What are the Barriers to Industrial Upgrading? Evidence from Pakistan

2015-08-12

2016-08-16

The study investigates the extent to which high costs of high-quality inputs are a barrier to upgrading in the football sector. One of the primary inputs into football production is an artificial leather called rexine. We propose an experiment that offers subsidies for high-quality rexine to a random subset of firms and examine if this subsidy spurs industrial upgrading.

We will look at two related but distinct dimensions of behavioral responses by firms. First, since high-quality inputs are likely to be complements in production, the subsidy may induce firms to purchase complementary high-quality inputs and produce higher quality footballs, using their existing technologies and production processes. Second, the subsidy may potentially stimulate learning and spur technological improvements in the production process, if for instance innovation has a higher return in high-quality segments of the industry or if producing higher-quality balls leads firms to transact with more sophisticated buyers.

To capture these dimensions, we will track changes in other inputs (e.g., the quality of the bladder or latex glue), shifts in the composition of output toward higher-quality footballs and output prices, the composition of the buyers (e.g., the country of origin of the buyers) and other process innovations (e.g., adopting a cost-saving innovation developed by Atkin et al (2015) to reduce wastage of the high-quality rexine?). We also intend to examine whether such changes spill over to other firms that are linked to the treated firms through business, family, geographical or other networks.

We expect substantial heterogeneity in the size of the treatment effects along two dimensions. As described in the experimental design, all treatment firms are provided with exactly the same treatment (see experimental design---PKR 650,000 of vouchers for the purchase of any high-quality foreign rexine 1.5mm or thicker). For firms that produce many balls, the subsidy is small compared to their total rexine purchases and so will likely have little effect on their product mix. Similarly, for firms that already primarily produce with high-quality imported rexine, subsidizing these particular rexine types will also have little effect on their product mix. Accordingly, we intend to interact treatment with the following metrics measured over the 6 months preceding the experiment (measured at the baseline survey): a) the ratio of the subsidy to the total value of rexine purchases; b) the proportion of high-quality foreign rexine 1.5mm or thicker in total rexine purchases by quantity; and c) the proportion of balls produced by the firm that are high quality. Since these measures may be noisy, we also intend to interact with firm size, which is a well-measured proxy that captures these dimensions as large firms tend to both buy more rexine and produce higher quality balls.

In a previous study, Atkin et al 2015, we have explored technology adoption by soccer-ball firms in Sialkot, Pakistan. Through several rounds of data collections from that study, we have collected characteristics of firms (e.g., employees, types of balls, prices, profit rates, among other characteristics). We have also collected information about their input usage, and in particular the types of rexine they use for production. This protocol describes a new experiment that subsidizes the purchase of higher-quality rexine for a random subset of firms in our sample. Firms report using domestic rexine that is purchased from Sialkot or the Lahore, or imported rexine from either China, Korea or Japan. Japanese and Korean rexine are considered the highest quality, followed by Chinese rexine and then domestic rexine. Our sample consists of 67 manufacturers in Sialkot. (We have one pilot firm.) These are the active firms that either received the technology we invented for the previous study, or active firms that responded to at least two surveys in the previous study, produce on average less than 75k balls/month, and have fewer than 100 employees.

In August 2015, we conducted a public lottery where all firms were invited to attend, and food was provided. At the lottery, 30 of the 67 firms were selected at random through the drawing of lots. The firms selected in the lottery, the treatment firms, received PKR 650,000 of vouchers for the purchase of any high-quality foreign Rexine (1.5mm or thicker only). Given the nature of a public lottery, it was not possible to stratify the randomization in any way without raising suspicions by firms that the lottery was rigged.

In order to ensure that the subsidized rexine has been used by the firms, rather than resold on a secondary market, we will provide the subsidy in multiple stages in the form of vouchers.

The winning firms were visited after the lottery and provided with a first voucher for PKR 200,000 of eligible Rexine. There will be three further vouchers. These additional vouchers will work slightly differently. These vouchers will reimburse firms for purchases they make.
o Voucher 2: If you purchase PKR 200,000 or Rexine, we pay PKR 175,000 of that.
o Voucher 3: If you purchase PKR 200,000 or Rexine, we pay PKR 150,000 of that.
o Voucher 4: If you purchase PRK 200,000 or Rexine, we pay PKR 125,000 of that.

The payment given for each voucher will not exceed its maximum value. For example, if a firm would like to use the Voucher 2 to purchase PKR 225,000 worth of rexine, we will pay PKR 175,000 of that order. If the firm does not wish to buy the entire voucher amount in one go, it can be used for a smaller amount where the subsidy is pro rata. For example, for voucher 3 a firm can spend only PKR 100,000 and then we will pay PKR 75,000 of that. Once a voucher is used, it cannot be used again even if less than PKR 200,000 was purchased with it. The vouchers have an expiration date of 1 year.

A firm that decides to use the vouchers will go to their supplier of choice to obtain the rexine. Once the footballs are manufactured, we will send trained auditors to ensure that the rexine variety purchased using the first voucher has been used. Upon successful audit, the firm can redeem the next voucher.

At the end of the intervention, we plan to compare treatment and control firms along the outcomes discussed in Outcomes (End Points), allowing the size of the treatment effect to differ by the size of the subsidy relative to rexine purchases, the initial proportion of a firm’s production that uses high-quality imported rexine, the proportion of total output that is high-quality balls, and the size of the firm.

References
Atkin, D., A. Chaudhry, S. Chaudry, A. Khandelwal, and E. Verhoogen (2015). "Organizational Barriers to Technology Adoption: Evidence from Soccer-ball Producers in Pakistan", NBER Working Paper 21417.

Public Lottery

Firm

No

1

67 firms

30 treatment firms, 37 control firms.