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Sunk Costs of Exports

  • Matteo Bugamelli

    ()

    (Bank of Italy, Economic Research Department)

  • Luigi Infante

    ()

    (Bank of Italy, Milan)

Using a very large panel dataset of Italian manufacturing firms, we test an empirical model of foreign markets participation with sunk costs. The period of analysis (1982-1999) is exceptionally informative: the large fluctuations in the lira exchange rate determined substantial flows of firms in and out of foreign markets. We find that sunk costs of exporting are very important: past experience in foreign markets increases the probability of exporting by about 70 percentage points. Although the assets entailing such costs depreciate quite slowly, new exporters have to acquire them very soon after entry. Altogether, these results suggest that the break in the Italian aggregate export supply function caused by the depreciation of the 1990s can be considerable and long-lasting. We then relate sunk costs to firm size and find that they are an important barrier to export, especially for the myriad of Italian small and medium firms. Finally, we provide some new evidence that sunk costs are indeed related to the need to collect information on foreign market/country characteristics.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 469.

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Date of creation: Mar 2003
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Handle: RePEc:bdi:wptemi:td_469_03
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  1. Andrew Bernard & Joachim Wagner, 1997. "Exports and success in German manufacturing," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 134-157, March.
  2. Basevi, Giorgio, 1970. "Domestic Demand and Ability to Export," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 330-37, March-Apr.
  3. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "learning-by-exporting" important? Micro-dynamic evidence from Colombia, Mexico and Morocco," Finance and Economics Discussion Series 96-30, Board of Governors of the Federal Reserve System (U.S.).
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  9. Arulampalam, Wiji & Booth, Alison L & Taylor, Mark P, 2000. "Unemployment Persistence," Oxford Economic Papers, Oxford University Press, vol. 52(1), pages 24-50, January.
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  12. Campa, José Manuel, 2000. "Exchange Rates and Trade: How Important is Hysteresis in Trade?," CEPR Discussion Papers 2606, C.E.P.R. Discussion Papers.
  13. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  14. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
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  16. 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.
  17. Richard Baldwin, 1989. "Sunk-Cost Hysteresis," NBER Working Papers 2911, National Bureau of Economic Research, Inc.
  18. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September.
  19. 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.
  20. Andrew Henley, 2004. "Self-Employment Status: The Role of State Dependence and Initial Circumstances," Small Business Economics, Springer, vol. 22(1), pages 67-82, 02.
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