Coping with the crisis and export diversification

• Author: Frédéric Warzynski,Kaleb Girma Abreha,Valérie Smeets
• Date: 01 May 2020
• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/twec.12937

1452

|

wileyonlinelibrary.com/journal/twec World Econ. 2020;43:1452–1481.

© 2020 John Wiley & Sons Ltd

Received: 17 December 2019

|

Accepted: 2 January 2020

DOI: 10.1111/twec.12937

SPECIAL ISSUE ARTICLE

Coping with the crisis and export diversification

Kaleb GirmaAbreha1

|

ValérieSmeets2

|

FrédéricWarzynski2

1Office of the Chief Economist for Africa Region, World Bank, Washington, DC, USA

2Department of Economics and Business Economics, Aarhus University, Aarhus, Denmark

Funding information

Tuborg Foundation; FSE

KEYWORDS

Denmark, export diversification, intensive and extensive margins, trade collapse

1

|

INTRODUCTION

The financial crisis that has struck the global economy and the Great Recession that followed co-

incided with a dramatic trade collapse. Most Western economies suffered a decline in exports by

15%–30% according to various reports (see e.g., the review by Bems, Johnson, & Yi, 2013). While

many feared the collapse would lead to a dramatic fall in the number of exporting firms, previous re-

search has shown that most of the decline occurred at the intensive margin (see e.g., Behrens, Corcos,

& Mion, 2013; Bricongne, Fontagné, Gaulier, Taglioni, & Vicard, 2012). Yet, we still know very little

about how firms adapted their product–market portfolio to the shock and in the recovery that followed.

In particular, the ability to reallocate goods across markets when facing a major crisis should be an im-

portant channel for firms to weather the storm, although one that has not been thoroughly investigated.

In this paper, we focus our analysis on this question. We use a rich transaction-level data from

Denmark to document new stylised facts on the export behaviour of firms facing a large shock. In line

with previous studies, we show that most of the trade decline can be attributed to the intensive margin,

that is incumbent firms reducing their level of activity in export markets. We follow a recent literature

(Amador & Opromolla, 2013; Gopinath & Neiman, 2014) by further decomposing the intensive mar-

gin into sub-intensive (the contribution to total export change of continuing products) and sub-exten-

sive margins (the contribution coming from product churning). We find that the sub-intensive margin

played the most important role during the 2008–09 trade collapse, so that Danish firms continued to

ship the same products to the same countries but in lower quantities. We also find a significant effect

of the sub-extensive margin, particularly during the recovery, as firms started shipping new products

to new destinations.

The main contribution of this paper is to analyse the role of export diversification as a growth

channel. We primarily focus on the involvement in fast-growing economies such as China or Brazil,

India, Russia and South Africa (often collectively referred to as BRICS). To do so, we perform a set

|

1453

ABREHA Et Al.

of empirical tests to better understand the choice of the product–destination portfolio of firms and how

it can be related to the export performance before, during and after the crisis. We first analyse what

determines the concentration of export sales in the core product on the various markets where firms

operate. In line with recent theoretical contributions (e.g., Mayer, Melitz, & Ottaviano, 2014), we find

that distance, toughness of competition and wealth matter. Firms have a higher share of their core

products on more distant and larger markets, while the opposite is true on richer markets.

In a second stage, we try to understand how firms' export performance was affected by their pres-

ence in fast-growing markets and their reliance on a core product. We find that firms that were able to

export to China and the BRICS enjoyed significantly higher export growth over our period of analysis.

While the overall decline of exports was around 15% between 2008 and 2009, exports to the Chinese

market grew on average by more than 9%. This growth, while lower than before and after the crisis,

was in sharp contrast to what happened on more traditional export markets in Western Europe and

North America. We also show the novel fact that export growth was lower for firms' core product,

further suggesting a strong role for diversification away from the core product on top of geographical

diversification.

There is already a large literature studying how firms adapted their export behaviour when facing a

large trade shock. Bernard, Jensen, Redding, and Schott (2009) studied the reaction of the US firms to

the Asian crisis of 1997 and showed the eminent role of the intensive margin of trade. More recently,

Gopinath and Neiman (2014) studied the behaviour of firms in response to the Argentine 2001–02

crisis and showed the considerable importance of the intensive margin as a trade adjustment mecha-

nism, even if the sub-extensive margin played a non-negligible role in the import trade of Argentina.

Bricongne et al. (2012) found that large French firms responded to the current economic crisis mainly

by lowering their export shipments, whereas small firms exited export markets or reduced the number

of products exported and destinations served. Using Belgian data, Behrens et al. (2013) found that the

trade collapse resulted mainly from a decline in quantities and prices of existing export firm–product

transactions rather than from entry and exit of firms, products and trading partners. These studies

establish that trade adjustment mechanisms at the microeconomic level are key to understanding the

aggregate trade collapse. Unlike these previous papers, our approach is focused on the link between

export diversification and performance.

The rest of the paper is organised as follows. Section 2 describes the data sets that we use. Section

3 presents some stylised facts about Danish exporters during our sample period, while Section 4

discusses our decomposition exercise. Section 5 presents the results regarding the concentration in

the core product, and Section 6 looks at the link between export growth and diversification. Section

7 concludes.

2

|

DATA

The data sets used in this paper are all provided by Statistics Denmark. The focus of our analysis is the

time period 2000–12. We combine three different data sets and merge them relatively easily, as firms

are identified by a common identification number.

Our main source of information provides detailed custom records on export transactions by all

trading firms in the Danish economy. It contains the value, weight and quantity of export transactions

for each firm and destination/source market at 8-digit CN.1

1 Combined nomenclature (CN) is a harmonized system (HS) of product classification with further subdivisions used in EU

member countries.