The impact of foreign demand shocks on organisational hierarchies

Abstract According to the theory of knowledge‐based hierarchies, a sufficiently large change in firm size should induce firms to change their organisational structure by adding or dropping organisational layers. In open economies, one of the main determinants of firm size is the volume of foreign sales, and its changes may also trigger reorganisations. However, changes in foreign sales are not only driven by foreign demand shocks alone, but also by firm characteristics like productivity and quality, which in theory confound both foreign sales and organisational structure. We construct a set of Bartik‐type measures of exogenous foreign demand shocks, and test whether firms respond to these shocks by changing their hierarchical structure. For this purpose, we combine transaction‐level trade data and employer–employee data for a set of Slovenian manufacturing firms that were engaged in exporting during the 1998–2011 period. While we find a positive relationship between changes in actual exports growth and number of organisational layers, we find no evidence that exogenous foreign demand shocks lead to adding or dropping organisational layers.