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ADB Economics Working Paper Series

Foreign Direct Investment, Innovation,and Exports: Firm-Level Evidencefrom Peoples Republic of China, Thailand, and Philippines

Ganeshan WignarajaNo. 134 | November 2008


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ADB Economics Working Paper Series No. 134

Foreign Direct Investment, Innovation,

and Exports: Firm-Level Evidencerom Peoples Republic o China,

Thailand, and Philippines

Ganeshan WignarajaNovember 2008

Ganeshan Wignaraja is Principal Economist, Of ce of Regional Economic Integration, Asian DevelopmentBank. This is a revised version of a paper presented at the Second Conference on Micro Evidence onInnovation and Development, organized by the United Nations University Maastricht Economic and SocialResearch and Training Center on Innovation and Technology (UNUMERIT) and Renmin University, 2123

April 2008, Beijing. The author is grateful to conference participants for comments and to Rosechin Ol ndofor research assistance. The views expressed here are solely the authors and not to be attributed to the

Asian Development Bank.


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Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.org/economics

2008 by Asian Development BankOctober 2008ISSN 1655-5252Publication Stock No.: _______

The views expressed in this paper are those of the author(s) and do notnecessarily re ect the views or policiesof the Asian Development Bank.

The ADB Economics Working Paper Series is a forum for stimulating discussion andeliciting feedback on ongoing and recently completed research and policy studiesundertaken by the Asian Development Bank (ADB) staff, consultants, or resourcepersons. The series deals with key economic and development problems, particularlythose facing the Asia and Paci c region; as well as conceptual, analytical, or methodological issues relating to project/program economic analysis, and statisticaldata and measurement. The series aims to enhance the knowledge on Asiasdevelopment and policy challenges; strengthen analytical rigor and quality of ADBscountry partnership strategies, and its subregional and country operations; and improvethe quality and availability of statistical data and development indicators for monitoring

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The ADB Economics Working Paper Series is a quick-disseminating, informalpublication whose titles could subsequently be revised for publication as articles inprofessional journals or chapters in books. The series is maintained by the Economicsand Research Department.


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Contents

Abstract v

I. Introduction 1

II. Why do Firms Export? 2

A. Theories 2B. Empirical Studies 3

C. Speci cation and Hypothesis 5

III. Data and Empirical Findings 6

A. Firm-evel Dataset A. Firm-evel Dataset 6B. Exploratory Data Analysis 7C. Econometric Results 8

IV. Conclusions 11

Appendix: Technology Index for Electronics Firms in Peoples Republic of China,

Thailand, and Philippines 12

References 18


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Abstract

This paper examines the links between ownership, innovation, and exportsin electronics rms in three late-industrializing developing countries (PeoplesRepublic of China, Thailand, and Philippines), drawing on recent developmentsin applied international trade and innovation and learning. Technology-basedapproaches to trade offer a plausible explanation for rm-level exportingbehavior. The econometric results (using probit) con rm the importance of foreign ownership and innovation in increasing the probability of exporting inelectronics. Higher levels of skills, managers education, and capital also matter

in the Peoples Republic of China as well as accumulated experience in Thailand.Furthermore, a technology index composed of technical functions performed by

rms emerges as a more robust indicator of innovation than the research anddevelopment to sales ratio. Accordingly, technological effort in electronics in thesecountries mostly focuses on assimilating and using imported technologies rather than formal research and development by specialized engineers.


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I. Introduction

There is growing empirical testing of the relationship between foreign direct investment(FDI), innovation, and exports at the rm level. This literature has been empirically led byeconometric analysis of rm-level datasets in individual countries. An important questionis whether rm ef ciency is considerably enhanced by the experience of competing inoverseas markets. It has generally emerged that the characteristics of exporting rms aresigni cantly different from nonexporting rms. Speci cally, exporting rms are larger; have

higher foreign equity; and are more innovative than nonexporters (for a recent selectionsee Bleaney and Wakelin 2002, Barrios et al. 2003, Bhaduri and Ray 2004, Raisah 2004,Correa et al . 2007). These ndings from studies on developed and developing countrieshave been rationalized in terms of the neo-Heckscher-Ohlin Model, neotechnologytheories, technological capabilities approach, and national innovation systems approach,among others.

The rst aim of this paper is to replicate tests of the links between foreign ownership,innovation, and exports in individual countries for a sample of electronics rms inPeoples Republic of China (PRC), Thailand, and Philippines. A comprehensive rm-levelexport function was estimated (which includes foreign ownership, innovation, and other

control variables) using a Probit model. This is one of a handful of rm-level cross-countryeconometric studies on these issues using a common framework. 1 The dataset used inthis paper is a relatively large one, covering 524 rms in the PRC, 166 rms in Thailand,and 117 rms in the Philippines. The industry and East Asian countries selected areparticularly fascinating. The technologically sophisticated electronics industry is one of East Asias largest exports and plays a crucial role in the regions industrial development(Mathews and Cho 2002). The giant PRC economy has successfully attracted signi cantFDI in ows and has rapidly emerged as one of worlds largest exporters of electronics.Thailand and the Philippines have also relied on FDI to emerge as notable electronicsexporters. Much remains unknown about the export and technological behavior of enterprises in these three countries.

The second aim is testing of alternative measures of innovation at the rm level:the dominant research and development (R&D)-to-sales ratio and a broader-basedtechnology index (TI). The econometric results con rm the ndings of earlier rm-levelstudies that foreign ownership and innovation increase the likelihood of exporting in all

Others include Rasiah (2003) on Malaysia and Thailand, and Wignaraja (2008a) on the PRC and Sri Lanka.


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three countries. Interestingly, the TI performs better as a proxy for innovation in the threecountries than the R&Dsales ratio. This seems to suggest that only a small part of thetechnological effort takes the form of formal R&D by specialized engineers. It mainlyconsists of minor changes and adaptations to technologies from abroad.

The paper is structured as follows. iterature on rm-level exports, FDI, and innovationis reviewed in Section II. Empirical results are presented and evaluated in Section III.Section IV concludes.

II. Why do Firms Export?

A. Theories

The analysis of rm-level export performance, FDI, and innovation has attracted theattention of two related schools of applied economics. Nearly three decades ago,applied international trade and investment specialists began to explore the effects of thetheoretical determinants of comparative advantage on rm-level export performance.In uential early papers by Auquier (1980) and Glejser, Jaquemin, and Petit (1980) onFrench and Belgian rms stimulated subsequent empirical work. 2 This literature (whichhas roots in the neo-Heckscher-Ohlin Model and the neotechnology theories) suggeststhat the theoretical determinants of comparative advantage, which are traditionallyrecognized as industry-level factors, 3 can also operate at the rm level. This literaturesuggests that conditions of imperfect markets with widespread oligopoly as well as

differences in technologies, learning, and tastes underlie the notion of rm-speci cadvantages. It follows that almost all the theories of comparative advantage can berm-speci c, determining not only which countries will enjoy a comparative advantage in

international markets but also which rms can exploit that comparative advantage better than others. Incorporating the notion of rm-speci c advantages somewhat modi es thepredictions of the theories of international trade as follows: (i) there are country-speci cand industry-speci c advantages that apply to all rms equally; and (ii) within this, someadvantages will be rm-speci c since certain managerial, organizational, marketing, andother skills will be peculiar to each rm as will production methods, technologies, andexperience-based know-how.

2 This is a large, growing literature on developed and developing countries. For a selection, see Lall ( 986), Wilmore( 992), Ito and Pucik ( 993), Kumar and Siddharthan ( 994), Bleaney and Wakelin (2002), and Barrios et al. (2003).

3 The major trade theories (Heckscher-Ohlin Model, theories o economies o scale and oligopolistic competition,neotechnology theories, and theories o economic geography) attribute the export per ormance o an opendeveloping economy to its comparative advantage over another in terms o access to certain actor inputscapital, labor, economies o scale, technology, and geography ( or surveys see Dosi et al. 988 and Deardor 2005).Empirical applications to developing countries have sought to explain the export per ormance o each industry/product in terms o their various characteristics.

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The other group with an interest in rm-level exporting is the literature on technologicalcapabilities and national innovation systems. Focusing on innovation and learningprocesses in developing countries, this literature puts emphasis on the acquisition of technological capabilities as a major source of export advantage at the rm level (see

all 1987 and 1992, Ernst et al . 1998, Mathews and Cho 2002, Rasiah 2004). Drawingon the evolutionary theory of technical change by Nelson and Winter (1982) and updatesby Metcalfe (2003) and Nelson (2008), this underlines the dif cult rm-speci c processesinvolved in building technological capabilities to use imported technology ef ciently.The central argument is that rms have to undertake conscious investments in search,training, engineering and even R&D, to put imported technologies to productive use.Technological knowledge cannot be readily transferred internationally across rms likea physical product because it has a large tacit element that is dif cult to codify in ameaningful way. The transfer of tacit elements of knowledge is slow and costly since itrequires the acquisition of experience. Furthermore, capacity building rarely occurs inisolation and involves active cooperation between rms, buyers of output, and support

institutions for technology and export marketing (undvall 1992). Hence, differences in theef ciency with which rm-level capabilities are created are themselves a major source of competitive advantage.

B. Empirical Studies

The available empirical studies have generally con rmed the importance of the theoreticaldeterminants of comparative advantage and the role of rm-level innovation. Studiesinclude a proxy for innovation and standard control variables in the rm-level exportingliterature like ownership, rm size, age, and human capital. Regressions were run relatingexport achievements to particular enterprise characteristics using different econometricmethods. Early studies relied on OS while recent studies have employed more re nedtechniques such as Tobit, Probit, and Heckman selection models. Empirical studieson developing countries can be classi ed into three types according to the proxy for innovation employed (see Appendix Table 1).

First, a long research tradition has used R&D expenditures to sales ratio (or a dummyvariable for R&D expenditures) as a proxy for innovation. The R&Dsales ratio,which captures the rms expenditures on design and R&D, is usually available in anenterprises accounts. R&D expenditures includes wages and salaries of R&D personnel(such as scientists and engineers); materials, education costs, and subcontracting costs.In an early study of Indian engineering and chemical rms, all (1986) found evidencefor technological determinants of enterprise exporting. Foreign equity was found to besigni cant in chemicals; licenses were highly signi cant in engineering (1% level); andR&D was signi cant in both industries (but with opposite signs). Zhao and i (1997)tested the relationship between R&D and export propensity in manufacturing rmsin the PRC and found R&D and rm size to be positive and signi cant determinants.Capital intensity was also signi cant but with a negative sign. In a study of Indonesian

Foreign Direct Investment, Innovation, and Exports:Firm-Level Evidence from Peoples Republic of China, Thailand, and Philippines | 3


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manufacturing rms, van Dijk (2002) found that foreign ownership and skills in uencedexporting in most industries. However, R&D expenditure was only signi cant in matureindustries, while age had a negative sign in supplier-dominated sectors.

Second, a few attempts have been made to include other innovation measures (e.g.,patents or a measure of product innovation). Du and Girma (2007), in a regressionmodel of exporting by manufacturing rms in the PRC, used an indicator representingnew product innovation with several determinants (e.g., age, training expenditures andself-raised nance). Product innovation and most explanatory variables were signi cant.In a study of rm-level exporting in Ecuador, Correa et al. (2007) use separate dummyvariables to represent aspects of innovation and technology (e.g., R&D, processinnovation, quality certi cation) that are found to be positively associated with exporting.Foreign ownership and rm size were signi cant but age was not.

Third and more recently, a comprehensive TI to represent innovation has come from the

technological capabilities literature in developing countries. Studies have developed asimple summary measure of technological capabilities by ranking the technical functionsperformed by enterprises (see the pioneering work on Thailand by Westphal et al. 1990). 4

The ranking procedure integrates objective and subjective information into measures of a rms capacity to set up, operate, and transfer technology. The typical approach is tohighlight the various technical functions performed by enterprises and to award a scorefor each activity based on the assessed level of competence in that activity. An overallcapability score for a rm is obtained by taking an average of the scores for the differenttechnical functions. As discussed below, the overall capability score (often referred toas TI) has proved robust in statistical analysis of rm-level exporting. Guan and Ma(2003), in their study of industrial rms in the PRC, reveals that export performance is

positively related to an index of innovative capability and rm size. In a comparative studyof garment rms in the PRC and Sri anka, Wignaraja (2008a) showed that exportingis positively correlated with an index of technological capability, learning from buyers(represented by a dummy variable), and foreign ownership. Rasiah (2003) examinedthe in uence of an index of process technology as well as several control variables(ownership, R&D expenditure, age, and skills) in determining exports in electronics rmsin Malaysia and Thailand. The process TI and the other four variables were signi cant.In a study of Indian pharmaceuticals and electrical/electronics rms, Bhaduri and Ray(2004) used an output-based measure of R&D capability (e.g., new products developed,technical reports published, development of new designs and processes). R&D capability,foreign ownership, and raw material imports were all signi cant.

4 More recent applications include Pakistan by Romijn ( 997), Mauritius by Wignaraja (2002), and Mexico byDominguez and Brown (2004).

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C. Specifcation and Hypothesis

Drawing on the above studies, the following econometric model is estimated for separateexport functions for PRC, Thailand, and Philippines electronics rms:

Y = X + , (1)

where Y is the vector denoting the probability of exporting at the rm level, X is the matrixof explanatory variables, is the matrix of coef cients, and is the matrix of error terms.The dependent variable is a binary variable, taking a value of 1 if the rm is an exporter (exports to sales ratio>0) and zero if it is a nonexporter (exports to sales ratio=0).The hypotheses and explanatory variables in X in equation (1) are described below. Adescription of the variables is provided in Appendix Table 2.

1. Foreign Ownership

The share of foreign equity (FOR) is expected to have a positive in uence on theprobability of exporting (all 1986, Wilmore 1992, Raisah 2003, Correa et al . 2007, andDu and Girma 2007). There are two a priori reasons. First, access to the marketingconnections and know-how of their parent companies as well as accumulated learningexperience of producing for export make foreign af liates better placed to tap internationalmarkets than domestic rms. 5 Second, foreign rms tend to be larger than domestic

rms and therefore better placed to reap economies of scale in production, R&D, andmarketing. A large rm will be better able to exploit such scale economies and enjoygreater ef ciency in production, enabling it to export more.

2. Innovation

Innovative activity at the rm level, leading to greater cost ef ciency is expected to bepositively associated with the probability of exporting. As the literature on technologicalcapabilities in developing countries indicates, the innovation and learning process inenterprises is not just a simple function of years of production experience but of moreconscious investments in creating skills and information to operate imported technologicalef ciently (see Westphal et al . 1990, Ernst et al . 1998, Rasiah 2003, Wignaraja 2002 and2008b, Guan and Ma, 2003). Such investments would include technology search, training,engineering, and possibly R&D activities. Accordingly, following the empirical literatureon innovation, two alternative proxiesR&Dsales ratio and a rm-level TI are used

in the econometric analysis. The R&Dsales ratio captures the rms expenditures ondesign and R&D (includes wages of R&D personnel, materials, and training costs). TheTI, which is based on the all (1992) taxonomy, is designed to represent a broad rangeof technological capabilities. It was constructed by ranking a clothing rms competenceacross a series of technical functions, and the results were normalized to give a valuebetween 0 and 1. The Appendix contains the details.5 See Dunning ( 993) or a discussion o the ownership advantages o multinationals.

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countries and is relatively recent. The data are not publicly available but it is possible toapply for rm-level data for research purposes from the World Bank. The sample containsa mix of rms of different ownership and size classes.

B. Exploratory Data Analysis

Appendix Table 3 reports t-test results on the mean values for some rm characteristics inthe three countries. Exporters are those that continue to export and new exporters whilenonexporters are the rest. The main ndings, which con rm those of earlier empiricalstudies, are as follows.

(i) There is a signi cant difference in foreign equity between exporters andnonexporters in the three countries. Exporters in the Philippines have the highestshare of foreign equity in total equity, followed by Thailand and the PRC.

(ii) The TI signi cantly differs between exporters and nonexporters in all threecountries but the R&Dsales ratio is not signi cant in any country. This seems tosuggest that the TI is likely to be a better predictor of the probability of exportingin the econometric analysis than the R&Dsales ratio.

(iii) The general managers education level is signi cantly different between exportersand nonexporters in all three countries.

(iv) The value of production machinery per employee is signi cantly different betweenexporters and nonexporters in the PRC and Thailand.

Table 1: Average Technology Index ScoresPRC Thailand Philippines

All Firms 0.5 7 0.505 0.406

Exporters 0.554 0.560 0.464Nonexporters 0.502 0.388 0.284t-values 3.643*** 5.032*** 4.780***

Foreign Firms 0.544 0.577 0.429Local Firms 0.5 0 0.388 0.333t-values 2.088** 5.876*** 2. 84**

Large Firms 0.543 0.586 0.437SMEs 0.478 0.3 3 0.3 9t-values 5.0 9*** 8.790*** 2.770***

*** signi cant at %, ** at 5%, and * at % levels.SMEs = small- and medium-size enterprises.Note: Exporters have >0 exports to sales ratio; oreign rms have >0% oreign

equity or have a oreign partner; and large rms have > 00 permanentemployees. t-values re er to test o di erences between means o topand bottom gures.



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Table 1 provides average TI scores for all electronics rms and by exports, ownership,and rm size. Two major ndings points emerge. First, the PRC has the highest averageTI scores (0.517) closely followed by Thailand. The Philippines lags behind. Second, thegaps between the TI scores of all three categories (exporters and nonexporters, foreign

and local, large and small rms) are narrower in the PRC than in the other two countries.This seems to suggest that spillovers are taking place between different types of rms inthe PRC at a faster rate than in the other two countries. Further empirical investigation isneeded to verify this interesting nding and the factors underlying it.

Table 2 shows the frequency distribution of the TI scores in the electronics rms in thethree countries. The data suggest a wide variation in TI scores between electronics rmswithin each country. There are only a handful of rms with a high degree of technicalcompetence (with a score in excess of 0.81), and some rms with a medium to highdegree of technical competence (with scores of in the range of 0.61 to 0.80). Theremaining rms, which form the largest group, have scores below 0.60. Interestingly, the

data suggest that the PRC and Thailand have a larger share of rms with TI scores inexcess of 0.60, which is indicative of technological strengths.

Table 2: Frequency Distribution o Technological Index ScoresTI Scores PRC Thailand Philippines

Number o Firms

Percent o Total Firms

Number o Firms


Number o Firms


0.000.20 3 0.6 7 0.2 23 9.70.2 0.40 89 7.0 24 4.5 3 26.50.4 0.60 306 58.4 68 4 .0 38 32.50.6 0.80 5 22.0 53 3 .9 25 2 .30.8 .00 2.0 4 2.4 0 0.0 Total 524 00.00 66 00.00 7 00.00

C. Econometric Results

The t-tests are a useful descriptive device but do not shed much light on causation.Hence, a two-stage modeling strategy was adopted to estimate an export function usingthe alternative proxies for innovation but the same binary dependent variable and other

rm characteristics. Initially a general model was estimated followed by a reduced formmodel with signi cant variables from the general model.

Table 3 shows the general and reduced form probit regression for the binary

exporter/nonexporter variable for all rms against the R&Dsales ratio and other rmcharacteristics. Most strikingly, the R&Dsales ratio is not signi cant (even at the 10%level) in any country. The reduced form regressions indicate the importance of other rm

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characteristics in explaining the probability of exporting. In the PRC, higher foreign equity,technical skills, general managers education level, and value of production machineryper employee increase the probability of exporting. In Thailand, foreign equity and ageare in uential. In the Philippines, only foreign equity is signi cant and positive in sign.

This underlies the fact that foreign rms make up the bulk of the electronics exporters inthe Philippines. The R&Dsales ratio, which focuses on formal technological activity byengineers, is insuf cient to capture the full range of technological effort taking place at the

rm level.

Table 3: Probit Estimates Using R&DSales RatioBinary Variable: Exporter (1) and Nonexporter (0)

IndependentVariables

PRC Thailand PhilippinesGeneral

(1)Reduced

(2)General

(3)Reduced

(4)General

(5)Reduced

(6)R&D 0.00 0 0.05 0 0.6 72

(0. 8) (0.74) ( .64)

FOR 0.0 72 0.0 70 0.0 4 0.0 42 0.0 94 0.0224(5.39)*** (5.55)*** (4. 4)*** (5.76)*** (4. 3)*** (5.4 )***

AGE 0.0003 0.0883 0.0387 -0.0 43(-0.05) (2.75)*** ( .96)** (-0.68)

ETM 0.000 0.000 0.0003 0.0 5(3.08)*** (3.04)*** (0.02) (0.8 )

EDUC 0.3625 0.3470 0.4990 0.3420(2.23)** (2.2 )** ( .65)* ( .2 )

GMEXP 0.0069 0.0543 0.0304(0.40) ( .57) ( .62)

CAP 0.0046 0.0048 0.0000 0.000(2.57)** (2.6 )** (0.74) (0.30)

Constant 2.6364 2.5393 2.5 06 0.6258 2.8726 0.7350(3.75)*** (3.99)*** ( .64) (2.33)** ( .76)* (2.69)***

n 35 356 34 66 77 79Wald 2 48.42*** 48.20*** 35.99*** 35.40*** 34.06*** 29.29***Pseudo R2 0.20 0.20 0.25 0. 8 0.44 0.37Loglikelihood

55.85 57.95 60.32 84.9 26.88 30.38

*** signi cant at % level, ** signi cant at 5% level, and * signi cant at 0% level.Note: z-values are in parenthesis.



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A broad-based TI may be more useful in representing rm-level technological activity indeveloping countries. The econometric evidence underlines the value of using a broad-based TI (made up of technical functions undertaken by rms) to represent innovation.Table 4 shows the general and reduced form probit regression estimates for the binary

exporter/nonexporter variable for rms in the three countries against TI and other rmcharacteristics. In contrast with the results for the R&Dsales ratio, the TI turns out to besigni cant and positive in sign in all three countries in both the general and reduced formmodels.

There are some interesting differences in the reduced form results by country. In thePRC, TI and foreign ownership are both signi cant at the 1% level and with the correctsigns. Meanwhile, human capital variables (technical skills and the general managerseducation level) as well as capital are also signi cant and positive in sign. In Thailand,TI, foreign ownership, and age are signi cant with the expected signs at the 1% level.In the Philippines, TI and foreign ownership are both signi cant at the 1% level with the

expected signs. It is noteworthy that TI and foreign ownership are good predictors of export propensity in all three countries. In the case of the PRC, higher levels of technicalskills, managerial education, and capital increase the likelihood of exporting. In Thailand,accumulated experience affects rms likelihood to export.

Table 4: Probit Estimates Using Technology IndexBinary Variable: Exporter (1) and Nonexporter (0)

IndependentVariables

PRC Thailand PhilippinesGeneral

(7)Reduced (8) General

(9)Reduced

(10)General

(11)Reduced

(12) TI .40 3 .3747 .6988 .7339 5.58 5.269

(2.70)*** (2.65)*** (2.88)*** (3.2 )*** (4.73)*** (5.25)***

FOR 0.0 76 0.0 76 0.0 03 0.0 8 0.0 88 0.0204(5.46)*** (5.67)*** (3.50)*** (4.48)*** (3.74)*** (4.22)***

AGE 0.000 0.0896 0.0505 -0.0276(0.03) (2.93)*** (2.67)*** ( .50)

ETM 0.000 0.000 0.0005 0.00 7(2.60)** (2.59)** (0.04) (0. )

EDUC 0.29 5 0.2785 0.2587 0.0246( .79)* ( .75)* ( .00) (0.09)

GMEXP 0.0083 0.0353 0.0 82(0.49) ( .07) (0.89)

CAP 0.0048 0.0048 0.0000 -0.0000(2.52)** (2.55)** (0.87) (-0.57)

Constant -3. 025 -2.9932 -73.9628 - .492 -2.765 -2.6820(-4.27)*** (-4.52)*** (- . ) (-3.97)*** (-2.03)** (-5.47)***

n 352 356 56 66 77 79Wald 2 54.57*** 54.38 38.29*** 39.87*** 54.35*** 53.94***Pseudo R 2 0.22 0.22 0.23 0.23 0.58 0.56Loglikelihood - 53.90 - 54.74 -72.69 -79.75 - 9.82 -2 . 9

*** signi cant at % level, ** signi cant at 5% level, and * signi cant at 0% level.Note: z-values are in parenthesis.



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IV. Conclusions

This paper used data from electronics rms in the PRC, Thailand, and Philippines toreplicate tests of the relationship between ownership, innovation, and exports conductedfor other countries. In all three countries, there is signi cant evidence of the correlationbetween ownership, innovation, and exports as has been found elsewhere. The resultsindicate that higher levels of foreign equity and technological capabilities increase exportpropensity of rms in all three countries. Furthermore, in the case of the PRC, theprobability of exporting is in uenced by higher levels of skills, managers education, andcapital. Accumulated experience affects Thai rms likelihood to export. More generally,the ndings suggest that technology-based approaches to trade offer a plausibleexplanation for rm-level exporting in developing countries.

Interestingly, the R&Dsales ratiothe dominant proxy for innovation in most empiricalstudiesis not signi cant in any of the three countries in the reduced form regressions.Nonetheless, an alternative broad-based technology index (which includes R&D as oneof eight components) emerges as a strong indicator of innovation at the rm level. Thisresult con rms the argument made by Westphal et al. (1990), Guan and Ma (2003), andBhadhuri and Ray (2004) that an innovation measure based on a range of technicalfunctions performed by rms is a robust proxy for innovation at the rm level in late-industrializing developing countries. Typically, little R&D is performed at the rm level insuch economies (particularly toward the development of new products and processesat the frontiers of technology), and most of the technological effort is directed towardlearning to use imported technologies ef ciently.

Further work is needed to re ne this useful tool for wider applicability in studies of exports and innovation in developing countries. In this vein, tailoring the TI to better capture the technical functions performed in different industries, application of morecomplex econometric estimation methods (e.g., panel data estimation) and improved dataavailability and quality would be useful ways forward.



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Appendix: Technology Index or Electronics Firmsin Peoples Republic o China, Thailand, and Philippines

The all (1992) taxonomy of technological capabilities provides a comprehensive matrix of technical functions required for a developing country rm to set up, operate, and transfer importedtechnology ef ciently. all groups these functions under three sets of capabilities: investment,production, and linkages. The all taxonomy of technological capabilities has been successfullyused by case study research to assess levels of rm-level technological development indeveloping countries (for a selection see all 1987, all and Wignaraja 1998, Wignaraja 1998, andRomijn 1999). Subsequently, a technology index (TI) based on the all taxonomy (or its variants)has been developed for econometric testing in several developing countries (see, for instance,Westphal et al. 1990; Romijn 1999; Wignaraja 1998, 2002, 2008a, 2008b; and Wignaraja andOl ndo, forthcoming).

The application of the all (1992) taxonomy in this study was in uenced by data availability onthe types of technical rms performed by rms in the World Bank Investment Climate Surveys for

the PRC, Thailand, and Philippines. Nine technical functions were common to all three samples.Hence, the TI used here was based on rms competence in the following (i) upgrading equipment,(ii) licensing of technology, (iii) ISO quality certi cation, (iv) process improvement, (v) minor adaptation of products, (vi) introduction of new products, (vii) R&D activity, (viii) subcontracting,and (ix) technology linkages. A rm is given a score of 1 for each technical function it undertakesand the result is normalized to give a value between 0 and 1. This gure can be interpreted as theoverall capability score for a rm.

The largest category, production, is represented by ve activities that range from ISO certi cationto R&D activity (items iii to iv). Investment represented by two activities (items i and ii), whilelinkages is also represented by two activities (items viii and ix).



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A p p e n d i x T a b l e 1 : S e l e c t e d S t u d i e s o f E x p o r t s a n d M e a s u r e s o f I n n o v a t i o n

S t u d i e s

C o u n t r y

S a m p l e

M e a s u r e o f T e c h n o l o g y

M o d e l

R e s u l t s / M a i n F i n d i n g s a

U s i n g R & D e x p e n d i t u r e s

L a l l ( 9 8 6 )

I n d i a

0 0 e n g i n e e r i n g a n d

4 5 c h e m i c a l f r m s ;

9 7 8

9 8 0 d a t a

R & D e x p e n d i t u r e

O L S

E x p o r t i n c e n t i v e s ( + ) , p r o d u c t

d i e r e n t i a t i o n

( + ) , a n d i n t e r n a l t e c h n o l o g i c a l e o r t ( + ) d

W i l l m o r e

( 9 9 2 )

B r a z i l

7 , 0

5 3 i n d u s t r i a l f r m s ;

9 8 0 d a t a

D i c h o t o m o u s v a r i a b l e : i f r m

h a s R & D

p r o g r a m ; 0

o t h e r w i s e

L o g i t

F o r e i g n o w n e r s h i p ( + ) , a d v e r t i s i n g ( + ) ,

n o n w a g e v a l u e - a d d e d p e r e m p l o y e e ( ) ,

v a l u e - a d d e d t o o u t p u t r a t i o ( ) , f

r m s v a l u e -

a d d e d ( + ) , a n d g e o g r a p h i c c o n c e n t r a t i o n o

i n d u s t r y s o u t p u t ( + )

K u m a r a n d

S i d d h a r t h a n

( 9 9 4 )

I n d i a

6 4 0 c o r p o r a t i o n s ;

9 8 8

9 9 0 s u r v e y

d a t a

I n t e n s i t y o i n - h o u s e R & D a c t i v i t y

T o b i t

T e c h n o l o g i c a l a c t i v i t y ( + o r L T a n d M T ) , f r m

s i z e ( U - s

h a p e d ) , a d v e r t i s i n g ( + ) , a n d c a p i t a l

i n t e n s i t y ( o r L T a n d M T , + o

r H T ) c

Z h a o a n d L i

( 9 9 7 )

P R C

, 5 6 2 m a n u a c t u r i n g

f r m s ; 9 9 2 s u r v e y

d a t a


h a s r e p o r t e d

R & D ; 0 o t h e r w i s e

L o g i t a n d

s i m u l t a n e o u s

e q u a t i o n s

R & D e x p e n d i t u r e s ( + ) ,

p r o f t a b i l i t y ( ) , a n d f r m

s i z e ( + )

V a n D i j k ( 2 0 0 2 ) I n d o n e s i a

2 0 , 2

3 9 m a n u a c t u r i n g

p l a n t s ; 9 9 5 d a t a

R & D e x p e n d i t u r e t o s a l e s r a t i o

T o b i t a n d

G L M m o d e l

b

F i r m

s i z e ( U - s

h a p e d ) , o r e i g n o w n e r s h i p ( + ) ,

a g e ( ) , h u m a n c a p i t a l ( + o r S D a n d

o r S I ) ,

R & D ( + o r S D a n d S I ) c

U s i n g O t h e r M e a s u r e s o f I n n o v a t i o n

D u a n d G i r m a

( 2 0 0 7 )

P R C

2 8 , 0


e n t e r p r i s e s ; 9 9 9

2 0 0 2 d a t a

N e w p r o d u c t i n n o v a t i o n t o t o t a l o u t p u t

T o b i t

P r o d u c t i n n o v a t i o n ( + ) , t r a i n i n g ( + ) , f r m

s i z e

( + ) , p r o d u c t i v i t y g r o w t h ( + ) , a g e ( ) , b a n k

l o a n s ( + ) , a n d s e l - r a i s e d f n a n c e ( + )

C o r r e a ,

D a y o u b , a n d

F r a n c i s c o

( 2 0 0 7 )

E c u a d o r


f r m s ; 2 0 0 3 s u r v e y

d a t a


h a s i n - h o u s e

R & D ; 0 o t h e r w i s e

H e c k m a n

s e l e c t i o n

T e c h n o l o g y ( + ) , f r m

s i z e ( + ) , a n d o r e i g n

o w n e r s h i p ( + )

( c o n t i n u e

d ) .



21/26

S t u d i e s

C o u n t r y

S a m p l e

M e a s u r e o f T e c h n o l o g y

M o d e l

R e s u l t s / M a i n F i n d i n g s a

U s i n g a T e c h n o l o g y I n d e x

W e s t p h a l e t a l .

( 9 9 0 )

T h a i l a n d

9 f r m s i n 8

i n d u s t r i e s

I n d e x u s i n g f v e t e c h n o l o g i c a l c a p a b i l i t i e s :

p r o d u c t i v e

, m a j o r c h a n g e , m

i n o r

c h a n g e , a n

d i n v e s t m e n t c a p a b i l i t i e s , a

n d

t e c h n o l o g i c a l r e s o u r c e s

O L S

F o r e i g n o w n e r s h i p ( + ) , B O I p r o m o t i o n ( + ) ,

a n d f r m

s i z e ( + )

G u a n a n d M a

( 2 0 0 3 )

P R C

2 3 i n d u s t r i a l f r m s ;

9 9 6

9 9 8 s u r v e y

d a t a

I n d e x u s i n g s e v e n d i m e n s i o n s o i n n o v a t i o n

c a p a b i l i t i e s : l e a r n i n g , R

& D

, m a n u a c t u r i n g ,

m a r k e t i n g , o r g a n i z a t i o n a l , r e s o u r c e s

e x p l o i t i n g , a n d s t r a t e g i c c a p a b i l i t i e s

M u l t i p l e

r e g r e s s i o n

I n n o v a t i v e c a p a b i l i t y ( + ) a n d f r m

s i z e ( + )

R a s i a h ( 2 0 0 3 )

M a l a y s i a

a n d

T h a i l a n d

7 e l e c t r o n i c f r m s ;

s u r v e y d a t a

I n d e x o r p r o c e s s t e c h n o l o g y c a p a b i l i t y

u s i n g o u r c o m p o n e n t s ( a l s o u s e d R & D

e x p e n d i t u r e t o s a l e s r a t i o a s a n o t h e r

v a r i a b l e )

O L S

F o r e i g n o w n e r s h i p ( + ) , w a g e ( + ) , a g e ( + ) ,

p r o c e s s t e c h n o l o g y ( + ) , a n d R & D ( + )

B h a d u r i a n d

R a y ( 2 0 0 4 )

I n d i a

2 4 p h a r m a c e u t i c a l

a n d e l e c t r o n i c s f r m s ;

9 9 4

9 9 5 d a t a

I n d e x o R & D o u t p u t c o n s i s t i n g o p r o d u c t s ,

t e c h n i c a l r e p o r t s , n

e w p r o c e s s e s , n

e w

d e s i g n s a n d i m p o r t s u b s t i t u t e s d e v e l o p e d ,

c o n s u l t a n c y s e r v i c e s r e n d e r e d , a

n d r e s e a r c h

p a p e r s p u b l i s h e d

T o b i t

F i r m

s i z e ( + ) , R & D ( + ) , o r e i g n o w n e r s h i p ( + ) ,

r a w m a t e r i a l i m p o r t ( + ) , a n d t e c h n o l o g i c a l

c a p a b i l i t y ( + )

W i g n a r a j a

( 2 0 0 8 a )

P R C a n d

S r i L a n k a

5 5 8 f r m s ( 3 5 3 i n

t h e P R C a n d 2 0 5 i n

S r i L a n k a )

I n d e x u s i n g f v e t e c h n i c a l u n c t i o n s : s e a r c h

o r t e c h n o l o g y , I

S O q u a l i t y c e r t i f c a t i o n ,

p r o c e s s a d a p t a t i o n , m

i n o r a d a p t a t i o n o

p r o d u c t s ; a n d i n t r o d u c t i o n o n e w p r o d u c t s

P r o b i t

F o r e i g n o w n e r s h i p ( + ) , T I ( + ) , b u y e r l i n k s

( + ) , s k i l l - a

d j u s t e d w a g e r a t e ( - ) , a n d c a p i t a l

i n t e n s i t y ( o r P R C s a m p l e )

W i g n a r a j a

a n d O l f n d o

( o r t h c o m i n g )

P R C

8 5 8 f r m s ( 5 0 6

e l e c t r o n i c s a n d 3 5 2

a u t o m o t i v e )

S a m e i n d e x a s W i g n a r a j a ( 2 0 0 8 a )

T o b i t

E d u c a t i o n l e v e l o t h e g e n e r a l m a n a g e r

( + ) , o r e i g n o w n e r s h i p ( + ) , T I ( + ) , f r m

s i z e

( + ) , a n d s h a r e o s k i l l e d a n d t e c h n i c a l l y

q u a l i f e d p r o e s s i o n a l s i n e m p l o y m e n t ( + o r

a u t o m o t i v e )

O L S = o r d i n a r y l e a s t s q u a r e s , R & D = r e s e a r c h a n d d e v e l o p m e n t , G

L M = g e n e r a l i z e d l i n e a r m o d e l , B

O I = B o a r d o I n v e s t m e n t .

a R e p o r t s s e l e c t e d s i g n i f c a n t a c t o r s t h a t a e c t e x p o r t p e r o r m a n c e .

b T h i s m o d e l w a s d i s c u s s e d i n m o r e d e t a i l i n P a p k e a n d W o o l r i d g e ( 9 9 6 )

.

c S D = s c a l e - d o m i n a t e d f r m s , S I = s c a l e - i n t e n s i v e f r m s , L T =

l o w - t e c h n o l o g y , M T = m e d i u m - t e c h n o l o g y , H T =

h i g h t e c h n o l o g y .

d S h o w s s i g n i f c a n t r e s u l t s o r b o t h e n g i n e e r i n g a n d c h e m i c a l f r m s .

A p p e n d i x T a b l e 1 ( c o n t i n u e

d ) .



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Appendix Table 2: Description o VariablesVariable DescriptionSIZE Number o permanent employees

FOR Share o oreign equity, percent

AGE Number o years in operation

ETM Share o technical manpower (technical and vocational levelquali cations) in employment, percent

EDUC Level o education o general manager/chie executive ofcer: No education

2 Primary school education3 Secondary education4 Vocational training/some university training5 Bachelor degree6 Graduate degree

GMEXP Number o years the general manager/chie executive ofcer hasheld the position

CAP Net value o production machinery and equipment per employee,Yuan

R&D Share o total R&D expenditure to total sales, percent

TI The technology scoring scale is based on nine technical unctions,graded according to two levels (0 and ) to represent di erent levelso competence. Thus, a given rm is ranked according to a totalcapability score o 9 and the result is normalized to give a valuebetween 0 and . The technical unctions are as ollows: Upgrading equipment Licensing o technology

ISO certi cation Process improvement Upgrade/adaptation o products Introduces new products R&D activity Subcontracts Technology linkages

BinaryDependentVariable

i exporter (exports to total sales ratio is > 0); 0 otherwise



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Appendix Table 3: Mean Characteristics o Exporters and Nonexporters in ElectronicsCountry Variables Mean t-values

Exporters Nonexporters

PRC Foreign ownership, percent 35.34 5.52 .47***

( 52 exportersand 372nonexporters)

R&Dsales ratio, percent .08 .60 0.6 Technology Index 0.55 0.50 3.64***

Education level o the general manager 4. 6 4.0 2.98***

Value o production machinery peremployee, local currency

95.55 25.54 4.38***

Thailand Foreign ownership, percent 66.67 23. 7 6.23***( 3 exportersand 53nonexporters)

R&Dsales ratio, percent 0.39 0.45 0.2

Technology Index 0.56 0.39 5.03***

Education level o the general manager 5.93 5.79 .98**


443.46 43.92 .66*

Philippines Foreign ownership, percent 8 .25 7.50 8.93***(79 exporters and28 nonexporters)

R&Dsales ratio, percent 0.95 0. 2 .02

Technology Index 0.44 0.23 4.77***

Education level o the general manager 5.20 4.74 2.29**


554.23 252.94 .05

*** t-values are signi cant at % level, ** at 5% level, and * at 0% level.R&D = research and development.Note: t-values or two-sample t-test with equal variance: mean(exporter) mean(non-exporter).



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About the Paper

dynamic electronics industry in Peoples Republic of China, Thailand, and Philippines.

in increasing the probability of exporting in all three countries, and of human capital in

countries mostly focuses on assimilating and using imported technologies rather thanformal research and development by specialized engineers.

About the Asian Development Bank

member countries substantially reduce poverty and improve the quality of life of their

people. Despite the region's many successes, i t remains home to two thirds of the world'spoor. Six hundred million people in the region live on $1 a day or less. ADB is committed toreducing poverty through inclusive economic growth, environmentally sustainable growth,and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its maininstruments for helping its developing member countries are policy dialogue, loans, equityinvestments, guarantees, grants, and technical assistance. In 2007, it approved $10.1 billionof loans, $673 million of grant projects, and technical assistance amounting to $243 million.

Asian Development Bank 6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.org/economicsISSN: 1655-5252Publication Stock No.: Printed in the Philippines

foreign direct investment, innovation, and exports: firm-level evidence from people's republic of...

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