Abstract

When serving a foreign market, firms need to comply with technical regulations and product standards of that country. If failed to meet the technical requirements, the shipments are refused entry to the market for consumer safety and public health concerns, which are known as import refusals or border rejections. This paper, to the best of our knowledge, is the first to examine export performance of firms in relation to their experiences of border rejections. To do so, we use a unique data set that connects US import refusal episodes against Chinese shipments including manufacturer and product information with Chinese firm-level customs and manufacturing survey data. We find evidence for substantial compliance costs in exporting: a past border rejection increases the likelihood of exiting from the market and discourages the (re-)entry to the market at the extensive margin of exports. Conditional on continued exporting, however, a past rejection increases the export quantity, price, and quality at the intensive margin. Compliance with technical requirements appears to serve not only as barriers to market entry but as catalysts for the firm's upgrading of capacity and competitive repositioning, especially in the case of firms based in developing countries and exporting to advanced economies with more stringent technical requirements.