New Stuff or Better Ways: What Matters to Access International Markets?

Innovation and export decisions are closely interlinked. Both activities contribute to firm performance in various ways: exporting provides a wider market to sell products, while innovation provides new and better products to supply those markets and/or more efficient ways to reduce costs. The connection of innovation and exporting is of major interest to developing countries aiming to achieve higher growth and wellbeing given that foreign markets are both a new challenge and a source of knowledge for firms. This study analyzes whether different types of innovation affect export behavior at the firm level for an unbalanced panel of Uruguayan manufacturing firms. Logistic regression and matching with difference-in-differences (MDID) techniques are applied to data from 2003 to 2012. Using logit models we find that previous innovation increases the probability of exporting. Unlike other studies, productivity-enhancing (or cost-reducing) innovation shows a stronger correlation than product innovation pointing out that price competition is more important than quality competition for Uruguayan products in foreign markets. Furthermore, using MDID we establish a direct causal link from innovation to exporting. Finally, we analyze export intensity by means of Tobit models. We find that innovation fosters export intensity. Overall, the findings indicate that active innovation policies along with other export promotion policies help to promote firms’ participation in foreign markets.