A Study of the Heterogeneous Effects of Globalization on Firm Productivity

The purpose of this paper is to estimate the effect of globalization (export in particular) on firms’ productivity distribution and then to suggest policy implication to improve government’s export promotion policies. We consider the two long-standing issues in the globalization and productivity literature: heterogeneity among firms and endogeneity between globalization and productivity, which distinguishes our study from the existing ones, by employing instrumental variables and quantile regression methods. In the empirical analysis, we found statistically significant evidences that export has a positive effect on productivity for all exporting firms regardless of their location in the productivity distribution and that the effect of globalization on productivity becomes bigger as the productivity quantile becomes lower. The first finding implies export promotion policies can induce firms to higher productivity than otherwise. The second implies a firm with lower productivity can obtain relatively bigger productivity gain by engaging in export markets if only it successfully survives the market. Based on the findings, we suggest the following directions regarding export promotion policies. Considering only 2.6% of total small and medium enterprises (SMEs) participate in export, we have potentially a large room for creating new exporting SMEs and improving their productivity. Hence, government needs to keep strengthening various efforts trying to increase the number of exporting SMEs. When government designs and executes policies to support export, (i) it is critical to estimate ex ante the potential capability of SMEs to survive in export markets which is in turn related to the firm’s productivity, (ii) it is advisable to support successful entries for a period of time long enough to settle the market since surviving is more difficult than entering, and (iii) it is crucial to evaluate ex post the consequence of policies and upgrade them on the ground of the policy performance, (iv) it is necessary to support indirect export via value chains, domestic as well as overseas, since they can play a pivotal role for SMEs to expand business activities outside country.