Collaborative Research - Penetrating Foreign Markets: A Firm and Product-Level Investigation

ABSTRACT

PROPOSAL NUMBER: 0318238

INSTITUTION: NBER/New York University

NSF PROGRAM: ECONOMICS

PRINCIPAL INVESTIGATOR: Eaton, Jonathan

PROPOSAL TITLE: Collaborative Research - Penetrating Foreign Markets: A Firm and Product-Level Investigation

Rapid technological innovation, international diffusion of technology, and integration of world markets have transformed the global economy in the last three decades. While these have been investigated at the aggregate and sectoral levels, individual firms that generate and respond to such changes are less studied. This research investigates the processes of innovation and globalization that integrates data at the scale of firms, products, sectors, and nations. It develops a methodology to investigate product innovation and entry into foreign markets. The methodology characterizes how firms compete in selling across national markets separated by trade barriers. The model of competition across space is linked to a model of firm dynamics involving the innovation of new products and the obsolescence of old ones. This methodology is applied to an extensive administrative dataset of private-sector French manufacturing firms since 1986. These data are unusual in that they indicate, for each firm in each year, the amount exported of each product to individual countries.

A goal of the research is to quantify the costs of selling in a foreign market. Questions addressed are: To what extent is the cost of selling in a foreign market fixed or variable? To what extent are fixed costs sunk or recurrent? Do firms have individual 'networks' of export destinations? A benefit of quantifying the costs of exporting is to accurately assess the benefits of different forms of market integration. For example, a finding that the fixed cost of entering a national market is substantial suggests that small countries are particularly likely to benefit from market integration. A second goal is to relate aggregate trade flows to what goes on at the firm level. How is the variation in export destination reflected in the quantities that individual firms sell and the participation of firms in exporting? This knowledge will provide insight into how various scenarios for the global economy are reflected in the performance of individual producers. A third goal is a better understanding of the role of exports in the life-cycle of firms. Are there connections between product innovation, firm growth, and penetration of foreign markets?

This study contributes to our understanding of the private firms in the international economy. The new methodology also allows us to integrate data sets at the scale of firms, sectors, and nations as well as enhance our ability to exploit the increasing array of available social, economic, and technological indicators to study fundamental global phenomena using theoretical models, advanced statistical techniques, and computer technology.