Sequential exporting

Abstract

Many new exporters give up exporting very shortly, despite substantial entry costs; others shoot up foreign sales and expand to new destinations. We develop a model based on experimentation to rationalize these and other dynamic patterns of exporting firms. We posit that individual export profitability, while initially uncertain, is positively correlated over time and across destinations. This leads to "sequential exporting," where the possibility of profitable expansion at the intensive and extensive margins makes initial entry costs worthwhile despite high failure rates. Firm-level evidence from Argentina's customs, which would be difficult to reconcile with existing models, strongly supports this mechanism. Sequential exporting also has important and novel policy implications: a reduction in trade barriers has delayed effects, while also promoting entry in third markets. This trade externality poses challenges for the quantification of the effects of trade liberalization programs and implies that the consequences of international trade agreements are significantly richer than traditional models suggest. JEL Codes: F10; D21; F13 Keywords: Export dynamics, experimentation, uncertainty, learning, trade liberalization * We thank Costas Arkolakis, David Atkin, Sami Berlinski, Jordi Blanes-i-Vidal, John Bluedorn, Holger Breinlich, Svetlana Demidova, Nic de Roos, Peter Egger, Robert Elliott, Daniel Ferreira, Rodrigo Fuentes, Martin Gervais, Juan Carlos Hallak, James Harrigan, Beata Javorcik, Marc-Andreas Muendler, Peter Neary, Brent Neiman, Dimitra Petropoulou, Horst Raff, Steve Redding, Frédéric Robert-Nicoud, Mark Roberts, Ina Simonovska, Thierry Verdier, Zhihong Yu, and seminar participants at various institutions and conferences for valuable comments and suggestions. We also thank the support of the Chair Jacquemin of the Université Catholique de Louvain in choosing this paper for its annual award at the 2009 European Trade Study Group Meeting. We gratefully acknowledge financial support from the British Academy and the ESRC.

Volatility and diversification of exports: Firm-level theory and evidence

“…Assume that a firm does not know its demand parameter χ ji on market i if it has never exported there (this assumption is similar to Albornoz et al (2012)). In the first year where it does so, the firm needs 20 Other theoretical contributions, such as Irarrazabal and Opromolla (2009) or Impullitti et al (2013), also include perperiod fixed costs of export.…”

“…We also present evidence that the results are driven by the destinations to which firms only export occasionally, as suggested by our theory. We also test for different confounding factors, such as other sources of export dynamics (à la Albornoz et al, 2012) or other dimensions of diversification (product diversification) and show that these do not drive the results. Although the lack of a strong instrument for firm-level export diversification prevents us from making a clean causal statement, the wide array of observables that we include and the additional tests that we conduct make us reasonably confident that reverse causality or omitted variable biases are unlikely to drive our results.…”

Shipment frequency of exporters and demand uncertainty

“…The margin of adjustment here falls on products and uncertainty leads to product churning and limited value for new flows. In these cases, experience discussed by Araujo & Ornelas (2007) and Albornoz et al (2012) help explain exporters' behavior. We will here focus on product-destination decisions: we assume that firms have already chosen their portfolio of exported product to each destination.…”

New exports from emerging markets: Do followers benefit from pioneers?

“…Within this trade literature on experimentation, we are related to Rauch and Watson (2003); Ruhl and Willis (2009);Albornoz, Corcos, Ornelas, and Pardo (2010);Segura-Cayuela and Vilarrubia (2008) and Eaton, Eslava, Krizan, Kugler, and Tybout (2010).…”