Trade growth in a heterogeneous firm model: Evidence from South Eastern Europe

In 2007 a free trade area (BFTA) will be created in the Balkans. In this paper we study BFTA-induced trade growth in the SEE. Given that welfare impacts associated with trade growth depend on the growth channels, more goods and varieties exported or at higher price or more volume of exported goods and varieties, we study the structure of integration-induced export growth in the Balkans. Given that no firm-level trade data is available for the Balkans, we adopt the heterogeneous firm framework, which allows to decompose aggregate trade growth into intensive margin of trade and extensive margin of trade using only aggregate trade data. Our empirical findings predict that the BFTA would primarily increase the export volume through a growing number of shipments (the extensive margin of trade) suggesting that the actual welfare gains from the trade growth in the Balkans might in fact be larger than predicted in previous trade studies. We also found that reducing variable trade costs leads to higher export growth rates compared to reducing fixed trade costs by the same percentage. © 2007 The Author Journal compilation © Blackwell Publishing Ltd.