Export failure and its consequences: evidence from Colombian exporters

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, the trade literature largely ignores export failure and...

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Bibliographic Details
Published in:Review of world economics 2023-08, Vol.159 (3), p.697-755
Main Author: Mora, Jesse
Format: Article
Language:English
Subjects:
Cash flow
Collateral
Companies
Cost benefit analysis
Costs
Domestic markets
Economic Policy
Economic theory
Economics
Economics and Finance
European Integration
Expenditures
Exports
Fixed costs
Global economy
International Economics
International trade
Macroeconomics/Monetary Economics//Financial Economics
Marketing
Original Paper
Profits
Revenue
Sales
Success
Citations: Items that this one cites
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Summary: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, the trade literature largely ignores export failure and views exporting as a simple cost-benefit analysis based on foreign profits and trade costs. This rationale ignores the differential effect export failure may have on financially-constrained firms. This study develops a heterogeneous-firm model with financial constraints and marketing costs to show how export failure can have the following effects: (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. A Colombian dataset merging firm-level trade and financial data is built to test the propositions of the model. The author finds evidence that export failure has a differential impact on financially-constrained firms. After exporting, financially constrained unsuccessful exporters have a worse cash flow to total assets ratio, lower domestic revenue, slower domestic revenue growth, and a higher probability of going out of business. The findings are robust to comparisons with similar successful exporters and even non-exporters, and an instrumental variable approach.
ISSN:1610-2878
1610-2886
DOI:10.1007/s10290-022-00480-3