Working Paper: NBER ID: w19916
Authors: Eduardo Morales; Gloria Sheu; Andrs Zahler
Abstract: Exporting firms often enter foreign markets that are similar to previous export destinations. We develop a dynamic model in which a firm's exports in a market may depend on how similar the market is to the firm's home country (gravity) and to its previous export destinations (extended gravity). Given the large number of export paths from which forward-looking firms may choose, we use a moment inequality approach to structurally estimate our model. Using data from Chilean exporters, we estimate that having similarities with a prior export destination in geographic location, language, and income per capita jointly reduce the cost of foreign market entry by 69% to 90%. Reductions due to geographic location (25% to 38%) and language (29% to 36%) have the largest effect. Extended gravity thus has a large impact on export entry costs.
Keywords: Export Entry; Dynamic Model; Extended Gravity; Moment Inequalities
JEL Codes: F14; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| similarities with a prior export destination in geographic location, language, and income per capita (F10) | cost of foreign market entry (F23) |
| geographic location (R12) | cost of foreign market entry (F23) |
| language (Y20) | cost of foreign market entry (F23) |
| previously served a market that shares a border with a destination (F55) | entry costs (L11) |
| sharing a continent without a border (F55) | entry costs (L11) |
| similarity in income per capita (F40) | entry costs (L11) |