Exports in Manufacturing, Exchange Rates, And External Exposure: Firm Level Evidence From Turkey

Turkish manufacturing firms are highly exposed to foreign currency in the forms of liability dollarization and high imported inputs content of domestic production. This might limit the competitiveness effect of currency depreciation. We attempt to uncover the relationship between the real exchange rates and exports of manufacturing firms in Turkey controlling for foreign currency exposures. We estimate that a real depreciation of the Turkish lira has a positive impact on both intensive and extensive margins of exports. This positive impact disappears for manufacturing firms operating in sectors that use imported inputs intensively. Similarly, for firms with relatively high dollarization ratios, the sensitivity of exports to the exchange rates is estimated to be weaker. (However, for firms with very high liability dollarization ratios, this impact is estimated to be stronger). Firms with high export and dollarization ratios, so-called “naturally hedged” firms, exports are less sensitive to changes in real exchange rates. Also, the exports of mature and larger firms are estimated to be less sensitive to the changes in exchange rates. In sum, contrary to macro evidence, firm level findings suggest that a depreciation of Turkish lira seems to favor the external competitiveness of firms. However, this is not the case when the firms are large and mature or their balance sheets are highly exposed to foreign currency.