How Exporters Grow

Abstract

We show that in successful episodes of export market entry, there are statistically and economically significant post-entry dynamics of quantities, but no post-entry dynamics of markups. This suggests that shifts in demand play an important role in successful entry, but that firms do not use dynamic manipulation of markups as an instrument to shift demand. We structurally estimate two competing models of customer base accumulation to match these moments. In the first model, firms use marketing and advertising to acquire new customers and thereby shift demand and increase sales. In the second, they use temporarily low markups to do so. The marketing and advertising model fits the quantity and markup moments well, and implies that successful entry is associated with high selling expenses. The second model cannot simultaneously fit quantity and markup moments, even with a counterfactually high price elasticity of demand and trade elasticity. We conclude that successful market entry is more likely to be associated with high selling expenses than low markups.

Exporters and Shocks

“…The first column of Table 7 reports the results from estimating our baseline export revenue equation, equation (12). We focus on the elasticities for observations with low predicted exit probability for which selection bias is less likely to be an issue.…”

“…Firms with 3 or more persons engaged are required to file returns. 12 We make use of data for the years 1996 through 2009, and for NACE Revision 1.1 sectors 10-40…”

“…The sample period for this estimation is 1980-2014. Notes: Table reports average across 100 simulated data sets of estimated coefficients on low exit probability observations in revenue equations similar to equation (12).…”

“…To obtain the quantity and markup elasticities from equations (14) and (15), we estimate equation (12), but with log quantity (i.e. tonnes) and log unit value (i.e.…”

Inflation Dynamics during the Financial Crisis

“…At the retail level, Hottman, Redding, and Weinstein (2014) use scanner price and expenditure data on individual consumer products to show that demand differences-reflecting variation in quality and taste among consumers-are the principal reason why some firms succeed in the marketplace while others fail. In addition, as documented by Roberts et al (2012); Eaton et al (2015);and Fitzgerald, Haller, and Yedid-Levi (2016), customer markets considerations also shape the pricing decision of exporting firms in both advanced and emerging market economies.…”