Abstract:

Traditional heterogenous firms and trade models such as Melitz (2003) predict no causal relationship between firms’ exports and domestic sales. This paper, using a rich dataset on Turkish firms, empirically examines whether exogenous export demand shocks influence firms’ domestic sales in a country where firms’ set of exported products differ substantially from their production, a phenomenon coined as Carry-Along Trade (CAT). I use an instrumental variables strategy and find that an exogenous doubling of exports increases domestic sales of a firm by 20 percent on average. A battery of sensitivity analyses using different clustering strategies, weights, and multiple instruments show that results are robust. Digging deeper, I separate foreign sales into produced versus CAT exports to identify the channel that links firms’ sales in different markets. In the process, I provide stylized facts that reveal the discrepancies between firms’ domestic production and exports at the product level.