Protected markets and firms' export distribution

Abstract

In a paper recently published in this journal [ 31 we have shown that the export performance of firms’ is positively correlated with their size; large firms tend to export a higher proportion of their output than do small firms. The theoretical explanation of this empirical finding was based on both the theory of monopoly and the theory of the firm facing uncertain demand. We assumed that foreign demand is more elastic and more risky than local demand. Large firms will export a higher proportion of their output since (a) their size gives rise to ‘excess’ output which is sold in markets where the demand curves are both low and elastic, and (6) they are more willing (or able) to assume the higher risks involved in exporting. The latter hypothesis was based on the assumption that firms are risk averse, and that their utility function is characterized by decreasing absolute risk aversion. In this paper we construct a similar model in order to analyse the effect on exports of firms following from the estab!ishment of trade blocks. Again, we distinguish among industries, but the main explanatory variable is the size of the firm. We show that in general smaller firms will react more vigorously to the creation of trade blocks than will large firms, i.e., they will sell a higher proportion of their total output and total exports in the protected markets. Section II contains the model. In Section III some empirical evidence on the relation between size and export distribution between protected and nonprotected markets is presented. The definition of a protected market in the context of this paper is questioned in Section IV, where we discuss and demonstrate alternative definitions. The paper concludes with some remarks on policy implications following from the model and the empirical findings.