Export concentration and diversification: Does the choice of trading partners matter?
Exports of most developing economics including Pakistan are highly concentrated in a few industrial sectors and a few destination markets. This lack of diversification of products and markets is one of the barriers that impedes growth and creates multiple macro-economic challenges. If exports are not diversified, any shock affecting the destination markets is directly transmitted to trading partners. Moreover, the taste and purchasing power of customers varies enormously across countries, it is vital that firms choose a right mix of export goods keeping in view these market factors. Also, after the elimination of export quotas and reductions in tariffs, to a greater extent, the selection of right set of products for each trading partner has become even more imperative in order to survive in a fiercely competitive world. These constraints to the Pakistan’s export promotion are widely recognized but poorly investigated.
Pakistan’s firms’ exports to more than 157 markets in different regions of the world. The number of products exported to these destinations varies widely. Since these trading partners differ enormously in terms of their natural endowments and in terms of trade relations with the rest of the world, it is important to investigate whether Pakistan’s export-oriented firms are focusing their energies on the right corners. The knowledge of existing level of diversification and market penetration can help in targeting trade negotiations for market access and tailoring trade facilitation measures accordingly.
In this back ground, this study intends to empirically investigate the role of factor endowments in the diversification of Pakistan’s trade and the level of penetration in export markets. It aims to generate a set of stylized facts about the diversification of export-product-mix and customers base, and then empirically examine the relationship of these variables with factors endowments (land, labour, and capital) of trading partners. This work will focus on the sectoral and geographical diversification of industrial and agricultural products, and also explore the role of firm heterogeneity in the export diversification activities. The project will extract information about exported products, firms, and factor endowments from multiple national and international sources to generate a panel dataset. It will then use the panel to examine the variation of export mix of incumbent firms across markets using empirical estimation technique.
In addition to extending the frontiers of knowledge regarding the firm capabilities, this research will provide intellectual input to the policy makers struggling for diversifying Pakistan’s exports. Given the production structure of this economy, this study will apprise policy makers about the existing level of diversification and concentration of exports, and identify markets that are more important for expanding exports of agricultural products and manufactured goods, alike. Once strengths and weaknesses of Pakistan’s export-oriented firma and the existing level of export diversification are identified, the policy makers can pursue the negotiation of markets access in order to increase the participation of firms in untapped markets.