Is export diversification good for profitability? First evidence for manufacturing enterprises in Germany

Abstract

This article uses a tailor-made newly available data set for enterprises from manufacturing industries in Germany to investigate for the first time the links between export diversification over destination countries and goods on the one hand and the profitability of the exporting firms on the other hand. We find that profits tend to be larger in firms with less diversified export sales over goods and in firms with more diversified export sales over destination countries.

Keywords:

• exports
• diversification
• profitability
• Germany

JEL Classification:

• F14

Acknowledgements

I thank two anonymous reviewers for helpful comments on an earlier version of this article. All computations were done at the Research Data Centre of the Statistical Office of Berlin-Brandenburg in Berlin. The firm-level data used are strictly confidential but not exclusive; see http://www.forschungsdatenzentrum.de/datenzugang.asp for information on how to access the data. To facilitate replications, the Stata do-file used is available from the author on request.

Notes

¹ The literature started with two seminal papers by Bernard et al. (1995, 1999) that used firm level data from the US to document differences between exporting and nonexporting firms even within narrowly defined industries and controlling for firm size. Further empirical research looked at the determinants of firms’ entry into export markets (Bernard and Jensen, 2004). In a next step, transaction-level data on firms and trade were used to investigate the margins of exports and imports, that is, the number of goods traded and the number of countries traded with (Bernard et al. 2007). Furthermore, links between other forms of international firm activities besides trade and various dimensions of firm performance were investigated. For recent surveys of this empirical literature, see Bernard et al. (2012) and Wagner (2012a).

² See Bernard and Wagner (1997) on exporter premia; Bernard and Wagner (2001) on export entry and exit; Wagner (2002) on causal effects of exports on firm size and productivity; Wagner (2006) on productivity differences between nonexporters, exporters, and firms with foreign direct investments; Schank et al. (2007, 2010) on exporter wage premia; Wagner (2007) on productivity and size of the export market; Wagner (2008a) on export entry, export exit and productivity; Fryges and Wagner (2008) on exports and productivity growth; Vogel and Wagner (2010a) on imports and productivity; Fryges and Wagner (2010) on exports and profitability in manufacturing; Vogel and Wagner (2010b) on exports and profitability in services; Wagner (2011) on offshoring and firm performance; Wagner (2012c, 2012d) on performance premia of multiple-product and multiple-destination exporters; Wagner (2012b) on exports, imports and profitability and Wagner (2013) on exports, imports and firm survival.

³ Note that firms with a value of exports to European Union (EU) countries that does not exceed 400 000 euros in 2009 do not have to report to the statistic on intra-EU trade. For trade with firms from nonmember countries, all transactions that exceed 1000 euros are registered. For details, see Statistisches Bundesamt, Qualitätsbericht Außenhandel, Januar 2011.

⁴ The data set used in this study has only information on the sales generated by the 10 most important goods exported. Therefore, it is not possible to compute concentration measures that use the information on the share of each product exported in total sales for firms with more than ten different exported goods like the Berry index (i.e., defined as 1 minus the sum of the squared shares of all products in total exports). The same holds for information on export sales to different countries.

⁵ Note that the data set does not have any information on the capital stock, or the sum of assets or equity, of the firm, so that it is not possible to construct profit indicators based thereon like return on assets or return on equity.

⁶ Given that the data set does not have information on the capital stock employed by the firms in the econometric investigations in the following sections, differences in the capital intensity are controlled for by including detailed industry dummy variables at the four-digit level.

⁷ Note that minimum and maximum values cannot be reported because they refer to a single enterprise and, therefore, are confidential.

⁸ For recent surveys of this literature, see Bernard et al. (2012), Melitz and Redding (2015, forthcoming) and Wagner (2012a).

⁹ Interestingly, this link between profitability and export diversification is different during the export crisis of 2009 and during the export boom in 2010. However, evidence for more years is needed before any relation between macroeconomic conditions and the profitability – export diversification link can be investigated in more detail.