Export performance of emerging market firms

International Business Review 18 (2009) 321–330

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Export performance of emerging market firms Deeksha A. Singh * Department of Business Policy, National University of Singapore, Singapore 117592, Singapore

A R T I C L E I N F O

A B S T R A C T

Article history: Received 22 January 2008 Received in revised form 20 February 2009 Accepted 11 March 2009

I investigate the export performance of firms from emerging economies based on resource based view (RBV) of a firm. Based on review of extant literature, I identify firm size, research and development expenditure, advertising expenditure and business group affiliation to be important antecedents of level of exporting activities of a firm. I utilize a two-stage least square estimation (G2SLS) on a sample of 47,140 firm-year observations over a period of sixteen years from 1990–2005. The findings suggest that export sales and domestic sales are interdependent and affect each other. R&D expenditure and business group affiliation positively affect export sales, however advertising expenditure negatively affects export sales. ß 2009 Elsevier Ltd. All rights reserved.

Keywords: Emerging markets Export performance Indian firms Resource based view

1. Introduction Global export trade contributes to about a quarter of world’s gross domestic product (World Bank, 2003). Despite the surge of direct foreign investment in recent years, firms in many emerging economies continue to rely on exports for venturing into foreign markets. There has been a renewed interest on the importance of exporting for international business researchers with an interest in emerging economies (e.g., Peng & York, 2001; Trabold, 2002). A study of the determinants of exports in the context of an emerging economy is an important contribution to the literature given that our understanding of what determines the export competitiveness of industries and firms is limited to say the least. The extant literature on exporting can be divided into two categories—macro level research and micro level research. At the macro level, scholars have modeled export performance based on international trade theories such as Heckscher–Ohlin (H–O) framework. Some of the issues investigated include export competitiveness of nations, magnitude and direction of trade flows between nations and how public policy affects exporting activities in specific sectors and industries. These studies have found trade flows between nations as a function of country level factor endowments and government policies. At the micro level, scholars have focused on establishing a link between different firm level characteristics, such as firm size, technological capabilities, and managerial motivation to export performance (Andersen & Kheam, 1998; Pla-Barber & Alegre, 2007; Wilkinson & Brouthers, 2006; Zou & Stan, 1998). In a review of more than 100 empirical studies on export performance, Katsikeas, Leonidou, and Morgan (2000) conclude that most of the existing research suffers from serious conceptual, methodological and practical limitations. I argue that there are at least three ways in which we can extend this literature. First, there is a need to provide greater theoretical insights into the export performance relationships. Most studies simply investigate the relationship between export performance and its antecedents, without relying on a comprehensive theoretical framework (for exception see Morgan, Kaleka, & Katsikeas, 2004; Wilkinson & Brouthers, 2006). Without a proper theoretical framework, it is often difficult to

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decipher the reasons behind inconsistent findings. Second, export research suffers from serious methodological shortcomings (Salomon & Shaver, 2005) which limit integration of empirical findings. As Zou and Stan (1998) point out, export research is known for uncoordinated and fragmented efforts, and scholars have not utilized the advances made in the research methods field in empirical modeling. Finally, much of the empirical work is based on firms coming from developed economy contexts. In their review of 10 years of export research, Zou and Stan (1998) found that more than 90% of the studies were conducted on firms based in developed economies. Likewise, in a review of export research published in top four international business journals (which I elaborate in the next section), I found that majority of the work was based on firms from developed economies. Given the changing nature of global trade, and increasing reliance of emerging economies on exporting to reach global markets, it is important to conduct investigation in emerging economies, taking into account the unique characteristics of the external environment in theoretical development. This study attempts to address the above limitations. I develop a theoretical model for assessing export performance using resource based view. I test my arguments on a longitudinal sample of 3542 Indian firms over a period of sixteen years from 1990 to 2005. The sixteen year period from 1990–2005 is appropriate as Indian economy started opening up in 1991 and there was a rapid growth of importing and exporting activities as a result of new outward looking policies of the Indian government. The findings support as well as challenge the conventional wisdom about the role of firm resources in affecting export performance. 2. Background 2.1. Literature review The importance of exports for international trade has tremendously increased in recent years. The increasing importance of exports has also generated a great deal of scholarly interest as can be gauged by the fact that top International Business journals have published research on this topic in recent years (e.g. Contractor & Mudambi, 2008; Estrin, Meyer, Wright, & Foliano, 2008; Filatotchev, Stephan, & Jindra, 2008; Sousa & Bradley, 2008). Scholars from diverse fields such as economics, management and marketing have explored various issues related to exports. I reviewed top four journals in international business field – Journal of International Business Studies, International Business Review, Management International Review, and Journal of World Business – to understand the current state of literature. I limited the scope of the review to recent eight years from 2001 to 2008. Table 1 presents a summary of the studies on export performance at both macro level as well as micro level, that appeared in these four journals during 2001–2008 time period. Early studies on firm level exporting behavior tried to identify the reason behind export activities, their gradual adoption by firms and the factors contributing to export growth (Cavusgil, 1976; Johanson & Vahlne, 1977; Tookey, 1964). Many of the early exporting models were based on the stages model of international expansion (Johanson & Vahlne, 1977). Although important to build our basic understanding, the stages model could not explain behavior of many firms, which did not go through the different stages, and many a times started with exports to places far off, both from geographic distance and psychic distance point of view (Rao & Naidu, 1992). In a simultaneous vein, researchers started exploring the effect of firm level and environmental determinants of exporting activities (Cavusgil & Zou, 1994; Zou & Stan, 1998). In this line, many researchers found firm size as one of the important factors affecting export performance. The findings about firm size-export performance relationship however have not been conclusive. Some studies found a positive relationship between firm size and export sales (for example, Majocchi et al., 2005; Wagner, 1995). Other studies report that firm size has no or very little impact on exporting activities (for example, Bonaccorsi, 1992). Still others report that firm size negatively affects export sales of a firm (for example, Patibandla, 1995). Other variables of interest, as reported in Table 1 include technological capabilities, human capital, exporting activities, and external factors. Surprisingly, most studies, barring a few (e.g. Wilkinson & Brouthers, 2006), did not utilize any theoretical framework in the analysis of the export behavior at the firm level. One of the reasons of inconclusive findings could be methodological problems associated with many of these studies. Many studies have investigated the relationship between firm size as measured by sales or assets and export intensity (exports to sales ratio) or absolute value of total exports. In a random sample of firms, there are many non-exporters. In addition, many firms report exports that are a positive share of all sales with a maximum of one (or 100%). Therefore, an empirical model has to deal with an endogenous variable that has many zeros and is bound between zero and one (or between 0 and 100%), including both limits. Studies have also analyzed export sales in isolation of domestic sales. In line with Salomon and Shaver (2005), we argue that for many firms, exports and domestic sales are likely to be simultaneously determined. Using export intensity (export sales to total sales) as a dependent variable is problematic as both numerator and denominator are endogenous. Many factors simultaneously affect export sales and domestic sales making it difficult to identify the net effect. By the same logic, using total exports as a dependent variable and predicting it with total sales as an indicator of firm size is also theoretically and methodologically problematic. In addition to the lack of sophistication on theoretical and methodological aspects, scholars have not paid adequate attention to contexts beyond the advanced economies for empirical tests. Many scholars have argued that findings derived from one context may not be applicable to another context especially if there are substantial differences in terms of nature

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Table 1 Antecedents of export performance. Study

Empirical setting

Dependent variable

Antecedents of export performance

Alvarez, 2004

295 Chilean SMEs

Export intensity

Baldauf, Cravens, & Wagner, 2000

184 Austrian firms

Export intensity, export sales and export effectiveness

Cadogan, Diamantopoulos, & Siguaw, 2002

206 US exporter firms

Contractor & Mudambi, 2008

25 countries (1989–2003)

Export sales growth and survey based export performance Goods and services export

Dosoglu-Guner, 2001

89 non-exporting US firms

Export intention

Estrin et al., 2008

494 MNE subsidiaries in Egypt, South Africa, India, Vietnam, Poland and Hungary 152 companies from Russia, Ukraine and Belarus

Export intensity

434 foreign invested firms in Poland, Hungary, Slovenia, Slovakia and Estonia 149 SMEs from Finland and Norway

Export intensity

International business efforts, process innovation and export promotion programs (+) Firm size, management’s motives to internationalize and use of differentiation strategy (+) Export market-oriented activities— degree of the firm’s market orientation in overseas markets (+) Human capital positively affects goods export, but not services export Ownership type (+); Organizational culture—adaptable cultures (+) and internationally oriented cultures () Host institutional environmenteconomic freedom (-); no effect of parent MNE size Export-oriented product development (+); unrelated external acquisition (); presence of foreign partner/investor (+) Foreign investor’s ownership (+); control over strategic decisions (+)

Hasnat, 2002 Kuivalainen, Sundqvist, & Servais, 2007

58 countries (country level data) 185 Finnish firms

Lages, Jap, & Griffith, 2008 Lee & Habte-Giorgis, 2004

519 Portuguese firms 455 US firms

Exports to GDP ratio Export sales performance, profit performance and sales efficiency performance Export intensity Export intensity

Ling-yee & Ogunmokun, 2001

111 Chinese firms

Perceptual measure

Majocchi, Bacchiocchi, & Mayrhofer, 2005 Peng & York, 2001

142 Italian SMEs

Export intensity

166 US firms

Net export sales margin, per capita export sales

Pla-Barber & Alegre, 2007 Rodriguez & Rodriguez, 2005

121 French biotechnology firms 1234 Spanish firms

Export intensity Export intensity

Seyoum, 2006 Sousa & Bradley, 2008

60 countries 874 Portuguese firms

Exports to US 5-item survey based measure

Styles, Patterson, & Ahmed, 2008

162 Indian firms

Verwaal & Donkers, 2002

Dyadic data from 125 Australia– Thailand exporter–importer partnerships 642 Dutch firms

Export intensity

Wilkinson & Brouthers, 2006

98 US SMEs

Perceptual measure

Filatotchev, Dyomina, Wright, & Buck, 2001 Filatotchev et al., 2008

Haahti, Madupu, Yavas, & Babakus, 2005

Export intensity

Export intensity, self-report perceptual measure of export sales growth

Knowledge intensity (+); Knowledge intensity mediates the relationship between cooperative strategies and export performance Human capital and investments (+) True born global firms (+)

Commitment to exporting (+) Product diversification (+); R&D intensity and firm size (+) Management’s perceived export advantages (+) Size (+); firm age or relative market experience (+) Export intermediary’s knowledge (+); intermediary’s involvement with commodity (+); ability to take title to goods (+) Innovation (+); no effect of firm size Product innovations (+); patents and process innovations (+); R&D spending intensity (+) Generalized system of preferences (+) Manager’s international experience (+); foreign market characteristics (price standardization strategy) (+) Commitment to future exchanges (+)

Size of export relationships (+); size of export relationships moderates the relationship between firm size and export intensity Export promotion activities (+)

and characteristics of firms and business environment therein (Khanna & Rivkin, 2001). This necessitates that we test the theories and models derived in developed economy contexts in emerging economies. Even though scholars have advocated replication studies for the development and progress of scientific research (Kuhn, 1970; Popper, 1959), we do not see much of replication work in the field of business and management (Tsang & Kwan, 1999). Given the early stages of development of our theories and methods, importance of replication increases many folds for social science disciplines such as management (Singh, Ang, & Leong, 2003). With respect to exports research, but for a few exceptions majority of firm level research is based primarily on firms based in advanced economies. In a study on firm size and exporting behavior, Calof (1994) reviewed 20 representative studies, 18 of which

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were based on data from the US or European firms. A similar pattern, with an overwhelming focus on developed economies can be found in the review presented in Table 1. The overwhelming focus on the firms from the advanced economies, even though important from the point of view of theory development for the advanced economy context, does not help much in the generalizability of these findings. In the next section, I elaborate on different characteristics of an emerging economy and firms based in emerging economies that make it important to extend the export literature to an emerging economy context. 2.2. Emerging economy firms How are emerging economy firms different from those based in advanced economies? A distinguishing aspect of emerging market firms is their small size. Firms from emerging economies tend to be at a relative resource disadvantage compared to the firms from advanced economies. Most of these firms tend to be much smaller, even in the large emerging nations such as India and China. For example, a sample drawn by Ray (2004) from the top 500 Indian companies, had mean net sales amounting to only $165 million (spread over a mean 3.19, usually, unrelated businesses) and mean profits of only $11 million. In addition, unlike the developed economy firms, which expand internationally through FDI and other high involvement, high risk modes; emerging economies firms carry out their international expansion primarily through exporting (Vernon-Wortzel & Wortzel, 1988). The differences between emerging economy and developed economy firms are also due to the very nature of emerging markets. For many years, many of the emerging economies had a centrally controlled, closed market system. Many industrial sectors were reserved for companies, promoted and supervised by the governments. Even the ones which were not reserved were not open for entrepreneurs to freely choose from. One had to get a license from the government before one could start a new business or even expand the existing business. These restrictions inhibited the growth of many large modern enterprises in emerging economies. Instead, there were many small firms, operating at an uneconomically small scale in different industrial sub sectors. However, in recent years several emerging economies have gone through a process of institutional transition with the objective of unleashing the entrepreneurial potential of local entrepreneurs (Gaur & Kumar, 2009; Singh & Gaur, 2009). Governments have relaxed the restrictions on private sector activities. This has resulted in an increase in the opportunities for local firms to explore the foreign markets on the one hand and an upsurge in foreign firms in the domestic markets on the other hand. With an increase in competition in the domestic markets, local firms have no choice but to engage in exporting activities. For these firms, exporting powerfully complements local market size and enables them to achieve scale economies. For example, Svetlicic and Rojec (2003) suggest that much of the international activities of Central and East European companies have been motivated by foreign market-seeking behavior. The above discussion highlights the need to explore the exporting behavior of emerging economy firms by taking into account the unique environmental characteristics that may make some factors more important while others less important for emerging economy firms. 3. Theory and hypotheses Resource based view has emerged as one of the most commonly used theoretical framework in export research (Andersen & Kheam, 1998; Dhanraj & Beamish, 2003; Lopez-Rodriguez & Garcia-Rodriguez, 2005; Wilkinson & Brouthers, 2006). According to resource based view, firms are unique bundle of resources, which provide them with competitive advantage against other firms (Barney, 1991). However, not all resources are useful in differentiating a firm against its competitors. In order for a resource to be a differentiating factor, it should satisfy the four criteria of being valuable, rare, inimitable, and non-substitutable. There is empirical support for both direct as well as indirect effect of firm resources on firm performance. Investigating the indirect linkages, scholars have found that resources and capabilities positively affect export performance by enhancing the export venture competitiveness (Morgan et al., 2004); affecting the technological intensity and internationalization (Dhanraj & Beamish, 2003); and affecting export marketing strategy (Cavusgil & Zou, 1994). The direct linkages that have been investigated in the literature include the effect of firm size, availability of marketing staff and time, and technological capabilities (Alvarez, 2004; Wilkinson & Brouthers, 2006). The extant literature, with its focus on the direct and indirect impact of traditional resources on export performance has advanced our understanding of the antecedents of firm level exporting behavior. However it is limited in explaining the exporting behavior of firms from emerging economies, which operate in less munificent environments, and suffer from resource scarcity as compared to their developed economy counter parts. This necessitates that we augment the resource based explanations to take into account other non-traditional resources that are possessed by emerging economy firms. Network based relationship in the form of being affiliated to a business group is one such resource for emerging economy firms, that has not received enough attention in extant literature. I investigate the impact of this and other more traditional resources on export performance as I develop my hypotheses in the next section. 3.1. Firm size The literature on firm size and export performance largely points towards a positive impact of size on export performance (Bonaccorsi, 1992; Dhanraj & Beamish, 2003; Majocchi et al., 2005; Wagner, 1995), even though some scholars found no or

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negative relationship between size and export performance (Pla-Barber & Alegre, 2007). Importance of size for exports has its basis in several theoretical concepts in economics and strategy literature. A larger firm size provides more scale economies, easier access to capital needed for exporting, and a greater ability to absorb the risks associated with exporting (Wagner, 1995). There are many fixed costs involved in export business, such as market research, redesigning of products for foreign customers, and setting up of a dedicated team to manage export operations. It is easier for larger organization to incur these fixed costs. Resource based view of the firm (Barney, 1991) also points to a positive link between firm size and export performance. According to the resource based view, a firm’s size represents the organizational resource base for various expansion activities such as diversification in different product and geographic markets. Firm size is an indicator of managerial and financial resources available with a firm, and firms with excess resources are more likely to look for growth opportunities (Penrose, 1959). A larger size also suggests that the firm has a strong domestic position. Firms with strong position in the domestic market are more likely to be successful in exports as the strength in the domestic market can be leveraged in international markets (Bernard & Jensen, 1999). Size becomes particularly important for emerging economy firms. In emerging economies, most of the firms are small and still growing in the domestic market. They have not yet fully captured and exploited the market in their home country, even though the market itself is very small. These firms will first start their growth process in the domestic market (Bonaccorsi, 1992). When these firms are small in size they avoid undertaking risky activities like exporting as they have severe resource constraints in terms of financial, technological and personnel resources to divulge in exporting activity. As the domestic sales of these firms increases and they grow in size, they have to look beyond national borders for further growth as opportunities in domestic markets become limited very rapidly due to small size of domestic markets. Exporting becomes the only means to increase sales, and many a times to counter the fierce competition in the domestic markets. As compared to other modes of entry, exporting requires relatively less resource commitments in terms of human, financial and other resources, making it a preferred choice for firms to enter foreign markets cost effectively (Leonidou & Adams-Florou, 1999). Larger size also helps firms to absorb risks and have greater bargaining power (Erramilli & Rao, 1993). Larger firms can deploy more resources for gathering information about foreign markets and cover the inconsistencies of foreign markets than the smaller firms. The arguments from scale economies as well as resource based view point towards a positive link between size and export sales. Accordingly, Hypothesis 1. Size of a firm is positively related to its export sales. 3.2. Firm resources Research has shown technological capabilities and marketing capabilities to be important resources for long term competitiveness of a firm. According to endogenous growth theory (Grossman & Helpman, 1995), export performance is dependent on the technological competitiveness, which in turn is dependent on the level of innovative activities. Buckley and Casson (1976) found technology as an important factor in determining the product mobility across national boundaries. R&D expenditure is commonly used as a proxy to identify the focus on technological and innovation activities in an organization. A higher level of R&D expenditure helps firms move up in the value chain by creating more economic value added in the production process through sophisticated and improved quality products. The resource based view of the firm also highlights the importance of technological capabilities. Technological resources and capabilities can be a source of long term competitive advantage for firms especially in foreign markets (Alvarez, 2004; Anand & Kogut, 1997). These capabilities translate tangible and intangible resources of the firm into new innovative products and technologies and thereby enhance firm’s competitiveness (Buckley & Casson, 1976; Morck & Yeung, 1991). In fact, many firms invest in R&D with the specific purpose of innovating for the foreign markets (Kuemmerle, 1999). The empirical evidence with respect to the relationship between R&D expenditure and export sales is mixed in nature. While many studies have found a positive relationship between the two (Cooper & Kleinschmidt, 1985; Moini, 1995; Wagner, 1995), some studies reported no relationship between R&D expenditure and exports (Lefebvre, Lefebvre, & Bourgault, 1998). However, given the theoretical support in favor of a positive relationship between the technological capabilities and exports, I hypothesize: Hypothesis 2. R&D expenditure of a firm is positively related to its export sales. Similar to technological capabilities, marketing capabilities also determine the success of a firm in the foreign markets. A vast amount of literature in marketing and industrial organization points that firms advertise in order to stimulate demand, establish a unique position for their products by differentiation and brand building and create monopoly situation by erecting entry barriers. All this is expected to help in increasing the domestic sales as well as export sales as emerging market firms often target the diaspora as the first set of customers in the foreign markets. Brands developed through the advertising efforts in the domestic market help in selling to the diaspora. In addition, some of the branding effort, specially done in the new media such as internet is global in nature and serves the domestic as well as foreign markets. Accordingly I hypothesize: Hypothesis 3. The advertising expenditure of a firm is positively related to its export sales.

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3.3. Network resources—business group affiliation Khanna and Palepu (2000) observe that emerging economies lack the institutions needed for efficient market based exchange. These institutions, such as an efficient capital market, labor market, product market, and government regulatory mechanisms are well developed in countries of North America and Western Europe but are still in their infancy stage in emerging markets such as Brazil, India and China (Chacar & Vissa, 2005). In order to circumvent the inefficiencies due to lack of external institutions, firms often arrange themselves in the form of business groups and create internal markets for capital, labor and products. Group affiliation acts as a source of competitive advantage for firms in emerging markets as they are in a better strategic position to control key sources of product and factor markets necessary for smooth functioning of day-to-day operations (Khanna & Yafeh, 2005). Emerging market environments are very risky due to uncertain economic and political systems. The exposure to export markets compounds the risk faced by firms in emerging markets. As a result of these risks, firms that can control the sources and supplies of their raw materials as well as sales of their finished products to the end consumers are better-off than those that cannot. These conditions encourage and support firms operating as part of a business group (Khanna & Rivkin, 2001; Chang & Choi, 1988). While profitability of group affiliated firms may suffer due to internal resource sharing and tunneling (Bertrand, Mehta, & Mullainathan, 2000), the network related benefits that accrue to the member firms are likely to enhance their export competitiveness. Accordingly, I hypothesize: Hypothesis 4. Business group affiliation will be positively related to a firm’s export sales. 4. Methods 4.1. Empirical modeling In much of the empirical literature export performance is modeled as export intensity, which is the ratio of export sales to total sales. In a review of more than 100 empirical studies on export performance, Katsikeas et al. (2000) found that 61% of the studies used exports to sales ratio as a measure of export performance. As I argued earlier, export intensity as a dependent variable poses methodological challenges as the dependent variable, by definition, is bound between a lower limit and an upper limit (Wagner, 2001). In addition, given that export sales and domestic sales (which is often used as a proxy for firm size) are simultaneously determined for several firms, we cannot use export intensity or total value of exports without taking into account the endogenous nature of the exports and domestic sales. To address the above problems, I employ two-stage least squares (G2SLS) with random effects and estimate the following equation:

Export sales ¼ f ðdomestic sales; R&D; advertising; group affiliation; world GDP; exchange rate; age; year indicators; industry indicatorsÞ

(1)

In addition, to show that domestic sales and export sales are simultaneously determined, I estimate another equation in which domestic sales is the dependent variable: Domestic sales ¼ f ðexport sales; R&D; advertising; distribution; group affiliation; age; year indicators; industry indicatorsÞ (2) In order to identify the above systems of equations, we must have explanatory variables that predict only exports and that predict only domestic sales (Greene, 2000). From the theoretical model, R&D expenses, advertising expenses, group affiliation, age, year indicators and industry indicators appear in both equations. I use distribution expenditure as instrumental variable in the equation in which firm size (domestic sales) is the dependent variable and exchange rate and world GDP predict in the equation in which export sales is the dependent variable. Thus the above system of equations is identified. Following Salomon and Shaver (2005), I employed G2SLS with random effects on each equation. I chose Random-effects estimation over Fixed-effects as the group affiliation variable is constant over time. However, an important assumption for choosing random-effect estimation is that the unobserved heterogeneity should not be correlated with the independent variables. I tested for this assumption and appropriateness of random-effects estimation using Hausman test after removing the group affiliation, year and industry indicator variables. I found no significant difference between random effects and fixed effects estimates, justifying the use of random effects estimation. 4.2. Sample I tested the hypotheses using a sample of 3542 Indian manufacturing firms from 1990 to 2005. I derived the list of Indian firms from the annual database, Prowess, published by the Centre for Monitoring Indian Economy (CMIE). This database is built on raw data obtained from reports that all companies file with the Registrar of Companies, a federal agency. The

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Prowess database provides industrial classification up to 5 digits for each firm. Based on the first two digits, I chose the manufacturing firms as those falling between 15 and 37. I obtained data from 1990 to 2005 to develop a longitudinal data set covering 16 years. The initial years did not have the same coverage of firms as later years and some of the firms disappeared from the database during the later years as a result of a merger or dissolution. As a result I had an unbalanced panel with 41,434 firm year observations. The database provides unambiguous information about the ownership of a firm. I utilized this information to classify the firm as group affiliated or unaffiliated. In addition, I had information on total exports, research and development (R&D) expenses, advertising expenses, distribution expenses, total sales, and age of the firm for each year. 4.3. Variables I use absolute value of export sales and domestic sales to estimate simultaneous equations shown later in the modeling procedure. For predicting export sales, firm size as measured by domestic sales, R&D expenditure, advertising expenditure, group affiliation, exchange rate and world GDP were the explanatory variables. Here, I estimated domestic sales in the first stage of 2SLS using distribution expenditure as an additional variable. For predicting domestic sales, export sales, R&D expenditure, advertising expenditure, distribution expenditure and group affiliation were the explanatory variables. Here, I estimated export sales in the first stage of 2SLS using exchange rate and world GDP as additional variables. I measured domestic sales as total sales minus export earnings due to exports of goods. R&D, advertising, and distribution expenditures were taken as the total value of the local currency spent on research, advertising and distribution respectively, in a particular year. Group affiliation was an indicator variable which took the value of one if the firm was affiliated to a business group and zero if it was not. I controlled for age of the firm and industry fixed effects. I measured age of the firm by total number of years since inception. I used 21 industry indicator variables based on the two digit national industrial classification to control for 22 different manufacturing industries. 5. Results Table 2 provides the descriptive statistics and correlations. As can be seen from the mean values, 42% of the firms in the sample are business group affiliated. Average age of the firms in the sample was 25.32 years. The highest correlation is between export sales and domestic sales for which I am testing the interdependence argument. All other correlations are modest to low, and pose no problem of multicollinearity between the independent variables, given the large sample size. Table 3 presents the results from the two systems of equations that I estimate. Column 1 and 2 present results for Eq. (1) (where exports sales is the dependent variable) and Eq. (2) (where domestic sales is the dependent variable) respectively. I discuss the results for both the equations, even though the hypotheses are tested based on Eq. (1) only. H1 predicted that firm size is positively related to export sales. The coefficient on firm size as measured by domestic sales is positive and significant (b = 4.885, p < .001). H1 is supported. Domestic sales is also positively and significantly related to export sales (b = 0.203, p < .001). Together these results support the argument that domestic sales and export sales are determined simultaneously and should be treated as such in empirical models. H2 and H3 predicted that firm resources as measured by R&D expenditure and advertising expenditure are positively related to export sales. The effect of R&D expenditure on export sales is positive and significant (b = 1.171, p < .001). This provides a support for H2. However, contrary to my expectations, the effect of advertising expenditure on a firm’s export sales is negative and significant (b = 3.744, p < .001). H3 is not supported. Advertising expenditure did have a positive and significant effect on domestic sales (b = 18.370, p < .001). I discuss the potential reasons for the unexpected effect of advertising expenditure on export sales in the next section. H4 predicted that firms affiliated to a business group will have Table 2 Descriptive statistics and correlations.a. Variables

Mean

S.D.

1.

2.

3.

4.

5.

6.

7.

8.

9.

1. 2. 3. 4. 5. 6. 7. 8. 9.

13.88 98.12 0.30 0.71 2.55 0.42 31045.35 39.61 25.32

165.50 667.43 4.31 5.48 18.88 0.49 3982.67 7.89 73.72

– 0.804 0.246 0.137 0.591 0.051 0.054 0.037 0.006

– 0.324 0.309 0.755 0.117 0.050 0.036 0.019

– 0.381 0.236 0.070 0.051 0.035 0.013

– 0.243 0.117 0.053 0.042 0.021

– 0.121 0.052 0.037 0.026

– 0.110 0.128 0.050

– 0.890 0.055

– 0.033

–

Exports sales Domestic sales R&D expenditure Advertising expenditure Distribution expenditure Group affiliation World GDP Exchange rate Age a

Based on data for year 2000. 1, 2, 3, 4 and 5 are in 100 million Indian national Rupees (INR). 7 is in billions of US $. N = 41434; correlations > or < 0.01 are significant at p = 0.01 level.

D.A. Singh / International Business Review 18 (2009) 321–330

328 Table 3 2SLS random effects estimates.a.

Export sales Coefficient Domestic sales Export sales R&D expenditure Advertising expenditure Distribution expenditure Group affiliation World GDP Exchange rate Age No. of cases (per year) R2 Wald x2 a

Domestic sales Std. error

0.203***

0.001

1.171*** 3.744***

0.125 0.099

7.578*** 0.002*** 0.776*** 0.018** 2590 0.67 47708.20***

0.994 0.000 0.214 0.006

Coefficient 4.886*** 5.581*** 18.369*** 0.189 37.187***

0.086** 2590 0.68 51822.21***

Std. error 0.288 1.544 0.661 1.469 4.927

0.032

Coefficient estimates for industry indicator variables not presented in the table; *p < 0.05; **p < 0.01; ***p < 0.001.

Fig. 1. Comparison between affiliated and un-affiliated firms (based on the data of year 2000).

higher export sales. The coefficient of the group affiliation variable is positive and significant (b = 7.578, p < .001). H4 is supported. As expected, group affiliation also has a positive and significant effect on domestic sales. Fig. 1 shows the difference in mean values of exports and domestic sales for affiliated and unaffiliated firms based on the data of year 2000. Mean exports for unaffiliated and affiliated firms is 0.535 and 2.077 billion INR respectively. Mean domestic sales for unaffiliated and affiliated firms is 3.019 and 20.032 billion INR respectively. While the mean values of both exports and domestic sales are higher for firms affiliated to business groups than unaffiliated ones, the difference is more pronounced for domestic sales than for exports. I also found strong industry effects. Barring one, all the industry indicator variables were significant in the equation predicting export sales. In the equation predicting domestic sales, 7 of the 22 industry indicator variables were significant. Further, the hypothesized relationships were not in the same direction if I did not use the industry controls. This highlights the strong variation between industries in terms of exports and sales. Results of previous studies, which did not control for industry effects, may be misleading. I discuss these findings in the next section. 6. Discussion and conclusion I utilized resource based view to investigate the export performance of emerging market firms. I hypothesized that traditional resources such as firm size, technological expenditure and advertising expenditure will positively affect export performance. In addition, I hypothesized that network related resources as derived from being affiliated to a business group in emerging economies will also have a positive impact on export performance. I structured my investigation acknowledging the interdependence between the export sales and firm size, and utilized an estimation procedure which recognizes this interdependence. Using 2SLS with random effect method, I found that domestic sales positively affect export sales and that the two are interdependent. I also found that R&D expenditure positively affects a firm’s level of export sales. However advertising expenditure has a negative impact on export sales. Finally group affiliation has a positive impact on export sales. The negative effect of advertising expenditure, though contrary to my hypothesis, is not entirely surprising. Advertising efforts are generally focused on a specific segment, which is often domestic (Benvignati, 1990). Due to limited resources, emerging market firms may not target overseas customers in the advertising campaign. Lee and Griffith (2004) also found insignificant relationship between advertising expenditure and export performance.

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To assess the robustness of these results I tested the models in a few sub samples. Firms in India are not required to report the expenditure which is less than 1% of the total turnover in their annual reports. Such expenses can be reported under miscellaneous category. As a result, many firms may not have reported the R&D and advertising expenditure. Likewise, many firms may not have any exports and the question of interdependence does not arise for such firms. Therefore I created two sub samples—one in which firms had a positive value of export sales and the other in which firms had a positive value for R&D as well as advertising expenditure. The results were qualitatively the same in both the sub samples. Before discussing the contributions of this research, its limitations need to be noted. The model in this paper is quite parsimonious and many other important variables such as managerial orientations are not included. While parsimonious models with adequate predictive power are good for theory building, one should not lose sight of other explanations for export performance. Further investigations can be made to incorporate other factors affecting export performance applying the methodology suggested in this paper. In addition, the empirical setting of the study is an emerging economy, which means that our model may not be equally good for other contexts. In particular, business group affiliation, even though prevalent across many emerging economies, has different rationales in different institutional contexts (Khanna & Yafeh, 2005). Just as the findings obtained in developed economy contexts may not be applicable to an emerging economy, the findings of this study may also be context specific. Future studies need to develop and test models in other contexts using the correct methodology. This study contributes to theory and practice in several ways. First, the findings provide stronger support for Salomon & Shaver’s (2005) arguments about interdependence of exports and domestic sales, which is important from both theoretical as well as empirical perspectives. Second, the finding that business group affiliation enhances a firm’s export performance point towards the utility of network based resources in emerging economies (Chang & Choi, 1988; Khanna & Palepu, 2000; Leff, 1978). Research on group affiliation and firm performance fails to identify the intervening factors through which group affiliation may be profitable for emerging market firms. The findings of this study show that exports could be one such intervening variable. This study also highlights the importance of replication studies. Replications can advance theory by raising new questions (Kuhn, 1970; Popper, 1959; Singh et al., 2003). Some of the anomalies of this study do exactly the same. Specifically the negative effects of advertising expenditure on export sales is contrary to existing theoretical arguments and need further exploration in other emerging economy contexts. Acknowledgements An earlier version of this paper was presented at the AIB 2006 conference. The helpful comments of the conference participants are gratefully acknowledged. References

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