Customs data allow assessment of the degree of unfulfilled potential in fragile states or, in other words, the scope for market creation. These data enable identification of the sectors in which no cross-border transactions—whether imports or exports—are recorded for years. The World Bank _Exporter Dynamics Database_ is a unique source of information to assess that gap.<sup>18</sup> Drawing on data sets covering the universe of cross-border transactions that are obtained directly from customs agencies in 70 countries allows assessment of the extent to which products are missing from fragile states.

The differences therein are striking: an average of 50–70 percent of product lines are missing from custom transactions in fragile states, as opposed to only 20–30 percent in the rest of the world. The gaps are persistent over time, and illustrate the absence of large-scale domestic production, as well as a missing market for foreign suppliers. In less distorted markets, such gaps reveal investment opportunities that result in high entry.

That is not the case with fragile states. The level of their failures and risks in fragile situations is prohibitive for most foreign suppliers, as illustrated by lower import entry rates, relative to other markets. As fragility imposes fierce selection at the borders, only the exceptional few make it in, which, in turn, translates into greater resilience post-entry for those that are able to overcome the sizeable entry barriers (see Figure 3).

What these dynamics suggest is also a significant ‘survivor bias’ in what we know about pioneers in fragile situations. The information we have comes from the few that succeed and survive, and who capitalize on capabilities that deviate substantially from entrepreneurs in the rest of the world. The characteristics of those who did not survive are unobserved, and, importantly, so are the characteristics of those that could potentially create markets with the support of financial institutions.

# **_First-mover advantages are not sufficient to secure credit_**

As corroborated by an array of studies, there are benefits to being a first entrant in a market. In high-income markets, pioneers enjoy, on average, as much as 16 market-share points over late entrants, and 10 market share points over early entrants.<sup>19</sup> Yet the verdict is still out: a growing body of empirical studies lends support to the claim that following is better than pioneering due to the costs outweighing the benefits.<sup>20</sup> However, the sector and the market clearly make a difference. In fragile states, first-mover advantages can be significantly higher than in other markets due to the lack of diversification: simple innovations can be greatly rewarding.

But costs can be more constraining too. In fragile states, the fixed costs of creating a new market, or restoring one disrupted by conflict, are significantly higher. Pioneer firms thus face a time inconsistency problem: the firm that bears the fixed costs by entering first will become the least competitive once the market is established. That is because such firms will be carrying the legacy of their market creation or restoration costs. This explains why, in fragile states, we mostly see

> 18 Fernandes, Freund, and Pierola, 2016.

> 19 Tellis and Golder, 2001.

> 20 Golder and Tellis, 1993; Schnaars, 1994; Shankar, Carpenter, and Krishnamurthi, 1998; Boulding and Christen, 2003; and Hauser, Tellis, and Griffin, 2006.

13