Firm-level capabilities and response to a negative export shock: 2014 Russian embargo on the West

This paper investigates the resources and capabilities that determine firm-level adjustments after a sudden unexpected closure of a major export market. We focus on the effects of the 2014 Russian embargo on Western food exporters using the example of Estonian firms. The paper applies a novel multimethod approach consisting of Study I quantifying the embargo effect on the trade diversion of firms that had exported embargoed goods to Russia, and Study II conducting a multiple case study into three dairy exporters highly affected by the embargo. Study I employs a difference-in-difference model with matched exporters of embargoed goods as treatment. Study II builds on extensive document analysis that serves as input for interviews with the CEOs of the sample dairy firms. We find that pre-shock productivity is on average a good predictor of post-shock firm trade diversion (Study I), however, we specify that the key firm-level resources and capabilities necessary for successful post-shock adjustments might not be reflected in the standard quantitative productivity level measures (Study II). We conclude that key firm-level resources and capabilities for embargo-resilience are the quality of exporting experience, competitive product-market matching, absorptive capacity, and managerial vision and empowerment.