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Export as shelter from domestic corruption: Theory and evidence from developing countries
Author(s) -
Liu Yu,
Zhou Mohan,
Lin Faqin,
Gu Lihua
Publication year - 2021
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.13085
Subject(s) - language change , economics , international economics , monetary economics , developing country , domestic market , business , international trade , economic growth , art , literature
When corruption becomes a significant barrier to develop domestic business, do firms resort to exporting as a solution? In other words, is there a ‘shelter effect’ of exporting? We build a simple model to analyse the effects of corruption on firms’ domestic versus foreign market sales. The model predicts that when corruption increases the cost of domestic sales, large firms increase exports relative to domestic sales, whereas small firms do the opposite. Using data from the World Bank Enterprise Surveys, we provide supportive evidence to these predictions. We also find the ‘shelter effect’ to be weaker for politically connected firms.