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Institutions and Export Dynamics

  • Luis Araujo
  • Giordano Mion
  • Emanuel Ornelas

We study the role of contract enforcement in shaping the dynamics of international trade at the firm level. We develop a theoretical model to describe how agents build reputations to overcome the problems created by weak enforcement of international contracts. We find that, all else equal, exporters start their activities with higher volumes and remain as exporters for a longer period in countries with better contracting institutions. However, conditional on survival, the growth rate of a firm's exports to a country decreases with the quality of the country's institutions. We test these predictions using a rich panel of Belgium exporting firms from 1995 to 2008 to every country in the world. We adopt two alternative empirical strategies. In one specification we use firm-year fixed effects to control for time-varying firm-specific characteristics. Alternatively, we model selection more explicitly with a two-step Heckman procedure using "extended gravity" variables as our exclusion restrictions. Results from both specifications support our predictions. Overall, our findings suggest that weak contracting institutions cannot be thought simply as an extra sunk or fixed cost to exporting firms; they also significantly affect firms' trade volumes and have manifold implications for firms' dynamic patterns in foreign markets.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1118.

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Date of creation: Jan 2012
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Handle: RePEc:cep:cepdps:dp1118
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  2. Romain Aeberhardt & Ines Buono & Harald Fadinger, 2012. "Learning, incomplete contracts and export dynamics: theory and evidence from French firms," Temi di discussione (Economic working papers) 883, Bank of Italy, Economic Research and International Relations Area.
  3. Andrew B. Bernard & Marco Grazzi & Chiara Tomasi, 2012. "Intermediaries in International Trade: Direct Versus Indirect Modes of Export," CEP Discussion Papers dp1137, Centre for Economic Performance, LSE.
  4. Do, Quy-Toan & Levchenko, Andrei A., 2009. "Trade, inequality, and the political economy of institutions," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1489-1520, July.
  5. Luis Araujo & Emanuel Ornelas, 2007. "Trust-Based Trade," CEP Discussion Papers dp0820, Centre for Economic Performance, LSE.
  6. Turrini, Alessandro & van Ypersele, Tanguy, 2010. "Traders, courts, and the border effect puzzle," Regional Science and Urban Economics, Elsevier, vol. 40(2-3), pages 81-91, May.
  7. McMillan, John & Woodruff, Christopher, 1998. "Inter-Firm Relationships and Informal Credit in Vietnam," CEPR Discussion Papers 2036, C.E.P.R. Discussion Papers.
  8. Martina Lawless, 2013. "Marginal Distance: Does Export Experience Reduce Firm Trade Costs?," Open Economies Review, Springer, vol. 24(5), pages 819-841, November.
  9. Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, EconWPA.
  10. Felbermayr, Gabriel & Jung, Benjamin, 2011. "Trade intermediation and the organization of exporters," Munich Reprints in Economics 20574, University of Munich, Department of Economics.
  11. Heiwai Tang & Yifan Zhang, 2012. "Quality Differentiation and Trade Intermediation," Discussion Papers Series, Department of Economics, Tufts University 0771, Department of Economics, Tufts University.
  12. Costinot, Arnaud, 2007. "On the Origins of Comparative Advantage," University of California at San Diego, Economics Working Paper Series qt07g7g8h8, Department of Economics, UC San Diego.
  13. Ahn, JaeBin & Khandelwal, Amit K. & Wei, Shang-Jin, 2011. "The role of intermediaries in facilitating trade," Journal of International Economics, Elsevier, vol. 84(1), pages 73-85, May.
  14. repec:stn:sotoec:1003 is not listed on IDEAS
  15. Tibor Besedeš & Byung–Cheol Kim & Volodymyr Lugovskyy, 2011. "Export Growth and Credit Constraints," CeFiG Working Papers 16, Center for Firms in the Global Economy, revised 16 Oct 2011.
  16. Albornoz, Facundo & Calvo Pardo, Héctor F. & Corcos, Gregory & Ornelas, Emanuel, 2012. "Sequential exporting," Journal of International Economics, Elsevier, vol. 88(1), pages 17-31.
  17. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  18. Morales, Eduardo & Sheu, Gloria & Zahler, Andrés, 2011. "Gravity and extended gravity: estimating a structural model of export entry," MPRA Paper 30311, University Library of Munich, Germany.
  19. Corcos, Gregory & Irac, Delphine & Mion, Giordano & Verdier, Thierry, 2009. "The Determinants of Intra-Firm Trade," CEPR Discussion Papers 7530, C.E.P.R. Discussion Papers.
  20. Gwartney, James & Lawson, Robert, 2003. "The concept and measurement of economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 405-430, September.
  21. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  22. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
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