where Yit is the variable indicating export or import. Assuming that E[πiYt ]- Sit isa
function of various factors that affect firm’s profitability and an error term εit, the
reduced form binary choice equation becomes
where Y is the variable identifying export or import status. δt is a time effect that should
capture the profitability conditions that are common across firms and ρi are time
invariant firm’s characteristics such as industry. According to the above mentioned
literature on the determinants of the firm’s export decision, the vector Xit of firm’s
characteristics includes employment, capital intensity, wages, the age of the firm and
technological proxies as age of machineries and the skill intensity. To avoid causality
problems all the firm’s characteristics variables are lagged one year. In addition the
share of foreign ownership controls for one of the possible channels that would favour
the export (or import) decision. With respect to the determinants of firm-level imports
there is much less research, though Kramarz (2003) finds that French importers are more
capital-intensive and have lower employment than non importers. Following MacGarvie
(2003) that also studies French firms we include in the import participation equation the
same variables that we use to model the export decision. In addition, to test for the fact
that there is a linkage between the activity of buying intermediate inputs from foreign
suppliers and of selling output to foreign customers, we also introduce the respective
variables in the participation equations.
Yit =
1 if λYXY + δt + Pi + εY > 0
0 otherwise
(2)
Therefore after modeling the probability of exporting (importing) as:
Pr(Y = 1|XY) = Pr(εY <λYXY + δt + Pi) (3)
we estimate the firm’s propensity to trade with maximum likelihood. Table 3 displays
the results of the Probit model estimations.
Interesting to note is that import and export are both positively correlated, respectively,
to the decision to export and to import. In the case of the export participation equation