Trade Liberalization and Exporter Dynamics – LICODYN

This research proposal aims at a better understanding of the dynamics of exports at the level of individual firms and their trade policy implications.
When firm-level trade data became widely available in the late 1990’s, they revealed a high turnover of exporting firms and a substantial contribution of entrants to aggregate export growth in the medium term. These patterns are at odds with now-standard trade models such as the Melitz (2003) model and some of its extensions. In particular existing theories based on self-selection and fixed export startup costs struggle to explain the high failure rates of new exporters (Ruhl and Willis, 2017). These theories have also been proved hard to reconcile with slow export growth and delayed entry in new foreign markets. Because aggregate exports partly respond to changes in trade costs through the number of exporters, the failure to explain these firm dynamics may lead to biased estimates of the gains from trade agreements.
Recent efforts to explain exporter dynamics have focused on ex ante uncertainty and learning (Freund and Pierola, 2010; Albornoz et al., 2012; Nguyen, 2012; Arkolakis et al., 2016). This research programme builds on two intellectual traditions. Firstly, a tradition in Industrial Organization theory recognizes the importance of learning to explain age-dependent growth and survival of firms in a market (Jovanovic 1982). Secondly, an empirical tradition in management science identifies knowledge about foreign markets as a key driver of internationalization strategies (the socalled ‘Uppsala model‘ of Johanson and Vahlne 1977).
In this project we will also consider learning mechanisms to explain firms’ export dynamics. A starting point will be previous work published in the Journal of International Economics (Albornoz et al. 2012). In that paper we offer a learning model of firms’ export growth, entry and exit and find support for their predictions in microdata on Argentinian exporters in the 2002-2007 period.
This approach will be extended in several directions. A first objective will be to extend the model to multi-product exporters. Just as understanding the number of exporters and the number of markets they access matters to understand aggregate exports, expansion of a firm’s product line is another important engine of export growth. The extended model would account for potential learning about the profitability of currently exported products in new markets as well as the profitability of new products in current export destinations.
A second objective is to explore the rich trade policy implications of such learning mechanisms. To the best of my knowledge these have never been studied. Learning implies that bilateral trade liberalization affects exports to third markets: liberalizing countries may be used as testing grounds for future exports to non-liberalizing countries; perhaps more surprisingly, firms may start exporting to close non-liberalizing countries before entering a distant liberalizing country. These trade policy spillovers matter for our understanding of gains from trade agreements and for their design.
Part of the project will therefore focus on deriving the theoretical response of aggregate trade flows to liberalization in third countries from a leaning model. Another part of the project will be to estimate the impact of bilateral trade liberalization on export dynamics in third markets. To conduct that empirical analysis we will match customs and balance-sheet data on French firms with highly disaggreated tariff data for the period 1993-2010. The analysis will exploit variations in Uruguay Round tariff reductions across products, countries and over time.
Finally, we will propose a survey of this exporting firm dynamics recent literature. In particular we will discuss ways to discriminate between competing theories of exporting firm dynamics.