DILIC Conference, London2 November 2015

Trade and productivity growth in Ghana: Does Sino-Africa trade make a difference?

Xiaolan Fu - University of OxfordJun Hou - University of OxfordPierre Mohnen - University of Maastricht

Introduction

China started minor trade relation with Africa in the early 90s and intensified these relations quickly and significantly over the following years• After 1989, China started looking for non-Western countries to boost

economic ties (Tull, 2006). • China has become the largest trade partner for Africa in 2012, at the

same time, Africa emerges as the major import source and largest investment destination for China.

In 2005, China overtook the US as Ghana’s second largest trading partner after Nigeria. • Imports of Chinese goods moved from 3.7 per cent share of total

imports in 2000 to 18.16 per cent in 2012• The total volume of imports from China increased more than ten–fold,

from USD 160.5 million to USD 2.2 billion in this period

Objectives

Estimate whether the economic integration between China and Ghana has brought about a productivity improvement for Ghanaian firms

Compare China-Ghana with OECD-Ghana trade flows to understand whether Sino-Africa trade made a difference

Investigate whether industries where Ghana has a comparative advantage benefit more from internationalization

Literature

The inflow of foreign capital increases local technological capability and efficiency, which eventually becomes a driver of TFP growth. • Technology diffusion (Dunning, 1995; Javorcik, 2004; Narula and

Driffield, 2012)• Mobility of skilled workers (Cantwell, 1989; Glass and Saggi, 1998 ;

OECD, 2008)• Competition forces the upgrading of local production efficiency (OECD,

2002)

Foreign presence can also have negative effects

• Foreign competitors may also crowd out local firms (Kumar and Pradhan, 2002; Kaplinsky et al., 2007)

• Negative wage spillovers (Görg and Greenaway, 2001)

Literature

The learning effects would be stronger when trading with countries that share similar production capabilities • Technological gap (Dunning, 1977; Dosi, 1990)• Domestic learning capability constraints (Cohen and Levinthal, 1989)

The learning effect will be greater in industries which the country has comparative advantage than those further away from its comparative advantage. • Low risk and uncertainty • Adequate resources

Estimation: computing TFP Olley and Pakes (1996), Levinsohn and Petrin (2004), Ackerberg, Caves and

Frazer (2006), Wooldridge (2009), Doraszelski and Jaumandreu (2014)

3rd order polynomial for

first-order Markov process TFP can be retrieved as:

Estimation: the dynamics of TFP

The impact of trade on productivity

FDI: the proportion of foreign asset, industrial levelHH: Herfindahl index measuring the industry competitionEX, IMP: firm level exports and imports. ‘a’ denotes African countries; ‘n’ is

non-African countriesEXI, Comp: industrial level exports and imports to industry output that firm i

belongs to. the superscripts c and o denote exports to China and OECD countries, respectively

Methodology issues

There may be omitted variables problem due to data unavailability: hence use of a dynamic model including lagged dependent variable

Bringing industry level data into firm level estimation may result in downward bias of estimated standard errors of the coefficients: hence standard errors will be clustered at the industry level

Possible endogeneity between industrial trade and TFP growth: OLS, FE, and GMM

Data

Firm-level: a panel survey comprising manufacturing firms operating in Ghana collected by the Centre for the Study of African Economies (CSAE) at University of Oxford. • 201 firms, 1710 unbalanced panel during 1991-2002, 12 waves• sectors include food processing, textiles and garments, wood products

and furniture, metal products and machinery • At least three consecutive years• Input and output data in 1991 price and trade statistics at firm level

Industry-level: trade indicators from COMTRADE, which is a set of bilateral commodity-level trade data for 1991-2002.• 6-digits commodity level to 4-digits level, SITC Rev. 2 • The importers’ reports as the primary source: imports of Ghana record

the volume from every country in the world, but the exports will be based on the trading partners reported imports from Ghana rather than the Ghanaian reported exports whenever possible (Feenstra et al., 2005)

Variables Definition Mean S.D Min Max

Firm level Output Real value of manufactured output (1991 firm-specific output

prices), in logarithm17.27 2.17 11.49 25.49

Capital Imputed replacement value of plant and machinery (deflator 1991 Cedis, million), in logarithm

16.13 3.09 9.54 23.64

Material Total cost of raw materials (1991 firm-specific output prices), in logarithm

3.19 1.39 0.00 7.50

Worker Total number of employees, in logarithm 16.43 2.16 8.92 24.49Expfirm_Africa Percentage of output exported within Africa 0.02 0.09 0.00 1.00Expfirm_nonAfrica Percentage of output exported outside of Africa 0.06 0.21 0.00 1.00

Impfirm Percentage of raw materials imported 0.24 0.36 0.00 1.00Industry level FDI Ratio of total assets owned by foreign firms in total industrial

assets, calculated with sampled firms0.41 0.29 0.00 0.91

Herfindahl The sum of squared shares of firm output/industrial output, calculated with sampled firms

0.30 0.18 0.09 1.00

Exp_China Industrial level exports volume from Ghana to China, as ratio of industrial value added

0.23 0.43 0.00 4.32

Exp_EE Industrial level exports volume from Ghana to the emerging economies, as ratio of industrial value added

0.40 0.63 0.00 5.56

Exp_OECD Industrial level exports volume from Ghana to the OECD economies, as ratio of industrial value added

2.64 6.61 0.00 49.17

Imp_China Industrial level imports volume from China to Ghana, as ratio of industrial value added

0.25 0.06 0.00 0.44

Imp_EE Industrial level imports volume from the emerging economies to Ghana, as ratio of industrial value added

0.12 0.29 0.00 3.26

Imp_OECD Industrial level exports volume from the OECD economies to Ghana, as ratio of industrial value added

8.83 11.16 0.00 57.18

Empirical evidence: TFP

Obtaining firm-level TFP indices

Empirical evidence: TFP robustness

Robustness of firm-level TFP indices

Empirical evidence: China-Ghana and OECD-Ghana

Empirical evidence: EE-Ghana and OECD-Ghana

Regional-Industrial panel analysis

• Use of the World Bank Enterprise Survey for Ghana of 2006 and 2012

• Compute mean firm level data (616 firms in 2006 and 720 in 2012) for each region and industry

• Do the same for the firm level data from the Centre for the Study of African Economies (CSAE)

• 11 industries, 4 regions• panel of 100 observations across 6 waves with at least 3

years apart (1992, 1995, 1999, 2002, 2006, 2012)• Panel of 237 observations from all available years 1990-

2002, 2006, 2012

Regional-Industrial panel analysis Summary statistics

Regional-Industrial panel analysis

Conclusion

Internationalisation fosters productivity improvement in Ghanaian manufacturing firms.

Compared to trade with OECD countries, forming trading activities with China in general increased the TFP of Ghanaian firms.

The learning effect is greater in industries which the country has comparative advantage than those further away from its comparative advantage

Implications

The learning effects from trade and internationalisation seem to be stronger when trading with countries when the technological gap is small.

Governments of low-income countries should develop more effective internationalization policies in directing firms to catch up with developing and developed countries

The trade partners and industry context are important contingency factors for latecomers to catch up by engaging in internationalization activities

Thank you!