Determinants of export performance of leather and leather products: Specify the

study area

Introduction
 The trend of Ethiopian GDP

In 2013/14, Ethiopia’s economy grew by 10.3%, making the country one of Africa’s top
performing economies and this strong growth is expected to continue in 2015 and 2016. (African
Development bank Group)

 The share of Ethiopian GDP in terms of Agriculture, industry and service sectors
 The trend of manufacturing sector

While manufacturing activities in Ethiopia have witnessed a historically unprecedented increase

in the past ten years, the sector still presents a large room of untapped potentials and
investment opportunities. The competitiveness of the industry has also been improving in the
Ethiopian setting that is characterized by cost effective labor force, abundance of production raw
materials and cheap utilities (African Development bank Group)

 Export sector/trend of the country

o In terms of performance specific products
 Export performance of agricultural, industrial and service sectors
 Livestock performance of the country
 Leather Product industry in Ethiopia


CHAPTER TWO

LITERATURE REVIEW

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2.1. Theoretical Literatures

2.1.1. Export Performance

Before defining what export performance is, it is helpful to see how export is defined by
different scholars.

The commercial meaning of export is to send out (commodities of any kind) from one country to
another (Simpson and Weiner, 1991).

Exporting is a key aspect of international trade and involves the sale, purchase or exchange of
goods and services across national borders. The exports of one country form the imports of
another (Victorian Government Export Services, 2009).

Cavusgil and Nevin (1981) also defined export as the international marketing related decisions
and activities of internationally active firms.

According to Cateora (1996), exporting is an indispensable part of all international business,

whether the company markets in one country or is a global marketer. Goods manufactured in one
country, destined for another, must be moved across borders to enter the distribution system of
the target market.

The word export performance has been defined in many ways and no unify-ing principle has
underlined its quantification. However, in the context of current study, Export performance is
defined by different scholars as follows:

(i) The success or failure of the efforts of a nation to sell domestically produced goods
and services in other nations markets (Zou and Stan, 1998);
(ii) The export effectiveness, export efficiency and continuous engagement in exporting
(Shoham, 1991);
(iii) The composite outcome a nation’s international sales (Shoham, 1996); and
(iv) The three sub-dimensions which encompasses sales, profit and growth (Madsen,
1987).

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To sum up, export performance is the relative success or failure of the efforts of a firm or nation
to sell domestically produced goods and services in other nations. Export performance can be
described in objective terms such as sales, profits, or marketing measures or by subjective
measures such as distributor or customer satisfaction.

2.1.2. Gains from Export Trade

Export is one of the most important economic activities for economic growth and development
of any country and also the benefit of individual firms. Here under are list of gains from export
for individual firms (companies) and the country as a whole in separate sub-topics.

a. Firm Level Gains

Any company, before committing its resources to venture in the export business, must carefully
assess the advantages and disadvantages of exporting into a new market. While some companies
enter the export business unintentionally after receiving order to purchase from foreign buyer
that found their product, others make a deliberate move and conduct thorough research before
entering new market. Whether it is unintentional or deliberate move, companies need to evaluate
and carefully assess the advantages and challenges of exporting before committing resources.

Harber (1964) explained one of the advantages of export which is creating exposure to
international competition. The exposure to international competition creates for each sector an
absolute productivity standard necessary to meet foreign rivals, not only a relative productivity
standard compared to other sectors within its national economy. Even if a sector is relatively
more productive than others in the economy and can attract the necessary human and other
resources, it will be unable to export unless it is also competitive with foreign rivals. If sectors
that are losing position to foreign rival are the relatively more productive ones in the economy, a
nation’s ability to sustain productivity growth is threatened.

Tekle (2009) has listed and explained the main gains from export trade in a well organized way.
According to him, the following are few of the major advantages of exporting:

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 1. Increased Sales and Profits: - Selling goods and services to a market the company never
had before boost sales and increases revenues. Additional foreign sales over the long
term, once export development costs have been covered, increase overall profitability.
2. Enhance Domestic Competitiveness: - Most companies become competitive in the
domestic market before they venture in the international arena. Being competitive in the
domestic market helps companies to acquire some strategies that can help them in the
international arena.
3. Gain Global Market Shares: - By going abroad, companies will participate in the global
market and gain a piece of their share from the huge international marketplace.
4. Diversification: - Selling to multiple markets allows companies to diversify their
business and spread their risk. Companies will not be tied to the changes of the business
cycle of domestic market or of one specific country.
5. Lower per Unit Costs: - Capturing an additional foreign market will usually expand
production to meet foreign demand. Increased production can often lower per unit costs
and lead to greater use of existing capacities.
6. Compensate for Seasonal Demands: - Companies whose products or services are only
used at certain seasons domestically may be able to sell their products or services in
foreign markets during different seasons.
7. Create Potential for Company Expansion: - Companies who venture into the exporting
business usually have to have a presence or representation in the foreign market. This
might require additional personnel and thus lead to expansion.
8. Sell Excess Production: - Companies who have excess production for any reason can
probably sell their products in a foreign market and not be forced to give deep discounts
or even dispose of their excess production.
9. Gain New Knowledge and Experience: - Going abroad can yield valuable ideas and
information about new technologies, new marketing techniques and foreign competitors.
The gains can help a company’s domestic as well as foreign businesses.
10. Expand Life Cycle of Product. Many products go through various cycles. Namely;
introduction, growth, maturity and declining stages. Declining stage is the end of their
usefulness in a specific market. Once the product reaches the highest stage, maturity in a

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 given market, the same product can be introduced in a different market where the product
was never marketed before.

While the advantages of exporting by far outweigh the disadvantages, small and medium size
enterprises especially face some challenges when venturing in the international marketplace.
According to Tekle (2009), some challenges are:

1. Extra Costs: - Because it takes more time to develop extra markets, and the pay back
periods are longer, the up-front costs for developing new promotional materials,
allocating personnel to travel and other administrative costs associated to market the
product can strain the meager financial resources of small size companies.
2. Product Modification: - When exporting, companies may need to modify their products
to meet foreign country safety and security codes, and other import restrictions. At a
minimum, modification is often necessary to satisfy the importing country's labeling or
packaging requirements.
3. Financial Risk: - Collections of payments using the methods that are available (open-
account, prepayment, consignment, documentary collection and letter of credit) are not
only more time-consuming than for domestic sales, but also more complicated. Thus,
companies must carefully weigh the financial risk involved in doing international
transactions.
4. Export Licenses and Documentation: - Though the trend is toward less export licensing
requirements, the fact that some companies have to obtain an export license to export
their goods makes them less competitive. In many instances, the documentation required
to export is more involved than for domestic sales.
5. Market Information: - Finding information on foreign markets is unquestionably more
difficult and time-consuming than finding information and analyzing domestic markets.
In less developed countries, for example, reliable information on business practices,
market characteristics, and cultural barriers may be unavailable.

Victorian Government Export Services (2009) has also listed out a number of common benefits
that long-term, sustainable exporters have identified. These include:

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  Gaining economies of scale through growth and expansion into new markets
 Gaining seasonal advantages by evening out home country’s seasonal sales punctuations
through sales to the other hemisphere markets in the reverse season
 Extending the life of products or services that have become outmoded in home market
but may still be in demand in foreign markets
 Exposure to new ideas, technologies and business processes — this provides
opportunities for firms to improve their knowledge and increase their competitiveness
 Improved Return on Investment (RoI) in the longer term. As the result of competing in
world markets, often companies improve efficiency and performance — which translates
to their bottom line.

The Victorian Government Export Services (2009) has also identified key risk areas to recognize
including:

 Different cultures may influence business decisions and processes in different ways
 Political instability in international markets may pose new challenges to the business
 Legal systems more than likely will vary from that of the home country. It is important to
understand what you need to do comply with legal requirements in all elements of the
export process.
 Communication issues need to be considered carefully as the firm is likely to be remote
from its export markets and customers
 Protecting intellectual property in overseas markets can be difficult and complex
 Exporting places extra pressure on business resources
 Additional funding required for export, trading terms and dealing in foreign currencies
may place pressure on firm’s cash flow and financial situation.

b. Country Level Gains

As explained by Salvatore (1993), through its direct and indirect impact on domestic activities,
the export sector plays a crucial role for a country in:

1. Creating employment opportunities,

2. Increasing production capacity of different sectors,

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 3. Reducing cost of production,
4. Bringing foreign exchange earnings, and
5. Increasing the revenue of government and hence strengthens the capacity of nation
building.

To explain the gains from international trade, Porter (1990) added that a rising national share of
world export is tied to living standards when the growth of exports achieving high level of
productivity contributes to the growth of national productivity. A fall in overall world export
share because of the inability to successfully increase exports, conversely, is a danger signal for a
national economy. However, the particular mix of exports is more important than a nation’s
average export share. A rising sophistication of exports can support productivity growth even if
overall exports are growing slowly.

Thirlwall (2000) also tried to examine the dynamic gains from trade which continually shift
outwards the whole production possibility frontier of countries if trade is associated with more
investment and faster productivity growth based on scale economics, learning by doing and the
acquisition of new knowledge from abroad, particularly through foreign direct investment. The
essence of dynamic gains is that they shift outwards the whole production possibility frontier by
augmenting the availability of resources for production through increasing the productivity of
resources and increasing their quantity. One of the major dynamic benefits of trade is that export
markets widen the total market for a country’s producers. Other important dynamic benefit from
trade consist of the stimulus to competition; the acquisition of new knowledge, new ideas and the
dissemination of technical knowledge, the possibility of accompanying capital flows through
foreign direct investment and changes in attitude and institutions.

In a developing nation like Ethiopia, international trade can play an important role in its
economic growth. Harber (1964) pointed out that trade can lead to the full utilization of
otherwise underemployed domestic resources. That is, through trade, a developing nation can
move from an inefficient production point inside its production frontier, with unutilized
resources because of insufficient internal demand, to a point on its production frontier with trade.
For such a nation, trade would represent an outlet for its potential surplus of agricultural
commodities and raw materials. This has indeed occurred in many developing nations,

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particularly those in South Asia and West Africa. In addition, it is an excellent antimonopoly
weapon because it stimulates greater efficiency by domestic producers to meet foreign
competition. This is particularly important to keep low the cost and price of intermediate or semi
finished products used as inputs in the domestic production of other commodities.

2.1.3. What Should Countries and Firms Do to Gain from Trade?

Before looking what modern theories advise countries and firms to do, it is better have a bird’s
eye view of traditional theories on the subject matter.

As explained by Salvatore (1993), the mercantilists believed that the way for a nation to become
rich and powerful was to export more than its imports. These exports would result in a trade
surplus and hence an inflow of bullions (bars of gold and silver). More gold and silver means the
nation becomes more rich and powerful. Thus the government should do everything it can to
discourage and restrict imports and to stimulate exports of nations.

According to the classical school of thought founded by Adam Smith, trade between nations is
based on absolute advantage. If one nation is more efficient in the production of one
commodity and less efficient in the production of the second commodity than the other nation,
then each nation will benefit by specializing in production of their absolute advantage and
exchange products (output) with each other. In this way, output of both commodities will rise
and resources are utilized efficiently (Salvatore, 1993).

David Ricardo, in 1817, developed the law of comparative trade theory to show that mutually
beneficial trade could occur when one nation is completely more efficient in the production of all
goods. According to the law of comparative advantage, even if one nation is less efficient in the
production of all goods than the other nation, there is still a basis for mutually beneficial trade.
The first nation should specialize in the production and export of the commodity in which
its absolute disadvantage is smaller and import the commodity in which its absolute
disadvantage is greater (Salvatore, 1993).

According to these traditional trade theories, if every nation specializes in the production of
commodities of its comparative advantage, global output will rise and through trade, each nation

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will benefit from the gain. The theory of comparative advantage with present distribution of
factor endowments and technology between developed and developing nations thus prescribes
that developing nations should continue to specialize in the production and export of raw
materials, fuels, minerals, and food to developed nations in exchange for manufactured products.
However, it is suggested that developing nations specializing in primary commodities are left
poor, underdeveloped, and dependent. Therefore, developing nations disagree with traditional
trade theory and consider it as static and irrelevant to the development process. In short,
traditional trade theory may maximize welfare at one point in time but over time (Salvatore,
1993).

Having those traditional theories in mind, let’s have a look at what modern theories and writers
advised countries and firms to gain from international trade activities in general and export trade
in particular.

Heckscher – Ohlin Theory states that, a country is said to be comparatively advantageous if it

uses the country’s abundant factor intensively in the production of the good (Stephen,
1990). According to this theory, trade results from difference in factor endowments. The theory
is formulated based on a two factor – model (labor and capital). Countries which have much
capital will export capital intensive goods and countries that have much labor will export
labor intensive commodities.

For sustain advantage, firms must achieve more sophisticated competitive advantage over time,
through providing higher-quality products or producing more efficiently. Competitiveness
requires effective utilization of available resources. Moreover, in today’s competitive global
market, competition is not only about price but also about supplying quality products. This
translates directly in to productivity growth. As a result, quality has become strategic target
involving all, both in and out of the firm in the management of its interference with client and
environment (Stuart Mill, et al, 2010).

Entering an export business requires careful planning, some capital, market know-how,
access to quality product, competitive pricing strategy, management commitment and
realizing the challenges and opportunities. Without them it is almost impossible to succeed in

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the export business. While there are no hard-and-fast rules that can help companies make
decision to export and to become successful, understanding the advantages and disadvantages of
exporting can help smooth entry into new markets, keep pace with competition and eventually
realize profit (Tekle, 2009).

2.1.4. Determinants of Export Performance

Determinants of export performance can be split into internal and external components. External
factors are related to market access conditions and other factors affecting import demand. Apart
from trade barriers and competition factors foreign market access is also determined by
transportation costs, which include geography and physical infrastructures. Internal factors refer
to supply-side conditions. Supply capacity is also affected by location-related elements, which
may for example, affect access to raw materials and other resources. It also depends upon factor
costs such as labor and capital. (UNCTAD, 2004).

Charles D Jebuni (2006) outlined that the availability and quality of infrastructural services is
critical to economic activity in terms of determining the costs, profitability and viability of
different economic activities. They also influence the attractiveness of different
countries/locations for investment, and the type of economic activities.

Dawson (2004) cited a number of theoretical justification which asserts that the export
performance is an important determinant of economic growth, and hence the concern for many
developing countries where growth is assumed to be their ultimate concern. First, via foreign
exchange multiplier, export growth leads to economic growth. Second, foreign exchange from
exports can be used to finance imported manufactured goods, capital goods, and technology,
which contribute a lot to growth. Third, competition leads to scale economics, advance in
technology and growth. Forth, export sector may provide positive externalities such as more
efficient management and production technique, which leads to growth.

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2.2. Empirical Review

BACKGROUND OF THE LEATHER SECTOR

The Ethiopian leather industry is relatively and older industry with more than 90 years of
involvement in processing leather and leather products. The first two tanneries were established
and vertically linked to two shoe factories: ASCO Tannery & ASCO Shoe Factory (the present
Addis Ababa Tannery and Tikur Abbay shoe factory) and Darmar Tannery & Shoe Factory (the
present Awash Tannery and Anbessa Shoe Factory). (LIDI, 2015)

Leather producers and exporters in Ethiopia

No. Company Name Line of Business

1 Abysiniya Leather Garments Manufacturer/Exporter:
Jackets
Ladies Bags
Bests
Wallet
2 Universal Leather Products (ELICO) Manufacturer/Exporter:
Ladies Hand Bag
Executive Case
Document Case
Luggage
School Bag
Small Leather Goods
Industrial Glove
Garments
Belts
3 Indu Leather Craft Manufacturer/Exporter:
  Leather Crafts
Libitur Leather Exporter PLC Manufacturer/Exporter:
4
Leather Products
5 Intoto Bethartisial PLC Manufacturer/Exporter:
  Leather Products
6 Dag-Er Leather Manufacturer/Exporter:
  Leather Products
7 MT Leather Products Manufacturer/Exporter:
  Leather Products
8 Korojo Leather Products PLC Manufacturer/Exporter:

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   Leather Products
9 Fetsum Leather Products Manufacturer/Exporter:
  Leather Products
10 Yezichalem Meaza Leather Products Manufacturer/Exporter:
  Leather Products
11 Girum Leather Manufacturer/Exporter:
  Leather Products
12 Sami Mohammed Manufacturer/Exporter:
  Leather Products
13 General Leather Products PLC Produce and export
    Jacket
  Ladies Bags
  Belt

REFERENCE

 UNCTAD (2004). EXPORT PERFORMANCE AND ITS DETERMINANTS: SUPPLY

AND DEMAND CONSTRAINTS. New York and Geneva: UN Publication
 Dawson P. J., (2004), “Agricultural Exports and Economic Growth in Less
Developed Countries” School of Agriculture, Food and Rural Development,
University of Newcastle upon Tyne, UK.

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