The role of non-productivity factors in the internationalization of firms

Using firm-level data for Japan, this chapter examines the determinants of export and foreign direct investment (FDI) decisions. We contribute to the literature by employing a mixed logit model to incorporate any unobserved firm heterogeneity and by paying special attention to the quantitative significance of the determinants. We find that although the effect of productivity on export and FDI decisions is positive and statistically significant, this effect is economically negligible. The quantitatively dominant determinants of the export and FDI decision are instead the prior status of firms in terms of internationalization and unobserved firm characteristics. This finding suggests that foreign market entry costs, which vary substantially in size across firms, play an important role in the export and FDI decision. Using a unique dataset for small and medium enterprises, we further show that such non-productivity factors of firm internationalization that are unobserved in standard firm-level data include the risk and time preferences and international experience of decision makers.