Firms in International Trade
Firms play a critical role in the global economy. The literature on "firms in trade," which has expanded substantially over the past 20 years, studies how firms, especially the most productive and typically very large firms, self-select into exporting and shape the landscape of international trade and investment. The decisions of the modern exporter are complex and have far-reaching implications for the firm's financial well-being, the workers whom the firm employs, and the consumers who employ its products. Yet the focus on firms is a relatively new development. The classic literature on trade focused mainly on country and industry characteristics to predict the pattern and implications of trade. This paper surveys and analyzes the literature on firms in international trade. It summarizes the key empirical facts that motivate the study of firms in trade, details recent theoretical developments on the micro-foundations of firm behavior in an international context, focusing on how firms self-select into exporting and how firms respond to international shocks, and analyzes a "real world," empirically focused view of exporting, beginning with the growth dynamics of firms expanding to global markets and then addressing the critical financing decisions firms make when engaging in international commerce.
- While most of the analyses discussed in this paper clearly point to the critical role of large firms in international trade, the ability of the theory to capture the full richness observed in the data is still limited. For example, a large share of empirical work is motivated under the assumption of monopolistic competition, whereas, in reality, models of empirical industrial organization on discrete choice are likely more appropriate to analyze firm entry into new markets.
- Many aspects of firm dynamics have not been settled by empirical work and would benefit from the introduction of elements recently identified in international trade. For example, the debate between learning-by-exporting and self-selection would benefit from studying the increasingly important role of intermediate goods in international trade. Another example is the role of uncertainty in limiting exports.
- There are several directions in which the literature on trade and finance can advance: it could improve greatly by incorporating new layers of heterogeneity such as allowing for the optimal financing choice to depend on, for example, the characteristics of the product being traded or by incorporating elements that are usually considered in models of open economy macroeconomics, for example, exchange rate variation and expectations. Further, the choice of the currency in which the transaction takes place appears to be important; yet little is known about it. And probably the most important need of this literature is access to datasets on the different payment choices.
Extending the literature in the directions listed can have important policy implications. For example, it may be that uncertainty limits the activity of firms abroad more than other trade costs and policymakers should spend resources not only to increase market access but also to lower uncertainty or to lower costs associated with exporting.
Firms play a critical role in the global economy. In this paper, we survey the behavior of firms in the international economy, both in theory and in the data. We first summarize the key empirical facts that motivate the study of firms in trade. Then, we detail recent theoretical developments on the micro-foundations of firm behavior in an international context, focusing on how firms select into exporting, and how firms respond to international shocks. Finally, we turn to a "real world," empirically focused view of exporting, beginning with the growth dynamics of firms expanding to global markets, and then addressing the critical financing decisions firms make when engaging in international commerce. We conclude with directions for future research.