Temporary trade and heterogeneous firms

Using Hungarian firm-level export data, we show that about one third of firm-destination and about one half of firm-product-destination export spells are short-lived, or temporary, in each year. This is inconsistent with theories where comparative advantage is stable and market entry costs are sunk. We show how endogenous choice between variable and sunk cost trade technologies can explain the empirical importance and some characteristics of temporary trade. We build a simple model in which the likelihood of temporary trade, defined by a simple filter, depends on productivity and capital cost of the firm as well as well known gravity variables of destinations. These predictions are borne out by the data; the likelihood of temporary trade rises with lower productivity, higher capital cost of the firm, further location and larger GDP of destination countries.