The Effects of Globalisation on Firms

Jump to Related Publications

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. 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: only the most productive firms are able to overcome the higher costs of entering foreign markets. CEP research shows that trade fosters productivity growth by forcing the lowest-productivity firms to exit, and by inducing firms to shed their less profitable products (Discussion Paper No 769, published in Quarterly Journal of Economics).

When locating stages of production overseas, firms decide what should be done within the boundary of the firm, and what can be outsourced. If a firm elects to keep production within its boundary, it may invest abroad and become a multinational, in which case trade occurs within the firm. Alternatively, production might be outsourced to a standalone supplier, in which case trade occurs at arm’s length. Which activities are likely to be undertaken within the boundaries of the firm? While this is a complex question, CEP research shows that one important factor is the reliability of contracts which allow firms to specify and enforce how arm's length production is performed. Firms in the United States tend to outsource to countries where foreign governance is relatively strong. (Discussion Paper No 978, published in American Economic Review Papers & Proceedings).

Whereas trade economists have traditionally focused 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. CEP research is filling this gap by providing novel empirical evidence (Discussion Paper No 901, published Journal of International Economics). For example, 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.

---

The CEP's research is often featured in international news coverage and is influential in informing public debate. Some recent coverage discussing work of the Impacts of Globalisation on Firms group include

• Sequential exporting: how firms break into foreign markets (CentrePiece), February 2012
  (link: http://cep.lse.ac.uk/pubs/download/cp364.pdf)
• In brief...Cotton and Cars: the Huge Gains from Process Innovation, October 2011
  (link: http://cep.lse.ac.uk/pubs/download/cp347.pdf)

---

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

CEP Discussion Paper
Productivity As If Space Mattered: An Application to Factor Markets Across China
Wenya  Cheng,  John  Morrow,  Kitjawat  Tacharoen,  December 2012
Paper No' CEPDP1181: Read Abstract | Full paper

---

CEP Discussion Paper
Selection Effects with Heterogeneous Firms
Monika  Mrázová,  J. Peter  Neary,  October 2012
Paper No' CEPDP1174: Read Abstract | Full paper

---

CEP Discussion Paper
Market Size, Competition, and the Product Mix of Exporters
Thierry  Mayer,  Marc J.  Melitz,  Gianmarco I. P.  Ottaviano,  May 2012
Paper No' CEPDP1146: Read Abstract | Full paper

---

CEP Discussion Paper
Intermediaries in International Trade: Direct Versus Indirect Modes of Export
Andrew B.  Bernard,  Marco  Grazzi,  Chiara  Tomasi,  March 2012
Paper No' CEPDP1137: Read Abstract | Full paper

---

CEP Discussion Paper
Institutions and Export Dynamics
Luis  Araujo,  Giordano  Mion,  Emanuel  Ornelas,  January 2012
Paper No' CEPDP1118: Read Abstract | Full paper

---

CEP Discussion Paper
Success and Failure of African Exporters
Olivier  Cadot,  Leonardo  Iacovone,  Denisse  Pierola,  Ferdinand  Rauch,  June 2011
Paper No' CEPDP1054: Read Abstract | Full paper

---

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

This paper has been published as:
Quarterly Journal of Economics (2012) 127(4): 1663-1705

---

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

---