Product Differentiation and Geographical Expansion of Exports Network at Industry level

TL;DR

This paper examines how product heterogeneity influences export network expansion at the industry level, highlighting the roles of market power, information sharing, and strategic entry decisions.

Contribution

It introduces a theoretical and empirical analysis of how product heterogeneity affects export entry and network growth, considering non-sunk entry costs and industry dynamics.

Findings

Higher product heterogeneity increases market entry and network expansion.

Information sharing among firms reduces entry costs and promotes market concentration.

Firms tend to enter less competitive markets first, influenced by product heterogeneity.

Abstract

Industries can enter one country first, and then enter its neighbors' markets. Firms in the industry can expand trade network through the export behavior of other firms in the industry. If a firm is dependent on a few foreign markets, the political risks of the markets will hurt the firm. The frequent trade disputes reflect the importance of the choice of export destinations. Although the market diversification strategy was proposed before, most firms still focus on a few markets, and the paper shows reasons.In this paper, we assume the entry cost of firms is not all sunk cost, and show 2 ways that product heterogeneity impacts extensive margin of exports theoretically and empirically. Firstly, the increase in product heterogeneity promotes the increase in market power and profit, and more firms are able to pay the entry cost. If more firms enter the market, the information of the market will be known by other firms in the industry. Firms can adjust their behavior according to other firms, so the information changes entry cost and is not sunk cost completely. The information makes firms more likely to entry the market, and enter the surrounding markets of existing markets of other firms in the industry. When firms choose new markets, they tend to enter the markets with few competitors first.Meanwhile, product heterogeneity will directly affect the firms' network expansion, and the reduction of product heterogeneity will increase the value of peer information. This makes firms more likely to entry the market, and firms in the industry concentrate on the markets.