Firms and trade in downturns

My research lies at the intersection of international trade and industrial economics. I contribute to the firms and trade literature, both empirically and theoretically, focusing on the impact of the financial crisis of 2008-09 on various dimensions of firms' activities. In particular, I study the response of international trade to the shock, focusing on the reaction of importers to the reduction in demand. Additionally, I explore the impact of the crisis on firms' innovation decisions, together with the implications of this for firms' export participation. I pursue these avenues of research as the Great Recession constituted a large shock, impacting severely various aspects of firms' operations. This allowed me to study the impacts of the fall in demand on trade, and the effects of liquidity scarcity on innovation and exporting. In Chapter 2 I exploit detailed Slovenian custom data to explore the product dimension of the trade crisis. I find that imports of inputs accounting for a larger share of firms' costs underwent an enhanced reaction during the event. This finding is explained with an inventory adjustment model which predicts a more than proportionate adjustment for high cost-share inputs because of their higher storage costs. In the Chapter 3 and 4, I concentrate on the effects of the 2008 crisis on firms' innovation decisions and selection into exporting. I augment the Melitz and Ottaviano (2008) framework to include process innovation subject to liquidity constraints, and show that a reduction in liquidity for innovation has opposing outcomes on innovators and exporters: innovative activity is reduced but entry into exporting is stimulated by a reduction in the industry-wide degree of competition. Evidence supporting these theoretical predictions is found in an empirical analysis with Slovenian firm level data in Chapter 4.