A small plant growing out of a globe, symbolizing new exporters in the global market.

Unlocking Export Growth: Why Traditional Models Fall Short

Soraya Malik in Business & Economy June 2025 • 5 min read.

"Rethinking export strategies for long-term success in global markets."

In today's interconnected world, exporting is a critical growth engine for businesses of all sizes. Economists have long relied on models that emphasize fixed export entry costs to understand international trade patterns. These models, which consider factors like trade frictions and policy impacts, often assume that companies face significant upfront investments to begin exporting. While these models have been useful in explaining certain aspects of trade, particularly the differences between exporters and non-exporters, they often fall short in capturing the intricate dynamics of new exporters.

The reality for many businesses venturing into the export market is far more nuanced than traditional models suggest. New exporters typically start small, experience gradual growth, and face a high likelihood of exiting the market within their first few years. This initial period is characterized by learning curves, market adjustments, and significant uncertainty. The standard models, however, tend to portray new exporters as rapidly scaling up and maintaining their export activities for extended periods, a stark contrast to empirical observations.

This article delves into the limitations of standard sunk-cost models in replicating the real-world experiences of new exporters. By examining plant-level data from Colombian manufacturers, we highlight key properties of new exporter behavior that challenge the assumptions of these models. We also explore how modifications to these models can better account for the observed dynamics, offering valuable insights for businesses and policymakers alike. Ultimately, understanding these dynamics is essential for developing effective export strategies and policies that foster sustainable growth in the global marketplace.

Why Do Traditional Sunk-Cost Models Fail to Capture New Exporter Dynamics?

A small plant growing out of a globe, symbolizing new exporters in the global market.

Traditional sunk-cost models, while valuable for understanding certain aspects of international trade, struggle to accurately represent the dynamics of new exporters due to several key limitations. These models often assume that once a firm decides to export, it immediately adjusts its export quantity to the optimal level. However, real-world data reveals a much more gradual process, where new exporters start small and incrementally increase their export volumes over time.

The models also tend to underestimate the likelihood of new exporters exiting the market early on. In reality, many new exporters face significant challenges in their initial years, leading to a higher rate of failure. This discrepancy arises because the models often don't fully account for the uncertainties and learning curves associated with entering a new market. Moreover, traditional models often overestimate the present value of exporting, leading to inflated estimates of export entry costs. Because they assume that exporters can achieve significant export volumes soon after they enter.

Overestimating Initial Export Volumes: Models assume immediate optimal export levels, contrasting with gradual real-world growth.
Underestimating Exit Rates: They fail to capture the high early exit rates of new exporters due to initial market challenges.
Ignoring Gradual Demand Growth: Traditional models do not account for how demand for new exporters' products grows over time.

The failure of these models is significant because it impacts our understanding of crucial aspects, such as the effect of trade policies and the measurement of export barriers. If the present value of exporting is misrepresented, it leads to inaccurate assessments of plant-level responses to trade policies and distorts the evaluation of export barriers. In essence, these models often paint a picture of exporting that is too optimistic, failing to capture the struggles and uncertainties that new exporters commonly face.

Revisiting Export Strategies for Sustainable Growth

Traditional economic models often fall short of capturing the real-world experiences of new exporters, it’s essential for businesses and policymakers to adopt a more nuanced perspective. By acknowledging the gradual nature of export growth, the high initial failure rates, and the importance of continuous learning and adaptation, stakeholders can develop more effective strategies for fostering sustainable export success. It requires businesses to start small, manage risk, and prioritize learning and adaptation. By understanding the true dynamics of new exporters, we can pave the way for more effective trade policies and business strategies that promote long-term growth and prosperity.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1111/iere.12232, Alternate LINK

Title: New Exporter Dynamics

Subject: Economics and Econometrics

Journal: International Economic Review

Publisher: Wiley

Authors: Kim J. Ruhl, Jonathan L. Willis

Published: 2017-08-01

Everything You Need To Know

What are the main limitations of traditional sunk-cost models when analyzing the behavior of new exporters?

Traditional sunk-cost models have several key limitations. They often overestimate the initial export volumes, assuming immediate optimal levels, which contrasts with the gradual growth observed in real-world scenarios. They also underestimate the exit rates of new exporters, failing to account for the high failure rates due to the challenges encountered in the early years. These models also ignore the gradual demand growth new exporters often experience. These shortcomings result in an inaccurate understanding of plant-level responses to trade policies and a distorted evaluation of export barriers, often painting an overly optimistic picture of the export process.

Why do traditional models struggle to accurately represent the experiences of new exporters, and what are the implications of this failure?

Traditional sunk-cost models struggle because they don't capture the nuanced realities faced by new exporters. They assume that firms adjust export quantities immediately to the optimal level, which is not the case. Real-world data shows a gradual process. Moreover, these models tend to underestimate the probability of new exporters exiting the market, which is higher in the initial years due to various challenges. This failure affects our understanding of critical aspects, such as trade policies' effects and the evaluation of export barriers. Misrepresenting the present value of exporting leads to inaccurate assessments of plant-level responses to trade policies and distorts export barrier evaluations.

How do the dynamics of new exporters, as observed in the real world, differ from the assumptions of traditional economic models?

Real-world observations of new exporters reveal several discrepancies compared to the assumptions of traditional models. New exporters typically start small and experience gradual growth, not immediately reaching optimal export levels as the models assume. There is a higher likelihood of exiting the market in the initial years due to market adjustments, learning curves and significant uncertainty, a factor often underestimated by the models. The models often overestimate the present value of exporting, which leads to inflated estimates of export entry costs because of their simplified view of the process.

What strategies should businesses and policymakers adopt to foster sustainable export growth, considering the limitations of traditional models?

To foster sustainable export growth, businesses and policymakers must adopt a more nuanced perspective. Businesses should start small, manage risk, and prioritize continuous learning and adaptation. Policymakers can develop more effective trade policies based on this understanding. Acknowledging the gradual nature of export growth, the high initial failure rates, and the importance of continuous learning and adaptation are crucial. Focusing on the true dynamics of new exporters paves the way for effective strategies that promote long-term growth and prosperity in the global marketplace.

Can you elaborate on how the assumptions within traditional sunk-cost models lead to inaccurate assessments of trade policies and export barriers?

Traditional sunk-cost models, by oversimplifying the export process, lead to inaccurate assessments in several ways. They tend to overestimate the present value of exporting, which results in inflated estimates of export entry costs. This overestimation skews the evaluation of how plants respond to changes in trade policies. For instance, if a trade policy reduces export barriers, the models might overestimate the positive impact because they don't fully account for the gradual growth and learning curves of new exporters. Similarly, they distort the evaluation of export barriers by not accurately reflecting the struggles and uncertainties that new exporters face, potentially leading to ineffective or misdirected policy interventions.