The impact of trade with pure exporters

Abstract

In the present paper we introduce heterogeneity in productivity, entry cost and demand shocks in both domestic and foreign market. Depending on their characteristics firms choose to become pure exporters, ordinary exporters or non-exporters. Pure exporters serve exclusively foreign markets, ordinary exporters both markets and non-exporters exclusively home markets. Pure exporters face lower demand-adjusted foreign entry cost than demand-adjusted domestic entry cost. Pure exporters have lower productivity than ordinary exporters and non-exporters. Therefore depending on the share of pure exporters, the effect of trade on average productivity can be positive or negative. However, the effect of trade on welfare is positive because trade increases the set of available goods. Moreover we explore the effects of trade liberalizations. In particular, a decrease of foreign entry cost across firms pushes some pure exporters and non-exporters out of the market and some ordinary exporters to become pure exporters or non-exporters. Finally, we provide the supportive empirical evidence.