Securing Foreign Markets: Exports, Relational Specificity and New Investment Locations

In this article we examine how the need to secure profit streams from exports has affected the location choice of new foreign investments by French manufacturing firms. Motivated by the observation that most firms entering a new foreign country do not establish a production unit there or decrease their exports, we develop a simple theoretical framework to guide our analysis and provide empirical evidence to support this “market securing” mechanism. Our results confirm that companies tend to locate new investments in countries that account for a larger share of their past exports; allowing for better monitoring of the foreign market, the investment prevents the disruption of the relationship, whose impact on profits would be more detrimental in the case of more important foreign partners. A 10 percent increase in bilateral exports increases the probability of investing by 3.4 percent. Consistent with our mechanism, given the same volume of exports, firms prefer countries that purchase goods with higher relational specificity as finding new buyers for these goods would imply higher costs if the relationship was broken.Exporting at least one good with relational specificity above the 75th percentile increases the probability of investing by 2.2 times compared to exporting more generic goods (below the 50th percentile).