Heterogeneity and Uncertainty in the Dynamics of Firm Selection into Foreign Markets

Firm-level data indicates a positive relationship between a firm�s revenues from a market and the number of markets penetrated by that firm, and previous presence in that market. After studying the role of different types of firm and market-specific shocks in firms� selection decisions, I quantify an entry-cost-reducing effect of previous presence in a market, and increasing returns to being in more markets. I find that being in an additional market increases the demand in other markets between 1% and 3% across different sectors. Additionally, a variance decomposition between firm and market-specific heterogeneity and idiosyncratic uncertainty in firms� selection problem indicates that 1) firm-specific heterogeneity explains more of the total residual variation in revenues from foreign markets as opposed to idiosyncratic variation in technology intensive indus- tries than less technology intensive ones and 2) the relative importance of idiosyncratic components diminishes as the level of per capita income of a destination market increases.