An Empirical Model of Sunk Costs and the Decision to Export

44 Pages Posted: 20 Apr 2016

See all articles by Mark J. Roberts

Mark J. Roberts

Pennsylvania State University - College of the Liberal Arts - Department of Economics; National Bureau of Economic Research (NBER)

James Tybout

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 30, 1999

Abstract

Exports respond unpredictably to a change in real exchange rates, suggests evidence from the 1980s.

Recent theoretical work explains this as a consequence of the sunk costs associated with breaking into foreign markets. Sunk costs include the cost of packaging, upgrading product quality, establishing marketing channels, and accumulating information on demand sources.

The authors use micro panel data to estimate a dynamic discrete - choice model of participation in export markets, a model derived from the Krugman-Baldwin sunk - cost hysteresis framework.

Applying the model to data on manufacturing plants in Colombia (1981-89), they test for the presence of sunk entry costs and quantify the importance of those costs in explaining export patterns. The econometric results reject the hypothesis that sunk costs are zero.

The results, which control for both observed and unobserved sources of plant heterogeneity, indicate that prior export market experience has a substantial effect on the probability of exporting, but its effect depreciates fairly quickly. The reentry costs of plants that have been out of the export market for a year are substantially lower than the costs of a first-time exporter. After a year out of the export market, however, the reentry costs are not significantly different from the entry costs.

Plant characteristics are also associated with export behavior: large old plants owned by corporations are more likely to export than other plants.

Variations in plant-level cost and demand conditions have much less effect on the profitability of exporting than variations in macroeconomic conditions and sunk costs do. It appears especially difficult to break into foreign markets during periods of world recession.

Suggested Citation

Roberts, Mark J. and Tybout, James R., An Empirical Model of Sunk Costs and the Decision to Export (November 30, 1999). World Bank Policy Research Working Paper No. 1436. Available at SSRN: https://ssrn.com/abstract=636165

Mark J. Roberts (Contact Author)

Pennsylvania State University - College of the Liberal Arts - Department of Economics ( email )

513 Kern Graduate Building
University Park, PA 16802-3306
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James R. Tybout

Pennsylvania State University - Department of Economics ( email )

517 Kern Graduate Building
University Park, PA 16802-3306
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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