Gravity and Extended Gravity: Using Moment Inequalities to Estimate a Model of Export Entry

Abstract

, and the World Bank for very helpful comments. We also thank Jenny Nuñez, Luis Cerpa, the Chilean Customs Authority, and the Instituto Nacional de Estadísticas for assistance with building the dataset. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Andres Zahler acknowledges the Nucleo Milenio Initiative NS100017 "Intelis Centre" for partial funding. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The internationalization process of firms: From exports to FDI

“…27 To allow for possible learning spillovers across markets emphasized in previous studies of firms' export dynamics (e.g. Albornoz et al, 2012;Morales et al, 2011), we define the variables Exports in close markets f,t−1,c and FDI in close markets f,t−1,c , which measure respectively the number of countries in continent c to which firm f is exporting to and where it has foreign affiliates at t − 1. 28 The Central Balance Sheet Office of the NBB collects the annual accounts of all companies registered in Belgium.…”

Spatial exporters

“…Recently, the literature has highlighted that the observed spatial correlation is larger than what the standard gravity model would predict. This fact has been labeled 'extended gravity' (see Morales et al, 2011, andAlbornoz et al, 2012) or 'spatial exporters' (see Defever et al, 2011).…”

“…As the network of subsidiaries of wholesalers and of multinational firms expands spatially (see Basker, 2005 and Defever, When demand is uncertain but correlated across markets, firms may enter new destinations gradually to learn about profits in proximate markets from their previous export experience (see Albornoz et al, 2012;Nguyen, 2012). Also, when firms have to adapt products to specific markets, adaptation costs may be reduced if a firm already has entered markets which are relatively similar (see Morales et al, 2011). As a consequence, when trade barriers fall, firms expand their export destinations following a spatial pattern.…”

“…Empirically, this leads to a dynamic discrete choice problem. As explained by Morales et al (2011), this problem is formulated in a straight-forward way theoretically but quickly leads to an empirically de facto unsolvable problem. The insolvability arises because one would have to compute the expected profits for every possible combination of time paths of entries into destinations to identify the firm's profit-maximizing choice.…”

“…3 Therefore, Morales et al (2011) do not solve this dynamic problem explicitly. Instead, they use moment inequality estimators to obtain parameter bounds for their structural empirical model.…”