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Export conditions in small countries and their effects on domestic markets

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  • Martin Alfaro
  • Frederic Warzynski

Abstract

In a small country's industries, it is common that both small and large firms export a significant share of their total production. How does better export access affect the domestic market when this occurs? Incorporating investments in quality that require fixed outlays and increase a variety's appeal in all countries, we show that an export shock entails two opposing mechanisms. On the one hand, it induces quality upgrades that raise the domestic market share of large firms. On the other hand, it fosters entry of small firms, making large firms lose domestic market share and downgrade quality. Using Danish data, we show that small firms in some industries are so heavily export‐oriented that better export opportunities reallocate domestic market share towards the least productive domestic firms. And while competition by small firms reduces some large firms' domestic markups, it also leads some to downgrade quality and suffer a substantial fall in profits. Conditions liées à l'exportation dans les petits pays et leurs effets sur les marchés intérieurs. Au sein des industries d'un petit pays, il arrive souvent que les grandes et petites sociétés exportent une part importante de leur production totale. Dans cette situation, quelle est l'incidence d'un meilleur accès à l'exportation sur le marché intérieur? En intégrant les investissements dans la qualité qui exigent des dépenses fixes et augmentent l'attrait pour la variété dans tous les pays, nous montrons qu'un choc de l'exportation comporte deux mécanismes opposés. D'un côté, cela produit des hausses de la qualité qui augmentent la part du marché intérieur des grandes sociétés. De l'autre, cela favorise l'entrée de petites sociétés, causant du coup une perte de la part du marché intérieur des grandes sociétés et une baisse de la qualité. Grâce à des données danoises, nous montrons que les petites sociétés de certaines industries sont axées tellement lourdement sur les exportations que de meilleures occasions d'exportation réaffectent la part du marché intérieur aux sociétés nationales les moins productives. En outre, bien que la concurrence des petites sociétés réduise certaines marges de grandes sociétés sur le marché intérieur, elle pousse également certaines sociétés à diminuer la qualité et à subir une chute importante des bénéfices.

Suggested Citation

  • Martin Alfaro & Frederic Warzynski, 2022. "Export conditions in small countries and their effects on domestic markets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1894-1928, November.
    • Handle: RePEc:wly:canjec:v:55:y:2022:i:4:p:1894-1928
    DOI: 10.1111/caje.12621
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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