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Exploring the complementarity between innovation and export for SMEs’ growth

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Abstract

In this paper, we advance and test the idea that innovation and export are complementary strategies for SMEs’ growth. We argue that innovation and export positively reinforce each other in a dynamic virtuous circle, and we identify and describe the process through which this complementarity relationship takes place. Participating in export markets can promote firms’ learning, and thus enhance innovation performance. At the same time, through innovation, firms can enter new geographical markets with novel and better products, therefore making exports more successful, and, by the same token, they can also improve the quality – and consequently increase the sales – of the products sold domestically. We test our theory using an unbalanced panel of Spanish manufacturing firms over the period 1990–1999. We find robust empirical support for our hypothesis: consistent with the presence of complementarity, we show that the positive effect of innovation activity on firms’ growth rate is higher for firms that also engage in exports, and vice versa. Furthermore, we show that, Ceteris paribus, firms’ adoption of one growth strategy (e.g., entering export markets) positively influences the adoption of the other (e.g., innovation).

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Notes

  1. We assume no interaction with domestic sales, for the sake of simplicity.

  2. The average proportion of the firms in year t that continue in the survey in year t+1 is approximately 91.5% for the 1990–1999 sample period. About 8.5% of firms exited the sample during this time period. Among the firms that exited the sample, approximately 2.6% disappeared due to closure, change to non-manufacturing activities and absorption during merger or acquisition. Approximately 3.3% of the exiting firms stopped collaborating, and about 2.6% were without access due to temporary closure or non-localizability.

  3. The source for the producer price index defined at the two-digit NACE industry level is Instituto Nacional de Estadística (www.ine.es).

  4. The test for complementarity is based on the definition of complementarity by Milgrom and Roberts (1990). Growth(Innovate&Export), Growth(OnlyInnovate), Growth(OnlyExport), and Growth(NoInnovate&NoExport) are the estimated coefficients on the firm's choice of different combinations of export and innovation in the growth regression (3). If the inequality (4) is true, that is, the complementarity test holds, it would mean that adding an activity (e.g., export) while the other activity is already performed (e.g., innovation) will result in higher incremental growth rates than when adding this activity in isolation.

  5. To explain the adoption decisions of the different combinations of export and innovation choices we use a multinomial probit model, which, unlike multinomial logit, avoids the I.I.A. assumption and assumes that the errors can be correlated across choices. We use a cross-sectional model with the errors corrected for the intra-group (firm) correlation.

  6. Following Campa (2004), we calculate an exchange rate index that reflects the changes in the peseta (the Spanish national currency over the period of analysis) with respect to other foreign currencies during 1990–1999, with higher values of the index corresponding to peseta depreciation periods. This index is firm specific, that is, it accounts for the fact that different firms may export to different markets and thus be differently affected by the exchange rate changes. It is calculated as a weighted average of the bilateral exchange rates of each of the potential export markets. For exporting firms, the information on the export markets is provided in the ESEE survey. The survey data distinguish among three broad export markets: EU (European Union) countries, other OECD countries, and the rest of the world. The computation of the exchange rate index is complicated, as the survey reports the information on the markets once in four years, that is, we have these data for 1990, 1994, and 1998. We calculate individual exchange rates for firms that were exporters in 1990, 1994, and 1998 by taking their export market to be equal to the one in the previous period. That is, for 1991–1993 we use the data for 1990, for 1995–1997 we use the information available in 1994, and for 1999 we use market destinations in 1998. For the firms that did not export in 1990 (1994) but exported in 1994 (1990), we define their markets as their 1994 (1990) pattern. The same procedure is applied to other combinations of 1990, 1994, and 1998. For firms that did not export during 1990–1999 we compute a weighted average of the EU, OECD, and other countries’ shares for Spain in that particular year.

  7. Prior strategy research has used a similar approach to test the interrelationship between different strategic decisions. For instance, Salomon and Shaver (2005b) investigate the link between domestic and export sales by using simultaneous equation modeling and testing for the direct effect between these two variables.

  8. The results of the Hansen test for the validity of over-identifying restrictions and the quality of instruments and Arellano–Bond test for the second-order serial autocorrelation of residuals support the validity of the model specification (Hansen test of over-identifying restrictions: χ2(27)=26.52; Prob>χ2=0.490; Arellano–Bond test for AR(2) in first differences: z=0.40 Pr>z=0.689).

  9. Instead of conducting the test for the equality of means, we use a matching technique, as it allows to take into account relevant matching characteristics, such as firm size, export and R&D intensity, industry and year in which we observe the compared firms. We use the matching estimator developed by Abadie and Imbens (e.g., Abadie, Drukker, Herr, & Imbens, 2001; Abadie & Imbens, 2002) and estimate a model using a STATA routine developed by Abadie et al. (2001).

  10. We used a CPI index (www.ine.es) to correct for the inflation during 1990–1999, and make the percentage of prices comparable over different time periods.

  11. Another possible explanation regarding the importance of advertising intensity for the adoption of both export and innovation activities considers the difference between OEM suppliers and own-brand manufacturers, which might have different needs for innovation when exporting to foreign countries. Clearly, in the case of own-brand manufacturers, innovation is of greater importance and requires promoting in the foreign markets as these firms start exporting. We thank an anonymous reviewer for suggesting this alternative explanation.

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Acknowledgements

We appreciate helpful and constructive comments from the Editor, Myles Shaver, three anonymous reviewers, Bruno Cassiman, Jose Manuel Campa, Gianluca Carnabuci, Guido Corbetta, Marta Maras, Robert Salomon, and Xavier Martin, as well as seminar participants at Carlos III University and CESPRI-Bocconi. We are grateful to the Fundacion Empresa Publica for providing access to these data. The financial support from the Catalan Government Grant No. 2009-SGR919 is gratefully acknowledged.

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Authors and Affiliations

  1. Department of Organization & Strategy, CIR and CentER, Tilburg University, Tilburg, the Netherlands

    Elena Golovko

  2. Bocconi University, Milan, Italy

    Giovanni Valentini

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  1. Elena Golovko
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  2. Giovanni Valentini
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Correspondence to Giovanni Valentini.

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Accepted by Myles Shaver, Consulting Editor, 1 November 2010. This paper has been with the author for two revisions.

APPENDIX

APPENDIX

Table A

Table A1 Variable definitions
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Golovko, E., Valentini, G. Exploring the complementarity between innovation and export for SMEs’ growth. J Int Bus Stud 42, 362–380 (2011). https://doi.org/10.1057/jibs.2011.2

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