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Internalization of externalities in international trade

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Abstract

Using disaggregated customs data about exporters from nine countries, I demonstrate that informational externalities are determinants of entry, survival, and growth of exporters at the product–destination market level. I show that exporters who optimize entry decisions and internalize informational externalities survive longer and grow faster. Then, I conceptualize why exporters enter certain international markets and why not all exporters from the same origin survive and grow in these markets. I incorporate the interaction between the performance and number of peers in a given market to identify a potential learning externality that exporters may be exposed to. Also, I highlight that, even without the formation of formal networks, the observation of the actions of peers in export markets can deliver implications for export flows: exporters may not need to start small in new markets if the actions of peers in those markets reveal enough information. By helping to explain how export relationships survive and grow, I complement the literature on the determinants of export diversification and signal to export promotion agencies the importance of internalization of informational externalities by exporters.

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Notes

  1. Throughout this paper, an exporting peer is defined as an exporter shipping the same product from the same origin to the same destination.

  2. Throughout this paper, I use the terms “informational externalities” and “peer effects” interchangeably.

  3. These countries are Burkina Faso, Bulgaria, Egypt, Guatemala, Jordan, Mexico, Malawi, Peru, and Senegal.

  4. See related work by Broocks and Van Biesebroeck (2017).

  5. Bisztray et al. (2018) used firm-level data from Hungary to estimate knowledge spillovers in importing.

  6. See, for example, the works of Das et al. (2007), Caplin and Leahy (1993, 1998), and Rob (1991).

  7. Thanks to the recent World Bank Exporters Dynamics Database (Cebeci et al. (2012)), more studies on exporters dynamics are now feasible given data availability.

  8. I deflated export values to their first year equivalents using the monthly US consumer price index (from Global Financial Data).

  9. The raw customs data from Egypt in the dataset include only the HS-4-digit-level product classification.

  10. Although the effect of peers on exporter’s entry to a given product–destination market can be nonlinear, the coefficients of the average marginal effects in the probit model are typically similar to the estimates of the linear probability model (i.e., see Wooldridge (2003) and Bernard et al. (2012)).

  11. I used Balassa’s revealed comparative advantage index (Balassa (1965)) to proxy for comparative advantage at country of origin.

  12. These shocks can be ones that affect the competitiveness of a market, time-varying exchange rates, demand, and import policies at destination as well as export policies that may affect exporters at origin.

  13. I used UN-Comtrade, not the customs, data to calculate BRCA.

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Acknowledgements

I thank Matthieu Crozet, Jonathan Eaton, Lionel Fontagné, Caroline Freund, James Harrigan, Jean Imbs, Amit Khandelwal, Francis Kramarz, Andrei Levchenko, Philippe Martin, Marc Melitz, and Thierry Verdier for useful comments and guiding suggestions. Seminar participants at Harvard University, Paris School of Economics, ENSAE-CREST, Université Paris 1 Panthéon-Sorbonne, and Stanford University shared helpful insights. I value the excellent research assistance received from Eisha Afifi and Hana Khayry. Ibrahim Ali Haidar provided inspiration. I acknowledge research funding from DIMeco (Région Île-de-France) and ENSAE Investissements d’Avenir (ANR-11-IDEX-0003/LabexEcodec/ANR-11-LABX-0047). I am solely responsible for the conclusions and inferences drawn in this paper.

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  1. The American University in Cairo, New Cairo, Egypt

    Jamal Ibrahim Haidar

  2. Harvard University, Cambridge, Massachusetts, United States

    Jamal Ibrahim Haidar

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Haidar, J.I. Internalization of externalities in international trade. Empir Econ 63, 469–497 (2022). https://doi.org/10.1007/s00181-021-02132-1

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