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An empirical model of sunk costs and the decision to export

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  • Roberts, Mark J.
  • Tybout, James R.

Abstract

Exports respond unpredictably to a change in real exchange rates, suggests evidence from the 1980s. Recent theoretical work explains this as a consequence of the sunk costs associated with breaking into foreign markets. Sunk costs include the cost of packaging, upgrading product quality, establishing marketing channels, and accumulating information on demand sources. The authors use micro panel data to estimate a dynamic discrete-choice model of participation in export markets, a model derived from the Krugman-Baldwin sunk-cost hysteresis framework. Applying the model to data on manufacturing plants in Colombia (1981-89), they test for the presence of sunk entry costs and quantify the importance of those costs in explaining export patterns. The econometric results reject the hypothesis that sunk costs are zero. The results, which control for both observed and unobserved sources of plant heterogeneity, indicate that prior export market experience has a substantial effect on the probability of exporting, but its effect depreciates fairly quickly. The reentry costs of plants that have been out of the export market for a year are substantially lower than the costs of a first-time exporter. After a year out of the export market, however, the reentry costs are not significantly different from the entry costs. Plant characteristics are also associated with export behavior: large old plants owned by corporations are more likely to export than other plants. Variations in plant-level cost and demand conditions have much less effect on the profitability of exporting than variations in macroeconomic conditions and sunk costs do. It appears especially difficult to break into foreign markets during periods of world recession.

Suggested Citation

  • Roberts, Mark J. & Tybout, James R., 1995. "An empirical model of sunk costs and the decision to export," Policy Research Working Paper Series 1436, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1436
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    References listed on IDEAS

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    1. On the euro
      by chris dillow in Stumbling and Mumbling on 2009-02-01 18:18:52

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    Cited by:

    1. Sarah Guillou, 2008. "Exports and exchange rate : a firm-level investigation," Working Papers hal-00973044, HAL.
    2. repec:bla:worlde:v:40:y:2017:i:12:p:2854-2874 is not listed on IDEAS
    3. Paul Brenton & Christian Saborowski & Erik von Uexkull, 2010. "What Explains the Low Survival Rate of Developing Country Export Flows?," World Bank Economic Review, World Bank Group, vol. 24(3), pages 474-499, December.
    4. World Bank, 2000. "Export Dynamics and Productivity : Analysis of Mexican Manufacturing in the 1990s," World Bank Other Operational Studies 14984, The World Bank.
    5. Andrew B. Bernard & J. Bradford Jensen, 2004. "Why Some Firms Export," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 561-569, May.
    6. Sarah Guillou, 2008. "Exports and Exchange Rate: A Firm-Level Investigation. Workshop : International Activities and Firm Performance, 27-28 February 2008, Nottingham," Sciences Po publications info:hdl:2441/9941, Sciences Po.
    7. Bosco Sabuhoro, Jean & Gervais, Yvan, 2004. "Determinants de la reussite ou de l'echec des etablissements canadiens sur les marches etrangers, selon une analyse de survie," Direction des etudes analytiques : documents de recherche 2004220f, Statistics Canada, Direction des etudes analytiques.
    8. Campa, Jose Manuel, 2004. "Exchange rates and trade: How important is hysteresis in trade?," European Economic Review, Elsevier, vol. 48(3), pages 527-548, June.
    9. Sofronis K. Clerides & Saul Lach & James R. Tybout, 1998. "Is Learning by Exporting Important? Micro-Dynamic Evidence from Colombia, Mexico, and Morocco," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 903-947.
    10. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling Trade Costs, Heterogeneous Firms, and Industry Dynamics," Working Paper Series WP03-4, Peterson Institute for International Economics.
    11. Humphrey, John & Schmitz, Hubert, 1996. "The Triple C approach to local industrial policy," World Development, Elsevier, vol. 24(12), pages 1859-1877, December.
    12. repec:spo:wpecon:info:hdl:2441/6151 is not listed on IDEAS
    13. Schmitz, Hubert, 1999. "Global Competition and Local Cooperation: Success and Failure in the Sinos Valley, Brazil," World Development, Elsevier, vol. 27(9), pages 1627-1650, September.
    14. Aitken, Brian & Hanson, Gordon H. & Harrison, Ann E., 1997. "Spillovers, foreign investment, and export behavior," Journal of International Economics, Elsevier, vol. 43(1-2), pages 103-132, August.
    15. Helen Shapiro, 2007. "Industrial Policy and Growth," Working Papers 53, United Nations, Department of Economics and Social Affairs.
    16. Gabriel Sánchez & María Laura Alzúa & Inés Butler, 2008. "Impact of Technical Barriers to Trade on Argentine Exports and Labor Markets," CEDLAS, Working Papers 0079, CEDLAS, Universidad Nacional de La Plata.
    17. Hernando Vargas H., 2005. "Exchange Rate Policy and Inflation Targeting in Colombia," IDB Publications (Working Papers) 1927, Inter-American Development Bank.
    18. Kanda Naknoi & Michael Kumhof & Douglas Laxton, 2005. "On the Benefits of Exchange Rate Flexibility under Endogenous Tradedness of Goods," Computing in Economics and Finance 2005 405, Society for Computational Economics.
    19. Dionisius A. Narjoko & Raymond Atje, 2007. "The Effects of Agricultural Trade Liberalisation under the Doha Development Agenda with Special Reference to the Asia Pacific Region: A Brief Survey," Working Papers 3207, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
    20. Jože P. Damijan & Črt Kostevc, 2006. "Learning-by-Exporting: Continuous Productivity Improvements or Capacity Utilization Effects? Evidence from Slovenian Firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 142(3), pages 599-614, October.
    21. Hernando Vargas H., 2005. "Política cambiaria y la fijación de metas inflacionarias en Colombia," Research Department Publications 4426, Inter-American Development Bank, Research Department.
    22. repec:spo:wpecon:info:hdl:2441/9941 is not listed on IDEAS
    23. Jin-Tan Liu & Meng-Wen Tsou & James Hammitt, 1999. "Export activity and productivity: Evidence from the Taiwan electronics industry," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(4), pages 675-691, December.

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