Innovative companies can find success in export markets, but is there a correlation in the other direction: Can exporting lead to greater innovation? A researcher in Australia, dissecting data from thousands of Australian SMEs, discovered some correlation between exporting and innovation, but concluded that it is wiser to focus on innovation first, before attempting to conquer export markets.
The traditional wisdom declares that companies that have their sights on export markets must first become innovators in their domestic markets. Innovation will give them the competitive advantage required to succeed in export markets. Another theory, however, argues for a relationship in the other direction. In other words, in addition to innovation leading to exporting, this theory argues that participating in export markets leads to innovation. The reason, according to this theory: the learning and models that companies acquire or observe in the export markets can then be applied to their own organizations.
Professor Alfons Palangkaraya, formerly of the University of Melbourne’s Melbourne Institute of Applied Economic and Social Research and now at Swinburne University of Technology’s Centre for Transformative Innovation, decided to test both theories using data from Australian SMEs. The decision to focus on SMEs was important; previous studies, whether they concluded that innovation enables exporting or exporting teaches innovation, had focused on larger companies. No research had explored the impact of innovation and exporting on SMEs.
Palangkaraya and his team studied the data from 3,000 Australian firms with 200 employees or less. These firms came from a wide variety of industries. As they studied the data, they sought the answers to two questions:
Through statistical modelling, Palangkaraya was able to explore the correlation between current exporting and innovation, as well as the impact for the next period (t+1). For example, the data could show whether innovation in the current period led to more exporting in the following period.
Palangkaraya also broke down the data by sectors (mining and agriculture, manufacturing, and services), and by innovation type (product, process, or both). Process innovation in this case can refer to either operational processes (e.g. new manufacturing) or organizational processes (e.g. restructuring the decision-making process).
He also broke out the samples of firms into subsamples that contained only ‘new’ exporters and ‘new’ innovators, to further investigate the relationships between exporting and innovation (i.e. did becoming an innovator result in exports, and vice-versa).
The results of the research were mixed. Depending on sector and type of innovation, innovation led to export and, to a lesser extent, export led to innovation.
The strongest evidence of either product or process innovation leading to exporting was in the primary (agriculture and mining) sector. Innovation led to exporting in the service sector as well, but only in process innovation.
The service sector is the only sector that shows the relationship in the other direction — exporting leading to innovation — and, again, only for process innovation.
The analysis of new innovators and exporters across the two periods (current and t+1) show that innovation leads to export, but that product innovation has a faster impact on exporting than process innovation. This is not surprising: a new product will grab the attention of a market faster than a new process.
In summary, on the question of the correlation between innovation and exporting, the strongest evidence points to innovation in domestic markets leading to potential success in export markets. The correlation in the other direction is less significant, although exporting can lead to new learning especially for process innovation, and especially for the service sector.
In general, according to this research, SMEs who want to enter export markets should focus first on discovering or creating their own comparative advantage. The way to create this advantage is to introduce product or process innovation — depending on your sector. Product innovation is, intuitively, more important than process innovation for the primary and manufacturing sectors, which process innovation is what counts for the service sector.
One interesting result from the study is that once a company has entered an export market — whether after some product or process innovation — the companies that stay competitive in those markets are those that innovate their processes.
In short, export markets present two challenges: breaking the barrier to entry, and then finding sustainable success in the new market. Original and ongoing product and process innovation is key to meeting both challenges.
Ideas for Leaders is a free-to-access site. If you enjoy our content and find it valuable, please consider subscribing to our Developing Leaders Quarterly publication, this presents academic, business and consultant perspectives on leadership issues in a beautifully produced, small volume delivered to your desk four times a year.
For the less than the price of a coffee a week you can read over 650 summaries of research that cost universities over $1 billion to produce.
Use our Ideas to:
Speak to us on how else you can leverage this content to benefit your organization. firstname.lastname@example.org