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Institutions and export dynamics

  • Luis Araujo


    (Michigan State University)

  • Giordano Mion


    (London School of Economics)

  • Emanuel Ornelas


    (London School of Economics)

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 National Bank of Belgium in its series Working Paper Research with number 220.

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Length: 54 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:nbb:reswpp:201202-220
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  1. James E. Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," Cowles Foundation Discussion Papers 1218, Cowles Foundation for Research in Economics, Yale University.
  2. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1285-1320.
  3. Albornoz, Facundo & Calvo Pardo, Héctor F. & Corcos, Gregory & Ornelas, Emanuel, 2012. "Sequential exporting," Journal of International Economics, Elsevier, vol. 88(1), pages 17-31.
  4. Lawless, Martina, 2011. "Marginal Distance: Does Export Experience Reduce Firm Trade Costs?," Research Technical Papers 2/RT/11, Central Bank of Ireland.
  5. Bernard, Andrew B. & Grazzi, Marco & Tomasi, Chiara, 2012. "Intermediaries in International Trade: Direct versus indirect modes of export," CEPR Discussion Papers 8766, C.E.P.R. Discussion Papers.
  6. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  7. Giordano Mion, 2011. "Trade crisis - what trade crisis?," CentrePiece - The Magazine for Economic Performance 336, Centre for Economic Performance, LSE.
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  9. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2007. "Governance Matters VI: Aggregate and Individual Governance Indicators, 1996-2006," Policy Research Working Paper Series 4280, The World Bank.
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  13. 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.
  14. Andrei A. Levchenko & Quý Toà n Ão, 2006. "Trade, Inequality, and the Political Economy of Institutions," IMF Working Papers 06/56, International Monetary Fund.
  15. Jean Tirole, 1996. "A Theory of Collective Reputations (with applications to the persistence of corruption and to firm quality)," Review of Economic Studies, Oxford University Press, vol. 63(1), pages 1-22.
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  17. Felbermayr, Gabriel & Jung, Benjamin, 2011. "Trade intermediation and the organization of exporters," Munich Reprints in Economics 20574, University of Munich, Department of Economics.
  18. 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.
  19. Heiwai Tang & Yifan Zhang, 2012. "Quality Differentiation and Trade Intermediation," Development Working Papers 340, Centro Studi Luca d\'Agliano, University of Milano, revised 13 Nov 2012.
  20. Romain Aeberhardt & Ines Buono & Harald Fadinger, 2009. "Learning, Incomplete Contracts and Ecport Dynamics: Theory and Evidence from French Firms," Vienna Economics Papers 1006, University of Vienna, Department of Economics.
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  22. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2009. "Governance matters VIII : aggregate and individual governance indicators 1996-2008," Policy Research Working Paper Series 4978, The World Bank.
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  31. repec:stn:sotoec:1003 is not listed on IDEAS
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