The Role of Product Level Entry and Exit in Export and Productivity Growth : Evidence from Estonia

Recent empirical studies of international trade have stressed that firm level decisions about the number of export products or markets represent an important margin of adjustment in response to globalization and changes in economic conditions. We investigate how decisions about the export product mix are associated with aggregate export dynamics and productivity of firms. For that purpose we use detailed product data and export market level data of the full population of Estonia's firms. Decomposition analysis of trade flows shows that both the relative importance of firms starting exporting and the role of product level churning (firms adding and dropping products) in total Estonian export growth increases significantly after accession to the EU in 2004. We show that starting to export and adding and dropping export products in the same period is associated with higher firm productivity compared to exporters that keep their export mix unchanged or decrease its breadth. Dropping peripheral products is associated with higher productivity only in the case of firms with a relatively large number of export products