Determinants of Exports: Productivity or Fixed Export Costs

Abstract

The purpose of this paper is to develop a theoretical framework to take several key determinants of exports into consideration and to propose an empirical model to identify which factors affect firms’ export performance, whether to start exporting (export extensity) and how much they will export (export intensity). Extending the Melitz (2003) model, in our theoretical part, we consider firm heterogeneity in two dimensions; fixed cost as well as productivity. As a result, when a firm with low productivity engages in exporting, there can also be a higher productive firm facing relatively high fixed cost. This allows us to resolve the difficulty in interpreting controversial empirical results, for example, whether productivity or firm size is a key determinant of export. Furthermore, in our empirical part, by using Korean firm-level data, we conclude that productivity plays an important role when a firm decides whether to start exporting, while fixed export costs variables are important determinants of fractions of outputs to be exported.