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Exports, investment and firm-level sales volatility


This paper presents a dynamic model of risk-averse producers’ decision to invest in physical capital and to export. The model features irreversible investment, no capital markets and fixed and sunk costs to export. Several features of the distribution of investment rates and export participation patterns observed in firm-level data are closely matched in a calibration exercise. Counterfactual experiments show that large adjustments in total sales associated with entry into foreign markets increase the volatility of total sales for exporting firms.

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  1. See for example Bernard and Jensen (1999), Bernard et al. (2007a), Lawless (2010), Vogel and Wagner (2010), among many others.

  2. Although the information in this data set is available at the plant level, I will use the term “firm” to maintain consistency throughout the paper.

  3. These costs include setting up a distribution network abroad, adjusting product characteristics to comply with foreign regulations, gathering market-specific information, etc.

  4. These stylized facts have also been documented by Doms and Dunne (1998) and Cooper and Haltiwanger (2006), among others.

  5. Installation disruptions, capital indivisibilities, retraining and restructuring costs, transaction costs, etc.

  6. Maloney and Azevedo (1995) note that in developing countries it is common for firm managers to own large shares of the firms they run. Even in a developed economy like the United States, Moskowitz and Vissing-Jørgensen (2002) find that around 75% of all private equity is owned by households for whom it constitutes at least half of their total net worth.

  7. I am grateful to an anonymous referee for suggesting the inclusion of this experiment.

  8. However, neither of these papers addresses the substantial degree of lumpiness and high frequency of inaction observed in plant-level investment.

  9. Early theoretical contributions by Clark (1973), Eldor and Zilcha (1987), Donnenfeld and Zilcha (1991) among others, study the export supply decision of a risk-averse monopolist and perfectly competitive firms, and how this decision is influenced by exchange rate volatility. These studies did not consider firm heterogeneity or entry and participation costs to start exporting. On the empirical side, Hirsch and Lev (1971), using a small sample of firms in Denmark, Israel and the Netherlands, find that international diversification is positively correlated with total sales stability.

  10. At the three-digit industry level di Giovanni and Levchenko (2009) find that sectors that are more open to international trade are more volatile.

  11. The model abstracts from entry and exit into and out of the domestic market.

  12. Alternatively, one could assume a technology that uses both capital and labor, where labor is a fully flexible input. The main results of the model remain unchanged.

  13. Thus, investment at t completely determines the production possibilities of the firm at t + 1. This contrasts with the model of Cooley and Quadrini (2001) where there is a market in which firms can rent capital to/from other firms.

  14. In other words, the decision to export would be irreversible.

  15. Roberts and Tybout (1997) find evidence of non-zero entry costs into foreign markets for manufacturing plants in Colombia. They also find that plants that have not operated in the export market for 2 years or more face re-entry costs that are not significantly different from the entry costs faced by plants that have not exported before. This is why I assume that a firm that stops exporting has to pay the sunk entry cost whenever it decides to start exporting again, regardless of its previous exporting experience. This assumption greatly simplifies the solution of the dynamic problem of the firm.

  16. Gelos and Isgut (2001) use a similar depreciation rate of 7% for machinery and equipment in their study of Colombian and Mexican manufacturing plants.

  17. Another way to compare the relative size of the entry and continuation costs of exporting is simply to look at the ratio of the calibrated/estimated parameters that different authors report. Alessandria and Choi (2007) find a ratio of 4.8 and Ruhl and Willis (2008), 9.2. Das et al. (2007) estimates for the continuation costs are not statistically different from zero.

  18. In a Melitz-type model, calibrating the entry and continuation costs of exporting in order to match the share of exporting firms alone would result on mean export-sales ratios that are too high relative to the data. Similarly, matching the mean export-sales ratio would necessitate relatively low fixed and sunk costs, thus producing too many exporting firms.

  19. I calculate sales volatility using a 10-years rolling window as follows: \(\hbox{sd}(r_t) = \left(\frac{1}{10}\sum_{\tau=t-4}^{t+5}(r_{\tau}-\overline{r_t})^2\right)^{1/2},\) where r t denotes total sales at time t.

  20. Firms starting to export are on average 33.7% larger in terms of capital stock relative to five periods before exporting.

  21. New exporters are 24% larger than exiting exporters, and these firms are twice as big as domestic firms in terms of their sales in the Colombian data.

  22. To make the second experiment comparable with the benchmark, I adjust the mean of the foreign demand shock downwards to make sure that the mean export-sales ratio is the same in both scenarios.


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I would like to thank Jim Tybout, Eugenia Gonzalez, Andreas Hoefele, Andrés Rodríguez-Clare, Erdal Yalcin, Ruilin Zhou, two anonymous referees and participants at ETSG 2010, the Ifo/GEP Conference on Products, Markets and Export Dynamics and the Spring 2010 Midwest International Trade Meetings for useful comments. Financial support from COLFUTURO is gratefully acknowledged.

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Correspondence to Alejandro Riaño.

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Riaño, A. Exports, investment and firm-level sales volatility. Rev World Econ 147, 643 (2011).

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  • Exports
  • Investment
  • Uncertainty

JEL Classification

  • F12
  • E22