Market Entry Costs, Producer Heterogeneity, and Export Dynamics

Abstract

As the exchange rate, foreign demand, production costs and export promotion policies evolve, manufacturing firms are continually faced with two issues: Whether to be an exporter, and if so, how much to export. We develop a dynamic structural model of export supply that characterizes these two decisions and estimate the model using plant-level panel data on Colombian chemical producers. The model embodies uncertainty, plant-level heterogeneity in export profits, and sunk entry costs for plants breaking into foreign markets. Our estimates, and the simulation exercises that they support, yield several implications. First, entry costs are typically large, but vary greatly across producers. Second, there is substantial cross-plant heterogeneity in gross expected export profit streams. Third, these large entry costs make expectations about future exporting conditions important for many producers, so changes in the exchange rate regime that are credible induce much more entry than those that are not. Fourth, however, most of the entry and exit takes place among marginal exporters who contribute little to aggregate export revenues. Finally, subsidies on export earnings have a much larger impact on export revenues (per dollar spent) than subsidies that reduce the entry costs faced by new exporters. (Baldwin and Krugman, 1989;Dixit, 1989;Krugman, 1989 These features of the Colombian chemical industry shape the results of our policy simulations. First, the fact that sunk entry costs are large makes expectations about future exporting conditions important for many plants. Thus we find that a moderate shift in the mean of the log exchange rate process induces sustained net entry by new exporters and rising export volumes if producers view it as a credible regime shift. On the other hand, the exact same change in the exchange rate process induces far less entry when producers retain their old beliefs about 2 Earlier studies of export market participation have focused on the null hypothesis that sunk costs don't matter, but have not been structural and thus have not quantified sunk costs (Roberts and Tybout, 1997a;Campa, 1998;Bernard and Jensen, 2001;Bernard and Wagner, 2001).3 the exchange rate process.Second, profits for the major exporters are sufficiently large to keep them in the export market under any reasonable policy scenario. So the foreign market entry and exit that takes place is concentrated among small suppliers who have a relatively minor effect on export volumes. It follows that, while expectations have a dramatic effect on the number of exporters, their effect on the volume of exports is much more modest.Third, policies that promote exports through per-unit subsidies generate far larger responses per peso spent than policies that promote exports through lump-sum transfers for new exporters. The reasons are that (1) exporters that need a subsidy to get into export markets are almost always marginal suppliers; (2) these same exporters face relatively high entry costs, and (3) large incumbent exporters, ...

Privatization in the presence of foreign competition and strategic policies

“…15 High cost needed to serve the foreign market may prevent the domestic …rm from entering the foreign market. Das et al (2007) show that there is a signi…cant …xed cost of exporting. Moreover, buyer-seller networks may be important for both international trade and investment (Greaney, 2003), and high network costs may prevent the foreign …rm in the model from serving the export markets.…”

Sequential exporting

“…Our work is also related to dynamic export models with idiosyncratic uncertainty. Das et al (2007) develop an heterogeneous firm model where firm profitability evolves over time according to an exogenous stochastic process determining the firm's entry, exit and production decisions abroad. Arkolakis (2009) proposes a dynamic model with endogenous entry costs that increase with the number of foreign consumers targeted.…”

Trade Liberalization and Firm Dynamics

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