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Geography and Firm Exports: New Evidence on the Nature of Sunk Costs

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  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

Abstract

This paper presents an extension of the analysis of the geographic dimension of trade, by examining the trading patterns of individual firms. Aggregate data does not tell us if a sector is geographically diversified because there are many exporting firms, each of which specialises in a separate destination, or if the firms themselves are selling their exports in many markets. This analysis is made possible by access to a new survey dataset of Irish firms, which includes detailed information on firm characteristics and on the destinations of their exports over a two-year period. In line with Eaton, Kortum and Kramarz (2004), we find that a large number of firms serve only the domestic market and many exporting firms export to a single foreign market. Although there is little movement of firms into and out of exporting, firms’ involvement in individual export markets is much more dynamic. Over thirty percent of firms change their market coverage, usually by entering or exiting one additional market. This is interpreted as evidence that the bulk of any sunk cost encountered in exporting in incurred during the initial entry to the export market. Subsequent entry to additional markets is made easier by prior export experience, which reduces the sunk cost of extending market coverage.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 1/RT/06.

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Length: 30 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:cbi:wpaper:1/rt/06

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References

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  1. The International Study Group on Exports and Productivity, 2007. "Exports and productivity - comparable evidence for 14 countries," Policy Research Working Paper Series 4418, The World Bank.
  2. Melitz, Jacques, 2007. "North, South and distance in the gravity model," European Economic Review, Elsevier, Elsevier, vol. 51(4), pages 971-991, May.
  3. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 620-38, June.
  4. Wagner, Joachim, 2005. "Exports and Productivity : A survey of the evidence from firm level data," HWWA Discussion Papers 319, Hamburg Institute of International Economics (HWWA).
  5. Andrew Bernard & Joachim Wagner, 2001. "Export entry and exit by German firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 137(1), pages 105-123, March.
  6. J Bradford Jensen & Andrew B Bernard, 2001. "Why Some Firms Export," Working Papers, Center for Economic Studies, U.S. Census Bureau 01-05, Center for Economic Studies, U.S. Census Bureau.
  7. Aitken, B. & Hanson, G.H. & Harrison, A.E., 1994. "Spillovers, Foreign Investment and Export Behavior," Papers, Columbia - Graduate School of Business 95-06, Columbia - Graduate School of Business.
  8. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 307-33, March.
  9. Anne Marie Gleeson & Frances Ruane, 2006. "Export dynamics in Small Open Economies: Indigenous Irish Manufacturing Exports, 1985-2003," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp140, IIIS.
  10. International Study Group on Exports and Productivity (ISGEP), 2008. "Understanding Cross-Country Differences in Exporter Premia: Comparable Evidence for 14 Countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 144(4), pages 596-635, December.
  11. Werner Holzl, 2005. "Tangible and intangible sunk costs and the entry and exit of firms in a small open economy: the case of Austria," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(21), pages 2429-2443.
  12. Timothy Dunne & J. Bradford Jensen & Mark J. Roberts, 2009. "Producer Dynamics: New Evidence from Micro Data," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number dunn05-1.
  13. Frances Ruane & Julie Sutherland, 2005. "Ownership and Export Characteristics of Irish Manufacturing Performance," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp032, IIIS.
  14. Davies, Stephen & Lyons, Bruce, 1996. "Industrial Organization in the European Union: Structure, Strategy, and the Competitive Mechanism," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198289739, October.
  15. David Greenaway & Richard Kneller, 2007. "Firm heterogeneity, exporting and foreign direct investment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(517), pages F134-F161, 02.
  16. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, Econometric Society, vol. 47(1), pages 153-61, January.
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Cited by:
  1. Alejandro Riaño, 2011. "Exports, investment and firm-level sales volatility," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 147(4), pages 643-663, November.
  2. Békés, Gábor & Muraközy, Balázs, 2012. "Temporary trade and heterogeneous firms," Journal of International Economics, Elsevier, Elsevier, vol. 87(2), pages 232-246.
  3. Jan Jørgensen & Philipp Schröder & Zhihao Yu, 2012. "Globalization beyond partitioning: back to Krugman’s world," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 148(1), pages 73-87, April.

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