Market Efficiency, Heterogeneous Trade Costs and Export‐Only Firms

• DOI: http://doi.org/10.1111/1468-0106.12206
• Published date: 01 February 2017
• Date: 01 February 2017
• Author: Zhijun Yan,Bin Qiu

MARKET EFFICIENCY, HETEROGENEOUS TRADE

COSTS AND EXPORT-ONLY FIRMS

BIN QIU Southeast University

ZHIJUN YAN*Nanjing University

Abstract. This paper provides a two-country general equilibrium model under monopolistic compe-

tition, in which we incorporate heterogeneous fixed export costs, a non-zero export tax rebate rate

and efficiency asymmetry to explain the existence of export-only firms. We focus on the impact of

efficiency differences on social welfare and the evolution of export-only activities from autarky to

trade. We show that exposure to trade brings a country of larger size and with higher efficiency more

welfare gains, including higher industry productivity and greater variety of products. We also find

that firms that face lower fixed export costs enjoy greater export tax rebates and firms that are located

in more efficient countries have a greater chance of becoming export-only firms. Further internation-

alization promotes the prosperity of export-only activities.

1. INTRODUCTION

Recent research has been devoted to developing a theoretical model to explore

the relationship between heterogeneous productivity and firms’export

behaviour (Melitz, 2003; Bernard et al., 2003a,b; Melitz and Ottaviano, 2008).

Empirical micro-level investigations have also been conducted widely (Wagner,

2007, 2013; Thomas and Narayanan, 2012). A few published studies have

focused on the joint effect of fixed export costs and productivity on firm-level ex-

port behaviour (Jorgensen and Schroder, 2006, Castro et al., 2016) and the influ-

ence of country efficiency on firm performance (Montagna, 2001; Falvey et al.,

2004). A sorting mechanism based on variable and fixed costs associated with

exports can be used to explain the self-selection effect on international trade.

In the new-new trade theory, heterogeneous productivity across firms can be

viewed as variable cost, and high-productivity firms are able to obtain sufficient

profits from exporting activities to cover fixed export costs. In addition, firms’

productivityis influenced by, for instance, the degreeof commercialization, the ca-

pacity to innovateand economic structure (Li et al., 2010).The general conclusion

derived from existing theoretical models is that export markets can only be occu-

pied by higher-productivity firms and those with lower productivity are restricted

to stay in the domestic market and can even be forced out of the industry.

However, the reliability of these popular conclusions is discounted when low-

productivity exporters and export-only firms are discovered. According to

statistical data from the China Industry Business Performance Database over

the period 1999 to 2007, exporters account for nearly one-quarter of all firms,

*Address for Correspondence: School of Economics, Nanjing University, No. 22, Hankou Road,

Gulou District, Nanjing, China. E-mail: yanzhijun_seu@126.com. The authors would like to express

our gratitude to the Associate Editor and two anonymous referees for their valuable comments. Re-

search grants were received from the National Social Science Foundation (Project No. 15AJY001),

the National Natural Science Foundation (Project No. 71203099, 71173116) and the Jiangsu Provin-

cial Social Science Foundation (Project No. 14EYA002).

Pacific Economic Review, 22: 1 (2017) pp. 101–122

doi: 10.1111/1468-0106.12206

© 2017 John Wiley & Sons Australia, Ltd

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and among all exporters, the average share of export-only firms is 27%. As a

matter of fact, productivity level cannot be considered as the only factor in

determining firm-level export behaviour, neither the only heterogeneity across

firms. Theoretically, firms’heterogeneous productivity is just one of the charac-

teristic differences between them and it has nothing to do with fixed export costs,

which is another important determinant of export behaviour. Gao and Tvede

(2013a,b) introduce heterogeneous fixed export costs to explain the existence

of export-only firms.

Obviously, fixed export costs cannot be treated as identical between firms if

we want to conduct further research. However, where does fixed export cost

heterogeneity come from? Existing research reports that firm-specificfixed

export costs may be endogenous and vary by destination market size and the

quantity of exporters in each destination market (Arkolakis, 2010; Eaton

et al., 2011; Krautheim, 2012). Assumes that fixed trade costs are borne by ex-

porters and, based on this assumption, he recalculates the tax equivalent of pro-

portional trade costs. Castro et al. (2016) also point out that fixed export costs

usually vary across firms and they are related to industrial and regional charac-

teristics. Wang and Zhao (2013) also mention that spillovers from exports play a

crucial role in the geographic expansion of export destinations, which implies

that export experience can be considered as an important factor affecting fixed

export costs. Accordingly, we assume that fixed export costs are exogenous

and draw from a random distribution Γ(f).

However, the abovementioned studies emphasize the impact of heterogeneous

productivity and fixed export costs on firm-level export behaviour and ignore the

influence of export policy and asymmetries between countries. In the real world,

export tax rebate policy and country efficiency differences exist and they actually

generate profound influences on the export decisions of low-productivity firms.

Export tax rebates enhance the competitiveness of exporters and promote

China’s export activities significantly (Chao and Chou, 2001; Chen et al.,

2006; Chandra and Long, 2013).

The present paper provides a general equilibrium model of international trade

under monopolistic competition, in which we assume that there are two asymmet-

ric countries in the world and exporters in any country have the chance to enter the

other foreign market. Each firm produces only one kind of product and decides to

serve the domestic market or foreign markets, or both. Heterogeneous fixed

export costs, a non-zero export tax rebate rate and an efficiency gap between

countries are introduced into the model to extend the existing research. We focus

on the explanation of export-only firms and show how their existence affects

industrial performance and social welfare. There are some surprising findings.

First, in a closed economy, greater efficiency in economic behaviour in a

country is accompanied by a greater productivity threshold, higher average

industrial productivity and a lower aggregate price index. At the same time,

the larger the size of a country, the larger the quantity of potential entrants

and the more performing firms, as well as the greater the diversity of available

products. It is clear that a country with higher efficiency and larger size brings

greater welfare to its consumers.

B. QIU AND Z. YAN102

© 2017 John Wiley & Sons Australia, Ltd