New developments in the world economy have increased the competitive pressures on European firms in international as well as in domestic markets. The divide between winners and losers from globalisation does not run only between sectors anymore. Increasingly, both winners and losers can also be found within sectors. With a growing recognition for the need to analyse these issues in a cross-country perspective, under the coordination of Bruegel and CEPR, six research centres from six EU countries agreed in 2006 to create a network working on policy-relevant questions that are best treated using firm-level trade and Foreign Direct Investment (FDI) data.1 The network’s first annual report is released today, and its key findings are summarised in a Policy Insight posted today.
In particular, the focus of the report is on the characteristics of European firms involved in international activities through exports or FDI (‘internationalised firms’). The analysis of firm-level evidence reveals some new facts that are simply unobservable at the aggregate level:
- Internationalised firms are superstars. They are rare and their distribution is highly skewed as a handful of firms accounts for most aggregate international activity. They are bigger, generate higher value-added, pay higher wages, employ more capital per worker and more skilled workers, and have higher productivity.
- The pattern of aggregate exports, imports and FDI is driven by the changes in two ‘margins’. The ‘intensive margin’ refers to average exports, imports, and FDI per firm. The ‘extensive margin’ refers to the number of firms actually involved in those international activities. The ‘extensive margin’ is much more important as the reaction of aggregate trade and FDI flows to country fundamentals takes place mostly through that margin. This is impossible to see without firm-level data and thus has not been seen so far.
In short, the international performance of European countries is essentially driven by a handful of highly-performing firms.
This new research raises important policy questions. The network has prioritised six of them for future investigation:
- If firms have to be large to be competitive in international markets, what is the importance of the size of the internal market?
- If superstars dominate international markets, is there any room for global SMEs?
- What does the dominance of the extensive over the intensive margins imply for policy intervention aimed at promoting the internationalisation of European firms?
- Do firms improve their performance when exposed to international competition?
- Is the fragmentation of production processes across countries a way through which firms become more competitive in international markets?
- Is the limited internationalisation of European firms eroding the political support to the SMP?
Answering these questions requires quality data at the firm level to be representative and comparable across European countries. Currently, however, the overlap among the different national datasets in terms of several key variables is far from complete at the targeted level of disaggregation. In this report, we select different countries depending on the specific issues addressed. This is clearly a second-best approach that is nevertheless enough to highlight the benefits that would come from the creation of a harmonised European dataset.
1 The partners are the Centre d'Études Prospectives et d'Informations Internationals (France), the Hungarian Academy of Sciences (Hungary), the Centro Studi Luca d’Agliano (Italy), the Institute for Applied Economic Research (Germany), the Leverhulme Centre for Research on Globalisation and Economic Policy (U.K.), Stockholm University (Sweden), The National Bank of Belgium (Belgium) and the University of Oslo (Norway).