Internationalization and Innovation in Emerging Markets

Hein Roelfsema,Yi Zhang

doi:10.17323/2500-2597.2018.3.34.42

Abstract

With high growth on domestic markets, many firms in emerging economies face a tradeoff between using their competitive advantages in foreign markets or innovating in domestic markets. By analyzing export and innovation data for a large dataset of Chinese firms, we uncover a specific productivity sorting pattern of firms over exporting and innovation. As expected, high productivity firms both export and innovate and low productivity firms do not export or innovate. Interestingly, low-medium productivity firms export more than they innovate, whereas high-medium productivity firms innovate more than they export. Clearly, these findings have important implications for the new trade literature that stresses the primacy of high productivity for entry into export markets.

Highlights

Over the past few decades, firms from China and to a lesser extent Russia, Brazil, and India have internationalized and become major players in the world economy
We find that the mean of the initial firm productivity level increases with the ordering of the groups, which provides some evidence for the pattern predicted in our conceptual model
Russia is probably the most outspoken in stating that digitalization and scientific capabilities are the key to its future success

Summary

Funding for technological development*

Note: Items marked by * are on 1-10 scale where 10 means a higher score and better performance. The intuition behind the new trade theory is that firms within a single industry differ in productivity, which under monopolistic competition results in higher profits for the higher productivity firms. Firms serve a domestic market and potentially a foreign market by exporting. Innovation comes at a cost that is equal for all firms, it comes from a trade-off that is different for high and low productivity firms. Higher productivity firms have larger market shares (lower marginal costs) which at the margin means that quality increases have a larger impact on profitability for high productivity firms than they have for low productivity firms. We draw two profit curves: DI is for innovators that produce for the domestic market, whereas EI are for exporters that innovate.

D Productivity

G2 G3 G4 Total 465 108 124 99 796

G4: Exporter

Conclusion and Policy Implications