Journal of Korea Trade

Korea Trade Research Association (한국무역학회)
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Effects of Market Diversity on Performance of Exporting Companies: An Inverted U-shaped Relationship

  • Lee, Jungeun (Department of Business Administration, The Catholic University of Korea) ;
  • Kim, Chang-Bong (Department of Trade and Logistics, Chung-Ang University) ;
  • Lee, Dong-Jun (Department of Trade and Logistics, Chung-Ang University)
  • Received : 2020.09.11
  • Accepted : 2020.12.15
  • Published : 2020.12.31
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Abstract

Purpose - The principle aim of this study is to further investigate the relationship between market diversity and export performance. We examine the benefits and costs of geographic market diversity regarding the number of countries exported to by firms on their export performance. Based on the financial risk reduction model and the entry costs model, we propose a way to incorporate the costs and benefits aspects of market diversity. Design/methodology - To empirically investigate our research question, the curvilinear relationship between market diversity and export performance, we built a secondary panel data set between 2015 and 2019, containing 17,863 observations of Korean exporting companies. A generalized least squares panel estimator with fixed effects was employed to test the hypothesis, and the statistical package, Stata 14, was used. Findings - Our main findings are as follows: As market diversity increases, export performance increases because exporters can diversify and reduce financial risks in export markets. However, the relationship between the two does not grow. As it peaks, the entry costs increase due to the high market diversity, thereby outweighing the benefits, leading, eventually to decrease in the export performance. Consequently, there is an inverted U-shaped relationship between market diversity and export performance. Originality/value - In the export and trade literature, the impact of market diversity on export performance has not been addressed yet, despite the importance of this subject. Many scholars have assumed a positive linear relationship between the two, considering only the decrease in market risks as the number of overseas markets increases, without examining the increase in the entry and management costs. Therefore, our study contributes by providing a new perspective for analyzing the characteristics and outcomes of market diversity.

Keywords

Acknowledgement

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2019S1A5A2A03034788).

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