# **2. Methodology and Variables of Interest**

To be able to evaluate whether trade restrictions affect export performance, one has to use the trade barriers imposed by trading partner countries on the products of the exporting country. Kee et al. (2009) constructed such an indicator. The market access-trade tariff restrictiveness index (MA-TTRI) which is presented in World Trade Indicators (WTI) from 2005 to 2007 measures the equivalent uniform tariff of trading partners facing the exporter country that would maintain the imports of the trading partners constant, including preferential tariffs. It is weighted by import values and import demand elasticities of trading partners and expressed as a tariff rate. A low value of the index indicates low trade barriers (or high market access) faced by the country’s exporters when selling their products to other countries. I use this indicator as a proxy for the restrictiveness of trade policies in accessing to foreign markets.

The tariff rates adopted at home can also contribute to the export performance of a country if exporters are more likely to use imported intermediate goods. In their analysis on U.S. firms, Bernard et al. (2007) find that 41 percent of exporting firms also import while 79 percent of importers also export. Using a firm level dataset from 43 developing countries, Seker (2010) shows that 35 percent of firms that are engaged with international markets through exporting or importing perform both activities. Low domestic tariff rates decrease the cost of imports which can stimulate exports. I include trade tariff restrictiveness index (TTRI) in the analysis which is also constructed by Kee et al. (2009) and presented in WTI.<sup>5</sup> This index summarizes the impact of each country’s non-discriminatory trade policies on its aggregate imports. It indicates the degree of domestic inefficiency caused by the trade regime. It is calculated as an equivalent uniform tariff of a country’s tariff schedule that would keep domestic import levels constant. Product level tariffs are weighted by import shares and expressed as a tariff rate. I introduce several estimation methods to explain how MA-TTRI and TTRI distort export performance of countries and show how investment climate interact with this relationship.

Dollar et al. (2006) show that a favorable business environment works in the direction of decreasing the sunk costs of exporting and eventually leads to higher participation in export markets. Such an environment can also increase export volumes of countries by reducing the distortions of the restrictive market access policies. Ability of a country to improve its foreign market access is limited to making multilateral and bilateral trade agreements. Such policy actions could be less practical and less convenient for governments relative to the policy changes for improving business environment. In this study, I focus on several investment climate measures. The choice of these indicators was motivated by the existing studies in the literature. As it was briefly discussed in the introduction, there are plenty of empirical studies that show institutions, infrastructure, trade facilitation, and regulations affect export performance of countries. To show how these aspects of investment climate affect export performance I choose the following indicators: regulatory quality, financial development, business entry regulations, exports facilitation, quality of infrastructure, and property rights.

> 5 The TTRI index used here is for the most favored nation which is the most common used tariff measure in the literature.

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