California's Exports and the 2004 Overseas Office Closures

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I. INTRODUCTION

Nearly all states in the United States fund export promotion programs such as overseas offices. State officials often justify using tax dollars on overseas offices by claiming that the offices help small- and medium-sized firms initiate or increase exports. If overseas offices work as justified, then the state's aggregate exports to countries with an overseas office will be greater than if the offices did not exist.

Despite the general willingness of state governments to fund overseas offices--40 states had at least one in 2002--their effectiveness is unknown (although debated). Measuring the success of an overseas office is difficult because of a causality problem. If states that are good exporters use overseas offices because they are already good exporters, then the ordinary least squares regression estimate on the impact of the offices is upwardly biased. This bias potentially causes false positives on their statistical significance.

Early twenty-first-century California provides a work-around to the causality problem. California operated 12 overseas trade offices at an annual cost of $6 million. It closed all of its offices on January 1, 2004, primarily because of a 2003 state budgetary shortfall of $40 billion that forced reductions in many state programs. The budget of the entire economic development agency housing the overseas offices was eliminated. Furthermore, there was a perception that the overseas offices were ineffective after a May 2003 expose by Kindy (2003a,b) reported a lack of oversight and false claims by the offices. Although no citations for wrongdoing were issued, this expose damaged the public reputation of the offices. As of this writing, none of the offices have re-opened.

The closure of California's 12 offices provides an opportunity for a direct estimate of their impact on California's exports because the decision to close the offices was as a result of the 2003 budget crisis, an exogenous intervention. This exogenous intervention allows for an unbiased test to determine if the difference in exports from California to the set of countries with trade offices is equal to the difference in exports to a set of countries without an overseas office, before and after the January 1, 2004, closures. If there is no statistically significant difference in exports before and after the office closures compared to those where no office existed, then it cannot be the case that the overseas offices made an impact on state exports distinguishable from random events. This differences-in-differences methodology is standard. It is the unique circumstance of the California budget crisis that is key because of its exogeneity to the office-export relationship.

Applying the differences-in-differences estimator to a sample of 44 countries (12 with overseas offices) over 8 years yields a point estimate suggesting if the offices had not closed, California's exports to those countries would have been 2%-3% larger in the best case scenario. This estimate, although economically reasonable, is not statistically different from zero. Under a battery of alternative specifications and robustness checks, there is no statistically relevant impact of overseas offices on California's exports to those countries.

During the 1980s and early 1990s, international business and marketing scholars studied the effectiveness of export promotion programs, including overseas offices. The resulting literature, largely based on surveys and interviews with export promotion participants, does not reach a consensus. Wilkinson and Brouthers (2000) provide a succinct review of these early studies in addition to their own mixed findings using data from 1990.

More recently, Wilkinson, Keillor, and d'Amico (2005) examined a cross section of U.S. state export program expenditures and manufacturing exports. They find a positive correlation, but they do not control for state or country features. …