Sunday, August 30, 2009

Speacial Hurriyet column: An industrious look at industrial enterprises

In addition for the weekly columns, I also do special analysis pieces from Hurriyet from time to time. I wanted to do an analytical piece on the Istanbul Chamber of Commerce (ISO) Top 500 Industrial Enterprises survey when it came out in July, but then decided to wait on for the second-500 list to be able to work with more data. I did the analysis with Ahmet Asarkaya, a very able ex-student from my teaching days at Izmir, who now happens to work in Turkey Data Monitor.

Anyway, as is the norm, below is the unedited version; you can read the final version at the Daily News website. One big difference between the two is that since the editors decided it, unlike my weekly would not be an opinion piece, the first person narrative had to be transformed to third person.

I am big fan of of the maxim "a picture is worth more than a thousand words", so below are the figures that go with the piece; the paper could only publish the second one due to space limitations.

Last but not the least, I learned by chance that ISO only publishes some of the data they collect; in fact, they get detailed balance sheet info, which would make their data the best panel data on Turkish companies. I am in talks with them to use the data for research, and if they agree, I and Ahmet plan to do more, especially interesting panel regressions. So you'll probably hear more on ISO data from me soon.

On Wednesday, Istanbul Chamber of Commerce released the results of its Turkey’s Next Top 500 Industrial Enterprises 2008 Survey.

The survey and its big brother covering the first 500 firms, which was made public a month ago, make up one of the best panel datasets of Turkish firms, so we had always been a bit disappointed by the indifference of academics and media alike towards them. While we have yet to see serious academic work making use of the surveys, the crisis has brought unprecedented media attention. Late to the game, we would like to highlight some of the uncharted results and dispel some chronic myths.

One of the recurring themes of the data is that big is beautiful. The top 200 firms are more than five times more productive (in terms of value added per worker) and profitable (as measured by return on assets, or ROA) than the bottom 200. More surprisingly, these much-publicized findings seem to be a result of aggregation more than anything. There is hardly any correlation between size and productivity or profitability, and whatever there is completely disappears once you account for sectoral differences.

Big is not only beautiful, it is also lean and mean: While the main take of the survey by the press, that Turkish industry has been devastated by the crisis, is unfortunately true, as depicted by the record decrease in profits (16.5%) and increase in losses (150.4%), larger firms have been able to relatively shield themselves (at least compared to their smaller counterparts), not only in this crisis, but also in the 2001-2002 episode. To illustrate, while the top 200 saw its profit margin decline by 2.6% from 2007 to 2008, the same figure is 3.7% for the bottom 200.

The dismal state of the smaller firms would be a just cause for concern, as they are arguably much more representative of the country’s small and medium-sized enterprises (SMEs) than the powerhouses in the top 500. But interestingly enough, it is the middle-pack that is displaying the largest declines in some negative performance scales. This surprising result is actually in line with previous findings, notably in the World Bank Investment Climate Assessment Survey of 2005, which found out that middle-sized lack the muscles of the behemoths and the flexibility of the SMEs. Then, maybe, big is beautiful, only if you are big enough.

One group that should have been affected disproportionately from the crisis is exporters: After all, with Turkey’s main export markets hit hard by the crisis and export volumes having registered sharp falls after the first quarter of 2008, one would expect exporters to be utterly devastated by the crisis. In fact, they are anything but, at least the ones on the ISO list, who have been able to maintain their ROAs and actually increase their profit margins. While deeper analysis is needed, we suspect a selection bias is going on, with the ISO list featuring crème de la crème of the exporters; the ones that have been able to rapidly shift their markets.

In a similar fashion, foreign-owned firms, as defined by non-domestics owning more than 50% of the firm, have been able to shield themselves better from the crisis as well. In general, these firms are also more productive than their domestic-own counterparts. But correlation should not be confused with causation: It could also be that better-managed firms attract foreign capital. However, a closer look leads us to partially reject this hypothesis, as foreign-owned firms are not that different from their domestic counterparts before they are acquired. Foreigners do not work their magic immediately, either: We found no difference in terms of profitability and productivity in the couple of years before and after a firm is acquired. The benefits seem to come later on.

There are nevertheless important sectoral differences as well. For one thing, all but two sectors (mining and electricity/energy) have seen their profit margin and ROA fall from 2007 to 2008, with the sharpest falls being in paper products (which include the newspapers to our dismay), textiles and food & tobacco. The latter is one hell of a surprise, as it has been touted in the media as rather unscathed from the crisis.

One important disclaimer of all this analysis is the timeframe of the survey. Since last year, we have seen a record-level growth collapse in the first quarter. But we have also witnessed temporary stimulus measures in certain sectors resulting in a likely quarter-on-quarter positive growth in the second quarter. It will be interesting to see how these factors have played out in the top-1000 industrial enterprises this year.

One of the authors of this study painted a rather contrarian view of the tourism sector in this paper titled For whom the bells toll? some time ago. He now completely regrets for having already used this title, which belongs more with industry. Compared to industry, tourism is in one great party.

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