Achieving Export Diversification: Lessons from Brazil

Achieving export diversification has been a central objective of development policy for the last 50 years. Yet for most developing countries, the composition of production and exports is highly concentrated in natural resources, exacerbated by a decade of high commodity prices. As a rapidly growing economy and large commodity exporter, Brazil provides an interesting case study of how export diversification occurs.

A narrow focus on raw materials exports can be a constraint for economic growth in periods of low commodity prices, and it increases these economies’ vulnerability to external shocks.

A narrow focus on raw materials exports can be a constraint for economic growth in periods of low commodity prices, and it increases these economies’ vulnerability to external shocks. Successful export diversification at an economy-level requires first understanding the firm-level processes which support the introduction of new products for export. This note uses evidence from research on Brazilian manufacturing firms to draw lessons for other developing countries on how firms achieve export diversification.

Despite the theoretical and empirical grounding on the benefits of export diversification, many developing countries struggle to achieve it. In addition, there are indications that it is becoming increasingly difficult to break into non-commodity export markets, due to the rise in global competition. Also current high commodity prices incentivise countries to remain in commodity exports. As a result, most developing economies are faced with exports that are highly-concentrated in natural-resources, and are unable to reap the benefits of diversification.

Firm-level diversification

Although the quantity and quality of empirical evidence on export diversification has increased in the last decade, much of the literature focuses on trade diversification at the country-level. However, achieving export diversification at the country-level requires individual firms to diversify exports, and little is known about the firm-level processes and innovation efforts required for introducing new products to export. 

Through studying a unique dataset of Brazilian manufacturing firms during the 2000s – including information on exports, firm characteristics, production processes and innovation efforts – our research aims to draw lessons for other developing countries that are seeking to encourage export diversification. 

Our findings for Brazil suggest that, firstly, the rate of export failure is high. The majority of new products introduced by exporters are not sustained beyond the first year. In fact, we observe that 57 per cent of export flows are only sustained for one year. Export sustainability is a critical challenge for maintaining diversification.

Secondly, it is existing exporters that tend to diversify, Indeed, our results show that diversification is mainly carried out by existing exporters, rather than new entrants to international markets. More than 80 per cent of new exports are introduced by existing exporters. Export experience is critical for diversification.

A third finding to emerge from our research is that diversification occurs mainly into similar and less-sophisticated products. We analysed the type of products that firms tend to diversify into. We found that in most cases, new products are similar or related to existing exported products, either in terms of sector, or the inputs used for production. They also tend to be of lower sophistication or technological content than existing exports. The picture, however, changes when we consider diversification in relation to the main domestic product for the firm. In this case, diversification tends to occurs in product more unrelated and more activities to core activities. This highlights the multiproduct nature of most firms, at the same time than the fact that existing firms’ capabilities constrain the scope for export diversification. 

And finally, firms that diversify are better performers and more internationally exposed. More importantly, we find that Brazilian firms that successfully diversify exports tend to have:

• Larger firm size and more productive
• Foreign ownership
• Larger domestic market share
• Less reliance on specific key products
• More innovative production processes and products

Increased investment in Research & Development (R&D), skilled labour and marketing activity

These findings suggest several implications for developing country governments trying to facilitate export diversification. These are listed below.

• Incentivise innovation. Policies that incentivise investments in innovation and R&D will help firms acquire the capabilities that are vital if they are to diversify. 
• Support firms to consolidate in the domestic market. Firms must improve their production base domestically, prior to diversifying. Therefore, policy frameworks that encourage export diversification should also focus on eliminating existing constraints in domestic markets
• Support export sustainability. While governments need to continue to support firms in breaking into new products and new markets, they equally need to address the sustainability of exports. This requires a more balanced approach of support policies such as Aid for Trade, giving more weight to measures that may facilitate consolidation of new trading relationships over time.
• Facilitate foreign exposure and links with international markets. Foreign exposure appears to increase diversification, so policies that encourage trade integration, FDI or participation in international value chains can critically assist firms in acquiring the required capabilities to boost export diversification.

Xavier Cirera is a trade economist at the Sussex University Institute of Development Studies with a particular interest in the impact of trade reform and regional integration. He has extensive experience in Southern Africa.

A version of this article was originally published in IDS In Focus Policy Briefing Issue 21: Achieving Export Diversification: Lessons from Brazil." It is part of a broader study: Cirera, Xavier; Anabel Marin and Ricardo Markwald (2012) “Firm Behaviour and the Introduction of New Exports: Evidence from Brazil” IDS Working Paper No. 390 . www.ids.ac.uk/idspublication/firm-behaviour-and-the-introduction-of-new-exports-evidence-from-brazil1

This article was published in GREAT Insights Volume 1, Issue 4 (June 2012).