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Demand Uncertainty: Exporting Delays and Exporting Failures

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  • Daniel X. Nguyen

    (Department of Economics, University of Copenhagen)

Abstract

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.

Suggested Citation

  • Daniel X. Nguyen, 2010. "Demand Uncertainty: Exporting Delays and Exporting Failures," Discussion Papers 10-17, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:1017
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    References listed on IDEAS

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    More about this item

    Keywords

    firm heterogeneity; exporting; trade failures; trade delay;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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