Demand Heterogeneity, Learning Diversity and Innovation in an Emerging Economy

Prior research has shown mixed findings about the relationship between exporting and a firm's innovation performance. This study applied organizational learning theory with a demand-side perspective to explore whether the mixed findings could be due to confounding a positive effect of knowledge variety with a negative effect arising from market separation. Compared with firms with only domestic or foreign customers, firms with both types of customers have more opportunities to acquire diverse knowledge and form innovative combinations, but serving disparate customers tends to inhibit knowledge transfer, sharing and integration. Data on 8529 Chinese automobile and component manufacturers were analyzed to test these arguments, and firms competing in less separated domestic and overseas markets were found to demonstrate the best innovation performance. Firms with greater absorptive capacity were found better able to overcome the difficulties caused by market separation and enjoy more benefits from market variety.