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Sequential Exporting

  • Facundo Albornoz
  • Hector F. Calvo Pardo
  • Gregory Corcos
  • Emanuel Ornelas

Firms need to incur substantial sunk costs to break in foreign markets, yet may give up exporting shortly after their first experience, which typically involves very small sales. Conversely, other new exporters shoot up their foreign sales and expand to new destinations. We investigate a simple theoretical mechanism that can rationalize these patterns. A firm discovers its profitability as an exporter only after actually engaging in exporting. The profitability is positively correlated over time and across foreign destinations. Accordingly, once the firm learns how good it is as an exporter, it adjusts quantities and decides whether to exit and whether to serve new destinations. Thus, it is the possibility of profitable expansion at both the intensive and extensive margins what makes incurring the sunk costs to enter a single foreign market worthwhile despite the high failure rates. Using a census of Argentinean firm-level manufacturing exports from 2002 to 2007, we find empirical support for several implications of our proposed mechanism, indicating that the practice of "sequential exporting" is pervasive. Sequential exporting has broad but subtle implications for trade policy. For example, a reduction in trade barriers in a country has delayed entry effects in its own market, while also promoting entry in other markets. This trade externality poses challenges for the quantification of the effects of trade liberalization programs, while suggesting neglected but critical implications of international trade agreements.

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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 10-08.

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Length: 49 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:bir:birmec:10-08
Contact details of provider: Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk

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