International Business Review 21 (2012) 766–781

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International Business Review

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The decision to export: Firm heterogeneity, sunk costs, and

spatial concentration
Jingtao Yi a,1,*, Chengqi Wang b,c
a
School of Business, Renmin University of China, Beijing, PR China
b
Nottingham University Business School, University of Nottingham, Nottingham NG8 1BB, United Kingdom
c
Jilin University of Finance and Economics, Changchun 130117, China

A R T I C L E I N F O A B S T R A C T

Article history: Integrating perspectives of the Uppsala model of internationalization process, international
Received 27 June 2010 new ventures and trade theories of heterogeneous firms, this paper develops a dynamic
Received in revised form 28 August 2011 discrete-choice model of export decisions by a profit-maximizing firm. Empirical analyses
Accepted 1 September 2011 based on a panel data set of Chinese firms show that sunk costs, productivity, firm size,
foreign ownership, industry competition and spatial concentration are positively associated
Keywords: with the decision to export, while state ownership has a negative association with the
Chinese firms probability of exporting. However, we find that the relationships are not always uniform and
Export
depend on firm-specific idiosyncrasies. The results show that foreign-invested firms and
Firm heterogeneity
large firms (regardless of ownership) rely on productivity performance related advantages
Ownership structure
Sunk costs
for expanding overseas, while domestic firms, especially small- and medium-sized
enterprises, build competitive advantage by leveraging agglomeration economies and the
associated spillovers. Our results highlight the role of firm heterogeneity, sunk costs and
spatial concentration in shaping the export behavior of firms.
ß 2011 Elsevier Ltd. All rights reserved.

1. Introduction

Despite the fact that firms are increasingly using a wider range of methods to serve foreign markets, exporting continues
to be an important mode of internationalization for firms (Dhanaraj & Beamish, 2003). Exporting constitutes the initial
preferred way of internationalization for firms (Johanson & Vahlne, 1977; Young, Wheeler, & Davies, 1989). However,
although discussions of what factors shape firms’ decision to export have been ongoing for many years, theoretical and
empirical knowledge of exporting remains limited and offers few insights for managers who are responsible for
internationalization decisions (Czinkota, 2000; Morgan, Kaleka, & Katsikeas, 2004). Indeed, there is still considerable interest
in export research in the field of international business (Styles, Patterson, & Ahmed, 2008).
In the international business literature, the process school, such as the Uppsala model of internationalization
(Johanson & Vahlne, 1977), explains not only why and how firms internationalize in a gradual and linear fashion but
also why firms export and the role of exporting in the internationalization process. The theory of international new
ventures (INV) (Oviatt & McDougall, 1994), on the other hand, integrates multiple theoretical perspectives such as
transaction costs, resource-based view (RBV), corporate governance and international entrepreneurship, attempting to

* Corresponding author at: Room 715, Mingde Business Building, Renmin University of China, No. 59, Zhongguancun Street, Haidian District, Beijing,
100872, PR China. Tel.: +86 10 82500436; fax: +86 10 82509169.
E-mail address: jingtaoyee@hotmail.com (J. Yi).
1
Assistant Professor in Economics at the School of Business, Renmin University of China since 2008; PhD in Economics at the School of Economics,
University of Nottingham, United Kingdom in 2003–2007; Senior Research Fellow at the University of Nottingham Ningbo, China since 2008.

0969-5931/$ – see front matter ß 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ibusrev.2011.09.001
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 767

explain export activities as interactions between internal and external forces (Naudé & Rossouw, 2010). While the
Uppsala model and INV explain the antecedents of exporting from different lens, the two perspectives complement to
each other (Autio, 2005). Liu, Xiao, and Huang (2008), for example, emphasize that most of factors that are identified for
explaining firm internationalization have theoretical bases in either the process theory or the INV.
In the economics literature, trade models of heterogeneous firms (Bernard, Eaton, Jensen, & Kortum, 2003; Melitz, 2003)
have emerged in recent years to coincide with international business studies on firm level analyses of export activities. These
models address antecedents of exporting that both the process theory and the INV ignore, either explicitly or implicitly, i.e.,
the importance of sunk costs. They also provide a more insightful understanding of exporting from the view of the firm than
traditional and new trade theories which focus on industry and macro-level analyses (Greenaway & Kneller, 2007). Although
prior research has provided evidence of the importance of trade models of heterogeneous firms, there are as yet no studies in
international business literature that examine the firm level antecedents of exporting by integrating the process-based view,
INV and the view of firm heterogeneity in a unified framework. The resulting lack of a comprehensive theory base for
explaining the decision of exporting makes it difficult to integrate findings from different studies into a coherent body of
knowledge (Aulakh, Kotabe, & Teegen, 2000).
This paper seeks to address this research gap. Our analysis differs from previous studies in some important ways.
First, prior theorizing relies on single perspectives, providing only a partial account of the antecedents of exporting.
Drawing on trade theories of heterogeneous firms, we develop and test a framework of export market participation
that integrates the process theory, the INV view, and economic geography, and thus providing a fuller account of the
antecedents of exporting. Second, although the significance of sunk costs associated with internationalization is well
analyzed in the trade models of heterogeneous firms, it is absent in the process theory and INVs. We integrate sunk
costs and the notion of self-select exporting with the Johanson–Vahlne model of internationalization, recognizing
that the importance of psychic distance and knowledge about foreign markets that may have important implications
for sunk costs and thus the internationalization behavior of firms (Javalgi, Deligonul, Dixit, & Cavusgil, 2011). By
theorizing exporting behavior in this manner, we provide important insights into the extensions of both the Johanson–
Vahlne model and the Oviatt–McDougall model. Third, firms feature different types of ownership advantages and thus
make different location choices in internationalization, implying that location choices are a matter of ‘right tree for the
right bird’ (Buckley & Ghauri, 2004; Javalgi et al., 2011; Lei & Chen, 2011). In this vein, prior studies stress the
importance of spillovers from neighboring exporters (Greenaway & Kneller, 2008). We extend this line of analysis to
include location advantages associated with transport costs and agglomeration economies. Thus, as firms require
diverse knowledge to engage in internationalization, they learn from both exporters and non-exporters operating in the
economic zones.

2. Model and hypotheses

2.1. A theoretical model

The conventional model of the decision to export assumes that a rational firm aims to maximize expected profits from
exporting. It assumes that once it enters the export market, the firm produces at the profit-maximizing level of exports, qi j . In
each period j, the firm i chooses the infinite sequence of values fqi j g1
j¼t to maximize the expected present value of payoffs Vit,
specified as:
0 1
X
1 n ot1
@ jt A
o1  Et
V it ðÞ ¼ nmax d Pi jj qi j (1)
j¼1
j¼t
qi j
j¼t

where d is the one-period discount rate, Pij is the amount of profits by which the firm i’s expected gross profits when
exporting differs
n ot1from those when not exporting, and expectations are conditioned on the firm-specific production
information qi j .
j¼1

2.1.1. Sunk costs

It is assumed that firm i faces one-time entry costs Ni that may include the costs of acquiring information about demand
conditions and establishing a distribution system when it enters the export market, or costs of exit Ki that may contain
irreversible investment when it exits from the export market. Then profits for the firm with entry and exit costs are given as:

P i j ¼ ½pi j ðX i j ; Z i j Þ  Ni ð1  Y i j1 ÞY i j  K i Y i j1 ð1  Y i j Þ (2)

where the function pij(Xij,Zij) represents the increment to expected profits associated with exporting in period j, the vector Xij
includes firm-specific factors that influence current operating profits (i.e., productivity, size, wage), the vector Zij includes
other factors from the market that affect the profits (i.e., region-industry spillovers, location), Yij is the status of exporting, i.e.,
Yij = 1 if the firm i exports in period j and Yij = 0 otherwise. The firm does not pay costs of entry if it exported in the previous
period, i.e., Yij1 = 1, but it has to pay costs of exit if it exits from the export market. The payoffs for the firm are therefore the
768 J. Yi, C. Wang / International Business Review 21 (2012) 766–781

profits from exporting net of sunk costs. The costs of entry or exit are time invariant, and therefore the framework rules out
the possibility that these costs vary over time as market integration increases and transport costs decline.2

2.1.2. The spatial economy

Knowledge spillovers, location and agglomeration economies that allow for spatial concentration may favor exporting by
firms (Fujita, Krugman, & Venables, 2001). Spillovers arising from the activities of other neighboring firms reduce the cost of
access to the export market (Aitken, Hanson, & Harrison, 1997). Location advantages in terms of backward and forward
linkages also reduce the cost of export participation. Agglomeration economies imply thick markets for specialized skills that
reduce cost of exporting. These factors influence the cost function and the profits from exporting with spatial concentration
and can be modeled as:
 
pi j ðX i j ; Z i j Þ ¼ pi j qi j  ci j ðX i j ; Z i j ; qi j1 qi j (3)
@ci j ðÞ
<0 (4)
@Z i j
where pij is the price of goods from the firm i sold abroad in period j, cij() is the variable cost of producing quantity qi j . The
spatial concentration will lead to a reduction in costs of production for exporting. In addition, if there is any learning effect
from exporting, the production of the exported good in period j  1 will reduce costs of production for exporting in period j
(Clerides, Lach, & Tybout, 1998).

2.1.3. The export market participation rule

The decision to export by the firm depends on its evaluation of profits from exporting. A firm chooses to export in period j,
i.e., qi j > 0, if the incremental profits from exporting are not less than zero. The export market participation for the firm is
then described by the dynamic discrete-choice equation:

Y i j ¼ 1 if pi j  Ni þ ðN i þ K i ÞY i j1  0
(5)
Y i j ¼ 0 if pi j  Ni þ ðNi þ K i ÞY i j1 < 0

where pi j is the latent variable representing the increment to expected gross future profits for firm i if it exports in period j.
In theprofit-maximizing
1 framework, the decisions to enter the export market are summarized as the infinite sequence of
choices Y i j j¼t to maximize the payoff function. Employing Bellman’s optimal export market participation equation, the
decision to export by firm i in period t can be made if its current export status Yit satisfies the maximized payoff as (Roberts &
Tybout, 1997):
 n ot1   n ot1 
V it ðÞ ¼ max P it j qi j þ dEt V itþ1 ðÞj qi j (6)
fY it g j¼1 j¼1

Therefore, the decision to enter the export market at the current period is based on the expected payoff at present and in
the future. Firm i in period t will export, i.e., Yit = 1 if

pit ðX it ; Z it Þ þ dfEt ðV itþ1 ðÞjY it ¼ 1Þ  Et ðV itþ1 ðÞjY it ¼ 0Þg  Ni  ðN i þ K i ÞY it1 (7)

n o
The increment to expected gross future profits pi j at current period is then defined as:
j¼t

p ¼ pit ðX it ; Z it Þ þ dfEt ðV itþ1 ðÞjY it ¼ 1Þ  Et ðV itþ1 ðÞjY it ¼ 0Þg
it (8)

Following Roberts and Tybout (1997), pit is assumed to be a function of firm-specific characteristics Xit and market
characteristics Zit. Hence, a decision of export market participation by a profit-maximizing firm i in current period t is
summarized as follows:

Y it ¼ 1 if pit ðX it ; Z it Þ  Ni þ ðNi þ K i ÞY it1  0
(9)
Y it ¼ 0 if pit ðX it ; Z it Þ  N i þ ðN i þ K i ÞY it1 < 0

2.2. Hypotheses

Building on this theoretical framework, we develop a series of hypotheses regarding the decision for a firm to export
below.

2.2.1. Sunk costs

Our theoretical model shows that the existence of sunk costs leads to the persistence in the patterns of firms’ export market
participation. Thus, while exporters may continue to export, non-exporters delay their participation in the export market or

2
Naudé and Matthee (2011) investigate the importance of transport costs in exporting of firms. Here, the theoretical framework focuses on the role of
sunk costs, ignoring the factor of transport costs and differentiates itself from their studies.
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 769

choose not to export in the subsequent period. Johanson and Vahlne (1977) indicate that early internationalization of the firm
(via exporting) is related to the psychic distance between the home and import countries. The psychic distance increases sunk
costs that the firm faces when it starts to export. Verwaal and Donkers (2002) highlight that export relationships require
considerable specific investments and the costs of safeguarding these investments are high due to uncertainty in the export
relationships (e.g., the difficulty to enforce the contract across borders, the information asymmetry and geographical distance
between the exchange partners). Majocchi, Bacchiocchi, and Mayrhofer (2005) emphasize that firms tend to prefer hierarchical
mechanisms of governance in managing export relationships and the establishment of these governance structures generates
high fixed costs. All these costs could be sunk in property. Therefore, the export behavior of the firm will be persistent if sunk
costs in the export market are high (Bernard & Jensen, 2004; Roberts & Tybout, 1997). Hence:

Hypothesis 1. Sunk costs are positively associated with the possibility of exporting and the persistence in the export
behavior.

2.2.2. Firm characteristics

Larger firms are associated with economies of scale and lower average or marginal costs. Majocchi et al. (2005) argue that
high fixed costs incurred in the establishment of hierarchical governance structures allow larger firms to capture economies
of scale. Dhanaraj and Beamish (2003) adopt the RBV identifying intangible assets that define the competitive position of
firms in export markets. They suggest that organizational capabilities, often proxied by firm size, reflect non-imitable
managerial abilities that transform financial and physical resources into competences through organizational routines.
Therefore, we hypothesize:

Hypothesis 2. Firm size is positively related to the firm’s propensity to export.

The Uppsala model posits that firms initially tend to focus on the domestic market due to the lack of knowledge about
foreign markets, and start internationalization through exporting to accumulate such knowledge and grow over time
(Johanson & Vahlne, 1977, 1990). This process model may well explain the extent and speed of internationalization for large
enterprises, but it has limited power in explaining the internationalization decisions of small- and medium-sized enterprises
(SMEs) (Naudé & Rossouw, 2010). The international entrepreneurship (IE) literature emphasizes the importance of
entrepreneurship in initiating internationalization of SMEs (Oviatt & McDougall, 1994, 2005). Managers with
entrepreneurship attitude can make various decisions to offset the competitive disadvantages associated with small
size. In this vein, Liu et al. (2008) argue that firm size is not required for an INV as long as an organization possesses some
critical assets to exchange in an economic transaction. SMEs can build competitive advantages through other means such as
location strategies that help them overcome ‘‘liabilities of small size’’ and expand into the export market. This leads to the
following hypothesis:

Hypothesis 2a. Large firms and SMEs build different types of competitive advantages to expand into export market. Large
firms rely more on their own performance advantages while SMEs rely more on advantages derived from partnering with
foreign firms and agglomeration effects.
Productivity performance is an important predictor of the decision to export (Cassiman & Golovko, 2011). Selling goods in
foreign countries incurs extra costs including costs associated with transportation, distribution, managing foreign networks,
adapting products for foreign consumption. These costs provide an entry barrier that only productive firms can overcome.
Higher productivity also allows a firm to adopt a cost leadership strategy in the early stage of internationalization (Liu et al.,
2008). Melitz (2003) and Das, Roberts, and Tybout (2007) argue that firm productivity becomes influential in the firm’s
export market participation as it helps to overcome the substantial sunk costs of foreign entry. Therefore:

Hypothesis 3. Productivity performance is positively related to the firm’s propensity to export.

Although productivity is a particularly useful barometer of firm performance and competitiveness, its effects on the
decision to export may vary depending on firm size. Prior studies find no clear and consistent relationship between a large
firm’s propensity to export and ability to report superior firm performance (for a review see Fahy, 2002). Firms without
significant productivity advantage can still expand into foreign markets. The INV literature considers business networks as a
crucial determinant in firm internationalization (Buckley & Ghauri, 2004; Guillen, 2002; Lei & Chen, 2011). Such networks
allow SMEs to get access to information and resources and overcome certain disadvantages in technology, scale and
productivity and expand into foreign markets (Liu et al., 2008). Therefore, firm scale and productivity may not be a
precondition for SMEs to engage in exporting. Hence:

Hypothesis 3a. The effect of productivity performance on exporting is more significant for large firms than for SMEs.
Labor quality refers to the level of knowledge, education and skills in the labor force of a firm (Wang, Clegg, & Kafouros,
2009). The quality of exported products is associated with the labor quality of the firm. Therefore, firms with high quality of
workforce become more competitive in international markets. Supporting this view, Bernard and Jensen (2004) argue that
the quality of the workforce is positively related with entry into foreign markets.

Hypothesis 4. Labor quality is positively related to the firm’s propensity to export.

770 J. Yi, C. Wang / International Business Review 21 (2012) 766–781

Prior research indicates the important role of ownership structure in explaining the decision to export (Filatotchev,
Stephan, & Jindra, 2008). According to principal–agency perspective, a firm’s internationalization may be constrained by
managers’ risk-aversion behavior (Lien, Piesse, Strange, & Filatotchev, 2005). When there is information asymmetry between
managers and owners relating to internationalization of the firm, ownership concentration becomes an effective governance
structure that limits managerial opportunism (Makhija, 2004). From the subsidiary mandate perspective, Filatotchev,
Strange, Lien, and Piesse (2007) argue that foreign investors as blockholders encourage global expansion of their portfolio
firms. From the RBV, Filatotchev, Hoskisson, Wright, and Buck (1996) suggest that large-block foreign investors have an
incentive to provide portfolio firms with access to their contractual networks and resources for the development of
international activities. From the INV perspective, Oviatt and McDougall (1994) argue that firms often use alternative modes
of controlling vital assets in their participation in international markets since they lack sufficient resources to control these
assets. Combining governance structure- and resources-based perspectives, Filatotchev et al. (2008) argue that foreign
investors have better governance and resources, and thus are more likely to export. Therefore:

Hypothesis 5. Foreign ownership is positively related to the firm’s propensity to export.

Hypothesis 5a. Wholly foreign ownership is positively related to the firm’s propensity to export.

Hypothesis 5b. Foreign joint venture structure is positively related to the firm’s propensity to export.
Governance- and resource-based views suggest that due to ownership structure and investors’ direct involvement in the
decision-making process, foreign-invested and domestically owned firms differ in the degree of internationalization
(Filatotchev et al., 2008). Andersen (1993), for instance, indicates that foreign investors leverage resources and capabilities of
their portfolio firms across countries and create scale economies through internationalization. In contrast in emerging
markets, domestically owned firms often have less advanced technologies than foreign-invested firms and rely on a
combination of reasonable quality and relatively low price to compete in international markets (Liu et al., 2008). As such,
foreign-invested firms are in a more advantageous position than indigenous Chinese firms in the process of early
internationalization (Naudé & Rossouw, 2010). However, domestically owned firms can build competitive advantages
through other means such as location strategies that help them expand into foreign markets. Hence:

Hypothesis 5c. Foreign-invested firms and domestically owned firms build different types of competitive advantages to
expand into export market. The former rely more on their own performance advantages while the latter rely more on
advantages derived from agglomeration effects.
State ownership is associated with soft budget constraints, lack of innovation, poor financial performance, and increased
corruption (Connelly, Hoskisson, Tihanyi, & Certo, 2010). Government and its agencies use state-owned enterprises (SOEs) to
serve political and social objectives, which has a negative impact on the SOE’s economic performance. Therefore, SOEs are
often less competitive in international markets than their non-state counterparts. Morck, Yeung, and Zhao (2008) argue that
SOE managers overvalue control owing to their distrust of markets and sense of national pride and accept below-market
share valuations in exchange for the perceived benefits of control. In contrast, strategic choices of non-state firms are shaped
by firm-level incentives and market forces rather than government goals. As they face unfair competition environment at
home that favors SOEs, non-state firms are more likely to expand overseas (Boisot & Meyer, 2008; Witt & Lewin, 2007).
Indeed, Liu et al. (2008) reveal a negative association between state ownership and the degree of participating international
markets through exporting. Hence:

Hypothesis 6. State ownership is negatively related to the firm’s propensity to export.

2.2.3. Spatial concentration

Agglomeration of economic activities allows firms to benefit from clustering and enjoying spillover effects from the
proximity to other firms (Naudé & Rossouw, 2010). Greenaway and Kneller (2008) indicate that spillovers from the activities
of other neighboring firms reduce the firm’s cost of access to the export market. Such spillovers assist firms to overcome
competitive disadvantages and expand into foreign markets. Therefore, the existence of spillovers will increase the firm’s
propensity to export even if exporting incurs high sunk costs.

Hypothesis 7. Spillovers from neighboring exporters are positively related to the firm’s propensity to export.
The degree of domestic competition is an important driver of exporting. Although firms tend to focus on domestic
markets when local demands are large (Krugman, 1980), the decision of whether or not engage in exporting will depend on
the degree of industry competition at home. As domestic competition increases, the home markets become more
competitive. Firms react to the increased competitive pressure by engaging in exporting. Alon and Lerner (2008), for
example, find that facing greater domestic competition, firms are more likely to export in China while those faced with few
competitors continue to focus on the domestic market.

Hypothesis 8. Firms in more competitive industries are likely to export than firms in less competitive industries.
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 771

Transport costs have an important impact on the probability of exporting of firms (Naudé & Matthee, 2011). As location
choices influence transport costs, they are important factors that influence the decision to export (Matthee & Naudé, 2008).
Supporting this view, Roberts and Tybout (1997) find that firms in coastal areas are more likely to produce for foreign
markets than firms in inland regions due to lower transport costs. Hence:

Hypothesis 9. Firms in coastal areas are more likely to export than those in inland areas.
Industrial district (Becattini, 2002) and cluster (Porter, 1998) theorists suggest that membership of localized clusters
confers competitive advantage because it provides the firm with thick markets for specialized skills and opportunities of
forward and backward linkages. In a similar vein, Fujita et al. (2001) underscore the role of agglomeration economies in the
decision to export. Maitland, Rose, and Nicholas (2005) identify clustering as an important aspect of networking that is
important for firms’ internationalization. Thus, as the spatial concentration of economic activities is likely to reduce costs of
entering the export market and increase the probability of exporting, we hypothesize:

Hypothesis 10. Firms in economic zones are more likely to export than those in other regions.
The Uppsala model suggests that firm size matters in triggering internationalization since large firms have better
knowledge and resources than SMEs. The INV literature, however, emphasizes the facilitating role of networking in
internationalization of firms (e.g., Buckley & Ghauri, 2004). Networking can assist firms to overcome disadvantages in the
lack of knowledge and experience about foreign markets, and compensate for the disadvantages associated with small size
(Buckley & Ghauri, 2004; Johanson & Mattsson, 1988). Thus, as economic zones provide more opportunities for networking
that is essential for SMEs to expand overseas, we hypothesize:

Hypothesis 10a. The effect of economic zones on exporting is more significant for SMEs than for large firms.
Governance- and resource-based views suggest that foreign ownership is associated with advanced technology,
resources and capabilities that affect the firm’s ability to undertake export-promoting actions (Buck, Filatotchev, Wright, &
Demina, 2003; Filatotchev et al., 2008). Compared with foreign-invested firms, domestically owned firms are less
advantageous in competitiveness in terms of technological knowledge and product quality (Liu et al., 2008). To compete in
international markets, domestically owned firms have to rely more on other vital resources, e.g., networking and clustering
to compensate their competitive weaknesses. Locating in economic zones allows these firms to acquire such resources, while
the competitive advantages that foreign-invested firms already possess decrease the importance of location choices in
expanding into foreign market. Hence:

Hypothesis 10b. The effect of economic zones on exporting is more significant for domestically owned firms than for
foreign-invested firms.

3. The heterogeneity of firms and export

3.1. The data

Our analysis employs a dataset derived from the Chinese Industrial Census that was undertaken in 2004. Our
sample focuses on Zhejiang province which is one of the biggest exporting regions in China for the period of 2001–2003.
It includes 30,333 firms across 11 cities in the province in the industries of mining (SIC 06-11), manufacturing (SIC 13-
43), and electricity, gas and water (SIC 44-46). The Census provide information on each firm’s geographic location,
industry, the value of output sold in the domestic market, the value of output exported, employment, wage, capital
stocks, total profits, value added, ownership structure, etc. The data also include the information concerning firms’ entry
and exit of export market, enabling us to examine changes in firms’ market orientation. The data are cleaned by
undertaking extensive checks for coding errors, missing values and possible organizational changes (e.g., mergers and
acquisitions).
Table 1 gives brief description of the sample between 2001 and 2003. The sample period matches the export boom due to
China’s entry into the WTO in 2001. The data show that exports in Zhejiang province grew rapidly at an extraordinary annual
rate of 33%. The number of exporting firms also increased and the share of exporters increased from 42% in 2001 to 44% in
2003. Partly due to the export boom, total employment, average wage, and labor productivity increased significantly as well
over the sample period.
Table 2 reports information regarding the geographic distribution of the sample firms.3 It shows that top three cities in
terms of the number of firms are Hangzhou, Ningbo, and Wenzhou. Hangzhou is the capital of Zhejiang province while
Ningbo and Wenzhou are among the earliest 13 coastal cities that opened their doors to foreign investors under China’s
open-door policy that was inaugurated in 1978.

3
The cities refer to prefecture-level cities in the administrative divisions of China. A city is generally composed of an urban center and surrounding rural
areas. Thus, a city is much larger than its name indicates. It is actually municipal in the strict sense of the term.
772 J. Yi, C. Wang / International Business Review 21 (2012) 766–781

Table 1
Exports of firms in Zhejiang province 2001–2003 (four-digit SIC industries).

Variable 2001 2002 2003

Quantity of exports (2001 = 100) 100.0 128.2 176.7

Number of exporting firms 7751 9554 11,269
Proportion of firms that export 0.421 0.439 0.442
Total employment (2001 = 100) 100.0 113.0 132.4
Average wage (monthly) 2280 2358 2479
Productivity (real output/employee) 233 259 287
Source: Authors’ calculations based on China’s Industrial Census.

Table 2
Firm geographic distribution (four-digit SIC industries).

City Year

2001 2002 2003

Firms % Firms % Firms %

Hangzhou 3398 18.47 3958 18.18 4690 18.39

Ningbo 3537 19.22 4066 18.68 4681 18.35
Wenzhou 2998 16.29 3686 16.93 3803 14.91
Jiaxing 1301 7.07 1762 8.09 2529 9.92
Shaoxing 1969 10.70 2115 9.72 2446 9.59
Zhoushan 211 1.15 276 1.27 293 1.15
Taizhou 2414 13.12 2258 10.37 2633 10.32
Jinhua 886 4.81 1711 7.86 2077 8.14
Huzhou 985 5.35 1,118 5.14 1325 5.19
Juzhou 375 2.04 425 1.95 518 2.03
Lishui 328 1.78 392 1.80 511 2.00
Total 18,402 100.00 21,767 100.00 25,506 100.00
Source: Authors’ calculations based on China’s Industrial Census.

3.2. Firm characteristics and exporting

Table 3 shows the characteristics of exporters and non-exporters, indicating the substantial differences in some
important attributes that may affect exporting decision between the two types of firms. Exporters are larger in terms of the
number of employees, pay higher wages, and enjoy higher labor productivity than non-exporters. Interestingly, wholly
owned subsidiaries and joint venture structure are more likely to export, while SOEs are less likely to be exporters owing to
the fact that they operate in a relatively protected market.

3.3. Entry and exit in the export market

Following Roberts and Tybout (1997) and Bernard and Jensen (2004), we used transition rates to gauge the magnitude of
firm’s entry and exit of the export market. Table 4(a) shows the transition rates of firms between 2001 and 2003. Each row
describes a transition from the exporting status of year t in the first column to the status of year t + 1 in the second column.
The exporting status has two possible categories and therefore, a transition of the exporting status from year t to year t + 1
consists of four possibilities. The entries are the proportion of firms in each of the year  t categories that choose each of the
two possible categories in year t + 1. The top row indicates that around 90% of the firms that did not export in year t continued
to be non-exporters in year t + 1, while the bottom row shows that about 92% of the firms that exported in year t remained in

Table 3
Characteristics of exporters and non-exporters 2001–2003 (four-digit SIC industries).

Variable Year

2001 2002 2003

Non-exporter Exporter Non-exporter Exporter Non-exporter Exporter

Employment (per firm) 139 278 129 265 126 268

Average wage (monthly) 1600 3215 1627 3293 1662 3511
Real output/employment 222 234 248 259 276 294
Wholly foreign ownership 1.49% 5.90% 1.52% 5.98% 1.56% 6.54%
Foreign joint venture 5.50% 19.11% 5.27% 17.94% 5.04% 17.72%
State ownership 5.82% 1.25% 4.08% 0.73% 3.10% 0.48%
Source: Authors’ calculations based on China’s Industrial Census.
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 773

Table 4
Entry and exit of export market 2001-2003 (four-digit SIC industries).

Year  t status Year  (t + 1) status 2001–2002 2002–2003 Average

(a) Firm transition rates in the export market

Non-exporter Non-exporter 0.895 0.910 0.903
Exporter 0.105 0.090 0.098

Exporter Non-exporter 0.077 0.077 0.077

Exporter 0.923 0.923 0.923

2001–2002 2002–2003 Average

(b) Export by firms that enter or exit the export market

New entrants % Firms 11.90 11.17 11.54
% Export 5.36 5.13 5.25
% Sales 5.66 5.59 5.63

Exiting firms % Firms 2.90 3.01 2.96

% Export 0.91 1.00 0.96
% Sales 2.69 2.77 2.73
Source: Authors’ calculations based on China’s Industrial Census.

the export market in year t + 1. Thus, non-exporters are more likely to remain non-exporters in the following period, while
exporters tend to continue exporting in the subsequent period. This clearly indicates substantial persistence in the exporting
status of firms.
Table 4(b) presents the percentage of firms that enter and exit the export market in each year relative to all firms and their
contribution to total exports and sales. Firms entering the export market account for 5% of total exports in the first year when
they participated in the export market. Exiting firms, on the other hand, account for a small percentage of total exports over
the last year, indicating that their export volume had significantly declined prior to their decision to exit the export market.

4. Methodology

4.1. The econometric model

Eq. (9) can be estimated in two ways by developing a structural representation of the participation condition or by
employing a reduced-form expression of the condition. We follow Roberts and Tybout (1997) and use a reduced-form
equation to approximate pit as a linear function of Xit and Zit that are observable to producers in period t. In addition,
variations in pit might arise not only from the sources of observable firm characteristics Xit and market characteristics Zit, but
also from the sources of unobservable firm characteristics ai and exogenous random disturbances hit. The firm-specific effect
ai may include managerial efficiencies, foreign contacts, and other factors that induce persistent firm-specific differences in
returns from exporting. The disturbance hit includes unobserved transitory shocks to returns from exporting, i.e., demand
shocks. Therefore, pit  Ni þ ðN i þ K i ÞY it1 is expressed as:
 
pit  N i þ ðNi þ K i ÞY it1 ¼ bX it þ g Z it þ uY it1 þ eit (10)
eit ¼ ai þ hit
where eit is the error term and is assumed to be the sum of unobserved ai and hit, ai is independently and identically
distributed normal across firms, hit is independently and identically distributed normal across time (and firms).
Substituting Eq. (10) into Eq. (9) gives:

Y it ¼ 1 if bX it þ g Z it þ uY it1 þ ai þ hit  0
(11)
Y it ¼ 0 if bX it þ g Z it þ u Y it1 þ ai þ hit < 0

Bernard and Jensen (1995) show that firms switching exporting status from non-exporter to exporter or from exporter to
non-exporter will have substantial contemporaneous changes in the firm characteristics such as size and wages. In the mean
time, changes in firm characteristics, such as productivity, may also induce firms to switch their exporting status. To avoid
possible simultaneity problems, all observed variables are lagged by one period. The estimating participation equation is
then specified as:

Y it ¼ bX it1 þ g Z it1 þ uY it1 þ ai þ hit (12)

4.2. Measures

In the model (12), the vector Xit1 includes firm characteristics that affect profits from exporting while the vector Zit1
includes market characteristics that also affect the profits from exporting. The variable Yit1 reflects the persistence of the
firm exporting behavior and is used to test the role of sunk costs.
774 J. Yi, C. Wang / International Business Review 21 (2012) 766–781

We use firm size (number of employees), productivity (real output per employee) and labor quality (average wages) to
examine the role of firm heterogeneity. A set of dummy variables is used to test the role of ownership structure of the firm,
including dummies for wholly foreign ownership, joint venture (with foreign firms), and state ownership.
We follow Bernard and Jensen (2004) and capture region-specific spillovers by export activities in the same city but
outside the 2-digit SIC industry and capture industry-specific spillovers by export activities within the same industry but
outside the city where the firm operates. The magnitude of export activities within a region or industry is measured by the
quantity of exports from firms. Additionally, we use the number of intra-industry firms in a 2-digit SIC industry to measure
industry competition. A dummy variable is used to distinguish the coastal cities from the inland cities to capture the location
effect (dummy = 1 for coastal cities). Finally, to examine the role of agglomeration economies, dummies for Hangzhou Bay,
Wen-Tai Area and Jin-Ju-Li Area are used to control for area-specific characteristics that favor firms’ exporting decision.4 We
also include a set of dummies to control for the year, industry, and region (city) effects.

4.3. The estimation strategy

A sizeable body of empirical research focuses on the identification of the parameter u associated with the lagged
dependent variable Yit1 (Bernard & Jensen, 2004). It is likely that some characteristics of the firm, such as product quality,
managerial efficiency, and foreign contacts, will remain unobservable and affect the propensity to firms’ export decision.
These unobservable firm characteristics may induce serial correlation in the error term eit. If estimation of the model ignores
this serial correlation, the parameter u that measures sunk costs will absorb these effects and the model will improperly
attribute the persistence in export status to sunk costs. We therefore use a model that allows for such serial correlation by
assuming it is a sum of a permanent, firm-specific component ai that remains unobserved to control for this effect and a
transitory exogenous disturbance component hit.
The estimation strategies for this dynamic binary discrete-choice model with unobserved heterogeneity include linear
probability models with fixed or random effects, probit models with fixed or random effects, and conditional logit models.
The unobserved heterogeneity of the firm can be better modeled as fixed or random effects. Following Roberts and Tybout
(1997), we assume:
8
< CovðX it1 ; ai Þ ¼ CovðZ it1 ; ai Þ ¼ 0
Covðai ; h Þ ¼ 0 8 i; j; t; s; t 6¼ s (13)
: Covðh ; hit Þ ¼ 0
it js

where hit is independently and identically distributed across firms and time. The linear probability models can produce
estimated coefficients that imply probabilities outside the unit interval [0,1] and the heterogeneous error term that violates
the assumption of constant variance in the OLS. For these reasons, the probit model with random effects is chosen for
estimating the dynamic discrete-choice model with unobserved firm heterogeneity.
Arellano and Bond (1991) use generalized method-of-moments (GMM) to estimate this kind of dynamic panel-data
model. The GMM instruments the differenced variables with all their available lags in levels. The problem with this
difference GMM, however, is that lagged levels are poor instruments for first differences if the variables are close to a random
walk. Arellano and Bover (1995) and Blundell and Bond (1998) develop an augmented version of GMM that adds the original
equation in levels to the system and find that additional instruments can be included to increase efficiency. We use this
system GMM as an alternative strategy to estimate our model. It assumes:
8
< CovðZ it1 ; ai Þ ¼ 0
Covðai ; h Þ ¼ 0 8 i; j; t; s; i 6¼ j (14)
: Covðh ; hit Þ ¼ 0
it js

where firm-specific characteristics Xit1 can be correlated with unobserved firm-level effects ai, and disturbances hit can be
heteroskedastic and correlated within but not across firms.

5. Results

5.1. Dynamic probit model

Since Eq. (12) includes lagged variables, the final data set consists of 20,917 firms yielding 35,060 observations for the
estimation. Table 5 reports the results from the dynamic probit model.

5.1.1. Sunk costs

The coefficient of the lagged export status variable is highly significant in all three models, indicating that past export
status has a strong and persistent positive effect on the probability of exporting in the current year. This finding supports H1,

4
Hangzhou Bay includes cities of Hangzhou, Ningbo, Shaoxing, Jiaxing, Huzhou, and Zhoushan. Wen-Tai Area consists of cities of Wenzhou and Taizhou.
Jin-Ju-Li Area includes cities of Jinhua, Juzhou, and Lishui.
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 775

Table 5
Dynamic probit model of export market participation.

Explanatory variables Model 1 Model 2 Model 3

***
Intercept 3.411 4.273 4.796***
(3.717) (0.735) (0.731)
Exported last year 2.587*** 2.594*** 2.597***
(0.020) (0.020) (0.020)
Firm size 0.235*** 0.205*** 0.207***
(0.032) (0.032) (0.032)
Labor quality 0.034 0.018 0.017
(0.029) (0.028) (0.028)
Productivity 0.027** 0.016 0.022*
(0.013) (0.013) (0.013)
Wholly foreign ownership 0.421*** 0.401*** 0.416***
(0.057) (0.057) (0.057)
Foreign joint venture 0.320*** 0.308*** 0.314***
(0.033) (0.033) (0.033)
State ownership 0.439*** 0.475*** 0.464***
(0.092) (0.091) (0.091)
Industry-specific exports 0.115* 0.114* 0.113*
(0.062) (0.061) (0.062)
City-specific exports 0.106 0.039 0.006
(0.256) (0.023) (0.022)
Industry competition 0.00006*** 0.00005*** 0.00006***
(0.00001) (0.00001) (0.00001)
Coastal area – 0.372*** –
– (0.104) –
Hangzhou Bay – – 0.237**
– – (0.103)
Wen-Tai Area – – 0.337***
– – (0.097)
Year dummies Yes Yes Yes
Industry dummies Yes Yes Yes
City dummies Yes Yes Yes

Log likelihood value 10,043.716 10,096.278 10,087.894

McFadden’s R2 (adjusted) 0.451 0.449 0.449
Percent correctly predicted 67.53 67.54 67.53
Observations 35,060 35,060 35,060

Notes: Standard errors in parentheses.

*
Significant at the 10% level.
**
Significant at the 5% level.
***
Significant at the 1% level.

suggesting that sunk costs play an important role in the decision to engage in exporting. It is also consistent with Roberts and
Tybout (1997) and Bernard and Jensen (2004), both of which find the link between sunk costs and entry into the export
market.

5.1.2. Firm characteristics

The results show that the decision to export is associated with observable firm characteristics. Model 1 shows that firm
size and productivity are both statistically significant, supporting H2 and H3, respectively. This suggests that firm size and
productivity are positively associated with the probability of exporting. Together with the finding of the significant role of
sunk costs, we infer that more productive and larger firms are more likely to export as they are capable of overcoming costs
barriers. However, labor quality is not significant, lending no support for H4. This finding reflects the fact that Chinese firms
export mature and undifferentiated products that do not require highest labor quality.
The coefficients for foreign ownership, foreign joint venture, and state ownership are correctly signed and statistically
significant. Thus, H5, H5a and H5b are strongly supported. This indicates the significant role of ownership strategy in the
firm’s decision to export. The results support Filatotchev et al. (2008) which underscores the role of governance and
resources in the decision to export. The finding of the significant role of foreign ownership is consistent with Wang, Buckley,
Clegg, and Kafouros (2007) who find foreign ownership is positively associated with exporting in China. The results also
show that state ownership is negatively related to the firm’s propensity to export, corroborating H6. Although state
ownership is often associated with significant political and economic advantages, more secure property rights and better
public provision, it appears that its negative effects dominate its positive effects when it comes to the decision to export.

5.1.3. Spatial concentration

As argued previously, location of value creation activities matters in the firm’s decision to enter the export market. We
follow Bernard and Jensen (2004) and use industry-specific and city-specific exports to capture spillovers associated with
the proximity to the firm. The results show that industry-specific exports are positive and significant in all three models
776 J. Yi, C. Wang / International Business Review 21 (2012) 766–781

Table 6
System GMM model of export market participation.

Explanatory variables Model 1 Model 2 Model 3

***
Intercept 0.325 0.397 0.461***
(0.567) (0.103) (0.104)
Exported last year 0.488*** 0.501*** 0.500***
(0.025) (0.025) (0.025)
Firm size 0.037*** 0.037*** 0.038***
(0.011) (0.011) (0.011)
Labor quality 0.001 0.00009 0.00004
(0.009) (0.00908) (0.00907)
Productivity 0.031*** 0.031*** 0.032***
(0.007) (0.007) (0.007)
Wholly foreign ownership 0.164*** 0.161*** 0.163***
(0.013) (0.014) (0.013)
Foreign joint venture 0.145*** 0.143*** 0.144***
(0.010) (0.011) (0.011)
State ownership 0.041*** 0.052*** 0.051***
(0.012) (0.012) (0.012)
Industry-specific exports 0.011* 0.010* 0.010*
(0.006) (0.006) (0.006)
City-specific exports 0.056 0.005 0.001
(0.039) (0.005) (0.004)
Industry competition 0.00003*** 0.00003*** 0.00003***
(0.000003) (0.000003) (0.000003)
Coastal area – 0.088*** –
– (0.019) –
Hangzhou Bay – – 0.071***
– – (0.019)
Wen-Tai Area – – 0.086***
– – (0.018)
Year dummies Yes Yes Yes
Industry dummies Yes Yes Yes
City dummies Yes Yes Yes

Number of instruments 34 28 28
Percent correctly predicted 67.51 67.53 67.53
Observations 35,060 35,060 35,060

Notes: Standard errors in parentheses.

*
Significant at the 10% level.
***
Significant at the 1% level.

while city-specific exports are insignificant. These findings provide partial support for H7, indicating that the industry-
specific proximity to other exporters help the firm reduces costs and enter the export market. This finding is consistent with
Greenaway and Kneller (2008) who also find the significant role of spillovers associated with agglomeration in shaping firms’
exporting decision.
As expected, the industry competition variable is highly significant in all three models, indicating that domestic
competition forces firms to enter export market. H8 is supported. Model 2 shows that firms in the coastal cities are more
likely to export than those in inland cities, corroborating H9. Controlling for the effects of location, the coefficient of the sunk
costs variable is higher in Model 2 than in Model 1. The increased role of sunk costs suggests that location advantages of firms
in coastal areas somehow offset sunk costs and help the firm enter the export market. Model 3 shows that firms from
Hangzhou Bay and Wen-Tai Area are more likely to export than firms in other areas, confirming the facilitating role of
agglomeration economies in exporting. H10 is therefore supported. This finding is consistent with Greenaway and Kneller
(2008) and Koenig (2009), both of which find that spatial concentration of economic activities increases the probability of
exporting. Controlling for the role of economic zones, the role of sunk costs in Model 3 is similar to that in Model 2.5

5
To access the overall fit of three models, we use measures of McFadden’s adjusted R2 and percent correctly predicted in the literature. McFadden (1974)
suggests a pseudo R2 measure for goodness of fit in qualitative choice behavior by computing the ratio of the log-likelihood value for the estimated model to
that for the model with an intercept only. The ratio is interpreted as the level of improvement over the intercept model offered by the estimated model.
McFadden’s adjusted R2 takes into account the role of the number of explanatory variables by penalizing a model for including too many explanatory
variables. Percent correctly predicted is a goodness-of-fit measure to compare the actual and predicted patterns of export market participation using a
threshold probability value. We define a binary predictor to be one if the predicted probability is at least 50% and zero otherwise. We find that the predictor
predicts well the actual decision to enter the export market. Standard R2 for the measure of goodness of fit in the OLS regression model is no longer valid for
the probit model. Given the unobserved firm heterogeneity in the dataset, McFadden’s pseudo R2 of roughly 45% indicates that all three models appear to do
the same job well. The results of percent correctly predicted show that all of them correctly predict about 67.5% of all outcomes. Judged from the two
statistical measures, Model 2 and Model 3 do not perform better than Model 1. However, as Model 2 and Model 3 fit the data very well when geographic
characteristics are considered, they are preferred to Model 1.
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 777

Table 7
Export market participation: large vs. SMEs.

Explanatory variables Dynamic probit System GMM

Model 1 (large firms) Model 2 (SMEs) Model 3 (large firms) Model 4 (SMEs)

Intercept 1.130 4.995*** 0.606* 0.172

(7.738) (0.748) (0.328) (0.106)
Exported last year 2.653*** 2.604*** 0.433*** 0.510***
(0.079) (0.021) (0.081) (0.027)
Labor quality 0.007 0.140*** 0.003 0.006
(0.047) (0.012) (0.017) (0.008)
Productivity 0.086* 0.014 0.042** 0.007
(0.045) (0.013) (0.020) (0.007)
Wholly foreign ownership 0.208 0.404*** 0.074** 0.180***
(0.190) (0.060) (0.029) (0.014)
Foreign joint venture 0.222* 0.313*** 0.082*** 0.163***
(0.117) (0.034) (0.020) (0.011)
Industry-specific exports 0.269 0.130** 0.005 0.013**
(0.797) (0.062) (0.013) (0.006)
City-specific exports 0.055 0.021 0.031* 0.003
(0.095) (0.022) (0.017) (0.005)
Industry competition 0.00007 0.00007*** 0.00003*** 0.00003***
(0.00005) (0.00001) (0.00001) (0.000003)
Hangzhou Bay 0.081 0.286*** 0.028 0.086***
(0.407) (0.106) (0.078) (0.019)
Wen-Tai Area 0.016 0.388*** 0.017 0.094***
(0.383) (0.100) (0.074) (0.018)
Year dummies Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes
City dummies Yes Yes Yes Yes

Percent correctly predicted 67.52 67.52 64.81 67.53

Observations 2798 32,262 2798 32,262

Notes: Standard errors in parentheses.

*
Significant at the 10% level.
**
Significant at the 5% level.
***
Significant at the 1% level.

5.2. System GMM model – robustness check

An alternative strategy to estimate Eq. (12) is to apply a system GMM estimator for the parameters of the dynamic model.
The validity of the GMM estimation depends on the assumption that the instrumenting variables are uncorrelated with firm-
level fixed effects and disturbances. We use Hansen test to test exogeneity of the instruments (Roodman, 2009) and the
results indicate the validity of the instruments. Since the study uses the unbalanced panel, orthogonal deviations are used in
Eq. (14) that allows for heteroskedastic and correlated disturbances within but not across firms. Therefore, a two-step
system GMM estimator with Windmeijer-corrected standard errors is chosen for this study. Table 6 reports the results from
the system GMM model.
The results are largely qualitatively consistent with those in Table 5. For example, firm characteristics still play significant
roles except for labor quality. We note, however, that the effects of firm size and ownership structure decline considerably.
An explanation is that the probit model does not allow for the correlation of firm characteristics with unobserved firm-level
effects, thus producing an upward-adjusted estimate. The coefficients for productivity are more significant in the GMM
estimator, probably due to the fact that the system GMM estimator removes the potential endogeneity problem of firm
productivity. While sunk costs are still significant, their effects decline dramatically since the GMM estimator allows for the
correlation of disturbances within firms. The results concerning with the role of spatial concentration are also similar to
those in Table 5. Spillovers, industry competition, location, and agglomeration economies all significantly affect the decision
to export. However, the effects of these variables appear to be smaller than those using the probit estimator. This is not
surprising as the GMM estimator allows for both the correlation of firm characteristics with unobserved effects and
heteroskedastic, correlated disturbances within firms.6 Overall, our results are highly robust to alternative estimation
methods.

6
To assess the overall fit of three models for the GMM estimator, the measure of percent correctly predicted is chosen. The results are similar in both
estimators and roughly 67.5% of all outcomes can be correctly predicted.
778 J. Yi, C. Wang / International Business Review 21 (2012) 766–781

Table 8
Export market participation: foreign vs. domestic.

Explanatory variables Dynamic probit System GMM

Model 1 (foreign) Model 2 (domestic) Model 3 (foreign) Model 4 (domestic)

Intercept 5.394 5.069*** 0.859* 0.455***

(7.172) (0.731) (0.449) (0.110)
Exported last year 2.580*** 2.606*** 0.406*** 0.521***
(0.055) (0.022) (0.071) (0.027)
Firm size 0.337*** 0.184*** 0.061** 0.031**
(0.076) (0.035) (0.025) (0.013)
Labor quality 0.121* 0.002 0.004 0.002
(0.066) (0.031) (0.020) (0.010)
Productivity 0.012 0.040*** 0.033** 0.030***
(0.034) (0.014) (0.014) (0.008)
Industry-specific exports 0.231 0.116* 0.042 0.010*
(0.367) (0.063) (0.037) (0.006)
City-specific exports 0.070 0.005 0.006 0.001
(0.070) (0.023) (0.013) (0.005)
Industry competition 0.00003 0.00007*** 0.00003*** 0.00003***
(0.00004) (0.00002) (0.000009) (0.000004)
Hangzhou Bay 0.563 0.193* 0.044 0.068***
(0.357) (0.108) (0.075) (0.020)
Wen-Tai Area 0.572* 0.307*** 0.068 0.082***
(0.336) (0.102) (0.072) (0.018)
Year dummies Yes Yes Yes Yes
Industry dummies Yes Yes Yes Yes
City dummies Yes Yes Yes Yes

Percent correctly predicted 67.52 67.53 65.70 67.53

Observations 5347 29,713 5347 29,713

Notes: Standard errors in parentheses. Foreign: foreign-invested firms. Domestic: domestically owned firms.
*
Significant at the 10% level.
**
Significant at the 5% level.
***
Significant at the 1% level.

5.3. Further analysis: firm heterogeneity and internationalization strategies

5.3.1. Firm scale and internationalization

As discussed previously, the Uppsala model of internationalization conjectures that firms develop resources and knowledge
about foreign markets initially on the domestic market, implying that scale is important for firms to expand abroad. In contrast,
the IE literature underlines the importance of knowledge, learning and networks (rather than firm size) as alternative vital
resources for internationalization particularly with respect to SMEs. Thus, large firms and SMEs use different resources/
competencies to initiate internationalization. To further explore the role of firm size, we divide the sample into groups of large
firms and SMEs to estimate the Eq. (12) with both probit and system GMM.7 Table 7 reports the results.
The results show that productivity performance is more important for large firms than for SMEs, supporting H3a. In
contrast, variables for the agglomeration effects (i.e., industrial spillovers and economic zones) are more significant for SMEs
than for large firms. H10a is corroborated. Although foreign ownership is significant for both SMEs and large firms (see GMM
results), its influence on exporting is larger for SMEs than for large firms. The results again suggest that given significant sunk
costs, large firms rely more on productivity performance for exporting while SMEs rely more on advantages derived from
partnerships, clustering and networking to achieve internationalization goals. Therefore, H2a is supported. These findings
indicate that the self-select export behavior identified by Melitz (2003) and Bernard et al. (2003) cannot explain the
exporting decision of SMEs.

5.3.2. Corporate ownership and internationalization

Governance- and resource-based views suggest that ownership status significantly influences the decision of market
orientation, implying that foreign-invested and domestically owned firms may behave in a different manner in the process of
internationalization. To test this proposition, we divide the sample into groups of foreign-invested (including wholly owned
subsidiaries and joint ventures) and domestically owned firms and re-estimate the models. Table 8 reports the results.
The results show that productivity performance is significant for both foreign-invested and domestically owned firms,
but its effect on exporting is larger for foreign-invested firms than for domestically owned ones (see GMM results).8

7
If the number of employees in a firm is not less than 500, the firm is identified as the large one. Otherwise, it is small and medium.
8
For the dynamic probit estimator, the productivity variable is not significant in Model 1, probably owing to the endogeneity problem. For the system
GMM estimator, it is highly significant in Model 3 after controlling for endogeneity.
 J. Yi, C. Wang / International Business Review 21 (2012) 766–781 779

Variables for the agglomeration effects, in contrast, are more significant for domestically owned firms than for foreign-
invested firms. These results support H10b, indicating that given significant sunk costs, domestically owned firms rely more
on clustering and networking for exporting than foreign-invested firms. H5c is supported. It appears that domestic firms use
resources of learning, networking and clustering to overcome their competitive disadvantages in the knowledge and
experience that are required for entering foreign markets.

6. Conclusion

In contrast to prior empirical studies that tend to explain variations in exporting behavior from single theoretical
perspectives, this study integrates the process theory of internationalization, the INV view and trade models of heterogeneous
firms in a unified framework of export participation. We developed an econometric model of the decision of firms to enter the
export market to test our theoretical framework and hypotheses. The results show that sunk costs, labor quality, foreign
ownership, industry competition and spatial concentration are positively associated with the decision to export. In contrast,
state ownership is negatively related the decision to export. The finding of the importance of sunk costs for exporting highlights
the need to incorporate the notion of sunk costs in the international business literature of export decisions.
However, the study shows that firm heterogeneity plays an important role in explaining exporting behavior, implying
that the relationships identified in the full sample are not uniform but depend on the attributes of the firm. Although Melitz
(2003) and others argue that only large and productive firms can export, we find that not all firms in an industry or a region
that are large enough or productive enough to meet sunk costs can still penetrate foreign markets. Our study shows that large
firms rely on productivity advantages to offset sunk costs of exporting. This is consistent with the hypothesis of self-select
exporting (e.g., Melitz, 2003). In contrast, SMEs, though tend to be less productive than large firms, can mobilize resources of
clustering and networking by locating in economic zones to overcome sunk costs and expand into foreign markets. We also
find that unlike their domestic counterparts, foreign-invested firms, regardless of size, rely on superior ability to configure
governance and resources to minimize the costs associated with exporting (Filatotchev et al., 2008). Overall, our results
consistently highlight the importance of firm heterogeneity, sunk costs and spatial economies.
Our findings have important implications for practice. First, the RBV posits that resources that are valuable, rare,
imperfectly imitable and imperfectly substitutable confer an enduring competitive advantage (Barney, 1991). Thus prior
managerial prescriptions emphasize the role of accumulation of competitive assets in triggering internationalization.
According to this logic, firms should become large and highly productive before they embark on international markets. Our
findings, however, suggest that firms can offset competitive disadvantages by locating in the ‘right’ locations. Spillovers
associated with agglomeration economies in the region where the firm operates help small firms overcome the ‘liabilities of
size’ and achieve internationalization goals (Lei & Chen, 2011). Second, we find that foreign ownership is positively
associated with the decision to export. Interestingly, we find that the role of foreign ownership depends on the size of the
firm. SMEs benefit more from foreign ownership than large firms. This implies that SMEs can build partnerships with
foreign-invested firms in the form of joint ventures, contractual arrangements or strategic alliances. Such partnership allows
local SMEs to learn from their foreign counterparts and overcome competitive disadvantages in expanding into foreign
markets. Third, in contrast to the positive role of foreign ownership, we find that state ownership is negatively associated
with the decision to exporting. This arises as SOEs enjoy a protected market (i.e., operate in monopoly industries or industries
subsidized by government) and also because they lack of capabilities to internationalize. The implication is that firms having
international agenda should avoid partnering with SOEs or choose to increase non-state stakes in the firm.
Nevertheless, the study has limitations, which may provide some insights for future research. First, although our
theoretical models assume that exporters seek profit maximization, the choice of exporting as an entry mode must fit the
firm’s overall strategy. Firms may export for other objectives (Javalgi et al., 2011), such as market share, risk diversification
and integration of value chains which may at times contradict profit maximization objectives. Emerging market firms may
even export for political reasons. Owing to our assumption of profit maximization, our study unlikely includes all these
potentially important factors. Second, our study limits to firm-specific and home country factors, ignoring the heterogeneity
of the exporting markets. Markets differ in terms of speed of globalization and other location-tied characteristics (Buckley &
Ghauri, 2004), implying that sunk costs vary by location of exporting. Therefore, our predicted relationships may not be
uniform across different markets of exporting. Third, as the institutional environment and industry environment vary
significantly across regions of China, our focus on a particular province limits the generalizability of our results. For similar
reasons, our findings may not equally apply to other countries. Future research can offer insights into the applicability of our
results for samples drawn from other regions of China and other countries.

Acknowledgement

This research is supported by National Natural Science Foundation of China (grant no. 71003102) and Renmin University
of China Science Foundation (grant no. 10XNK096).

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