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Firm Size and Participation in the International

Economy: Evidence from Bangladesh

Ben Shepherd, Principal.


February 6th, 2020.

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank
Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy
of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with
ADB official terms.

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Outline
1. Introduction and Motivation

2. Research Questions and Methodology

3. Results

4. Conclusion and Policy Implications

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1. Introduction and Motivation
250  Bangladesh is a rapidly
developing economy
 Income growth
200
 Poverty reduction
Real GNI Per Capita (2000 = 100)

 Structural transformation
150

 International integration has


100
been a key part of the strategy.
 Trade % GDP up from 29.3% in
2000 to 38.2% in 2018.
50

 SMEs are crucial to the


Bangladeshi economy, but how
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 do they engage with global
Year markets?
Bangladesh LMIC

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2. Research Questions and Methodology
 In Melitz (2003) style models, large 70.000

firms account for the bulk of exports


by value (see export intensity by size
figure). 60.000

 SMEs can still be numerous in a count


sense. 50.000
 Political salience of the SME sector in
developing countries as a major source
of employment, often 80%-90% of total. 40.000

 Theory suggests that SMEs are most 30.000


likely to be involved with the
international economy indirectly:
 Through wholesalers/distributors. 20.000

 As second-tier suppliers.
10.000

 What do the data say about the


apparent disjuncture between policy 0.000
and theory? Small Medium Large

Direct Indirect

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2. Research Questions and Methodology
 Concrete research questions:
 What role does firm size play in export decisions at the
extensive and intensive margins?
 What role do imports of intermediates and the presence of a
foreign investor have on export decisions at the extensive and
intensive margins?
 Is there any evidence of different effects by firm size of
imported intermediates and inward FDI on export behavior?

 World Bank Enterprise Surveys panel data for Bangladesh


(2007, 2011, 2013). Retain manufacturing firms only.

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2. Research Questions and Methodology
1. Estimate TFP using Levinsohn-Petrin and Olley-Pakes.
Use labor productivity (VA/worker) as a robustness
check.

2. Estimate export models using Heckman sample


selection estimator.
 Enables separate identification of extensive and intensive
margin effects. (Use just-identified model; ideally should over-
identify.)
 Control for productivity, size, capital intensity.
 Estimate marginal effects at different firm sizes.

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3. Results

Olley-Pakes Levinsohn-Petrin

Log(Prod.Workers) 0.359*** 0.398***

(0.000) (0.000)

Log(Non-Prod.Workers) 0.358*** 0.416***

(0.000) (0.000)

Log(Capital) 0.285 0.235

(.) (.)

N 502 1163

R2

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3. Results
(1) (2) (3)

Outcome Selection Outcome Selection Outcome Selection

Log(TFP LP) 0.336 0.096

(0.106) (0.546)

Log(TFP OP) 0.400* 0.122

(0.093) (0.503)

Log(VA/Emplo 0.653*** 0.260***

yees)

(0.000) (0.000)

Log(Employee 0.479** 0.504*** 0.427* 0.482*** 0.566*** 0.565***

s)

(0.017) (0.001) (0.055) (0.004) (0.000) (0.000)

Log(Capital/E 0.029 -0.046 -0.010 -0.059 0.049 -0.039

mployee)

(0.682) (0.362) (0.912) (0.356) (0.120) (0.193)

Importer 0.010 0.473*** 0.009 0.471*** -0.260** 0.347***

(0.944) (0.000) (0.950) (0.000) (0.025) (0.002)

Foreign 0.153 6.049*** 0.151 6.048*** -0.144 2.794***

(0.405) (0.000) (0.411) (0.000) (0.399) (0.000)

Constant 12.992*** -3.245*** 13.002*** -3.235*** 7.757*** -5.999***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

N 1102 1102 1075

Pseudo R2 0.301 0.301 0.574

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3. Results

Importer Effect FDI Effect


3 25

2.5
20

15

1.5

10

5
0.5

0 0
Small Medium Large Small Medium Large

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4. Conclusion and Policy Implications
 In line with the literature, firm size is positively linked to
export propensity and intensity.

 Imported intermediates and inward FDI are associated with


superior export propensity; evidence weaker for export
intensity.
 International integration, including through GVCs, may reduce fixed
trade costs, but not have much impact on variable trade costs.

 Integration with world markets benefits firms of all sizes, but


the effects are larger for medium and large firms than for small
firms.
 Consistent with a story about absorptive capacity.

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