Export decisions of services firms between agglomeration effects and market-entry costs

Abstract

This chapter tests the role of agglomeration effects on the export decision of services firms. Recent theories on trade with heterogeneous firms predict that export to foreign markets goes along with sunk market-entry costs. Only the more productive firms will be able to absorb such sunk costs, so that ex ante self selection on the basis of productivity may be expected. Recent research by spatial economist suggests however that productivity sorting may also be the result of operating in large-city areas. In this chapter I find strong evidence that the productivity differences between exporting and non-exporting services firms depend on both agglomeration effects and on anticipated market-entry costs in foreign markets. The research is based on a large set of micro-data for Dutch services establishments. Productivity sorting is strongest for markets with heterogeneous services. Productivity self-selection is found to be strongest for services exporters in rural areas and small agglomerations. This is consistent with the finding that urban services firms on average already have a higher productivity.