Export Growth Determinants in Bangladesh

What explains export booms in developing countries? In prior IGC-funded research examining apparel exports from Bangladesh we uncovered an interesting pattern, namely that entry into exporting is comparatively low but entrants tend to be larger and exhibit lower rates of exit. We conjectured that these patterns arise because Bangladeshi apparel exporters tend to be new firms whose revenue comes almost entirely from foreign sources. This prevalence of “born-to-export” firms would stand in contrast to the typical findings for developed countries (as well as some developing countries) where new exporters are typically mature firms that remain primarily oriented to the domestic market. In the second phase of our research, we examine this conjecture using the transactions-level exporting dataset assembled in the first phase of our project complemented with new sources of data for Bangladesh as well as data for Colombia, China and Taiwan. More importantly, we study the implications of the “born-to-export” phenomenon for future export growth in Bangladesh and other developing countries.

In the case of “born-to-export” firms, entrepreneurs not only face the costs of establishing foreign markets but also the costs associated with the creation of a new firm. This leads to high start-up costs that make the dynamics of export growth quite distinct from those that characterize export fluctuations among firms that were created primarily to serve domestic consumers. In particular, since large start-up costs must be amortized over relatively lengthy periods, expectations about future payoffs are likely to become key drivers of exporting decisions. Such expectations may be especially sensitive to the signals that potential entrants extract from the experiences of pioneering firms that lead the way into these markets. In this way, learning spillovers are likely to be particularly important. And since all potential exporters will be reacting to the same signals rather than their idiosyncratic experiences, dramatic export surges during the early stages of a boom may be likely.

In addition to providing a conceptual framework for interpreting previous export booms, we hope to shed light on the circumstances under which poor countries are able to generate new export successes. This is highly relevant for future trade and industrial policy in Bangladesh – in particular, what are appropriate policies to support diversification beyond apparel exports over the next decade?

A particularly important issue for policy relates to the role of trade preferences. We will study the effect that preferences for Bangladeshi exports in the EU have had on Bangladeshi exports in other markets. A standard competitive setting would suggest that if the EU reduced its tariffs on, say, apparel from Bangladesh, Bangladeshi supply would be diverted towards the EU and away from other markets (such as the US). In contrast, in models of monopolistic competition the key investment is the creation of a new product, and once that product is created, it can be exported everywhere. Thus, tariff reductions by the EU on apparel from Bangladesh would lead to entry of new firms/products to the sector and these new firms would potentially export not just to the EU but also to other markets. The data we have compiled during the initial phase of our IGC research project provides us with an opportunity to test this hypothesis for the case of Bangladeshi apparel exports. By looking at how exports across different markets changed in response to liberalization by the EU, we can better understand if this prediction holds or whether liberalization by one country diverts supply from others. In addition, since different apparel categories face different MFN tariffs in the EU, we might expect to see Bangladesh firms export more of apparel subgroups where the MFN tariff levied by the EU is higher, both to the EU and to other markets.