Internationalisation increases exports and improves firms’ flexibility

Why have some European firms weathered the financial crisis better than others? How can policy makers help European companies become more competitive internationally? These are among the compelling questions explored by the EFIGE research project. For example, EFIGE’s analysis of post-crisis data from several thousand firms in seven EU Member States suggests that “protectionist instincts during the crisis may have been misguided”. The researchers encourage policy makers to bear in mind that domestic companies producing abroad may have an easier time tapping those markets. In turn, this can strengthen a company’s international competitiveness and positively affect domestic employment.

The backbone of the project is formed by an original database that pools information about some 16,000 European firms. The harmonised cross-country dataset covers companies in Austria, France, Germany, Hungary, Italy, Spain and the United Kingdom. The questionnaires completed by international firms in these countries contained more than 150 qualitative and quantitative items, covering everything from business organisation and job composition to innovation activities, finance and market strategies. The results, say the researchers, offer an unprecedented chance to test a range of economic theories and identify new policy implications for European business.

In their initial policy reports, the researchers have focused on two broad themes: the global operations of European firms and the impact of the crisis on those firms. Taking a detailed look at European firms’ global operations, the project found that company characteristics “influence the patterns of internationalisation in a surprisingly consistent way across countries”. These characteristics include size, productivity, the skill intensity of the work force and the ability to innovate. The researchers found a relationship between these characteristics and the export performance of firms in all countries involved in the study.

Anyone with an interest in this policy area will find rich technical detail in EFIGE’s reports, which address questions on the causal link between firm characteristics and internationalisation. In more general terms, the findings indicate that European enterprises have developed very different patterns of internationalisation. Companies in France and Germany, for instance, are more sophisticated than those in other countries studied, while firms in Spain and Hungary are lagging behind with respect to successful internationalisation. Italian firms, meanwhile, show a higher export propensity.

Obviously, as the researchers observe, the challenge from a policy making perspective is how to foster the right kind of firm characteristics in order to boost international competitiveness. On this point, however, EFIGE cautions against trying to push industrial structures in European countries towards a hypothetical optimum. Indeed, citing the multifaceted nature of policies affecting firm growth, the consortium notes that progress in this area may require reforms in several areas including labour regulation, taxation and reducing red tape. Nonetheless, one concrete step that policy makers can take, say the researchers, is to ease even further the movement of goods and factors within the EU (the most important export market for European firms). This includes “resisting calls for local measures that support firms within national boundaries”.

Among the project’s most interesting observations - and one that supports the consortium’s anti-protectionist stance - is that firms that have foreign production facilities are also the main exporters, particularly to emerging economies. Figure 1 reports the shares of French, German, Italian and Spanish exporters that serve selected groups of geographical destinations. EFIGE notes that over 25% of French, German and Italian exports to China and India come from French, German and Italian companies that have also invested in manufacturing operations there. This leads the researchers to conclude that international production complements exporting as it also facilitates expansion into new markets, especially those (like China and India) that are far away and considered difficult to operate in.

 

Figure 1 – The geography of French, German, Italian and Spanish exports
 

Source: Navaretti et al (2010), The Global Operations of European Firms1

 
In a related aspect of the project - focusing on the impact of the financial crisis - EFIGE found that European exporters were generally hit harder than non-exporters. Importers, meanwhile (defined as those firms that outsource some of their production or have an affiliate) were observed to suffer less of a decline in turnover. In essence, the internationalisation of firms involves an important policy trade-off. Export-oriented strategies may improve competitiveness, but they also increase a company’s exposure to foreign crisis. On the other hand, outsourcing to foreign countries has distinct stabilisation effects. Supply chain linkages with lower-wage countries, it seems, offer firms greater flexibility to cope with demand shocks.

 

1 See: http://ec.europa.eu/research/social-sciences/pdf/events-138/5-efige-navaretti_en.pdf

EFIGE - European firms in a global economy: internal policies for external competitiveness (duration: 1/9/2008 – 31/8/2012). FP7 Socio-economic Sciences and Humanities, Activity 1 “Growth, employment and competitiveness in a knowledge society”, Research area 1.2 “Structural changes in the European knowledge economy and society”. Large scale project.

See: http://www.efige.org

Contact: Delphine Michel, delphine.michel@bruegel.org