Which Countries to Target? Transaction Cost Analysis, Cultural Distance and Export Performance

Abstract

The first important question that exporting manufacturers need to address is which countries to target their exportation efforts. A critical factor that exporting managers need to consider in this targeting decision is the transaction costs occurred in exporting to the markets. However, transaction cost analysis (TCA), one of the dominant approaches in studying entry modes of multinational companies, has largely been ignored in the context of export market targeting. Hence, we proposed a model of the relationship between transaction cost factors, target export destinations, and export performance. We tested the model with a database of Chinese manufacturing firms expanding into international markets. We found that TCA is able to explain companies’ export target markets by cultural distance, and that firms using TCA-based market selections performed significantly better than firms choosing other markets.