What are the Barriers to Industrial Upgrading? Evidence from Pakistan

By studying the football and surgical goods industries of Pakistan, this project seeks to identify barriers to upgrading in manufacturing firms such as high costs of high-quality inputs and fixed costs of innovation. 

A growing body of research suggests that innovation and quality improvements by manufacturing firms --which together we refer to as "industrial upgrading" --are key elements of the process of private-enterprise development in low-income countries. It is widely recognized that industrial upgrading is not automatic: some sectors in some countries successfully move up the ladder to more technologically sophisticated, higher value-added products, and others fail to do so. What are the barriers that the unsuccessful countries or sectors face? And what policies, if any, can reduce these barriers and promote upgrading? These are the questions that motivate our proposal. A key goal is to inform the design of industrial policies to reduce these barriers and promote sustained upgrading in Pakistan and other low-income countries.

This project will comprise 3 related studies or "modules," seeking to understand the barriers to the upgrading process in two manufacturing industries in Sialkot, Pakistan: the football (soccer-ball) industry and the surgical-goods industry.

The first module 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 to offer subsidies for high-quality rexine to a random subset of firms and examine if this subsidy spurs upgrading. We will look at two related but distinct dimensions of behavioural 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 knowledgeable buyers.

The second module investigates the extent to which fixed costs of innovation are a barrier to upgrading in the surgical-goods sector in Sialkot. If there are externalities in the process of innovation, there may be an important role for governments in subsidizing the costs of innovation. A leading policy idea is to provide matching grants, in which governments provide supplemental funding for projects chosen and partially paid for by individual firms. However, there has never been a rigorous randomized evaluation of such a program (Campos et al, 2012). Here we propose to carry out a pilot experiment, offering matching grants for innovations that increase exports and for innovations to produce new products (i.e. that have not previously been produced in Sialkot). We will randomize both the encouragement to apply for the grants and the grants themselves among applicants who are deemed worthy of funding. If the pilot is successful, we plan to scale up this evaluation at a later stage.

The third module of the project comprises long-term, high-frequency surveys of the universes of football and surgical-goods producers in Sialkot. Our survey will build on the survey infrastructure (survey team, questionnaires, etc.) that we have already created in an existing project. It will allow us to carefully document and analyse patterns of entry, exit, growth and decline in a period of significant change in both industries, driven by increasing competition from China and other low-income countries, by increasing automation, and by quality pressures from international buyers.