Friday, September 10, 2010

Large plants and distance to customers

Understanding why some firms export and some others do not is important for industrial policy. In empirical studies, one factor that always appears to be important is plant size: larger plants have a higher propensity to export. This has been rationalized, for example, by some fix cost of exporting, for example learning about foreign markets and producing to their specifications. But there is more to the story.

Thomas Holmes and John Stevens find that the distance to domestic markets is also associated to plant size. As export markets typically also distant, the link is clear. In fact, Holmes and Stevens claim that 50% of the plant size-export relationship can be explained by distance. Then how are we going to rationalize this? But it is clear from this that it makes little sense to assist a plant in exporting if it does not ship across the country.

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