International trade ; heterogeneous firms ; capacity constraints ; capital adjustment costs ; firm dynamics ; firm panel data
Abstract:
Theoretical and empirical work on export dynamics has generally assumed constant marginal production cost and therefore ignored domestic product market conditions. However, recent studies have documented a negative contemporaneous correlation between firms´domestic and export sales growth, suggesting that firms can be capacity constrained in the short run and face increasing marginal production cost. This paper develops and estimates a dynamic model of export behavior incorporating short-term capacity constraints and endogenous capital investment. Consistent with the empirical evidence, the model features firms´sales substitutions across markets in the short term, and generates time-varying transition paths of firm responses through firms´ capital adjustments over time.
The model is fit to a panel of plant-level data for Colombian manufacturing industries and used to simulate how firm-responses transition following an exchange-rate devaluation. The results indicate that incorporating capital adjustment costs is quantitatively important. First, it takes more than five years for firms to fully adjust to a permanent change of the exchange-rate process. Second, the long-run exchange rate elasticity of exports is substantially higher than that in the short run. Firms´expectation on the permanence of the policy changes also matters. The failure to accurately anticipate the duration of the devaluation results in reduction in firms`profits due to over- or under-investment in capital.
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