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Institutions and Export Dynamics

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  • Luis Araujo
  • Giordano Mion
  • Emanuel Ornelas

Abstract

We study the role of contract enforcement in shaping the dynamics of international trade at the firm level. We develop a theoretical model to describe how agents build reputations to overcome the problems created by weak enforcement of international contracts. We find that, all else equal, exporters start their activities with higher volumes and remain as exporters for a longer period in countries with better contracting institutions. However, conditional on survival, the growth rate of a firm's exports to a country decreases with the quality of the country's institutions. We test these predictions using a rich panel of Belgium exporting firms from 1995 to 2008 to every country in the world. We adopt two alternative empirical strategies. In one specification we use firm-year fixed effects to control for time-varying firm-specific characteristics. Alternatively, we model selection more explicitly with a two-step Heckman procedure using "extended gravity" variables as our exclusion restrictions. Results from both specifications support our predictions. Overall, our findings suggest that weak contracting institutions cannot be thought simply as an extra sunk or fixed cost to exporting firms; they also significantly affect firms' trade volumes and have manifold implications for firms' dynamic patterns in foreign markets.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1118.

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Date of creation: Jan 2012
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Handle: RePEc:cep:cepdps:dp1118

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Firm exports; contract enforcement; contracting institutions; firm dynamics;

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  1. Bernard, Andrew B. & Grazzi, Marco & Tomasi, Chiara, 2012. "Intermediaries in International Trade: Direct versus indirect modes of export," CEPR Discussion Papers 8766, C.E.P.R. Discussion Papers.
  2. Luis Araujo & Emanuel Ornelas, 2005. "Trust-Based Trade," IBMEC RJ Economics Discussion Papers 2005-08, Economics Research Group, IBMEC Business School - Rio de Janeiro.
  3. Facundo Albornoz & Héctor Calvo-Pardo & Gregory Corcos & Emanuel Ornelas, 2010. "Sequential exporting," LSE Research Online Documents on Economics 28724, London School of Economics and Political Science, LSE Library.
  4. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  5. Aeberhardt, Romain & Buono, Ines & Fadinger, Harald, 2014. "Learning, incomplete contracts and export dynamics: Theory and evidence from French firms," European Economic Review, Elsevier, vol. 68(C), pages 219-249.
  6. Corcos, Gregory & Irac, Delphine & Mion, Giordano & Verdier, Thierry, 2009. "The Determinants of Intra-Firm Trade," CEPR Discussion Papers 7530, C.E.P.R. Discussion Papers.
  7. Felbermayr, Gabriel & Jung, Benjamin, 2011. "Trade intermediation and the organization of exporters," Munich Reprints in Economics 20574, University of Munich, Department of Economics.
  8. Heiwai Tang & Yifan Zhang, 2012. "Quality Differentiation and Trade Intermediation," Discussion Papers Series, Department of Economics, Tufts University 0771, Department of Economics, Tufts University.
  9. Gwartney, James & Lawson, Robert, 2003. "The concept and measurement of economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 405-430, September.
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  11. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  12. Do, Quy-Toan & Levchenko, Andrei A., 2009. "Trade, inequality, and the political economy of institutions," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1489-1520, July.
  13. Turrini, Alessandro & van Ypersele, Tanguy, 2010. "Traders, courts, and the border effect puzzle," Regional Science and Urban Economics, Elsevier, vol. 40(2-3), pages 81-91, May.
  14. repec:stn:sotoec:1003 is not listed on IDEAS
  15. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  16. Morales, Eduardo & Sheu, Gloria & Zahler, Andrés, 2011. "Gravity and extended gravity: estimating a structural model of export entry," MPRA Paper 30311, University Library of Munich, Germany.
  17. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
  18. Costinot, Arnaud, 2007. "On the Origins of Comparative Advantage," University of California at San Diego, Economics Working Paper Series qt07g7g8h8, Department of Economics, UC San Diego.
  19. Tibor Besedeš & Byung–Cheol Kim & Volodymyr Lugovskyy, 2011. "Export Growth and Credit Constraints," CeFiG Working Papers 16, Center for Firms in the Global Economy, revised 16 Oct 2011.
  20. JaeBin Ahn & Amit K. Khandelwal & Shang-Jin Wei, 2010. "The Role of Intermediaries in Facilitating Trade," NBER Working Papers 15706, National Bureau of Economic Research, Inc.
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  22. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
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