# **2.2. Industry**

In a firm-level analysis of export performance, the industry to which a firm belongs is an important export determinant given that inter-industry features affect firms’ opportunities to export differently. Glejser et al. (1982) argue that a high domestic market concentration could negatively affect the share of exports in firms’ total sales for two reasons: (i) it allows major firms to harvest the possible economies of scale in the domestic market; and, (ii) dominant firms can exploit monopolistic prices in the home market whereas they might become price-takers in foreign markets.

Another feature concerns the patterns of technological change, which is highly industry-specific (Pavitt, 1984).<sup>5</sup> To the extent that innovative activities have an impact on firms’ exporting probability, one must account for industrial patterns of technological change.<sup>6</sup> Furthermore, if different regions within a country are strongly specialized in particular industrial activities, the impact of the industry effect on firms’ exporting propensity is reinforced by agglomeration economies. Bechetti and Rossi (2000) argue that firms located in “Marshallian districts” benefit from a cost reduction when entering foreign markets because of external economies in the provision of exporting services and information exchange on foreign customers.<sup>7</sup> They found that, in Italy, the location of small and medium enterprises in industrial districts increases both their probability of exporting and their export intensity. In addition, positive externalities can be obtained through networking and formal integration with other firms. They also found that the affiliation of a firm with an industrial or business group increases its financial and commercial capabilities and, thus, its propensity to export, especially when the business group operates internationally.

# **2.3. R&D, Innovation, and Technological Capabilities**

While there is considerable macroeconomic evidence that differences in innovation can affect firms’ export performance, the existing literature on microeconomic empirical studies yields somewhat mixed results.<sup>8</sup> Hirsch and Bijaoui (1985) found a significant and positive relationship between innovation (measured as the share of R&D employees) and export propensity and intensity in a sample of 111 Israeli firms. Using a sample of 250 Swedish firms, Braunerhjelm (1996) found a positive association between R&D expenditure and export intensity.<sup>9</sup> Moreover, Bleaney and Wakelin (2002) report that both innovative and non-innovative firms in sectors with high ratios of R&D expenditure to output are more likely to export than firms in sectors in which this share is low.

> 5 Pavitt (1984) identifies four industry patterns of technological change: (i) supplier dominated; (ii) specialized suppliers; (iii) scale intensive; and, (iv) science based. 6 See section 2.3.

> 7 The positive effect of geographical agglomeration on export performance will be higher if local firms compete in segmented foreign markets or when there are strong complementarities among them (in both production and commercial activities).

> 8 See, for example, Fagerberg (1988).

> 9 These 250 firms represented around 40 percent of the total employment in the Swedish manufacturing industry.

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