Innovation and Development via Overseas Exports

XIE, Zhenzhen | LI, J. T.

Exporting plays a significant role in the development of a firm, as can provide an opportunity to access knowledge from other sources, which can facilitate organizational learning. As such, governments in emerging markets (EMs) encourage exporting, as it is considered a key indicator of firms’ technological sophistication.

That said, EM exporters often have difficulties in translating their information advantage into an innovation advantage. This is because such translation often requires strong technological competence, superior absorptive capacity, as well as having close and direct relationships with technologically sophisticated customers.

While these problems exist for exporters in EMs, researchers Zhenzhen Xie and Jiatao Li explain, “while it is difficult for EM firms to overcome such limitations, macro-level institutional development in EMs might help such firms to benefit more from what they learn through exporting”.

In EMs, the ability to learn via exporting takes place in various ways. For example, in order to ensure the quality and performance of imported goods, foreign importers may transfer extensive knowledge about production techniques, quality control, customer needs, etc.

With this in mind, Xie and Li examined how aspects of institutional development in a firm’s home region and institutional distances between the home and destination countries might influence EM firms’ ability to benefit from exporting. Using the data of individual enterprises, which was collected by China’s National Bureau of Statistics, the researchers tested four hypotheses.

Hypothesis 1 suggested that greater openness to the global market in the home region weakens the positive relationship between exporting an innovation for emerging market firms. Hypothesis 2 explained that institutions that support local innovation in the home region strengthen the positive relationship between exporting an innovation for emerging market firms. Hypothesis 3 suggested that better-developed intermediaries in the home region strengthen the positive relationship between exporting and innovation for EM firms. Finally, Hypothesis 4 explained that exporting to overseas markets with similar institutions promotes innovation by EM firms more effectively that exporting to overseas markets with very different institutions.

The researchers found that their empirical study of Chinese manufacturers largely supported their hypotheses. Export intensity was found to be positively related with the output of new products. Such relationships were also stronger in provinces where governments invested more in R&D and where supporting intermediaries were better developed. Furthermore, Chinese exporters that exported a larger proportion of their products to other EM economies tended to be more innovative than those exporting to advanced markets. Interestingly, Chinese exporters’ innovation benefited more from exporting to countries with a similar level of culture, knowledge, and connectedness.

While previous research found that market openness and other market-supporting institutions have similar effects on the commercial activities in EMs, Xie and Li were able to show the opposite effects. For example, they explain that “EM exporters in a less open market can take advantage of the limited access to overseas knowledge at home and innovate more actively than their non-exporting counterparts”. Additionally, the study found that institutions that promote local R&D and the development of market intermediaries complement export promotion policies, and help to transform exporters from knowledge recipients into knowledge creators. In contrast, open market policies could potentially reduce the effectiveness of export promotion, as they weaken the information advantage of exporters.

The researchers add, “future research might fruitfully extend this study by developing better operational measures of institutional variables at the national level as well as the subnational level”.

LI, J. T.

Lee Quo Wei Professor of Business, Chair Professor, Director of Center for Business Strategy and Innovation