We investigate the effect of the size of government, captured by the tax revenue as a share of GDP, and institutional features on countries’ export performance (export shares in international markets). Theoretically, we show in a model of endogenous extent of domestically-produced goods that there exists a well-defined government size that optimally promotes exports. Empirically, we show in a panel of 18countries for 1980-2005 that the tax-GDP ratio is significant and exerts a non-linear effect on export performance, showing that there indeed exists an optimal size of government, which we estimate at around 40%. Product market rigidities are also shown to affect negatively export performance via a negative effect on R&D. Among traditional variables, relative unit labour cost and R&D shares in GDP show up significantly and with the expected signs
