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Demand Uncertainty: Exporting Delays and Exporting Failures

  • Daniel X. Nguyen

    (Department of Economics, University of Copenhagen)

This paper presents a model of trade that explains why firms wait to export and why many exporters fail. Firms face uncertain demands that are only realized after the firm enters the destination. The model retools the timing of uncertainty resolution found in productivity heterogeneity models. This retooling addresses several shortcomings. First, the imperfect correlation of demands reconciles the sales variation observed in and across destinations. Second, since demands for the firm's output are correlated across destinations, a firm can use previously realized demands to forecast unknown demands in untested destinations. The option to forecast demands causes firms to delay exporting in order to gather more information about foreign demand. Third, since uncertainty is resolved after entry, many firms enter a destination and then exit after learning that they cannot profit. This prediction reconciles the high rate of exit seen in the first years of exporting. Finally, when faced with multiple countries in which to export, some firms will choose to sequentially export in order to slowly learn more about its chances for success in untested markets.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 10-17.

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Length: 25 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:kud:kuiedp:1017
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  16. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  17. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
  18. Christian Gormsen, 2012. "Intransparent markets and intra-industry trade," Documents de travail du Centre d'Economie de la Sorbonne 12017, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
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