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Learning to Import From Neighbors

Hu, Cui and Tan, Yong (2017): Learning to Import From Neighbors.

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Abstract

This paper studies how learning from neighboring firms affects the behaviors of new importers. We first develop a learning model in which firms update their beliefs about the import price in foreign markets based on several factors, including import prices and number of neighboring firms that import from the same country. The updating proceeds according to the Bayesian rule. The model predicts that a positive signal about import prices revealed by neighboring importers encourages entry and increases initial imports from the same country. The signal plays a stronger role when it is revealed by more neighbors. Using a transaction-level dataset of Chinese importers over the 2000-2006 period, we find supporting evidence for the model's predictions. Our results are robust to controlling for various fixed effects and different subsamples.

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