Institutions and Export Dynamics

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.

Institutions and export dynamics

“…We do so by assuming that in each period while the partnership is active, the distributor privately finds an opportunity to default on the contract without incurring costs 12 Interestingly, Carballo et al (2013) show that, for Costa Rica, Ecuador and Uruguay, for which they have nearly the universe of transactions for 2005-2008, the median exporter has indeed a single buyer in each foreign destination it serves. However, the largest exporters deal with multiple buyers per destination.…”

Redirecting International Trade: Contracts, Conflicts, and Institutions

“…It is therefore more costly to trade in such relationship-specific goods, especially if institutional quality is weak it and it is uncertain whether contracts can be enforced. Hence, the relationshipspecificity of industries influences trade, often in interaction with the quality of institution in the exporting and importing economies (Nunn 2007;Araujo et al 2012;Söder-lund/Tingvall 2014). To analyze this dimension of trade, we will include a proxy for relationship-specificity from Nunn (2007) in our empirical analysis of firm-level trade.…”

“…In new and uncertain markets, we expect to see relatively short-lived trade flows (Aeberhardt et al 2011;Araujo et al 2012;Söderlund/Tingvall 2014). Figure 4 graphs descriptive statistics on the survival probability of trade flows with respect to different firm and country characteristics.…”

“…Apart from reducing trade volumes, weak institutions may also affect the duration and the dynamics of trade (Aeberhardt et al 2011;Araujo et al 2012;Söderlund/Tingvall 2014). As shown by Araujo et al (2012), trade with countries with weak institutions is characterized by short-lived trade flows and small initial volumes.…”

“…As shown by Araujo et al (2012), trade with countries with weak institutions is characterized by short-lived trade flows and small initial volumes. Subsequently, trade flows may increase as exporters become more familiar with their contractual partner and learn about the institutional environment in the target economy.…”