RIETI Report December 2013

Agglomeration and exports

The importance of increasing the number of internationalized firms is becoming recognized, and promoting internationalization can spread the benefits of economic globalization. Exports involve high upfront entry costs, of which the essential are knowledge-intensive expenditures required to penetrate foreign markets, and knowledge spillover from experienced exporters may help reduce entry costs. Does the agglomeration of incumbent exporters contribute to the higher likelihood of new export entry by Chinese firms? In the December issue of the RIETI Report, we present the column "Agglomeration and exports" written for VoxEU by Fellow Banri Ito in collaboration with Zhaoyuan Xu, an associate researcher at the Development Center, State Council of the People's Republic of China, as well as Consulting Fellow Naomitsu Yashiro.

Ito et al. exploit large firm-level data of Chinese manufacturing firms to answer this question. They find that the agglomeration of exporters indeed has a statistically significant positive contribution to the probability of export entry by Chinese firms, and that knowledge spillover in China is localized but complex, with effects varying according to the characteristics of the firms. Finally, Ito et al. give some policy implications as China seeks to accelerate its economic reforms through opening its economy and stimulating innovation.

This month's featured article

Agglomeration and exports

ITO BanriFellow, RIETI

Xu Zhaoyuan Associate Researcher, DRC

YASHIRO NaomitsuConsulting Fellow, RIETI

Policymakers in both developed and developing countries are beginning to recognise the importance of enlarging the mass of internationalised firms. Exporting allows firms in countries with small domestic markets to exploit economies of scale. In large emerging countries such as China, exporting exposes firms to advanced technology, which they can turn toward domestic innovation (see for example the case studies by Breznitz and Murphree 2011). Promoting the internationalisation of firms – especially among small and medium enterprises or in sectors facing severe import competition – can spread the benefits of economic globalisation. Exporting is known to be associated with substantial non-recoverable upfront costs, implying that only a subset of firms with sufficiently high productivity can profit from exporting. The essential part of such entry costs is often believed to be knowledge-intensive expenditures required to penetrate foreign markets, such as the establishment of distribution networks or the development of new products adapted to foreign consumers' tastes. If this is indeed the case, knowledge spillover from experienced exporters may reduce entry costs.

In our latest paper we exploit large firm-level data of Chinese manufacturing firms to assess whether an agglomeration of incumbent exporters contributes to the higher likelihood of new export entry by Chinese firms. Although the deepening of industrial agglomeration in China and its close interaction with China's exports are well documented (see for example Ge 2009 and Lu and Tao 2009), such knowledge spillover from agglomeration has not been explored.

To read the full text
http://www.rieti.go.jp/en/columns/v01_0010.html

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