The Opportunity Cost of Exporting

Recent evidence suggests that firms face tradeoffs between serving domestic and foreign markets. We advance this literature by first differentiating between two types of exporters, transitory and perennial exporters, and then documenting differential behaviors for these firms. Using data on Chilean firms, we find a negative correlation (-0.30) between domestic and foreign sales for transitory exporters, but a mild positive correlation (+0.14) for perennial exporters, with an overall correlation of -0.19. To address these facts, we build a model that combines a linear demand system a la Melitz and Ottaviano (2008) with decreasing returns to scale in production and shocks to demand and productivity. The key departure is that costs can no longer be separated and treated in isolation across markets. While a positive productivity shock increases both foreign and domestic sales, a positive foreign demand shock increases exports but decreases domestic sales. We then calibrate the model and find that the model matches the data well, generating correlations of the right sign for each type of exporter and accounts for nearly 80% of the overall correlation. To evaluate the economic significance, we consider the counterfactual experiment of reducing trade costs. Contrary to exisiting studies, decreasing trade costs has on average positive effects on firms’ domestic sales. Furthermore, while markups are higher for exporters than non-exporters, markups within a firm tend to decline when firms start exporting. Both results would be absent in a model where markets are treated independently.