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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
Date of revision:
Handle: RePEc:bdi:wptemi:td_469_03
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  1. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  2. Guiso, Luigi & Schivardi, Fabiano, 1999. "Information Spillover and Factor Adjustment," CEPR Discussion Papers 2289, C.E.P.R. Discussion Papers.
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  4. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, vol. 78(4), pages 773-85, September.
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  9. Andrew B. Bernard & J. Bradford Jensen, 2001. "Why Some Firms Export," NBER Working Papers 8349, National Bureau of Economic Research, Inc.
  10. Andrew Bernard & Joachim Wagner, 2001. "Export entry and exit by German firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(1), pages 105-123, March.
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  19. 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.
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