Exports, Investment and Productivity Growth in Small Firms: A Firm-level Analysis from Tanzania and Ghana

Abstract

This paper examines the effect of firm-level investment in capital on export entry and productivity growth among different firm size classes using matching and difference-in-differences techniques. We find that firm-level investment in capital reduces the burden of sunk costs of export market entry, thereby inducing small firms to enter export markets with ease and increase their productivity as a result of export market participation. New entrants who survive their first year of exporting also grow their investment levels to consolidate market share. We show that micro and small firms that initiate exporting are more likely to implement firm-level investment as well, one way of technology upgrading, to remain competitive in export markets. Moreover, firm-level investment helps small exporters to generate higher productivity once they engage in export markets. This may suggest that the observed market selection and growth of small firms could be the outcome of distinctive productivity improvements in these firms. We note that investing in capital, especially plant and equipment, may help micro and small firms improve their productive capacity to produce more output at lower unit costs as a result of low-marginal costs of production. Export-led growth policies should be directed at supporting micro and small firms access the much needed financing to upgrade their production processes and improve their productivity.