Abstract:
This study focuses on the interrelationship between export and domestic sales and the impact of
firm, industry, and macroeconomic factors on firm-level exports. Panel Data Two-Stage Least
Squares (2SLS) is used to analyze the data on financial statements of publicly listed firms in the
manufacturing sector of Pakistan covering the period from 2012 to 2021. The key firm-level
factors include capacity utilization and financial constraint, and external factors include trade
shocks. Firstly, the finding shows that local and export sales are substitutes, so firms face the
dilemma of either exporting or selling in domestic markets. Although the relationship between
exports and domestic sales is less elastic, it is economically and statistically significant. Second,
an increase in the real effective exchange rate affects both domestic and export sales adversely
because it makes imports relatively cheaper. Third, capacity utilization does not just affect export
sales, it also affects domestic sales, and the impact is more pronounced in the case of export sales
indicating that unmet demand is relatively high in the foreign market compared to the domestic
market. Fourth, financial constraints and external shocks also have adverse effects on export sales.
