Domestic Sales or Exporting: A Strategic Dilemma

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.