Export Market Size Matters: The Effect of the Market Size of Export Destinations on Manufacturing Growth

Literature contends that the manufacturing sector is crucial for economic development, and it is conventional wisdom that exports drive manufacturing growth. However, it has yet to be established empirically whether the market size of export destinations is an essential factor in explaining diverging regional and sectoral manufacturing growth patterns. This article argues that accessing a few large external markets reduces entry costs, increases expectations of economies of scale, and fosters capital formation. To test this hypothesis, we construct a novel Relative Export Market Size (REMS) index that measures whether the share of sectoral exports destined to large economies in one region is higher than in other regions. Using a PVAR model with fixed effects, we verify the impact of the REMS index on value added, employment, and capital accumulation of 129 manufacturing sectors in 23 regions in Colombia from 1992 to 2017. The obtained results show that exporting to larger markets positively impacts employment, capital formation, and value added per capita of manufacturing sectors at a regional level. This finding indicates that exporting to the world’s largest market helps develop competitive manufacturing sectors.