Hello. Welcome back. Countries can be heterogeneous in many ways, for example, with respect to large variations in area, population, production factor, factor abundance, income, culture, geography, and climate. Countries can also be heterogeneous internally, for example, in terms of huge differences between firms in size, employment, capital intensity, skills, international orientation, and productivity. Heterogeneity, productivity, and developments are closely related. At the end of this lecture, you will understand this relationship and its policy implications. If you want to analyze the degree of firm heterogeneity in a country, you need access to detailed and reliable micro-economic datasets. For long, these data were hard to come by for most developing countries. This is the main reason why the literature focused on high-income countries with high-quality datasets, combined with a few developing countries for which more information was available. In this and the following lectures, you will discover that this picture is changing quickly because more reliable data for a wide range of emerging and developing countries is becoming available. Due to great efforts and investments made by, for example, the World Bank and the International Finance Corporation, these datasets enable the analysis that Binyam and I will present, thereby providing a much more robust evidence base for trade and investment policy in developing countries. At the macroeconomic and geopolitical level, it is increasingly being recognized that analysis and policies can no longer continue to treat developing countries as a homogeneous group. Indeed, policymakers at UNCTAD, the IMF, and the World Bank know that the Global South is heterogeneous. Economists recognize that macroheterogeneity, especially in differences in productivity levels across countries, and the resultant distribution of per capita income levels. This distribution has changed a lot due to the process of globalization and because of differing national policies and circumstances in the context of this internationalization process. This graph shows the relationship between internationalization and productivity over the last quarter of a century. If necessary, pause the video to really take a good look. Each dot is a country. On the horizontal axis, we have the growth rates of exports of goods and services, and on the vertical axis, the growth in GDP per person employed, which is a good proxy for labor productivity. We see widely diverging country experiences both for export growth and for productivity growth. But there's also some correlation, a positive association between the change in exports and the change in productivity. But the direction of causality is not clear beforehand. Are more productive countries in a better position to export, or do countries that export a lot become more productive? This is a key issue which we will return in the next lecture. Heterogeneity is not only a relevant issue for countries, but it's also important for the differences between firms within the same country. Even within the same sector of the same country, some firms are large while others are small, some firms exports while others do not, some firms are more productive than others, some firms are foreign-owned while others are not, and so on. Let's take a closer look at one of these heterogeneities, namely the firms that trade internationally. Each dot, again, represents a country. On the horizontal axis, we see the share of firms that are exporting. You can see that the range runs from 0-50 percent. In most countries, the vast majority of firms are not exporting. Being an exporter is just special. Indeed, the median share of exporters is about 10 percent. On the vertical axis, we have the share of firms that are importing. The range now is from 0-100. You can see that in most countries, the majority of firms use foreign inputs or suppliers. This means that these firms are importers. The medium share of importing firms is a good 60 percent. That is six times as high as the share of the exporters. Being an importer is just less special than being an exporter. Now, let's see how this works out for regions and continents. We start with the exporter heterogeneity. For six regions, the graphs illustrate the share of exporting firms and the share of total sales that are exported, respectively. There are, of course, differences between the regions. For example, firms in Europe and Central Asia tend to be more inclined to exporting. Still, the picture is clear. Exporting is special. Now let's compare this with importing. It is immediately clear. Importing is much more common than exporting, and we see that this is the case for all regions of the world. Now, as a final check, we compare the shares of exporters and importers against income per head. First, the exporter share. Next, the importer share. Again, it is obvious that importing is much more common, and it does not depend on the level of development. Professor Peter, you have shown that important firms are more common in the economy. But actually, it makes it much more difficult for me to understand why policymakers pay more attention to exporters and exporting firms, and it seems a bit strange why actually they neglect input facilitation. Again, it's an excellent observation. Policymakers, indeed, often forget the importance of imports. But imports are really important because without capital goods, without energy, without raw materials, without intermediate goods, an economy would really come to a still stand, just as we've seen during the COVID-19 pandemic. Yes, but then it makes much more difficult to understand why policymakers pay less attention to the needs of importing firms. One reason may be that they take a aesthetic look at exporting and importing. If you calculate national income, then exports are added, and imports are subtracted. It may also be that the dynamics are ignored. The dynamics are what happens in the longer term, and there you see that it is a key factor for economic growth and development. Finally, policymakers prioritize exports because of the fact that they need hard currency. But then, in the end, you need the hard currency to pay your importing bill. I see. So an important insight is that importers are more common than exporters. I'm always reminded of the words of Adam Smith. He said, "The sole purpose of production is consumption." In the same vein, you can say the sole purpose of exporting is importing. It is the ability to import the goods that you need but can not produce domestically. Now let's look again at this graph. When you look at the graph, it is always difficult to see what is not there. Do you see the empty space? The empty triangle indicates a necessary condition. At low levels, for the exporter share, the import does not seem to matter. But in order to get at a higher exporter share, the importer share needs to be higher. A higher importer share is not a sufficient condition because sometimes higher import shares are associated with a low exporter share. But we do not have the opposite. We do have high exporter shares together with low importer shares. Now, this is another graph that illustrates a necessary condition for the export share on the vertical axis. On the horizontal axis, we have the share of firms that experience difficulties with customs and trade policy. Do you see the empty triangle? Do you understand what it means? See you next time.