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How Do Firms Adjust When Trade Stops?

Author

Listed:
  • Povilas Lastauskas

    (School of Business and Management, Queen Mary University of London.)

  • Aurelija Proskute

    (Bank of Lithuania and Vilnius University)

  • Alminas Zaldokas

    (Hong Kong University of Science and Technology (HKUST))

Abstract

We investigate how _rms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. We explore a unique event when, due to political reasons, unrelated to the underlying economic conditions, the exporters completely lost access to a major foreign market. In particular, in 2014 Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

Suggested Citation

  • Povilas Lastauskas & Aurelija Proskute & Alminas Zaldokas, 2023. "How Do Firms Adjust When Trade Stops?," Working Papers 111, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    • Handle: RePEc:cgs:wpaper:111
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    File URL: http://cgr.sbm.qmul.ac.uk/CGRWP111.pdf
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    More about this item

    Keywords

    economic sanctions; firm adjustment margins; part-time employment; new export markets;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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