A structural model of productivity, uncertain demand, and export dynamics

Abstract

This paper develops and estimates a dynamic model of exporting to quantify how productivity and uncertain foreign demand separately influence firms' export participation. In this model, firms face uncertainty about their own foreign demand, and they update their beliefs based on individual export transactions according to Bayes' rule. I estimate the model using data on firm-level production and transaction-level exports to Germany in the Chinese ceramics and glass industry. The empirical results show substantial heterogeneity in productivity and demand belief. For experienced firms, productivity is the major driving force of export participation. In contrast, for potential entrants, demand learning plays a more important role. A counterfactual exercise suggests that trade cost reduction has a significant impact on stimulating the export participation of potential entrants. Importantly, more than half of the participation increase is attributed to firms' endogenous reaction to demand learning in the foreign market.