The Effects of Globalisation on Firms

Top Left to Right: Holger Breinlich, Fabrice Defever, Giordano Mion, Emanuel Ornelas

Bottom Left to Right:Dimitra Petropoulou, Ferdinand Rauch, Stephen Redding, and John Van Reenen .

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We want to understand how reduced transportation costs, lower import tariffs, and a rapidly changing international environment affect firms in advanced and developing countries. We also want to identify and understand the varied responses of firms to those changes. Such an understanding can help in the design and the evaluation of the public policy response to the threats and opportunities presented by globalisation.

A key insight from recent research in international trade is that there is vast heterogeneity in export behaviour within industries. Across a wide range of countries and industries, exporters are larger, more productive, more skill- and capital-intensive, and pay higher wages than non-trading firms. These differences exist even before exporting begins, which suggests self-selection: exporters are more productive, not necessarily as a result of exporting, but because only the most productive firms are able to overcome the higher costs of entering foreign markets. A similar process occurs within firms. CEP research shows that free trade fosters productivity growth not only across firms and in aggregate, by forcing the lowest-productivity firms to exit, but also within firms, by inducing firms to shed their less profitable products (Discussion Paper No 769, final version forthcoming in the Quarterly Journal of Economics).

When relocating stages of production overseas, firms need to decide whether to undertake foreign direct investment and become a multinational firm, in which case international trade occurs within the boundaries of the firm, or whether to outsource production to a standalone supplier, in which case international trade occurs at arm’s length, outside the boundaries of the firm. Which activities are likely to be undertaken within the boundaries of the firm? If it is costly to write contracts for all possible contingencies, the allocation of property rights becomes important. Theory therefore predicts that sourcing of products from weak governance countries should take place within firms. Empirical CEP research finds that this is exactly what we observe among firms in the United States (Discussion Paper No 978, short version published on May 2010 in the American Economic Review Papers & Proceedings).

Now, whereas traditional trade theory has focused largely on trade in goods, trade in commercial services has been the fastest growing component of international trade over the past two decades. Despite this growing importance, we still know very little about the firms engaging in such activity. We start to fill this gap by providing novel empirical evidence on trade in services (Discussion Paper No 901). Our researchers find, for example, that only around 8 per cent of United Kingdom service firms engage in international trade. Moreover, services traders in the United Kingdom are bigger, more productive, and are more likely to be foreign owned or part of a multinational enterprise than services non-traders.

These and other related issues have been explored in several recent CEP papers:

CEP Discussion Paper
Trade as an Engine of Creative Destruction: Mexican Experience with Chinese Competition
Leonardo Iacovone, Ferdinand Rauch, L. Alan Winters, September 2010
Paper No' CEPDP0999: Read Abstract | Full paper

CEP Discussion Paper
Productivity Spreads, Market Power Spreads and Trade
Ralf Martin, September 2010
Paper No' CEPDP0997: Read Abstract | Full paper

CEP Discussion Paper
Trade Crisis? What Trade Crisis?
Kristian Behrens, Gregory Corcos, Giordano Mion, August 2010
Paper No' CEPDP0995: Read Abstract | Full paper

CEP Discussion Paper
Theories of Heterogeneous Firms and Trade
Stephen Redding, August 2010
Paper No' CEPDP0994: Read Abstract | Full paper

CEP Discussion Paper
The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China
Ana Fernandes, Heiwai Tang, May 2010
Paper No' CEPDP0980: Read Abstract | Full paper

CEP Discussion Paper
Intra-Firm Trade and Product Contractibility (Long Version)
Andrew B. Bernard, J. Bradford Jensen, Stephen Redding, Peter K. Schott, May 2010
Paper No' CEPDP0978: Read Abstract | Full paper

CEP Discussion Paper
Sequential Exporting
Facundo Albornoz, Hector Calvo-Pardo, Gregory Corcos, Emanuel Ornelas, March 2010
Paper No' CEPDP0974: Read Abstract | Full paper

CEP Discussion Paper
Wholesalers and Retailers in U.S. Trade (Long Version)
Andrew B. Bernard, J. Bradford Jensen, Stephen Redding, Peter K. Schott, February 2010
Paper No' CEPDP0968: Read Abstract | Full paper

CEP Discussion Paper
Trade, Wages and Productivity
Kristian Behrens, Giordano Mion, Yasusada Murata, Jens Südekum, July 2009
Paper No' CEPDP0942: Read Abstract | Full paper

CEP Discussion Paper
The Organization of Firms Across Countries
Nick Bloom, Raffaella Sadun, John Van Reenen, June 2009
Paper No' CEPDP0937: Read Abstract | Full paper

CEP Discussion Paper
The Margins of US Trade
Andrew B. Bernard, J. Bradford Jensen, Stephen Redding, Peter K. Schott, January 2009
Paper No' CEPDP0906: Read Abstract | Full paper

CEP Discussion Paper
Service Traders in the UK
Holger Breinlich, Chiara Criscuolo, December 2008
Paper No' CEPDP0901: Read Abstract | Full paper

CEP Discussion Paper
Protection and International Sourcing
Emanuel Ornelas, John L. Turner, December 2008
Paper No' CEPDP0900: Read Abstract | Full paper

CEP Discussion Paper
Does Family Control Affect Trade Performance? Evidence for Italian Firms
Giorgio Barba Navaretti, Riccardo Faini, Alessandra Tucci, November 2008
Paper No' CEPDP0896: Read Abstract | Full paper

CEP Discussion Paper
The Impact of Trade on Aggregate Productivity and Welfare with Heterogeneous Firms and Business Cycle Uncertainty
Jang Ping Thia, July 2008
Paper No' CEPDP0883: Read Abstract | Full paper

CEP Discussion Paper
Multinational Firms, Monopolistic Competition and Foreign Investment Uncertainty
Arunish Chawla, April 2008
Paper No' CEPDP0866: Read Abstract | Full paper

CEP Discussion Paper
Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly
Dimitra Petropoulou, February 2008
Paper No' CEPDP0854: Read Abstract | Full paper

CEP Discussion Paper
Information Costs, Networks and Intermediation in International Trade
Dimitra Petropoulou, February 2008
Paper No' CEPDP0848: Read Abstract | Full paper

CEP Discussion Paper
Productivity and the Sourcing Modes of Multinational Firms: Evidence from French Firm-Level Data
Fabrice Defever, Farid Toubal, December 2007
Paper No' CEPDP0842: Read Abstract | Full paper

CEP Discussion Paper
Imports and Exports at the Level of the Firm: Evidence from Belgium
Mirabelle Muûls, Mauro Pisu, June 2007
Paper No' CEPDP0801: Read Abstract | Full paper

CEP Discussion Paper
Firms in International Trade
Andrew B. Bernard, J. Bradford Jensen, Stephen Redding, Peter K. Schott, May 2007
Paper No' CEPDP0795: Read Abstract | Full paper

CEP Discussion Paper
Multi-Product Firms and Trade Liberalization
Andrew B. Bernard, Stephen Redding, Peter K. Schott, December 2006
Paper No' CEPDP0769: Read Abstract | Full paper