Key message 1 – Exporting benefits both SMEs and their owners’ families by increasing profits.

 

Researchers David Atkin, Amit Khandelwal, and Adam Osman (2017) recently implemented the first randomised controlled trial (RCT) on exporting to map the effects on SMEs. The researchers provided a randomly drawn group of small rug manufacturers in Egypt with the opportunity to export by matching them with foreign buyers (see box below). The opportunity to export raised the overall performance of these firms, as measured by monthly profits, by 16–26%.1 This increase is large when compared to other policy interventions aimed at increasing profits, such as access to credit (Banerjee, 2013).

“The opportunity to export raised overall performance of these firms, as measured by monthly profits, by 16–26%.”

Exporting not only benefits the firm itself, but also the family of the firm owner. Follow-up research done by Atkin et al. (in progress) shows that household consumption also rises when exports increase. For example, the number of times a family eats meat per month rises by 24% as a result of engaging in international trade. In this setting, meat consumption is a simple but informative measure of wellbeing and living standards, as Egyptian families pride themselves on the ability to serve meat at least a few times a month.

Supporting SMEs to engage in more international trade can therefore have important implications for firm profits, as well as for the wellbeing and income of owners, workers, and their families. This provides an important justification for government efforts to make it easier for SMEs to trade internationally, and to remove the costly barriers that restrict such activity.

Egyptian family walking through market. Credit: Getty | Edwin Remsberg

Measuring the effect of trade through a randomised controlled trial

Despite research suggesting that exporting is associated with higher sales, productivity, wages, and increased innovation, it is hard to pinpoint the exact effect of exporting for SMEs. Distinguishing between, on the one hand, exporting causing firms to perform better and, on the other hand, better firms choosing to export, is challenging. Finding this causal relationship requires a robust method that controls for the so called “selection bias”, by which the most productive firms are also the ones who start trading in the first place (Melitz, 2003). On top of that, it is difficult to get the data needed to capture small changes in the types of products firms produce and the quality of
these products. This means that researchers struggle to identify which efficiency improvements come from exporting alone.

Randomised controlled trials (RCTs) are considered the “gold standard” for uncovering causal relationships and getting around the problems outlined above. The use of this methodology in trade literature has so far been limited, as it is difficult to randomly allow some firms to export and not others. Atkin, Khandelwal, and Osman (2017) overcame this inherent problem, conducting the first-ever RCT on exporting.

The researchers first selected a small set of Egyptian rug manufacturers at random. They then partnered with a US-based non-governmental organisation (NGO) and an Egyptian intermediary to secure export orders from foreign buyers through trade fairs and direct marketing channels. The random assignment of these initial export orders dealt with the
bias that better firms tend to go into exporting.

Even with the randomisation, careful measurement is needed to understand the effects of exporting. The researchers tracked performance through periodic surveys of both treatment firms (those who received the opportunity to export) and control firms (those who did not receive the opportunity). The authors recorded not only the prices and quantities of rugs produced and the inputs going into the rugs, but also detailed product specifications for the rugs and quality levels along 11 dimensions, as recorded by an external quality assessor.

Even then, it was difficult to record small differences in the specifications of rugs made for different clients, and thus to control for specifications when comparing quality and productivity across treatment and control firms. To solve this issue, the authors set up a lab where weavers from each firm produced identical-specification rugs for the domestic market under controlled conditions. This level of detail allowed the authors to control for changes in the product mix due to exporting with much more accuracy than is possible in typical datasets.

Thanks to the randomisation procedure, the causal effects of exporting were then identified by comparing the average outcomes between the treatment and control firms.

Woman weaving rug in Cairo. Credit: Getty | Chris Mellor

Footnotes

  • 1 The setup of the research intervention was such that the authors could not rule out that trading with equally sophisticated domestic buyers could yield equal results. However, as such buyers are scarce in developing countries, foreign trade is still likely to be more beneficial.