Decomposing service exports adjustments along the intensive and extensive margin at the firm‐level

• Date: 01 February 2019
• Author: Michael Pfaffermayr,Elisabeth Christen,Yvonne Wolfmayr
• Published date: 01 February 2019
• DOI: http://doi.org/10.1111/roie.12365

Rev Int Econ. 2019;27:155–183. wileyonlinelibrary.com/journal/roie

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© 2018 John Wiley & Sons Ltd

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INTRODUCTION

International trade in services in 2015 still only represented about a quarter of world trade in manufac-

tured goods and accounted for only about one fifth of world trade (UNCTAD).1 However, while the gap

between services trade and goods trade is still high and to some extent related to the intangible nature of

most services requiring the proximity between sellers and buyers, cross‐border trade in services has be-

come the most dynamic segment of world trade, growing more quickly than trade in goods over the past

20 years especially since the middle of the noughties.2 Technological advances, partly also deregula-

tions and trade liberalization, the increasingly fragmented nature of production due to offshoring as well

as the increased services content of manufactured goods exports foster services trade across borders.

Against this background of the growing role of services and their increasing importance to trade

flows, this paper analyzes the determinants of services trade in Austria to dissect the role of foreign

Received: 16 January 2018

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Revised: 11 April 2018

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Accepted: 13 June 2018

DOI: 10.1111/roie.12365

ORIGINAL ARTICLE

Decomposing service exports adjustments

along the intensive and extensive margin at the

firm‐level

Elisabeth Christen1

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Michael Pfaffermayr2

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Yvonne Wolfmayr1

1Austrian Institute of Economic

Research,Arsenal, Object 20, A‐1030,

Vienna, Austria

2Department of Economics,University of

Innsbruck, Universitaetsstrasse 15, A‐6020,

Innsbruck, Austria

Correspondence

Yvonne Wolfmayr, Austrian Institute of

Economic Research, Arsenal, Object 20,

A-1030 Vienna, Austria.

Email: Yvonne.Wolfmayr@wifo.ac.at

Abstract

Using a panel data set of Austrian service exporting firms

this paper examines the determinants of service exports at

the firm/destination country level. We implement a ran-

dom effects Heckman sample selection firm‐level gravity

model as well as a fixed effects Poisson model. Expected

firm‐level service exports are decomposed into the inten-

sive and extensive margins of adjustment as a response to

counterfactual changes. We find market demand to be a

key determinant. Results also suggest high service export

potentials due to regulatory reform in partner countries

within the EU. Adjustments at the extensive margin only

play a marginal role. Increases in firm size as well as

changes in distance related costs are most effective in de-

veloping new export relationships in services.

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CHRISTEN et al.

demand, firm performance, the competitive environment in export markets, regulation in services

and other trade barriers. We employ a large panel data set of Austrian service firms covering service

exports by Austrian firms, by destination over the period 2006 to 2009. Exploiting the full panel

structure of our data, we thereby focus on the determinants of both the decision of firms which export

markets to serve as well as the export performance of firms in terms of export values in each destina-

tion. Thus, we take account of the extensive and intensive margins of trade as well as the correlation

between the two through sample selection as implied by economic theory.

Indeed, the literature finds substantial variation in the number of markets served by a firm at the

same time as the absence of bilateral trade turned out to be an important and persistent stylized fact of

international trade patterns (Helpman, Melitz, & Rubinstein, 2008). Burgeoning research on the char-

acteristics and strategies of globalized firms at the micro‐level, have documented that participation in

international markets is systematically related to performance differences across firms. Most of this

research focused on manufacturing industries while firm‐level evidence on trade in services is still

rare and has just recently begun to emerge (for an overview see Wagner, 2007, 2012).3 Recent con-

tributions on services trade include Breinlich and Criscuolo (2011) who are among the first to study

firm‐level services trade with a focus one trade participation and trade patterns of UK firms. In related

papers Ariu (2016), Federico and Tosti (2012, 2016) as well as Biewen and Blank (2014) provide

firm‐level evidence on services trade for Belgium, Italy and Germany, respectively.4 In general, these

studies on trade in services suggest that many of the stylized facts on the characteristics of exporting

firms, the number of markets served and the trade patterns derived for goods trade at the firm‐level

also hold for services trade. Exporting firms are larger, more productive, more profitable and employ

a higher skilled workforce. Firms were also found to differ substantially in their engagement in inter-

national trade. Larger and more productive firms serve a greater number of export markets. Firms with

high market coverage in turn are also more likely to serve less popular markets, while firms selling

to only a few markets usually choose the most popular ones (see e.g., Lawless, 2009). The majority

of firms do not export at all, and of those that do export, most only export to one country. Overall,

exporting activities are concentrated on activities of a few firms (“superstars”). Wolfmayr, Christen,

and Pfaffermayr (2013) verify these relationships for Austrian service exporters.

The heterogeneous trade theory literature pioneered by Melitz (2003) builds the theoretical foun-

dation for many of these empirical facts. Bernard, Jensen, Redding, and Schott (2007), Melitz and

Ottaviano (2008) are important variations of the basic model, but the extension by Chaney (2008),

Helpman et al. (2008), as well as Eaton, Kortum, and Kramarz (2004, 2011) taking into account

asymmetric countries that are separated by asymmetric trade costs is especially relevant to this paper.

Chaney (2008) explicitly models the exporters’ strategic choice on which markets to enter and pro-

vides the theoretical foundation for the extensive margin of trade. As firms exhibit heterogeneity in

their productivity, only the more productive and larger firms are able to earn sufficient operating prof-

its in a destination market to cover the associated fixed costs and self‐select into exporting to specific

destinations. It is key to these models that the export value decision is conditional on a positive export

decision and that adjustments in trade flows due to changes in exogenous determinants occur along

two margins: the extensive margin as firms select into destination markets and the intensive margin

as firms intensify trade in already established bilateral trade relationships. Hence, the insights from

both, the theory and the wide array of empirical papers, require to control for sample selection and

to consider adjustments at the intensive and extensive margin of trade in firm‐level gravity models.

Despite the prominent role gravity models have had in explaining aggregate bilateral trade flows,

their adoption to firm‐level trade data has not yet gained widespread attention in the empirical lit-

erature, and has so far almost exclusively focused on trade in goods. Fitzgerald and Haller (2014),

Berman, Martin, and Mayer (2012), Greenaway, Gullstrand, and Kneller (2009), Smeets, Creusen,