Export Survival
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This discussion can be summarized as follows: • Sunk costs of entry and exit into export markets, such as search costs, raise export survival; the empirical evidence on the extent of such costs is so far limited and ambiguous. • Fixed and variable costs of exporting (paperwork, representations abroad, and the array of trade-cost factors typically included in gravity equations) reduce export survival; the empirical evidence on the extent of such costs is substantial. • Different types of uncertainty have sharply different effects on export survival: - a high volatility of prices and earnings on export markets raises survival, and - a high probability of buyer-determined termination reduces it. • Survival rates may increase or decrease with entry rates when firms are heterogeneous in some unobserved ability to survive; thus, changes in the business environment (which also have an effect on average entry rates) have an ambiguous effect on average survival. We will build on these very preliminary considerations in chapter 2 to explore systematically the drivers of export survival.
Annex 1A: The Basic Analytics of Survival This annex uses a simple model of uncertainty with sunk cost to illustrate the determinants of a firm’s decision to stay in the export business or to exit in the face of temporarily negative returns. The model is based on the real-options approach to decisions under uncertainty, laid out in Dixit (1989) and Dixit and Pyndyck (1994). A rigorous, infinite-horizon model can be found in Roberts and Tybout (1997); see also Clerides, Lach, and Tybout (1998) for a model with entry costs and learning. Let p be the price of a widget the firm is exporting on a foreign market; y(p,c), its profit-maximizing supply of widgets; F and c, the fixed and variable costs of production, respectively; and e, the exchange rate of the country in which the firm is selling. The exchange rate is expressed as the price of the foreign currency in home currency, so it goes up when the foreign currency appreciates.