Discussion Papers in Economics

As the exchange rate, foreign demand, production costs and export promotion policies evolve, manufacturing firms are continually faced with two issues: Whether to be an exporter, and if so, how much to export. We develop a dynamic structural model of export supply that characterizes these two decisions and estimate the model using plant-level panel data on Colombian chemical producers. The model embodies uncertainty, plant-level heterogeneity in export profits, and sunk entry costs for plants breaking into foreign markets. Our estimates, and the simulation exercises that they support, yield several implications. First, entry costs are typically large, but vary greatly across producers. Second, there is substantial cross-plant heterogeneity in gross expected export profit streams. Third, these large entry costs make expectations about future exporting conditions important for many producers, so changes in the exchange rate regime that are credible induce much more entry than those that are not. Fourth, however, most of the entry and exit takes place among marginal exporters who contribute little to aggregate export revenues. Finally, subsidies on export earnings have a much larger impact on export revenues (per dollar spent) than subsidies that reduce the entry costs faced by new exporters. Sanghamitra Das Mark J. Roberts James R. Tybout Planning Unit Department of Economics Department of Economics Indian Statistical Institute The Pennsylvania State Univ. The Pennsylvania State Univ. 7 S J S Sansanwal Marg University Park, PA 16802 University Park, PA 16802 New Delhi 110016, India mroberts@psu.edu jxt32@psu.edu dasm@isid.isid. ac.in 1 Start-up costs are the focus of the analytical literature on export hysteresis (Baldwin and Krugman, 1989; Dixit, 1989; Krugman, 1989). 1 1. Overview In developing countries, manufacturing sectors that respond to export stimuli are highly prized. By making greater imports feasible, these sectors help to generate the traditional gains from trade. They also stabilize domestic employment by venting surplus production in foreign markets, and they may even generate efficiency gains through trade-related technology diffusion (e.g., Westphal, 2001). But export supply responses are poorly understood. Seemingly similar stimuli have given rise to very different export responses in different countries and time periods, making it difficult to know whether the next devaluation or export subsidy scheme will generate a surge or a trickle of new exports. Several micro explanations might account for the puzzle of export responsiveness. First, a strong export response may require the entry of non-exporters into foreign markets. But to break into foreign markets, firms must establish marketing channels, learn bureaucratic procedures, and develop new packaging or product varieties. In the presence of these entry costs, expectations about future market conditions can critically affect current behavior, and doubts about the permanence of export promotion packages may discourage foreign market entry. Second, entry costs make firms’ export supply responses dependent upon their previous exporting status. Firms that already export can adjust their volumes at marginal production costs, while those that do not must bear the sunk costs of breaking in before any exports are possible. These two margins of adjustment—volume and entry—have distinct determinants and lead to different supply elasticities, so seemingly similar industries with different degrees of foreign market presence may respond quite differently to exporting stimuli.