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Does domestic demand matter for firms’ exports?

Author

Listed:
  • Paulo Soares Esteves

    (Banco de Portugal)

  • Miguel Portela

    (NIPE/Universidade do Minho and IZA Bonn)

  • António Rua

    (Banco de Portugal & NOVA School of Business and Economics)

Abstract

The existence of a link between exports and domestic demand challenges the standard theoretical assumption in international trade models and carries out important policy implications. Being a small open economy and one of the hardest hit economies during the latest economic and financial crisis, Portugal is a natural case study for assessing the role of this channel, in particular given the large export market share gains that mitigated the negative effects on economic activity. A key difference of our empirical approach vis-`a-vis previous literature is that the estimated relationship between exports and domestic sales results directly from a monopolistic model of a firm selling to both domestic and external markets. Drawing on an appropriate estimation strategy, it is found a noteworthy negative relationship between domestic demand and firms’ exports covering the manufacturing sector over the period 2009–2016. This result holds for almost all industries although with a heterogeneous magnitude. Aditionally, there is also evidence that this effect is stronger for larger firms.

Suggested Citation

  • Paulo Soares Esteves & Miguel Portela & António Rua, 2018. "Does domestic demand matter for firms’ exports?," NIPE Working Papers 18/2018, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:18/2018
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    References listed on IDEAS

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    More about this item

    Keywords

    international trade; firms; exports; domestic demand; foreign demand; panel data.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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