WPS4368 Policy ReseaRch WoRking PaPeR 4368 Trade Costs, Barriers to Entry, and Export Diversification in Developing Countries Allen Dennis Ben Shepherd The World Bank Financial and Private Sector Development Doing Business & Development Research Group Trade Team September 2007 Policy ReseaRch WoRking PaPeR 4368 Abstract This paper finds that a 1 percent reduction in the cost also incorporates new export cost data from the World of exporting or the cost of international transport is Bank's Doing Business database, covering document associated with an export diversification gain of 0.3 preparation, inland transport, administrative fees, percent or 0.4 percent respectively. Lower domestic and port/customs charges. Findings are highly robust, market entry costs can also promote diversification, but including to the use of geography and colonial history as the elasticity is weaker (-0.1). To obtain these results, the instruments for trade and entry costs. Both the signs and authors construct new measures of export diversification relative magnitudes of these effects are consistent with for 118 developing countries using highly detailed 8- predictions from a heterogeneous firms model of trade digit mirror data from the European Union. The analysis with asymmetric costs. This paper--a joint product of Doing Business and the Trade Team, Development Research Group--is part of a larger project on trade costs, trade facilitation, and economic development, supported through a Trust Fund of the U.K. Department for International Development (http://econ.worldbank.org/projects/trade_costs). Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at adennis@worldbank. org and bshepherd@worldbank.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 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