Direct Versus Indirect Exports in Post-Communist Europe and Central Asia: The Role of Innovation Activities and Internationalization

ABSTRACT

The distinction between direct and indirect exporting has been increasingly stressed in recent advances in the theory and empirics of international trade. In particular, the prior literature suggests a hierarchy of exporting decisions determined by firm productivity. We use firm-level data from a wide group of post-communist countries to investigate which characteristics of firms can explain their choice of export modes. We find that firm internationalization, firm size, and per worker revenue are linked to exporting decisions in a way consistent with Lu’s et al. model, while the relationship with innovation performance is more complex.

KEYWORDS:

• Central and East Europe
• Central Asia
• indirect and direct exports
• innovation activities
• internationalization of firms
• generalized ordered logit model

JEL CLASSIFICATION:

• F12
• F14
• F23
• L25

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1. According to firm level BEEPS data for 2019, the percentage of exporting firms in the post-communist countries was equal to 50.3% in the case of NMS, 40.0% in the case of European countries (nonmembers of the EU), and only 18.1% among Asian countries. The relevant data for individual ECA countries are shown in Table 1.

2. The surveys of empirical evidence on the relationship between firm productivity and exporting were provided by Wagner (2007, 2012). According to the first survey by Wagner (2007), future exporters tend to be more productive than future non-exporters in the years before they enter the export market. This picture was largely confirmed in the recent survey by Wagner (2012), i.e., his review provides extensive evidence in favor of the self-selection hypothesis.

3. Their measure of institutional harshness is based on nine questions of the World Bank Enterprise Survey referring to: institutional obstacles to business operations related to tax system, legal environment, macroeconomic instability, political situation, and corruption. Uncertainty avoidance is defined as the extent to which a society relies on social norms, rules, and procedures to alleviate the unpredictability of future events: this notion is operationalized based on the data from the GLOBE study (Elango and Pangakar, 2020).

4. While the literature on direct versus indirect exporting in post-communist countries, especially those outside the EU, is scarce, there have been studies on the characteristics of exporters in general. See Prašnikar et al. (2013) on Albania, Martuscelli and Varela (2018) on Georgia, Lutz, Talavera, and Park (2008) on Ukraine, Makhmadshoev, Ibeh, and Crone (2015) on Tajikistan and Kyrgyzstan, and Davaakhuua, Sharmab, and Bandara (2014) on Mongolia.

5. These variables characterize the cost necessary to meet border compliance requirements (cf. https://data.worldbank.org/indicator/IC.EXP.CSDC.CD)

6. The only exception was Albania. The details concerning the sampling methodology are explained in the Sampling Manual available at http://www.enterprisesurveys.org/Methodology/

7. Here and in the next sentences of the following two paragraph we refer to the columns (3) and (5).

8. Despite the export promotion policy in this country, as documented by Davaakhuua, Sharmab, and Bandara (2014), the export activity of Mongolian firms remains very limited.

9. We note that the estimate for log_rev_emp (0.132) in our Table 3, column (4). is the counterpart of Lu’s et al. estimate for log output per worker (0.255) in their Table 2, column (1) (Lu et al. (2017), 10).

10. We do not include country-industry interactions because the procedure would become computationally not feasible, however we do not believe that it affects our results substantially (if we estimate ordered logit model with and without country-industry effects, we obtain results that are very similar).

11. This may mean that exports could be replaced by horizontal foreign direct investment aimed at serving host country markets by foreign affiliates located in host countries. However, the empirical verification of this hypothesis requires further studies.

Additional information

Funding

This work was supported by the Narodowe Centrum Nauki [2017/27/B/HS4/01696].

Notes on contributors

Andrzej Cieślik

Andrzej Cieślik is a full professor of economics at the Faculty of Economics Sciences at the University of Warsaw. His research interests include the roles of economic integration, institutions and openness to international trade and foreign direct investment in promoting growth and development in emerging, developing and transition economies and their convergence with developed countries.

Jan Jakub Michałek

Jan Jakub Michałek graduated from University of Warsaw and from College of Europe in Brugge. He is full professor of International Economics at the Faculty of Economic Sciences at the University of Warsaw. He has published on trade policy, economics of transition, European integration, and analysis of trade flows at the sectoral- and firm levels.

Krzysztof Szczygielski

Krzysztof Szczygielski is a professor of economics at the University of Warsaw, Faculty of Economic Sciences, where he leads the Unit for Innovation and Development. He has published on innovation, international trade, firm competitiveness, and science, technology and innovation (STI) policy.