One of the disadvantages of the standard propensity score method is the fact that it discards a lot of the potentially useful information in the sample.
For example, in our case of 3-to-1 matching for a set of 605 foreign owned firms in a sample of 9,244 firms, only 1815 (3*605) domestic firms would
be included in the analysis, and this is only if a good match is found for each foreign owned firm. So, only about a quarter of the surveyed firms will be used in the analysis. In Tables 4 and 5 we repeat our analysis of the impact of foreign ownership and access to external financing on engagement in trade for a significantly larger sample of 6967 firms (some observations drop out due to non-reporting of the additional controls that we include in the analysis). Including additional control variables does affect the results of the balancing tests: the bias on ISO certification, and educated labor force and especially on plant age goes beyond the 5% cut off, which justifies the use of the propensity score reweighting estimator.
The first thing to note about the results in Tables 4 and 5 is the remark-able similarity to the effects found in our standard propensity score analysis.
Foreign ownership and access to external sources of financing unambiguously boost engagement in direct international trade, with the effect of foreign ownership at least triple the size of the effect of access to external financ-ing. Unlike moderately significant findings in the standard propensity score analysis, all propensity score reweighting estimates are significant at the 1%
significance level.
Tables 4 and 5 also show other factors to be strongly correlated with engagement in international trade. In line with expectations, larger and more productive firms are more likely to engage in exporting and importing, especially directly. The effects of R&D expenditure and the use of educated labor are moderate, contrary to expectation. New to the literature on firm-level determinants of trade are the use of ISO certification (as a proxy for product quality) and the indicator of whether a firm uses external audit (as a proxy for reputation). Both variables have a moderate positive effect on direct engagement in international trade. Existence of plants abroad and location of headquarters in other countries have statistically strong and economically large effects; like foreign ownership these are indicators that the plant is part of an MNC.
5.3 Extensions
In Tables 6-8 we break down the analysis for lower and upper middle income countries and consider alternative factors that could be related to the firm’s endowment of “ability”. Given the similarity between the standard propen-sity score and reweighting estimates, we choose to report the findings from the former one, because they provide conservative estimates of the effects.
In Table 6 we investigate whether the impact of foreign ownership on the propensity to engage in trade is similar across different country groupings.
Specifically, we investigate the differences between lower and upper middle income countries. Foreign owned firms are more likely to engage in interna-tional trade only in lower middle income countries (by 17 percentage points in the matched sample). The difference between foreign owned and domes-tic firms is much smaller in upper middle income countries–primarily due to much higher engagement in international trade by domestic firms–and its size shrinks and the statistical significance disappears once we employ matching. When we break down trade by type, we see that this finding is driven primarily by similar propensity of foreign owned and domestic firms to export. Whereas in lower middle income countries foreign firms are more likely to engage in all types of international trade, in upper middle income countries foreign owned firms are only significantly more likely to import and, when they import, they are more likely than domestic firms to do so directly. Propensity to both export and import is higher for foreign owned firms, irrespective of the country’s development level.
In Table 7 we look at the effect of access to external sources of financing across different country groupings. The first thing to notice is that whereas in upper middle income countries about half of the firms are financially con-strained, their proportion in lower middle income is much higher (about 70 percent). Overall, the differences in the magnitude of the effects between upper and lower middle income countries are minor; nonetheless the effects are much more statistically significant for lower middle income countries. In
particular, engagement in importing depends on access to external finance only in lower middle income countries.
In Table 8 we conduct a robustness check and look at two more indica-tors of “outside/external support” or “ability”: doing business with MNCs operating in the local market and with large domestic partners, respectively.
Comparing the second column of the top and the bottom panels of Table 6 (the analyses before matching), we see that the firms who do not have MNCs or large domestic firms as clients are remarkably similar in the propensities to engage in international trade. Similar comparison of the first column sug-gests that the firms who do business with MNCs are somewhat more likely to engage in international trade than those with large domestic partners. After restricting the sample through the matching procedure, the differences be-tween firms with “external support” and without–be it in the form of large domestic partners or MNCs–decrease dramatically and are driven primar-ily by importing behavior, with no differences in exporting. Firms without
“external support” also seem to rely less on independent distributors and to trade through intermediaries. What this suggests is that contrary to the ex-pectation that having MNCs as clients could be another source of “ability”, it seems to be that there is no particular benefit to having them as clients and that it is rather the size of the trading partner that matters. It is pos-sible that large trading partners–be they domestic or multinational–may have some specific product quality requirements and that firms meet those by using imported intermediate goods.
6 Conclusions
The paper used micro-data from the World Bank Investment Climate Surveys to study how manufacturing firms in emerging markets connect with foreign customers and suppliers. In particular, we examined the role of two factors in this process, namely foreign ownership and access to external finance. We
discovered that both factors have a statistically significant and in many cases economically large impact on the world market access of emerging market firms.
Foreign owned firms are 11 percentage points more likely to engage in trade than domestically owned firms. This premium of foreign owned firms in the propensity to trade is especially big when it comes to direct trade, namely 15 percentage points. The impact of access to external finance is smaller but persistent, with firms reporting access to external sources of financing being up to 6 percentage points more likely to engage in foreign trade.
While foreign owned firms are significantly more likely to trade than matched domestic firms, they are around 4 percentage points less likely to export or import through intermediaries. Apparently MNCs internalize at least some of the intermediation functions that are important to international trade. This role of MNCs in matching buyers and sellers in international mar-kets is especially important for lower middle income countries, with foreign owned firms being 17 percentage points more likely to engage in direct in-ternational trade in the matched sample than domestic firms. By contrast, foreign ownership conveys no such advantage in upper middle income coun-tries, at least when it comes to exporting, which suggests that the export support foreign owners can bring is especially important for countries with a low level of economic development but vanishes as countries become devel-oped. Foreign ownership remains an important factor in the propensity to import even in upper middle income countries.
The effect of access to external finance has a similar magnitude in both upper and lower middle income countries. Nonetheless the effects are much more statistically significant for lower middle income countries. In particular, engagement in importing depends on access to finance only in lower middle income countries.
Overall the evidence presented in the current paper suggests that world
market access of emerging-market firms benefits significantly from external support, specifically from the intermediation provided by foreign owners.
This is also supported by the finding that simply doing business with in-dependent MNCs operating in the country provides no advantage to firms when it comes to trade: there is no effect on the propensity to export, and the propensity to import is boosted to the same extent as having a large domestic client. These results have obvious implications for economic policy, suggesting in particular that foreign ownership plays an important role in facilitating international trade.
This role, however, has recently been put under strain by the financial crisis. According to UNCTAD (2011, Table I.1), world outflows of foreign direct investment (FDI) were 46% lower in 2009 compared to 2007, with the drop in outflows from developed countries exceeding 50%. The direct acqui-sition of ownership in foreign companies through cross-border mergers and acquisitions fell even more during this period, namely by over 75% measured in net purchases (UNCTAD, 2011, Table I.3). Moreover, FDI flows have so far been very slow to recover. Given the importance of foreign owners in intermediating exports especially from lower middle income countries, the financial crisis may have long-term negative effects on developing country trade over and above the effects stemming from the obvious difficulties of firms to gain access to external sources of finance.
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Ω
̅x
̅x( )
̅w
̅w( )
Figure 1
Table 1: Effects of Foreign Ownership on Engagement in Trade (Means and [Bootstrapped] Standard Errors for [Post-Matching] Effects)
Middle Income Countries (N=9,244: Foreign Owned 605, Domestic 8,639) Before Matching After Matching (3-to-1 NN PS) Foreign
Owned Domestic Effect Size
Foreign
Owned Domestic Effect Size
International Trade 0.846 0.343 0.503 0.846 0.728 0.118
(0.020) (0.033)
Exporting 0.760 0.252 0.508 0.760 0.623 0.136
(0.018) (0.034)
Importing 0.604 0.197 0.407 0.604 0.492 0.111
(0.017) (0.033)
Exporting & Importing 0.511 0.100 0.411 0.511 0.389 0.123
(0.013) (0.034)
Use of Intermediaries in Trade 0.159 0.146 0.012 0.159 0.203 -0.044
(0.015) (0.030)
Trade Through Intermediaries 0.050 0.108 -0.058 0.050 0.094 -0.045
(0.013) (0.020)
Direct Trade 0.820 0.258 0.562 0.820 0.670 0.150
(0.018) (0.026)
Direct Exporting 0.736 0.217 0.519 0.736 0.590 0.145
(0.017) (0.029)
Direct Importing 0.576 0.118 0.458 0.576 0.437 0.139
(0.014) (0.041)
Table 2: Effects of Access to External Finance on Engagement in Trade (Means and [Bootstrapped] Standard Errors for [Post-Matching] Effects)
Middle Income Countries (N=9,244: Unconstrained 3,501, Constrained 5,743) Before Matching After Matching (3-to-1 NN PS) Access to
External Finance
Finance
Constrained Effect Size
Access to External Finance
Finance
Constrained Effect Size
International Trade 0.473 0.317 0.156 0.473 0.413 0.060
(0.010) (0.017)
Exporting 0.357 0.242 0.115 0.357 0.312 0.045
(0.010) (0.014)
Importing 0.281 0.189 0.092 0.281 0.231 0.050
(0.009) (0.013)
Exporting & Importing 0.159 0.109 0.051 0.159 0.131 0.028
(0.007) (0.013)
Use of Intermediaries in Trade 0.199 0.115 0.084 0.199 0.169 0.030
(0.008) (0.014)
Trade Through Intermediaries 0.143 0.080 0.063 0.143 0.115 0.028
(0.007) (0.011)
Direct Trade 0.367 0.252 0.115 0.367 0.325 0.042
(0.010) (0.016)
Direct Exporting 0.314 0.213 0.100 0.314 0.275 0.039
(0.009) (0.013)
Direct Importing 0.175 0.133 0.043 0.175 0.157 0.019
(0.008) (0.013)
Table 3: Balancing Test Results and Comparison of Samples on Covariates Foreign Ownership
Variable Sample
Mean Treated
Mean
Control %Bias
Log(Employment) Unmatched 5.193 3.591 117.1
Matched 5.193 5.241 -3.5
Labor Productivity Relative to the Industry's Average Unmatched 1.132 0.987 63.5
Matched 1.132 1.139 -2.9
Number of Plants Abroad Unmatched 0.250 0.026 68.5
Matched 0.250 0.231 5.9
Location of Headquarters Unmatched 0.860 0.927 -21.9
Matched 0.860 0.863 -0.9
Share of Domestic Sales going to Parent Company or Subsidiaries Unmatched 0.032 0.015 12.5
Matched 0.032 0.037 -3.3
Access to External Financing
Variable Sample
Mean Treated
Mean
Control %Bias
Log(Employment) Unmatched 4.008 3.509 37.2
Matched 4.008 4.011 -0.3
Labor Productivity Relative to the Industry's Average Unmatched 1.021 0.981 17.8
Matched 1.021 1.024 -1.3
Reported Cost of Financing as an Obstacle to Business Unmatched 0.325 0.280 9.6
Matched 0.325 0.317 1.5
Reported Access to Financing as an Obstacle to Business Unmatched 0.265 0.249 3.5
Matched 0.265 0.253 2.7
Table 4: Effects of Foreign Ownership on Engagement in Trade: Weighted Propensity Score
(1) (2) (3) (4) (5) (6) (7) (8) (9)
VARIABLES
Engagement in
Trade Exporting Importing
Exporting &
Reporting Cost of Financing as an
Obstacle to Doing Business 0.049*** 0.018 0.046*** 0.017* 0.018 0.010 0.032** 0.027** 0.019*
(0.016) (0.015) (0.014) (0.010) (0.014) (0.011) (0.014) (0.013) (0.010)
Reporting Access to Financing as an
Obstacle to Doing Business -0.019 0.001 -0.030** -0.006 -0.018 -0.000 -0.001 0.003 -0.007
Research & Development Expenditure 0.010*** 0.013*** 0.003* 0.002* 0.012*** 0.004*** 0.010*** 0.011*** -0.000
(0.002) (0.002) (0.002) (0.001) (0.002) (0.001) (0.002) (0.002) (0.001)
Use of External Audit 0.036*** 0.018 0.020* 0.004 0.003 -0.003 0.032*** 0.023** 0.015*
(0.013) (0.011) (0.011) (0.008) (0.011) (0.010) (0.011) (0.011) (0.008)
ISO Certification 0.082*** 0.093*** 0.007 0.033*** 0.007 -0.013 0.096*** 0.099*** 0.026***
(1) (2) (3) (4) (5) (6) (7) (8) (9)
VARIABLES
Engagement in
Trade Exporting Importing
Exporting &
Importing
Use of Intermediaries
Trade Only Through Intermediaries
Direct Trade
Direct Exporting
Direct Importing
Share of State in Ownership -0.051 -0.092** 0.047 0.046 0.012 0.054 -0.060 -0.071* 0.057*
(0.053) (0.047) (0.045) (0.031) (0.046) (0.042) (0.045) (0.042) (0.032)
Constant -0.121** -0.600*** 0.247*** -0.185*** 0.458*** 0.505***
-0.606*** -0.656*** -0.189***
(0.050) (0.046) (0.045) (0.031) (0.045) (0.036) (0.044) (0.042) (0.032)
Observations 6,967 6,967 6,967 6,967 6,967 6,967 6,967 6,967 6,967
R-squared 0.406 0.323 0.291 0.220 0.100 0.095 0.395 0.337 0.283
(Table 4 Continued)
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 5: Effects of Access to Financing on Engagement in Trade: Weighted Propensity Score
(1) (2) (3) (4) (5) (6) (7) (8) (9)
VARIABLES
Engagement in
Trade Exporting Importing
Exporting &
Reporting Cost of Financing as an Obstacle
to Doing Business 0.043*** 0.010 0.045*** 0.012 0.015 0.010 0.030** 0.022* 0.023**
(0.016) (0.015) (0.014) (0.011) (0.014) (0.013) (0.014) (0.013) (0.011)
Reporting Access to Financing as an
Obstacle to Doing Business -0.026* -0.005 -0.039*** -0.013 -0.018 -0.010 -0.012 -0.004 -0.025**
Research & Development Expenditure 0.012*** 0.013*** 0.003 0.003** 0.012*** 0.006*** 0.010*** 0.011*** -0.001
(0.002) (0.002) (0.002) (0.001) (0.002) (0.002) (0.002) (0.002) (0.002)
Use of External Audit 0.032** 0.016 0.023** 0.007 -0.001 -0.007 0.029*** 0.020* 0.020**
(0.013) (0.011) (0.011) (0.008) (0.011) (0.010) (0.011) (0.010) (0.009)
ISO Certification 0.074*** 0.096*** 0.009 0.033*** 0.003 -0.020* 0.097*** 0.102*** 0.027***
(1) (2) (3) (4) (5) (6) (7) (8) (9)
VARIABLES
Engagement in
Trade Exporting Importing
Exporting &
Importing
Use of Intermediaries
Trade Only Through Intermediaries
Direct Trade
Direct Exporting
Direct Importing
Share of State in Ownership -0.075 -0.096* 0.020 0.011 0.033 0.035 -0.078* -0.066 -0.013
(0.053) (0.049) (0.047) (0.036) (0.047) (0.042) (0.047) (0.045) (0.038)
Constant -0.182*** -0.587*** 0.212*** -0.224*** 0.471*** 0.466*** -0.596*** -0.621*** -0.218***
(0.050) (0.044) (0.044) (0.032) (0.045) (0.040) (0.043) (0.040) (0.034)
Observations 6,967 6,967 6,967 6,967 6,967 6,967 6,967 6,967 6,967
R-squared 0.332 0.335 0.301 0.308 0.099 0.085 0.403 0.367 0.354
(Table 5 Continued)
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 6: Effects of Foreign Ownership on Propensity to Engage in Trade by Country Groups (Means and [Bootstrapped] Standard Errors for [Post-Matching] Effects) Lower Middle Income
(N=6,669: Foreign Owned 376, Domestic 6,293)
Upper Middle Income
(N=2,575: Foreign Owned 229, Domestic 2,346) Egypt, ElSalvador, Guatemala, Honduras, India, Morocco,
Nicaragua, Philippines, Vietnam Brazil, Chile, Ecuador, SouthAfrica
Table 7: Effects of Access to External Finance on Engagement in Trade by Country Groups (Means and [Bootstrapped] Standard Errors for [Post-Matching] Effects) Lower Middle Income
(N=6,669: Unconstrained 2,109; Constrained 4,560)
Upper Middle Income
(N=2,575: Unconstrained 1,392; Constrained 1,183) Egypt, ElSalvador, Guatemala, Honduras, India, Morocco, Nicaragua,
Philippines, Vietnam Brazil, Chile, Ecuador, SouthAfrica
Table 8: Effects of Ability to Locate “Better” Clients on Engagement in Trade (Means and [Bootstrapped]
Standard Errors for [Post-Matching] Effects)
Middle Income Countries (N=9,384: Treated 2,476, Untreated 6,908) Before Matching After Matching (3-to-1 NN PS) Large
Domestic Partners
No Large Domestic
Partners Effect Size
Large Domestic
Partners
No Large Domestic
Partners Effect Size
International Trade 0.525 0.331 0.194 0.525 0.471 0.054
Middle Income Countries (N=9,244: Treated 984, Untreated 8,400) Before Matching After Matching (3-to-1 NN PS) MNC
Partners
No MNC
Partners Effect Size
MNC Partners
No MNC
Partners Effect Size
International Trade 0.600 0.356 0.244 0.600 0.514 0.085
Table 9: Effects of Access to Better Clients on Engagement in Trade by Country Groups (Means and [Bootstrapped] Standard Errors for [Post-Matching] Effects) Lower Middle Income
(N=6,669: Treated 1,346; Untreated 5,323)
Upper Middle Income
(N=2,302: Treated 1,055; Untreated 1,247) Egypt, ElSalvador, Guatemala, Honduras, India, Morocco, Nicaragua,
Philippines, Vietnam Brazil, Chile, Ecuador, SouthAfrica
(Table 9 continued)
Lower Middle Income
(N=6,669: Treated 432; Untreated 6,237)
Upper Middle Income
(N=2,302: Treated 515; Untreated 1,787) Egypt, ElSalvador, Guatemala, Honduras, India, Morocco, Nicaragua,
Philippines, Vietnam Brazil, Chile, Ecuador, SouthAfrica