Learning How To Export

• DOI: http://doi.org/10.1111/sjoe.12226
• Author: Paul S. Segerstrom,Ignat Stepanok
• Published date: 01 January 2018
• Date: 01 January 2018

©The editors of The Scandinavian Journal of Economics 2017.

Scand. J. of Economics 120(1), 63–92, 2018

DOI: 10.1111/sjoe.12226

Learning HowTo Export*

Paul S. Segerstrom

Stockholm School of Economics, SE-113 83 Stockholm, Sweden

paul.segerstrom@hhs.se

Ignat Stepanok

Institute for Employment Research, DE-90478 Nuremberg, Germany

ignat.stepanok@iab.de

Abstract

In this paper, we present a standard quality ladders endogenous growth model with one

significant new assumption: it takes time for firms to learn how to export. It is known

that the welfare gains from trade liberalization implied by a large class of models like

the Armington gravity model, the Krugman model, and the Melitz model are small.

Our quality ladders model is consistent with a number of firm-level stylized facts from

the heterogeneous firms trade literature and is, in addition, capable of generating very

large welfare gains from trade liberalization.

Keywords: Endogenous growth; heterogeneous firms; quality ladders; trade liberalization

JEL classification:F12; F13; F43; O31; O41

I. Introduction

Empirical research has found that there are large productivity differences

between firms in narrowly defined industries, and that within so-called

export sectors many firms do not export their products. It is the most

productive firms that tend to export (Clerides et al., 1998; Bernard and

Jensen, 1999; Aw et al., 2000). Furthermore, exposure to international

trade forces the least productive firms to exit and contributes to productivity

growth (Bernard and Jensen, 1999; Aw et al., 2000; Pavcnik, 2002). In

an influential paper, Melitz (2003) developed the first trade model that

was consistent with this empirical evidence.

A number of later models enhanced the heterogeneous firms literature

and successfully addressed many of the firm-level facts related to inter-

national trade that have become known recently. It turns out, however,

that many of these new trade models predict small welfare gains from

*We thank Frederic Robert-Nicoud, Rikard Forslid, Lars Ljungqvist, Yoichi Sugita, the

anonymous referees, and participants at various seminars, workshops, and conferences for

their helpful comments. We are grateful to the Wallander Foundation and the Fritz Thyssen

Foundation for financial support.

64 Learning how to export

trade liberalization. Arkolakis et al. (2012, hereafter ACR) have shown

that the welfare gain from trade liberalization in the Melitz model can

be calculated with a simple formula that uses two statistics connected

with each equilibrium: the trade elasticity and the share of domestic

expenditure. The formula holds for many other well-known trade models,

including the Armington model, the models presented in Krugman (1980)

and Eaton and Kortum (2002), and extensions of the Melitz model such as

those in Chaney (2008) and Eaton et al. (2011). ACR show that moving

from autarky to the US 7 percent import penetration ratio results in a

welfare gain of 0.7 percent or 1.4 percent, depending on the magnitude

of trade elasticity. Thus, there is a large class of trade models for which

the welfare gains from trade liberalization are very small for plausible

parameter values.

In work that is closely related to ACR, Atkeson and Burstein (2010,

hereafter AB) study how firms’ exit, export, process, and product innovation

decisions are affected by a change in international trade costs. Their main

finding is that, although such a trade cost change can have a substantial

impact on individual firms’ decisions, the dynamic welfare gains are not

different from those predicted by simpler models such as Krugman (1980),

which abstract from endogenous firm selection and process innovation.

In this paper, we present a model of international trade with

heterogeneous firms but without the standard Melitz-type assumptions.

Instead of assuming that firms conduct R&D to develop new product

varieties, we study a quality ladders endogenous growth model where

firms do R&D to develop higher-quality products, as in Grossman and

Helpman (1991) and Segerstrom (1998). Instead of assuming that firms

find out their marginal cost after developing a new product, we assume that

there is no uncertainty about the marginal cost of a firm that innovates.

Firm heterogeneity emerges naturally in our model because of uncertainty

in R&D itself: some firms innovate more quickly than others. Thus, at

any point in time, different firms produce products of differing quality

and have different profit levels. The model is a standard Schumpeterian

growth model with the new feature that it takes time for firms to learn

how to export.

We show that our model can account for much of the evidence that

the heterogeneous firms trade literature was originally designed to explain.

Solving the model for a balanced growth equilibrium, we find that many

firms do not export their products, that the firms that do export tend

to be higher-productivity firms, and that exposure to international trade

contributes to productivity growth. Exporting firms charge on average

higher prices and mark-ups as compared to non-exporting firms, many

large firms do not export, and trade liberalization increases the firm exit

rate.

©The editors of The Scandinavian Journal of Economics 2017.