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.

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Fig. 1
Fig. 2

Notes

  1. 1.

    Evidence from the following countries supports the LBE hypothesis: Canada (Baldwin and Gu 2003), Columbia (Clerides et al. 1998), Germany (Bernard and Wagner 1997), Egypt (Atkin et al. 2017b), Indonesia (Blalock and Gertler 2004), Korea (Hahn and Park 2009), Slovenia (De Loecker 2007), the UK (Greenaway and Kneller 2008), Spain (Manjon et al. 2013), and the USA (Bernard and Jensen 1999). However, evidence from Chile (Alvarez and Lopez 2005), Spain (Delgado et al. 2002), and Sweden (Greenaway et al. 2005) does not support it. The mixed evidence may be also attributed to the different estimators used in each study, the various ways to estimate the TFP, and so on.

  2. 2.

    A few studies have empirically investigated the variables that make the extent of LBE different, such as industry competition (Greenaway and Kneller 2007), the income level of the destination countries (De Loecker 2007), R&D investment (Dai and Yu 2012; Lileeva and Trefler 2010), licensing (Utar 2010), and ownership structure (Tse et al. 2015).

  3. 3.

    Masso and Vahter (2015) and Yashiro et al (2017) also present the empirical evidence that the extent of new knowledge in foreign markets critically determines the size of LBE effects. To measure such knowledge, Masso and Vahter (2015) use the number of exporting products and that of destinations, because several foreign partners give more scope for learning and the transfer of knowledge. Yashiro et al. (2017) focus on whether exporting firms participate in the upstream of global value chains relating to the knowledge-intensive activities.

  4. 4.

    Firms that start exporting and increase exports upgrade the observed skills of their employees and hire skill-upgraded workers to meet the increased demand for skilled labor (Verhoogen 2008; Accetturo et al. 2013). Helpman et al. (2010) argue that a new exporting firm has the incentive to increase the cutoff unobserved abilities that affect skill-upgrading.

  5. 5.

    Arkolakis (2010) and Eaton et al. (2012) provide evidence of the importance of the continuous ‘search and learning about foreign demand’ problem that firms face when selling abroad. Mion and Opromolla (2014) and Masso et al. (2015) show that the export experience gained by managers in previous firms leads their current firm toward better export performance, specifically when export knowledge is market-specific.

  6. 6.

    Lazear (2000) finds that, after switching from hourly wages to piece rates, an automobile glass installation company experienced an increase in productivity by about 44%, with half of this caused by the sorting effect and half by the motivation effect. After assuming that worker sorting causes worker flows, and using information from a panel of Dutch firms, Gielen et al. (2010) empirically showed that the introduction of performance pay leads to a 9% increase in firm-level productivity and a net employment growth of 5 percentage points.

  7. 7.

    There are no manufacturing firms that have adopted only a merit bonus in South Korea.

  8. 8.

    I use the levpet command developed by Petrin et al. (2004) to implement this approach.

  9. 9.

    The results estimating the production function for each 2-digit sector are omitted because of the space constraints.

  10. 10.

    Some studies use a control group of firms that never export in the sample. Since the ratio of exporting firms is increasing up to 80.1% in 2015, the number of never-exporting firms is small, which leads to lower matching quality. So this paper uses non-exporting firms as a control group.

  11. 11.

    The probit estimation results for each 2-digit sector are omitted because of the space constraints.

  12. 12.

    I use a caliper width of about 20% of the standard deviation of the propensity score (Austin 2011).

  13. 13.

    I use the psmatch2 command developed by Leuven and Sianesi (2003) to implement the propensity score matching.

  14. 14.

    The LBE effects in Hahn and Park (2009) are larger and more continuous than those in this paper. This difference is attributed to the use by Hahn and Park (2009) of plant-level data including lots of small firms that were in the less trade-liberalized period (i.e., 1990 to 1999) compared with those in our sample period.

  15. 15.

    Panel (b) of Fig. 2 shows that the TFP trajectory for the two groups has the similar trend from 3 years before starting to export (t = − 3) to 1 year ago (t = − 1). According to balancing checks, there are no significant differences of the means of all firm characteristics in each subsample. The results of balancing checks are available upon request from the author.

  16. 16.

    I measure firm-level investment as the acquisition of tangible assets. Since 2.03% of this sample reports zero investment, this dataset is not a case in which investment does not smoothly respond to productivity shock, as raised in Leuven and Sianesi (2003). I use the opreg command developed by Yasar et al. (2008) to implement the Olley and Pakes approach.

  17. 17.

    I use the acfest command developed by Manjon and Manez (2016) to implement the Ackerberg, Caves, and Frazer approach.

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Acknowledgements

I would like to thank the anonymous reviewers and the Editor for their valuable comments and suggestions. The views expressed in this paper are those of the author. This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2017S1A5A8021136).

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Appendix

Appendix

See Table 8.

Table 8 Balancing tests for Table 2

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Kang, Y. How you pay matters: performance-related pay and learning by exporting. Empir Econ (2020). https://doi.org/10.1007/s00181-020-01832-4

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Keywords

  • Learning by exporting
  • Merit bonus
  • Merit pay
  • Seniority-based pay

JEL Classification

  • F14
  • M52