When companies attempt to export their products, some of them will succeed on the export market while others will have to withdraw. But what makes a company exit an export market? A new study from Aarhus BSS has explored this question.
25.02.2020 | MICHAEL SCHRØDER
Companies with market-specific import experience may be more prone to try their luck as exporters to the same market. Such experimentation is associated with a 13 per cent higher probability to exit the export market again. PHOTO: Chuttersnap/Unsplash
Is it always a defeat when companies exit an export market? Not necessarily, claims a new study by Associate Professor Eliane Choquette from the Department of Management at Aarhus BSS, Aarhus University, in which she analysed data from 1,920 Danish manufacturing companies from 2001 to 2011. During this period, these companies have made almost 25,000 attempts to conquer one or more export markets.
“There may be many good reasons for why companies decide to enter an export market and just as many good reasons for why they decide to leave. In the study, I try to find out more about what makes companies exit an export market,” explains Eliane Choquette, whose study was published in the internationally recognised Journal of International Business Studies.
Does international experience guarantee export success?
One of the questions that the Aarhus BSS researcher asked is whether companies with previous experience on a market – e.g. importing goods or materials - are more likely to achieve long-lasting export success on this market.
You would think so, wouldn’t you? From a learning perspective, experience on a market should make a company better equipped to assess their potential to succeed on the market. It could also give the company an opportunity to establish a network that could come in handy when entering an export market. One former study from 2015 points in this direction and shows that companies in the Asian one-party socialist state of Laos increase their chance of survival on an export market if they have previous import-based market experience.
However, it is not as simple as that, according to the more comprehensive study conducted by the Aarhus BSS researcher. In fact, the study shows that Danish companies are 13 per cent more likely to exit an export market if they have previous import-based market experience on the same market.
"International experience is not a homogeneous concept when it comes to surviving on export markets. International experience comes in many different shapes and sizes and so do the experiences companies gain as either importers or exporters"
Eliane Choquette, Associate Professor, Department of Management, Aarhus BSS
Experimentation
In the Danish study, the researcher argues that the reason for this negative effect could be that companies are more likely to try their luck at exporting to markets for which they have previous import experience. Such experimentation may be explained by the presence of sunk costs of exporting, which are the costs connected with entering an export market.
Previous research shows that market-specific import experience reduces a company’s sunk costs associated with subsequently starting to export to that same market. The reason is that companies can use the knowledge and experience that they have already acquired. Since their sunk costs are lower, these companies may be more likely to experiment and “test the waters” in the export market. Based on the assumption that the real potential of an export venture does not become clear until a company has actually entered the market, it is expected that such an experimental approach will lead to higher probability of export market exit.
“The results show that companies with market-specific import experience are not just more likely to leave an export market but also to leave after a very short period of time only. In the article, this is interpreted as a sign of experimentation taking place,” says Choquette. However, she emphasises that further research is necessary to determine whether other factors than experimentation explain the increased tendency to leave export markets for companies with previous market-specific import experience.
Similar markets
The study also shows that the more similar the export market is to the domestic market, the more the results are in line with the experimentation explanation. On export markets that are highly similar to the Danish market, companies with previous import-based market experience are 17 per cent more likely to exit the export market compared with companies with no such import experience. On markets that are somewhat similar to the Danish market, the effect is 13 per cent, while the effect is no longer significant on markets that bear little resemblance to the domestic market.
“One explanation could be that on markets that are very different from the domestic market, the effects of learning and experimentation cancel each other out,” says Eliane.
Export experience helps
“The results also show that international experience is not a homogeneous concept when it comes to surviving on export markets. International experience comes in many different shapes and sizes and so do the experiences companies gain as either importers or exporters,” says Eliane.
While import-based market experience appears to be linked with companies being more likely to exit an export market, the opposite is true for companies with export experience. Indeed, for each export market that a company exports to, the likelihood of leaving a particular market is reduced by 1 per cent. In addition, market-specific export experience pays off, as companies are 39 per cent less likely to leave an export market if they have previously exported to the same market. The study also shows that the longer companies export to a market, the more likely they are to survive on the market. After two years on an export market, companies are 44 per cent less likely to exit the market than in the first year.