Theoretical and empirical work on export dynamics has generally assumed constant

marginal production cost and therefore ignored domestic product market conditions.

However, recent studies have documented a negative correlation between firms' do-

mestic and export sales growth, suggesting that firms can be capacity constrained in

the short run and face increasing marginal production cost. This paper develops and

estimates a dynamic model of export behavior incorporating short-term capacity con-

straints and endogenous capital investment. Consistent with the empirical evidence,

the model features firms' sales substitutions across markets in the short term, and

generates time-varying transition paths of firm responses through firms' capital adjust-

ments over time.

The model is fit to a panel of plant-level data for Colombian manufacturing indus-

tries and used to simulate how firm responses transition following an exchange-rate

devaluation. The results indicate that incorporating capital adjustment costs is quan-

titatively important, as shown by the length of the transition period, and the difference

between the short-run and long-run exchange rate elasticity of exports. Firms' expeca-

tion on the permanence of the policy changes also matters.