A non-parametric framework to analyse export potentials: An application to the Portuguese footwear industry

Governments and firms spend considerable resources promoting their products and services abroad to increase exports. An efficient allocation of these resources requires the identification of the markets with the greatest potential for export growth. In this line of thought, a broad literature stream focuses on the identification of trading potentials at the country level. Existing studies try to identify trading potentials by measuring the difference between the observed and expected volumes of trade by employing the gravity equation (Tinbergen 1962). With few exceptions, the estimation of this equation resorts to parametric methods, such as Regression Analysis (RA) and Stochastic Frontier Analysis (SFA). However, in such methods, strong assumptions on the distribution of the error components are required, which are not always met (Silva and Tenreyro 2006). In addition, a specific functional form among the volume of trade and the explanatory variables has to be assumed. However, this may lead to a distortion of evidence by imposing wrong parametric form (Schmidt, 1985).

In this project, a novel assessment framework to evaluate trading potentials with existing trading partner countries, at the industry level, is introduced. This framework still relies on the tradition of the gravity equation, but it departs from the extant assessment methods by employing a deterministic frontier analysis method, namely Data Envelopment Analysis (DEA), that has not been employed before in the literature on trading potentials’ measurement. In DEA, contrary to RA and SFA, the efficient frontier is shaped by the observed best practice units. In this sense, it does not require specific a priori functional forms or distributional assumptions.

The new proposed framework is further employed to evaluate and identify trading potentials for the footwear industry in Portugal using panel data for 63 destination markets over the 2011-2018 period. Footwear is an important industry for Portugal, being responsible for almost 4% of the country’s exports. Portugal exports more than 90% of the footwear it produces1 and as a result, the Portuguese footwear industry dedicates much effort to external promotion and is keenly interested in identifying the markets with greater potential to increase its exports.

This project contributes to the literature at both the theoretical and applied level. At the theoretical level, a two-step non-parametric assessment framework to evaluate trading potentials is introduced. In the first step, the increase in revenue that can be obtained, given the demand and the purchasing power of destination markets, is determined. In the second step, this revenue potential is decomposed into quantity and price changes. At the applied level, feasible trading potentials to maximize Portugal’s revenue for footwear exports are identified.

Fit with the sustainable development goals of the 2030 agenda
The current project aims to build a theoretical framework that can be applied to any country and industry, in order to identify trading potentials with existing trading partner countries. Consequently, the expected outcomes of this project are twofold. First of all, it will support the efficient allocation of resources spent on marketing campaigns abroad and thus, it will reduce economic losses. Secondly, the expected increase of trading exports will effectively boost the production capacity of an industry within a country and thus, it will contribute to the country’s sustainable economic growth. Therefore, the scope of this project is in line with Goal 8 (decent work and economic growth) of United Nations’ 2030 Agenda for Sustainable Development.