Domestic and Foreign Sales: Complements or Substitutes?

26 Pages Posted: 26 Mar 2015

Date Written: November 20, 2014

Abstract

How are the dynamics of foreign and domestic sales correlated at the firm level? The question is relevant in that the sign of the correlation shapes the international transmission of shocks and the effects of policy measures. From a theoretical perspective, the correlation could be either zero, as assumed by standard international trade models, or negative if firms are capacity constrained, or positive if liquidity constraints dominate. The empirical evidence, however, is rather mixed. Using a sample of Italian manufacturing firms in the period 2001-12, we show that: i) the sign of the correlation changes over the business cycle, being negative in the first part of the past decade and positive after the 2008 crisis; ii) all the channels suggested by the literature are involved and they may explain the time-varying correlation; iii) the drop in domestic sales by Italian firms in 2012, contributed negatively to firms’ exports, and together with liquidity constraints, the fall reduced the growth rate of exports by an average of 0.6 percentage points.

Keywords: domestic sales, export, credit, liquidity and capacity constraints

JEL Classification: F10, F12, F14, L11

Suggested Citation

Bugamelli, Matteo and Gaiotti, Eugenio and Viviano, Eliana, Domestic and Foreign Sales: Complements or Substitutes? (November 20, 2014). Bank of Italy Occasional Paper No. 248, Available at SSRN: https://ssrn.com/abstract=2584919 or http://dx.doi.org/10.2139/ssrn.2584919

Matteo Bugamelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Eugenio Gaiotti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 06 4092 2718 (Phone)
+39 06 4792 3723 (Fax)

Eliana Viviano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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