Economic Research Forum (ERF)

MENA firms involved in trade: characteristics and challenges

1247
How do MENA firms participating in international trade compare with their counterparts elsewhere in the world as well as with non-traders in the region? This column reports globally comparative data on the size and productivity of firms that export, import and do both – ‘two-way traders’. The results indicate the need for policy measures in MENA economies to promote efficient access to export markets and material inputs, especially for dynamic mid-range firms with potential for growth.

In a nutshell

Trade premia in MENA economies suggest that there are higher barriers to entry for exporting and importing firms than elsewhere, and access to markets and inputs is often distorted.

Export promotion can be effective: there is a need for programmes that support sustained trading output in viable and competitive activities.

MENA economies’ lack of a supporting middle of expanding and growing exporters is more evident than in other regions.

Are traders different? An extensive and diverse body of research indicates that exporting firms tend to be larger and more productive than firms that aren’t involved in international trade (see Hayakawa et al, 2012, for an overview).

Similarly, firms that import intermediate goods also tend to be more productive and employ more people. Importing may allow these firms to access foreign technology, seek higher quality inputs, and provide an entry point for learning about the workings of international markets (Amiti and Konings, 2007).

Researchers have referred to the larger size and productivity of both exporting and importing firms as ‘trade premia’. Yet while these results are consistent across time and geographical regions, the mechanisms that generate these premia are less clear: it may be that larger and more productive firms are the ones that can break into and compete effectively in foreign markets. It also may be that once firms start trading, they gain access to new technology and know-how, allowing them to become more productive and grow – what is known as ‘learning-by-doing’.

Are these relationships the same in MENA?

Our research takes up this question specifically for traders in the Middle East and North Africa (MENA) region. Using a unique, firm-level dataset for more than 80 middle-income economies based on enterprise surveys conducted by the European Bank for Reconstruction and Development, the European Investment Bank and the World Bank, we explore the underlying characteristics of firms that export, import and do both – ‘two-way traders’.

Previous research finds that MENA economies trade at volumes below their potential, especially given the region’s proximity to Europe (Behar and Freund, 2011). Despite this, the region features many trading firms: it’s simply that these firms tend to be low-volume traders. Compared with averages from over 80 similar economies from the World Bank’s Enterprise Surveys, MENA has a higher proportion of traders, especially those that both export and import (see Figure 1).

So, are MENA traders also bigger and more productive compared with non-traders? Here, the evidence is mixed. In manufacturing, MENA exporters are larger than firms in the region that don’t export, but this gap is substantially smaller than in other regions. What’s more, MENA exporters in both manufacturing and services are no more productive than those that do not export at all.

The picture changes when we differentiate firms by their export volumes. The three categories are superstars (the top 5% of firms by export value), big players (firms between the median and 94th percentile) and small players (firms below the median).

The MENA region’s superstar manufacturers are seven to nine times the size of non-exporters, while big players are roughly twice the size of non-exporters. Both these findings are in line with the trade premia we find elsewhere in the world.

But the region’s small player manufacturing exporters – the abundant, low-volume exporters – are no larger than non-trading firms. What’s more, these small players actually exhibit lower productivity levels compared with non-exporting manufacturers.

These patterns are similar for the region’s services firms engaged in trading. While the superstar services exporters are indeed larger and more productive, low-volume small player exporters are no larger (indeed, they are even smaller) than non-traders and no more productive.

Our study also looks at manufacturing firms that only export, those that only import intermediate goods and those that engage in both activities. For manufacturers that only import, we find the expected positive and significant trade premia for both size and productivity: these firms are twice as productive on average as those that do not use intermediates from abroad.

Similarly, MENA’s two-way traders are more productive and larger than non-traders, though this size premium is smaller than in other regions.

Next steps for research and policy

While our findings shed some light on the dynamics of trading firms in MENA economies – comparing them with non-traders in the region as well as with traders elsewhere – the results are largely descriptive. But they do raise a few salient questions and policy implications.

First, economic research predicts that firms that begin trading (particularly exporters) will be among the largest, most productive and most promising businesses. Free and open entry to export markets and exposure to international competition will ensure that less efficient firms exit the market, while the survivors continue to grow.

Trade premia in MENA indicate that these forces are not operating properly, suggesting higher barriers to entry for trading firms, and privileged access to markets and inputs. In particular, access to inputs from abroad may be distorted: several countries in the region have overvalued exchange rates, making imports relatively cheaper. But access to foreign currency itself can be limited, which means that only a few firms may leverage imported goods and materials.

Second, a specific area of policy focus and research should be the role of export promotion agencies. MENA features several active agencies for export promotion, including EPCC in Egypt, Jedco in Jordan, IDAL in Lebanon, CEPEX in Tunisia and several others. These agencies have been particularly active in the promotion of small and medium-sized exporters (Jaud and Freund, 2015).

Export promotion can be effective. One study finds that each dinar of support provided by Tunisia’s FAMEX export promotion programme resulted in nine dinars of exported output. Yet after only a few years, these effects disappeared, indicating that there is a need for programmes that support sustained trading output in viable and competitive activities (Cadot et al, 2015, cited in Jaud and Freund, 2015).

Third, our evidence supports previous findings that MENA lacks a supporting middle of expanding and growing exporters. Jaud and Freund (2015) call this dynamic one of champions ‘without a team’. We show that this lack of a team is indeed more evident in MENA than elsewhere.

Further research and policy work should focus on what can be done to help this middle to grow, including removing potential distortions to firms that export, as well as those accessing inputs from abroad.

Further reading

Amiti, M, and J Konings (2007) ‘Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia’, American Economic Review 97(5): 1611-38.

Behar, A, and C Freund (2011) ‘The Trade Performance of the Middle East and North Africa’, Middle East and North Africa Working Paper Series No. 53, World Bank.

Cadot, O, AM Fernandes, J Gourdon and A Mattoo (2015) ‘Are the Benefits of Export Support Durable? Evidence from Tunisia’, WPS 6295.

Francis, D, and H Schweiger (2017), ‘Not So Different from Non-traders: Trade Premia in Middle East and North Africa’, Economics of Transition 25: 185-238.

Hayakawa, K, T Machikita and F Kimura (2012), ‘Globalization and Productivity: A Survey of Firm-level Analysis’, Journal of Economic Surveys 26(2): 332-50.

Jaud, M, and C Freund (2015) ‘Champions Wanted: Promoting Exports in the Middle East and North Africa’, Directions in Development, World Bank.

Tags: , , ,

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Climate change: a growing threat to sustainable development in Tunisia

Tunisia’s vulnerability to extreme weather events is intensifying, placing immense pressure on vital sectors such as agriculture, energy and water resources, exacerbating inequalities and hindering social progress. This column explores the economic impacts of climate change on the country, its implications for achieving the sustainable development goals, and the urgent need for adaptive strategies and policy interventions.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Assessing Jordan’s progress on the sustainable development goals

Global, regional and national assessments of countries’ progress towards reaching the sustainable development goals do not always tell the same story. This column examines the case of Jordan, which is among the world’s leaders in statistical performance on the SDGs.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

The threat of cybercrime in MENA economies

The MENA region’s increasing access to digital information and internet usage has led to an explosion in e-commerce and widespread interest in cryptocurrencies. At the same time, cybercrime, which includes hacking, malware, online fraud and harassment, has spread across digital networks. This column outlines the challenges.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

Education and health in Tunisia: is human capital at risk?

Tunisia has made significant strides in enhancing the skills, knowledge and health of its population, all cornerstones of economic growth and social progress. This column examines the state of the country’s education and healthcare systems, identifying structural weaknesses that could jeopardise human capital and, by extension, progress towards achieving the sustainable development goals.