Sequential exporting
Firms need to incur substantial sunk costs to break in foreign markets, yet many give up exporting shortly after their �rst experience, which typically involves very small sales. Conversely, other new exporters shoot up their foreign sales and expand to new destinations. We investigate a simple theo...
| Main Authors: | , , , |
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| Other Authors: | |
| Format: | Text |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.408.6932 http://www.parisschoolofeconomics.eu/IMG/pdf/CEPII-PSE-paper2-060710.pdf |
| Summary: | Firms need to incur substantial sunk costs to break in foreign markets, yet many give up exporting shortly after their �rst experience, which typically involves very small sales. Conversely, other new exporters shoot up their foreign sales and expand to new destinations. We investigate a simple theoretical mechanism that can rationalize these patterns. A �rm discovers its pro�tability as exporter only after actually engaging in exporting. The pro�tability is positively correlated over time and across destinations. Accordingly, once the �rm learns how good it is as an exporter, it adjusts quantities and decides whether to exit and whether to serve new destinations. Thus, it is the possibility of pro�table expansion at both the intensive and extensive margins what makes incurring the sunk costs to enter a single foreign market worthwhile despite the high failure rates. Using a census of Argentinean �rm-level manufacturing exports from 2002 to 2007, we �nd empirical support for several implications of our proposed mechanism, indicating that the practice of “sequential exporting ” is pervasive. Sequential exporting has broad but subtle implications for trade policy. For example, a reduction in trade barriers in a country has delayed entry e�ects in its own market, while also promoting entry in other markets. This trade externality poses challenges for the quanti�cation of the e�ects of trade liberalization programs, while suggesting neglected but critical implications of international trade agreements. |
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