How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications

Based on a large French firm-level database that combines information on balance-sheet and destination-specific export values and volumes over the period 1995-2009, this article investigates how heterogeneous exporters react to real exchange-rate volatility. We find that strongly multi-destination firms tend to reduce both their export values and volumes to a destination that face higher exchange-rate volatility, while firms serving only a few destinations increase their market share. This result is robust to various specifications, samples, potential omitted variables, as well as hedging strategies, and is not specific to multinational firms. We also show that, following an exchange-rate volatility shock in a given country, export values and volumes to all other destinations served increase with the number of destinations served by the firm. These results are consistent with models under uncertainty, where the risk increases with firm size, and risk-averse behavior is equivalent to a preference for diversification. Therefore, this paper proposes an additional potential explanation for the macro puzzle of the muted reaction of aggregate exports to exchange-rate volatility. Since big multi-destination firms, which account for the bulk of aggregate exports, minimize their overall risk exposure by diverting their exports from high- to low-volatility markets, this contributes to exports at the macro level remaining unchanged in the main.