Evidence from Firm-level Data in Vietnam

In the framework of multiple periods without sunk e ntry costs, the expected profit of the firm becomeswhere−t( [ pisqis− cis( Xs, Zis| qis)s **∑ ∞ t s=tπ ( X , Z ) = E δ)](3)ittitδ is the one-period discount rate. If there is any effect of today’s production on the costs tomorrow,such as learning-by-doing in the production of exports, the current export status of the firm will have someeffects on the decision to export the next period. This is because th e cost function in the function of expected* *profit now is c c X , Z , q | q ) with ∂c/ ∂q0 . The value function of the firm isit=it(t t it−1 itit it−1≠Vit* t +qTherefore, the exporting behavior of the firm will be( )*(.) = max πitYit+ δE[ V it 1(.)| q it] . (4)itYit⎧1if πit+ δEt[ V= ⎨⎩0otherwise(.) | q> 0] − δE[ V(.) | q**it+1 itt it+1 it= 0] ≥ 0(5)Now consider the case with sunk entry costs. As stated in the introduction, entry costs are an important factorin the decision to export of firms. Costs associated with entering foreign market may include those inacquiring information about the markets, in adjusting the production process and products to satisfy foreigncustomers, or in setting up distribution network abroad. Most of these costs are by nature sunk. It is usuallyassumed that firms will not have to pay the entry cost if they exported in the previous period. If there are sunkcosts involved in taking up export activities, a forward-looking firm will look beyond the present period in itsdecision to export or not to export. The presence of sunk costs makes the decision rule dynamic, becauseexporting today carries an additional option value of being able to export tomorrow without paying the sunkcosts of exporting. If we denote N be the entry cost for a firm, in the single period maximization problem,its profit is as follows:~*** *π ( X , Z , q ) p q − c ( X , Z , q | q ) − N(1Y ) (6)ittitit−1=it it itit −1it− it− 1The firm will export if this profit is non-negative, that is, Y = 1 if ~itπit≥ 0 and Yit= 0 otherwise. In thedynamic maximization problem, the firm will maximize the expected value of profits by choosing a sequencetitof export quantities∞{ q * } . In other words, the firm will maximize the following:iss=tΠits−t( ( ~isYis)∑ ∞t s=t( X , Z ) = E δ π )(7)titThe form of the value function is the same as that in the case of without entry cost:V (.) = max πAnd the condition of exporting decision isit( ~*Y E [ V (.) | q ])+ δ (8)* it it t it+1 itqitYit⎧1if ~ πit+ δEt[ V= ⎨⎩0otherwise(.) | q> 0] − δE[ V(.) | q**it+1 itt it+1 it= 0] ≥ 0(9)or7