IMF Research Perspectives is the new online newsletter covering updates on IMF research.

Abstract

IMF Research Perspectives is the new online newsletter covering updates on IMF research.

Suppose you are a rice farmer in Vietnam with a successful harvest over the past few years. Wouldn’t it be nice to increase your sales and expand your customer base by tapping the international market? But reaching customers directly in a range of countries takes a lot of work and money. What if there were another way: selling your product to a global retailer with name recognition and networks all over the world?

Trade intermediaries such as wholesalers and retailers play a significant role in the export sector, in particular for small and medium-sized companies. For example, nearly 20 percent of Chinese and French exports and about 10 percent of Italian, US, and Vietnamese exports are carried out by intermediaries. Firms that export via intermediaries, so-called indirect exporters, tend to be smaller and less productive than direct exporters. While much has been documented about the static characteristics of these firms, little is known about their business dynamics and prospects over time. Once firms start exporting indirectly, do they grow over time? Do they eventually become direct exporters (exporting without trade intermediaries)? What share of the gains from trade is generated by indirect exporters?

A forthcoming IMF working paper seeks to address these questions empirically and theoretically. The paper uses firm-level data from Vietnam to document business dynamics of indirect exporters and develops a dynamic trade model to decompose the welfare gains from indirect and direct exporting. After a series of economic reforms over the past three decades, Vietnam is now one of the fastest growing economies in the world. Export growth has been the key driving force behind this rapid economic expansion, which makes Vietnam a suitable case for the study of export dynamics and the evolution of exporters.

What do firm-level data from Vietnam tell us?

First, indirect exporting is a temporary state: the probability of remaining an indirect exporter for two consecutive years is lower than the probability of remaining a direct exporter. Second, indirect exporters graduate faster: they are more likely than nonexporters to shift to direct exporting in subsequent years. Finally, indirect exporting helps build sales networks abroad: among new direct exporters, the group with indirect experience has a higher average export-to-sales ratio than the group without such experience.

What are the mechanisms behind these observations ?

These facts are replicated in a small open economy framework in which Vietnam is the home country and the rest of the world is the foreign country. The model builds on earlier research and extends those models to a dynamic setting. There are three types of firms: nonexporters (firms operating domestically), indirect exporters, and direct exporters. These types reflect differences in productivity, foreign demand, and fixed and variable costs. A key feature of this model is customer accumulation. Upon entry, new exporters have access to a small share of aggregate demand in the foreign country. As firms continue to export-indirectly or directly-this share expands. On average, indirect exporters have access to a higher share of foreign demand than nonexporters, as a result of their exporting tenure. This explains why indirect exporters are more likely than nonexporters to export directly in the future and why, among new direct exporters, the group with indirect exporting experience has a higher average export-to-sales ratio.

The model calibrated to match the Vietnamese data demonstrates that the fixed costs of indirect exporting are only 30 percent of the fixed costs of direct exporting. Intermediaries allow for lower fixed costs and thus easier entry, but-since fixed costs are used to build export networks-indirect exporters expand more slowly than direct exporters. It takes 10 years for indirect exporters and 5 years for direct exporters to reach their average export-to-sales ratio. The calibrated model can also evaluate the importance of intermediaries. In the absence of intermediaries, and hence of indirect exporting, the share of exporters declines by 10.5 percentage points, export volume contracts by 11.1 percent, and welfare drops by 1.3 percent. Indirect exporting accounts for 18 percent of the gains from trade in Vietnam.

How can policies affect export performance?

The model can be used to run counterfactual exercises to seek insight into this question. Consider, for instance, trade license requirements. In Vietnam, until 20 years ago, if firms wanted to export or import, they had to use a handful of state-owned enterprises as trade intermediaries. The impact of reinstating this trade license requirement can be evaluated by closing the direct exporting channel. For highly productive firms or for firms that face high foreign demand, exporting indirectly is not the optimal decision.

This is mainly because these firms find it more desirable to pay the high fixed costs of direct exporting and enjoy its lower variable costs by exporting larger quantities. Consequently, in the absence of the direct exporting channel, the share of exporters declines by 11 percentage points, export volume drops by 74 percent, and welfare falls by 6 percent.

As another example of a counterfactual exercise, consider moderate subsidies to reduce the fixed cost of indirect exporting. Recent research shows that wholesalers, on average, export more products than manufacturing firms, which suggests that these trade intermediaries spread the fixed costs of indirect exporting across many products. Under this assumption, taxing the income of households and subsidizing the fixed costs of indirect exporters can lead to welfare gains, although these gains are negligible.

For a small Vietnamese rice producer, exporting directly may be expensive and risky. However, another way of gaining access to international markets is through trade intermediaries. Indirect exporting is not only a cheaper way of testing the waters in foreign markets, it is also a stepping-stone to direct exporting for small and young exporters.