Manufacturing Exports and Employment in Iran: The Role of Economies of Scale and Human Capital

Abstract

Following a discussion of Iran’s employment and non-oil export aspirations, we are prompted in this chapter to estimate a set of translog cost and production functions for the country’s four-digit ISIC manufacturing subsectors to derive economies of scale and total factor productivity. We also extract subsector efficiencies using a stochastic frontier production function. We then assess the impacts of these factors as well as human capital on total employment of the manufacturing sector and on each subsector’s employment and exports. Our results indicate that economies of scale have a positive and strong influence on employment as well as manufacturing exports. However, the effects on exports are asymmetrical—that is, there are some subsectors for which exports are reduced. We further identify manufacturing subsectors whose exports exhibit a positive response to economies of scale, which may be targeted by government initiatives. We additionally show that human capital has positive and significant effects on both exports and employment. Our findings suggest that the government should pursue an active role in boosting economies of scale, efficiency, and productivity in the manufacturing sector and invest in enhancing human capital.