How innovation impacts firms' export survival: Does export mode matter?
| Author | Meihong Dai,Haiyang Liu,Lingtao Lin |
| DOI | http://doi.org/10.1111/twec.12847 |
| Date | 01 January 2020 |
| Published date | 01 January 2020 |
World Econ. 2020;43:81–113. wileyonlinelibrary.com/journal/twec
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© 2019 John Wiley & Sons Ltd
Received: 21 July 2018
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Revised: 25 June 2019
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Accepted: 8 July 2019
DOI: 10.1111/twec.12847
ORIGINAL ARTICLE
How innovation impacts firms' export survival:
Does export mode matter?
MeihongDai1
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HaiyangLiu2
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LingtaoLin3
1Economics School,Dongbei University of Finance and Economics, Dalian, China
2School of International Business,Southwestern University of Finance and Economics, Chengdu, China
3School of Economics and Management,Dalian University of Technology, Dalian, China
Funding information
The Ministry of Education of Humanities and Social Science project, Grant/Award Number: 18YJCZH023; Fund of
Education Department of Liaoning Province, Grant/Award Number: LN2019Q08; Social Science Planning Project of
Liaoning Province, Grant/Award Number: L18CJY008
KEYWORDS
export survival, firm, innovation
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INTRODUCTION
Technological innovation has been demonstrated as a vital driving force for the export development
in many countries (Deng, Guo, Zhang, & Wang, 2014). Especially in China, the government explic-
itly advocates implementing the strategy of innovation‐driven development, suggesting that scientific
and technological innovation should be given top priority so as to raise the overall national strength.
For instance, China's investment in research and development (R&D, hereinafter) ranked second
(1.75trillion yuan) in the world in 2017, making up a 2.12% share of the GDP. With regard to China's
export development, what is the role of innovation and how it takes effects?
Although innovation's impact on export performance has been extensively explored at the micro‐
firm level, the existing literature mainly focuses on firms' export propensity or intensity, remaining
mixed conclusions. The traditional view explores a positive role of innovation in enhancing firms'
export performance. Innovative exporters can not only enjoy reduced production costs enhancing their
propensity to enter new markets (Wakelin, 1998), but also learn through the production process (learn-
ing‐by‐using in technological change) which helps stimulate their export productivity. And trade facil-
itation will further induce exporters to upgrade technology (Atkeson & Burstein, 2010; Bustons, 2011;
Lileeva & Trefler, 2010). Much evidence has demonstrated this positive effect, such as evidence from
Brazil (Willmore, 1992), the UK and German (Roper & Lover, 2002) and some emerging markets
(Filatotchev, Liu, Buck, & Wright, 2009). The positive ‘innovation‐export’ linkage has been demon-
strated not only in manufacturing industries, but also in the service sector (Ebling & Janz, 1999).
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More specifically, some scholars have also compared the positive effects of different innovation types
on firm export performance. For example, Becker and Egger (2013) find a larger positive magnitude
of product innovation on firms' export propensity compared to process innovation, employing micro‐
firm level data from Germany. Cassiman and Golovko (2007) also emphasise the vital role of product
innovation on firm productivity and export performance, employing a panel Spanish manufacturing
firms. In contrast, a insignificant and even negative impact of innovation on export performance has
also been examined (Roper & Lover, 2002) due to the fact that innovation itself is a highly risky and
costly effort with time lag effects.
How innovation affects the export survival of firm? Unfortunately, although there has been rich
evidence on the innovation and firm survival relationship, there are relatively a smaller amount of
studies focusing on innovation's impact on firm survival in the export market. Therefore, this paper
differs from prior studies in that we investigate not only the impact of innovation on firms' export sur-
vival, but also consider firm heterogeneity in export mode—direct and indirect exports.
Similar to the innovation‐export nexus discussed above, the impact of innovation on firms' export
performance is also twofold. On the one hand, a positive impact is expected. The creative destruction
theory (Schumpeter, 1942) provides an early demonstration explaining that innovative exporters are
more capable of improving competitive advantage by adding new products and simultaneously replac-
ing outdates ones. As such, innovative exporters present lower exit hazards in the fierce competitive
market. The heterogeneous‐firm trade theory (Bernard, Redding, & Schott, 2010) also shows grow-
ing interests in studying firms' introducing new high‐effective products and replacing low‐effective
ones, described as product switching behaviour (Bernard et al., 2010). Innovative exporters are hence
more productive (Bernard, Redding, & Schott, 2011; Mayer, Melitz, & Ottaviano, 2014) by product
switching and reallocating resources from low productive products to higher productive ones which
in turn improves their probability to survive. In addition, innovation helps exporters to improve ab-
sorptive capacity (Zahra & George, 2002) and maintain a closer positive to the technological frontier
(Deng et al., 2014; Fontana & Nesta, 2009), simulating the 'learning‐by‐exporting' effect which also
helps lower firms' exit hazards. In other words, innovative firms can enjoy better development (such
as higher productivity, profits and market power) which in turn enhances their survival chance in the
domestic and export markets (Aghion, Akcigit, & Howitt, 2014; Zhang, Zheng, & Ning, 2018). This
impact is of vital importance for both new entrants and incumbents (Cefis & Marsili, 2006), indicating
an effective role of innovation on improving export prospects and export success of firms.
On the other hand, innovation may also exert an insignificant and even a negative effect. Innovation
itself is characterised by huge costs, high risks and time lag effects of transforming R&D fruits into
profitable outputs (Deng et al., 2014). Innovation activities involve commercialisation risks and are
characterised by inherent uncertainties (Zhang et al., 2018). Accordingly, innovative exporters con-
front with higher exit hazards when the costs of innovation outweigh the total benefits. Especially
for firms who enter new export markets, costly innovation activities may impose them unbearable
financial burdens and huge exit risks. Additionally, innovative exporters are likely to adopt ‘home rep-
lication’ product strategies in the early stages of internationalisation. However, it may be a challenge
for innovative exporters tailoring these products to foreign customers with heterogeneous preferences,
increasing their exit risks exposed to the stochastic demand shocks (Peng, 2006). Moreover, although
firms can introduce new and competitive products into the export market, they may also becon-
fronted with high failure risks when their counterparts successfully copy their new products or their
introduced products are not accepted by the new market (Ericson & Pakes, 1995). Apart from above
analysis, many studies also argue that the role of innovation in enhancing firm survival depends on
other qualifications, such as managers' skills (Thieme, Song, & Shin, 2003), institutional uncertainties
(He & Yang, 2016) and the firm's product portfolio (Wezel & van Witteloostuijin, 2006).
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Specially, does firms' export mode matter the innovation‐export survival nexus? To the best of our
knowledge, this research may be the first attempt to explore this issue. As such, this research contrib-
utes new empirical evidence to the analysis of innovation‐export survival nexus by considering firms'
export modes. In specific, two kinds of export modes are investigated: direct exporters and indirect
exporters. The former refers to exporters who are more productive and directly trade with the foreign
partners, while the latter refers to exporters who are less productive and rely on trade intermediaries
to export (Ahn, Khandelwal, & Wei, 2011). Although the export threshold and sunk costs to export
are lower for indirect exporters, they also earn lower profits due to the cut by trade intermediaries. As
such, indirect exporters who are capable enough to export directly usually show strong tendencies to
get rid of trade intermediaries (Bai, Krishna, & Ma, 2016).
Based on the above discussions, we speculate that innovation's positive effects on firms' export
survival may dominate for direct exporters who present better competitive performance. While for
indirect exporters, we expect an insignificant and even a negative impact of innovation on their export
survival. Innovative exporters who export indirectly may suffer more from costly innovation activities
and financial constraints. This in turn increases their failure rates and exit hazards. In addition, the
technology spillover effect may be less effective for indirect exporters since they export via the trade
intermediates. This indicates that they may not effectively transfer R&D results into practice, hamper-
ing the improvement of their survival prospects in the export market.
In order to examine this issue, we employ a large panel data covering Chinese exporters in periods
of 2000–10.1 There are at least two reasons why China provides an ideal setting. First, China has ex-
perienced phenomenal rates of economic growth that are largely attributed to its 'export boom'.
Investigating how firms achieve export success is vital both to the stable development of exports and
to China's economy. Second, China has paid increasing attention to technological innovation in pursuit
of export competitiveness. It is thus important to evaluate the effect of innovation on micro‐economic
performance from the perspective of firms' export survival.
Econometrically, we first employ the discrete‐time survival model addressing the censored issue
in this research. However, there may be selection‐bias issues in our dataset due to the non‐assignment
of exporters: firms who are in larger scale and more productive show higher probability to innovate
(Shefer & Frenkel, 2005), while firm size and productivity also enhance firms' survival prospects
(Görg & Spaliara, 2014; Melitz, 2003). As such, it cannot be confirmed whether the positive or neg-
ative impact of innovation on firms' export survival stems from innovation itself or other influencing
factors. Therefore, we then employ the propensity score matching methodology to explore this re-
search addressing the selection‐bias issue. Based on the matched 'like‐for‐like' exporters with except
for their innovation and survival performance, we then compare their export survival probability to
disentangle the pure impact of innovation on firms' export survival.
Notably, this paper also differs from previous related studies in that we consider relatively com-
prehensive characteristics of firms who operate in the largest developing country in the world and
also an transition economy. Additionally, we explore the heterogeneous impacts of different inno-
vation types on the export survival of Chinese firms. To explain specifically, distinct from firms in
developed countries, firms in developing countries usually exhibit different characteristics in terms of
firm size, resource reallocation efficiency and so forth (Goldberg, Khandelwal, Pavcnik, & Topalova,
2010). The research ignoring this heterogeneity may lead to biased conclusions and even wrong pol-
icy implications (Fernandes & Tang, 2015). Therefore, this research considers firm heterogeneity in
China including firm ownership, export intensity, export status, industry category, and firms' export
1 The statistical standard changes since year 2011 in our dataset, and we hence focus on years 2000–10 to exclude the
potential estimation bias of firm enter and exit due to the variation of statistical standard.
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