Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

How do multi-product exporters react to achange in trade costs?

Antoine Berthou Lionel Fontagne

Les entreprises francaises et europeennes dans la concurrenceinternationale

Banque de France, 25 novembre 2009

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Introduction

Few - but large - firms concentrate a high proportion of countries’exports (Eaton, Kortum and Kramarz, 2004 - Mayer andOttaviano, 2007)

These firms are typically multi-product exporters:

Iacovone and Javorcik (2008) : 62% of Mexican firms exporta single product category

Bernard, Jensen, Redding and Schott (2007)⇒ only 42% of US firms export a single product category

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

What about French exporters?

Figure: Distribution of the number of product categories exported byFrench firms over all destinations, 1998

⇒ 70% of French exporters do export more than a single productcategory

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

What about French exporters on each destination?

Figure: Distribution of the number of product categories exported byFrench firms on individual destination, 1998

⇒ 50% of exporters are multi-product on each destination

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

What have we learnt recently?

Main feature: trade statistics at firm level dominated by zeros:

Only few firms export, over the whole sample of domesticfirms

Exporters sell abroad only few product categories, among allpossible product categories

Exporters reach only few of the potential destinations

But: a large proportion of firms export several goods categories toeach destination

Contrasts with New Trade Theory: all firms are expected tosell a single variety to all destinations

New theoretical frameworks have been developed to allow forfirm and product selection (Melitz, 2003; Eckel and Neary2008; Bernard Redding and Schott, 2009)

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

How do firms adjust their exports consecutive to a change intrade costs ?

Our objective is to measure the relative contribution firm selection,product selection, and value of exports by product

First, we consider the adjustment of firm-level exports in thecross section: effect of distance

Second, we provide evidence about the dynamic adjustment offirm-level exports: euro adoption in 1999

We make use of French exports data at the firm level (Frenchcustoms) and firms characteristics (EAE business survey)

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Preview of the results

We first consider the effect of distance on firm-level exports

Distance has a negative effect on all components of firms’exports

This contrasts with previous findings where the effect ofdistance on the intensive margin is ambiguous

Second, we use Euro adoption in 1999 as a natural experiment

Elimination of transaction costs and nominal exchange ratevolatility was expected, as well as increased competition

Firms react to a decrease in trade costs over time essentiallyby adding or dropping products on the export market

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Main data sources

French customs data at the firm and product level

Manufactured exports at the firm level over the 1995-2003period, with CN 8-digit product disaggregation (about 8,000product categories)Firms identified by SIREN numberWe keep the main 50 destinations, EU15 or OECDdestinations

EAE business survey :

Report firm-level information about main activity, valueadded, employment, capital stock ... for firms with more than20 employeesWe use this information to estimate Total Factor Productivity(TFP) of exporters, according to Olley-Pakes methodology

Customs and EAE data matched with firms’ SIRENidentification numberBerthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Decomposition of aggregate trade flows:

Firm-level exports:

X fj = N fjp × x fj

X fj : value of exports by firm f to destination j

N fjp : number of NC8 product categories exported by firm f to

destination j

x fj : average value of exports by product category for firm fand destination j .

Total exports:

X j =∑

f

N fjp × x fj

X j : total value of French exports to destination j

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Alternatively, French exports to any destination j can bedecomposed as follows:

X j = N jfp × x j

N jfp is the number of individual shipments from France to

destination j

x j is the average value of exports by individual shipment

A shipment is defined as a firm exporting a single CN8product category to a given destination

Importantly, x j 6= x fj :

x fj : composition effect due to scope of products exported byfirm

x j : composition effect due to product and firm scope

⇒ Definition of the intensive margin matters for the analysis of theeffects of trade costs

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Distance and the margins of French exports:

We estimate a simple gravity equation on the number individualshipments (N j

fpt) and the average value by individual shipment

(x jt): by pooling data over the 1995-2004 period:

ln(N jfpt) = µ0 + µ1ln(RGDPjt) + µ2ln(Distj) + µ3κt + εjt

ln(x jt) = ν0 + ν1ln(RGDPjt) + ν2ln(Distj) + ν3κt + εjt

1 exporting country, 10 years, 50 destinations

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Distance and the margins of French exports

Table: Trade margins, pooled data (1995-2004)

Sample All destinationsEstimator OLS

Dependent variable ln(Njfpt

) ln(x jt )

RGDPjt 0.580*** 0.262***(0.025) (0.018)

Distj -0.772*** -0.026(0.026) (0.016)

Nb observations 500 500R-squared 0.73 0.45

⇒ Distance has a negative effect on the number of individualshipments⇒ No effect of distance on the average value of exports byindividual shipment

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Distance and firm-level exports:

Absence of effect of distance on the intensive margin, atcountry-level, may be related to composition effect due to firmselection:

As trade costs decrease, demand addressed to each varietyincreases and new firms enter

New exporters typically export small volumes

Firm-level estimates enable to get rid of between firmscomposition effect

This analysis requires to decompose firm-level exports intocomponents:

E (X fjt ) = Prob(X fj

t > 0)× E (N fjpt |X

fjt > 0)× E (x fj

t |Xfjt > 0)

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Effect of distance on firm selection ⇒ logit

T fjt = α0+α1ln(RGDPjt)+α2ln(Distjt)+α3ln(TFPft−1)+α4κk +α5κt+εfjt

Effect of distance on (i) the number of products, and (ii)average value per product: ⇒ Poisson for positive export values

N fjpt = β0+β1ln(RGDPjt)+β2ln(Distjt)+β3ln(TFPft−1)+β4κk +β5κt +εfjt

x fjt = γ0 +γ1ln(RGDPjt)+γ2ln(Distjt)+γ3ln(TFPft−1)+γ4κk +γ5κt +εfjt

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Table: Firm-level exports, pooled data (1995-2004)

Sample All destinationsEstimator Logit Poisson Logit Poisson

Dependent variable Tfjt N

fjpt x

fjt T

fjt N

fjpt x

fjt

Distj -0.508*** -0.229*** -0.314*** -0.397*** -0.232*** -0.395***(0.102) (0.023) (0.072) (0.063) (0.018) (0.040)

RGDPjt 0.206*** 0.105*** 0.373*** 0.276*** 0.146*** 0.405***(0.072) (0.024) (0.058) (0.057) (0.020) (0.038)

TFPft−1 0.395*** 0.293*** 0.642***(0.016) (0.014) (0.019)

Nb observations 7,505,486 3,013,935 3,013,876 1,729,113 1,020,152 1,020,130Fixed effects year year, industry

⇒ Controlling for TFP reduces the sample of firms (+20 thresholdin EAE database)⇒ Estimates confirm the negative effect of distance on the 3components of firm-level exports⇒ Negative effect on the product intensive margin, at firm level,suggests that composition effect due to firm selection is high

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Euro adoption as a natural experiment :

We now use euro adoption as a natural experiment to estimate theeffect of a change in trade costs over time for a fixed set ofdestinations

Two effects can be expected:

1 Decrease in trade costs due to the elimination of nominalexchange rate volatility and transaction costs

2 Rise in competition on domestic and export markets

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Difference-in-difference methodology

“Treated” destinations are the ones that adopted the singlecurrency in 1999

Austria, Finland, Germany, Italy, Ireland, The Netherlands,Spain, Portugal, Belgium + Luxembourg

Greece (joined in 2001) is removed so that we identify a singleshock over the period

“Control group”: EU15 destinations that do not participate to theeuro

United-Kingdom, Denmark and Sweden + other OECDdestinations

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Results: Euro adoption and firm-level adjustment

Table: Euro effects on the components of firm-level exports

Sample OECD EU15Estimator Cond. FE logit Cond. FE poisson Cond. FE logit Cond. FE poisson

Dependent variable Tfjt N

fjpt x

fjt T

fjt N

fjpt x

fjt

EZ1999−2003 -0.134* 0.019 0.013 -0.058 0.000 -0.009(0.080) (0.015) (0.032) (0.045) (0.010) (0.041)

RERjt -1.570*** -0.229*** -0.317* -0.735 -0.167* -0.847*(0.479) (0.084) (0.189) (0.783) (0.086) (0.445)

RGDPjt 2.009*** 0.440*** 0.474 1.148** 0.388*** 0.203(0.677) (0.118) (0.479) (0.479) (0.099) (0.644)

TFPjt−1 0.150*** 0.059*** 0.126*** 0.072 0.061*** 0.107***(0.020) (0.006) (0.029) (0.045) (0.007) (0.034)

Nb observations 493,090 621,988 621,978 184,528 373,602 373,592Fixed effects Firm × destination, year Firm × destination, year

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Results on the effects of euro adoption are provocative:

Weak but negative effect on firm participation in OECDsample only

Effect on number of products by firm and average value ofexports by product is not significant

Is the effect of euro different for different types of firms?

We take firm’s Total Factor Productivity before 1999 anddefine 4 TFP quartiles: Q1, Q2, Q3 and Q4

The euro variable is interacted with the 4 quartiles dummy

We have now 4 coefficients, corresponding to the euro effectsfor the 4 types of firms

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Heterogenous response of French exporters to euro adoption

Table: Euro effects according to initial TFP

Sample OECD EU15Estimator Cond. FE logit Cond. FE poisson Cond. FE logit Cond. FE poisson

Dependent variable Tfjt N

fjpt x

fjt T

fjt N

fjpt x

fjt

EZ1999−2003 × Q1 -0.100 -0.007 -0.034 -0.059 -0.027** -0.056(0.083) (0.015) (0.043) (0.056) (0.011) (0.048)

EZ1999−2003 × Q2 -0.117 0.020 0.013 -0.075 0.000 -0.009(0.080) (0.016) (0.057) (0.049) (0.011) (0.059)

EZ1999−2003 × Q3 -0.122 0.001 0.012 -0.079 -0.019* -0.010(0.086) (0.015) (0.027) (0.058) (0.011) (0.034)

EZ1999−2003 × Q4 -0.097 0.051*** 0.035 -0.055 0.031*** 0.012(0.080) (0.014) (0.045) (0.038) (0.011) (0.053)

RERjt -1.595*** -0.225*** -0.374** -0.765 -0.168* -0.927**(0.489) (0.085) (0.189) (0.720) (0.086) (0.445)

RGDPjt 1.932*** 0.434*** 0.504 1.246*** 0.375*** 0.261(0.676) (0.117) (0.488) (0.465) (0.096) (0.656)

TFPjt−1 0.151*** 0.059*** 0.105*** 0.128*** 0.062*** 0.079***(0.021) (0.006) (0.027) (0.026) (0.007) (0.030)

Nb observations 477,579 580,485 580,474 160,236 342,758 342,747Fixed effects Firm × destination, year Firm × destination, year

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

The effects of euro are very much related to firms’ Total FactorProductivity:

Positive effect of euro introduction on the number of productcategories exported by most productive exporters (Q4)

Negative effect on product selection for least productiveexporters (Q1) in the EU15 sample of destinations

Consistent with an increased competition on eurozone markets

Dynamic adjustment of French exporters channels mainlythrough the number of products exported

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

ConclusionOur objective was to test the various dimensions of multi-productfirms adjustment to trade costs

Cross-section analysis of the effect of distance show that distancehas a negative effect on the number of bilateral export flows inFrench data, with no effect on the average value of export by flow

Firm-level estimates though suggest that distance has a negativeeffect on all components of firm-level exports⇒ Composition effects are important at the country-level, due tofirm selection

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

We then test the euro effects, as a natural experiment for a changein trade costs over time

Firms react to a change in trade costs over time mainly byadding/dropping product categories

Product selection is an important feature of the dynamicadjustment of firm-level exports

Suggests that fixed cost for exporting a new product islower than fixed cost for starting exporting to a newdestination

Secondary results show that past monetary cooperation matters⇒ Larger Euro effect for least integrated destinations within theeurozone

Berthou - Fontagne Multi-product exporters and trade costs

Introduction Data and stylized facts Decomposition of trade flows Distance as a trade cost Euro adoption as a natural experiment Conclusion

Thanks

Berthou - Fontagne Multi-product exporters and trade costs