Determinants of the level of manufactured exports of developing countries.

Abstract

Recent development literature favors export-promotion over import-substitution as a strategy for generating rapid economic growth in developing countries. Developing countries are now being urged to liberalize trade, particularly in industry, so that they may enjoy the higher growth rates that have been found to be statistically associated with a more export-oriented development strategy. This dissertation examines the factors that play a role in determining the success of exporters of manufactures in developing countries. The first two chapters contain a theoretical argument for the use of export subsidies for manufacturing firms in LDCs with low levels of manufactured exports. This argument is made in the context of a dynamic model that explores the intertemporal allocation of resources by manufacturing firms to domestic and foreign markets. In this model, the cost to firms of breaking into foreign markets is a function of the exporting activity of all firms, but firms do not take this into account in their profit maximization problems. Subsidies can lead firms to produce the socially optimal level of exports. The time-consistency problem involved with the implementation of export subsidies over time is also discussed. The remainder of the dissertation is concerned with the effect of real exchange rate uncertainty on the manufactured exports of developing countries. A model is developed of firm behavior under uncertainty which includes specific aspects of the environment in which LDC exporting firms operate. In this model, it is shown that even a firm with risk-neutral management will choose to export less as it faces increasing exchange rate uncertainty. This prediction is found to be consistent with cross-sectional data for 46 LDCs on manufactured exports and exchange rate uncertainty over the period 1960-81.