Playing the lottery or dressing up? A model of firm-level heterogeneity and the decision to export

• In current theory of firm heterogeneity, whether firms export or not are determined by their productivity. These models assume that firms enter a market to find their productivity levels revealed to them as in a lottery. In this paper we propose an alternative way to model whether firms export or not, namely as a firm-level decision akin to an investment decision with a real option value.
• It is not only the decision to export wherein much heterogeneity on the firm-level is reflected, but also in the timing – the when – of exporting.
• This element of firm-level heterogeneity has largely been neglected in theory.
• Our models shows that while opening up or reducing trade barriers will lead to opportunities for firms these opportunities will not automatically and immediately translate into exports.

In models of firm heterogeneity whether firms export or not depends on their productivity. These models assume that firms enter a market only to find their productivity levels revealed to them as in a lottery. However, if productivity is not determined as in a lottery, why do some firms export early and some late? In this paper we propose a model of firm heterogeneity to address this question. In our model exporting is an investment decision with a real option value. Our model illustrates that whether not a firm exports is a matter of timing. Some firms may always find it more worthwhile to postpone exporting, depending on the nature of the product, the target market, and firm-level characteristics. For instance, our model shows that firms evaluating exporting to a volatile, or two foreign market, will need more time to dress up (prepare) for this. We derive implications for policies to support exporting.