Abstract
This paper presents an examination of the trading patterns of individual firms, looking at their coverage of export markets and movements into and out of destinations. This analysis is made possible by access to a new survey data set of Irish firms, which includes detailed information on firm characteristics and on the destinations of their exports over a 2-year period. In line with Eaton et al. (Am Econ Rev 94:150–154, 2004), we find that a large number of firms serve only the domestic market and many exporting firms export to a single foreign market. Although there is little movement of firms into and out of exporting, firms’ involvement in individual export markets is much more dynamic. Over one-third of firms change their market coverage, usually by entering or exiting one additional market. This is consistent with an interpretation where the bulk of any sunk cost encountered in exporting is incurred during the initial entry to the export market. Subsequent entry to additional markets may be made easier by prior export experience, which could help reduce the sunk cost of extending market coverage.
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Notes
Enterprise Ireland is an Irish state agency set up to promote the development of indigenous industry and, in particular, to assist Irish companies in exporting, and Forfás is the Irish national policy advisory board for enterprise and trade. The higher incidence of exporting firms in the data is also potentially due to the sampling frame being drawn predominantly from firms that have been clients of these agencies.
The information on firm characteristics available for 1999 allows us to lag these explanatory variables without losing any of the export data we are particularly interested in.
The vector of firm characteristics included in the market coverage equation, X i, can include the same variables as Z i in the selection equation, but ideally they should not overlap completely as this makes identification more difficult. Domestic sales are included as a determinant of scale that might be correlated with the firm entering exporting (when local opportunities have been exhausted perhaps) but given the small size of the home market, these sales are unlikely to determine the extent of foreign coverage.
To check the robustness of this result, we ran a similar specification using an alternative measure of concentration (the Theil index), and the essential pattern of results remained very similar.
The regions are United Kingdom, European Union-15, Other Europe, North America, South America, Africa, Middle East, Asia and Oceania.
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Acknowledgments
I would like to thank Paul Walsh, Dermot McAleese, Frank Barry, Karl Whelan, Maurice McGuire and seminar participants in Trinity College Dublin and the CBFSAI for many useful suggestions. The anonymised data used in this paper was generously made available by Forfás. The views expressed in this paper are the personal responsibility of the author. They are not necessarily held by either the Central Bank and Financial Services Authority of Ireland or the ESCB.
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Appendix: Variable definitions
Appendix: Variable definitions
Export status: Dummy variable equal to 1 if firm reports positive export sales and 0 otherwise.
Market coverage: Count variable for how many of the 55 countries named in the survey the firm reports exports.
Export market Herfindahl/HH Index: Concentration measure consisting of the squared shares, s, of each destination market, d, in the exports of a given firm, summed over all its destinations. HH of 1 indicates that the firm exports to only one country and HH measures close to zero indicate a great deal of diversification, with no destination being dominant.
C1 concentration: Percentage of its exports that the firm sells to its main market.
Employment: Number of full-time employees in the Republic of Ireland at year end.
Age: Years since firm was established.
R&D: Total expenditure on in-house R&D.
Training: Direct cost of all formal structured training, in-house and external (excluding salary of those being trained).
Average wage: Total of wages, salaries, pensions and other payroll costs for employees divided by number of employees.
Sector technology dummy: Based on the Davies and Lyons (1996) classification of European sectors, grouping industries according to the intensity of investment in R&D and advertising. The dummy is defined as 0 for a firm in a high technology sector and 1 for a firm in a traditional or low technology sector.
Industry dummies: 3-digit Nace Clio industry classification.
Domestic sales: Sales of manufactured goods and services produced by firm for the domestic market.
Distance: Kilometres from Dublin to capital city of each destination (source: Jon Haveman’s gravity data website: http://www.macalester.edu/research/economics/PAGE/HAVEMAN/Trade.Resources/TradeData.html#Gravity).
GDP per capita: Gross Domestic Product in constant prices divided by population from Penn World Tables (Heston et al. 2002).
Population: Population (millions) from Penn World Tables (Heston et al. 2002).
Language dummy: Dummy variable equal to 1 if English is an official language of the destination market (Source: Jon Haveman’s gravity data website: http://www.macalester.edu/research/economics/PAGE/HAVEMAN/Trade.Resources/TradeData.html#Gravity).
Market entry: Number of markets the firm exported to in 2001 that had not been exported to in 2000.
Market exit: Number of markets the firm exported to in 2000 that are no longer exported to in 2001.
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Lawless, M. Geography and firm exports: new evidence on the nature of sunk costs. Rev World Econ 146, 691–707 (2010). https://doi.org/10.1007/s10290-010-0070-x
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DOI: https://doi.org/10.1007/s10290-010-0070-x