Export Orientation and Exchange Rate Changes: Do Firms React Differently and Why?

This paper uses firm level data from 28 developing countries to examine the relationship between manufactured firms’ export orientation and exchange rate. The analysis incorporates the role of firm heterogeneity and country characteristics. We capture firms’ heterogeneity through the share of imported inputs, the size of the firm and labor productivity and country characteristics through the quality of domestic institutions and the degree of financial development. The data set allows constructing three sub-samples according to firms’ status on the export market (survivors, entrants and exitors). The results show important differences between survivors, entrants and exitors. Firm characteristics have little effect on survivors while many of these characteristics have significant effect on entry and on exit. Among the country characteristics of interest, only financial development has consistent effect across samples. The effect of exchange rate on exports volume is influenced by firm size and country financial development. The effect on entry is influenced by firm size and imported inputs but not by country characteristics. In contrast to entry, no firm characteristic has an impact on the effect of exchange on firm exit while financial development does on exit but not on entry. Splitting the REER into Equilibrium REER and misalignment shows that both components have effects on firm export orientation. Such effects depend only on the level of financial development but the dependence is not monotonic.