Trade with Heterogeneous Firms, Distance, and Time: An Analysis of Latin American and the Caribbean (LAC) Manufacturing Firms

One of the key conclusions of empirical trade literature is that distance dampens aggregate trade flows as the distance parameters in the gravity equation are consistently negative across studies. Using a sample of Latin American and the Caribbean (LAC) exporters, this paper contributes to the distance literature by evaluating the distance and time of travel effects on individual exports, especially if these effects differ across firm sizes and modes of transport. The study uses firm-specific distance and time of travel as proxies for variable costs respectively; (i) traces the exports from the exporting firms’ locations to main export destinations in relationship with the modes of transport and (ii) estimates the effects of distance and time of travel by a directional trade model with heterogeneous firms through a Bayesian sample-selection technique. The posterior mean estimates predict the effects of distance and time of travel on export to be negative, however, these effects are likely higher for small and medium firms than for large firms. Comparing these effects across modes suggests that exporting by maritime and land is likely to have higher effects than exporting by air.