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Endogenous Export Modes

by Pascal Bürki (Submitted: 10/07/2009)

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WHAT IS IT?

This is a model of international Trade. It explains how incertitude, trade relations and different modes of export interact with each other. Exporters face incertitude, have to pay a sunk search cost and a fixed link-cost to maintain the relationship. Exporters will then endogenously choose different export modes. The different possibilities of export in the model are direct trade, trade through a general importer or installing a foreign distribution center. Trade evolves through consumers' love of variety.

HOW IT WORKS

The economy consists of two countries, left and right. Producers are different in productivity and have to search costly for a distributor to set up a trade relationship. Both, producers and distributors pay a link cost in order to maintain the trade relationship. Trade emerges because the consumers’ utility increases, when they can consume more different products (love for variety).
Producers and distributors are hit by negative shocks (1/(P or D)-shock). Following which, the producer has to give up business totally while the distributor has to break one of his trade relations. The distributor will choose the least competitive producer to break the relation with him. In each time step, as many producers as had to give up business will enter the market.

Because producers do not know their relative productivity, they have to make experience and overcome uncertainty about their competitiveness. If they are certain to be competitive, they will try to make business in the foreign country, while they have to pay a trade cost. But also the search cost and the cost to maintain a relationship increase for the foreign country.

When producers are certain to be competitive in the foreign country, they will install a foreign distributor center (FDC).

Distributors will make offers to foreign producers to supply them as a general importer (GI). This means, that the distributor, as a GI, imports goods and resells them to other local distributors.

For more detailed information about the model please contact me.

THINGS TO NOTICE

The model is able to replicate several facts which were discovered in recent empiric analysis on international trade:
More productive exporters trade a big part of the overall trade (see graph "Trade per Productivity").
Trade relations are extremely short lasting and volatile, but if they survive the first periods, they increase the traded quantity (see graphs "Trade per Relation", "Trade per Firm").
Exporter use different trade modes. While a small part of firms use FDCs, they trade a big share of the overall trade. About 30% to 50% of traders use a GI while their share in total export is about the share of firms trading through a GI (hence also 30% to 50%). Finally, a big part of traders exports directly, while their traded quantity is very small (see the two graphs on the top).
The model explains several more facts which need statistical analysis.

HOW TO USE IT

- anzcons, anzprod is the number of consumers and producers in each country.
- gamma is a constant which influences the adaptation process of certainty.
- 1/(P or D) -shock) is the probability for producers or distributors to be hurt by a negative shock.
- fixcost is the producers fixed cost and also the cost to install a FDC.
- searchcost is a sunk cost which the producer pays for every new link.
- P/D-linkcost is the cost producers or distributors has to pay for every period and trade relations in order to maintain the partnership.
- Demand is the demand of the part of the economy one distributor supplyies, which is always equal.
- tradecost indicates how much of the traded quantity is lost during trade. Hence it is a variable trade cost. Further this parameter also increases search costs and link costs

THINGS TO TRY

By increasing the fix cost of a firm, fewer firms are able to stay on the market. This decreases competition and has also an influence on the mean productivity and the decomposition of the trade modes.
Another thing to try is to increase or decrease the trade cost and study the decomposition of the trade modes. While GIs are very performing for low trade costs, there is a point from which on it becomes interesting to invest in a FDC. For very high trade costs the competitiveness of foreign supplier is very low and they will not invest in a FDC nor trade through a GI.

CREDITS AND REFERENCES

This model was built by Pascal Bürki. For more information you can contact me on pascal.buerki@hotmail.com

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