Moving skills from hands to heads: does importing technology affect export performance in textiles?

Abstract

This paper examines the link between imported technologies and a country’s export performance, as measured by product quality. The analysis is set in the background of the process of regional integration between the European Union (EU) and its neighbouring developing countries. The underlying question is whether trade integration fosters or dampens learning and technological upgrading. We find that unit values of exports from these countries to the EU rose steadily between 1988 and 1996, relative to the unit values of world exports to Europe. If increases in unit values satisfactorily proxy increases in product quality, then trade integration has fostered product upgrading and technological learning in the sample countries. We find that imported technologies and other sources of knowledge have a strong bearing on this pattern. Technological inflows are captured by the degree of involvement of European companies in export flows from our sample countries (outward processing trade (OPT)) and by the skill content of the machines imported. Non-technical abstract Trade and greater economic integration affect the upgrading of technologies in less advanced areas. The open questions pertain to the direction of such change and to the channels through which technologies are transmitted. This paper explores the role of a few different channels for importing technologies and their impact on export performance. The study is set in the context of the process of economic integration between the EU and its neighbouring developing countries, in particular Central and Eastern European Countries (CEECs) and the Southern Mediterranean Countries (SMCs). New potential sources of technological inputs become available with declining trade barriers. Some of these technological inputs are deliberately purchased (new machines, foreign investments, skilled personnel) and others are acquired through spillovers, by trading with more technologically advanced partners, by gathering information in foreign markets, by learning from sophisticated imported goods. In the present paper export performance is defined in terms of the quality of exported products, on the presumption that higher quality products imply the use of more complex technologies and have a strong learning potential. We find that unit values of exports from the sample countries to the EU rose steadily between 1988 and 1996, relative to the unit values of world exports to Europe. We then investigate whether imported technologies and other sources of knowledge have some bearing on this pattern. Particular attention is devoted to the technologies embodied in the machines. We develop a measure of technological complexity of the machines imported related to the level of skills required to use them. We also jointly estimate the role of outward processing trade which indirectly captures foreign investments and other forms of involvement of European firms in our sample countries. These channels of technological imports appear to have a statistically discernible and positive role on product quality for all the countries analysed. Imported machines are the most important determinant of product upgrading in the SMCs, while foreign firms play a dominant role in the CEECs. This result is consistent with stylised facts. The pattern of trade liberalisation and specialisation was quite different for the two groups of countries. In the CEECs liberalisation was sudden and drastic. Trade patterns changed considerably, both in terms of products and market destination. Foreign companies are playing a crucial role in this pattern of transition. In the SMCs things have been smoother. Trade is being liberalised more gradually and many of these countries have a strong specialisation in textiles. Although based on imported technologies, upgrading and learning appears to be rooted in the local production structure rather than being channelled by foreign companies.