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Institutions and Export Dynamics

Luis Araujo (), Giordano Mion () and Emanuel Ornelas

CEP Discussion Papers from Centre for Economic Performance, LSE

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 (search for similar items in EconPapers)
JEL-codes: F10 F12 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2012-01
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Journal Article: Institutions and export dynamics (2016) Downloads
Working Paper: Institutions and Export Dynamics (2012) Downloads
Working Paper: Institutions and export dynamics (2012) Downloads
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