Intermediaries, Firm Heterogeneity and Exporting Behaviour

• Published date: 01 July 2017
• DOI: http://doi.org/10.1111/twec.12423
• Author: Jiangyong Lu,Zhigang Tao,Yi Sun,Yi Lu
• Date: 01 July 2017

Intermediaries, Firm Heterogeneity and

Exporting Behaviour

Jiangyong Lu

1

,YiLu

2

, Yi Sun

3

and Zhigang Tao

4

1

Peking University, Beijing, China,

2

Department of Economics, National University of Singapore,

Singapore,

3

Shanghai University of International Business and Economics, Shanghai, China and

4

Faculty of Business and Economics, University of Hong Kong, Hong Kong

1. INTRODUCTION

THE new new-trade literature has uncovered the importance of firm-level variations, par-

ticularly firm productivity, in determining exporting behaviour. A dominant theoretical

explanation for exporters being generally more productive than non-exporters in this literature

is the assumption of a fixed cost of exporting, under which the more productive firms self-

select to become exporters.

1

What is implicitly assumed in this literature is that firms export

directly by themselves to foreign countries. In reality, however, many firms, especially those

in developing economies, export through intermediaries,

2

which may significantly reduce the

costs of exporting and consequently have radical implications for the predictions of the new

new-trade theory.

Recently, intensive effort has been made to investigate the role of intermediaries. While

much understanding has been gained regarding how intermediaries facilitate trade (e.g. Feen-

stra and Hanson, 2004; Antras and Costinot, 2011) and how they differ from direct exporters

(e.g. Rauch and Watson, 2004; Ahn et al., 2011), a fundamental question remains unan-

swered, that is what types of firms export through intermediaries and what types of firms

export directly by themselves. This paper fills in the gap by offering a theoretical analysis of

exporting behaviour in the presence of export intermediaries and firm heterogeneity. Furt her-

more, this paper, among the first few studies, provides direct evidence on the relation between

firm productivity and methods of exporting.

3

Our theoretical analysis is built upon a standard trade framework: a home country plus N

foreign countries, two sectors (i.e. a homogeneous good and a continuum of differentiated

goods), and one production factor (i.e. labour). Production takes place in the home country,

and firms can directly export to Nforeign countries by incurring a fixed cost (Melitz, 2003).

As in Chaney (2009), we assume that the fixed cost of direct exporting differs acro ss foreign

countries.

Jiangyong Lu acknowledges research supports from the National Science Foundation of China

(#71525004). Yi Lu acknowledges research supports from the National University of Singapore (the

Ministry of Education AcRF Tier 1 FY2014-FRC2-001).

1

For empirical evidence, see Bernard and Jensen (1995, 1999 2004), Bernard and Wagner (1997), Cler-

ides et al. (1998); for theoretical analysis, see Melitz (2003), Bernard et al. (2003).

2

For example, about 80 per cent of Japanese exports and imports in the early 1980s was handled by

300 trade intermediaries (Rossman, 1984). In China, at least 22 and 18 per cent of its exports and

imports, respectively, in 2005 flew through intermediaries (Ahn et al., 2011). In Sweden, about 15 per

cent of export came through intermediaries in 2005 (Akerman, 2010).

3

The two exceptions are (McCann 2013) and (Abel-Koch 2011) which use firm-level data sets from the

Eastern Europe and Turkey, respectively.

©2016 John Wiley & Sons Ltd 1381

The World Economy (2017)

doi: 10.1111/twec.12423

The World Economy

The departure of our model from the literature is that firms can also use intermediaries to

export to foreign countries. Intermediaries can facilitate trade by helping firms sear ch for their

trading partners and by alleviating the problem of information asymmetries between the trad-

ing parties (Rubinstein and Wolinsky, 1987; Biglaiser, 1993). In this paper, we focus on how

firms make exporting decisions in the presence of intermediaries, instead of how intermedi-

aries work, which has been studied in the literature (for a survey of this literature, see, e.g.,

Spulber, 1996). Following Rauch and Watson (2004) and Ahn et al. (2011), we assume that

when using intermediaries to export, firms need to share a portion of their exporting revenue

with intermediaries. Meanwhile, based on the findings of Blum et al. (2009), we assume that

when using intermediaries to export, firms do not need to incur the fixed cost of direct export-

ing but a lower fixed cost of dealing with the intermediaries.

4

Under this model set-up, we can show that as a firm’s productivity increases, it switches

from having sales in the home country only to having both sales in the home country and

exporting. Regarding the methods of exporting, as a firm’s productivity increases, it starts

with exporting through intermediaries, then proceeds to both direct exporting and exporting

through intermediaries, and finally, to direct exporting. Moreover, as a firm’s productivity

increases, it starts with exporting to some foreign countries, and finally, to all foreign coun-

tries.

Next, we empirically investigate the relation between firm productivity and exporting beha-

viour. The data come from Private Enterprise Survey of Productivity and the Investment Cli-

mate (PESPIC), which is a standardised data based on a series of The World Bank Enterprise

Surveys (WBESs) conducted by the Enterprise Analysis Unit of the World Bank. There are a

total of 12,679 firms in 29 developing economies during the period of 2002–06. PESPIC con-

tains unique information about firms’ methods of exporting, including direct exporting,

exporting through intermediaries and both. It is found that 27 per cent of exporters use inter-

mediaries and 11 per cent of exporters export both directly and through intermediaries, which

indicate the importance of intermediaries for exporting.

To uncover what types of firms use which exporting methods, we first compare firms along

six dimensions (i.e. output, employment, capital, output per worker, capital per worker and

total factor productivity). It is found that firms with both sales in the home country and direct

exporting always have the highest mean value, followed by those with sales in the home

country and exporting both directly and through intermediaries, than those with sales in the

home country and exporting through intermediaries, and finally, those with sales in the home

country only. These preliminary results are consistent with our theoretical predictions.

To further establish the relation between firm productivity and methods of exporting, we

conduct a regression analysis. It is found that along with the increase in productivity, a firm

switches from having sales in the home country only to having sales in the home country and

exporting through intermediaries, then to having sales in the home country and exporting both

directly and through intermediaries, and finally to having sales in the home country and direct

exporting. These findings are consistent with our theoretical prediction.

To conclude that our empirical findings are not biased due to some estimation problems,

we conduct a series of robustness checks, such as addressing the endogeneity of firm

4

We also discuss alternative arrangements between exporters and intermediaries, but find that the result-

ing theoretical predictions regarding the relation between firm productivity and methods of exporting are

not supported by the empirical regularities. See the Appendix for details.

©2016 John Wiley & Sons Ltd

1382 J. LU ET AL.