Product and Destination Shifting by Firms in International Trade: Evidence from Kenya’s Manufacturing Exporters

This project will develop an integrated firm transaction database for Kenyan firms in order to study firm productivity, entry and exit dynamics into international trade, and switching in product and destination space in response to a changing investment climate.

In the context of international trade, low income countries rank lower in efficiency relative to their American and Indian counterparts. Models in the literature usually assume a frictionless environment permitting efficient allocation of resources across and within firms, but market conditions in developing countries are characterized by large constraints and an unfavourable business environment. This study seeks to address this inconsistency by examining the behaviour of Kenyan firms in their choice of products and destinations for exports using micro-level data.  

Specifically, the project will focus on how manufacturing firms in Kenya shift their product and destination scope as a result of changes in investment climate and globalization, on the relationship between product and destination shifting and firm characteristics, and on the factors determining a successful firm-product-destination relationship into fragile and conflict-affected states. Kenya trades with several countries plagued by internal conflict such as South Sudan, Somalia, and the Democratic Republic of Congo, and the study will assess the mechanisms of Kenyan firms that allow them to maintain export relationships to such locations.

This research is importance for Kenya as the country seeks to grow through an expansion of its export opportunities. Product and destination switching in exports is a common strategy for adjustment to shocks by firms to maintain their competitiveness. An examination of these trends for Kenya’s manufacturing firms will provide a better understanding of what drives Kenya’s export performance, thus providing a better foundation for policies to promote export growth.