The extensive and intensive margins of Spanish trade

ABSTRACT

Recent empirical research highlights that differences in trade flows across countries, products and years are governed by two margins: the intensive margin and the extensive margin. The analysis of the relative contribution of each margin is very important to determine which policies can be more efficient to foster trade at the aggregate, geographic, product or firm level. We use the whole universe of firm level transaction data to analyse the relative contribution of these margins to changes in Spanish trade flows during the 1997–2007 period. We first apply the methodology proposed by Bernard et al. (2009) to decompose trade variation over time into three components: net entry of firms, product-country switching and value growth by regular trading firms. The first two components correspond to the extensive margin and the last one refers to the intensive margin. We find that short-run changes in exports and imports are governed by firms’ intensive margin; however, in the long-run, both the extensive and the intensive margins are equally important to foster trade. We also examine the importance of the trade margins at the cross-sectional level for the year 2007. We find that large differences in the Spanish trade flows across countries and products, especially in the case of exports, are explained by the number of firms that participate in trade, which is consistent with the fact that the number of trading partners decline significantly with distance.

Keywords:

• firm exports
• firm imports
• extensive margin
• intensive margin
• Spain

JEL Classification:

• F1

Acknowledgements

The authors would like to thank Customs and Excise Department of the Spanish Revenue Agency (AEAT) for providing the essential information for this paper. Asier Minondo thanks the Basque Government’s Education and Universities Counselling and Diputación Foral de Gipuzkoa for financial support. Francisco Requena acknowledges financial support from the Spanish Central Government (ECO 2008–04059/ECON) and Valencian Regional Government (program PROMETEO/2009/098).

Notes

1. De Lucio and Mínguez (2008) perform a similar analysis to ours and conclude that new firms account for most of the variation in trade volume over the period 2000–2005 while product-country switching plays a minor role. Madrid (2009) finds that, among firms that export annually more than €200,000, both existing firms and new firms contribute the same to the variation in aggregate exports value over the period 2000–2007. However, she does not analyse the importance of product-country switching as an additional extensive margin. Martín and Rodríguez (2009) also investigate the importance of new exporting firms in Spanish trade using a different database (Central de Balances elaborated by Bank of Spain). Since large firms are overrepresented in their sample, their results are similar to those reported by Madrid (2009).

2. Bernard et al. (2009) use match data since they do not have access to firm identifiers. They claim to be able to match 76% and 82% of the exports value and imports value, respectively, over the period 1993–2003. Our original files have a firm identification for each transaction so it is easy to follow all the transactions of the same firm every year.

3. Since methodological changes in 1999 and in 2002 did not significantly change the total value of imports and exports in these years, they do not affect significantly our calculations of the contributions of the trade margins (expressed in percentage contribution to the variation in aggregate trade value).

4. For example, ‘exports of edible fruits and nuts by a Spanish firm to Germany in a year’ is defined as a transaction.

5. Unlike the 2002–2007 period, the 1997–2002 and 1997–2007 periods are subject to methodological changes in 1999 and 2001 so the interpretation of the results in these periods should be interpreted cautiously.

6. In another piece of research, the authors have compared the role played by country-switching and product-switching in explaining the composition of portfolio diversification for the years 2008–2009 using different levels of product aggregation. The results reveal that the importance of product-switching as a determinant of diversification increases significantly when we use a high level of product classification (CN 8-digits) compared with the one (CN 2-digit) used in the current paper, because some relationships previously classified as intensive margin change to extensive margin, and because of changes in the composition of extensive margin.

7. The findings using the entire universe of firms are in contrast with previous studies that used a selection of firms. Wagner (2004) finds that the entry of new exporting firms contributed marginally to the export growth boom in the German Low Saxony states in the 1995–2002 period while Gleeson and Ruane (2007), in their analysis of the evolution of exports for Irish manufacturing plants between 1985 and 2003, find that continuing firms explain the majority of changes in both exports booms and slumps.

8. As the OLS is a linear estimator, and errors have an expected value of zero, the sum of the relative contribution of each margin adds to 1.

9. Results are not altered significantly if we use other years.

10. The coefficient for number of firms in imports rises to 0.551 when we exclude primary products from the regression. In the case of exports the rise in the coefficient is almost negligible (0.627).