Marginal Distance: Does Export Experience Reduce Firm Trade Costs?

Abstract

Are the costs of exporting to a market reduced if a firm has experience of exporting to a neighbouring market? If so, does this effect operate through reducing entry barriers or by increasing sales once the firm is operating in the market? This paper examines linkages between current export destinations and entry, sales and exit for new markets. We find that measures of exporting experience in geographically nearby markets increase the probability of entry into a market and reduce the probability of exit. However, these same measures have very limited effect on the firm’s export sales in the market. The effect of related experience on sales tends to be negative for recently entered firms. We interpret this result in the context of the Melitz heterogeneous-firm model of trade by showing that lower fixed costs reduce the entry threshold, but this lower threshold has the effect of allowing lower-sales marginal firms to be present in the market.

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Fig. 1

Notes

  1. 1.

    See Disdier and Head (2008) for a meta-analysis of the effect of distance in aggregate gravity estimation.

  2. 2.

    See for example Eaton et al. (2008), Lawless and Whelan (2008), Fabling et al. (2009).

  3. 3.

    A separate agency, the Industrial Development Agency, is responsible for attracting foreign direct investment and promoting foreign-owned businesses. The data from the Enterprise Ireland survey were made available to us by Forfás, which is the Irish national policy advisory board for enterprise, trade and technology.

  4. 4.

    Note that the entry and exit rates are calculated by market - the same firm may simultaneously be entering one market and exiting a different one.

  5. 5.

    From http://en.wikipedia.org/wiki/List_of_countries_where_English_is_an_official_language

  6. 6.

    Earlier work with this data in Lawless (2009) showed that firms with more markets were more likely to increase or decrease their number of markets - the result here however refers to the probability of leaving a specific market and thus does not contradict that finding.

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Acknowledgments

I would like to thank Forfás for provision of the anonymous data, Debbie Quinn for her help with queries on the data and two anonymous referees for helpful comments on an earlier draft. The views expressed in this paper are the author’s own, and do not necessarily reflect the views of the Central Bank of Ireland or the ESCB.

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Correspondence to Martina Lawless.

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Lawless, M. Marginal Distance: Does Export Experience Reduce Firm Trade Costs?. Open Econ Rev 24, 819–841 (2013). https://doi.org/10.1007/s11079-013-9275-7

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Keywords

  • Distance
  • Export performance
  • Heterogeneous firms

JEL Classification

  • F10