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An empirical model of sunk costs and the decision to export

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Author Info
Roberts, Mark J.
Tybout, James R.

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Abstract

Exports respond unpredictably to a change in real exchange rates, suggests evidence from the 1980s. Recent theoretical work explains this as a consequence of the sunk costs associated with breaking into foreign markets. Sunk costs include the cost of packaging, upgrading product quality, establishing marketing channels, and accumulating information on demand sources. The authors use micro panel data to estimate a dynamic discrete-choice model of participation in export markets, a model derived from the Krugman-Baldwin sunk-cost hysteresis framework. Applying the model to data on manufacturing plants in Colombia (1981-89), they test for the presence of sunk entry costs and quantify the importance of those costs in explaining export patterns. The econometric results reject the hypothesis that sunk costs are zero. The results, which control for both observed and unobserved sources of plant heterogeneity, indicate that prior export market experience has a substantial effect on the probability of exporting, but its effect depreciates fairly quickly. The reentry costs of plants that have been out of the export market for a year are substantially lower than the costs of a first-time exporter. After a year out of the export market, however, the reentry costs are not significantly different from the entry costs. Plant characteristics are also associated with export behavior: large old plants owned by corporations are more likely to export than other plants. Variations in plant-level cost and demand conditions have much less effect on the profitability of exporting than variations in macroeconomic conditions and sunk costs do. It appears especially difficult to break into foreign markets during periods of world recession.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1436.

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Date of creation: 31 Mar 1995
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Handle: RePEc:wbk:wbrwps:1436

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Keywords: Economic Theory&Research Markets and Market Access Environmental Economics&Policies Decentralization Water Conservation Environmental Economics&Policies Economic Theory&Research TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT Markets and Market Access Access to Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feinberg, Robert M., 1992. "Hysteresis and export targeting," International Journal of Industrial Organization, Elsevier, vol. 10(4), pages 679-684, December. [Downloadable!] (restricted)
  2. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November. [Downloadable!] (restricted)
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  3. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November. [Downloadable!] (restricted)
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  4. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August. [Downloadable!] (restricted)
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  6. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May. [Downloadable!] (restricted)
  7. Andrews, Donald W. K., 1988. "Chi-square diagnostic tests for econometric models : Introduction and applications," Journal of Econometrics, Elsevier, vol. 37(1), pages 135-156, January. [Downloadable!] (restricted)
  8. Richard Baldwin, 1989. "Sunk-Cost Hysteresis," NBER Working Papers 2911, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier. [Downloadable!] (restricted)
  10. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, vol. 50(3), pages 761-64, May. [Downloadable!] (restricted)
  11. Caves, Richard E., 1989. "International differences in industrial organization," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 21, pages 1225-1250 Elsevier. [Downloadable!] (restricted)
  12. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October. [Downloadable!] (restricted)
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  13. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-22, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling Trade Costs, Heterogeneous Firms and Industry Dynamics," CEP Discussion Papers dp0585, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  2. Brian Aitken & Gordon H. Hanson & Ann E. Harrison, 1994. "Spillovers, Foreign Investment, and Export Behavior," NBER Working Papers 4967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Bosco Sabuhoro, Jean & Gervais, Yvan, 2004. "Déterminants de la réussite ou de l'échec des établissements canadiens sur les marchés étrangers, selon une analyse de survie," Direction des études analytiques : documents de recherche 2004220f, Statistics Canada, Direction des études analytiques. [Downloadable!]
  4. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Joze P. Damijan & Crt Kostevc, 2005. "Performance on Exports: Continuous Productivity Improvements or Capacity Utilization," LICOS Discussion Papers 16305, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  6. Campa, Jose M., 2000. "Exchange rates and trade: How important is hysteresis in trade?," IESE Research Papers D/427, IESE Business School. [Downloadable!]
    Other versions:
  7. Andrew B. Bernard & J. Bradford Jensen, 2001. "Why Some Firms Export," NBER Working Papers 8349, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Moser, Christoph & Nestmann, Thorsten & Wedow, Michael, 2006. "Political risk and export promotion: evidence from Germany," Discussion Paper Series 1: Economic Studies 2006,36, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  9. Helen Shapiro, 2007. "Industrial Policy and Growth," Working Papers 53, United Nations, Department of Economics and Social Affairs. [Downloadable!]
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