Export Dynamics

The export strategies of multi-product firms in entering and defending foreign sales markets are investigated by studies by Iacovone and Javorcik (2008) and Iacovone and Javorcik (2010). They find that new exporters³³ start small in terms of both values and number of exported products. Firms begin their endeavor abroad with one or two export varieties (on average: 1.7 (Iacovone and Javorcik (2008)); 1.5 (Iacovone and Javorcik (2010))), and already two years after entering the average number of exported products raises to two.

The products with which the firms start their export activity are typically those for which the firms have gained some experience in the domestic market: In about 68% to 90% (on average: about 85%) of the cases, new exporters enter foreign markets with a variety that is previously sold domestically (Iacovone and Javorcik (2010): in at least one of the previous three years: 79% of the cases, within the past two years: 75% of the cases, in the year before: over two-thirds of cases (68%)). Although, the total number of varieties sold by the firm increases slightly in the year of entering foreign markets, but is stable afterwards.

The volume of exports with which the firm starts is very small relative to the total sales of the variety and the first-year exports represent only a small fraction of the firm’s total sales (about 12% (Iacovone and Javorcik (2010))). This share increases subsequently, but less than firm’s total sales (close to 20% in the fifth year of exporting (Iacovone and Javorcik (2010))). The whole distribution of export values of varieties in their first year of being exported, normalized by the total sales of the variety by a given firm, is skewed to the left and therefore indicates that most trading relationships start with small volumes.

With increasing familiarity with the export market, firms are willing to launch products that are new to them: In nearly one-third (on average: about 31%) of the cases, experi-enced exporters³⁴ introduce to export markets a variety that has not been previously sold domestically by them. And those products start to be exported at a larger scale, i.e. with a larger volume in absolute terms and relative to domestic sales: 43% of the production is exported relative to 13% for the other group of products. The introduction of a new export

33According to Iacovone and Javorcik (2008, 2010), new exporters are firms that were not exporting in the previous year, but are exporting in the current year under observation.

34According to Iacovone and Javorcik (2008, 2010), experienced exporters are firms that are in their second or later year of exporting activity.

product by foreign firms³⁵ is characterized by the fact that this product is more likely to be of higher quality, i.e. higher unit value. About a quarter (28%) of newly introduced export varieties are export discoveries, which are newly introduced export varieties that were not exported before by any firm, and those are more frequent in the immediate period after a devaluation of the domestic (Mexican) currency, the Peso. In detail, all types of firms (experienced and new exporters, domestic and foreign exporters) are accountable for the export discoveries, since they represent comparable shares of newly introduced export products across firm types: Out of the new export products introduced by experienced exporters and new exporters, export discoveries take a share of 30% and 27%, respectively, while for domestic (foreign) firms, they account for 29% (29%).

Export products that are exported for the first time at the country level experience a process of fast diffusion. These export discoveries are typically introduced by more than one firm - between one and two firms - and for approximately half of them, an additional firm starts exporting in the following year. Not before three years after the discovery, the rate of diffusion slows down but continues until at least the eighth year. Before and after starting an export activity, withfirm adjustments are undertaken. A surge in in-vestment in physical assets and technology acquisition precedes the introduction of new export varieties, while at the same time, there is no evidence for increased research and development activity in preparation for exporting. Instead of, research and development increases after the introduction of a new export variety. And this pattern of investment is not only restricted to new exporters, but also experienced exporters show higher volumes of investment in the surrounding of the introduction of new export varieties, suggesting the existence of fixed costs associated with the export variety introduction and not with the export activity by itself. In line with this, the export status of firms play an important role for investments undertaken by them. While only 51% of non-exporters invest, more than 70% of the exporters are active in some forms of investment, indicating a substantial difference in the frequency of investments between exporters and non-exporters. The dif-ference however is much smaller between exporters introducing a new export product and those not introducing a new export product (77% versus 71%), nonetheless some difference exists.

Iacovone and Javorcik (2010) further report that a vast percentage of the export vari-eties does not survive for more than a year in the foreign market. In particular, only about two-thirds of the new export varieties are exported for more than one year, between 46%

and 60% of the varieties are able to stay in the foreign markets for at least three years and only a bit more than one-third (37%) of the export varieties introduced to foreign markets in 1995 are still exported eight years later. In addition, the export variety’s survival rate increases with its tenure in the export market. Specifically, the survival rates are lowest in the varieties initial period of being supplied abroad, only between half and two-thirds of

35According to Iacovone and Javorcik (2008, 2010), foreign firms are firms with some foreign (vis-a-vis Mexico) participation in 1994.

the varieties survive between the entry year and the subsequent period and between 76%

and 88% survive between the second and third year after entry.

In addition to the empirical evidence above, which suggests among others that firms feel their way into export markets by starting small and with a domestically approved portfolio, ´Alvarez et al. (2013) explicitly analyze the question of whether some previous export experience can be an important factor for prospective exports and find that the firm’s own previous export experience with a product or market plays an important role.

An increase in the cumulative export value of a particular product in the previous period by 1% increases the probability that the firm will export the same product to a new market by 2.3% and an increase in the previous experience in a given market by 1% increases the probability of exporting different products to that market by 2.7%. Not only the firm’s own experience with export markets and products has an influence on its exports, but also other firms’ export experience seems to have an impact on the firm’s export behavior.

The probability that a firm exports a new product-market pair increases by 0.69% when the cumulative export amount of the same product by other exporters to the same market increases by 1%. The increase in probability is even higher (0.74%) when other firms export the product to other markets at a larger scale, i.e. when the cumulative export amount of the same product by other exporters to other markets increases by 1%. Furthermore, an increase in the cumulative export value of different products to the same market by other firms by 1% increases the probability of introducing a new product to that market by 1.16%.

The effect of past export activity on the firm’s exports, which is contextualized by get-ting or making some experience in exporget-ting and thereby reducing uncertainty associated with the export process, differs across heterogeneous firms and products. While larger firms are in general more likely to introduce a new product, smaller firms benefit more from having exported a product in the past. The effect of having experience in exporting a product is also stronger for relatively more heterogeneous products and gets particularly important in those sectors that are more dependent on external finance. Furthermore, firms benefit more from previously exporting relatively simple products and thereby from experience in those goods’ exporting. Overall, one can observe diminishing returns to ex-perience at some point in the firm’s learning process and a congestion effect among firms exporting the same product. However, firms whose export product-market pairs are more concentrated show a lower probability of introducing new products in new markets.

Lo Turco and Maggioni (2015) analyze the impact of the export (and import) activity of firms on their (product) innovation activity and therefore on their scope. They find that firms which start to export their own produced products increase both their product scope and their product innovation intensity.³⁶ In the entry year, the number of products increases by 18% and a year later by 14%. The probability of expanding the product scope

36In case of a broader treatment of exported goods, i.e. exports also include non-produced goods, the positive effect of exports is relevantly downsized.

shifts upwards by about 6% in the entry year. With regard to new products, their number increases by 20% in the entry year and the probability that the firm introduces a new good is higher by 9.1% in the entry year. In contrast, starting to import has no significant effect on scope and innovation. This observation alters if one takes a look at firms that enter the export and import market at the same time: Those firms are more likely to both expand scope and innovate and this effect is higher than for new exporters, which implies that there is some complementarity between export and import activities. However, starting to export and starting to import have not symmetric effects on the innovation activity of firms that consequently switch to two-way trading: While the innovation activity of importing firms that start exporting increases, adding an import activity does not substantially improve the innovation activity of the exporting firms. Giving up exporting by contrast implies a contraction of both scope and innovation: Switching from export starters to import starters, a substantial and significant reduction in the firms’ innovation propensity and product scope is observable. Therefore, product innovations seem to be attributable to the firm’s relationship to foreign customers and the effect is enhanced when the firm sources a part of its inputs from abroad. A learning process in firms takes particularly place in case of a two-way trading of the firms.³⁷ Using foreign intermediates alone however does not contribute to an intensified innovation activity of firms. Regarding the timing of the firms’

activity in their sales endeavor abroad, Lo Turco and Maggioni (2015) report that firms are most active in the same year they enter the foreign market, i.e. right at the beginning of their activity. The possibility of exporting turns out to be especially important in enhancing the weight of newly introduced products in the firm’s production and product portfolio and starting to import simply reinforces the positive effects of the export entry.

In addition to the insights above, two-way traders reveal a higher likelihood for the introduction of new goods of higher quality and starting to export exerts a mild effect on the probability to start introducing new goods of higher quality the year after the entry.