DP14640 How Do Firms Respond to Demand Shocks? Evidence from the European Sovereign Debt Crisis

Author(s): Manuel Adelino, Paulo Fagandini, Miguel Ferreira, Francisco Queiro
Publication Date: April 2020
Keyword(s): exports, financial crises, Fiscal austerity, Investment opportunities
JEL(s): F10, G01, G30, H57, H60
Programme Areas: Public Economics, Financial Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14640

We examine how firms respond to domestic demand shocks using the large and unanticipated shock to government spending in European periphery countries during the 2010-2011 sovereign debt crisis. We find that firms with higher ex-ante exposure to government procurement contracts significantly increase their exports after the shock or exit. Older and larger firms are better able to substitute domestic sales with entry into export markets than younger and smaller firms. Firms with high-skill workers, high productivity and more educated managers are also more likely to start exporting. Our results suggest that mature and high-quality firms drive the response of tradable industries to domestic demand shocks.