Internationalization and Innovation in Emerging Markets

With high growth on domestic markets, many firms in emerging economies face a tradeoff between using their competitive advantages in foreign markets or innovating in domestic markets. By analyzing export and innovation data for a large dataset of Chinese firms, we uncover a specific productivity sorting pattern of firms over exporting and innovation. As expected, high productivity firms both export and innovate and low productivity firms do not export or innovate. Interestingly, low-medium productivity firms export more than they innovate, whereas high-medium productivity firms innovate more than they export. Clearly, these findings have important implications for the new trade literature that stresses the primacy of high productivity for entry into export markets.