The Impact of Export and Diversification on Firm Performance: Evidence from Pakistan

Abstract

The pursuit of internationalization is an important element for a variety of emerging and transitioning economies in their ongoing reform process, following exhibits of export-led development stories in nations such as China, Singapore, and South Korea. Moreover, firms play a major role in the country’s economy; hence, this study empirically analyzes the impact of export and diversification on the performance of firms in Pakistan. This paper utilizes World Bank enterprise data for Pakistani firms across the whole country for the years 2007 and 2013, it is a panel data comprising 454 firms. The dependent variable for this study is sales per employee that we use as our performance measure and the independent variables are Export in terms of Export intensity and Geographic diversification in terms of an inverse measure named export concentration calculated by the Herfindahl-Hirschman index (HHI). For analysis, this paper utilizes Panel EGLS (estimated generalized least square) and the estimation suggests that exports and diversification both positively and significantly correlated in their respective sample. Nonetheless, there is an endogeneity issue with Panel EGLS and to counter that two-stage Panel EGLS is used with “average days to clear customs” as an instrumental variable (IV). Results show a positive association of exports with firm performance again. However, the diversification variable proved to be exogenous as per the exogeneity bias test, so its IV results are not robust. Thus, the findings indicate that Pakistani firms perform better if they export, thus supporting the learning by exporting hypothesis, in addition to their exports being geographically diversified.