Demand, Costs and Product Scope in the Export Market

We develop a theoretical model in which the relative importance of firm demand side factors and productivity in explaining firms' export participation and their export scope depends on the degree of product differentiation and cost elasticities of demand side improvement. Our empirical results confirm the predictions of the theoretical model. Both demand index and productivity play important roles in explaining firm export participation and export scope. Demand side factors contribute more to export decisions for firms in more differentiated product markets and products with lower cost elasticities of demand improvements while productivity effects are stronger in markets with low degrees of product differentiation but high cost elasticities of demand improvement. Our results also indicate that the lowest-selling products of wide-scope exporters have firm-product demand and productivity indexes that are progressively lower than narrow scope exporters.