Evidence from Firm-level Data in Vietnam

IV. ESTIMATION SPECIFICATIONS AND VARIABLE DISCRIPTIONIV.1. Estimation specifications:Our purpose is to examine determinants of the decision to export of firms via testing the causal effects of sunkcosts and firm characteristics, especially productivity, on the probability of a firm to be an exporter. We firstfind the difference between exporters and non-exporters in some main characteristics at a given moment oftime, then test the causality running from the sunk costs and firm characteristics to export probability.In models having binary dependent variables, logit, probit or linear probability models are usuallyemployed. However, there are some issues in the model of export decision that should be taken intoconsideration when choosing estimation strategies. First, it is likely that there are unobserved characteristicsthat have significant effects on the decision to export by the firm. Second, exporting is highly persistent due tothe presence of sunk entry costs, leading to the necessity to include the lagged dependent variable in the righthand side of estimation equations. And third, as discussed in the previous section, there may exist two-wayrelationship between exporting behaviors and characteristics of firms, possibly causing problem ofsimultaneity. We will discuss one by one, noting that it is not always able to do so separately due to theinteraction among them.It is reasonable to believe that there are many factors that are influential to firms’ decision to exportor not to export but unobservable. They are either firm-specific or exogenous, and in the dynamic framework,time variant or invariant. The observed and unobserved exogenous factors can be controlled for to someextent by using industry, location or time dummies or first-difference framework in panel analysis. However,the presence of unobserved firm-specific characteristics (usually termed as unobserved firm heterogeneity) inthe model may raise some proble ms, especially when lagged dependent variables are included as explanatoryvariables. In practice, the error term u itis a composite error representing all unobserved firm-specificcharacteristics. It can be thought of as comprising two components: a time-invariant firm-specific componentεiand a transitory componentηit(usually termed as idiosyncratic error). Ifεiis not properly controlledfor, estimates are inconsistent and biased [Wooldridge (2003)]. In addition, some unobserved characteristicssuch as product attributes, managerial skills, or strategic management are potentially permanent or highlyserially correlated. These characteristics can induce persistence in the decision to export or not to export byfirm, and then may lead us to overestimate the parameter of the lagged dependent variable in the model. Todeal with unobserved firm heterogeneity, researchers usually use techniques in panel analysis such as randomorfixed-effects. In random-effects models, the core assumption that the firm’s unobserved characteristicsmust be uncorrelated with other explanatory variables is likely to be violated in models of export decision. Inexport decision models like ours, unobserved characteristics such as those listed above apt to be correlatedwith other independent variables such as productivity, size, or factor intensity in the model. On the other hand,most fixed-effects models produce biased and inconsistent parameter estimates [Bernard and Jensen (2004)].These issues require more econometric techniques that are not always possible, especially in logit or probitmodels with lagged dependent variables.The above-mentioned issues are those specifically related to unobserved firm heterogeneity. Thereare also problems specifically associated with the inclusion of lagged dependent variables in the right handside of estimation equations. In econometric theories, a lagged dependent variable is used as an explanatory10