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Structural Reform and Firm Exports

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Abstract

  • We analyze the impact of structural reform on firm exports. We argue that structural reform generates new opportunities and reduces transaction costs, inducing firms to improve their efficiency and competitiveness to international levels, therefore, helping them to export. However, we propose that not all companies benefit equally, because firms differ in how structural reform affects their competitiveness. We argue that subsidiaries of foreign firms are the main beneficiaries of structural reform, followed by domestic private firms, and finally by domestic state-owned firms.

  • We test these arguments on a sample of the largest companies in Latin America for the period 1990–2005. We find that structural reform induces firms to export. Furthermore, it has the highest positive impact on the exports of subsidiaries of foreign firms, followed by those of domestic private firms. Surprisingly, we find that structural reform has a negative impact on the exports of domestic state-owned firms.

  • The paper contributes to a better understanding of how changes in institutions affect firm behavior by explaining the mechanisms that link structural reform to firm exports and how these vary across firms. Moreover, by indicating that not only foreign but also domestic private firms benefit from structural reform, it counters the arguments of detractors of globalization who claim that foreign firms are the sole beneficiaries of structural reform. The paper also highlights the need to discuss who benefits from structural reform rather than whether structural reform is beneficial or detrimental.

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Notes

  1. Besides institutional economics, Campbell (2004) identifies two other schools that analyze the influence of institutions on firms: organizational institutionalism or neo-institutionalism (e.g., Scott 1995) and historical institutionalism (e.g., Granovetter 1985). We do not build on these two other schools because their assumptions are largely incompatible with those of institutional economics (Campbell 2004).

  2. In some domestic private firms the controlling family may be unable to undertake the necessary changes required to operate under the new conditions because of lack of talent in the family and lack of willingness to relinquish control to managers with the needed skills, thus limiting the long-run competitiveness of the firm. As we mentioned before, this problem is in line with the inability of small firms to change and with firms that are dependent on relationships with the government for their competitive advantage. Again, although some domestic private firms will not change, most of them will either change or risk disappearing in the new context.

  3. There are several independent indices that assess structural reform. Morley, Machado, and Pettinato (1999), from the Economic Development Division of ECLAC, developed a structural reform index for Latin America covering the years 1970–1995. Lora (2001), from the Inter-American Development Bank (IADB), developed a structural reform index for Latin America for the period 1985–1999. The Fraser Institute’s measure of Economic Freedom of the World (Gwartney/Lawson/Easterly 2007) is only available at five year intervals from 1995–2000 and annually thereafter. The Heritage Foundation’s Index of Economic Freedom (Kane/Holmes/O’Grady 2007) is available for the period 1995–2005. Finally, Sahay and Goyal (2006), from the International Monetary Fund (IMF), combined the measures by Morley et al. (1999) and the Heritage Foundation (Kane/Holmes/O’Grady 2007) in order to develop a measure that spans the period 1970–2005. We use this latter measure in our analyses, because it is the only one that covers the entire period of interest. Nevertheless, we tested its convergent validity against the other measures and found a high correlation. In addition, as we describe later, using these alternative independent measures in our robustness tests generates similar conclusions.

  4. AmericaEconomía classifies firms based on whether their majority ownership is foreign, domestic private, or domestic state-owned. A limitation of this classification is that it does not allow us to study the behavior of joint ventures or other types of mixed-ownership firms. We cannot obtain further information on the ownership of the firms from alternate sources, as a large percentage of these firms are not quoted in the stock market.

  5. Only two dummy variables are needed to code a three-category variable. As such, subsidiary of foreign firm, domestic private firm, and domestic state-owned firm can be captured with only two variables. The same is the case for the interaction between this three-category variable and structural reform, as only two interaction terms are necessary in the model.

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Acknowledgements

For useful suggestions for improvement, we thank the focused issue editors Trevor Buck, Igor Filatotchev, Roger Strange, and Mike Wright, anonymous reviewers, Joshua Ault, Chei Hwee Chua, Omrane Guedhami, Sophia Jeong, Tatiana Kostova, Chuck Kwok, Eduardo Lora, Gundula Lucke, William Mackenzie Jr., Michael Messersmith, Matthew Mitchell, Thomas Moliterno, Kurt Norder, Adrian Pitariu, Robert Ployhart, Kendall Roth, Adam Shambaugh, Liang Shao, Andrew Spicer, Annique Un, Kathryn Wilson, and Christopher Zorn. We thank Nelson Rivera from the Interlibrary Loan Department at the University of South Carolina for excellent library support. The first author thanks the Center for International Business Education and Research at the University of South Carolina for financial support. The second author is grateful for the financial support of the University of South Carolina. Authors are listed alphabetically and contributed equally. All errors remain ours.

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Correspondence to Alvaro Cuervo-Cazurra.

Appendices

Appendix A: Historical Roots of Structural Reform

Although nowadays most countries have undertaken structural reform and reduced the influence of the government in the economy, this was not always the case. During most of the 20th century, governments maintained a very active role in the economy. Governments in capitalist developed countries (then known as the First World) implemented the ideas of Keynes (1936) and established high levels of regulation and controls over the market economy. Governments in communist countries (then known as the Second World) followed the ideas of Marx (1867) and established a communist economic system with central planning of prices and quantities and state ownership of the means of production. Governments in developing countries (then known as the Third World) followed a middle-path, with a capitalist system of private property and a price system, but with high levels of government regulation, state ownership, and price controls (Sachs and Warner 1995). Influenced by dependency theory (Prebisch 1950), the governments of some of these countries imposed an import substitution model of development whereby they also limited imports to protect domestic firms from international competition and to enable them to develop and the country to industrialize.

The last three decades have witnessed the spread of structural reform throughout the world. In broad terms, we can identify three different forms of implementation of structural reform, as a result of the three different types of government controls over the economy. In developed countries, structural reform has meant primarily the reduction of governmental influence in the economy through deregulation and, in some cases, privatization of state-owned enterprises (Peltzman 1989; Winston 1993). This process started in the early 1980s in the UK under Prime Minister Thatcher and in the US under President Reagan, later expanding to other developed countries. In formerly communist countries, now called transition economies, structural reform has resulted in a deep transformation of the economy, requiring the dismantling of the communist system of state ownership of means of production and central planning and the creation of a capitalist system of private ownership of means of production and a price system (Blanchard 1997). This process started in the early 1980s in China and spread to the former Soviet Union and Eastern Europe in the late 1980s. In developing capitalist countries, structural reform involve economic liberalization and governance improvements (Rodrik 1997; 2006; Williamson 1990). The process started in the mid 1970s in Chile and spread to other developing countries in the mid 1980s.

Appendix B: Structural Reform in Developing Countries

In developing capitalist countries, structural reform has become known as the Washington Consensus (Kuzynski/Williamson 2003, Williamson 1990, 1994, 2000, 2004). Williamson (1990) came up with the term Washington Consensus to refer to the desirable policies for reform in Latin America, which he perceived as being dominant in Washington, D.C., where the World Bank, International Monetary Fund, and U.S. government are based. The term has come to be employed as a prescription for economic development and growth, and as a means of resolving the problems of developing nations (Williamson 2004). Williamson’s (1990) original text includes ten areas of reform: Fiscal discipline, reordering public expenditure priorities, tax reform, liberalizing interest rates, competitive exchange rates, trade liberalization, liberalization of inward foreign direct investment, privatization, deregulation, and property rights. Improving governance was later added to this list (Rodrik 2006).

Developing countries were initially reluctant to implement structural reform. During most of the 20th century governments maintained a high level of control over the economy. The oil crisis of the 1970s and the subsequent stagflation revealed the limitations of such a model for delivering growth and set the stage for the implementation of structural reform. In the mid 1970s, Chile was the first developing country to implement structural reform to deal with its economic crisis. Although the program was successful and made Chile one of the fastest growing economies in the region, it was not replicated elsewhere because of its association with Chile’s dictatorial regime. In the mid-1980s Bolivia implemented a program of structural reform that stopped hyperinflation and put the country back on a path of growth. Unlike in dictatorial Chile, this served as an example to other countries that structural reform could be implemented successfully in a democracy (Yergin and Stanislaw 1998). Thus, in the late 1980s and early 1990s, developing countries in Latin America, Asia (e.g., India and Turkey) and Africa (e.g., Egypt and Ghana) undertook structural reform (Bruton 1998).

However, by the late 1990s doubts regarding the benefits of structural reform began to emerge with force, creating the basis for an intense debate. Although structural reform had helped countries achieve macroeconomic stability and growth, progress towards achieving the desired goals was slow (Lora 2001, Fraga 2004, Katz 2004). Proponents of structural reform argued that the reason for the lack of progress was the inconsistent application of policies (Kucynski and Williamson 2003, Fraga 2004). Furthermore, they contended that policymakers chose to blame the Washington Consensus for their countries’ ailments rather than accept responsibility for the incorrect application of its prescriptions (Lora et al. 2004, Ocampo 2004). Critics of structural reform, on the other hand, argued that it was designed to favor foreign firms at the expense of local firms and citizens, thus harming developing countries (Mander and Goldstein 1996).

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Cuervo-Cazurra, A., Dau, L. Structural Reform and Firm Exports. Manag Int Rev 49, 479–507 (2009). https://doi.org/10.1007/s11575-009-0005-8

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