How Do Firms Respond to Demand Shocks? Evidence from the European Sovereign Debt Crisis
41 Pages Posted: 27 Dec 2019 Last revised: 16 Mar 2020
Date Written: November 18, 2019
We examine how firms respond to domestic demand shocks using the large and unanticipated shock to government spending in European periphery countries during the 2010-2011 sovereign debt crisis. We find that firms with higher ex-ante exposure to government procurement contracts significantly increase their exports after the shock or exit. Older and larger firms are better able to substitute domestic sales with entry into export markets than younger and smaller firms. Firms with high-skill workers, high productivity and more educated managers are also more likely to start exporting. Our results suggest that mature and high-quality firms drive the response of tradeable industries to domestic demand shocks.
Keywords: Fiscal austerity, Exports, Investment opportunities, Financial crises
JEL Classification: F10, G01, G30, H57, H60
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