The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs

TLDR

Theoretical entry models suggest that sunk costs make current market participation depend on prior experience. The study quantifies how prior exporting experience influences Colombian manufacturing plants’ decisions to export. A dynamic discrete‑choice model distinguishes profit heterogeneity from sunk entry costs in explaining exporting decisions. Sunk costs are significant, and prior export experience raises exporting probability by up to sixty percentage points. © 1997 American Economic Association.

Abstract

Recent theoretical models of entry predict that, in the presence of sunk costs, current market participation is affected by prior experience. This paper quantifies the effect of prior exporting experience on the decisions of Colombian manufacturing plants to participate in foreign markets. It develops a dynamic discrete-choice model of exporting behavior that separates the roles of profit heterogeneity and sunk entry costs in explaining plants' exporting status. Sunk costs are found to be significant and prior export experience is shown to increase the probability of exporting by as much as sixty percentage points. Copyright 1997 by American Economic Association.