This article was downloaded by: [Central Planbureau], [Dr Arjan Lejour]

On: 04 September 2012, At: 02:12

Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,
37-41 Mortimer Street, London W1T 3JH, UK

Applied Economics Letters

Publication details, including instructions for authors and subscription information:
http://www.tandfonline.com/loi/rael20

Market entry and economic diplomacy

a

Harold Creusen & Arjan Lejour

CPB Netherlands Bureau for Economic Policy Analysis, PO Box 80510, 2508GM, The Hague,
Netherlands
Version of record first published: 28 Aug 2012

To cite this article: Harold Creusen & Arjan Lejour (2013): Market entry and economic diplomacy, Applied Economics Letters,
20:5, 504-507
To link to this article: http://dx.doi.org/10.1080/13504851.2012.714066

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.tandfonline.com/page/terms-and-conditions
This article may be used for research, teaching, and private study purposes. Any substantial or systematic
reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to
anyone is expressly forbidden.
The publisher does not give any warranty express or implied or make any representation that the contents
will be complete or accurate or up to date. The accuracy of any instructions, formulae, and drug doses should
be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims,
proceedings, demand, or costs or damages whatsoever or howsoever caused arising directly or indirectly in
connection with or arising out of the use of this material.

Applied Economics Letters, 2013, 20, 504507

Market entry and economic

diplomacy
Harold Creusen and Arjan Lejour*

Downloaded by [Central Planbureau], [Dr Arjan Lejour] at 02:12 04 September 2012

CPB Netherlands Bureau for Economic Policy Analysis, PO Box 80510,

2508GM, The Hague, Netherlands

This article analyses the role of economic diplomacy on the export market
entry decisions of Dutch firms. We show that the presence of government
support offices in middle-income countries and government trade missions
stimulate Dutch firms to enter export markets in these countries. These
conclusions follow from using detailed international trade data combined
with firm and export market characteristics.
Keywords: market entry; economic diplomacy; heterogeneous firms
JEL Classification: F10; D22; F13
I. Introduction
Many countries use several institutions and activities, such as export promotion agencies, economic
departments at embassies and foreign trade offices
(business support offices) and trade missions, to
promote exports. However, the effects of these institutions are seldom measured. Rose (2007) has stimulated research on economic diplomacy by
including the number of consulates and trade offices
in gravity equations. He also took account of the
endogeneity problem that the number of consulates
depends on similar characteristics, such as the size
of the market, as exports do. Using various instruments, Rose finds that bilateral exports increase by
6% if a consulate is established. Nitsch (2007) uses
a gravity approach to analyze the effect of trade
missions with political representation. For the
United States, France and Germany, he concludes
that a trade mission increases bilateral exports by
810%. Head and Ries (2010) conclude that
Canadian trade missions focus on countries with
significantly higher bilateral trade levels, but these
visits do not increase bilateral trade. Yakop and van
Bergeijk (2011) present a more extensive overview.
However, these papers cannot distinguish between
the effects on market entry or on export volume.

Government support is particularly relevant for

market entry, because incumbent exporters and particularly export starters have to learn about market
conditions and institutions (see Albornoz et al.,
2012). Only a few papers investigated the role of government support on export market entry. Gorg
et al.
(2008) and Bernard and Jensen (2004) found no significant impact of individual grants and subsidies on
market entry. Volpe Martincus et al. (2010) find that
embassies and export promotion offices have a positive effect on the number of goods exported by Latin
American and Caribbean countries.
This article analyses the effect of economic diplomacy on market entry of starting and incumbent
exporters. It combines detailed international trade
data by firm and destination with Dutch firm and
export market characteristics. Using instrumental
variables to correct for endogeneity, it shows that
trade posts and trade missions raise significantly the
export probability to a market. Section II presents
some descriptive statistics. Section III presents the
regression results and section IV concludes.
II. Descriptive Statistics
We have matched detailed international trade data
with demographic and financial data of Dutch firms,

*Corresponding author. E-mail: arjan.lejour@cpb.nl

504

Applied Economics Letters ISSN 13504851 print/ISSN 14664291 online # 2013 Taylor & Francis
http://www.tandfonline.com
http://dx.doi.org/10.1080/13504851.2012.714066

505

Market entry and economic diplomacy

Number of exporters (%)

394
100
90
80
70
60
50
40
30
20
10
0

261

Downloaded by [Central Planbureau], [Dr Arjan Lejour] at 02:12 04 September 2012

6917
>41
2140
1120
410
3
2
1

2003

2007

Starters in 2003

Fig. 1.

9505

2003

2007

Continuers in 2003

Number of
countries

Distribution of export destinations of (surviving) starters and continuers in 2003, 20032007

Table 1. NBSOs and trade missions for largest 50 trade partners

Trade posts, 2007

Trade missions, 20022006

Country groups (number

of countries)

Number of countries

Posts per country

Number of countries

Missions per country

EU15 (14)
EU12 (12)
Rest OECD (10)
(B)RIC (3)
Rest top 50 (11)

9
5
6
3
4

2.2
1.0
2.8
6.0
1.3

5
10
4
3
5

1.6
1.7
2.5
3.7
1.8

Note: NBSOs, Netherlands Business Support Offices.

all collected by Statistics Netherlands.1 On average,

we have annually about 16.5 thousand exporters with
an average export value of 5.13 million euro for the
years from 2003 to 2007. Each year about 5% of these
firms start to export. Figure 1 presents the distributions of the number of destinations in 2003 and 2007
of starting and incumbent exporters. First, it indicates
that after 4 years (relatively) more starters (34%) have
dropped out than continuers (27%). Second, in the
cohort of starters, the number of exporters serving one
country dropped substantially after 4 years. In contrast, the number of firms exporting to three or more
countries increased, particularly in the category of 11
to 20 destinations. In the cohort of continuers, we
observe a similar shift towards more destinations,
but the shift of starters is more salient and stresses
the expansion drift of young exporters.
The question is whether the expansion to foreign
markets is effectively supported by the policy instruments. We concentrate on the role of trade posts of
1

embassies, consulates and the Netherlands Business

support offices (NBSOs),2 and trade missions, mostly
accompanied by one or a few ministers. Table 1 shows
that trade posts provide supporting activities in about
half of the 50 largest Dutch trade partners, but that
their presence varies widely over country groups.
Many posts are established in the BRIC countries,
particularly in China. They are less well represented
in new EU12 countries. The trade missions mainly
focus on upcoming trade partners, particularly the
BRIC countries and EU 12 countries.

III. Econometric Results

Our model follows Albornoz et al. (2012) and explains
the probability of firm i to enter market k in a period
t Pikt by firm and market characteristics. The
(lagged) firm characteristics Xit#1 refer to their
labour productivity and employment representing

Creusen and Lejour (2011) discuss the construction of this matched dataset in more detail.
The NBSOs provide similar activities as the embassies and consulates, but they have no formal diplomatic status (see also
http://www.evd.nl). In the remainder, we label them all as trade posts.

506

H. Creusen and A. Lejour

Table 2. Decision to enter specific markets (marginal effects in percentage points)

Downloaded by [Central Planbureau], [Dr Arjan Lejour] at 02:12 04 September 2012

S: Export starter in t - 1
L: Log distance to nearest market (in t - 1 and t)
L S
Log labour productivity (in t - 1)
Log employment (in t - 1)
Log GDP
Log distance to the Netherlands
Log tariffs
Observed probability to enter a new market
No. of observations
Log likelihood

0.161 (0.070)***
-0.401 (0.019)***
-0.209 (0.069)***
0.091 (0.019)***
0.232 (0.013)***
0.220 (0.008)***
-0.365 (0.014)***
-0.024 (0.002)***
1.756
580311
-42810

Notes: Numbers in parentheses are SEs. The probability to enter and all marginal
effects are multiplied by 100 so that they represent marginal effects in %-points.
***Denotes significance at 99% level.

firm size. We also include a dummy for being a recent

starting exporter Sit#1 , and the distance to the firms
nearest market Likt in order to pinpoint learning
effects from exporting to nearby markets. The market
characteristics Zkt include GDP, distance to the
Netherlands and import tariffs. The main variables
of interest are several instruments of (market-related)
economic diplomacy Dkt . The full model becomes
Pikt

aXit#1 bSit#1 !Likt "Sit#1 Likt

X

eZkt #Dkt li mikt

with li representing the time-invariant firm characteristics and mikt the error term. To estimate the
equation, we use a probit estimator with random
effects in order to control for nonobserved, firmspecific effects. For computational reasons, we only
include the 50 most important export markets for
Dutch firms. Further, we include only exporters
which all do not export to market k in t # 1. In
year t, some of them will enter market k, while the
others remain outside that market.

Table 2 presents the results (without economic

diplomacy) in terms of marginal effects, that is, the
impact of a 1% change in each determinant on the
probability (in percentages) to enter a new market. A
recent export starter has a 0.2%-point higher probability to enter new markets than incumbent exporters, which is substantial if we compare it to the
average probability of entry of 1.8% per year. The
probability to enter will increase if the firm has gained
experience from exporting to markets close to the new
market. This learning effect is particularly relevant for
recent export starters. Firm size and labour productivity increase the probability to enter new markets as
well. The country-specific effects are in line with common expectations. So, firms will more likely export to
countries with larger GDP, but less likely to countries
at higher distance (from the Netherlands) and with
higher import tariffs.
Table 3 indicates that the presence of trade posts
and the number of trade missions have a significant
and positive impact on the probability to enter a
new market. The probability will increase by about
0.06%-point if the country hosts some trade posts.
The number of these offices, however, has a minor

Table 3. Market entry and economic diplomacy

Dependent variable entry on specific market
Policy instruments
All countries
Policy instruments adjusted for GDP,
distance to the Netherlands
All countries
High-income countries
Middle-income countries

Presence of trade posts

0.058 (0.018)***
0.038 (0.018)***
-0.0021 (0.026)
0.100 (0.027)***

Number of trade posts

Number of trade missions

0.009 (0.004)***

0.085 (0.015)***

0.008 (0.004)*
0.010 (0.007)
0.007 (0.005)

0.094 (0.015)***
0.082 (0.026)***
0.100 (0.019)***

Notes: Numbers in parentheses are SEs. All marginal effects and SEs are multiplied by 100 so that they reflect marginal effects in
%-points. The coefficients and SEs of the other variables are similar to those in Table 2. The observed probability to enter a
market remains at 1.756%.
*** and *Denote significance at 99% and 90% levels, respectively.

507

Downloaded by [Central Planbureau], [Dr Arjan Lejour] at 02:12 04 September 2012

Market entry and economic diplomacy

effect on the export probability, only 0.01%. Oneadditional trade mission would raise the export
probability by nearly 0.1%-point. We also checked
whether economic diplomacy is particularly useful
for recent starting exporters. The policy instruments
do provide an additional effect for recent starters,
but the coefficients are not significant.3
The causality between trade and economic diplomacy is not obvious. Governments could decide to
support firms because market entry is high. This decision could also be based on the size of the market and/
or market opportunities, which is also a determinant
for the firm. Therefore, we first have instrumented the
trade policy instruments on GDP, GDP growth and
distance to the Netherlands and then adopt the predicted errors in the regressions. These errors represent
the determinants for economic diplomacy that are not
linked to the size of trade or market characteristics, for
instance, diplomatic service. Table 3 shows that using
instrumented data on economic diplomacy provides
similar results as before.
Market entry costs are often higher in developing
countries because of weaker institutions and more
cultural dissimilarity. To test this hypothesis, we separate the sample in high-income countries (EU-15,
10 OECD countries, Singapore and Hong Kong) and
in middle-income countries (EU12, the BRIC and
other countries).4 Table 3 presents the results for the
separated country groups using instrumented policy
variables. Overall, the impact of trade posts and trade
missions on market entry is larger in middle-income
countries than in high-income countries. In particular,
in high-income countries the presence of trade posts
has no significant impact on market entry.

IV. Conclusions
The presence of trade posts and trade missions to
particularly middle-income countries stimulate the
entry to new markets. Trade posts have no significant
impact on market entry in higher-income countries.
These results are derived after instrumenting the

3
4

policy instruments to reduce possible endogeneity. It

does not seem to matter whether the firm is a starting
or experienced exporter. These results suggest that
economic diplomacy should be focused on countries
with substantial market entry barriers such as developing countries and less focused on the type of firms.

Acknowledgements
We thank Fred Kuijpers (CPB) and Harry Habets
(Statistics Netherlands) for their assistance and help
to match the datasets and Frank van Leeuwen (EVD)
and Selwyn Moons (Ministry of Economic Affairs) for
providing data on economic diplomacy, and the participants at the FREIT conference in Ljubljana for
providing helpful suggestions.

References
Albornoz, F., Calvo Pardo, H., Corcos, G., et al. (2012)
Sequential exporting, Journal of International
Economics. Available at http://www.sciencedirect.com/
science/article/pii/S0022199612000220 (accessed 13
August 2012).
Bernard, A. B. and Jensen, J. B. (2004) Why some firms
export, Review of Economics and Statistics, 86, 5619.
Creusen, H. and Lejour, A. (2011) Uncertainty and the
export decisions of Dutch firms, CPB Discussion
Paper 183, CPB, the Hague.
Gorg,
H., Henry, M. and Strobl, E. (2008) Grant support

and exporting activity, Review of Economics and

Statistics, 90, 16874.
Head, K. and Ries, J. (2010) Do trade missions increase
trade?, Canadian Journal of Economics, 43, 75475.
Nitsch, V. (2007) State visits and international trade, The
World Economy, 30, 1797816.
Rose, A. (2007) The foreign service and foreign trade:
embassies as export promotion, The World Economy,
30, 2238.
Volpe Martincus, C., Estavadeordal, A. and Gallo, A.
(2010) Information barriers, export promotion institutions and the extensive margin of trade, Review of
World Economics, 149, 91111.
Yakop, M. and Van Bergeijk, P. A. G. (2011) Economic
diplomacy, trade and developing countries,
Cambridge Journal of Regions Economy and Society,
4, 25367.

These coefficients are available on request.

We do not consider low-income countries because they do not belong to the Dutch top 50 of export destinations.