Institutions and Export Dynamics

National Bank of Belgium Working Paper No. 220

54 Pages Posted: 5 Feb 2012

See all articles by Luis F. Araujo

Luis F. Araujo

Michigan State University - Department of Economics

Giordano Mion

University of Sussex - Department of Economics; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Emanuel Ornelas

Sao Paulo School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2012

Abstract

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.

Keywords: firm exports, contract enforcement, contracting institutions, firm dynamics

JEL Classification: F10, F12, L14

Suggested Citation

Araujo, Luis Fernando and Mion, Giordano and Ornelas, Emanuel, Institutions and Export Dynamics (February 1, 2012). National Bank of Belgium Working Paper No. 220, Available at SSRN: https://ssrn.com/abstract=1998025 or http://dx.doi.org/10.2139/ssrn.1998025

Luis Fernando Araujo (Contact Author)

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-355-7583 (Phone)
517-432-1068 (Fax)

Giordano Mion

University of Sussex - Department of Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://sites.google.com/site/giordanomionhp/

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Emanuel Ornelas

Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/emanuelornelaseo/

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