International Agricultural Trade under Regulatory Asymmetry: An Economic Analysis of SME Export Behavior

Over the last three decades, international agricultural trade has grown significantly. Technological advances in transportation logistics and storage have created opportunities to ship anything almost anywhere. Bilateral and multilateral trade agreements have also opened new pathways to an increasingly global market place. Yet, international agricultural trade is often constrained by differences in regulatory regimes. The impact of “regulatory asymmetry” is particularly acute for small and medium sized enterprises (SMEs) that lack resources and expertise to successfully operate in markets that have substantially different regulatory structures. As governments seek to encourage the development of SMEs, policy makers often confront the critical question of what ultimately motivates SME export behavior. Specifically, there is considerable interest in understanding how SMEs confront the challenges of regulatory asymmetry. Neoclassical models of the firm generally emphasize expected profit maximization under uncertainty, however these approaches do not adequately explain the entrepreneurial decision under regulatory asymmetry. Behavioral theories of the firm offer a far richer understanding of decision making by taking into account aspirations and adaptive performance in risky environments. This paper develops an analytical framework for decision making of a single agent. Considering risk, uncertainty and opportunity cost, the analysis focuses on the export behavior response of an SME in a situation of regulatory asymmetry. Drawing on the experience of fruit processor in Muzaffarpur, India, who must consider different regulatory environments when shipping fruit treated with sulfur dioxide, the study dissects the firm-level decision using @Risk, a Monte Carlo computational tool.