Firm-Level Investment and Exporting: New Empirical Evidence from Ghana and Tanzania

Abstract

Using firm-level data from two selected African countries, we examine whether firm-level investment in capital is a possible channel through which less productive firms gain entry into export markets. Our findings reveal that non-exporters who invest in capital stock increase their probability of switching status, from non-exporter to exporter, and we provide evidence that firm-level investment is correlated with increased productivity growth among exporters. Consequently, we emphasize that firm-level investment in capital enables non-export to increase their odds of entry to export markets, and provides opportunity for young exporters to grow rapidly and persist long in export markets. Although firm productivity differences can be explained by self-selection factors as one channel, firm-level investment in capital stock provides another explanation as to why less productive firms, gain entry into the export markets. We establish that when firms invest in capital, they improve their productive capacity, raising their productivity in the process. Export promotion policies should target providing support to firms that seek to upgrade or expand their production technology as this would stimulate the probability of export market entry hence promoting exports.

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