# **1. Introduction**

Understanding the main challenges to export diversification and survival is crucial from a policy perspective for many developing countries as an important part of their growth prospects is inevitably linked to their ability to competitively produce and market goods in the global marketplace.

Export growth results from different factors such as the expansion into new products and new markets (the extensive margin), the extension of existing export relationships (the intensive margin) and the survival of these relationships across time (the sustainability margin). A closer look at the sources of export growth reveals that exporting is a risky activity characterized by a high degree of uncertainty. Firms struggle to diversify their export portfolio both in terms of products and destination, but once they have reached new markets, they also struggle to keep their export flows active for long periods (Besedes and Prusa (2004, 2006), Brenton et al. (2010), Cadot et al. (2013)). Low survival rates entail welfare losses for the economy as a whole when sunk costs of entry and exit are high.

Besedes and Prusa (2007) have shown that the main difference between successful developing countries and less successful ones in terms of export performance lies in the ability to maintain export relationships for longer. Brenton et al. (2009) also have shown that poor export performance of some developing countries is attributable to low survival rates, with no substantial differences in the introduction of new trade flows. Thus, improving the survival rate of new export flows is important not only because the high mortality rate implies high inefficiencies but mostly because low survival limits the deepening of trade relationships and henceforth diversification, overall export growth and the resulting job creation.

In this paper we use a unique data set on Georgian firms matched with customs’ export transactions for the period 2006-2012. This database allows us to explore the role of firm level characteristics among the factors affecting export survival. We also explore the role of both diversification strategies and network effects on the success of export flows.<sup>1</sup> The analysis yields five main results.

First, Georgian exporters failed to consolidate new products in international markets. We find that while Georgia experienced sustained export growth between 2006 and 2012, firms encountered difficulties in the introduction of new export products and particularly failed to keep these flows alive. This unsatisfactory record is mainly the result of low survival rates at the product level. There is substantial churning in export flows with firms adding and dropping products to their export mix continuously. Second, firms’ diversification strategies matter for the prospects of survival. Looking at the relationship between diversification and export survival we find that it matters how firms diversify. Flows from multi-product firms show better chances of survival relative to those originating from firms that have a concentrated export bundle. However, export

> 1 A related analysis on export survival using export transaction data for Georgia has been carried out by Doghonadze (2012).

2