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Survival in Export Markets

Survival in Export Markets

Facundo Albornoz, Sebastian Fanelli and Juan Carlos Hallak

A substantial fraction of aggregate exports is explained by new exporters. In the case of Argentina, 42% of aggregate exports in 2006 are explained by either new exporters or old exporters entering new destinations after 1996. Similarly, Eaton, Eslava, Kugler, and Tybout (2008) find that new exporters explain about 50% of export growth in Colombia between 1996 and 2005. New exporters tend to start small and focus on a single, usually neighbouring, country. Once they outlive their entry year, they tend to expand their sales abroad and reach a larger number of destinations. The occurrence of this process, however, is not guaranteed. Both new exporters and exporters entering new markets exhibit high rates of failure in their exporting activity. Eaton, Eslava, Kugler, and Tybout (2008) show that about half of new exporters discontinue their exporting activity within the first year. For Argentine firms, the survival rate is 31% after two years for exporters - new or old - entering a new export destination. This body of evidence suggests the importance of understanding the determinants of export survival.

In this Nottingham School of Economics working paper, published in the Journal of International Economics, Facundo Albornoz, Sebastian Fanelli and Juan Carlos Hallak develop a model to explicitly study the probability of export survival upon entry new markets. They show theoretically and quantitatively the relevance of distinguishing between fixed and sunk costs, highlight the role of distance and previous export experience and discuss how these results should impose discipline to the plethora of recent quantitative estimates of export costs appearing in the literature.

In their paper, Albornoz, Fanelli and Hallak explore the determinants of firm survival in export markets by building an exporter dynamics model where firms need to pay market-specific sunk and fixed costs to operate abroad and where firm export profitability in each foreign market follows a geometric Brownian motion. Firms also differ ex ante by a constant market-specific profitability shifter. The authors derive the probability of export survival upon entry in a market and show that it increases with the ratio of sunk to fixed costs and is insensitive to the profitability shifters. Also, they show that the survival probability is unaffected by fixed costs if sunk costs are zero. Once taken the model to the data using firm-level Argentine export information, they find that survival rates decrease with distance, which the model rationalizes with sunk costs that increase with distance proportionally less than fixed costs. Estimated sunk costs are small. In fact, a counterfactual exercise shows that removing those costs increases aggregate exports by less than 1.5%. Finally, they also find that survival increases with a firm's export experience. Analogously to distance, the model's implication of this empirical result is that experience reduces sunk costs proportionally less than fixed costs.

The results of this paper carry potentially important implications for the quantitative literature on sunk and fixed exporting costs. In particular, Das, Roberts, and Tybout (2007) and Morales, Sheu, and Zahler (2014) find that sunk costs are substantially higher than fixed costs, which is at odds with any observable survival pattern. The results of "Survival in Export Markets" suggest that existing estimates of exporting costs may need to be re-evaluated in light of their ability to explain survival patterns across distance and export experience.

Journal of International Economics, "Survival in Export Markets", by Facundo Albornoz, Sebastian Fanelli and Juan Carlos Hallak. http://dx.doi.org/10.1016/j.jinteco.2016.05.003

 

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Posted on Tuesday 4th October 2016

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