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RESEARCH PRODUCT

THE DURATION OF FIRM-DESTINATION EXPORT RELATIONSHIPS: EVIDENCE FROM SPAIN, 1997-2006

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I. INTRODUCTION The traditional trade literature that investigates aggregate trade flows emphasizes the sizeable increase in trade relationships since World War II and the remarkable persistence of trade flows. However, recent microlevel studies point out that under the stable aggregate trade flows there is a rich dynamics at firm- and/or product-level with a high turnover. In fact, international-market presence is often a transitory and an uncommon phenomenon. At any period, only a small percentage of home-based firms participate in trade and exporting firms are different from non-exporters (larger, more productive, etc.). Moreover, there is much persistence in exporting status; being an exporter in one period raises the probability of being an exporter in the next period. (1) This article contributes to the recent literature on export dynamics by investigating the determinants of the duration of firm-country trade relationships: what factors help to explain the length of a spell of a regular exporting firm selling to a particular country. (2) Destination markets (countries) differ in several dimensions, such as market development, political stability, competitive conditions in markets, consumers' tastes, quality-standard legislation, trade policies. Therefore, the decision to export and to remain exporting should clearly differ by markets. Furthermore, different firm attributes may make them more suitable for some markets than for others. For example, the U.S. market is far more competitive than less-developed destinations, so firm efficiency may be more relevant to enter and stay in the former than in the latter. To our knowledge, this is the first study that investigates the determinants of survival in export markets using firm-destination data. While previous studies focus on the effect of country-of-origin characteristics on imports survival using product-level data, we focus on the effect of firm-level characteristics in explaining firm-country export relationships. In particular, Besedes and Prusa (2006a, 2006b), Besedes (2008), and Nitsch (2009) reach similar results for U.S. and German import trade. They find product-level trade to be rather short lived, with a median duration of 2 years. Esteve-Perez et al. (2007) use firm-level data to examine the survival of Spanish manufacturing firms that start exporting over the period 1990-2000 and report a median duration of 6 years for export spells, with 25% of the spells ending after the first year of service. The main contribution of this article is to use firm-level data in order to assess the role of destination country-risk on the duration of firm trade relationships. As pointed out by the gravity literature, red tape, corruption, and imperfect contract enforcement are found to be important hidden transaction costs that reduce international trade. (3) We classify countries according to the Organization for Economic Cooperation and Development (OECD) country-risk classification and examine whether the impact of firm attributes (size and productivity), and gravitational variables (country size and distance), on trade duration differs across country-risk groups. To preview the results, we find that firm-country export relationships are short lived, with 47% of spells ending after their first year (and a median duration of 2 years). Nevertheless, we find evidence of negative duration dependence, that is, the risk of failure of a firm-country trade relationship falls with the duration of that relationship. Heterogeneity across destination markets is remarkable, with low-risk countries facing far better survival conditions than their higher-risk counterparts. The econometric results lead to reject unobserved firm-destination heterogeneity as a relevant source of persistence. Rather, sunk costs, learning-by-exporting, and the different characteristics of both exporters and destinations seem to explain the observed differences in duration. …