No. 469 - Sunk costs of exports

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by Matteo Bugamelli and Luigi Infante March 2003

Using a very large panel dataset of Italian manufacturing firms, we test an empirical model of foreign markets participation with sunk costs. The period of analysis (1982- 1999) is exceptionally informative: the large fluctuations in the lira exchange rate determined substantial flows of firms in and out of foreign markets. We find that sunk costs of exporting are very important: past experience in foreign markets increases the probability of exporting by about 70 percentage points. Although the assets entailing such costs depreciate quite slowly, new exporters have to acquire them very soon after entry. Altogether, these results suggest that the break in the Italian aggregate export supply function caused by the depreciation of the 1990s can be considerable and long-lasting. We then relate sunk costs to firm size and find that they are an important barrier to export, especially for the myriad of Italian small and medium firms. Finally, we provide some new evidence that sunk costs are indeed related to the need to collect information on foreign market/country characteristics.

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