Working Paper: NBER ID: w25878
Authors: Hiroyuki Kasahara; Heiwai Tang
Abstract: Using transaction-level data for all Chinese firms exporting between 2000 and 2006, we find that on average 78% of exporters to a country in a given year were new exporters. Among these new exporters, an average of 60% stopped serving the same country the following year. These rates are higher if the destination country is a market with which Chinese firms are less familiar. We build a simple two-period model with imperfect information, in which beliefs about their foreign demand are determined by learning from neighbors. In the model, a high variance of the prior distribution of foreign demand induces firms to enter new markets. This is because the profit function is convex in perceived foreign demand due to the option of exiting, which insures against the risk of low demand realization. We then use our micro data to empirically examine several model predictions, and find evidence to support the hypothesis that firms' high entry and exit rates are outcomes of their rational self-discovery of demand in an unfamiliar market.
Keywords: export dynamics; entry and exit rates; learning from neighbors; Chinese firms; international trade
JEL Codes: D8; F1; F2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms' beliefs about foreign demand (F23) | firms' export decisions (F10) |
| high variance in prior distribution of foreign demand (D39) | increased market entries (D40) |
| high entry rate among exporters (F10) | firms' rational behavior in seeking new markets (L21) |
| initial optimism about demand (D84) | sustained market presence (L19) |
| entry and exit rates (J63) | systematic pattern in firms' export dynamics (F10) |
| destination countries' GDP (F29) | firms' exit rates (L26) |
| ex-ante uncertainty regarding demand (D84) | excessive entries (Y60) |