Export-Led versus Import Substitution Industries: The Food Industry in Jordan

Many analysts believe that export-led policies improve technical efficiency. This is the main focus of export-oriented economists, who argue that participation in export markets brings industries into contact with international best practice and fosters learning and productivity growth. In support of this argument, many empirical studies have concluded that export-oriented industries (EXOI) are more efficient than import substitution industries (IS). The rationale for this is the fact that under the IS strategy, firms are normally protected by tariffs and quotas, and tend to be inefficient because of the lack of competition and economies of scale. However, very few studies have answered the question of whether exporting brings about efficiency gains. Plausible arguments can be made for causality to flow in the opposite direction: relatively more efficient plants are self -selected into export markets because the returns brought about by doing so are relatively high, depending on the exchange rate, and hence the degree of protection overall. In this study we investigate the impact of trade orientation on the productivity level by focusing on the case of the food industries in Jordan. We base our analysis on fieldwork conducted for the purpose of this study. Our main conclusion is that the economic process in export-oriented and import-substitution industries is similar when we divide our data according to trade orientation into two groups.  We observe some differences in the structure, the size and the factor intensity, and even in the estimated TFP between the EXOFs and the ISFs. However, we cannot formally confirm that the two groups of industries are significantly different.