The importance of sunk costs of exporting in risky situations

Abstract: This paper investigates if the importance of sunk costs differs between markets with different exchange rate risk. First, it examines the importance of sunk costs on the export participation decision by estimating the effect the previous export status has on the current export decision. Second, it analyses the effects of product-market characteristics on the export participation decision. Third, it provides estimates on the empirical relevance of exchange rate volatility on sunk costs. By using data on representative information of the export status of different Swedish industries and individual markets, the paper finds that sunk costs of exporting and hysteresis in trade are prominent factors in determining export market participation. Further, it finds that the expected revenues from exporting increase with market size, the income of the recipient country and a favourable exchange rate. Finally, the importance of sunk export costs varies with the degree of exchange rate uncertainty faced by the exporter.