Abstract
This paper investigates the determinants of indirect exporting, using firm-level data for 27 countries in Eastern Europe and Central Asia. Indirect exporting depends on a combination of fixed and variable trade cost factors. We first hypothesize that firms that perceive customs, transportation, crime and legal systems as severe obstacles anticipate higher fixed costs and are more likely to export indirectly. The second hypothesis is that indirect exporting tends to be a temporary strategy. Econometric models are used to test the first hypothesis and transition matrices to test the second. In particular, probit, Heckman-probit and fractional response models are estimated to analyse the determinants of the export mode and the share of indirect exports. The results indicate that the factors that account for the fixed cost of exporting, mainly affect the decision to export indirectly (extensive margin), but some of them also affect, to a lesser extent, the amount exported indirectly (intensive margin). More specifically, factors such as customs and trade restrictions and transportation obstacles affect the extensive margin only, whereas crime affects both margins. Secondly, trade agreement membership mainly affects trade in manufactured goods, while exchange rate volatility affects positively the extensive and intensive margin of indirect exports of services. The results also indicate that firms are more likely to change their status as an indirect exporter than they are to change their status as a direct exporter or a non-exporter, which provides support to the second hypothesis.
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Notes
Unfortunately, the data does not contain information about the destination of exports. We believe that since the number of export destinations grows with firm size, controlling for firm size but not being able to control for the number of destinations of a firm’s exports may lead us to underestimate the negative relation between firm size and indirect exports (Abel-Koch 2013).
According to the Doing Business dataset (World Bank) the average time and cost for obtaining, preparing, processing, presenting and submitting documents for exports is 30 h in the region under study compared to 4.5 h in high-income OECD countries, and the average cost for documentary compliance is 143 USD, whereas in high-income OECD countries it is only 35.6 USD.
McCann (2013) is the only previous paper that focuses on Eastern Europe and Central Asia. However, his main aim is different to ours, as he gives descriptive evidence of the characteristics of indirect exporters, compares the likelihood of exporting indirectly for single-product and multi-product firms and focuses exclusively on manufacturing firms, excluding the service sector from the analysis.
Two alternative exchange rate measures are considered to calculate exchange rate volatility. First, the bilateral exchange rate with respect to the USD and second, a nominal effective exchange rate weighted with trade shares using 138 destinations of exports (Darvas 2012).
Although the number of observations is considerably reduced (19218 in the whole sample excluding retailers and wholesalers), it allows us to provide some insight into the hypothesis that indirect exports tend to be a temporary strategy.
The advantage of direct exporters over indirect exporters is clearer when the narrow definition of indirect exporters is used (indirect-only exporters).
We have re-scaled the variable customs, which takes the value of 1 if customs and trade regulations are a severe or very severe obstacle for current operations of the firm, 0 otherwise. Another two variables, corruption and permits are also used in some models; they are described in Table 9 in the “Appendix”. In particular, corruption is used in the Heckman-Probit model as exclusion restriction and permit is used in the regressions for the service sector.
Rodman’s cmp stata command allows for a large class of simultaneous-equation systems, including recursive models, in which endogenous variables could influence one another.
Results are available upon request from the authors.
Results using country, year and industry dummies were not substantially different and are available upon request.
This variable has been coded as 1 if the customs are a major or very severe obstacle and 0 otherwise. Assuming that this is a fixed cost that could affect the decision to export or not and the decision to export indirectly or directly, we now consider that when the value is 3 or 4, the fixed costs are an obstacle to export, whereas when the answer is 0–3, the obstacle does not impede exporting.
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Acknowledgement
I would like to thank the comments and suggestions received from two anonymous referees and from the participants in the 1st Meeting on International Economics at the University Jaume I. Financial support from the Spanish Ministry of Economy and Competitiveness is grateful acknowledged (ECO2014-58991-C3-2-R).
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Appendix
Appendix
See Tables 9, 10, 11, 12 and 13 and Fig. 1.
Labour productivity distribution for direct and indirect exporters and non-exporters, whole sample. Note: Green colour denotes non-exporters, red denotes indirect exporters and blue direct exporters. Labour productivity is calculated by dividing total annual sales in the last fiscal year by number of permanent, full-time employees of the firm at the end of the last fiscal year. Broad definition of indirect exporters has been used. When using the narrow definition, the overlap between indirect exporters and direct exporters is more notorious (colour figure online)
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Martínez-Zarzoso, I., Johannsen, F. What explains indirect exports of goods and services in Eastern Europe and Central Asia?. Empirica 45, 283–309 (2018). https://doi.org/10.1007/s10663-016-9361-3
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DOI: https://doi.org/10.1007/s10663-016-9361-3