No single theoretical model fully explains the phenomenon of intermittent exporters. We therefore develop our conceptual framework based on two major theoretical perspectives to explain how firm characteristics and market conditions affect firms’ decision to exit and re-enter exporting. Augmenting these theories with insights from the performance feedback literature, we develop a model of firm export exit and (possible) re-entry conditional on exit – the defining characteristics of intermittent exporters.
The first theoretical pillar is the resource-based view (RBV). Recent international trade theory has highlighted the importance of producer heterogeneity in explaining the dynamics in international trade (e.g., Melitz, 2003). Scholars in these fields have investigated intensively why firms export and how they benefit from exporting. While the economics literature has tended to regard firm-level productivity to be the ‘catch-all’ determinant of heterogeneous export behavior, the IB literature in parallel has adopted a more complex and nuanced view, and explored these questions in the framework of the resource-based view and firm-specific advantages (Dunning, 1980). An underlying assumption about these frameworks is that firms vary in their resource bundles and productive capacity (Barney, Wright, & Ketchen, 1991). Both literatures reach similar conclusions – we now understand that to start exporting, firms need to be sufficiently productive or competitive to cover the sunk cost associated with export entry, including the costs of collecting market information, modifying products to global preferences, logistics and distribution. This is supported by a large body of empirical work (as reviewed by Wagner, 2007; ISGEP, 2008; Martins & Yang, 2015).
The second strand of theories we draw on is the gradual process of internationalization. This includes the original Uppsala internationalization process models and the further developments that highlight the interplay between learning, commitment building and business network development (Johanson & Wiedersheim, 1975; Johanson & Vahlne, 1977, 2006, 2009). Here, the gradual learning process of internationalization is featured in which firms first gain experience from the domestic market before moving to foreign markets, starting their foreign operations from ‘less foreign’ countries (in terms of psychic distance) before moving to more foreign countries, and starting foreign operations by using traditional exports before gradually moving to more intensive and demanding operation modes such as sales subsidiaries and direct investment. This is a process in which firms develop market knowledge, decide foreign market commitments, and identify and develop opportunities.2
Despite their usefulness in explaining exporting and internationalization, neither the RBV nor the process model satisfactorily explains the phenomenon of intermittent exporting. The RBV concentrates on the internal resources of the firm, while the process model stresses learning from previous international experience coupled with decisions on likely future prospects in foreign markets in deciding on future commitment levels. In their more recent re-conceptualization of the process model, Johanson and Vahlne (2009) stress that commitment may decline, or even cease, if performance and prospects are not sufficiently promising. However, this is considered in the context of commitment to a given market, and does not specifically explain why some firms repeatedly enter, withdraw from, and re-enter exporting activity as a whole. More specifically, neither theoretical approach fully explains the interplay between demand conditions in both the domestic and potential export markets and internal firm characteristics in the decision to exit or re-enter exporting, nor the conditions under which firms react more or less strongly to changes in demand patterns in deciding whether to exit or re-enter exporting. We develop a conceptual model which does this, drawing on elements of the resource-based perspective and the process model, but augmenting both with an understanding of firms’ reaction to domestic and foreign demand changes through the process of performance feedback.
Performance feedback describes a situation in which the firm evaluates performance against an aspirational level which is set either in terms of previous performance achievement, or through comparisons with competitors. Previous research suggests that performance feedback does play a role in internationalization, and especially in irregular and intermittent forms of internationalization. For example, in a study of Swedish SMEs, Wennberger and Holmquist (2008) find that performance below defined aspiration levels tended to increase the firm’s search for opportunities to internationalize; and in a study of over 500 export managers, Lages et al. (2008) demonstrate that exporting performance is inversely correlated with the extent of change in exporting marketing strategy in the next period, consistent with performance feedback. More specifically, Lin (2014) shows that where performance is below the aspiration level, firms tend to respond not only by adopting more rapid internationalization, but also a more irregular pace of international expansion in order to improve performance.
The interplay between firms’ internal resources and perceived opportunities in domestic and international markets drives the process of export entry, exit and potential re-entry. A firm engaged in domestic operations has the opportunity to employ its internal productive resources and its knowledge of the external environment to commit resources in the decision to start exporting. The firm’s experience as an exporter then helps to shape its view of the profitable opportunities available in both domestic and overseas markets, and it decides whether to remain as an exporter or to exit exporting. This is done by comparing actual performance arising from exporting to the level considered acceptable. We argue below that this decision is influenced by the interaction between a firm’s internal resources and demand conditions at home and abroad. Having made the exit decision, depending on its internal capacity and on the reasons for exit, the firm then faces the decision to remain as a domestic producer or re-enter exporting. Crucially, the re-entry decision is shaped by experiences and performance prior to and during the exit phase, including the rationale for exit. The re-entry decision is therefore a conditional one. Firms which go through all three stages culminating in re-entry are intermittent exporters, the focus of this article.
The detailed hypotheses underlying this process are developed below. As demonstrated in the empirical analysis, this model exhibits several useful features. It explains why intermittent exporting is more likely to be carried out by smaller, less resource-intensive firms, shedding light on the opportunistic and intermittent nature of exporting among small firms observed but largely unexplained in earlier research (e.g., Crick, 2004; Love & Ganotakis, 2013). The model also demonstrates that demand conditions at the time of exit, and the firm’s reaction to these, are central to the probability of export re-entry, an issue not previously considered in empirical research. More generally, our analysis highlights the role of the firm’s strategic choice in exit and re-entry, especially regarding reaction to changes in home and overseas demand.
The initial export entry decision is well researched in the IB and economics literatures. In the sections below we concentrate on developing the conceptual arguments and hypotheses for the exit and conditional re-entry stages that define intermittent exporters.
Export Exit: Firm Resources and External Market Conditions
We hypothesis that export exit is shaped both by perceived market demand conditions and on the interaction between the firm’s internal resources and demand at home and overseas.
External Market Conditions
Firms make exit decisions strategically, based at least partly on expected earnings in the export market due to the changes in its external market opportunities. There is growing evidence that the globalization of markets and industries has fundamentally changed the competitive conditions facing firms (Colantone, Coucke, & Sleuwaegen, 2008). Not only has the global market place become more competitive, but there are also more market opportunities from which firms can take advantage. Therefore, demand conditions in domestic and foreign markets are likely to play a role in the exit decision alongside the firm’s internal resources.
Export and domestic sales are closely linked. There is ample macro-level evidence that exports can be motivated both by improved global trade condition and by domestic crisis or depression (Greenaway & Kneller, 2007). Indeed, Salomon and Shaver (2005) argue that export sales and domestic sales should be determined simultaneously: their relationship is interdependent rather than independent. In a similar vein, Belke, Oeking, and Setzer (2015) argue that under certain conditions, firms consider export activity as a substitute for serving domestic demand. One potential limitation of the previous literature is that the ‘complementarity’ versus ‘substitutability’ property of domestic demand and export activity has typically been analysed in a linear framework. The relationship between domestic demand and export performance may, however, vary with economic conditions and thus be of a nonlinear nature.
Some empirical evidence supports this view. Based on firm-level data from five Euro area countries, Belke et al. (2015) find that domestic demand developments are relevant for the short-run dynamics of exports especially during the more extreme stages of the business cycle. A strong substitute relationship between domestic and foreign sales can most clearly be found in Spain, Portugal and Italy, providing evidence of the importance of sunk costs and suggesting that history matters in international trade. In their analysis of Chilean firms, Blum et al. (2013) find that intermittent exporters have lower capital (either given exogenously or related to their lower productivity): as a consequence the marginal costs of exporting is higher when domestic demand is high since it is more profitable to sell domestically. When domestic demand is low it becomes more profitable to sell to foreign markets, and as a result firms reduce domestic sales and start exporting.
Given these theories and evidence, we argue that firms’ export exit may reflect the adjustment to external market conditions, including both domestic and overseas market conditions. It is a process of firms’ learning through engaging in international export markets and at the same time identifying and creating opportunities. Profitable opportunities encourage entry, into either the domestic market or global markets. When the domestic market grows, exporters may find higher profit margins from domestic sales increase and hence are willing to shift sales from exports back to the home market. Similarly, when global markets grow, selling in international markets becomes more profitable, hence staying in export markets and expanding the market share is logical.
Hypothesis 1a:
The higher the growth rate in the domestic market, the more likely are firms to exit export markets.
Hypothesis 1b:
The higher the growth rate in foreign markets, the less likely are firms to exit export markets.
The Role of Internal Resources
The outcome of the knowledge gained from exporting can be to withdraw commitment from international markets, just as much as it is possible to increase resource commitment. Firms may realize only after starting to export, or only through exporting, that they are not competitive enough to stay in international markets: negative performance feedback therefore leads such firms to cease exporting. An example of this arises in ‘opportunistic’ or ‘accidental’ exporters, firms which may respond to an enquiry or order placed by a customer overseas without such behavior being a clear strategic decision (Crick, 2003; Requena-Silvente, 2005). Such firms may not have sufficient time to learn about foreign markets and that may induce their rapid exit from exporting. By contrast, more resourceful and capable firms are more likely to be in the position to survive the negative productivity shocks than less resourceful and capable ones.
This suggests that the nature of a firm’s response to changes in domestic and foreign demand will be determined partly by its internal resource capabilities. We therefore hypothesize that firms’ internal characteristics and resources interact with market conditions in systematic ways to determine the likelihood of exit.
Although expanding foreign markets provide opportunities for all firms (as H1b above suggests), for small firms this is something of a mixed blessing. Smaller firms and those further from the productivity frontier are less likely to be able to compete effectively with the increased competition that is likely to accompany increased foreign demand. Such marginal firms may find themselves squeezed out of export markets as their (relative) productivity levels fall relative to the average, as new, more capital-intensive and more productive entrants move into the market. Similarly, smaller and less productive firms are more likely than larger, more capital-intensive and more productive enterprises to exit export markets when domestic demand rises. Such firms are more likely to be ‘opportunistic’ exporters: for them exporting is often a marginal exercise, and one which is easily reversed when domestic demand conditions improve relative to export markets. Precisely such a scenario is outlined by Crick (2003), and demonstrated for British new technology-based firms by Love and Ganotakis (2013). And in their analysis of Chilean firms, Blum et al. (2013) find that intermittent exporters tend to have lower capital intensity, possibly related to their lower productivity. By contrast, larger and more productive firms are less likely to be adversely affected by increased demand in expanding export markets, and are also more able to cope with increased production in times of rising domestic demand without the need to switch out of export markets, an option which may be more difficult for smaller firms and those further from the productivity frontier. In addition, larger and more capital-intensive firms may suffer from a degree of inertia or sclerotic thinking as well as having longer-term planning horizons than their smaller, more nimble counterparts, making them less reactive to short-term changes in demand conditions. This leads to our next hypothesis:
Hypothesis 2a:
The larger the firm, the less strongly it reacts to changes in domestic and foreign demand in terms of the likelihood of export exit.
Hypothesis 2b:
The more productive the firm, the less strongly it reacts to changes in domestic and foreign demand in terms of the likelihood of export exit.
Hypothesis 2c:
The more capital-intensive the firm, the less strongly it reacts to changes in domestic and foreign demand in terms of the likelihood of export exit.
Export Re-Entry: Firm Resources and External Market Conditions
The key distinguishing feature of intermittent exporters is that they re-enter exporting having previously ceased doing so. As with the exit decision, we postulate that re-entry will depend on firms’ internal productive resources and on their strategic reactions to domestic and foreign demand conditions.
There is evidence that experience of exporting helps firms to learn about and overcome the difficulties of operating in foreign markets (Salomon & Shaver, 2005; Love & Ganotakis, 2013; Sui & Baum, 2014). In particular, the past experience of exporting reduces the uncertainty associated with re-entering export markets and helps firms lower the sunk cost associated with re-entry. This is consistent with the view that previous international experience leaves international ‘heritage’ which can be useful for subsequent re-entry (Welch & Welch, 2009).
However, firms will vary in their capacity to access, interpret and absorb the information gained through a previous period of exporting. Firms with a low probability of exiting exporting, typically larger, more productive enterprises, will typically find the same attributes useful in re-entering should the need arise: we know from the export entry literature how important scale and productivity are in entering foreign markets. In addition we argue that the firms best equipped to absorb useful knowledge from their previous exporting experience are those which already have the scale, productive capacity and absorptive capacity to learn – precisely the set of firms which had a relatively low likelihood of exit. While some larger firms may suffer from inertia or sclerotic thinking, recent evidence indicates this is largely a function of firm age rather than size, while scale and previous experience are major advantages in export entry and success (Love, Roper, & Zhou, 2016). Thus variations in firms’ internal resources not only directly affect exit, but have a conditional effect on the probability of re-entry: exit and re-entry are inversely correlated.
External Market Conditions
Related to Hypothesis 1a and 1b on exit, we argue that the external market conditions in which exporters exited exporting not only help explain the exit decision, but also matter with respect to the likelihood of re-entry. This is because the reasons for exit say much about the quality of firm’s internal resources and the nature of the export re-entry. On the one hand, when the domestic market experiences a boom, firms face increasing marginal costs of exporting as it is more profitable to sell domestically and output is fixed in the short term (as in Blum et al., 2013). Firms that have suitably high productive capacity may not need to choose the domestic market over foreign markets, and are able to expand in the domestic market while remaining as exporters. However, firms that have short-term quantity constraints in the amount of output that they can produce may decide to retreat (temporarily) from the foreign market to satisfy increased domestic demand. Subsequently such firms are more likely to increase production in the following periods not only to meet the increased demand domestically, but also to re-start selling abroad.
On the other hand, if firms exit exporting when the domestic market experiences a negative shock (such as an economic crisis), then it is reasonable to assume that they might be experiencing challenges in maintaining sufficient profit margins to stay in export markets. A likely scenario is that the firm is heading towards closure: Ilmakunnas and Nurmi (2010) show that many exporting firms share similar characteristics to those of firms completely exiting from the market. Such firms are hence less likely to re-enter export markets.
Similarly, when foreign markets experience a boom, irrespective of domestic market conditions, firms face lower marginal costs of exporting, as it is more profitable to expand international market and sell less domestically. Under these conditions it is counter-intuitive to retreat from exporting unless firms experience serious challenges in maintaining sufficient profit margins to stay in foreign markets. One possible scenario is that a positive global demand shock encourages new entrants to compete in the existing markets. Increased competition decreases profit margins for incumbents, and some of the existing exporters may no longer be able to continue exporting. If exit from exporting is driven by the exporter’s insufficient productive efficiency, it may take time to catch up with the productivity frontier: thus firms which exited when foreign demand was growing are in a relatively weak position to subsequently re-enter exporting. Hence:
Hypothesis 3a:
The higher the domestic market growth rate at the time of exit, the more likely firms are to re-enter exporting.
Hypothesis 3b:
The higher the foreign market growth rate at the time of exit, the less likely firms are to re-enter exporting.
Together, Hypotheses 1a/1b and 3a/3b indicate that reactions to demand conditions at the time of exit systematically affect the probabilities of both exit and re-entry. Coupled with the other hypotheses, this in turn suggests a clear pattern of the nature and likelihood of intermittent exporting under different demand conditions at the time of exit. These are illustrated in Fig. 1, which compares the situations when domestic and foreign demand are high/low at the time of exit.
In the top left quadrant, where demand growth is (relatively) high in the domestic market but (relatively) low in overseas markets, domestic and foreign conditions pull in the same direction with regard to exit/re-entry: firms clearly have an incentive to exit exporting on both counts. As indicated in H3a/3b, firms exiting under these conditions also have a high likelihood of subsequent re-entry: firms that have short-term quantity constraints in the amount of output that they can produce may decide to retreat (temporarily) from the foreign market to satisfy increased domestic demand. Such firms are able to increase production in the following periods to re-start selling abroad when demand conditions improve. Under these conditions, exit and re-entry is therefore likely to be relatively frequent: firms reacting this way may be characterized as the opportunistic intermittent exporters, frequently relatively small-scale producers which react strongly to changes in demand at home and abroad (H2a).
On the leading diagonal are conditions where demand in both domestic and foreign markets is high/low at the time of exit. Here, conditions in either the domestic or export markets drives exit and re-entry patterns. In the high/high case (top right quadrant) any incentive to exit comes exclusively from reaction to the growth in the domestic market, as some firms switch production there in the short term (H1a). These firms are also likely to re-enter exporting (H3a) as they are subsequently able to expand production to accommodate growth in both domestic and overseas markets. Thus intermittent exporting takes place, but is driven wholly by reactions to events in the domestic market. In the opposite low/low growth case (bottom left quadrant) the reverse applies: exit and re-entry occurs as a result of firm’s responses to low demand growth in export markets. Firms thus have an incentive to exit exporting, but they are also in a good position to re-enter exporting subsequently. This is because they left exporting purely because of low demand, and were not driven out by the competition in export markets.
The final case is where domestic market growth at the time of exit is low, and that of export markets at the time of exit is high. Firms have little incentive to exit exporting here, but those that do are ill-equipped for re-entry into exporting: these firms exit exporting because they are unable to keep up with the competition in growing export markets, not because of limited export opportunities. The likelihood of intermittent exporting is therefore low, and firms exiting under these conditions might best be regarded as ‘failed’ exporters.