Demand Uncertainty: Exporting Delays and Exporting Failures

Daniel Nguyen

No 10-17, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper presents a model of trade that explains why firms wait to export and why many exporters fail. Firms face uncertain demands that are only realized after the firm enters the destination. The model retools the timing of uncertainty resolution found in productivity heterogeneity models. This retooling addresses several shortcomings. First, the imperfect correlation of demands reconciles the sales variation observed in and across destinations. Second, since demands for the firm's output are correlated across destinations, a firm can use previously realized demands to forecast unknown demands in untested destinations. The option to forecast demands causes firms to delay exporting in order to gather more information about foreign demand. Third, since uncertainty is resolved after entry, many firms enter a destination and then exit after learning that they cannot profit. This prediction reconciles the high rate of exit seen in the first years of exporting. Finally, when faced with multiple countries in which to export, some firms will choose to sequentially export in order to slowly learn more about its chances for success in untested markets.

Keywords: firm heterogeneity; exporting; trade failures; trade delay (search for similar items in EconPapers)
JEL-codes: F12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2010-05
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Demand uncertainty: Exporting delays and exporting failures (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:1017

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