Does Experience Facilitate Entry into New Export Destinations?

• Author: Yong Zhao,Lili Wang
• Date: 01 September 2013
• DOI: http://doi.org/10.1111/j.1749-124X.2013.12038.x
• Published date: 01 September 2013

36 China & World Economy / 36–59, Vol. 21, No. 5, 2013

©2013 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Does Experience Facilitate Entry

into New Export Destinations?

Lili Wang, Yong Zhao*

Abstract

Using a large panel dataset that covers 116 countries and 5013 products over the period

1998–2010, this study evaluates the effects of export experience on the geographic expansion

of China’s exports. The results suggest that past export experience in geographically close

and culturally similar markets plays a crucial role in facilitating new market entry, and the

positive spillover effects are more pronounced for incumbent and successful products. The

results also indicate that spillovers from export experience are market-specific and product-

specific, and they are limited to within the same product class and the same market, with little

cross-group effects. Finally, there is no strong evidence that export experience is more

important for differentiated products than for homogeneous products, and the positive

spillover effects are remarkable for both categories of products.

Key words: experience, export costs, geographic expansion

JEL codes: F10, F13, F14

I. Introduction

The existing literature has well documented the importance of export diversification, and in

doing so has suggested that export diversification could lead to economic growth by

improving an economy’s ability to absorb external shocks, improving the terms of trade,

reducing macroeconomic instability and breeding spillover benefits (Al-Marhubi, 2000;

Herzer and Nowak-Lehnmann, 2006; Bacchetta et al., 2007; Hesse, 2008; World Bank, 2009).

*Lili Wang, Assistant Professor, Institute of International Economy, University of International Business

and Economics, Beijing, China. Email:wanglili@uibe.edu.cn; Yong Zhao (corresponding author), Assistant

Professor, School of Economics, Renmin University of China, Beijing, China. Email: joyong@ruc.edu.

cn. This paper is funded by the Research Funds of University of International Business and Economics

(Project No. 12QD08), the Ministry of Education of Humanities and Social Science Youth Fund Project

(Project No. 12YJC790283), and the Key Project of Key Research Institute of Humanities and Social

Sciences at Universities, Ministry of Education (Project No. 12JJD790016). The authors would like to

thank the anonymous reviewers and Yihua Yu for useful comments and suggestions.

37

Does Experience Facilitate Entry into New Export Destinations?

©2013 Institute of World Economics and Politics, Chinese Academy of Social Sciences

However, despite the potentially enormous benefits of export diversification, penetration

of new destinations and product classes has made only a limited contribution to China’s

export growth. In 2010, China’s total export value was US$1771bn, approximately 7.68 times

higher than that in 1995. The trade flows that existed in 1995 are responsible for 86.8 percent

of this growth in exports, while the creation of new export linkages only contribute to

13.2 percent of export growth.1

One of the barriers to geographic expansion is the existence of fixed costs associated

with exporting, such as packaging for foreign markets, monitoring customs procedures,

observing product standards, understanding consumer tastes and exploiting distribution

networks (Roberts and Tybout, 1997; Bernard and Jensen, 2004; Das et al., 2007). In the

presence of export costs, firm heterogeneity in productivity becomes the foundation of

new trade expansion, and only the most productive firms are able to enter new export

markets (Melitz, 2003; Eaton et al., 2011). This mechanism of self-selection is supported by

a large number of theoretical and empirical studies, with some providing an earlier explanation

for the absence of the creation of new trade linkages (Arnold and Hussinger, 2005;

Bernard et al., 2007; Wagner, 2007; Andersson et al., 2008; Baldwin and Harrigan, 2011).

One limitation of these studies is that profits and costs are assumed to be uncorrelated

across export destinations, and dynamic destination decisions relating to export participation

are not accounted for. In fact, if export costs are sunk and shared among culturally similar

or geographically close countries, firms’ export participation decisions could be dynamic

and the probability of entry into a new destination could be shaped by the accumulation of

export experience in similar export markets. Therefore, learning from past export experience

could be a driver of geographic expansion.

Export experience could ease entry into new destinations in the following three ways.

First, export experience could make it easier to access additional destinations, as the average

sunk investments of exporting for items such as human capital investments in learning

languages and regulations could be lowered by exporting to multiple destinations. The

more similar the export destinations, the more possibilities the firm will have to benefit from

reductions in average sunk investments (Borchert, 2007; Castagnino, 2010; Zahler, 2011).

Second, while an international network is vital to export participation (Combes et al., 2005;

Jackson and Rogers, 2007; Chaney, 2011), export experience can also facilitate entry to

additional markets by reducing search costs, as exporters can build on their existing network

to identify new trading partners, subject to matching frictions (Defever et al., 2011). Third,

1The author’s calculation is based on CEPII BACI data.