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Entry costs and adjustments on the extensive margin - an analysis of how familiarity breeds exports

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  • Andersson, Martin

    ()
    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

Abstract

Fixed entry costs play an important role to explain the heterogeneity among exporters in terms of the geographical scope of their export activities. Yet, the existing literature has paid little attention to the nature and variation of such costs across different markets. This paper proposes a link between familiarity and fixed entry costs, such that (all else equal) the cost of entering a familiar market is lower than entering an unfamiliar one. A testable implication of this is that familiarity should primarily affect the extensive margin (number of exporters) of exports. This hypothesis is tested by estimating a gravity equation on a panel that describes Swedish firms’ exports to 150 destination countries over a period of seven years. The results are consistent with the hypothesis and show that the effect of familiarity on the volume of aggregate exports is primarily due to adjustments on the extensive margin. Adjustments on the extensive margin are large and have a significant impact on aggregate export volumes. The findings do not only help to clarify the nature and variation of fixed entry costs across destination markets: they also suggest a precise mechanism through which familiarity affects trade.

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Bibliographic Info

Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 81.

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Length: 35 pages
Date of creation: 05 Feb 2007
Date of revision:
Handle: RePEc:hhs:cesisp:0081

Contact details of provider:
Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/
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Related research

Keywords: international trade; fixed entry costs; transaction costs; gravity models; extensive margin; intensive margin; heterogeneous firms;

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Cited by:
  1. Bastos, Paulo & Silva, Joana, 2012. "Networks, firms, and trade," Journal of International Economics, Elsevier, vol. 87(2), pages 352-364.
  2. Persson, Maria, 2008. "Trade Facilitation and the Extensive and Intensive Margins of Trade," Working Papers 2008:13, Lund University, Department of Economics.
  3. The International Study Group on Exports and Productivity, . "Exports and Productivity – Comparable Evidence for 14 Countries," Discussion Papers 07/41, University of Nottingham, GEP.
  4. Christodoulopoulou, Styliani, 2010. "THE Effects of Multilateral Trade Liberalization on the Extensive and the Intensive Margins of Trade," MPRA Paper 29169, University Library of Munich, Germany.
  5. Andersson, Martin & Johansson, Sara & Lööf, Hans, 2007. "Productivity and International Trade - firm-level evidence from a small open economy," Working Paper Series in Economics and Institutions of Innovation 99, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  6. Francesco Serti & Chiara Tomasi, 2009. "Self-selection along different export and import markets," LEM Papers Series 2009/18, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  7. Persson, Maria, 2010. "Trade Facilitation and the Extensive Margin," Working Paper Series 828, Research Institute of Industrial Economics.
  8. Gábor Békés & Balázs Muraközy, 2011. "Temporary trade and heterogeneous firms," CeFiG Working Papers 6, Center for Firms in the Global Economy, revised 13 Feb 2011.
  9. Paulo Bastos & Joana Silva, . "Cultural Links, Firm Heterogeneity and the Intensive and Extensive Margins of International Trade," Discussion Papers 08/30, University of Nottingham, GEP.
  10. Francesco Serti & Chiara Tomasi, 2008. "Firm Heterogeneity: do destinations of exports and origins of imports matter?," LEM Papers Series 2008/14, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  11. Balazs Murakozy & Gabor Bekes, 2009. "Temporary Trade," IEHAS Discussion Papers 0909, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

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