Sunk Costs,Firm Heterogeneity,Export Market Entry and Exit: Evidence from India

This paper analyses the role of sunk costs and firm heterogeneity in firm decision to enter and exit export markets. Employing rich firm-level data on Indian manufacturing firms, the study points out that sunk costs in terms of previous export experience significantly explain entry and exit decisions of firms in the export market. The first set of analysis involves estimation of dynamic discrete choice model using random effects probit correcting for initial conditions problem. We find evidence that previous export experience (sunk costs) matters for export decision. However, importance of sunk costs is found to depreciate rapidly. Further, analysis across sub-sample of firms accounting for firm heterogeneity factors like size and product level information supports the hypothesis of sunk costs. Second set of analysis involving firm survival in export markets using discrete-time hazard models shows evidence of negative duration dependence. We observe that those firms which continue to export for few years are less likely to exit from export markets.

     

Does policy reform promote FDI in developing economies? a firm-level simulation approach

How do policy reforms for foreign investors in developing economies affect inward foreign direct investment? Using a firm heterogeneity model calibrated to match data on Japanese multinational firms, we simulate how multinationals respond to a decline in investment procedure days. We find that such policy reforms in investment procedures significantly increase the aggregate entries and sales of multinational firms in developing economies, with the more pronounced impact at the extensive margin than at the intensive margin. At the firm level, declining entry costs encourage more productive firms to invest in a wider range of markets although such impacts are modest for the most productive firms that already penetrate many markets. The impacts on foreign sales per multinational firm are less clear-cut in magnitude across productivity levels in part because falling entry costs directly increase multinational entry to developing economies, but only indirectly encourage their existing production in these markets.     

Exporting and Productivity: The Effects of Multi‐Product and Multi‐Market Export Entry

Empirical studies on the micro‐level effects of exporting on productivity pay usually little attention to the potentially heterogeneous effects of the different modes of export market entry. We show that multi‐product export entry is associated with higher post‐entry productivity compared to other firms. This can imply significant benefits from experimentation with different products. Our analysis is based on detailed export data from full population of firms in Estonia, disaggregated for each firm by export markets and individual products.     

A theory on the role of wholesalers in international trade based on economies of scope

This paper offers a theoretical foundation for the existence of wholesalers and other intermediaries in international trade and analyzes their role in an economy with heterogeneous manufacturing firms and fixed costs of exporting. Wholesalers are assumed to possess a technology such that they can buy manufacturing goods domestically and sell in foreign markets and they can, unlike manufacturers, export more than one good. A wholesaler therefore faces an additional fixed cost, which increases in the number of goods it handles. The presence of wholesale firms leads to productivity sorting. The most productive firms export on their own by paying a fixed cost, but a range of firms with intermediate productivity levels export through international wholesalers. A higher fixed cost of exporting to a destination means that wholesalers handle: (i) a higher share of total export volumes to this destination and (ii) a higher share of the exported product scope (i.e., the number of exported products) to this destination. A higher fixed cost of exporting gives wholesalers a larger role, since these can spread the fixed cost across more than one good. The wholesale technology therefore exhibits economies of scope. An empirical analysis using Swedish firm‐level data supports the main assumption and predictions of the model.     

Sequential Entry in a Vertically Differentiated Market

This paper considers a sequential entry game of homogeneous firms in a vertically differentiated market. A firm can choose any variety of products, with a fixed cost per product. Each product can be withdrawn afterwards without exit costs. Then each firm chooses one product at most in equilibrium because of a commitment problem. The first firm chooses the highest quality if the fixed cost is so large that subsequent entry is blockaded. It chooses middle quality to deter entry of a low–quality firm if the fixed cost decreases. Hence everyone becomes worse off as the entrant becomes more dangerous. JEL Classification Numbers: D43, L13.     

Does Exporting Increase Productivity? A Microeconometric Analysis of Matched Firms

Exporting involves sunk costs, so some firms export whilst others do not. This proposition derives from a number of models of firm behavior and has been exposed to microeconometric analysis. Evidence from the latter suggests that exporting firms are generally more productive than nonexporters. They self‐select, in that they are more productive before they enter export markets, but the evidence suggests that entry does not make them any more productive. This paper investigates exporting and firm performance for a large panel of UK manufacturing firms, applying matching techniques. The authors find that exporters are more productive and they do self‐select. In contrast to other evidence, however, exporting further increases firm productivity.     

Learning to Export and the Timing of Entry to Export Markets

Exporters normally enter their first foreign markets some time after beginning to sell locally, then enter subsequent markets progressively. Standard trade models are essentially static and do not explain these elementary facts about exporting, which can bias the estimation of trade patterns. This paper proposes a model that endogenously generates the timing of entry to new export markets. The timing results from a learning mechanism. More productive firms are less sensitive to the learning effect and therefore (1) enter markets more quickly and (2) enter larger markets earlier and smaller markets later. These predictions are confirmed using Swedish firm‐level data.     

The relationship among enterprise clustering,prices, and productivity in Ethiopia’s manufacturing sector

We use census panel data on Ethiopian manufacturing firms to analyze how enterprise clustering in local markets covaries with firm‐level output prices and physical productivity. We find a negative and statistically significant relationship between the density of firms that produce a given product in a given location and the local price of that product. We also find a positive and statistically significant relationship between the density of firms that produce a given product in a location and the physical productivity of same‐product firms in the location. These results are consistent with the notion that increased clustering of firms generates higher competitive pressure and positive externalities. Across firms that produce different products, we find no statistically significant relationship between enterprise clustering and firm‐level output prices and productivity. We also find no clustering effects across towns. Our results suggest that while clustering can impact firm performance, the advantages are narrow in scope.     

Importing exporters and exporting importers: A study of the decision of Chinese firms to engage in international trade

This paper examines the complex and interdependent relationship between importing and exporting for a panel of Chinese manufacturing firms. We estimate the decision to import and export simultaneously within a dynamic random‐effects bivariate probit framework addressing the endogenous initial conditions problem. Results show that decisions to export and import are simultaneously determined and that sunk‐entry costs play a significant role in a firm's decision to enter international markets. Costs are larger for exporting. We also find a substitution effect between the two decisions. The substitutability between exporting and importing is greater for financially constrained private firms.     

Entry and Exit in International Markets: Evidence from Chilean Data*

Several studies examine the patterns and determinants of entry and exit in manufacturing industries. Not much work exists on entry and exit in international markets. This paper uses Chilean data to analyze the industry‐level determinants of entry and exit in export markets. First, we show as stylized facts that entry and exit rates differ across industries, vary over time, and are positively correlated. Then, we study the main determinants of these patterns. Our econometric analysis shows that within‐industry heterogeneity, measured by differences in productivity or other firm characteristics, has a significant effect on plant turnover in international markets. Our findings reveal that trade costs, factor intensities, and fluctuations in the real exchange rate play a minor role explaining entry and exit. This last result is consistent with hysteresis in international markets.     

Fixed export cost heterogeneity, trade and welfare

Recent literature on the workhorse model of intra-industry trade has explored heterogeneous cost structures at the firm level. These approaches have proven to add realism and predictive power. This paper presents a new and simple heterogeneous-firms specification. We develop a symmetric two-country intra-industry trade model where firms are of two different marginal cost types and where fixed export costs are heterogeneous across firms. This model traces many of the stylized facts of international trade. However, we find that with heterogeneous fixed export costs there exists a positive bilateral tariff that maximizes national and world welfare.     

Trade, inequality, and the political economy of institutions

This paper investigates the relationship between international trade and the quality of economic institutions. We model institutions as fixed costs of entry, in a framework that has two key features. First, preferences over entry costs differ across firms and depend on firm size. Larger firms prefer to set higher costs of entry, in order to reduce competition. Second, these costs are endogenously determined in a political economy equilibrium. Trade opening can lead to higher entry costs when it changes the political power in favor of a small elite of large exporters, who in turn prefer to install high entry barriers.     

Corporate Social Responsibility Spillover and Competition Effects on the Food Industry

This paper examines the spillover and competition effects of corporate social responsibility (CSR) with duopoly competition. In employing the assumption that firm CSR increases consumer willingness to pay for the firm's products while consumer willingness to pay decreases for non‐CSR firm products, some interesting conclusions are achieved. First, CSR spillover effects increase CSR firm outputs and prices, while CSR spillover has the opposite effect on competitors. Second, CSR spillover decreases total outputs and total social welfare levels. Third, competition effects increase CSR expenditures, and CSR firms' CSR policies are the most robust when non‐CSR firms assume a leading position. It is found that total outputs and consumer utilities are highest when CSR firm acts as leader, while the relationships of social welfare among different cases are ambiguous depending on product substitution and spillover effects.     

Technology diffusion and growth

Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to Luttmer (2007) [21]. If entrants can make only small improvements over the technologies used by the least productive incumbents, then the firm size distribution approximates Zipf?s law and entry and exit rates are high, as in the data.     

Mixed Oligopoly at Free Entry Markets

We investigate the optimal behavior of a public firm in a mixed market involving private firms and one public firm. Existing works show that welfare-maximizing behavior by the public firm is suboptimal when the number of firms is given exogenously. We allow free entry of private firms and find that, in contrast to the case with the fixed number of firms, welfare-maximizing behavior by the public firm is always optimal in mixed markets. Furthermore, we find that mixed markets are better than pure markets involving no public firm if and only if the public firm earns nonnegative profits.     

Multinational Enterprises,Absorptive Capacity and Export Spillovers: Evidence from Polish Firm‐level Data

An important benefit attributed to the activity of multinational enterprises (MNEs) in developing and transition countries is its effect on international market access. Through a variety of channels the presence of MNEs is expected to reduce the costs faced by indigenous firms in breaking into international markets and in turn boost their export prospects. In this paper we use an extensive Polish firm‐level dataset for the period 2000–2008 to verify whether MNEs have positively contributed to the export performance of indigenous firms. We track not only sectoral and geographical spillovers stemming from the activity of MNEs but also control for firm‐specific characteristics that affect indigenous firms' decisions to export including their absorptive capacity. Our empirical results support the existence of positive spillovers (related to MNE export activity) at the sectoral level but not at the regional level. Finally, we find that individual absorptive capacity determines the size of export spillovers.     

Export Destination,Product Quality and Wages in a Middle‐Income Country. The Case of South Africa

A robust finding in the firm‐level literature is that exporting firms pay higher wages. Using South African data this paper investigates the relationship between export destination and wages at a worker level. South Africa, a middle‐income country, has two distinct main export markets—a regional market where per capita incomes are lower than at home, and an international market with higher per capita incomes. Our estimates show that workers in firms that export to the region earn less than those that produce for the domestic market. Those in firms that export outside the region earn more than either domestic producers or region‐only exporters. Much of this difference in wages can be explained by the premium the different types of exporters pay for skills. These results support previous studies which suggest that export destination is related to product quality which in turn is related to worker quality and therefore wages.     

Foreign competition and social efficiency of entry

We consider social efficiency of firm-entry in the presence of foreign competition. If the labour markets are competitive, entry is insufficient for the domestic country if the transportation cost is low and the marginal costs of the domestic firms are sufficiently higher than the marginal cost of the foreign firm. In the presence of a domestic labour union, entry is always socially insufficient for the domestic country. Hence, the anti-competitive entry-regulation policy may not be justified in an industry facing foreign competition, and it may depend on the transportation cost, the marginal cost difference between the firms and the domestic labour market structure.     

Effects of Islamic religiosity on bilateral trust in trade: The case of Turkish exports

Using a rich firm level data set for Turkish manufacturing, we test whether sharing similar religious beliefs with potential contracting parties drives a firm’s first time entry into export markets. We exploit variation in the practice of Islam across Turkish NUTS3 regions and we find that firms located in regions characterised by stronger religiousness are more likely to enter export destinations with a higher share of Muslims among their population. This result is robust to the control for past trade, common language, cultural and migration ties as well as for selective trade policy in favour of politically connected religious business groups. In particular, religious proximity eases export entry for producers of “trust intensive” goods, it favours subsequent foreign market entries and reduces the export exit probability. All in all, our evidence supports an export enhancing effect of religious proximity working through export sunk costs reduction rather than through similarity in preferences.     

Antidumping and heterogeneous quality adjustment of multi-product firms: Evidence from Chinese exporters

This paper investigates the effect of antidumping on multi-product firms’ adjustment in export quality using highly disaggregated Chinese exports data at the firm-product-country level for the period 2000–2014. In response to antidumping, firms tend to upgrade the quality of their exports for targeted products in affected markets by product adjustment, with this effect being more pronounced for firms with ex ante higher product quality. Antidumping induces resource reallocation across firms for a product such that higher-quality firms upgrade the quality while lower-quality firms are unaffected, and reallocation across products within a firm with the quality of products of higher competency increasing more substantially under antidumping policy. Our paper contributes to our understanding on how a multi-product firm adjusts by reallocating resources across products in the face of trade policy shocks.