Firm-Level Heterogeneity and the Decision to Export: A Real Option Approach

Abstract

In "new" new international trade theory, whether firms export or not are determined by their productivity. These models assume that firms enter a market to find their productivity levels revealed to them as in a lottery. In this paper we propose an alternative way to model whether firms export or not, namely as a firm-level decision akin to an investment decision with a real option value. We show that endogenizing the export decision is consistent with patterns of productivity and exporting reported in the empirical literature.

Keywords: international new ventures, firm-level heterogeneity, start-ups, stochastic dynamic programming, trade, exports, productivity, real option theory, investment, firms, international entrepreneurship

JEL Classification: D92, D81, L26, M13