remarkably, import uncertainty now displays a negative effect on both firm entry and exit rates, but only in the case of advanced products exports. We argue that high-technology products such as machinery, motor vehicles and precision instruments exhibit high sunk costs of export entry and exit given their sophistication, translating into lower survival rates only three years after the firm’s entry date into the foreign market.

Finally, we examine the role of sunk costs in mediating the relationship between import uncertainty and export dynamics. The theoretical literature on hysteresis in international trade shows that firms must incur a sunk cost of entry to start serving foreign markets, which generates hysteresis in aggregate trade flows by inducing a high persistence in export status, hence raising export survival.<sup>28</sup> In a seminal paper, Roberts and Tybout (1997) find that prior export experience raises the probability of exporting by 60 percentage points for Colombian firms. In other words, sunk costs of entry induce persistence in firms’ exporting status by making it hard to switch from non-exporter to exporter status and by entailing that those firms that have already incurred the sunk start-up costs to enter the foreign market are more likely to remain exporters.<sup>29</sup> Broadly speaking, sunk costs of entry pertain to the start-up costs faced by a firm that wants to export, such as the cost of identifying and informing potential buyers about its products, the cost of learning about the foreign market, including the prevailing regulations and standards, and the cost of setting up new distribution channels at destination (Melitz, 2003). Based on a simple model of exchange rate uncertainty, Brenton, Cadot, and Pierola (2012) confirm the positive relationship between sunk costs and export survival by showing that a firm’s option value of staying in the export market increases with sunk costs of reentry, even under the scenario of a negative exchange rate shock.

Against this background, we argue that the adverse impact of uncertainty in import clearance times on firms’ export survival rates should decline with increasing levels of sunk costs of reentry, leading exporting firms to wait before exiting the market as any future attempt of reentry would be costly. To test this prediction, we build on Helpman, Itskhoki, Muendler, and Redding (2017) and use the cost induced by procedures to start a business in the destination country, expressed as a share of GNI, as a proxy for the sunk costs absorbed by a firm when entering that foreign market. Table 7 presents the regressions including the interaction term between the cost of business start-up procedures at destination and import uncertainty at origin. Figure 4 shows how the total marginal effect of import uncertainty on the exit rate of incumbents and entrants, as well as the first-, second- and third-year survival rates of entrants varies across the range of possible values of entry costs at destination. Following Brambor, Clark, and Golder (2006) and Berry, Golder, and Milton (2012), the vertical axis on the right indicates the magnitude of the marginal effect, while the left axis is for the histogram depicting the distribution of observations in the sample across the range of costs associated with business start-up procedures in the importing country. We find that the survival-hindering impact of import uncertainty weakens and even turns insignificant as sunk costs of entry in the foreign market rise. These results support the assumption that high sunk costs of entry lead new exporters to “tough it out” and wait for better times instead of exiting the foreign market right away, despite recording lower margins due to unpredictable import

> 28See the seminal work by (Dixit, 1989a,b); Baldwin (1988); Baldwin and Krugman (1989); Krugman (1989); and Dixit and Pindyck (1994).

> 29The hysteresis effect associated with export participation has also been evidenced by Bernard and Wagner (2001) for German firms and Bernard and Jensen (2004) for US firms.

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