Abstract
AbstractThis article uses firm × national market export and import data for all Swedish private sector firms for 1997–2014 to examine the firm‐level contribution of trade and foreign ownership to the correlation between Swedish value added growth and partner country gross domestic product (GDP) growth. Export and import links increase the firm‐level correlation but net out for firms that both export to and import from the same market, evidence that this type of ‘natural hedging’ can help reduce a firm's exposure to foreign economic shocks. We proceed to aggregate the firm‐level results to the whole economy and find that severing firm‐level ties with a foreign market is predicted to lower the correlation between Swedish value added growth and foreign GDP growth from 0.72 to 0.64 on average. Gabaix's ‘granularity’ of trade is central to this result: if all firms are given equal weight overall correlations are essentially unaffected by severing firm level ties. Natural hedging is quantitatively important at the firm level and also plays a role in limiting overall comovements.
Highlights
The distribution of firm size is highly skewed and shocks to large firms can have important aggregate effects as shown by a recent empirical literature
Does the firm-level phenomenon of matched trade that we report have macro-economic implications for the role of bilateral trade in the international transmission of shocks? We establish that firm-level trade/affiliate links provide an important contribution to international business-cycle comovements
We repeat the first counterfactual with factual firm weights, and estimate a Δ^ρmf,natched, which includes the effects of matched trade, using the results reported in Column (6) of Table 3: Δ^ρmf,natched = − β1EXf,n − β2EXf,n × matchEf,Xn − β3IMf,n − β4IMf,n × matchIfM,n − β5AFFf,n: We aggregate these firm-level effects of severing international trade links using Equation (8) and find that including matched trade effects has a consequential effect on aggregate correlations
Summary
The distribution of firm size is highly skewed and shocks to large firms can have important aggregate effects as shown by a recent empirical literature Using French data for 1993–2007 they establish that firm-level linkages with foreign markets in terms of trade and affiliations within multinational firms matter substantially for the correlation between the French value added growth and GDP growth of partner countries. The model as presented indicates that the effects of exports and imports on covariance are additive This implies that in the empirical work that follows it would not be a concern if the effect of source country shocks on the correlation with a firm's value added were identified mainly off of pure importers. The average correlation between firm-level value added growth and trading partner GDP growth is 0.07.16 The dummy variables that capture trade patterns imply that on average 5.7% of observations correspond to cases where a firm exports to a given market and 6.3% to imports from a given market. Around 0.8% of observations correspond to the case where a firm is a Swedish affiliate of a firm based in n
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