Successful exporters learn about external demand and deliver on product quality

February 20, 2019

How and why firms become successful exporters? To answer this question, the paper examines the joint evolution of export revenue, and input and output prices over the firm’s life cycle. Using detailed micro data from the Portuguese manufacturing sector, the paper finds that export revenue tends to rise with experience in export destinations, and that successful firms that export for longer periods to a destination tend to ship larger quantities at lower prices to that market, while using more expensive inputs. Subsequently, the volatility of output and input prices tends to decline with export experience.

The paper explains these features of the data with a model in which heterogeneous firms supply products of varying quality based on their beliefs about expected demand. Through the life-cycle, the typical surviving firm updates its demand expectations upwards. As a result, the firm grows and finds it optimal to sell its product at a lower price. At the same time, an increase in expected demand for the product increases the demand for quality of that product. To produce higher-quality products, the firm needs to use higher-quality inputs, which are more expensive. The interaction between learning about demand and endogenous quality choice generates the joint evolution of firm performance and prices observed in the data.

Export revenue in small countries is often concentrated among a small number of firms. These large exporters help define specialization patterns and play a key role in shaping the impact of trade on macroeconomic performance. Understanding the dynamics of these firms can inform public policy and help predict macroeconomic outcomes.

Click here to go to the paper by Paulo Bastos, Daniel Dias and Olga Timoshenko.