to identify causal effects of export growth within a firm (as a share of total sales) on a firm’s labor market outcomes. The first-stage regression specification is: 1 ∗R R 2<sup>ss</sup> ff,ii,tt ii tt ff,ii,tt=0 tt<sup>+ αα</sup> ff,ii,tt<sup>+ γγ</sup> ff,ii,tt xx = ηη + ηη + αα1 xx 2 ff,ii,tt,dd ii tt ff,ii,tt=0,dd dd,tt ff,ii,tt ff,ii,tt mm = ηη + ηη + αα mm ∗NNR RR + αα ss + γγ where ∗R R effective (trade weighted) exchange rate of the country and ff,ii,tt=0 tt<sup>is the initial share of exports in total sales of each firm</sup> is the initial share<sup>4 times the real</sup> xx of firm-level exports to destination market in each firm’s total sales times the nominal effective ff,ii,tt=0,dd dd,tt mm ∗NNR RR (trade weighted) exchange rate between the origin country and the destination. A valid instrument dd is one that is correlated with the endogenous regressor and uncorrelated with the error term. The choice of instruments is valid given that (i) a change in a countries’ effective exchange rate affects export competitiveness of a firm, (ii) the initial level of firms’ exposure to exports is predetermined, and (iii) the assumption that a country’s trade-weighted exchange rate is not influenced by any single firm.<sup>5</sup> While the effective exchange rate is common to all firms within a country at a point in time, the interaction with a firms’ initial export or destination-market share allows the instrument to vary over time and across firms (so it can explain variation in changes in export shares over time and across firms).<sup>6</sup> We test the model using firm-level survey data and customs data for Georgia (described below), which provides a sufficiently large and rich data set.

# **3. Variable definitions and data sources**

We utilize firm-level data to estimate the effects of within-firm changes in sales structure on firmlevel employment and average wages. The data sets include firm-level employment (total and

> 4 The first year a firm appears in the sample is when it first exported, such that the initial share of exports is not zero for any firm.

> 5 We alternatively control for firm-specific effects by estimating the model in first-differences, which wipes out the influence of time-invariant firm-specific characteristics. Industry and year dummy variables are included to control for industry- and year-specific effects. Because the specification in levels has firm-level fixed effects, which control for time-invariant firm-specific factors, first differencing the model is not necessary to remove the effect of such factors. However, estimating the specification in changes arguably allows for a stronger instrument, given that changes in the effective exchange rate as opposed to the level are a better exogenous correlate to export competitiveness.

> 6 Changes in firms’ sales may also be endogenous to the specification, for example if firm size is correlated with unobservable firm characteristics that change over time. Notwithstanding, because we are less interested in estimating this coefficient, and because not including it potentially biases the coefficient we are interested in estimating, we maintain the specification.

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