Firm Export Dynamics in Interdependent Markets; joint with Alonso Alfaro-Ureña, Juan Manuel Castro Vincenzi, Sebastián Fanelli, and Eduardo Morales

Abstract

Firms exhibit persistence in their export destinations and these destinations tend to be similar to their home market or to other export destinations of the firm. To account for these patterns in firms’ export decisions, we develop a dynamic model featuring country-specific fixed and sunk export costs, and allow the fixed costs that a firm pays to export to a country in a period to depend on which other countries the firm exports to in the same period. Sunk costs and complementarities across countries in fixed export costs jointly imply that a firm’s export decision in a country and period will impact its export decisions in any other country in any future period. Each firm in our model thus decides in every period the bundle of countries it exports to by solving a forward-looking dynamic combinatorial discrete choice model. Using a novel solution algorithm and detailed data for the period 2005-2015 on the export choices of the universe of firms located in Costa Rica, we show that cross-country complementarities play an important role in determining firms’ export decisions. Using the estimated model, we show that permanent increases in tariffs in an export destination significantly reduce export flows not only to that destination but also to other destinations geographically close to it.