Executive summary

View the most recent version.

Ascertaining whether entry to export markets leads to productivity gains has recently engaged the attention of researchers. In Canada, entry to export markets in the 1990s has been found to be associated with higher growth (Baldwin and Gu, 2003). Studies for other countries have not produced uniform results. The cross-country differences may be the result of variations in the trading environments facing different countries.

In order to ascertain the impact of different trading environments on the dynamics of participation in export markets, this study examines how the relationship between export-market participation and plant-level productivity growth in the Canadian manufacturing sector evolved over three separate periods (the late 1980s, the early 1990s and the period post-2000) that featuring different rates of Canada/U.S bilateral tariff reductions and differing movements in bilateral real exchange rates. We find:

1. The more productive a plant is, the more likely it is to make a transition to export markets, and the less likely it is to leave them.
2. Entrants to export markets improve their productivity performance relative to the population from which they originated and plants that stay in export markets do better than comparable plants that exited, lending support to the thesis that exporting boosts productivity. This finding is robust to the estimation technique used.
3. The productivity growth advantage that in normal circumstances is enjoyed by export-market participants is reinforced or attenuated by macroeconomic events such as exchange rate fluctuations. Export-market participants gain more in productivity growth from currency depreciation than non-participants. The superior performance of Canadian export-starters or continuing exporters was reinforced in the 1990-1996 period, when the Canadian dollar depreciated. The advantage, however, was reduced in periods (1984-1990 and 2000-2006) when the Canadian dollar appreciated. In particular, the dramatic increase in the value of the Canadian dollar during the post-2000 period almost completely offset the advantages enjoyed by export-market participants. Our counterfactual exercise shows that fluctuations in real exchange rates explain almost all the shifts in productivity growth gaps between export-market participants and non-participants in this latter period.

The paper also examines aspects of the entry and exit dynamics of exporters and finds:

1. Plants self-select into export markets – that is, a select group of plants with superior chances of succeeding choose to buy the option to experiment in these markets: more efficient plants are more likely to enter and less likely to exit export markets.
2. The trading environment impacts on the degree of experimentation. A tariff reduction and currency depreciation increase the probability that more efficient non-exporters will enter export markets. Currency depreciation also increases the likelihood that less efficient exporters will stop exporting.