The Adoption of an Exporting Strategy as a Diusion Process Sofronis K.

Clerides
Department of Economics University of Cyprus P.O.Box 20537 CY-1678 Nicosia, Cyprus sofronis@ucy.ac.cy

George I. Kassinis
Department of Public and Business Administration University of Cyprus P.O.Box 20537 CY-1678 Nicosia, Cyprus kassinis@ucy.ac.cy

March 2003

Corresponding author. Until July 2003 the author can be reached at: Department of

Economics, Yale University, P.O.Box 208264, New Haven, CT 06520-8264; tel. 1-203-4323714; fax 1-203-432-6323; email sofronis.clerides@yale.edu.

The Adoption of an Exporting Strategy as a Diusion Process

Abstract Motivated by the growing importance of international trade in a globalizing world, we analyze the process of internationalization of the rm via the adoption of an exporting strategy. Our modeling framework generalizes standard diusion models to allow for a changing pool of potential adopters and to include rms that abandon and re-adopt the strategy under study. Using a detailed plant-level dataset we nd that the pattern of adoption of the exporting strategy is consistent only with the external model of diusion. The rate of diusion is related to rm characteristics but not to the performance of past adopters.

Keywords: exporting strategy, diusion of strategies, diusion models.

Introduction

The importance of international trade in an increasingly globalizing world cannot be overstated.1 Individual rms are the vehicles via which most of international trade is conducted, and for this reason they deserve special attention. For decades, researchers and policy makers alike have focused their attention on the very process that leads rms to engage in international operations, whether those are exporting, foreign direct investment, or other activities. In this paper we focus on one aspect of the internationalization of a rm: the adoption of an exporting strategy. We are interested in addressing three important questions. First, can the adoption of an exporting strategy by rms be characterized as a diusion process? Second, is the spread of exporting a result of imitation; a function of characteristics of rms and the external environment; or perhaps both? Third, which are the factors that determine the rate of diusion of exporting activity? Diusion models have been used to describe the spread of technological innovation since the 1960s (Rogers 1983). More recently, attention has also been given to the diusion of corporate governance mechanisms and strategies across organizations (Teece 1980, Abrahamson 1991, Venkatraman, Loh, and Koh 1994). Imitation has been proposed as a possible force driving the diusion of strategies. Competitive and/or social pressures may push rms to copy strategies of others in the hope of realizing gains in performance or reputation. In addition to imitation, the adoption of a strategy may be precipitated by conducive external factors and rm characteristics. Exchange rate uctuations are an obvious candidate in the case of exporting: as the local currency depreciates, exports become more protable and exporting rms may realize performance gains. Moreover, one might expect the rate of diusion to be higher among rms that are more productive or possess the resources and

capabilities that are necessary to compete eectively in international markets. We start with the standard diusion models used in the literature and generalize them in three important ways. First, our framework allows the pool of potential adopters to change over time as it often does in practice, including our data. Second, it incorporates information on both rms that adopt the strategy under examination and rms that abandon it (possibly to re-adopt later). And third, it proceeds with a parameterization of the rate of diusion, allowing us to test how the latter is aected by changes in external factors. All commonly used diusion models can be obtained as special cases of this general framework. Our results are quite revealing. We nd that the internal inuence model is inconsistent with the observed process while the external inuence model ts the data well. We nd that past adopters are much more likely to re-adopt an exporting strategy than potential rst-timers. We also nd that the rate of adoption depends on the exchange rate, and is also related to rm characteristics such as size, age, and corporate status. The performance of users of the strategy, on the other hand, is not related to the diusion rate. The paper is organized as follows. In section 2 we review the relevant literature; in section 3 we specify our model, derive the regression equations to be estimated, and describe our data and methodology. In section 4 we present and discuss the results. Section 5 concludes.

2
2.1

Literature review
The diusion of innovations and strategies

The question of whether the adoption of an exporting strategy can be described as a diusion process lies at the foundation of our work. The diusion of strategies across rms may be driven by imitation and/or by characteristics of the rm and its external environment. We 2

think of imitation as the act of adopting a strategy not because of some internal calculation that shows it to be protable, but simply because the strategy proved successful for others. In other words, imitation occurs when rms copy their competitors actions in the hope of replicating their success. The alternative rationale is for the rm to adopt a strategy when the latter has been evaluated and judged to be worth pursuing. In the following paragraphs we motivate our investigation with a review of both the theoretical and the empirical literature on imitation and the determinants of exporting activity.

2.2

Imitation as a driver of diusion

Institutional explanations of the diusion of innovation may allow a better understanding of the spread of a strategy such as exporting. In general, institutional theory assumes that social pressures rather than strategic foresight shape adoption processes (Oliver 1991, Ingram and Clay 2000). In dealing with uncertainty, for example, organizations model themselves on or imitate organizations they perceive to be more legitimate or successful since the prestige of past adopters may provide some information about the inherent protability of the choice made. Also, regardless of the actual value or success of the strategy organizations may wish to associate with prestigious adopters in order to gain legitimacy (Terlaak and King 2002). Some researchers describe the pressures on rms to adopt an innovation or a strategy as bandwagons where the sheer number of adopters prompts other rms to adopt (Abrahamson and Rosenkopf 1993). Such institutional bandwagons are diusion processes (ONeill, Powder, and Buchholtz 1998, p. 100) and can be viewed as a result of fears of non-adopters of appearing dierent from the numerous adopters (Abrahamson and Rosenkopf 1993). Consequently, then, the number and prestige of previous adopters will shape the extent and nature of future adoption (DiMaggio and Powell 1983, Haveman 1993). Proxies for 3

the prestige of previous adopters used in the literature include the size of the adopter, its protability, growth, and eciency (Haveman 1993, Rosenkopf and Abrahamson 1999, Baum, Li, and Usher 2000). Research also suggests that the prestige of previous adopters not only aects the rates of subsequent adoption but also the type of organizations that imitate the adoption decision (Rosenkopf and Abrahamson 1999, Baum et al. 2000). For example, adoption by prestigious rms (bigger and/or better performing ones) is more likely to be imitated by less prestigious ones because these lower reputation rms assume that higher reputation ones have the know-how to make better choices (Abrahamson and Fombrun 1994). On the contrary, other researchers argue that as rms look for role models, they also monitor the behavior of a reference group of comparable organizations (possibly their closest competitors) in similar situations (Baum et al. 2000) and support the idea that similarity (e.g., in terms of size) among rms fosters imitation (Haveman 1993, Lant and Baum 1995, Greve 1998). In this case, competitive bandwagon pressures occur because non-adopters fear below-average performance if many competitors prot from adopting (Abrahamson and Rosenkopf 1993, p. 487). Contrary to such descriptions of institutional or bandwagon eects, other researchers have argued that some rms may resist institutional pressures to adopt popular strategies (Oliver 1991) or suggest that organizational inertia and the properties of a strategy, such as its complexity, may delay or even prevent its imitation by competing organizations (Dewar and Dutton 1986). Moreover, environmental uncertainty may inuence both the adoption and the diusion rate of strategic changes (Zajac and Shortell 1989). In addition to the institutional literature, a large literature on exporting provides some evidence as to the role that imitation may play in the spread of exporting strategies. Specically, an environment that contains exporting rms is likely to create positive at-

titudes towards exporting among non-exporting rms, especially if exporters are successful (Wiedersheim-Paul, Olson, and Welch 1978). Moreover, contacts may allow the exchange of information and create possibilities for the transmission of ideas from rms that are in dierent stages of expansion into international markets. Ito (1997) suggests that eorts by Japanese rms to increase their economic returns by improving their capabilities to imitate their competitors products, services, or strategic choices is a form of imitation or followthe-leader approach that may have an impact on the number of rms engaging in exporting (Manseld 1988). Overall, there are competing views on whether social and/or competitive pressures can induce rms to copy the strategies of others in hopes of realizing the gains (in performance or reputation) of earlier adopters. Therefore, whether imitation is a potential factor in the diusion of strategic choices and in particular of exporting remains an open empirical question.

2.3

Factors associated with the decision to export

A large literature spanning various disciplines has studied exporting strategies and analyzed the factors that determine both a rms propensity to export and the level of its exporting activity. These factors can be grouped into three general categories: rm characteristics, characteristics of the rms external environment, and managerial characteristics. We focus on the rst two categories that directly inform our work. Moreover, we emphasize studies that, like our paper, relate such characteristics to the decision to export and not the volume of exports. Since we are interested in whether rms adopt the exporting strategy, the appropriate measure is the number of exporters, not the volume of exports.

Firm characteristics. This category includes rm resources and capabilities (e.g., assets, human resources, product characteristics), rm demographics (size, ownership, years of export experience), and rm performance (productivity, protability, growth). Empirical work focuses mostly on the last two categories because they are relatively easy to quantify. Most studies, however, relate characteristics to export volume, which is not our primary concern. The relationship between size and exporting activity has received considerable attention. For example, size was found to be positively related to plant export status in samples of U.S. (Bernard and Jensen 2001) and Colombian (Roberts and Tybout 1997) plants. These two papers model the decision to export (as opposed to the decision of how much to export), hence they are directly relevant to our study. Studies that investigate the relationship between size and export levels report mixed results (Cavusgil 1984, Benvignati 1990, Ito 1997). Other rm characteristics that have been empirically linked to exporting activity include R&D spending (Benvignati 1990), rm age, level of foreign ownership, and corporate status (Roberts and Tybout 1997, Bernard and Jensen 2001). The latter nd that exporting is more likely to occur in older rms, rms with a substantial level of foreign ownership, and incorporated rms. A number of theoretical studies suggest that a positive relationship should exist between international operations (including exporting) and rm performance. Proposed explanations include performance stability, reduced risk, cost advantages via production economies, crosssubsidization, and arbitraging tax regimes (Gomez-Mejia and Palich 1997). Melitz (2002) recently developed a model that explicitly links productivity with exporting status. Empirical studies generally conrm the existence of such a positive relationship.2 Two such papers (Clerides, Lach, and Tybout 1998, Bernard and Jensen 1999) go a step further and examine the direction of causality; that is, whether exporting leads to eciency gains (rms learn to

be more ecient from their interactions in world markets) or whether more ecient rms self-select into export markets because the returns to doing so are relatively high for them (Clerides et al. 1998, p. 904). Both studies conclude that the causality runs from eciency to exporting: the more ecient rms become exporters, and exporting does not necessarily make a rm more ecient. Market characteristics. This category includes factors related to market and economic variables such as the size and level of competition in foreign markets, trade barriers, sunk costs of exporting, externalities, and exchange rates (Cooper and Kleinschmidt 1985). For example, Roberts and Tybout (1997) and Bernard and Jensen (2001) both nd that the exchange rate is an important factor in the export decision: the number of exporters increases as the local currency depreciates. Moreover, they nd evidence of sunk costs in exporting. Such one-time costs, incurred when a rm enters the export market, can be the costs of doing market research, establishing contacts and distribution networks, and so on. In our context we can think of these as the costs of adoption of the new strategy. Finally, regional or sectoral externalities (spillovers) may also inuence the decision of a rm to engage in exporting. Such externalities may manifest themselves as upgrades of transport infrastructure beneting both exporters and non-exporters as well as exportrelated services. In the presence of externalities a rm that belongs to an export-intensive industry (or export-oriented region) is more likely to become an exporter than an identical rm in a non-exporting industry (or region). Papers that examined the role of spillovers in the export decision include Aitken, Hanson, and Harrison (1997) and Clerides et al. (1998). Generally, the results suggest that spillovers are often though not always important. Overall, the literature points to a number of factors that may inuence the decision of a

rm to adopt an exporting strategy. Given the attention they receive in the literature and the accumulated evidence, our empirical investigation will focus on size, performance, age, corporate status, and the exchange rate as factors that are expected to positively inuence the rate of diusion of exporting strategies across organizations.

3
3.1

Model specication
Diusion models

The diusion process has generally been described using three modeling specications: internal inuence (often referred to as imitation), external inuence, and mixed inuence. In the imitation model (Manseld 1961), the diusion of an innovation is a result of communication, contact or interaction between prior adopters and potential adopters within a specic system (be it an industrial sector, an organizational eld, a country, a region etc.). Imitative behavior within this system drives the diusion process. This model, where the rate of diusion is a function of the number that has already adopted and the remaining potential adopters, can be represented by: dN (t) = qN (t)[M N (t)] dt (1)

where N (t) is the cumulative number of adopters at time (t), q is the coecient of imitation, and M is the number of potential adopters in the system (or the market potential). As Mahajan and Muller (1994, p. 224) indicate, the term qN (t)[M N (t)] captures the word of mouth interaction in a system. In the external inuence model (Coleman, Katz, and Menzel 1966), the diusion process is driven exclusively by factors external to the system and there is no imitation behavior.

The rate of diusion thus depends only on the number of adopters present in the system at time t. The model can be represented by: dN (t) = p[M N (t)] dt (2)

where p is a non-negative constant usually dened as the coecient of external inuence. According to Mahajan and Muller (1994), it represents the impact of external communication sources. Lastly, the mixed inuence model (Bass 1969) is a more general functional form that nests the imitation and external inuence models: dN (t) = p[M N (t)] + qN (t)[M N (t)] dt (3)

The internal and external models have fundamentally dierent implications for the pattern of diusion. These implications are demonstrated in Figure 1. The rst graph shows the number of new adopters as a function of past adopters. The external model implies that the number of new adopters is a decreasing linear function of total past adopters. In other words, the number of adopters decreases over time. In the internal model, on the other hand, the number of adopters is initially increasing up to the point where half of the pool of rms has adopted and only then does it start decreasing. The implications of this behavior on the path followed by the cumulative number of adopters over time are portrayed in the second graph. In the external model the cumulative number rises quickly early on and gradually slows down. In the internal model it starts rising slowly, picks up halfway through, and then slows down again. Our study aims to identify the model whose implications are more consistent with the data. INSERT FIGURE 1 9

All the models described above rely on the assumption that there is a stable pool of potential adopters and that rms never abandon the strategy being examined. Thus they are not rich enough to properly model diusion patterns that emerge when there is simultaneously adoption and abandonment of exporting, or when rms enter or leave the pool of potential adopters of the strategy. Failure to account for these movements could lead to erroneous results if, for example, ex-users behave dierently from rms that have never adopted. We will take up this issue in more detail once the model has been laid out. We proceed rst with an outline of our modeling strategy. We refer the interested reader to the appendix for the technical details.

3.2

A generalized framework

We think of the process starting at some unknown time T0 in the past and continuing through time. In periods t = 1, . . . , T we observe the following variables: N (t) = the number of rms using the strategy at time t; x(t) = the number of new adopters at time t; y(t) = the number of quitters at time t. We dene some variables to assist us with our calculations (note the convention that capital letters represent stocks while small letters represent ows): n(t) x(t) y(t), net adoption: the dierence between adopters and quitters at time t; X(t) Y (t)
t =T0 t =T0

x( ), the cumulative number of adopters up to time t; y( ), the cumulative number of quitters up to time t.

Our extension is based on a simple idea: the rate of diusion should depend not only on the number of new adopters, but also on the number of users who decide to abandon the 10

strategy. We rst illustrate this using the external inuence model. We generalize equation (2) in the following way: dN (t) = p0 [M (t) X(t)] + p1 [X(t) N (t)]. dt (4)

Note that if p0 = p1 and M (t) = M for all t then our model reduces to Colemans model. Essentially our modication allows the rate of adoption to dier among two groups: those who never adopted, M (t) X(t), and those who once adopted and then abandoned, X(t) N (t). It is easy to imagine scenarios where this may be the case. For example, ex-users might be less inclined to re-adopt if their rst experience taught them that this strategy is not suitable for them. This would result in p1 < p0 . Alternatively, ex-users might be more likely to re-adopt since they are familiar with the strategy and the cost of implementing it will be lower the second time around. This is essentially the sunk cost theory and it predicts that p1 > p0 . Changes in the pool of potential adopters are also important to keep track of. Suppose that there are N rms in the cluster at the beginning of our sample period and kN rms at the end. If in that last period x rms adopt the strategy in question, the true rate of diusion is x/(kN ), but if we do not take into account the change in the number of rms we will calculate it to be x/N . In other words, if the number of rms increases over time (k > 1) we will over estimate the rate of diusion, while if the number of rms is decreasing we will under estimate it. The regression analogue of equation (4) can be shown to be (see appendix): nt = p0 [Mt1 xt1 ] + p1 yt1 . (5)

There are two dierences between this regression equation and the one delivered by the standard model. One is the adjustment for the changing pool of potential adopters (Mt1 ); 11

the other is the inclusion in equation (5) of the number of quitters, yt1 , as an additional variable. Econometrically, failure to account for quitters would be equivalent to imposing the restriction p0 = p1 . The same idea is applied to Manselds (1961) internal inuence model, which generalizes to the following form: dN (t) N (t) N (t) = q0 M (t) X(t) + q1 (X(t) N (t) . dt M (t) M (t) The regression analogue in this case is nt = q0 Lt1 (Mt1 Nt1 Yt1 ) + q1 (Lt1 Yt1 ) + Lt1 , (7) (6)

where Lt = Nt /Mt and Yt = Yt Y0 . We note that in this model one more variable is introduced than is necessary to identify q0 and q1 . This is related to the fact that we do not observe those who adopted the strategy and quit before the beginning of our dataset; see the appendix for more details. Finally, the mixed model is an additive combination of the external and internal inuence models (when in dierence form): nt = p0 Mt1 xt1 +p1 yt1 +q0 Lt1 (Mt1 Nt1 Yt1 ) +q1 (Lt1 Yt1 )+ Lt1 . (8) Factors aecting the rate of diusion. We further generalize the model to allow external factors to aect the rate of diusion of exporting. We implement this modication as a parameterization of the coecient of inuence. For example, in equation (5) we write p0 = p0 zt1 and p1 = p1 zt1 , where zt1 is a vector of variables that may aect the rate of diusion (including a constant term) and p0 and p1 are parameters. The regression equation then becomes nt = p0 zt1 [Mt1 xt1 ] + p1 zt1 yt1 . 12 (9)

The parameters on the z variables can not be identied if we have only a single cluster of rms. Hence we split our sample into dierent clusters according to industrial sector and geographical region. Variation in the composition of the clusters enables us to identify the parameters in question. Thus we can capture the eect of any variables of interest on the rate of diusion of exporting activity.

3.3

Data and methods

The data we utilize in this study come from manufacturing surveys in Colombia. The same dataset has been used in other studies, including Roberts and Tybout (1997) and Clerides et al. (1998). It is quite comprehensive as it covers every plant with at least 10 workers for the years 1981-91.3 Our nal sample includes 13,625 plants, about half of which are in the sample for the whole 11-year period, while the rest enter or exit the market during the sample period. An important modeling issue concerns the denition of the cluster within which diusion patterns will be analyzed. Two denitions are reasonable candidates: we can think of the cluster as being an industrial sector or a geographical region. Both denitions nd support in the spillover literature we reviewed above. Our plants belong to 23 dierent manufacturing sectors when dened at the three-digit level (or 9 sectors at the two-digit level) and to 12 dierent geographical regions. Summary statistics indicating cluster size, adoption, and other variables of interest are reported in Table 1. INSERT TABLE 1 Our econometric methodology revolves around estimating equations (5), (7) and (8). In principle we should be able to estimate these equations separately for each cluster. However, we only have nine periods and the mixed model requires the inclusion of ve explanatory

13

variables. This makes it impossible to obtain meaningful results for individual clusters. Fortunately, we can exploit the presence of multiple clusters in our data by combining them and estimating a common diusion rate for all the clusters. This approach also enables us to test for the eects of dierent factors on the rate of diusion. We divide those factors into two groups. The rst group includes factors that measure the relative performance of adopters versus non-adopters within a cluster. If exporting plants perform better than non-exporters then this may induce the latter to adopt the exporting strategy. We use two measures of plant performance: value added as a percentage of total output and rate of growth of output. Factors in the second group contain information on cluster characteristics and they can vary either across clusters or over time, or both. The most important time-varying factor is the exchange rate. A high exchange rate (expressed as local currency per U.S. dollar) will render exported goods cheaper and thus increase export potential. This should have a positive eect on the rate of adoption of an exporting strategy in all clusters. Cluster-specic factors relate to the composition of each cluster. If, for example, size is conducive to exporting, then the strategy should diuse faster in clusters that are made up of relatively large plants. In addition to size (which is measured as the real value of output) we use plant age (number of years since it started production) and corporate status (whether the rm is a corporation or not) as possible determinants of the rate of diusion. In estimating our model we have to deal with several econometric issues. Our dependent variable n(t) is the dierence between two integers, and therefore an integer itself. It takes values that range from -36 to 24; 55.1% of those values are in the interval [3, 3]; 41.6% are less than zero and 48.8% are greater than zero. The unboundedness and large range of our dependent variable suggest that the discreteness of the data is not an important issue. We

14

thus estimate the model using conventional techniques for continuous dependent variables. Our regression equations do not include a constant term because the theoretical models that form the basis of our estimation do not call for one. In our reported estimates we account for possible serial correlation in the error term by applying the Prais-Winsten correction to our least squares estimator. Also, we report standard errors that account for general forms of heteroskedasticity and within-cluster correlation. We experimented with other estimation procedures, including panel generalized least squares and xed eect estimators. We also estimated versions of the model where observations were weighted by cluster size. Although the quantitative results varied, the qualitative conclusions were robust to the technique used. A nal econometric issue concerns the possible endogeneity that might arise due to the dynamic nature of our model. Although our equation does not directly include lagged values of the dependent variable, it does include lagged values of components of the dependent variable (such as yt1 in equation (5)). We tried to address this problem with instrumental variable techniques (using lags as instruments) but were unable to obtain precise estimates. Nonetheless, we believe that the bias introduced is small for two reasons. First, the serial correlation in the error term is fairly small; second, our equations include functions of the lagged dependent variable and not the lagged dependent variable itself. We are, therefore, condent in our results.

Results and implications

The external model (equation (5)), internal model (equation (7)) and mixed model (equation (8)) were estimated using the techniques outlined in the previous section for each of the three clusterings described earlier: industrial sector (two- and three-digit level) and geographical

15

region. Table 2 shows the correlations between the explanatory variables in the case of the three-digit sector clustering.4 INSERT TABLE 2 Results from the estimation are summarized in Table 3. Starting with the internal model, we note that all three estimates of q0 are strongly negative. A negative diusion rate implies that the process will never get o the ground; it will just implode. The q1 estimate, on the other hand, is positive but implausibly large. A diusion rate that is greater than one implies that there will be more adopters than there are rms in the sample. Hence both the sign and the magnitude of these coecients are inconsistent with the theoretical model. INSERT TABLE 3 The external model fares quite a bit better. Our estimates of p1 are positive and take on reasonable values in the range .157-.195. The p0 estimates are negative but closer to zero and statistically no dierent from it. The fact that p1 > p0 demonstrates the importance of keeping track of rms that abandon a strategy. It implies that the rate of diusion among rms that had adopted and then abandoned the exporting strategy is higher than the rate among rms that have never exported before. This is an important result that is consistent with the presence of sunk costs of exporting, which have been documented in the economics literature. The crux of the story is that the cost of re-adopting a certain strategy is lower than the cost of implementing it for the rst time. Our conclusions are unchanged when the two models are combined in the mixed model. Two of the three p1 coecients lose their statistical signicance and one turns negative, though insignicant. The q0 coecients again come out negative (although only one signicantly so), while the q1 estimates are highly insignicant. We note that all the results 16

are strikingly similar qualitatively and even quantitatively for all three clusterings. This strong evidence leads us to conclude that the external model is the better descriptor of the exporting strategys diusion process. We note that we also estimated simpler versions of the models that do not account for quitters or for the varying number of potential adopters (not reported because of space constraints). When we do not account for quitters (that is, impose p0 = p1 and q0 = q1 ) the results are substantially dierent in that the internal model performs better than the external model. This underscores the importance of keeping track of both adopters and quitters. When we x the number of potential adopters we nd exactly what our discussion in the previous section predicts for a cluster with an increasing number of potential adopters: failing to account for that leads to overestimation of the diusion rate. Having established that the external model provides a more accurate depiction of the diusion process of exporting, our next step is to investigate the specic factors that aect the rate of diusion. As discussed in the previous section, we concentrate on the eects of exchange rates, performance, size, age, and corporate status. We test for each of these variables separately in a series of regressions using equation (9). In each regression the vector z includes just a constant term and one of the explanatory variables. We are not able to test for all the variables together in a multivariate regression setting because of the high correlation between them (recall from equation (9) that each is the interaction of the variable whose eect we are examining and the sum of the two variables in (5)). In order to conserve space, we will only present the results for the three-digit sector case, shown in Table 4. INSERT TABLE 4

17

The results generally corroborate other similar ndings in the literature. The coecient on the exchange rate has the expected positive sign; a favorable exchange rate accelerates the diusion of exporting. The coecient on the time trend is also positive, suggesting that there is a growing (over time) tendency for rms to export that is independent of short-term uctuations in the number of adopters. The relative performance measures have little explanatory power. This may be interpreted as evidence that imitation is not important, but it may also be due to the fact that our performance measures are not directly observable by other rms and thus can not possibly form the basis of imitation. Cluster-specic characteristics, on the other hand, have a strong eect on the rate of diusion. The exporting strategy diuses faster in clusters that have larger rms, older rms, and more corporations. This suggests that rms that t into those categories are better suited to benet from exporting activities than other rms. It may also imply that rms monitor the behavior of a reference group of comparable organizations (possibly their closest competitors) operating in similar situations and this similarity among them (in terms of size or age, for example) may foster imitation as the literature reviewed earlier suggests.

Conclusion

In this paper we investigate the diusion pattern of exporting activity among rms in the same industrial or regional cluster. Our primary goal is to establish whether the spread of exporting follows one or more of the patterns associated with the diusion models that have been used heavily to model the diusion of innovations. We embark on this analysis using a general framework that nests all standard diusion models. The framework allows

18

for a changing number of potential adopters and incorporates the potential eect of rms abandoning and (possibly) re-adopting the strategy. Our ndings suggest that the diusion of the exporting strategy can be best described by the external model of diusion. We then proceed to investigate the extent to which various factors may aect the rate of diusion. We nd no evidence that performance imitation is a signicant determinant of the rate of adoption of an exporting strategy. This suggests in part that the decision to adopt an exporting strategy is internal to the rm and unrelated to the performance of its competitors. In other words, the rm bases its decision on its own assessment of the strategys protability and not on the success others may have had with it. This is an appealing result that endorses the notion of a rational rm that makes decisions in an optimizing manner and not in response to fashion or bandwagon pressures. Thus it can be generalized to describe the diusion of other strategies whose adoption involves a signicant implementation cost and whose eectiveness depends strongly on rm-specic factors such as age, size, and corporate status. Also, as discussed in the last section, rm characteristics such as the above, found to be related to the rate of diusion, cannot be ruled out as sources of imitative behavior either. Clearly, the eect of imitative and non-imitative (or rm-specic) factors on the rate of diusion of a strategy can be further examined in future research. Our paper demonstrates that simple deterministic models can perform well in describing the diusion of strategies. Future research can utilize our extensions of standard diusion models to examine the spread of other strategies in dierent competitive environments and shed more light on the factors that inuence such processes.

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Appendix: Derivations

Preliminaries. We start by providing some simple but useful identities that follow from the denitions given in section 3. The number of current users N (t) is the dierence between the cumulative number of adopters and quitters from time T0 to time t:
t t

N (t) =
=T0

[x( ) y( )] =
=T0

n( ).

Note that N (t) = N (t 1) + x(t) y(t) = N (t 1) + n(t). Now consider X(t), the total number of adopters regardless of whether they quit or not. We dene it as
t t t

X(t) =
=T0

x( ) =
=T0

[x( ) y( )] +
=T0

y( ) = N (t) + Y (t)

Note that we know N (t) but we do not know Y (t) because we do not observe quitters prior to time 1. We break up Y (t) into two terms:
0 t

Y (t) =
=T0

y( ) +
=1

y( ) Y0 + Yt .

The term Yt counts the total number of quitters in our sample period. The term Y0 is the cumulative number of quitters prior to the beginning of our sample. This is unobserved and gets absorbed into the xed eect. The external inuence model. We start from dN (t) = p0 [M (t) X(t)] + p1 [X(t) N (t)]. dt In discrete time the above takes the following form: Nt Nt1 = nt = p0 [Mt1 Xt1 ] + p1 [Xt1 Nt1 ], which implies that nt = p0 [Mt1 Xt1 ] + p1 [Xt1 Nt1 ]. 20

Substituting Xt1 = xt1 and Nt1 = nt1 delivers equation (5). The internal inuence model. We start from dN (t) N (t) N (t) = q0 M (t) X(t) + q1 (X(t) N (t) , dt M (t) M (t) We dene L(t) N (t)/M (t), substitute X(t) = N (t) + Y (t) = N (t) + Y0 + Y (t) and then discretize the above expression to get Nt Nt1 nt = q0 Lt1 [Mt1 Nt1 Yt1 ] + q1 Lt1 Yt1 + (q1 q0 )Y0 Lt1 . Dening (q1 q0 )Y0 and taking dierences gives equation (7).

21

Notes

According to World Trade Organization statistics, international trade increased by a

factor of 90 during the second half of the 20th century, even though world GDP increased by only 6.5 times (World Trade Organization 2001).
2

The literature is large; indicative papers include Buhner (1987), Geringer, Beamish, and

daCosta (1989), Grant (1987), Grant, Jammine, and Thomas (1988), Aitken, Hanson, and Harrison (1997), Bernard and Jensen (1999), and Clerides, Lach, and Tybout (1998). A smaller number of studies report negative or non-results on the said relationship (Ito 1997, Kim, Hwang, and Burgers 1989, Michel and Shaked 1986, Yamawaki 1986).
3

Note that our unit of observation is the plant, not the rm. This introduces some

possible bias if the decision to export is taken at the rm level, which is likely. However, Clerides et al. (1998) report that 95% of rms in semi-industrialized countries like Colombia are single-plant rms, so in practice any bias that may exist is likely to be small.
4

Correlation matrices for the other two clusterings are similar and are not reported.

22

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23

Clerides, S. K., S. Lach, and J. Tybout, 1998, Is Learning-by-Exporting Important? MicroDynamic Evidence from Colombia, Morocco, and Mexico, Quarterly Journal of Economics, 113, 903947. Coleman, J., E. Katz, and H. Menzel, 1966, Medical Innovation: A Diusion Study, BobbsMerrill, Indianapolis, IN. Cooper, R., and E. Kleinschmidt, 1985, The Impact of Export Strategy on Export Performance, Journal of International Business Studies, 16, 3755. Dewar, R. D., and J. E. Dutton, 1986, The Adoption of Radical and Incremental Innovations: An Empirical Analysis, Management Science, 32, 14221433. DiMaggio, P., and W. Powell, 1983, The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields, American Sociological Review, 48, 147160. Geringer, M., P. Beamish, and R. daCosta, 1989, Diversication Strategy and Internationalization: Implications for MNE Performance, Strategic Management Journal, 10, 109119. Gomez-Mejia, L., and L. Palich, 1997, Cultural Diversity and the Performance of Multinational Firms, Journal of International Business Studies, 28, 309335. Grant, R., 1987, Multinationality and Performance Among British Manufacturing Companies, Journal of International Business Studies, 18, 7989. Grant, R., A. Jammine, and H. Thomas, 1988, Diversity, Diversication, and Protabilty among British Manufacturing Companies, Academy of Management Journal, 31, 771 801. Greve, H. R., 1998, Managerial Cognition and the Mimetic Adoption of Market Positions: What you See is What you Do, Strategic Management Journal, 19, 967988. Haveman, H. A., 1993, Follow the Leader: Mimetic Isomorphism and Entry into New Markets, Administrative Science Quarterly, 38, 593627.

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Ingram, P., and K. Clay, 2000, The Choice-Within-Constraints New Institutionalism and Implications for Sociology, Annual Review of Sociology, 26, 525546. Ito, K., 1997, Domestic Competitive Position and Export Strategy in Japanese Manufacturing Firms: 1971-1985, Management Science, 43, 610622. Kim, C., P. Hwang, and W. Burgers, 1989, Global Diversication Strategy and Corporate Prot Performance, Strategic Management Journal, 10, 4557. Lant, T. K., and J. A. Baum, 1995, Cognitive Sources of Socially Constructed Competitive Groups, in W. R. Scott, and S. Christensen (ed.), The Institutional Construction of Organizations, Sage, Thousand Oaks, CA. Mahajan, V., and E. Muller, 1994, Innovation Diusion in a Borderless Global Market: Will the 1992 Unication of the European Community Accelerate Diusion of New Ideas, Products, and Technologies?, Technological Forecasting and Social Change, 45, 221235. Manseld, E., 1961, Technical Change and the Rate of Imitation, Econometrica, 29, 741 766. Manseld, E., 1988, The Speed and Cost of Industrial Innovation in Japan and the United States: External vs. Internal Technology, Management Science, 34, 11571168. Melitz, M., 2002, The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry, NBER Working Paper 8881. Michel, A., and I. Shaked, 1986, Multinational Corporations vs. Domestic Corporations: Financial Performance and Characteristics, Journal of International Business Studies, 17, 89100. Oliver, C., 1991, Strategic Responses to Institutional Processes, Academy of Management Review, 16, 145179. ONeill, H. M., R. W. Powder, and A. K. Buchholtz, 1998, Patterns in the Diusion of Strategies Across Organizations: Insights from the Innovation Diusion Literature, Academy of Management Review, 23, 98114.

25

Roberts, M., and J. R. Tybout, 1997, The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs, American Economic Review, XXCVII, 545564. Rogers, E. M., 1983, Diusion of Innovations, The Free Press, New York. Rosenkopf, L., and E. Abrahamson, 1999, Modeling Reputational and Informational Inuences in Threshold Models of Bandwagon Innovation Diusion, Computational & Mathematical Organization Theory, 5, 361384. Teece, D. J., 1980, The Diusion of an Administrative Innovation, Management Science, 26, 464470. Terlaak, A., and A. A. King, 2002, Contrasting Institutional Theory and Signaling Theory to Explain the Adoption Process of an Industry Standard, mimeo. Venkatraman, N., L. Loh, and J. Koh, 1994, The Adoption of Corporate Governance Mechanisms: A Test of Competing Diusion Models, Management Science, 40, 496507. Wiedersheim-Paul, F., H. Olson, and L. Welch, 1978, Pre-Export Activity: The First Step in Internationalization, Journal of International Business Studies, 9, 4758. World Trade Organization, 2001, International Trade Statistics 2001, World Trade Organization, Geneva. Yamawaki, H., 1986, Exports, Foreign Market Structure, and Protability in Japanese and U.S. Manufacturing, The Review of Economics and Statistics, 68, 618627. Zajac, E. J., and S. M. Shortell, 1989, Changing Generic Strategies: Likelihood, Direction, and Performance Implications, Strategic Management Journal, 10, 413430.

26

Figure 1: Implications of the internal and external models

x(t) 6
Q External Q Q Q Q Q

N (t) 6 M Internal
Q Q Q

External Internal

Q Q

N (t 1)

Note: the precise shapes and relative positions of the curves will vary depending on actual diusion rates; the graphs are meant to illustrate the general form only.

Table 1: Data summary Variable Clusters Firms (M ) Statistic Mean Min Max Mean Min Max Mean Min Max Mean Min Max Mean Min Max Clustering Sector-2 Sector-3 9 740 119 1,772 20.6 3.7 61.9 14.4 2.8 36.1 6.2 2.8 25.8 93.8 14.4 220.7 23 285 57 987 7.9 1.7 25.7 5.5 1.0 16.4 2.4 1.0 9.3 35.8 4.7 80.9 Region 12 555 113 2,178 15.5 1.4 69.1 10.8 1.0 48.8 4.7 1.0 20.3 70.4 4.5 279.2

Adopters (x)

Quitters (y)

Net adopters (n)

Cum. net adopters (N )

The statistics in this table are dened over cluster means. That is, we computed the mean over time of every variable for each cluster and we report the mean, minimum, and maximum of those cluster means.

27

Table 2: Correlation matrix for 3-digit sector clustering Variable (1) (2) (3) (4) (5) (1) 1.000 (2) (3) (4) (5) -0.173 (0.013) 0.202 (0.004) -0.359 (0.000) -0.222 (0.001) 1.000 -0.330 (0.000) 0.541 (0.000) -0.244 (0.000) 1.000 0.214 (0.002) 0.543 (0.000) 1.000 0.330 (0.000) 1.000

Row and column numbers correspond to the order in which each variable appears in equation (8); p-values are in parentheses.

28

Table 3: Main results from the three models Internal Sector-3 Region

Parameter p0

Sector-2

p1

Sector-2 -.071 (.041) .167 (.015)

External Sector-3 -.029 (.041) .195 (.022) Region -.062 (.035) .157 (.043)

q0

29 81 .208 -.199 207 .099 -.285

: 5%

q1

Observations R2

-.683 (.036) 1.28 (.342) 81 .274 .114 108 .156 -.336

-.662 (.069) 1.01 (.417) 207 .318 .126

-.775 (.152) 1.63 (.371) 108 .269 -.103

Sector-2 -.098 (.104) .331 (.354) -.004 (.566) -1.05 (2.41) 81 .303 -.031

Mixed Sector-3 -.047 (.055) .265 (.117) -.369 (.217) -.476 (.733) 207 .325 .070

Region -.017 (.031) -.144 (.390) -.753 (.451) 2.43 (2.78) 108 .270 -.159

Signicance levels :

: 10%

: 1%. We do not report the estimate of because it is of no interest.

Standard errors (in parentheses) are robust to heteroscedasticity; is the coecient of autocorrelation.

Variable

Table 4: Factors aecting the rate of diusion Coecient Std error

R2

I. Global factors Exchange rate Time trend II. Relative performance factors Dierence in growth rates Dierence in value added III. Cluster-specic factors Size Age Corporate status
Signicance levels : : 10% : 5%

.374 .026

(.196) (.010)

-.298 -.307

.152 .181

.014 -.067

(.013) (.736)

-.280 -.285

.108 .107

.073 .254 1.02

(.019) (.077) (.352)

-.265 -.238 -.253

.201 .168 .159

: 1%; is the coecient of autocorrelation.

Each line reports the results of a regression based on equation (9) with 207 observations.

30