export decisions have been suggested. Causality may run in the opposite direction, where firms overcome financial constraints by diversifying their sales markets and choose to become exporters to overcome liquidity constraints.<sup>1</sup> Trade policies may also play a role.<sup>2</sup> In parallel, a limited but growing literature on the role of demand shocks on trade flows is developing. When faced with demand shocks, firms may seek to spread their sales between domestic and foreign markets to smooth their cash flows. Indeed, Campa and Shaver (2002) suggest that Spanish manufacturing firms may decide to export to foreign markets to smooth their cash flow and thus exploit the imperfect correlation between the destination country and the Spanish business cycles. Behrens, Corcos, and Mion (2013) use micro data to identify the fall in the demand for tradable goods as the main driver for trade decline in Belgium. More attenuated effects are documented by Eaton, Kortum, Neiman, and Romalis (2011) whose counterfactual analysis shows that non-durables demand shocks lead to 18% fall in world trade. Claessens, Tong, and Wei (2012) take a different approach and study the impact of the crisis on cross-country balance sheets of non-financial firms. They find that the crisis hampered more firms with greater sensitivity to the business cycle and trade. Conversely, financing openness (measured as total international assets plus liabilities over GDP) played a more limited role. The recent crisis has highlighted the significant role of real sector shocks on trade dynamics, as suggested by Eaton, Kortum, Neiman, and Romalis (2011).

The paper proceeds in three sections. We discuss the multiple data sources used in Section 2. We then outline the empirical strategy and present the results in Subsection 3.1 and 3.2. We conclude in Section 4.

# **2 Data**

We base our analysis on information from three main data sources. First, the Business Environment and Enterprise Performance Surveys (BEEPSs) provide information about firms’ characteristics. Second, the World Development Indicators (WDI) and Global Development Finance (GDF) contain the macroeconomic variables to correct for inflation and exchange rate fluctuations, and capture the macroeconomic conditions faced by firms. Third, the National Accounts Estimates of Main Aggregates and Trade Policy Information System (TPIS) data allow us to estimate demand shocks.

The World Bank jointly with the European Bank for Reconstruction and Development administered the BEEP Surveys for four years (2002, 2005, 2009 and 2013) in 27 Eastern European and Central Asia countries.<sup>3</sup> The firms interviewed were selected to form a representative sample of the

> 1In a study of Spanish manufacturing firms, Campa and Shaver (2002) suggest that firms may decide to export to foreign markets to smooth their cash flow and thus exploit the imperfect correlation between the destination country and the Spanish business cycles.

> 2Pavcnik (2002) concludes that Chilean manufacturing plants in import-competing sectors underwent large productivity improvements during the massive trade liberalization of the late 1970s. Similarly, examining a period of significant changes in Colombian trade policy across industries between 1977 and 1991, Fernandes (2007) finds that tariff liberalization boosts plant productivity and the effect appears to be particularly strong if the firm is larger and operating in a less competitive industry.

> 3Specifically the surveys are fielded in Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croa-

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