Abstract
This paper investigates the effect of quality on foreign entry using data on international movie exports and direct and revealed measures of movie quality. Strict quality sorting is predicted by a model of firm heterogeneity. An alternative model is random entry, in which entry decisions are independent of the movie’s quality. I develop a discrete choice model that allows for both of these extremes as special cases, and use graphical techniques and simulations to compare their predictions to the data. I then use regression analysis to estimate the effect of quality on the propensity to enter foreign markets. A one-standard-deviation increase in quality increases the probability of entry by 25–50 %. Systematic differences in taste for different genre types are used to estimate a measure of cultural distance between countries. Movies in “culturally dependent” genres are less likely to enter foreign markets and their probability of entry is less sensitive to quality. The cultural distance measure enters a gravity equation of US bilateral trade significantly.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Crozet et al. (2012) use expert ratings in their study of Champagne exports and quality.
The six majors (and their parent companies) are Paramount (Viacom), Warner Brothers (Time Warner), Columbia (Sony), Walt Disney (Walt Disney), Universal (Comcast/General Electric), and 20th Century Fox (News Corporation).
In general, increasing profits does not imply increasing revenues since there may be costs associated with quality. If higher marginal costs are required for higher quality, and if prices are a function of marginal cost, then revenues may fall with quality—through movement along the demand curve—even as profits increase due to a higher price per unit. The relevant condition is a comparison of the elasticity of consumer demand with respect to quality versus the elasticity of marginal cost with respect to quality.
This definition is the author’s adaptation of the first definition in Random House (2010).
The precise partition used will be explained in the empirical section.
Once again we use the fact that the optimal price is p dm = c d + 1/α for all m.
The Netflix business model has since changed to focus on digital distribution of movies.
The following countries had zero imports in at least one of the two subsets of movies: Bahamas, Bosnia-Herzegovina, Cuba, Faroe Islands, Ghana, Iran, South Korea, Macau, Nepal, Syria, Tanzania.
Figures for the other quality proxies are qualitatively similar, though the evidence in favour of the quality-sorting model is strongest for the box-office revenue measure.
Film distributor Hammad Zaidi (2010) writes that, “When it comes to comedies, romantic comedies, dramas, coming-of-age films, personal stories, family films…you have a better chance of winning the lottery than you do of enjoying healthy sales internationally…The reason that most genres don’t work overseas is because their content is specifically designed to work within the country they were made. For example, in comedies, what’s funny in Los Angeles may not be funny in Zimbabwe and in romantic comedies, what’s romantic in Nashville may be offensive in China”.
As a robustness check, I also estimated a probit model with fixed effects, which potentially suffers from the incidental parameters problem. The resulting Hollywood distance has a correlation coefficient of 0.99 with the index reported using LPM estimation.
See Disdier and Head (2008).
References
Abramitzky, R., & Sin, I. (2012). Book translations as idea flows: The effects of the collapse of communism on the diffusion of knowledge (Motu Working Paper 12-05). Wellington: Motu Economic and Public Policy Research.
Anderson, S., de Palma, A., & Thisse, J. F. (1992). Discrete choice theory of product differentiation. Cambridge, MA: MIT Press.
Bernard, A., Redding, S. J., & Schott, P. K. (2011). Multiproduct firms and trade liberalization. Quarterly Journal of Economics, 126(3), 1271–1318.
Cameron, A. C., Gelbach, J. B., & Miller, D. L. (2011). Robust inference with multiway clustering. Journal of Business and Economic Statistics, 29(2), 238–249.
Cavalli-Sforza, L. L., Menozzi, P., & Piazza, A. (1994). The history and geography of human genes. Princeton, NJ: Princeton University Press.
Chen, M. X., & Moore, M. O. (2010). Location decision of heterogeneous multinational firms. Journal of International Economics, 80(2), 188–199.
Crozet, M., Head, K., & Mayer, T. (2012). Quality sorting and trade: Firm-level evidence for French wine. Review of Economic Studies, 79(2), 609–644.
De Vany, A. (2004). Hollywood economics. London: Routledge.
Disdier, A.-C., Fontagné, L., Mayer, T., & Tai, S. (2010). Bilateral trade in cultural goods. Review of World Economics/Weltwirtschaftliches Archiv, 145(4), 575–595.
Disdier, A.-C., & Head, K. (2008). The puzzling persistence of the distance effect on bilateral trade. Review of Economics and Statistics, 90(1), 37–48.
Dyen, I., Kruskal, J. G., & Black, P. (1992). An Indo–European classification: A lexicostatistical experiment. Transactions of the American Philosphical Society, 82(5).
Eaton, J., Kortum, S., & Kramarz, F. (2011). An anatomy of international trade: Evidence from French firms. Econometrica, 79(5), 1453–1498.
Ferreira, F., & Waldfogel, J. (2013). Pop internationalism: Has a half century of world music trade displaced local culture? The Economic Journal, 123(569), 634–664.
Ferreira, F., Petrin, A., & Waldfogel, J. (2012). Trade, endogenous quality, and welfare in motion pictures. Mimeo University of Minnesota.
Hanson, G., & Xiang, C. (2011). Trade barriers and trade flows with product heterogeneity: An application to US motion picture exports. Journal of International Economics, 83(1), 14–26.
Helpman, E., Melitz, M. J., & Rubinstein, Y. (2008). Estimating trade flows: Trading partners and trading volumes. Quarterly Journal of Economics, 123(2), 441–487.
Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills, CA: Sage.
Hofstede, G. (2002). Dimensions do not exist: A reply to Brendan McSweeney. Human Relations, 55(11), 1355–1361.
Khandelwal, A. (2010). The long and short (of) quality ladders. The Review of Economic Studies, 77(4), 1450–1476.
Kugler, M., & Verhoogen, E. (2012). Prices, plant size, and product quality. Review of Economic Studies, 79(1), 307–339.
Maystre, N., Olivier, J., Thoenig, M., & Verdier, T. (2009). Product-based cultural change: is the village global? (CEPR Discussion Paper 7438). London: Centre for Economic Policy Research.
Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725.
Random House. (2010). Culture. Dictionary.com Unabridged. http://dictionary.reference.com/browse/culture.
Thompson, S. B. (2011). Simple formulas for standard errors that cluster by both firm and time. Journal of Financial Economics, 99(1), 1–10.
Zaidi, H. (2010). Going bionic: Distributing independent films internationally that sell—genres that sell! Film Threat. http://www.filmthreat.com/features/22250.
Acknowledgments
I appreciate invaluable guidance from Keith Head and John Ries. I also benefited greatly from the comments of an anonymous referee. I am grateful for financial assistance from the University of British Columbia and from Canada’s Social Sciences and Humanities Research Council.
Author information
Authors and Affiliations
Corresponding author
About this article
Cite this article
Holloway, I.R. Foreign entry, quality, and cultural distance: product-level evidence from US movie exports. Rev World Econ 150, 371–392 (2014). https://doi.org/10.1007/s10290-013-0180-3
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10290-013-0180-3