A Dynamic Model of Firm Activities: Evidence from Danish Manufacturing

Abstract

This paper structurally estimates a dynamic discrete choice model of exporting and importing. The model provides a framework to analyse the determinants of a firm's decision to export and import while allowing for its current decision to affect its future productivity. Considering a panel of Danish manufacturing firms over the period 2000–07, a simple description of the data reveals considerable firm heterogeneity; significant export and import activity premia; frequent incidence of simultaneous exporting and importing; and high persistence in the scope of firm trading. Structural estimation of the model shows a marked difference in the demand elasticities in which export markets are characterised by more elastic demand, tougher competition and lower markup than the domestic market. The estimates also indicate that firms with larger capital holding and paying higher wages are cost‐efficient even after controlling for their productivity. Additionally, the estimates imply substantial sunk and fixed costs of exporting and importing, and these are consistent with the hypothesis of self‐selection of productive firms into trading. There also exists a positive correlation between the size of these costs and the scale of firm operation. Moreover, both exporting and importing improve firm productivity, and therefore, these learning effects further drive the self‐selection process.