How Exporters Grow
49 Pages Posted: 1 Feb 2016
Date Written: January 2016
We show that in successful episodes of export market entry, there are statistically and economically significant post-entry dynamics of quantities, but no post-entry dynamics of markups. This suggests that shifts in demand play an important role in successful entry, but that firms do not use dynamic manipulation of markups as an instrument to shift demand. We structurally estimate two competing models of customer base accumulation to match these moments. In the first model, firms use marketing and advertising to acquire new customers and thereby shift demand and increase sales. In the second, they use temporarily low markups to do so. The marketing and advertising model fits the quantity and markup moments well, and implies that successful entry is associated with high selling expenses. The second model cannot simultaneously fit quantity and markup moments, even with a counterfactually high price elasticity of demand and trade elasticity. We conclude that successful market entry is more likely to be associated with high selling expenses than low markups.
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