Global sourcing, firm size and export survival

Roger Bandick

doi:10.5018/economics-ejournal.ja.2020-18

Abstract

Abstract This paper investigates how firm size and global sourcing affect the export surviving probabilities. By using data on export and import transactions disaggregated by destination/origin for the entire Danish manufacturing firms between the period 1995–2006, the author is able to classify the firms into different size categories and to observe whether they continue or cease to export. Moreover, he is able to define whether the firms source intermediate inputs from high- or low-wage counties. The results, after controlling for the endogeneity of the international sourcing decision by using instrument variable and propensity score matching, indicate that firm size is positively correlated with the likelihood of continuing to export. Moreover, for small and medium size firms, global sourcing seems also to increase the probability of staying in the export market but only if they source from high-wage countries. However, sourcing inputs from abroad, no matter if it is from high- or low-wage countries, do not seem to significantly affect the export surviving probabilities for larger firms.

Highlights

Following the heterogeneous firm trade models (e.g., Melitz, 2003; Bernard et al, 2003; Bernard et al, 2007), firms are ranked according to their productivity level
I use data on export and import transactions that are disaggregated by destination/origin for the entire Danish manufacturing firms with at least one employee between the periods 1995–2006
The result seems to indicate that for small and medium size firms, global sourcing increases the probability of staying in the export market, but only if the import is from high-wage countries

Summary

Introduction

Following the heterogeneous firm trade models (e.g., Melitz, 2003; Bernard et al, 2003; Bernard et al, 2007), firms are ranked according to their productivity level. International sourcing engagement and firm size play major role in collecting market information, product adaptation and learning abilities, for which directly relates to export profits, sunk cost and probability to survive. The knowledge gained from import experience may reduce the export entry sunk cost in which may induce the firms to experiment with their export entries that may lead to higher exit probabilities, (Gullstrand and Persson, 2015; Li et al, 2017; Choquette, 2019) Another dimension is that the learning ability from import experience and the level of market uncertainties faced are much dependent on the size of the firm and on the location of the sourcing activities.

Theoretical framework

Estimation strategy

Data description

Result

Findings

Conclusions and remarks