2010) find evidence that the presence of offices of export promotion agencies abroad favours an increase in the number of differentiated goods being exported, whereas a larger number of diplomatic representations in the importer countries seems to be associated with exports of a larger number of homogeneous goods. Lastly, Volpe Martincus and Carballo (2010) confirm these effects and show that export promotion benefits accrue asymmetrically to smaller firms that are suspected to suffer from more severe informational impediments. Also, small firms contribute a disproportionate share of major innovations. In line with the findings on learning-by-doing and learning-by-exporting, small firms’ contribution to innovation has been found to be greatest in immature industries (Acs & Audretsch, 1990). Moreover, young firms are the main driver of job creation (Davis et al., 2008), providing an additional rationale for targeting support towards these businesses.

Foreign Direct Investment Policies to attract FDI have been widespread in both developed and developing countries. Governments have usually sought to attract such investments by tilting incentives toward foreign investors, such as by offering tax holidays, tariff exemptions or subsidies for infrastructure. Empirical evidence generally confirms a link between FDI and sectoral growth, but again it is very difficult to draw conclusions concerning the direction of causality: while FDI might induce growth of a certain sector, promising growth prospects of a sector might also induce FDI inflow (Harrison & RodríguezClare, 2009). Rather than looking at whether FDI promotes sectoral or economy-wide growth, most pertinent research has therefore focused on whether FDI increases firm productivity, be it within or across industries. Here, most researchers have found that firms with foreign equity participation display higher output, higher output per worker, or higher levels of total factor productivity, making a strong case for policies promoting joint ventures, as exemplified by China (Harrison & Rodríguez-Clare, 2009).

Using econometric techniques that rule out the possibility that foreign firms tend to acquire the most productive domestic enterprises, studies have been able to conclude that, indeed, foreign equity infusion does confer productivity benefits to domestic firms (see, for example, Matthias & Javorcik, 2009). However, there is little evidence for the existence of horizontal spillovers, the extent to which foreign ownership benefits indigenous firms in the same industry.

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