Key message 2 – Small firms can learn important new skills from exporting, increasing the gains from trade.
Engaging in international trade enhances firms’ productivity as they gain new skills and capabilities. By engaging with more sophisticated foreign buyers that have information about skillsets and techniques they are not familiar with, exporters learn techniques that increase their productivity, efficiency, and/or output quality. Firms are particularly likely to absorb and implement knowledge that allows them to satisfy demanding buyers (De Loecker, 2007 and 2013). Learning by exporting may be especially powerful for SMEs in developing countries, where small producers have limited knowledge of frontier techniques and domestic markets lack this type of expertise.
Atkin et al. (2017) found strong evidence of the learning-by-exporting mechanism in their experiment with Egyptian rug manufacturers. The increase in profitability came, to a great extent, from developing the ability to produce the higher quality rugs needed to meet the demands of foreign buyers – for example, using weaving techniques that ensure the rug lies flat on the floor. With these more advanced skills, the rug manufacturers who had the chance to export produced not only higher quality rugs but also, for a given quality level, produced them faster than the non-exporters. When all firms were asked to produce identical domestic market rugs under controlled conditions, the exporters even produced domestic-specification rugs at dramatically higher quality levels and in less time than their non-exporting peers.
“With these more advanced skills, the rug manufacturers who had the chance to export produced not only higher quality rugs but also, for a given quality level, produced them faster than the non-exporters.”
Where did this new knowledge come from? Drawing on correspondences between foreign buyers and the intermediary, as well as logbooks of discussions between the intermediary and the producers, it appears that foreign buyers and the intermediary passed on information about particular skills and techniques gleaned from previous experience.
This “learning-by-exporting” mechanism means that exporting not only boosts firms’ profits and growth in the short term through greater demand and/or higher prices, but also raises firms’ productivity and capabilities. This increases the gains generated by trade (Alvarez et al., 2013), which in turn raises the returns on investments that facilitate trade for SMEs.
Learning through participation in value chains
Besides engaging in international trade, another way in which SMEs can learn new skills and techniques is by participating in global and regional value chains. Like exporting, participation in global value chains requires interactions with foreign clients either upstream or downstream in the production chain. More efficient or advanced techniques and capabilities can be learned from other foreign firms in the value chain. This means domestic SMEs can upgrade their own capabilities and increase their efficiency (Gereffi et al., 2014).
Global value chains tend to be highly dynamic and internationally competitive. Firms therefore face increasing pressure from a growing number of producers to increase the skill content of their activities or develop new competencies (Humphrey and Schmitz, 2002). An IGC-funded project by Gereffi et al. (2014) found that the potential for skill upgrading in East Africa, particularly through regional integration, is high and could
provide important opportunities for countries like Rwanda and Uganda to increase
their productivity in key manufacturing and service sectors.