Survival in Export Markets

FACUNDO ALBORNOZ; SEBASTIÁN FANELLI; JUAN CARLOS HALLAK

Seminario; Universidad de Montevideo; 2013

This paper explores the determinants of firms´ survival in export markets. In our theoretical framework, firm profitability is characterized by a general parameter that follows a geometric Brownian motion process and a set of market specific components that are fixed over time. Exporting involves sunk and fixed costs, which vary across destinations but are the same across firms. We derive the probability of survival upon entry in a given market. This probability is common to all firms despite their market specific profitability fixed component. Hence, export survival depends on the magnitude of sunk and fixed costs. The predictions on their effects are opposite: the probability of survival increases with the sunk cost and decreases with the fixed cost. We test these predictions using Argentine customs data. We use distance and different forms of export experience as proxies for both fixed and sunk costs. The probability of survival decreases with distance and is higher for experienced firms. These results indicate that fixed costs prevail over sunk costs to explain cross-country variation in survival probabilities and variation in these probabilities between experienced and inexperienced firms.