Two Worlds Apart? Export Demand Shocks and Domestic Sales

Traditional heterogeneous firms and trade models predict no causal relationship between firms' exports and domestic sales. This paper, using a rich dataset on Turkish firms for the 2005-14 period, analyzes the relationship between firm-product sales in different markets for the first time in the literature to identify the channels that link exports and domestic sales. First, I use an instrumental variables strategy and establish that an exogenous doubling of exports increases a firm's domestic sales by 26 percent on average--a result that is mostly driven by small firms. Second, I do an analogous exercise at the firm-product level, and find coefficients that are 62 percent larger, hinting to the importance of product-specific scale effects. Moreover, I propose a novel approach to isolate the production versus non-production factors that influence firm dynamics by focusing on non-produced (or carry-along trade, CAT) exports. I find that CAT exports also affect domestic sales positively, suggesting that spillovers at the firm level such as the easing of liquidity constraints play a role. In the process, I reveal that export demand shocks influence firms' expansion in terms of employment, wages per employee, and investment.