Does domestic demand matter for firms’ exports?

The existence of a link between exports and domestic demand challenges the standard theoretical assumption in international trade models and carries out important policy implications. In our empirical setup the estimated relationship between exports and domestic sales results directly from a monopolistic model of a firm selling to both domestic and external markets. We find a noteworthy negative relationship between domestic sales and firms’ exports covering the manufacturing sector over the period 2009 – 2016. This result holds for almost all industries although with a heterogeneous magnitude. Additionally, there is also evidence that this effect is stronger for larger firms.