From foreign demand to domestic production: A multi-country framework
Tell me where you export to, and I tell you what your firms produce!
This paper proposes a novel empirical strategy to study how third-country demand effects determine domestic production. I show that multilateral market access is a key determinant of a country’s output composition in a multi-country trade model with non-homothetic CES preferences and economies of scale. The model predicts that firms’ production choice is determined by a trade-off between demand incentives and production costs, and is reflected in the destination composition of a country’s exports. Using product-level trade data, I confirm that market access increases exports disproportionately to high-income countries - suggesting a higher share of high-quality producers - yet only for exporters in the top quintile of the market access distribution.
Earlier versions circulated as Foreign market access’ role for export quality and The global geography of income and export patterns.