What Drives Exports? Empirical Evidence at the Firm Level

Abstract: The aim of this thesis is to the understand how firms engage in exporting, particularly in consideration of three aspects—product type, past trade experience, and investments in innovation activities. It consists of one introductory chapter and three independent papers relating to determinants of firms’ exporting. Chapter 2 investigates the distance effect on the exporting of homogeneous and differentiated products. Chapter 3 examines the interaction between past importing and productivity in affecting firms’ export decisions. Chapter 4 uses a structural framework to provide empirical evidence linking innovation, productivity, and exporting. All chapters employ Swedish microdata for the analysis. The negative relationship between distance and trade is one of the most robust empirical findings in the international trade literature. However, the impact of distance is not uniform across products: It varies in magnitude due to product characteristics. Rauch’s (1999) network or search view argues that differentiated products assert greater distance sensitivity than homogeneous products because it is more costly to compare differentiated products by their varying characteristics and features. Buyers and sellers must establish network ties to match orders across markets, thus increasing transaction costs. Despite this argument, the empirical studies so far have found conflicting results. In Chapter 2, I intend to test the hypothesis that there are greater distance effects for differentiated products by employing a detailed dataset that matches firms with their exported products. The main findings are in contrast with the network or search view and suggest that homogeneous products exhibit greater distance sensitivity in both export participation and export intensity. Several robustness checks confirm the main findings. The positive effect of productivity on firms’ exporting is generally taken as given in international trade studies, but little is known about importing’s role. The study in Chapter 3 investigates the importance of previous imports as an export driver by analysing the interaction between importing and productivity. The hypothesis is that the effect of productivity on exporting is greater for firms with previous importing experience. For an equal increase in productivity among all firms, those with import experience are able to exploit their exposure to international markets and are more likely to engage in exporting, compared to firms with no previous importing. All results confirm a positive impact of the interaction effect between importing and TFP, and this effect is stable over time. The interaction effect matters more for export starters in both export decisions when compared to the full sample results. The policy implication points to support for a free-trade policy, where importing raw materials can help stimulate domestic firms to obtain better supplies, be more productive, and begin exporting later. Exporting is a self-selection process where only highly productive firms can afford the costs of entering foreign markets. But early models often treat the source of this productivity as given, until recently. In this chapter, I look at the interdependence of innovation activities, productivity, and export performance at the firm level. The empirical setting extends Lööf and Heshmati’s (2006) structural model with an additional export equation. This framework provides an intermediate step between innovation input and productivity, disentangling innovation into input and output separately. It also corrects for a potential bias arising from firms’ selection into innovation investments and allows for interdependence between innovation output, productivity, and exporting. The dataset is a combination of two waves of the Swedish Community Innovation Survey (CIS), covering 2002–2004 and 2004–2006 within the manufacturing sector. The results suggest that exporting is driven by firm productivity, which is in turn positively related to past innovation output. Depending on the specifications, innovation output is also positively related to innovation input. Lastly, exporting always increases innovation but only increase a firm’s productivity when correcting for selectivity and simultaneity issues.