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Sunk Costs of Exports

Listed author(s):
  • 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
Handle: RePEc:bdi:wptemi:td_469_03
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  1. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 635-654.
  2. Matteo Bugamelli & Patrizio Pagano, 2001. "Barriers to investment in ICT," Temi di discussione (Economic working papers) 420, Bank of Italy, Economic Research and International Relations Area.
  3. Bernard, A. & Wagner, J., 1996. "Exports and Success in German Manufacturing," Working papers 96-10, Massachusetts Institute of Technology (MIT), Department of Economics.
  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.
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  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.
  12. 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.
  13. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
  14. 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 545-564, September.
  15. J Bradford Jensen & Andrew B Bernard, 2001. "Why Some Firms Export," Working Papers 01-05, Center for Economic Studies, U.S. Census Bureau.
  16. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
  17. Andrew B. Bernard & Joachim Wagner, 1998. "Export Entry and Exit by German Firms," NBER Working Papers 6538, National Bureau of Economic Research, Inc.
  18. Basevi, Giorgio, 1970. "Domestic Demand and Ability to Export," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 330-337, March-Apr.
  19. Richard Baldwin, 1989. "Sunk-Cost Hysteresis," NBER Working Papers 2911, National Bureau of Economic Research, Inc.
  20. James R. Tybout, 2001. "Plant- and Firm-Level Evidence on "New" Trade Theories," NBER Working Papers 8418, National Bureau of Economic Research, Inc.
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