How you pay matters: performance-related pay and learning by exporting

Abstract

This paper argues that the extent of learning by exporting (LBE) depends on which pay system a new exporting firm pre-adopts. This is because performance-related pay enhances the absorptive capacity of new exporting firms by meeting the increased demand for labor quantity and quality. To empirically examine the argument, I use the Korean firm-level survey of business activities from 2006 to 2015, which provides information that identifies the export status, classifies pay-system types, and estimates total factor productivity. To control for self-selection into export markets, I use a combination of matching techniques and difference-in-differences. Empirical results reveal that the LBE exists instantaneously in the overall sample. Interestingly, new exporting firms pre-adopting a merit bonus are more likely to obtain significant and sizeable productivity gains from exporting than are ones without a merit bonus, regardless of whether a basic salary ties employee’s performance or not, i.e., merit pay or seniority-based pay. The results from various robustness checks support the main results.