Many countries are looking to their export sectors as a source of future growth, but how do domestic companies make a success of selling their output abroad? Research by Emanuel Ornelas and colleagues finds evidence of 'sequential exporting' - firms experimenting in nearby foreign markets before seeking to become big exporters.sequential exporting, international business

Emanuel Ornelas

Facundo Albornoz

Gregory Corcos

Hector Calvo-Pardo

English

Research Papers in Economics

EXPORT
CentrePiece Winter 2011/12 
26
H
ow do firms break into foreign
markets? Trade theory tends to
emphasise the substantial ‘sunk
costs’ that they have to incur to start
exporting. The implication is that only the
most efficient firms can afford to export.
Yet recent empirical
research drawing on
customs data from several
countries has uncovered
patterns of foreign entry
that seem difficult to
reconcile with high sunk
costs. Many domestic firms
enter foreign markets every year; they
often start selling small quantities to a
single neighbouring country; and almost
half of them stop exporting within a year.
At the same time, new exporters that
survive the first year tend to expand
exports to their initial markets and also
move into other markets.
If entry is so costly, how can we
explain so many firms starting export
activity with so few initial sales and such
low survival rates? And what could explain
the seemingly sequential entry pattern of
the surviving exporters?
Many countries are looking to their export
sectors as a source of future growth, but how do
domestic companies make a success of selling
their output abroad? Research by Emanuel
Ornelas and colleagues finds evidence of
‘sequential exporting’ – firms experimenting in
nearby foreign markets before seeking to
become big exporters.
Sequential exporting:
how firms break into foreign marketsCentrePiece Winter 2011/12 
27
and distant countries for domestic firms.
When a nearby country lowers its
trade barriers, it attracts exports from
previously purely domestic firms. As these
new exporters learn about their ability to
serve foreign markets, some fail and give
up exporting, whereas others are very
successful and decide to expand into other
foreign destinations. As a result, trade
liberalisation in the nearby country
promotes entry not only there but also in
distant non-liberalising countries, albeit
with a lag.
Similarly, the reduction of trade
barriers in a distant country, by raising the
value of profitably exporting there, also
enhances the value of export
experimentation in nearby markets,
spurring entry into the latter even in the
short run. Once some of the entrants
realise a high export potential from their
experience in the neighbours’ markets,
they move on to the market of the
liberalising distant country.
Our research conjectures that a central
force behind this behaviour is the
uncertainty that firms face about their
own ability to export profitably. Because
the drivers of export success are different
for each firm (they are ‘firm-specific’), they
can only be uncovered when a firm
actually starts exporting. But because they
are uncertain and entry is costly, new
exporters tend to start small to avoid
adding negative variable profits to the
potentially lost sunk costs.
At the same time, because what drives
export success for an individual firm tends
to have ‘global scope’ beyond the first
market it enters, substantial entry costs
lead new exporters typically to enter a
single destination first and then to develop
their export potential. If their performance
is good in the first market, firms will
gradually expand there and pursue
‘sequential exporting’ to other
destinations.
Researchers in international business
have long recognised that export
profitability is uncertain and firm-specific.
For example, an early study shows how
the distinct knowledge and competencies
associated with export success (which are
typically related to product adaptation,
marketing and distribution) are only
acquired by firms once they start 
their foreign operations (Johanson and
Vahlne, 1977). 
Previous research has also illustrated
how a company with global scope can
apply knowledge from its initial foreign
operations to new export destinations.
Analysing firms in four emerging export
sectors in Argentina, a recent study
documents how such export-specific
knowledge can be used when accessing
different foreign markets (Artopoulos 
et al, 2011).
Similar reasoning applies to firm-
specific characteristics of demand. For
example, trade facilitation agencies, such
as SITPRO in the UK, stress the importance
of uncovering foreign demand for would-
be exporters, indicating that the key
uncertainty is about persistent
components of demand, some of which
may be present in multiple countries.
Developing our conjecture theoretically
provides a number of novel implications
for the dynamic behaviour patterns of
exporting firms, which we test empirically.
Using firm-level data on all Argentine
manufacturing exports between 2002 and
2007, we find strong evidence that firms’
first foreign destination plays a crucial role
in explaining future patterns of foreign
entry. It is in that first market where firms
learn the most. 
Specifically, as long as a firm continues
to be an exporter, its growth on entry (at
both the intensive margin – sales in the
market – and the extensive margin – the
number of markets served) is significantly
higher in its first foreign market than in
markets it enters subsequently. The
outcome is similar for exit: a firm is more
likely to stop right after entering its first
foreign destination than it is to leave
markets entered subsequently.
But if ‘export experimentation’ is
indeed key, the differential effect of the
first market should not apply universally to
all exporters. For example, if the firm were
to start exporting again after a break,
there would no longer be a fundamental
uncertainty to be uncovered.
Similarly, if a firm starts exporting by
serving multiple markets, it must be
because it is relatively confident about its
export success – so on average the role of
self-discovery should not be as
pronounced for such firms as it is for
single-market entrants. Uncertainty about
export profitability should also be less
marked for producers of homogeneous
goods, for which global reference prices
are available.
In turn, our theory about sequential
exporting suggests that we should observe
rapid first-market export growth, early
entry into additional markets and frequent
early first-market exit primarily among
first-time, single-market exporters of
differentiated products. This is indeed
what we find empirically. 
Hence, while firm-specific uncertainty
is but one possible force shaping firms'
export strategies, our evidence indicates
that it plays an unequivocal role in
explaining sequential exporting. Notice
that our mechanism does not deny the
possibility of a firm’s productivity (and
other characteristics) also shaping its
export behaviour. Even if a firm becomes
more efficient, which will raise the appeal
of exporting, uncertainty about potential
profitability in foreign markets could still
trigger sequential exporting.
The policy implications of a process of
sequential exporting driven by self-
discovery are far-reaching. Consider the
impact of trade liberalisation in nearby
Uncertainty
about their
potential
profitability 
in foreign
markets leads
firms to pursue
‘sequential
exporting’EXPORT
CentrePiece Winter 2011/12 
28
Thus, our findings suggest the
existence of a ‘trade externality’: lower
trade barriers in a country induce the entry
of foreign firms into other markets. For
example, trade liberalisation in a distant
but large country A (say, China) can
induce firms from country B (say, the UK)
to start exporting to nearby country C (say,
Germany). This possibility could provide a
novel motive for international coordination
of trade policies, one that strengthens the
rationale for institutions like the World
Trade Organization (WTO).
If the trade externality is stronger at
the regional level, this possibility could 
also help to explain the pattern of free
trade agreements throughout the world. 
Indeed, the impact of trade agreements
could be very distinct from what existing
studies indicate.
For example, a regional trade
agreement can boost export
experimentation by lowering the costs of
accessing the markets of bloc partners. As
a result of more experimentation, a greater
number of domestic firms would eventually
find it profitable to export to countries
outside the bloc. This would generate
‘trade creation’ that is very different from
the concept that economists often
emphasise: in addition to promoting intra-
bloc trade, a regional trading bloc can also
stimulate exports to non-members. 
If the agreement were of the
multilateral type, tracking down its effects
becomes even trickier. Indeed, third-
country and lagged effects of trade
liberalisation may help to
explain the difficulty in
identifying significant trade
effects of multilateral
liberalisation, thus
corroborating well-
entrenched beliefs that the
WTO (and its predecessor,
the General Agreement
on Tariffs and Trade)
have been crucial in
promoting world trade.
This article summarises ‘Sequential
Exporting’ by Facundo Albornoz, Hector
Calvo Pardo, Gregory Corcos and Emanuel
Ornelas, CEP Discussion Paper No. 974
(http://cep.lse.ac.uk/pubs/download/
dp0974.pdf).
Facundo Albornoz is at the University of
Birmingham. Hector Calvo-Pardo is at the
University of Southampton. Gregory Corcos
is at the Norwegian School of Economics and
Business Administration. Emanuel Ornelas
is director of CEP’s research programme on
globalisation.
Further reading
Alejandro Artopoulos, Daniel Friel and Juan
Carlos Hallak (2011) ‘Lifting the Domestic
Veil:The Challenges of Exporting
Differentiated Goods Across the Development
Divide’, National Bureau of Economic
Research Working Paper No. 16947
Jan Johanson and Jan-Erik Vahlne (1977) 
‘The Internationalization Process of the 
Firm – A Model of Knowledge Development
and Increasing Foreign Market
Commitments’, Journal of International
Business Studies 8: 23-32
The process of
sequential
exporting
suggests that
lower trade
barriers in one
country can
induce the entry
of foreign firms
into other
markets
Trade liberalisation in distant but
large country A (say, China) may
induce firms from country B (say,
the UK) to start exporting to
nearby country C (say, Germany)

Sequential exporting: how firms break into foreign markets

http://cep.lse.ac.uk/pubs/download/cp364.pdf

Sequential exporting: how firms break into foreign markets

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