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Export conditions in small countries and their effects on domestic markets
Author(s) -
Alfaro Martin,
Warzynski Frederic
Publication year - 2022
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12621
Subject(s) - downgrade , business , domestic market , market share , competition (biology) , quality (philosophy) , shock (circulatory) , international economics , international trade , economics , marketing , medicine , ecology , philosophy , computer security , epistemology , computer science , biology
In a small country's industries, it is common that both small and large firms export a significant share of their total production. How does better export access affect the domestic market when this occurs? Incorporating investments in quality that require fixed outlays and increase a variety's appeal in all countries, we show that an export shock entails two opposing mechanisms. On the one hand, it induces quality upgrades that raise the domestic market share of large firms. On the other hand, it fosters entry of small firms, making large firms lose domestic market share and downgrade quality. Using Danish data, we show that small firms in some industries are so heavily export‐oriented that better export opportunities reallocate domestic market share towards the least productive domestic firms. And while competition by small firms reduces some large firms' domestic markups, it also leads some to downgrade quality and suffer a substantial fall in profits.