Internalization of Externalities in International Trade

Haidar, Jamal Ibrahim (2021): Internalization of Externalities in International Trade.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: exporters dynamics; peer effects; informational externalities; market entry; diversification; trade; development
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F1 - Trade > F10 - General; F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade

References

Aitken, B., Hanson, G., and Harrison, A., 1997. Spillovers, Foreign Investment, and Export Behavior. Journal of International Economics, 43 (1-2), 103-132.

Amsden, A., 1992. Asia's Next Giant: South Korea and Late Industrialization. Oxford University Press, USA.

Arguello, R., Garcia-Suaza, A., and Valderrama, D., 2020. Exporters’ agglomeration and the survival of export flows: empirical evidence from Colombia. Review of World Economics, 156(3): 703-729.

Arrow, K., 1962. The economic implications of learning by doing. Review of Economic Studies, 29(3): 155-73.

Artopoulos, A., Friel, D., Hallak, J., 2013. Challenges of exporting differentiated products to developed countries: the case of SME-dominated sectors in a semi-industrialized country. Journal of Development Economics, 105: 19-35.

Atkeson, A. and Kehoe, P., 2005. Modeling and Measuring Organization Capital. Journal of Political Economy, 113: 1026-1053.

Balassa, B., 1965. Trade Liberalisation and Revealed Comparative Advantage. The Manchester School, 33: 99-123.

Barrios, S., Holger, G., and Strobl, E., 2003. Explaining Firms’ Export Behaviour: R&D, Spillovers and the Destination Market. Oxford Bulletin of Economics and Statistics, 65(4): 475-496.

Berman, N., Martin, P., and Mayer, T., 2012. How do different exporters react to exchange rate changes? theory and empirics. Quarterly Journal of Economics, 127: 437-492.

Bernard, A. and Jensen, J., 2004. Why Some Firms Export. The Review of Economics and Statistics, 86(2): 561-569.

Bernard, A., Bradford, J., Redding, S., and Schott, P., 2012. The Empirics of Firm Heterogeneity and International Trade. Annual Review of Economics, 4: 283-313.

Berthou, A., and Fontagné, L., 2013. How do Multiproduct Exporters React to a Change in Trade Costs? Scandinavian Journal of Economics, 115(2): 326-353.

Bisztray, M., Koren, M., and Szeidl, A. 2018. Learning to import from your peers. Journal of International Economics, 115, 242-258.

Broocks, A., and Van Biesebroeck, J., 2017. The impact of export promotion on export market entry. Journal of International Economics, 107: 19-33.

Cadot, O., Iacovone, L., Pierola, M., and Rauch, F., 2013. Success and Failure of African Exporters. Journal of Development Economics, 101, 284-296.

Cebeci, T., Fernandes, A., Freund, C., and Pierola, M., 2012. Exporter dynamics database. Policy Research Working Paper Series 6229, The World Bank.

Caplin, A. and Leahy, J., 1993. Sectoral Shocks, Learning, and Aggregate Fluctuations. Review of Economic Studies, 60: 777-79.

Caplin, A. and Leahy, J., 1998. Miracle on sixth avenue: Information externalities and search. The Economic Journal, 108: 60-74.

Cassey, A. and Schmeiser, K., 2013. The agglomeration of exporters by destination. The Annals of Regional Science, 51: 495-513.

Clercq, D., Hessels, J., and Stel, A., 2008. Knowledge spillovers and new ventures’ export orientation. Small Business Economics, 31(3): 283-303.

Conley, T., and Udry, C., 2010. Learning about a New Technology: Pineapple in Ghana. American Economic Review, 100: 35-69.

Clerides, S., Lach, S., and Tybout, J., 1998. Is Learning By Exporting Important? Micro-Dynamic Evidence From Colombia, Mexico, And Morocco. The Quarterly Journal of Economics, 113: 903-947.

Das, S., Roberts, M., and Tybout, J., 2007. Market Entry Costs, Producer Heterogeneity, and Export Dynamics. Econometrica, 75: 837-873.

Dinlersoz, E. and Yorukoglu, M., 2012. Information and industry dynamics. American Economic Review, 102: 884-913.

Easterly, W. and Reshef, A., 2014. African Export Successes: Surprises, Stylized Facts, and Explanations. NBER Chapters, in: African Successes: Modernization and Development National Bureau of Economic Research, Inc.

Eaton, J., Eslava, M., Kugler, M., and Tybout, J., 2007. Export Dynamics in Colombia: Firm-Level Evidence. NBER Working Papers 13531, National Bureau of Economic Research, Inc.

Eaton, J., Kortum, S., and Kramarz, F., 2004. Dissecting trade: firms, industries, and export destinations. American Economic Review, 94, 150-154.

Eaton, J., Kortum, S., and Kramarz, F., 2011. An Anatomy of International Trade: Evidence From French Firms. Econometrica, 79: 1453-1498.

Farole, T. and Winkler, D., 2014. Firm location and the determinants of exporting in low- and middle-income countries. Journal of Economic Geography, 14: 395-420.

Fontagné, L., Koenig, P., Mayneris, F. and Poncet, S., 2013. Cluster policies and firm selection: evidence from France. Journal of Regional Science, 53: 897-922.

Foster, A., and Rosenzweig, M., 1995. Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture. Journal of Political Economy, 103: 1176-1209.

Gilbert, R., and Newbery, D., 1982. Preemptive patenting and the persistence of monopoly. American Economic Review, 72: 514-526.

Greenaway, D., Sousa, N., and Wakelin, K., 2004. Do domestic firms learn to export from multinationals? European Journal of Political Economy, 20(4): 1027-1043.

Greenaway, D. and Kneller, R., 2008. Exporting, productivity and agglomeration. European Economic Review, 52(5): 919-939.

Grossman, G., and Rossi-Hansberg, E., 2010. External economies and international trade redux. Quarterly Journal of Economics, 125: 829-858.

Haidar, J.I., 2020. Late-movers outperform first-movers in export markets. Economics Letters, 196(C).

Harasztosi, P., 2016. Export spillovers in Hungary. Empirical Economics, 50(3): 801-830.

Hausmann, R. and Rodrik, D., 2003. Economic development as self-discovery. Journal of Development Economics, 72: 603-633.

He, C., Guo, Q., and Ye, X., 2016. Geographical agglomeration and co-agglomeration of exporters and nonexporters in China. GeoJournal, 81(6): 947–964.

Henderson, R., 1993. Underinvestment and incompetence as responses to radical innovation: evidence from the photolithographic alignment equipment industry. RAND Journal of Economics, 24: 248-270.

Hidalgo, C., Klinger, B., Barabasi, A., and Hausmann, R., 2007. The product space conditions the development of nations. Science 317, 482.

Iacovone, L. and Javorcik, B., 2010. Multi-product exporters: Product churning, uncertainty and export discoveries. The Economic Journal, 120 (544): 481-499

Inui, T., Ito, K., and Miyakawa, D., 2015. Overseas market information and firms' export decisions. Regional Science and Urban Economics, 51: 47-69

Jaffe, A., Trajtenberg, M., and Henderson, R., 1993. Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations. The Quarterly Journal of Economics, 108(3): 577-598.

Jovanovic, B., 1982. Selection and the Evolution of Industry. Econometrica, 50: 649-70.

Kang, Y., 2016. Is agglomeration a free lunch for new exporters? Evidence from Chile. The Annals of Regional Science, 57(1): 195-222.

Kasahara, H. and Tang, H., 2019. Excessive entry and exit in export markets. Journal of the Japanese and International Economies, 53(C): 1-15.

Khandelwal, A. and Topalova, P., 2011. Trade Liberalization and Firm Productivity: The Case of India. Review of Economics and Statistics, 93: 995-1009.

Kehoe, T., and Ruhl, K., 2013. How Important Is the New Goods Margin in International Trade?. Journal of Political Economy, 121: 358-392.

Kinuthia, B.K., 2017. Export Spillovers: Comparative Evidence from Kenya and Malaysia. Journal of African Economies, 26(1): 24-51.

Kneller, R. and Pisu, M., 2007. Industrial Linkages and Export Spillovers from FDI. The World Economy, 30(1): 105-134.

Koenig, P., Mayneris, F., and Poncet, S., 2010. Local export spillovers in France. European Economic Review, 54: 622-641.

Lederman, D., Olarreaga, M., and Payton, L., 2010. Export promotion agencies: Do they work? Journal of Development Economics, 91: 257-265.

Lucas, R., 1993. Making a miracle. Econometrica, 61: 251-272.

Melitz, M., 2003. The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity. Econometrica, 71: 1695-1725.

Melitz, M. and Ottaviano, G., 2008. Market Size, Trade, and Productivity. Review of Economic Studies, 75(1): 295-316.

Moen, O., and Servais, P., 2002. Born global or gradual global? Examining the export behavior of small and medium-sized enterprises. Journal of International Marketing, 10: 49-72.

Moulton, B., 1990. An illustration of a pitfall in estimating the effects of aggregate variables on micro unit. Review of Economics and Statistics, 72: 334-38.

Porter, M., 1990. The competitive advantage of nations. Harvard Business Review, 90: 73-93.

Porter, M., 1998. Clusters and the new economics of competition. Harvard Business Review, 76, 77-90.

Prusa, T., and Schmitz, J., 1994. Can companies maintain their initial innovative thrust? A study of the PC software industry. Review of Economics and Statistics, 76: 523-540.

Ramos, R., and Moral-Benito, E., 2017. Agglomeration by export destination: evidence from Spain. Journal of Economic Geography, 18(3): 599-625.

Rauch, J. and Watson, J., 2003. Starting small in an unfamiliar environment. International Journal of Industrial Organization, 21: 1021-1042.

Rob, R., 1991. Learning and Capacity Expansion under Demand Uncertainty. Review of Economic Studies, 58: 655-677.

Sui, S., Baum, M., and Malhotra, S., 2019. How Home-Peers Affect the Export Market Exit of Small Firms: Evidence From Canadian Exporters. Entrepreneurship Theory and Practice, 43(5): 1018-1045.

Wooldridge, J., 2003. Cluster-sample methods in applied econometrics. American Economic Review, 93: 133-138.

Zhou, Y., Zhu, S., and He, C., 2019. Learning from yourself or learning from neighbours: knowledge spillovers, institutional context and firm upgrading. Regional Studies, 53(10): 1397-1409.