Effect of international activity on firm performance Updated

Effect on firms that export

In 1995 comprehensive firm-level data for the US was used to systematically document for the first time the differences between exporters and firms that sell their product only on the home market [2]. This started a literature in which the central topic is the relationship between exports and productivity, a dimension of firm performance that is crucial for competitiveness, survival, and growth.

Exporting firms are more productive than non-exporters of the same size and in the same narrowly defined industry. Empirical studies using firm-level data from countries around the world have investigated the direction of causality for this correlation, seeking to answer questions such as the following:

• Do more productive firms self-select into export activity? If they do, is it because of the additional costs of selling goods in foreign countries? These extra costs—which include transportation, distribution, marketing, hiring of personnel with the skills to manage foreign networks, and the production costs of modifying current domestic products for foreign consumption—may set up an entry barrier that less successful firms cannot overcome [3].

• Is the behavior of firms forward-looking in the sense that the desire to export tomorrow leads a firm to improve performance today so as to become competitive in the foreign market?

• Does exporting help firms improve through the knowledge they gain from international buyers and competitors?

• Does exporting enhance performance because firms participating in international markets face more intense competition and must improve faster than those that only sell their products domestically?

A 2007 study summarized the findings of 54 empirical studies published between 1995 and 2006 that used firm-level data from 34 countries to investigate the relationship between exporting and productivity [4]. Among the countries covered were highly industrialized countries, countries in Latin America and Asia, transition economies, and least developed countries. The evidence for this wide range of countries is remarkably consistent and clear-cut. The findings for pre-entry differences often show evidence in favor of the self-selection hypothesis: firms that eventually became exporters tended to be more productive than firms that never ventured outside the domestic market years before they entered the export market. They also often had higher rates of productivity growth before entering the export market. The message is clear: good firms go abroad.

Evidence on the “learning-by-exporting” hypothesis is more mixed. Results for post-entry differences in performance between export starters and non-exporters point to faster productivity growth for exporting firms in some studies only. Exporting does not necessarily improve firms [3].

There are several hundred studies on this topic, a summary of which would fill a book [3]. One 2010 survey concluded that studies supporting the self-selection hypothesis numerically overwhelm those supporting the learning-by-exporting hypothesis, and that this implicitly provides stronger support for the positive effects of productivity and growth on trade than for the positive effects of trade on productivity and growth [5].

However, another study surveying more than 170 empirical studies on the learning-by-exporting hypothesis concludes that positive effects of exports on productivity are often found in younger firms from less advanced economies, in firms that operate at some distance from the technological frontier, in firms that export intensively, and in firms that export to more advanced markets [6]. Exports may improve productivity in some firms.

Effect on firms that import

While the causes and consequences of exporting and its mutual relationships with productivity are prominent topics in the literature on internationally active firms, importing is seldom explored. One summary discusses the arguments for both a positive impact of productivity on importing—which is in accordance with the self-selection of more productive firms into import markets—and for a positive impact of importing on productivity (“learning by importing”) [3]. The study points out that the use of foreign intermediate goods increases a firm's productivity but that, due to the fixed costs of importing, only inherently highly productive firms import intermediate goods. Importing is associated with fixed costs that are sunk because the import agreement is preceded by a search process for foreign suppliers, inspection of goods, negotiation, contract formulation, and similar expenses. Furthermore, the importer must learn and become familiar with customs procedures, another sunk cost of importing.

On the hypothesis of learning by importing, advocates of this view argue strongly in favor of a causal effect of importing on productivity, because importing enables firms to exploit global specialization and use inputs on the frontier of knowledge and technology [3]. Proponents point to studies on the international diffusion of technology, which identify imports as an important vehicle for knowledge and technology transfer.

Importing intermediate products also allows a firm to focus its resources on and specialize in activities in which it has particular strengths. Importers may improve productivity by using higher quality foreign inputs or by extracting technology embedded in imported intermediates and capital goods. Moreover, some studies posit a variety effect, in which the broader range of available intermediates contributes to production efficiency, along with a quality effect caused by the possibly better quality of imported intermediates than local ones [3].

If importing increases productivity, this might lead firms to self-select into export markets and improve their success in these markets, which might help explain why two-way traders (both exporters and importers) are the most productive firms. From a theoretical point of view, therefore, the direction of causality between productivity and importing can run in one direction or both simultaneously [3].

With new data sets that include information on importing at the firm level becoming available for more countries, a new literature is emerging that focuses on the links between productivity and imports. A number of empirical studies based on data from a wide range of countries document the shares of firms that are exporters, importers, and two-way traders, along with those that sell or buy on the national market only, and look at differences among these four types of firms. The studies focus on differences in productivity and their relationship with different degrees of involvement in international trade [3].

Details aside, the big picture that emerges from this literature can be outlined as follows [3]:

• There is a positive link between importing and firm productivity, and the productivity differential between firms that import and firms that do not trade internationally is significant.

• The same holds for firms that export.

• Often, two-way traders are the most productive group of firms, followed by importers and then exporters, while firms operating only in their home market come last.

• There is evidence for self-selection of more productive firms into exporting from most of the studies that look at this issue.

• The evidence on learning by importing is still very limited and inconclusive.

Exports, imports, and firm profitability

Another important dimension of firm performance is firm profitability. In general, the links between profitability and the margins of international trade qualify as an under-researched area. This comes as a surprise because profit maximization can be regarded as a central aim of a firm. The number of studies on trade and profits, however, is still small and the number of countries covered is even smaller. A survey of the evidence for five countries from six studies shows that results differ widely across the studies—from positive to no to negative profitability differences between exporters and non-exporters; from evidence for self-selection of more or less profitable firms into exporting to no evidence for self-selection at all; from no positive effects of exports on profits to positive effects [8].

As regards the links between the extensive margins of trade (number of countries traded with, number of goods traded) and firm profitability, empirical evidence is even scarcer. From a theoretical point of view the sign of this link is ambitious. On the one hand, there are extra costs (that are often fixed costs) that come with every extra country served in exports or sourced in imports, and with every extra good traded internationally. On the other hand, every international extra deal a firm engages in voluntarily is (at least, potentially) profitable. And it might well be the case that only more productive firms self-select into more foreign markets because only these better firms are able to cover the extra costs caused by these extra extensive margins of trade. It is an open question whether the extra costs that come with extra international markets eat up any extra profits and any productivity advantages.

There is empirical evidence on the link between the number of foreign markets (where a market is defined as the combination of one traded good and one country traded with) a firm is active in and its profitability for firms from German manufacturing industries [9]. Accordingly, profitability of a firm is neither positively nor negatively related to the number of foreign markets. The extra costs associated with being active on more foreign markets tend to be balanced by the extra benefits. According to this study it does not pay to be active in many foreign markets [9]. Note, however, that this evidence is rather limited because it is based on results for one country only.