The Rewards of Self-Discovery: Learning and Firm Exporter Dynamics

Abstract

I develop and estimate a model of export dynamics featuring self-discovery. The estimated model accounts well for the relationship between growth, survival, and tenure in the export market that is observed in the data for new exporters: (a) continuation rates are increasing with export tenure, and (b) growth rates of export sales are decreasing with export tenure. I use the estimated model to quantify the role of learning in shaping the firm level export decision and to undertake counterfactuals for the effects of export promotion on aggregate trade. I find that: (i) first-time exporters expect to incur losses by serving the foreign market, but the option value generated by the acquisition of more precise information regarding export profitability compensates inexperienced exporters for these losses; (ii) the initial period serving the foreign market provides a crucial learning experience for new exporters, but the discovery stage extends beyond the first year: the value of learning remains positive for the first four years of tenure in the export market. The probability of exiting the export market decreases with tenure and after the discovery stage is only 5% higher than the exit probability of well established exporters; the cutoff for exporting experiences 90% of its long-term adjustment over the same period; (iii) firms that continuously export over a period of six years observe a 137% increase in their (ex-ante) probability of serving the foreign market and a 900% increase in their (average) export premia, and (iv) temporary shocks to the profitability of serving the export market can have permanent consequences on aggregate trade volumes. In particular, export promotion policies that temporarily subsidize the fixed costs of maintaining a presence in the foreign market can result in permanent increases in aggregate trade volumes. The impact of these types of policies crucially depends on the speed at which firms are able to uncover their export profitability.