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Export Failure and its Consequences: Theory and Evidence


The purpose of this dissertation is to argue that exporting is a risky endeavor and that there are consequences to export failure. Exporters pay high fixed costs to enter foreign markets, yet the majority will not export beyond one year. What happens to these exporters after they fail abroad? For these firms, exporting likely resulted in heavy profit losses. Despite this, trade literature often views exporting as a harmless exercise based on a simple cost-benefit analysis of foreign profits. This rationale ignores the differential effect export failure may have on financially constrained firms.

The first chapter develops a heterogeneous-firm model with financial constraints and marketing costs to show how export failure can: 1) make the liquidity constraint more likely to bind, 2) force financially constrained firms to limit marketing expenditure and, hence, decrease domestic sales, and 3) induce some firms to default. Using Colombian firm-level data and two identification techniques (difference-in-difference and an instrumental variable approach), I provide empirical support for these propositions and find evidence that export failure has a differential impact on financially constrained firms. After exporting, financially constrained unsuccessful exporters have a higher probability of going out of business, lower domestic revenue, and lower domestic revenue growth; the findings are robust to comparisons with similar successful exporters and even non-exporters.

The second chapter expands on my initial findings. I begin by noting similarities between firms that export and firms that expand beyond their original export market: 1) Few firms export and few firms expand beyond their original market, and 2) most new exports only do so for one year and many firms that expand only do so for one year. I argue that attempting to expand beyond the original export destination or product bundle and failing can have an effect similar to that of export failure. That is, expansion failure can have negative feedback effects on the original export market. I find that unsuccessful expansions are associated with lower export revenue in the original export market, slower export revenue growth, and a greater probability of exiting the export market. The poor export performance is stark when compared with that of firms that successfully expand and even those that do not expand. The evidence with the second group, however, is mixed when measuring market performance in terms of the probability of exiting the export market. Either way, the effect of expansion failure are worse when measuring the original market by the initial product bundle than by the initial destinations reached; this may imply that the effect of expansion failure is greater when expanding to new products than when expanding to new destinations.

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