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Export decisions of services firms between agglomeration effects and market-entry costs

  • Kox, Henk L.M.

The paper tests the role of agglomeration effects on the export decision of services firms. Recent theories on trade with heterogeneous firms predict that export participation goes along with sunk market-entry costs. Only the more productive firms will be able to overcome these sunk costs. This leads to a process of - ex ante - self selection. These predictions are tested for the services industry, with due account for the possible role of agglomeration effects in large-city areas. Standard empirical tests of the new trade models consistently find productivity-based ex ante self selection by exporters, and this effect is mostly explained by unobserved sunk entry costs that exporters have to absorb in new foreign markets. Recent research by urban economists (e.g. Combes et al., 2012) suggests, however, that operating in large-city areas also goes along with positive productivity sorting. Ignoring this leads to upwardly biased estimates of the effect of foreign market entry costs. A large set of micro-data for establishments in Dutch services is used to investigate this hypothesis. I find evidence that positive productivity self-selection is based on the combined effects of agglomeration and anticipated market-entry cost for export starters. This effect is strongest in markets with more or less homogeneous products. I also find evidence that the productivity self-selection effect (of exporters compared to non-traders) is stronger in non-urban areas and smaller agglomerations.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39127.

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Date of creation: May 2012
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Handle: RePEc:pra:mprapa:39127
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  1. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent & Puga, Diego & Roux, Sébastien, 2012. "The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection," IZA Discussion Papers 6502, Institute for the Study of Labor (IZA).
  2. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  3. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 635-654.
  4. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
  5. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  6. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  8. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  9. Bernard, Andrew B. & Jensen, J Bradford & Redding, Stephen J. & Schott, Peter K., 2007. "Firms in International Trade," CEPR Discussion Papers 6277, C.E.P.R. Discussion Papers.
  10. Lawless, Martina, 2008. "Deconstructing Gravity: Trade Costs and Extensive and Intensive Margins," MPRA Paper 10230, University Library of Munich, Germany.
  11. Russell H. Hillberry & Edward J. Balistreri & Thomas F. Rutherford, 2007. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," DEGIT Conference Papers c012_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  12. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
  13. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  14. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "learning-by-exporting" important? Micro-dynamic evidence from Colombia, Mexico and Morocco," Finance and Economics Discussion Series 96-30, Board of Governors of the Federal Reserve System (U.S.).
  15. Kox, Henk L.M. & Rojas Romasgosa, Hugo, 2010. "Exports and productivity selection effects for Dutch firms," MPRA Paper 24390, University Library of Munich, Germany.
  16. Lawless, Martina, 2009. "Firm export dynamics and the geography of trade," Journal of International Economics, Elsevier, vol. 77(2), pages 245-254, April.
  17. Ciccone, Antonio, 2002. "Agglomeration effects in Europe," European Economic Review, Elsevier, vol. 46(2), pages 213-227, February.
  18. Alexander Vogel & Joachim Wagner, 2011. "Robust estimates of exporter productivity premia in German business services enterprises," Working Paper Series in Economics 207, University of Lüneburg, Institute of Economics.
  19. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," Development Working Papers 201, Centro Studi Luca d'Agliano, University of Milano.
  20. Facundo Albornoz & Hector F. Calvo Pardo & Gregory Corcos & Emanuel Ornelas, 2010. "Sequential Exporting," Discussion Papers 10-08, Department of Economics, University of Birmingham.
  21. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2008. "An Anatomy of International Trade: Evidence from French Firms," NBER Working Papers 14610, National Bureau of Economic Research, Inc.
  22. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 441-487.
  23. Ciccone, Antonio & Hall, Robert E, 1996. "Productivity and the Density of Economic Activity," American Economic Review, American Economic Association, vol. 86(1), pages 54-70, March.
  24. Joachim Wagner, 2007. "Exports and Productivity: A Survey of the Evidence from Firm-level Data," The World Economy, Wiley Blackwell, vol. 30(1), pages 60-82, 01.
  25. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February.
  26. Martin Andersson & Hans Lööf, 2011. "Agglomeration and productivity: evidence from firm-level data," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(3), pages 601-620, June.
  27. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  28. Henk Kox, 2002. "Growth challenges for the Dutch business services industry; international comparison and policy issues," CPB Special Publication 40, CPB Netherlands Bureau for Economic Policy Analysis.
  29. Melo, Patricia C. & Graham, Daniel J. & Noland, Robert B., 2009. "A meta-analysis of estimates of urban agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 332-342, May.
  30. Roger Smeets & Harold Creusen & Arjan Lejour & Henk Kox, 2010. "Export margins and export barriers: uncovering market entry costs of exporters in the Netherlands," CPB Document 208, CPB Netherlands Bureau for Economic Policy Analysis.
  31. Tibor Besedes & Thomas Prusa, 2006. "Ins, outs, and the duration of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 266-295, February.
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