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Geography and firm exports: new evidence on the nature of sunk costs

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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File URL: http://hdl.handle.net/10.1007/s10290-010-0070-x
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Article provided by Springer & Institut für Weltwirtschaft (Kiel Institute for the World Economy) in its journal Review of World Economics.

Volume (Year): 146 (2010)
Issue (Month): 4 (December)
Pages: 691-707

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Handle: RePEc:spr:weltar:v:146:y:2010:i:4:p:691-707
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  1. Joachim Wagner, 2005. "Exports and Productivity: A survey of the evidence from firm level data," Working Paper Series in Economics 4, University of Lüneburg, Institute of Economics.
  2. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  3. Andrew B. Bernard & J. Bradford Jensen, 2004. "Why Some Firms Export," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 561-569, May.
  4. Melitz, Jacques, 2007. "North, South and distance in the gravity model," European Economic Review, Elsevier, vol. 51(4), pages 971-991, May.
  5. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  6. David Greenaway & Richard Kneller, 2007. "Firm heterogeneity, exporting and foreign direct investment," Economic Journal, Royal Economic Society, vol. 117(517), pages F134-F161, 02.
  7. 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 iiisdp140, IIIS.
  8. Timothy Dunne & J. Bradford Jensen & Mark J. Roberts, 2009. "Producer Dynamics: New Evidence from Micro Data," NBER Books, National Bureau of Economic Research, Inc, number dunn05-1.
  9. Frances Ruane & Julie Sutherland, 2005. "Ownership and Export Characteristics of Irish Manufacturing Performance," The Institute for International Integration Studies Discussion Paper Series iiisdp032, IIIS.
  10. 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.
  11. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  12. 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, vol. 37(21), pages 2429-2443.
  13. repec:spr:weltar:v:144:y:2008:i:4:p:596-635 is not listed on IDEAS
  14. Andrew Bernard & Joachim Wagner, 2001. "Export entry and exit by German firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 137(1), pages 105-123, March.
  15. Davies, Stephen & Lyons, Bruce, 1996. "Industrial Organization in the European Union: Structure, Strategy, and the Competitive Mechanism," OUP Catalogue, Oxford University Press, number 9780198289739, December.
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