Playing the Lottery or Dressing Up? A Model of Firm-Level Heterogeneity and the Decision to Export

Wim Naudé, Thomas Gries, Natasa Bilkic

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In models of firm heterogeneity whether firms export or not depends on their productivity. These models assume that firms enter a market only to find their productivity levels revealed to them as in a lottery. However, if productivity is not determined as in a lottery, why do some firms export early and some late? in this paper we propose a model of firm heterogeneity to address this question. In our model exporting is an investment decision with a real option value. Our model illustrates that whether not a firm exports is a matter of timing. Some firms may always find it more worthwhile to postpone exporting, depending on the nature of the product, the target market, and firm-level characteristics. For instance, our model shows that firms evaluating exporting to a volatile, or two foreign market, will need more time to dress up (prepare) for this. We derive implications for policies to support exporting.
Original languageEnglish
Pages (from-to)1-17
JournalQuarterly Review of Economics and Finance
Volume58
Issue number1
DOIs
Publication statusPublished - 2015

JEL classifications

  • d92 - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
  • d81 - Criteria for Decision-Making under Risk and Uncertainty
  • l26 - Entrepreneurship
  • m13 - "New Firms; Startups"

Keywords

  • international entrepreneurship
  • firm-level heterogeneity
  • start-ups
  • real options
  • stochastic dynamic programming

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