Breaking into New Markets: Relying on Networks and Spillovers

As documented in the literature, exporting firms breaking into new markets can help alleviate risk and uncertainty by using various information channels. Such channels include spillovers, foreign consumer networks, and, potentially, foreign supplier networks. Novel to the literature, we jointly estimate the effects of these three channels. We show that each of these channels has statistically and economically significant effects on breaking into new markets and that omitting any of the channels in the estimation equation can bias (upwards) the marginal effects of the other channels by up to 150%. Each of these channels has a stronger magnitude of the effect than all other control variables combined, thereby increasing the probability of breaking into new markets by up to 50%. For a subset of our data, we were able to match importing and exporting firms and construct a more granular, firm-to-firm measure of the foreign consumer networks. The effect of our measure is three times greater (on breaking into new markets) than that of a more aggregate, firm-to-country measure. This implies that information is more likely to dissipate through the direct partners as emphasized by the networks literature.