Market knowledge: Evidence from importers

Previous firm‐level literature established that there are substantial costs of entry into new export markets. Chaney (The American Economic Review, 104, 2014, 3600) opens the black‐box of entry costs by building a dynamic network model of international trade where firms acquire customers in new destinations through their existing customers in other destinations. Following his conjecture, this paper examines whether firms use their existing suppliers in a destination to find their first clients in those markets. I use a disaggregated data set on Turkish firms' exports and imports for the 2003–08 period, and investigate the effect of import experience on export entry. By identifying import experience using instrumental variables, and shutting down productivity channels with firm‐year fixed effects, I find that having a supplier in the destination country raises the probability of starting to export to that country by 5.5 percentage points on average, revealing a “market knowledge” phenomenon. The paper's main contribution to the literature is finding that firms' country‐specific import experience increases the likelihood of export‐market entry. Digging further to explore heterogeneous effects, I find that this effect does not exist when trading with low‐income countries, but it increases with the destination country's size, proximity, language similarity and the size of its Turkish immigrant community. Moreover, the strength of the firm's relationship with its supplier as proxied by several variables such as the share of imported products that are differentiated increases the probability of export‐market entry.     

Trade patterns and export pricing under non-CES preferences

We develop a two-factor, two-sector trade model of monopolistic competition with variable elasticity of substitution. Firms' profits and sizes may increase or decrease with market integration depending on the degree of asymmetry between countries. The country in which capital is relatively abundant is a net exporter of the manufactured good, although both firm sizes and profits are lower in this country than in the country where capital is relatively scarce. The pricing policy adopted by firms depends neither on capital endowment nor country asymmetry. It is determined by the nature of preferences: when demand elasticity increases (decreases) with consumption, firms practice dumping (reverse-dumping).     

Trade,Tariffs and Total Factor Productivity: The Case of Spanish Firms

The aim of this paper is to examine the sensitivity of total factor productivity (TFP) to foreign competition in the case of a European country. Using the Olley and Pakes method, we calculate the TFP of Spanish manufacturing firms and study the impact of EU tariffs and the presence of foreign products and imports on TFP at the firm level. Applying the System‐GMM method, we find that TFP is negatively impacted by European tariffs, whereas competition in the form of the increased presence of foreign products in the domestic market and firm imports leads to improvements in the TFP. Moreover, these two effects are complementary. We also find evidence of important asymmetries among firms depending on their involvement in foreign markets.     

Why So Small? Explaining the Size of Firms in Latin America

On average, Latin American firms are small with respect to world patterns, both in terms of the quantity of assets they control and the amount of employment they generate. We examine data on firm size from developed and developing countries around the world to assess the influence of demand, supply and institutional factors on the size of the largest firms in each country. We find that, besides the size of the economy and the level of income per capita, the key determinants of the size of firms are trade openness, stock market capitalisation and physical infrastructure. Our simulations suggest that if the gaps with respect to the best Latin American performer were closed in each of these three areas, firm size in the countries of the region would – on average – reach world patterns.     

Market valuation of marketing alliances in East Asia: Korean evidence

This paper investigates firm value created by non-equity marketing alliance announcements of Korean listed firms in terms of stock price reactions to the announcements. We find evidence that on the Korean stock market, the announcements of marketing alliances produce significant positive abnormal returns, which reflect an increase in firm value, around the announcement date. This suggests that firm managers need to seek for various marketing alliances not only for an effective competition in competitive business environments but also for enhancement in shareholder wealth. The increase in firm value has inverse relationship with firm's size and growth opportunity. In particular, marketing alliances with firms based in G7-countries create greater firm value than ones with firms based in the home country. Our study provides investors, firm managers, and academics with valuable implications of an importance of marketing alliances for valuation of firms in other Asian countries as well as in Korea.     

Is competition from China so special?

Competition from China is perceived as particularly damaging. We study whether this is true for firm performance. Using the universe of Spanish export transactions, we find that an increase in competition from China does not have a more damaging effect on export revenues, prices and number of exported products than an equally sized increase in competition from other countries. We document, though, that Chinese competition raises the probability that a firm ceases to export a good to a destination more than competition from other countries. This effect declines over time. We document an omitted variable bias in studies focusing only on Chinese competition, even when controlling for unobserved heterogeneity of destinations for different products within firms.     

Performance implications of market orientation,marketing resources,and marketing capabilities

Abstract

Drawing on the competitive capability theory, this paper examines how market orientation, marketing resources, and marketing capabilities contribute to firm performance. The empirical results show that being market oriented influences the level of marketing resources firms possess and the capability to deploy such resources. The findings show marketing resources and marketing capabilities are significant drivers of firm performance, and their impact is greater when they are complementary to each other.     

Liability of Foreignness and the Constitutive Legitimation of Foreign Firms in a Host Country

We examine population density effects on foreign firms’ likelihood to exit from a host country. The lack of constitutive legitimacy is an important aspect of the liability of foreignness experienced by foreign firms. Both foreign firms from a focal firm’s home country and foreign firms from other countries can provide constitutive legitimation for the focal firm. These intrapopulation and interpopulation legitimation effects strengthen with a greater psychic distance between the home and host countries; they also interact with and strengthen each other. Results based on a dataset containing 68,723 firm-year observations on 29,843 foreign firms in China support our predictions.     

A theory of the currency denomination of international trade

The currency denomination of international trade has significant macroeconomic and policy implications. In this paper we solve for the optimal invoicing choice by integrating this microeconomic decision at the level of the firm into a general equilibrium open economy model. Strategic interactions between firms play a critical role. We find that the less competition firms face in foreign markets, as reflected in market share and product differentiation, the more likely they will price in their own currency. We also show that when a set of countries forms a monetary union, the new currency is likely to be used more extensively in trade than the sum of the currencies it replaces.     

Welfare and quality improvement in an international market

This paper analyzes the optimal uniform and discriminatory quality requirements under Cournot competition when two firms produce high-quality and low-quality products, respectively, in an international market. The quality requirements in our paper are not set for the foreign firm but are set to regulate products of different qualities, since in the real world a domestic firm could be a high- or low-quality producer. We find that whether the government should raise the quality requirements depends on the type of competition in which firms engage and the adopted quality requirements. By and large, the government should always set quality requirements raising both firms’ quality directly or indirectly, regardless of the quality of the product of the domestic firm. However, if the domestic firm is a high-quality producer, the government should set a quality requirement that enables the domestic firm to monopolize the market when a discriminatory quality requirement is adopted, and should not set any quality requirement when a uniform quality requirement is adopted. Moreover, we show that the quality requirement can actually improve global welfare in most cases.     

Tie-in contracts with downstream competition

A tie-in contract has frequently come under scrutiny for its role as an exclusionary device. A firm that is a monopolist in a primary market can utilize such contracts to exclude a more efficient rival in a secondary market. When the firms sell through competing retailers, the leveraging firm may offer tie-in contracts to the retailers inducing them to purchase both primary and secondary products entirely from it such that the rival is excluded. We examine whether such tie-in contracts are profitable for an incumbent firm under different conditions of (i) the ability to commit to prices by the upstream firms and (ii) downstream competition among the retailers. We show that when retailers compete in prices, then regardless of whether the entrant is able to commit to its own prices, an exclusionary tie-in strategy is profitable (not profitable) for the incumbent when it is able (unable) to commit to prices. However, when retailers compete in quantities, the entrant’s commitment ability does matter. Specifically, an exclusionary tie-in strategy (i) may be unprofitable for an incumbent when both upstream firms are able to commit to their prices, depending on the degree of cost advantage of the entrant; (ii) is always profitable when it alone can commit to its price; and (iii) is unprofitable when both upstream firms cannot commit to their prices. Our results extend to situations where the products are complementary or substitutes and where the retailers may be asymmetric in nature.     

The moderating role of local embeddedness on the performance of foreign and domestic firms in emerging markets

This paper examines the impact of the firm’s degree of local embeddedness on its performance in emerging markets using the World Bank’s Enterprise Survey Manufacturing Sector Module data on 15,715 firms covering 78 emerging markets. We use the degree of localization of sourcing and sales to measure the degree of embeddedness in the host country market. We argue that since embeddedness brings the firm into closer interaction with local firms and institutions, the costs of embeddedness should be lower for local firms than for MNE subsidiaries, since local firms can be assumed to be better able to decipher local institutions. We find that both dimensions are subject to a reversed U-shaped function. That is, by extending the degree of local sales and local sourcing up to a certain percentage, a firm can realize positive performance growth by becoming more embedded into the emerging market, but beyond this point, the performance impact is negative. We also find that foreign firms involved in local sales seem to lose part of their ability to exploit their ownership advantages as compared to foreign firms that export their production.     

Foreign firm characteristics,labour market restrictions and FDI spillovers: Evidence from Moldova

This paper investigates how productivity spillovers from foreign to domestic firms are affected by foreign firm characteristics and labour market conditions in Moldova. We use firm-level administrative panel data and annual survey region-sector indicators of labour market conditions in 2005–2014. Baseline regressions show that domestic firms benefit from backward FDI spillovers, while we find no evidence of horizontal or forward spillovers. Spillover effects are heterogeneous and depend on the ownership structure and age of foreign firms. Domestic firms in upstream sectors benefit from both wholly foreign-owned companies (WFOC) and joint ventures (JV). However, JVs need less time in the market for positive spillovers to materialise, while WFOCs only lead to larger spillover effects when they are older. In regions and sectors where firms experience fewer labour market restrictions, backward FDI spillovers are larger. Interacting foreign firm characteristics with labour market restrictions, we find that spillovers through the labour market channel materialise only for older FDI, regardless of ownership type. The results are in line with our expectation that WFOCs need more time than JVs to develop linkages with local suppliers and lead to spillovers through this channel. Moreover, in developing countries labour market restrictions reduce labour mobility and consequently, the size of FDI spillovers across industries.     

国际市场进入模式研究:一种网络的观点

国际市场进入模式是企业国际化进程中最重要的课题之一,与其相关的理论可谓是众说纷纭,但它们都是从单个企业的角度进行研究和分析的。然而,当今全球市场的竞争越来越表现为在企业所处的网络之间而非单个企业之间进行。因此,企业在选择国际市场进入模式时,应该考虑自身与目标国市场所具有的网络的关系类型,并根据企业自身在该网络的关系类型中所处的位置来制定适合的进入战略。     

International mergers: Incentives and welfare

Information asymmetry creates incentives for firms from different countries to merge. To demonstrate this point, we develop a model of international oligopolistic competition under demand uncertainty and asymmetric information. We show that when domestic firms but not foreign firms are completely informed of local market demands, information sharing enhances the profitability of a merger between a domestic firm and a foreign firm. We also examine how such a merger affects the non-merging firms' profits, consumer surplus and social welfare.     

International market exit by firms: Misalignment of strategy with the foreign market risk environment

International market withdrawals by firms continue to persist regardless of geography, industry, firm experience, and national origin. The extant literature argues that a host of factors, such as firm characteristics, organizational capabilities, host country environment, international business risks, strategy and strategic choices are among the likely reasons for firms to prematurely exit the markets they have entered. Drawing from the contingency theory, we contend that underlying most market exit events is the misalignment of firm strategy with the foreign market risk environment. This happens when managers fail to optimize strategy formulation and implementation in view of the foreign market risk environment. Based on an in-depth examination of 62 cases of foreign market exits via pattern coding using NVivo 12, we delineate common patterns accounting for market withdrawals. We then formulate propositions with respect to how misalignment between strategy and risk environment interferes with foreign market exits in accordance with the contingency theory. We conclude with a discussion of theoretical implications, managerial recommendations, and suggestions for future research and limitations.     

Location decision of heterogeneous multinational firms

We examine how multinational firms with heterogeneous total factor productivity (TFP) self-select into different host countries. Both aggregate- and firm-level estimates suggest that more productive French firms are more likely than their less efficient competitors to invest in relatively tough host countries. Countries with a smaller market potential, higher fixed costs of investment or lower import tariffs tend to have higher cutoff productivities and attract a greater proportion of productive multinationals. This self-selection mechanism remains largely robust when we control for unobserved firm and country heterogeneity and address potential TFP endogeneity.     

Foreign direct investment productivity premium and foreign affiliates' heterogeneity: A comparison between advanced and emerging market overseas investments in the EU

This paper aims to investigate the existence of productivity heterogeneity among foreign‐owned firms (FOFs) based in the European Union (EU). Using firm‐level data for a sample of FOFs investing in the EU over the period 2006–14, we find that foreign affiliates from advanced countries (AFOFs) show a positive productivity gap compared to foreign affiliates from emerging countries (EFOFs). However, when we consider the type and the motivation of foreign direct investment, our results reveal that, while AFOFs always seem to be more productive than EFOFs in manufacturing sectors, EFOFs appear to enjoy a productivity premium compared to AFOFs in the services, when their activity occurs in the same industry as their parent and they operate in less knowledge‐intensive market sectors.     

Strategic Implications of Keeping Product Value Secret from Competitor’s Customers

Customers can sometimes learn unanticipated or hidden use value of a firm’s product whereas the non-customers remain uninformed about that extra value. A monopolist will increase its profit by informing the non-customers of its product’s hidden value. However, our analysis reveals that this may not be true when the firm faces competition in the market—the firm may actually make a higher profit if it keeps its hidden value secret from its competitor’s customers even if advertising to inform those customers is costless. This is because no advertising leads to information heterogeneity among consumers about the existence of the firm’s hidden value, which gives an incentive for both firms to continue targeting their own existing customers rather than poaching each other’s customers, alleviating price competition and increasing firms’ profits. This beneficial strategic effect of keeping some product value secret from the competitor’s customers can persist even when the firms anticipate the hidden value and compete more aggressively for customers in the early period. Our research suggests that firms can benefit from an “under-promise and over-deliver” strategy if they refrain from communicating their extra value to the competitor’s customers. Moreover, positive word of mouth about a firm’s product will not necessarily benefit the firm and can in fact make all firms worse off.