ThE Papers 07/02. Do sunk exporting costs differ among markets? Evidence from Spanish manufacturing firms.

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1 ThE Papers 07/02 Deparameno de Teoría e Hisoria Económica Universidad de Granada Do sunk exporing coss differ among markes? Evidence from Spanish manufacuring firms. Blanes Crisóbal, José Vicene. Universidad Pablo Olavide Sevilla (Spain) Dovis, Marion. Cenre d'economie e de Finances nernaionales (France) Milgram-Baleix, Juliee. Universidad de Granada (Spain) Moro-Egido, Ana. Universidad de Granada (Spain)şş 1 Corresponding auhor: Juliee Milgram, Deparameno de Teoría e Hisoria Económica, Universidad de Granada. Campus Caruja s/n, E-18071, GRANADA (SPAN); Phone: ; Fax : ;

2 Tile Do sunk exporing coss differ among markes? Evidence from Spanish manufacuring firms. 1 Auhors Blanes Crisóbal, José Vicene. Universidad Pablo Olavide Sevilla (Spain) 2 Dovis, Marion. Cenre d'economie e de Finances nernaionales (France) 3 Milgram-Baleix, Juliee. Universidad de Granada (Spain) 4 Moro-Egido, Ana. Universidad de Granada (Spain) 5 Absrac n his paper, we es he hypohesis of sunk exporing coss differing among markes. We use a sample of Spanish firms from Encuesa sobre Esraegias Empresariales (ESEE) for period Our resuls confirm he imporance of hose sunk coss and demonsrae ha hey differ depending on he marke hey expor o. Alhough mos of he firms expors o developed markes, he coss o ener (and "o re-ener") are greaer in hose markes. Key Words: Sunk coss, heerogeneiy of firms, Regionalism. JEL Codes: F12 1 The auhors graefully acknowledge he financial suppor from he CCYT Projec SEJ and SEJ (Spanish Minisry of Educaion and FEDER), Grupo de invesigación GAMMA (SEJ 340), Fundación Cenro de Esudios Andaluces (ECOD.105/034). 2 Deparameno de Economía, M. Cuaniaivos e Hª Económica Universidad Pablo de Olavide Cra. de Urera, Km Sevilla Spain 3 Cenre d'economie e de Finances nernaionales Châeau La Farge - Roue des Milles Les Milles Aix-en-Provence FRANCE 4 Deparameno de Teoría e Hisoria Económica, Universidad de Granada F.C.C.E.E., Universidad de Granada, Campus Caruja s/n, Granada, Spain. 5 Deparameno de Teoría e Hisoria Económica, Universidad de Granada F.C.C.E.E., Universidad de Granada, Campus Caruja s/n, Granada, Spain.

3 0. nroducion To enry in a foreign marke, firms have o adap heir producs o foreign demand and echnical and adminisraive sandards and find disribuion neworks. Sunk exporing coss are usually presened as a consequence of imperfec informaion and informal or formal barriers ha separae domesic and foreign markes. Lieraure on border effec and graviy equaion gives an idea of he imporance of hese hidden barriers, ofen seen as he beer candidaes o explain he mysery of he missing rade 6 (Trefler, 1995). Our conribuion is wofold: firs, we es wheher sunk coss differ from one marke o anoher, a hypohesis ha has no been esed by micro-level sudies. Secondly, we es wheher experience in one marke has he same influence on he probabiliy o expor o his marke as an experience in oher marke. We use a panel daa probi model o sudy he expor behaviour of a sample of Spanish manufacuring firms coninuously operaing from 1991 o The fac ha exporers are generally more producive han non-exporers is commonly jusified by he exisence of sunk coss, see Meliz (2003) for a heoreical jusificaion of his selfselecion effec. Robers and Tybou (1997) derive an empirical model, using daa from Colombia, and find evidence in favour of he hypohesis of sunk exporing coss: a firm incurs in a cos for enering (re-enering) in a marke, hen a firm expors only if heir expeced gross profi is posiive and is curren expor saus depends on is pas experience. Bernard and Jensen (2004) obain similar conclusions wih a panel of manufacuring companies of he U.S.A. for period Campa (2004) uses a sample of Spanish manufacuring firms and finds sunk coss hyseresis o be an imporan deerminan of expor marke paricipaion. Mañez e al. (2005) find ha sunk coss, labour produciviy, size of he firms, R&D inensiy, unobserved characerisics of producs and correlaions in exogenous shocks influence firms paricipaion in expors marke. Eseve e al. (2001) find ha survival rae a exporing is posiively correlaed wih he expor inensiy. Furhermore, firms exporing o closes markes expor a longer ime. Barrios e al. (2001) show ha R&D aciviies exer a deerminan effec on he exporing decision and on he inensiy, for naional and foreign firms, moreover when exporing o EU and OECD. Finally, Fariñas and Marin-Marcos (2007) show ha exporers exhibi greaer economic performance and hey do self-selec. n paricular, firms selling a higher share of heir expors in OECD markes have greaer produciviy han firms ha mainly expor o he Res of he World (ROW). This paper is organised as follows. n Secion 1, we presen he empirical model. n Secion 2, we describe he daa se. Our findings are explained in Secion 3. Secion 4 concludes. 1.- Empirical Model We closely follow Robers and Tybou s (1997) approach o model a muli-period expor decision for enry and exi wih sunk coss. They consider ha in each period, a firm decides o expor if he incremen o he expeced gross profis associaed wih exporing is posiive. Following relaed lieraure, a reduce form of he dynamic model is esimaed. We assume ha he expeced gross profis depend on exogenous firm characerisics (X i ), macro condiions (µ ) and pas expors. Le us define an indicaor funcion ha akes value 1 if firm i expored o k in year k i. Because he fixed cos is no observed, we include he lagged expor saus in he explanaory variables 7. Firm s characerisics and macro-condiions are assumed observable o he firm in he period. Therefore he equaion for he decision o expor is k i H h k k 1 if 0 µ + βx i + γ i h + εi = k h= 1 (1) 0 oherwise 6 This expression describes he fac ha rade is larger han predics by demand- supply analysis. Then i is parly explained by common language, presence of bilaeral agreemens, culural proximiy. 7 We follow Robers and Tybou (1997) and Bernard and Jensen (2004). 2

4 k where ε i is an error erm and k=(all, EU, OECD, ROW). The vecor X i is a se of characerisics of he firm ha includes: he age of he firm in logarihm (lage); he size of he firm in logarihm erms (lsize); a dummy ha akes value 1 if more han 25% of is capial is owned by foreigners (FORCAP); a variable o measure he firm s labour produciviy in logarihm erms (lprod); a variable o measure he R&D inensiy in logarihm erms (lrdi); a dummy ha akes value 1 if he firm receives any subvenion for R&D (SUBRD) and a se of dummies for year and secor. We expec he lagged expor saus o affec he expor-decision posiively when explaining he expor in general. The inclusion of ime-specific effecs pursues o capure macro-level changes in expor condiions like emporal variaions in expor profiabiliy, sar-up coss ha are common across firms, he influence of business cycle, credi-marke condiions, aggregae exchange rae movemens, rade-policy condiions, overall changes in demand for Spanish expors and oher imevarying facors. The indusry dummies conrol for unobservable marke characerisics where firms compee, being proxies of marke concenraion, use of echnology or firms behaviour by indusry. The parameer γ i reflec he role of sunk coss in he decision o expor. f significan, hese coefficiens should be inerpreed as he rae of depreciaion of expor marke experience and accumulaed knowledge in foreign markes on he exporing likelihood. 2.- Daa The Encuesa sobre Esraegias Empresariales (ESEE) is an annual represenaive survey of Spanish manufacuring firms classified by indusrial secor 8 and size caegories 9. The ESEE includes variables relaive o he srucural characerisics of he company, informaion on he volume of expors and impors and is disagregaion for hree regions: OECD counries, EU, and ROW 10.. We use a panel of coninuously operaing firms from 1991 o We end up wih a balanced panel of 756 firms. Noe ha he period is larger han in mos sudies sudying sunk coss, especially for Spain. Sample represenaiveness is very close o he complee sample from he ESEE. This is rue especially for relevan variables like he probabiliy of being an exporer/nonexporer and he share of exporing firms in oal sales. Table 1 presens some firms relevan characerisics by expor marke 12. The main desinaion of Spanish expors is he EU(15). This paern is more sriking for expors value han for he number of exporing firms. The share of expors on sales, produciviy and he presence of foreign capial is larger for hose firms ha expor o he EU exclusively or a he same ime o any of he ohers desinaions. We do no observe he same for adverisemen inensiy and R&D inensiy, larger for firms ha expor o he ROW/OECD in 1991/ Economeric resuls We esimae he model considering he expor o four ses of counries: ALL, EU, ROW, and OECD. We consider he pas experience (hree-lagged value of expor saus) in each of hese markes. Resuls are repored in Table 2. Dummies for years and secors are included, bu dropped from ables from simpliciy, hey are generally significan. Considering firm s characerisics, we find ha he eldes and larges firms display higher probabiliy of exporing. This resul is consisen wih he hypohesis of increasing reurns and wih oher empirical sudies. Technological framework and innovaion process are also imporan feaures for expors. The inensiy in R&D expendiure does have a significan and posiive effec in all cases. Firms ha benefied from R&D subvenion also have a greaer probabiliy of exporing in general. However, i does no maer when a specific marke is considered. 8 NACE-93 classificaion. 9 Paricipaion rae o he survey is abou 70% for firms wih more han 200 employees. Firms ha employed beween 10 o 200 were randomly sampled by indusry and size sraa holding around a 5% of he populaion. 10 Since 2000, he disagregaion includes Lain America and Asia. We canno ake i ino accoun here because he period is very shor. 11 We correc problems from nonreporing or misreporing, dropping observaions for he year 1990 (oo incomplee) and hose nonrepored or non-answered. While in 1991, here are 2359 firms, in 2002 increase up o Since some firms have disappeared, he number of answers is lower in all years. 12 Since i could be he case ha a firm expors o more ha one marke per year, he oal number of firms is larger han ha of he sample. 3

5 More sriking resuls are found concerning produciviy and ownership. The produciviy has a posiive and significan effec in all cases excep OECD case, which is posiive bu no significan. These resuls are he expeced from he Meliz model and confirm a presence of selfselecion effec in he expor marke. A higher foreign paricipaion increases he probabiliy of exporing o developed markes (EU and OECD) bu does no maer for ohers desinaions. Regardless he desinaion, we find ha here is a significan difference beween he reenry cos of a firm ha has expored hree years ago and a firm ha never expored. Besides coefficiens for he experience a exporing o OECD and ROW have a greaer impac on curren expor saus. Focusing on he probabiliy o expor o he EU, ROW or OECD, sunk coss clearly differ among markes since he experience as an exporer o he ROW is no relevan for exporing o he EU and less imporan for he probabiliy o expor o he OECD. n he same way, have been previously exporing o he EU does no increase he probabiliy of exporing o he ROW. 4. Conclusions Summarizing, his paper shows ha he coss o ener (and "o re-ener") are greaer in developed markes han in hose of he ROW. Moreover, we find ha a previous experience in he EU marke (respecively he ROW) increases boh he probabiliy of exporing o he OECD and o he same marke bu is no relevan for he ROW (respecively for he EU). OECD counries (non- EU) appear as an inermediae case. European norms may be very specific and homogeneous among members counries whereas he difficulies or norms in oher OECD imply differen ype of organisaion ha are easily used o perform in oher marke. 4. References Barrios, S., H. Görg and E. Srobl (2001). Explaining firms expor behaviour: he role of R&D and spillovers, Research Paper 2001/27, Universiy of Noingham. Bernard, A.B. and J.B. Jensen (2004). Why some firms expor?, The Review of Economics and Saisics, 6, Campa, J.M. (2004). Exchange Raes and Trade: How mporan is Hyseresis in Trade?", European Economic Review, 48(3), Eseve, S., A. Sanchis and J. Sanchis (2003). Microeconomeric analysis of he survival of Spanish manufacuring firms, Deparameno de Esrucura, Univesia de Valencia, mimeo. Fariñas J. C. and A. Marin-Marcos (2007). Exporing and economic performance: firm-level evidence of Spanish manufacuring, The World Economy 30 (4), Máñez, J., M. E. Rochina and J.A. Sanchis (2005)." Hyseresis in he Spanish manufacuring expors", Documeno de rabajo VE. Meliz, M. (2003). The impac of rade on inra-indusry reallocaions and aggregae indusry produciviy. Economerica, 71, Robers M.J. and J. Tybou (1997). "The Decision o Expor in Colombia: An Empirical Model of Enry wih Sunk Coss", American Economic Review, 87, Trefler D. (1995). The Case of he Missing Trade and Oher Myseries, American Economic Review 85(5),

6 Table 1.- Firms characerisics by expor marke (coninuous sample). Share in Share in R&D-nensiy Adver-nensiy firms expors Added Value by employee Foreign Capial > 25% Expors/Sales 1991 EU % OECD ROW EU & OECD EU & ROW OECD & ROW EU, OECD & ROW Non-exporers EU OECD ROW EU & OECD EU & ROW OECD & ROW EU, OECD & ROW Non-exporers

7 Table 2.- Probabiliy of Exporing ALL UE OECD ROW UE ** *** ** ** 3 [0.133] [0.102] [0.123] [0.087] *** *** *** *** OECD 3 [0.095] [0.130] [0.092] [0.089] *** * *** ROW 3 [0.097] [0.101] [0.098] [0.073] lage *** *** *** ** [0.078] [0.080] [0.080] [0.074] lsize *** *** *** *** [0.056] [0.054] [0.059] [0.051] FORCAP *** ** [0.121] [0.163] [0.129] [0.122] lprod *** *** *** [0.072] [0.070] [0.071] [0.058] lrdi ** *** *** *** [0.009] [0.011] [0.009] [0.008] Subrd ** [0.102] [0.135] [0.108] [0.103] Consan *** *** *** *** [0.821] [0.773] [0.849] [0.682] Obs # firms Sand. dev in brackes * significan a 10%, **a 5%; ***a 1%

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