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How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications

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  • Jérôme Héricourt
  • Clément Nedoncelle

Abstract

Based on a large French firm-level database that combines information on balance-sheet and destination-specific export values and volumes over the period 1995-2009, this article investigates how heterogeneous exporters react to real exchange-rate volatility. We find that strongly multi-destination firms tend to reduce both their export values and volumes to a destination that face higher exchange-rate volatility, while firms serving only a few destinations increase their market share. This result is robust to various specifications, samples, potential omitted variables, as well as hedging strategies, and is not specific to multinational firms. We also show that, following an exchange-rate volatility shock in a given country, export values and volumes to all other destinations served increase with the number of destinations served by the firm. These results are consistent with models under uncertainty, where the risk increases with firm size, and risk-averse behavior is equivalent to a preference for diversification. Therefore, this paper proposes an additional potential explanation for the macro puzzle of the muted reaction of aggregate exports to exchange-rate volatility. Since big multi-destination firms, which account for the bulk of aggregate exports, minimize their overall risk exposure by diverting their exports from high- to low-volatility markets, this contributes to exports at the macro level remaining unchanged in the main.

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  • Jérôme Héricourt & Clément Nedoncelle, 2017. "How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications," CEPREMAP Working Papers (Docweb) 1620, CEPREMAP.
  • Handle: RePEc:cpm:docweb:1620
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    Cited by:

    1. Fontagné, Lionel & Orefice, Gianluca, 2018. "Let’s try next door: Technical Barriers to Trade and multi-destination firms," European Economic Review, Elsevier, vol. 101(C), pages 643-663.
    2. De Sousa, José & Disdier, Anne-Célia & Gaigné, Carl, 2020. "Export decision under risk," European Economic Review, Elsevier, vol. 121(C).
    3. Tscheke, Jan, 2016. "Operational Hedging of Exchange Rate Risks," Discussion Papers in Economics 30227, University of Munich, Department of Economics.
    4. Van Cauwenberge, Annelies & Vancauteren, Mark & Braekers, Roel & Vandemaele, Sigrid, 2021. "Measuring and explaining firm-level exchange rate exposure: The role of foreign market destinations and international trade," Economic Modelling, Elsevier, vol. 105(C).
    5. Senol Babuşçu & Adalet Hazar & M. Nihat Solakoglu & Cengiz Tunc, 2019. "Sector-Level Competition and Export: Evidence from Exporter Dynamics Database," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 1-18, October.
    6. Ponomarev, Yuriy (Пономарев, Юрий) & Rey, Aleksey (Рей, Алексей) & Radchenko, Darya (Радченко, Дарья), 2018. "Investigation of the Relationship between the Intensity of International Trade and the Volatility of Paired Exchange Rates of the Russian Federation and its Trading Partners [Исследование Взаимосвя," Working Papers 061823, Russian Presidential Academy of National Economy and Public Administration.

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    More about this item

    Keywords

    Real Exchange Rate Volatility; Multi-destination Exporters; Diversification; Aggregation;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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