International linkages and sunk costs of exporting

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Trade costs and sunk export costs play a crucial role in defining trade flows between countries and, directly, affect firms’ strategic decisions in terms of international expansion. Trade costs include all the costs attached to a delivery of good to a final user and, thus, incorporate transportation costs, policy barriers, information costs, contract costs and currency costs. Sunk costs include costs of packaging, innovations in product quality, accumulating information on foreign markets and establishing new market channels. The present study closely looks at the patters of the effects that trade cost, in general, and sunk costs of exporting, in particular, have on firms’ decisions regarding exporting and FDIs. The analysis is based on existing literature contributions to the topic. The main findings are that intrinsic characteristics of exporters are different from firms operating domestically. Exporters are usually bigger, more productive and efficient than non-exporters. The existence of entry export costs and sunk costs determines a self-selection that allows only more productive firms to export. The decision to export appears to be history-dependent since last years exporters are, generally, more willing to export the next year than non-exporters. Sunk costs and re-entry export costs can cause hysteresis in export participation determining firms’ commitment to the export market even when it would be reasonable to exit. The study also shows that business administration literature contributions can be useful in order to explain and interpret the role played by sunk costs of exporting in firms’ strategic decisions regarding international expansion.

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