What Explains Indirect Exports of Goods and Services in Eastern Europe and Central Asia?

Abstract

This paper investigates the determinants of indirect exporting, using firm- level data for 27 countries in Eastern Europe and Central Asia. Indirect exporting depends on a combination of fixed and variable trade cost factors. We first hypothesize that firms that perceive customs, transportation, crime and legal sys- tems as severe obstacles anticipate higher fixed costs and are more likely to export indirectly. The second hypothesis is that indirect exporting tends to be a temporary strategy. Econometric models are used to test the first hypothesis and transition matrices to test the second. In particular, probit, Heckman-probit and fractional response models are estimated to analyse the determinants of the export mode and the share of indirect exports. The results indicate that the factors that account for the fixed cost of exporting, mainly affect the decision to export indirectly (extensive margin), but some of them also affect, to a lesser extent, the amount exported indirectly (intensive margin). More specifically, factors such as customs and trade restrictions and transportation obstacles affect the extensive margin only, whereas crime affects both margins. Secondly, trade agreement membership mainly affects trade in manufactured goods, while exchange rate volatility affects positively the extensive and intensive margin of indirect exports of services. The results also indicate that firms are more likely to change their status as an indirect exporter than they are to change their status as a direct exporter or a non-exporter, which provides support to the second hypothesis.