Growth under exchange rate volatility: Does access to foreign or domestic equity markets matter?

Abstract

Employing a matched employer-employee dataset, this paper explores the effects of exchange rate volatility on the growth performances of domestic versus foreign, and publicly traded versus non-traded private manufacturing firms in a major developing country, Turkey. The empirical results using dynamic panel data estimation techniques and comprehensive robustness tests suggest that exchange rate volatility has a significant growth reducing effect on manufacturing firms. However, having access to foreign, and to a lesser degree, domestic equity markets is found to reduce these negative effects at significant levels. These findings continue to hold after controlling for firm heterogeneity due to differences in export orientation, external indebtedness, profitability, productivity, size, industrial characteristics, and time-variant institutional changes.

Does Trade Foster Employment Growth in Emerging Markets? Evidence from Turkey

“…In particular, our study adds to previous empirical work on Turkey (Demir, 2010(Demir, , 2013Meschi, Taymaz, & Vivarelli, 2011;Yasar & Morrison Paul, 2008) by providing, for the first time, comprehensive evidence regarding the causal effects of importing, exporting, and joint importing and exporting on firm level labor demand, using recent and representative data. The empirical strategy we adopt is based on a combination of Multiple Propensity Score Matching (MPSM) and Difference-in-Differences (DID) estimation.…”

“…For the manufacturing sector as a whole, Meschi et al (2011) find that between 1992 and 2001, both exporters and firms belonging to sectors experiencing increasing inflows of foreign inputs from advanced countries displayed higher skilled labor costs as a share of total labor costs. Turning to the evidence on firm employment levels, in an analysis of the impact of exchange rate volatility on firm growth, based on a sample of about 500 of the largest Turkish firms, Demir (2010Demir ( , 2013 4 find a negative direct relationship between firm exports and employment growth, although the relationship is shown to be barely significant under sensitivity checks.…”

“…Indeed, no previous work has dealt with firm level importing and exporting simultaneously and none has identified a causal effect of trade on firm labor demand. As for the contemporaneous analysis of firm level import and export activities, Yasar and Morrison Paul (2008) do not address firm level exports in their analysis, while Demir (2010Demir ( , 2013 do not account for imports. Meschi et al (2011) test for both export and import measures, but the import indicator used in the analysis is at the sector level and their focus is limited to the firm skill ratio.…”

“…Thus, they test how relative skilled labor demand differs across firms in sectors with heterogeneous imported input exposures, but not the consequences of the firms' decision to import. Turning to the question of causality, only Demir (2010Demir ( , 2013 show some concern about the endogeneity of their export measure and, as an assessment of the impact of exporting is not their main focus, this concern is addressed by testing for the effects of the export share lagged one year. However, this expedient may not prove sufficient to identify the causal effect of exporting on employment growth.…”

“…However, this expedient may not prove sufficient to identify the causal effect of exporting on employment growth. Furthermore, the samples used by Yasar and Morrison Paul (2008) and Demir (2010Demir ( , 2013 are rather small and biased toward very large firms. 6 Although larger firms trade more and may drive most of the overall effect of trade on employment within manufacturing, the exclusion of medium and small sized firms from the analysis may obscure important information on the relationship investigated.…”