Deforestation, foreign demand and export dynamics in Indonesia

This paper presents a dynamic, heterogeneous firm model of investment in environmental abatement and exporting. The model highlights the interaction between firms' environmental investment and export decisions on the evolution of productivity and export demand in timber manufacturing industries. The model is structurally estimated using Indonesian timber manufacturing data that captures firm-level variation in environmental investment and export behavior. The results suggest that environmental abatement has little impact on productivity dynamics, but does encourage growth in export demand. Counterfactual experiments quantify the impact of policy change on trade and abatement decisions.