Discussion Paper Series 2019 #04: Differential Impact of Uncertainty on Exporting Decision in Risk-averse and Risk-taking Firms

Abstract

Most existing literature examining the links between firm heterogeneity and entry into exporting assumes that firms are risk neutral. In this study, we relax this strict assumption that firms are risk neutral and introduce different attitudes of firms toward risk as an additional source of firm heterogeneity. In particular, we examine how risk attitude changes the effect of uncertainty on the decision of a firm to export considering the different types of uncertainty faced by the firm, namely, firm-specific and macroeconomic. Our analysis
yields two interesting findings. First, firm-specific uncertainty discourages
risk-averse firms from participating in foreign markets more than risk-taking firms. One possible explanation for this finding is that risk-averse firms are more cautious in export market participation when firm-specific uncertainty increases. Second, we find that riskaverse firms are less likely to decrease their export market participation when responding to macroeconomic uncertainty. Thus, risk-averse firms are more likely to diversify their domestic risk by participating in foreign markets in responding to macroeconomic uncertainty.

Author

Acknowledgment

This article was originally published in the Seoul Journal of Economics, 2016, Vol. 29, No. 3.

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