Final Report Summary - EFIGE (European firms in a global economy: internal policies for external competitiveness)
Executive summary:
The chances of European countries to grow prosper and provide well-being to their citizens rest on the ability of their firms to become successful traders and producers in foreign markets within and outside the EU. This project examines the pattern of internationalisation of European firms. With a clear focus on defining adequate and effective policy measures, it looks at the broad factors constraining or enhancing companies' foreign operations, like growth in size and productivity; type of ownership and corporate governance; access to financial markets; innovation; the macroeconomic environment. It does so by combining theoretical and empirical research at the frontier of the academic and policy debate with the gathering of new data through a cross country survey. The main questions addressed by the project are: What are the features of European firms that successfully compete in international markets? To what extent do they contribute to productivity and employment? Does access to foreign market enhance firm performance through a learning process? Why are some countries more successful in international trade and FDI? What are the policies that can improve a nation's foreign trade performance? Does integration within the Single Market foster productivity improvements? Has the euro led to a wider participation of firms in cross-border business? What policies can promote the participation of other European firms that are currently excluded from international markets? What are the gains and the adjustments involved in reducing barriers to trade and foreign direct investment (FDI)? What policies can best maximise gains and smooth adjustments?
Project Context and Objectives:
Nations do not trade, nor do sectors. It is firms that trade. This simple truth makes it clear that understanding the firm-level facts is essential to good policy-making in Europe. What are the features of European firms that successfully compete in international markets? To what extent do they contribute to productivity and employment? Does access to foreign markets enhance firm performance through a learning process? Why are some countries more successful in international trade and FDI? What are the policies that can improve a nation's foreign trade performance? Does integration within the Single Market foster productivity improvements? Has the Euro led to a wider participation of firms in cross-border business? What policies can promote the participation of other European firms that are currently excluded from international markets? What are the gains and the adjustments involved in reducing barriers to trade and foreign direct investment (FDI)? What policies can best maximise gains and smooth adjustments? Until recently, economists and practitioners had very different views on these issues. Economists tended to assume that trade and FDI opening affected sectors differently but firms similarly. Practitioners viewed them as a selection process in which some firms thrived and others went bankrupt. There was a disconnect between trade models and the fact that, firms being heterogeneous, they fared differently under the pressure of foreign competition. Recent developments in trade theory have bridged this gap by introducing firm heterogeneity. In this new framework, trade and FDI opening do not only affect sectors but also firm-level employment and productivity within sectors.
The aim of the project is to address the above questions by generating new data through matching existing firm-level datasets and by supplementing their limitations through original coordinated data collection. A key obstacle that the projects removes is the absence in the existing datasets of detailed information on the modes of internationalisation that involve cross-border production networks.
The research strategy adopts an integrated approach to internationalisation by investigating the interactions between the strategic decisions of European firms and the various facets of Europe's economic environment. In terms of the former, the project studies the feedbacks between the ability of firms to compete in foreign markets and their reliance on local as well as global production networks. It shows evidence of a strong complementarity between different sets of international activities. Successful exporters often also carry out a large part of their production activities abroad, either through FDI or some form of subcontracting. Moreover, successful firms manage wide ranges of products but they do not sell all of them on all markets. In terms of the latter, the project identifies the bottlenecks to internationalisation stemming from firm size, innovation, access to financial markets, governance and organisational modes, the skill composition of the labour force, regional characteristics. Finally, particular attention is devoted to the impact of European integration and the Crisis on the external competitiveness of European firms, also with a special focus on the effects of the single currency on firms' trade and production decisions.
The objective of WP3 is to provide a detailed assessment of the internationalisation patterns of European firms. This is contained in seven country reports and one cross-country report including descriptive information. Given the detailed information required, the focus is on seven representative EU countries (Austria, France, Germany, Hungary, Italy, Spain and the UK) whose non-harmonised and sometimes incomplete firm-level data are available to the various teams. This broadens and deepens previous analysis reported in the EFIM report. Typically, however, the overlap among the different national datasets in terms of sampled variables is far from complete at the targeted level of disaggregation (firm-level data). In the EFIM report different countries were therefore selected depending on the specific issues addressed. This is a first crucial constraint as it prevents one from learning and drawing policy implications from cross-country comparisons. Moreover, some key variables are simply unavailable in the existing datasets outside EFIGE. Among those variables, the most important are the ones that capture the reliance on local and global production networks based on offshoring (i.e. location abroad), outsourcing and other forms of contracting out. This is a second crucial constraint as it prevents the investigation of the recent tendency of internationalised firms increasingly to rely on more flexible modes of internationalisation. For these reasons, an important contribution of WP3 is the creation of an original cross-country dataset based on harmonised surveys run in seven selected countries (Austria, Germany, France, Hungary, Italy, Spain and UK). This makes our project a pioneering endeavour in systematic cross-country firm-level data collection in Europe. There are signals that it is becoming a turning point in applied research and policy-making on internationalisation issues at the European level. The idea is also to explore if in the future such data collection could be taken over by coordinated national statistical agencies and EU institutions. In this sense our endeavour should be seen as contributing to the on-going effort at the EU level to provide enhanced policy support and anticipate scientific and technological needs in the wake of FP6 initiatives such as EU KLEMS. Most naturally, the public-good aspect of our project is reflected in free access to our original firm-level dataset after its construction in the wake of the successful experience of EU KLEMS.
By adopting, adapting and extending the cutting-edge tools of related frontier research in theoretical and empirical economics, the other six work packages build on the data gathered and the patterns highlighted in WP3 to investigate major issues for research and policy in six interrelated areas:
WP4 - Size, productivity and internationalisation;
WP5 - Firm organisation and internationalisation;
WP6 - The geographical scope of internationalisation;
WP7 - Skills, tasks and internationalisation;
WP8 - Innovation and internationalisation;
WP9 - Financial constraints to internationalisation;
WP10 - Internationalisation and the Euro.
Interrelatedness makes integration among the seven work packages unavoidable and reinforces the research network interactions. In particular, the work packages share the same methodological framework based on the new perspective on international trade and FDI that stresses the importance of firms rather than sectors to understand the challenges and the opportunities countries face in the age of globalisation. The traditional concepts of 'comparative advantage' and 'comparative disadvantage' are used to identify industries in which a country is stronger than its competitors and those in which it is weaker, meaning industries in which its relative costs of production are respectively low and high. In the global arena industries of comparative advantage are expected to expand while those of comparative disadvantage are expected to shrink. In recent years this 'sectoral view' has been increasingly challenged by the analysis of large firm-level datasets that have unveiled a large heterogeneity in the competitiveness of firms. Within the very same industry, while some firms are not able to cope with international competition, others thrive. The resulting intra-industry reallocations of market shares and productive resources are much more pronounced than inter-industry reallocations driven by comparative advantage.
Project Results:
A. Introduction
Within the framework of the project research has been carried out at the frontier of academic and policy analysis, building on the fact that several researchers in the participant institutions and members of the Scientific Advisory Board are among the leaders in the field. Specifically, the project has produced 62 working papers (31 already published in scientific reviews and journals) and 12 reports (4 policy reports, 7 country reports and 1 cross-country report), from which coherent pictures have emerged on all the seven areas of research of the project concerning: firm size, productivity and internationalisation; firm organisation and internationalisation; the geographical scope of internationalisation; skills, tasks and internationalisation; innovation and internationalisation; financial constraints to internationalisation; internationalisation and the euro. New insights have been gained based on the newly collected data (EU-EFIGE -UniCredit dataset) as well as existing data as long as these allow for the in-depth analysis of specific issues for specific countries.
B. New insights from old and new data
Methodologically the research has developed along two parallel action lines.
The effects of the euro on European firms
First, new insights have been developed based on existing data as long as these allow for the in-depth analysis of specific issues for specific countries. The outcome has been a rich series of working papers distributed among the seven areas of research detailed above as well as the 1st Policy Report titled 'Of markets, products and prices: The effects of the euro on European firms'.
The report, however, also argues that trade effects cannot be measured by trade volumes alone. More trade does not necessarily mean more efficient organisation of production. It is indeed easy to construct examples where efficient organisation (say, the location of all production in the country where costs are lowest) results in less trade than the organisation adopted to protect a firm's profits from the possible effects of exchange rate fluctuations (say, the distribution across several countries of the stages of production). So trade volume can be a misleading yardstick. As important, if not more so, is who is trading and at what price. For allowing more producers to access foreign markets and lowering the price paid by consumers unambiguously result in welfare gains. Here is where this report makes a difference.
The EU-EFIGE/ Unicredit Dataset
While these and other aspects have been fruitfully investigated using existing datasets, the latter constrains several valuable insight to specific issues and/or specific countries. Hence, some of the most enticing research outcomes of the project come from its second action line, along which new data have been collected through harmonised cross-country firm-level surveys in order to create the EU-EFIGE/Unicredit Dataset. This has provided the consortium (and will provide the entire academic and policy community henceforth) with an invaluable mine of information to address research questions that are simply impossible to tackle with previously existing datasets.
The global operations of European firms
To start with, previous data did not even allow researchers to obtain a comparable cross-country mapping of the overall international activities of European firms, something now possible thanks to EFIGE. The 2nd Policy Report on 'The global operations of European firms' fills this gap. Its findings are reassuring for researchers who had previously fathomed the characteristics of successfully internationalised firms using non-harmonized and often patchy cross-country data: the hypotheses they had formed on the basis of theory and partial evidence are by and large confirmed.
As the policy report stresses, the most compelling fact that emerges from systematic comparisons is that firms in different countries behave in a strikingly similar way. To put it in simple words, there is no special gene that explains why Germany exports much more than Italy or Spain. In fact, German firms do not differ markedly from similar firms elsewhere in Europe. Rather, the structure of German industry and especially the density of medium-sized firms (the famous Mittelstand) go a long way towards explaining macroeconomic differences with neighbouring countries. It is therefore on the basis of strong evidence that research can deliver messages about policy. The main message is that, at a time when most governments have put competitiveness at the top of their agenda, they should first and foremost focus on firm-level development. The key questions for policymakers looking for ways to increase exports are how they can foster growth in the size of existing small and medium-sized firms, and how they can promote the entry of new firms. In turn, actions to this end will help improve productivity, foster innovation and enrich skills.
How European firms weathered the crisis
The 3rd Policy Report 'Still standing: how European firms weathered the crisis' zooms on the effect of firms' internationalisation on their resilience to the economic downturn. Exploiting the unique features of the project's dataset, this report provides more, and more precise, evidence of what makes firms successful and therefore also what makes countries successful in the context of globalisation. Internationalisation, however, also makes firms vulnerable to large shocks affecting international trade and may transform them into agents of propagation of global downturns. In this respect, the 3rd Policy Report enriches some of the finding of the 2nd Policy report.
Breaking down the barriers to firm growth in Europe
That this should not be an argument for 'picking the winners', rather to find ways to help 'fatten the tail' of globally competitive firms is one of the key messages of the 3rd Policy Report. How to achieve this goal in a non-discretionary, non-distortive way is the further issue addressed by the 4th Policy Report, which is also the last of the series, titled 'Breaking down the barriers to firm growth in Europe'.
The fact that larger firms export more and innovate more suggests that barriers to research and development and to trade are the main culprits that slow down firm growth. Countries that face higher trade costs provide fewer opportunities for businesses to become large. And a relative absence of R&D spending puts a break on firm growth, leading to a size distribution skewed towards smaller firms. Trade and innovation are not independent; they interact in significant ways. A reduction in trade costs, for example, tends to stimulate innovation, because it allows firms to become larger, thus making it easier for them to bear the fixed costs of R&D.
An important conclusion is that in order to identify the barriers to firm growth, a model is needed that jointly analyses trade and innovation. For example, if trade were to be ignored, the model would predict that both Italy and Spain have high innovation costs. However, once trade is introduced, the model finds that the high proportion of small firms in Italy is mainly due to high innovation costs, whereas in Spain it is due to a combination of high trade and high innovation costs. In other words, if Italy wants to reduce barriers to firm growth, it should mainly focus on promoting innovation, whereas in Spain the emphasis should also be on reducing trade costs and improving access to international markets.
All in all, the overarching message emerging from the original body of knowledge created by EFIGE is that, in assessing country international competitiveness, it is crucial to complement the traditional set of macro indicators with new indicators based on firm-level evidence. This is all the more important now that the debate on how to define, measure and assess 'competitiveness' has taken an unexpected turn, which is easily understandable but rather unwarranted. On the one hand, in line with the approach of the project, the recent literature on trade has increasingly underlined and shown empirically that aggregate industrial performance depends strongly on firm level factors, such as size, organization, technological capacity, as well as on other financial and institutional conditions firms are confronted with in the specific environment they operate. On the other hand, the policy debate in Europe has increasingly singled out macro factors, (such as labour costs or current account dynamics), which are seen as the preponderant determinants of aggregate economic performance, while leaving other factors, if any, to the domain of structural/non-price competitiveness matters, possibly to be tackled within the proposals of the 'Europe 2020' reforms agenda.
Policy impact and the 'Competitiveness Research Network'
This view peddled by the consortium has been sympathetically received by the policy community. In this respect, the best example is probably the creation by the European Central Bank of the 'Competitiveness Research Network' (CompNet) to which EFIGE researchers have been providing key expertise based on the successful experience of the project. The fact that some of the associate partners of EFIGE also rank among the founding members of CompNet further testifies the existence of fruitful cross-fertilization between the project and the policy community. As implied by the findings of the project, CompNet starts from the observation that, from a policy perspective, competitiveness issues have been identified as root causes of the ongoing crisis and have therefore been deliberately included in the surveillance processes being established at EU/euro area and G20 level. Yet, there is still a lack of a commonly agreed unified framework that connects determinants of competitiveness with outcomes. Moreover, there are various views on and definitions of competitiveness, which tend to remain rather polarised and are rarely cross-checked.
The triggers of competitiveness
'The triggers of competitiveness' is the title of the EFIGE Cross-Country Report, which is dedicated to European cross-cutting issues that go beyond the specificities of the countries covered by the project.
Against this background, the cross-country report takes a fresh look by inquiring into the determinants of firm-level international performance, that is external competitiveness. In fact, in the competitiveness debate, it is of crucial importance to understand not only the macroeconomic challenge but also to search for the right policy response that will generate growth and exports. This can be found at the firm level. A number of new results emerge. Firm-level total factor productivity is clearly identified as a crucial determinant of growth and exports. Human capital, R&D, equity finance and performance-based incentives for employees also underpin the success of firms. Moreover, size matters and large firms typically are much better exporters than their smaller counterparts.
A number of important policy conclusions are drawn from the analysis. Central for the promotion of export growth is setting the right conditions for firms to grow and export. It is crucial to remove incentives for firms to stay small. Important factors hampering firm growth are taxes and social and labor regulation. But lack of access to finance also often limits growth. And indeed, one of the most dangerous side-effects of the current sovereign debt crisis is that the financial system in Europe is fragmenting, putting a break on credit as well as equity finance, in particular in crisis countries. Equity finance has always been weak in Europe compared to the United States and this may explain the less dynamic European corporate sector. Finally, all the standard recommendations about R&D and education are confirmed by the report. Adjustment in the euro area will require very comprehensive relative price changes. In the absence of nominal exchange rates, wage and product price inflation need to adjust to create conditions for jobs and growth. Yet, the report reminds us that lasting external competitiveness needs to be underpinned by the right policies for corporations. In this respect, microeconomic data sets and research of the kind employed in this and other EFIGE reports are crucial to define the right policy set. All too often, policy makers ignore the rich potential that microeconomic research offers them.
In a policymaking perspective, the findings from the cross-country report have several implications:
- If the objective of policy is to foster a country's competitiveness, the ultimately firm-driven nature of this process is such that aggregate measures of competitiveness are subject to a number of biases that have to be appropriately taken into account when interpreting aggregate statistics: there is no useful 'average firm' concept, rather, firms are very heterogeneous within countries and industries. As a result, rather than formulating policies in an effort to increase the competitiveness of the average firm, it is much more efficient to stimulate competitiveness by fostering the reallocation of economic activities from less to more efficient firms.
- Among the comparable firm-level measures currently available thanks to EFIGE, the single best predictor of a firm's ability to successfully operate in international markets is its total factor productivity (TFP).
- Successful international companies invest in human capital and R&D, rely on equity finance, motivate their human resources through performance-based incentives, do not necessarily loathe family ownership but do draw a line between the family owner and the firm's management, and do not see foreign capital as an intrusion but rather thrive on the synergies it creates and the international opportunities it opens up, via both imports and exports, and in general the participation in global value chains.
- Small is not beautiful per se. It is true that a significant part of employment and productivity growth comes from small firms. However, these are not any small firms. They are, instead, firms that start small and, in the process of getting bigger, become more productive and start to hire more employees. In this respect, the key question for policy aimed at small and medium-sized companies should not be how to help small firms to survive as they are, but should rather be how to help small firms adopt the right attributes that promote not only survival but also growth.
- In particular, specific incentives (both market- and government-based) should be created in the areas of innovation (e.g. tax credit schemes for R&D expenditures), finance (e.g. via the liberalisation and simplification of a cross-border pan European market for private equity and venture capital), human resources (e.g. promoting lifelong training programmes and securing an improvement in national education systems), management (e.g. via a better link between wages and productivity), and ownership (fostering the attraction of foreign investment and the participation of domestic firms in global value chains).
- More in general, the promotion of productivity growth and competitiveness can and should go beyond the traditional exercise of educated guesswork, targeting instead the specific structural aspects that make firms inclined to acquire the 'right' set of characteristics, beyond the worn-out generic mantra of 'flexibilities versus rigidities'. Such an approach, still popular in policy circles, is hardly justifiable in the era of firm-level data.
Country specificities
While cross-cutting issues are the topic of the cross-country report under the common heading of competitiveness, the seven Country Reports shed additional light on country specificities that the policy reports still highlight as important. In this respect, the country reports offer a unique overview of the opportunities and the challenges faced by the seven countries covered by the project. In so doing, they further reveal the great potential of the project's new perspective on competitiveness - based on micro evidence - as a precious complement to the traditional perspective - based on macro evidence.
In its country report Austria is depicted as a small, open economy characterised by ambitious innovation policies. In the 2000s, the country stimulated its research, technology and innovation policies as a matter of economic policy priority. To foster research and innovation activity, a variety of policies were used, including measures aimed at attracting foreign investment in R&D; it is not a coincidence that Austria is now characterised by a concentration of medium foreign enterprises. In the period 2000-2007, Austria was able to demonstrate the highest rate of change of its R&D intensity in the world (+0.63 percentage points); the corporate sector, including foreign owned enterprises, has contributed significantly to this increase. The results of these striking policies were tested for their resilience in a crisis for the first time in 2008-2009.
The analysis presented in this report is based on a wide range of information on the characteristics of firms and their specific innovation strategy provided by the EU-EFIGE/Bruegel-UniCredit Survey. While the crisis had a considerable impact on exports as prospects were gloomier than expected, the data show that Austrian firms suffered less than other countries surveyed, suggesting that a successful 'system of innovation', which includes the presence of foreign-owned businesses characterised by a high propensity for R&D and innovation, is not neutral. Also small businesses (10-49 employees) have been more able to weather the crisis when compared with other small European companies, and their success is strictly connected to their capability to invest, innovate and compete on quality.
The main policy indication that emerges from this report is the centrality of research, technology and innovation policies. For Austria, as a small country with a number of large firms, including foreign multinationals and many small- and medium-sized firms, it is important to foster innovation diffusion, whether created domestically or abroad, and to make choices that contribute to continuous technological upgrading of the economy, facilitating interaction between all the players in the innovation system.
For France, the corresponding country report also underlines the crucial importance of innovation in building a competitive manufacturing sector. Exporters are more innovative, have a greater tendency to invest in research and development, and are more likely to be certificated over the quality of their products and their production processes (see Figure 5). Hence, success in foreign markets is, before all, related to the overall performance of firms. The report also highlights the crucial role of innovation financing.
Several policy implications emerge. First, as highlighted also in the policy reports, firms' innovation over products and production processes is an important determinant of the success of domestic firms on home and foreign markets. Promoting firms' innovation propensity therefore has the potential of raising the competitiveness of the domestic production structure, as it increases the quality of goods offered by firms. Second, the establishment of vertical relations with other firms, research centres and universities is a critical determinant of domestic firms' innovation propensity. Buying an innovation can help a firm upgrade its technology within a short period of time. Third, investing in R&D is costly and requires external financial resources. When failures in credit markets occur, a public policy may be required so as to allow firms to innovate.
Average percentage change in personnel according to export share
The report goes on to identify the factors that most hampered German exporters and then looks at the means employed by firms to cope with the effects of the crisis. The main policy implication of this report is that the implemented measures of the German government to dampen the effects of the crisis worked well overall, but have failed to reach some types of firms. Exporters that were strongly affected by the crisis, for example, faced severe problems in obtaining credit. Policy instruments have to be more aptly designed in order to make them accessible to a wide range of firms in the event of a crisis.
Turning to Hungary, the corresponding country report documents the internationalisation patterns of Hungarian firms. There are two key features of Hungary that were found important to investigate. First, Hungary is a small, open economy - much more open than any other country in the sample. This materializes also in the export intensity of its firms.
Hungarian exports are heavily concentrated on few firms. These firms are mostly subsidiaries of large multinationals serving EU markets. The quality of Hungarian exports is competitive on the European markets, but this quality is mainly supported by the R&D and innovation of the parent firm. The success of this type of economy depends on how widely and deeply the supply chain is based on the domestic economy. In this respect there seems to be a great divide between firms that are able to be part of the suppliers and those which are excluded. Second, Hungary is known for its political business cycle which has been the strongest of countries that joined the European Union in the 2000s. As a result its macroeconomic policies had to move in an opposite direction when the crisis hit; fiscal and monetary tightening was necessary when most countries could rely on massive temporary relief and easing in order to contain the dire consequences on output and employment. These polices may have affected the performance of companies and represent an interesting angle on the relationship between macro policy and the response of firms.
Four policy conclusions can be drawn. First, it should be noted that firms in Hungary do not behave very differently from other EU countries in many respects. While Hungarian firms are smaller and less open to trade with countries outside Europe, export and innovation performance is not very different. Thus, Hungary may well use policy ideas from other economies such as labor market reforms in Germany. Second, Hungary serves as an export platform for some very large companies, which sell 90-100 percent of their output abroad. Making sure these companies can continue to operate is important for growth. Third, internationalisation is important for Hungarian firms and hence, policies should aim to increase the number of firms not only in exports, but imports, FDI and outsourcing as well. Hungary is lagging behind in terms of contacts with outside Europe; this should be addressed. Fourth, as a consequence of poor policy management before the crisis, fiscal policy was retracting just when it should have been there to cushion the fallout from the crisis. This caused domestic sales to fall more than in other countries and more firms suffered from the crisis. This shows that sound fiscal policy has also an option value - the potential for application in a crisis.
The country report on Italy starts from the observation that competing in a global environment requires an increasing level of 'sophistication' in firms' investment, innovation, internationalisation and organisation strategies. The report focuses on several questions on the Italian manufacturing structure. What is the comparative level of sophistication of Italian firms' strategies? We look at three areas of firm activity (internationalisation, innovation and human capital) by depicting firms' complexity, or their 'quality', through a wide spectrum of variables that capture, in our view, their intangible assets endowment. We single out several indicators of a sophisticated firm and investigate how they are related among themselves and with firm size, comparing Italian firms' performance with respect to France, Germany and Spain. Do Italian firms behave like their European competitors? Along which dimensions do they differ? Do these differences disappear when comparing firms belonging to the same size class? Is the relationship between a firm's quality and size similar across countries? Answering these questions allows us to show whether Italian firms suffer a gap in their degree of sophistication with respect to other European countries, and along which specific dimensions.
As a further step, this report investigates a potentially relevant aspect that can be a driver of firms' strategic choices: their financial structure. More complex strategies imply more elaborated financial needs. Intangible assets do not always embed physical collateral to be held as a guarantee to external financiers. First, we look at the relationship between Italian firms' financial structure and size, investigating whether small- and medium-sized firms are characterised by a different financial structure with respect to larger firms. Then, we investigate whether there is a relationship between a firm's financial structure and its sophistication, as predicted by the abovementioned set of indicators of firm quality.
The gap with the other European countries is not only driven by the Italian firms' size distribution, but also by a lower performance with respect to the main European counterparts within each size class. Also, our analysis shows that large Italian firms are characterised by a less fragile financial structure than small- and medium-sized firms, and that firms with a less fragile financial structure are more sophisticated. Our findings highlight the specific areas where Italian firms lag behind their European competitors and that should be targeted by policy intervention. At the same time, the report argues that, in order to be effective, policy intervention should pay attention to the financial and banking system's ability to assess the intangible assets of firms, which are required in the current global competition environment.
Of the large European countries, Spain has been arguably hit the hardest by the economic crisis. While the extent of the crisis is evident in many aggregate macroeconomic indicators, such as the sharp increase in unemployment and the slow recovery of GDP growth, these indicators mask systematic differences at the firm level. This country report analyses the heterogeneity of firm performance across countries, and singles out differences that set Spanish firms apart. Given the high degree of firm heterogeneity, understanding the crisis at the firm level is key to the designing of targeted policies, and thus improving the effectiveness of economic policy.
The report finds that the poor performance of Spain appears to be mainly accounted for by the relative predominance of small firms. The Spanish firms that clearly fared worse than their European neighbors are the small firms: 65.7% of small Spanish firms (10-19 employees) report decreases in their profit margin while the survey average is 52.4%. For large firms, instead, although there is a larger share of firms reporting a decrease in profit margin in Spain than the survey average, 46.6% versus 43.3%, the share of firms reporting an increase is significantly larger, 24.9% versus 18.4%. These findings suggest that policies should focus on identifying and reducing firm-size distortions that negatively affect the growth of small firms.
Finally, for the United Kingdom, the country report focuses on the impact of the financial crisis. In particular, we study the spatial dimension of the available information and provide a number of indicators of the degree of internationalisation of UK firms across regions. A key contribution of this report, which is particularly relevant to policy makers, is to provide the first firm-level analysis of the response of UK firms to the 2008-09 financial crisis. Thanks to the unique features of the project's dataset, we enrich the body of knowledge about firms and the crisis by investigating its regional dimension.
Conclusions
All in all, from the rich body of new knowledge created by EFIGE, we can draw some broader lessons for fact-based policy making in Europe and beyond.
The first lesson is a methodological one: whereas ten years ago economists and policymakers routinely discussed competitiveness on the basis of aggregate trade and investment flows, it has become unimaginable to overlook the firm-level dimension of international economic performance. Nations do not trade, it is firms that trade. This simple truth has become obvious and to speak of competitiveness without speaking of firms is now as awkward as to speak of employment without speaking of job destruction and creation. We are proud to have contributed to this intellectual and policy revolution.
Second, there is a strong and robust correlation between firm internationalisation and firm performance. Simply put, and as documented again in this report, a firm that exports tends to be also more profitable, more productive and more innovative. Again this may seem evident - but if it were to everyone, would globalisation be so disputed?
Third, the evidence collected within the framework of the project has confirmed to a remarkable extent that in different countries, firms with the same characteristics tend to behave in the same way with respect to international competition. German entrepreneurs may have a stronger propensity to export and invest abroad, but this is not what explains Germany's strong presence on international markets. Rather, it is the density of medium-sized, skill-endowed and innovative firms that explains German export performance. In this respect this report brings new evidence to the fore, showing that in comparison, the less stellar trade performances of Italy and Spain are due to the much higher density of small firms.
Fourth and consistent with the previous findings, to let domestic firms grow is one of the surest ways to improve export performance. But as demonstrated by this report, how to tear down barriers to growth is a country-specific question. Obstacles can be of different natures - they can originate in product, labor, technology and financial markets - and the binding constraints may be different from one country to another. So there is no one-size-fits-all recipe for firm growth and exports, rather each government must do its homework and identify domestic roadblocks.
Fifth, the relationship between firm characteristics and internationalisation is highly non-linear. Exports and FDI involve fixed costs and this gives rise to threshold effects. For this reason, long-distance exports and, to an even greater extent, FDI rely on a tiny group of truly global firms. In comparison to those serving the domestic market, only a minority of firms are serving even the closest neighboring market. From a policy perspective, this implies that the highest returns from public action are to be expected from initiatives that 'fatten the tail' of globally competitive firms. If this can be done without picking the winner is a question of major relevance for all governments looking for ways to improving competitiveness.
As a testimony of the project's socio-economic impact, the findings, the insight and the lessons from EFIGE have received considerable attention by the policy community. EFIGE partners have been invited to present them in high profile events at key policy institutions such the European Commission, the Bank of Italy, the Bank of Spain, the Banque de France, the OECD, the IMF, the World Bank, the WTO, the ILO, the United Nations Conference on Trade and Development (UNCTAD) and, last but not least, the European Central Bank within the CompNet framework. At the beginning of EFIGE there was a clear commitment by the partners to maintaining the momentum after the funding has finished. New far-reaching initiatives like CompNet testify the fulfilment of that initial commitment.
Potential Impact:
A. Socio-economic impact and wider societal implications
The project touches upon the interests both of the EU as a whole and of individual countries. The composition of the Associate Partners and of the Policy Advisory Board testifies to the relevance of the project in terms of its potential implications for national as well as European policy design and implementation. The central tenet is that the international performance of countries is not simply related to their pattern of sectoral competitiveness ('comparative advantage') so that its drivers must be investigated by looking at what happens at the firm level. Firm-level analysis has a very short history in international economics, both in terms of empirics and even more in terms of theory and policy. While most of what has been done so far concerns a single country, namely the US, this project provides a unique cross-country perspective on Europe.
B. Exploitation of results
Four Policy Reports have been produced under the EFIGE project. Each year, the reports summarise the main findings of the consortium, in a non-technical manner, intended for the widest possible diffusion. In order to successfully exploit the results at a policy level, each Policy Report has been completed by a Policy Brief providing concise and up-to-date analysis along with policy recommendations targeted to a policy audience. They are eight pages, easy to read, fact-based and targeted at an audience of executives and decision-makers, with an emphasis on concrete recommendations.
1st Policy Brief
Published at an early stage of the project, the first Policy Brief does not provide recommendations; rather defines the partners' strategy to successfully deliver the key messages for policy-makers, businesses, trade unions and civil society actors. It also raises the main questions to be addressed throughout the overall project:
Because it draws on concrete, individual firm-level evidence, and will lead to new insights into the determinants of performance on international markets, EFIGE research has the potential to change the way policymakers envisage competitiveness policies in the same way evidence based on individual data has changed the way they envisage labor market and welfare policies.
2nd Policy Brief
The findings presented in this Policy Report lends support to fostering structural reforms that allow firms across the board to grow and develop sophisticated technologies, skills and forms of management. It is hard to disentangle the causal link between firm characteristics and performance and international activities and we do not aim to do so at this stage. Analysis of this new data is only starting. Nonetheless, our results so far, which are mostly based on broad correlations, already suggest several areas worth deeper investigation.
1. Firm growth and consolidation, particularly of small-medium companies, could generate a considerable increase in the value of European exports. Firms in industrialized economies are less and less able to compete by cutting costs and prices. They increasingly rely on other competitive factors: quality, technology, branding and so on, which are costly to acquire. Moreover, the broadening of the global span of markets forces firms to operate in several regions, often also to produce abroad. These patterns raise the cost of global competition, often beyond the means of small firms. Consequently, structural reforms that foster firms' growth and favor their move towards sophisticated forms of management, organisation and innovation, favor export growth.
2. Advocating the growth in size of small and medium-sized enterprises does not imply that companies should all become very large. They must be large enough to carry out complex global operations, including global production. A big share of firms in the 50-250 employees category exports, serve a number of markets and have foreign production. Medium sized firms contribute considerably to export performance in most European countries.
3. Structural reforms may be required in several areas, such as labour regulation, taxation and reducing red tape. Also targeted sector-specific training and research programmes can foster export-oriented activities. Several of these measures may have a European dimension and partly be coordinated. Particularly in a phase of sluggish demand and reduced fiscal resources, we should not forget the enormous potential of the European single market as the quintessential quasi-domestic space where firms initially grow and reinforce their global competitiveness. Policy action should then aim at easing even further the movement of goods and factors within the EU, resisting calls for local measures that support firms within national boundaries.
4. Obstacles hindering firms' growth should be lifted through structural policies. But policy measures forcing aggregation and growth could be wasteful and ineffective. Industrial structures often reflect characteristics of the business environment and cannot change unless the business environment also changes. Therefore policies aimed at directly inducing changes in the industry and size composition of activities (vertical industrial policies; incentives for aggregation etc.) could likely be of little effect.
5. Global production strengthens global sales, particularly to emerging markets. Through foreign production, firms can often reduce production costs and make entry into distant and difficult markets easier for themselves. China and India are the countries where European firms most frequently have production facilities outside the EU. Policymakers may want to bear this in mind. Attempts to prevent the transfer of production abroad could severely hinder export growth. At the same time such measures would weaken the global competitiveness of national firms, with long-term negative effects on domestic employment.
3rd Policy Brief
The third Policy Brief is based on the EFIGE Policy Report 'The Impact of the Crisis on the European Firms'. This policy report aims at analysing how the Great Recession impacted European firms. Policy implications and recommendations of the report are summarized by the Policy Brief as follows:
The findings presented in this Policy Report lend support to:
1. Heterogeneity of firms: Policymakers can learn from studying the experience of firms that were relatively successful in weathering the crisis. This heterogeneity also suggests that one-size-fits-all policies might be ineffective. Understanding the patterns emerging from this heterogeneity may enable governments to better target spending and regulations.
2. Short-time work: While short-time work in Europe may be the right instrument to dampen the effect of crises on employment, this report found no support for this. Moreover, our results suggest that temporary workers were fired first, with firms with larger pools of temporary workers actually shedding more employees. In terms of the labor market, we found that skill-composition seems to matter more, as firms with less-skilled workers had to lose more jobs than those with more white-collar and skilled blue-collar labor. Firms prioritised the retention of human capital embodied in skilled labor during the crisis.
3. Network position of firms: Dominant firms centrally placed in the technology, trade and ownership network fared better. Hence, in crises, policy should focus on helping stabilise firms that are in weaker positions, that are owned by foreign firms and producing less skill-intensive and/or specific products for large customers. This raises an important policy trade-off. On the one hand, while export-oriented strategies may improve competitiveness, they also bring about greater exposure to foreign crises. Accessing foreign markets may help firms attain bigger scale, improve productivity or upgrade their products in stable times, but such firms, sectors and countries will also be more vulnerable to crises. The flip side of the same trade-off is that outsourcing to other countries has distinct stabilisation benefits. While many see competition by lower-wage countries as a threat, it should also be clear that these supply chain linkages give greater flexibility when responding to a demand shock. These additional gains from trade for rich countries imply that protectionist instincts during the crisis may be misguided.
4. Credit and finance: Anecdotal evidence suggested that as banks collapsed, trade credit dried up and hence exports fell more sharply than output. Yet, earlier studies found mixed evidence regarding the effect of trade finance. This report falls in line with other papers, finding no convincing result. However, it confirms the importance of pre-crisis external constraints, and adds that a greater reliance on external finance had a negative impact on sales during the crisis. As a further contribution, the report detected that the financial crises affected firms not through major international banks but through smaller and financially weaker local banks. Of course, this may have been a result of government intervention shoring up the capital positions of some large and important banks. Whichever is the case, strengthening local banks may help firms to cope with the consequences of crises.
5. Fiscal policy: While fiscal policy was the main policy tool used by governments, with sizeable new government purchases from the private sector, evidence on the role of the state is scant. The report confirms the role of the general fiscal policy stance and the role of public-sector orders from companies in helping mitigate declining sales.
4th Policy Brief
Policy implications and recommendations of the report are summarized by the Policy Brief as follows:
The findings presented in the Policy Report lend support to:
1. Policies to improve firm growth: If policymakers want to increase firm growth, how does action to reduce trade costs compare in terms of effectiveness to reductions in innovation costs or lower labor taxes? To answer this question, the policy report estimates the effect on firm growth and the firm size distribution of a one percent reduction in the different barriers (innovation costs, trade costs and taxes). It argues that, in all countries, with the exception of Austria, reducing innovation costs has a substantially greater impact than reducing trade costs. On average, a one percent reduction in innovation costs is predicted to lead to an approximately 1.2 percent increase in firm growth, whereas a one percent drop in trade cost would increase firm growth by about 0.6 percent. This implies that policymakers, who need to find a trade-off between the difficulty of reducing certain barriers and the potential returns from doing so, would achieve a much greater impact by focusing on reducing the barriers to innovation.
2. Policies to improve the firm size distribution: Large firms are key to a country's economic performance. Policymakers therefore need to know which policies are more effective in increasing the share of large firms in an economy. In the EFIGE survey, 10.7 percent of German firms reported more than 250 employees. Reducing the innovation cost by 5 percent would increase that share to 12.6 percent, compared to an increase to 11.0 percent when reducing the trade cost by 5 percent.
3. The effect of the crisis: Europe is in the midst of the most severe economic crisis since the Great Depression. Fiscal austerity programmes are biting hard. The breakup of the euro area, once considered a far-off doomsday scenario, is becoming a real possibility. Unfortunately, few models are able to shed light on the economic impact of these shocks. The framework developed in this policy report is well equipped to analyse these questions. The Policy Report estimates the effect of a 20 percent drop in government expenditure on R&D in Spain. Although this drop only amounts to 0.1 percent of GDP, the model predicts it will lead to a welfare drop in terms of consumption of 2.7 percent. Assuming that trade would drop by 10 percent, the model predicts that abandoning the common currency would lead to a welfare drop in consumption of between 7 percent and 15 percent. Larger countries, such as Germany, have larger domestic markets, and would lose less (around 7 percent), compared to smaller countries, such as Austria, which rely more on international trade, and would lose more (around 15 percent). These estimates, already substantial, should be viewed as a lower bound, since they only capture the negative effect the breakup of the euro area would have on trade flows, thus ignoring many other factors.
Research Outcomes
As the research activity is successfully coming to its conclusion along the planned action lines, it is time to draw lessons from its achievements.
As highlighted by Jean Pisani-Ferry, Bruegel's Director, in the foreword to the recently released fourth and last EFIGE Policy Report on Breaking down the barriers to firm growth in Europe, the first lesson is a methodological one: whereas ten years ago economists and policymakers were routinely discussing competitiveness on the basis of aggregate trade and investment flows, it has become unimaginable to overlook the firm-level dimension of international economic performance. Nations do not trade, it is firms that trade. This simple truth has become obvious and to speak of competitiveness without speaking of firms it is by now as awkward as to speak of employment without speaking of job destruction and creation. EFIGE is proud to have contributed to this intellectual and policy revolution.
Second, there is a strong and robust correlation between firm internationalization and firm performance. Simply put, a firm that exports tends to be also more profitable, more productive and more innovative. Again this may look evident - but if it were to everyone, would globalization be so disputed?
Third, the evidence collected within the framework of the project has confirmed to a remarkable extent that across countries, firms with the same characteristics tend to behave in the same way vis-a-vis international competition. German entrepreneurs may have a stronger propensity to export and invest abroad, but this is not what explains Germany's strong presence on international markets. Rather, it is the density of medium sized, skill-endowed and innovative firms that explains German export performance. In this respect EFIGE has brought new evidence to the fore, showing that in comparison, the less stellar trade performance of Italy and Spain is due to the much higher density of small firms.
Fourth and consistent with the previous findings, to let domestic firms grow is one of the surest ways to improve export performance. But as evidenced by EFIGE, how to tear down barriers to growth is a country specific question. Obstacles can be of different natures - they can originate in product, labor, technology and financial markets - and the binding constraints may be different from one country to another. So there is no one-size-fits-all recipe to firm growth and export, rather each government must do its homework and identify domestic roadblocks.
Fifth, the relationship between firm characteristics and internationalisation is highly non-linear. Export and FDI involve fixed costs and this gives rise to threshold effects. For this reason, long-distance exports and even more FDI rely on a tiny group of truly global firms, and the passage from serving the domestic market to serving the neighboring ones is also made by a minority of firms only. From a policy perspective, this implies that the highest returns from public action are to be expected from initiatives that 'fatten the tail' of globally competitive firms. Whether this can be done without picking the winner is a question of major relevance for all governments looking for ways to improving competitiveness.
Publications
The results and findings of the EFIGE project have been regularly published in the form of scientific working papers. Since the beginning of the project, 62 scientific working papers have been produced. A number of them have been published in, or are currently under revision and resubmission for, some of the top economic journals, such as Econometrica, the Quarterly Journal of Economics, the Review of Economic Studies, the American Economic Review (revise and resubmit), the Journal of Political Economy (revise and resubmit), International Economic Review, the Review of Economics and Statistics, European Economic Review, the Journal of International Economics, the Journal of Regional Science, the International Journal of Industrial Organization, Regional Science and Urban Economics, etc. In addition, four Policy Reports, summarising the policy findings of the groups have been published. Finally, using the EFIGE dataset, 7 Country Reports and 1 Cross-Country Report has been produced.
Main Dissemination Activities
1. Events
The network of EFIGE teams had frequent and regular meetings intended to provide direct interactions with the academic community on the results of the research. Another key goal of the project was the diffusion of knowledge to and the collection of feedback from a wider (non-academic) audience.
In total, 4 Policy Conferences and Scientific Workshops were held:
-03-04.06.2009 First Policy Conference and Scientific Workshop, Madrid
-18-19.06.2010 Second Policy Conference and Scientific Workshop, Rome
-08-09.06.2011 Third Policy Conference and Scientific Workshop, Nottingham
-31.05-02.06.2012 Fourth Third Policy Conference and Scientific Workshop, Barcelona
On top of those key events, the EFIGE consortium also either organised or participated in 77 disseminations activities:
-47 Presentations
-15 Conferences
-11 Workshops
-3 Articles Published in the Popular Press (VoxEu)
For the presentations, conferences and workshops the average audience size was 50 participants, the main countries addressed were Europe and the United States and the type of audience was mainly the Scientific Community but included Policy Makers, Industry, Civil Society and Medias.
2. Publications
4 Policy Reports aiming at going beyond technical analyses to make detailed recommendations to policymakers were produced:
-Of markets,products and prices - Lionel Fontagne, Thierry Mayer and Gianmarco Ottaviano, February 2009
-The global operations of European firms - The second EFIGE policy report - Daniel Horgos, Daniela Maggioni, Fabiano Schivardi, Giorgio Barba Navaretti, Matteo Bugamelli and Carlo Altomonte, Jul y 2011
-Still standing: how European firms weathered the crisis - The third EFIGE policy report- Gábor Bekes, Laszlo Halpern, Miklos Koren and Balazs Murakozy, December 2011
-Breaking down the barriers to firm growth in Europe: The fourth EFIGE policy report - by Loris Rubini, Klaus Desmet, Facundo Piguillem and Aránzazu Crespo , August 2012
The Policy Reports were summarised into 4 Policy Briefs to deliver concise and concrete policy recommendations.
The EFIGE Consortium also produced 7 Country Reports and a Cross-Country Report:
-The triggers of competitiveness: The EFIGE cross-country report - July 2012
-AUSTRIA - Austria Felix: The impact of the crisis on a small open economy - February 2012
-FRANCE - How does innovation affect the internationalisation pattern of firms? - February 2012
-GERMANY - How did exporting firms cope with the crisis? - February 2012
-HUNGARY - How did exporting firms cope with the crisis? - February 2012
-ITALY - Investment in intangible assets and level of sophistication: the role of Italian firms' financial structure - February 2012
-SPAIN - Did Spanish firms perform worse in the wake of the 2008 crisis? - February 2012
-UNITED KINGDOM - UK firms, space and the crisis - February 2012
62 EFIGE Working Papers were written and the EFIGE partners published 31 articles in scientific reviews and journals.
3. Integrated Communication Strategy
Project website: http://www.efige.org
The chances of European countries to grow prosper and provide well-being to their citizens rest on the ability of their firms to become successful traders and producers in foreign markets within and outside the EU. This project examines the pattern of internationalisation of European firms. With a clear focus on defining adequate and effective policy measures, it looks at the broad factors constraining or enhancing companies' foreign operations, like growth in size and productivity; type of ownership and corporate governance; access to financial markets; innovation; the macroeconomic environment. It does so by combining theoretical and empirical research at the frontier of the academic and policy debate with the gathering of new data through a cross country survey. The main questions addressed by the project are: What are the features of European firms that successfully compete in international markets? To what extent do they contribute to productivity and employment? Does access to foreign market enhance firm performance through a learning process? Why are some countries more successful in international trade and FDI? What are the policies that can improve a nation's foreign trade performance? Does integration within the Single Market foster productivity improvements? Has the euro led to a wider participation of firms in cross-border business? What policies can promote the participation of other European firms that are currently excluded from international markets? What are the gains and the adjustments involved in reducing barriers to trade and foreign direct investment (FDI)? What policies can best maximise gains and smooth adjustments?
Project Context and Objectives:
Nations do not trade, nor do sectors. It is firms that trade. This simple truth makes it clear that understanding the firm-level facts is essential to good policy-making in Europe. What are the features of European firms that successfully compete in international markets? To what extent do they contribute to productivity and employment? Does access to foreign markets enhance firm performance through a learning process? Why are some countries more successful in international trade and FDI? What are the policies that can improve a nation's foreign trade performance? Does integration within the Single Market foster productivity improvements? Has the Euro led to a wider participation of firms in cross-border business? What policies can promote the participation of other European firms that are currently excluded from international markets? What are the gains and the adjustments involved in reducing barriers to trade and foreign direct investment (FDI)? What policies can best maximise gains and smooth adjustments? Until recently, economists and practitioners had very different views on these issues. Economists tended to assume that trade and FDI opening affected sectors differently but firms similarly. Practitioners viewed them as a selection process in which some firms thrived and others went bankrupt. There was a disconnect between trade models and the fact that, firms being heterogeneous, they fared differently under the pressure of foreign competition. Recent developments in trade theory have bridged this gap by introducing firm heterogeneity. In this new framework, trade and FDI opening do not only affect sectors but also firm-level employment and productivity within sectors.
The aim of the project is to address the above questions by generating new data through matching existing firm-level datasets and by supplementing their limitations through original coordinated data collection. A key obstacle that the projects removes is the absence in the existing datasets of detailed information on the modes of internationalisation that involve cross-border production networks.
The research strategy adopts an integrated approach to internationalisation by investigating the interactions between the strategic decisions of European firms and the various facets of Europe's economic environment. In terms of the former, the project studies the feedbacks between the ability of firms to compete in foreign markets and their reliance on local as well as global production networks. It shows evidence of a strong complementarity between different sets of international activities. Successful exporters often also carry out a large part of their production activities abroad, either through FDI or some form of subcontracting. Moreover, successful firms manage wide ranges of products but they do not sell all of them on all markets. In terms of the latter, the project identifies the bottlenecks to internationalisation stemming from firm size, innovation, access to financial markets, governance and organisational modes, the skill composition of the labour force, regional characteristics. Finally, particular attention is devoted to the impact of European integration and the Crisis on the external competitiveness of European firms, also with a special focus on the effects of the single currency on firms' trade and production decisions.
The objective of WP3 is to provide a detailed assessment of the internationalisation patterns of European firms. This is contained in seven country reports and one cross-country report including descriptive information. Given the detailed information required, the focus is on seven representative EU countries (Austria, France, Germany, Hungary, Italy, Spain and the UK) whose non-harmonised and sometimes incomplete firm-level data are available to the various teams. This broadens and deepens previous analysis reported in the EFIM report. Typically, however, the overlap among the different national datasets in terms of sampled variables is far from complete at the targeted level of disaggregation (firm-level data). In the EFIM report different countries were therefore selected depending on the specific issues addressed. This is a first crucial constraint as it prevents one from learning and drawing policy implications from cross-country comparisons. Moreover, some key variables are simply unavailable in the existing datasets outside EFIGE. Among those variables, the most important are the ones that capture the reliance on local and global production networks based on offshoring (i.e. location abroad), outsourcing and other forms of contracting out. This is a second crucial constraint as it prevents the investigation of the recent tendency of internationalised firms increasingly to rely on more flexible modes of internationalisation. For these reasons, an important contribution of WP3 is the creation of an original cross-country dataset based on harmonised surveys run in seven selected countries (Austria, Germany, France, Hungary, Italy, Spain and UK). This makes our project a pioneering endeavour in systematic cross-country firm-level data collection in Europe. There are signals that it is becoming a turning point in applied research and policy-making on internationalisation issues at the European level. The idea is also to explore if in the future such data collection could be taken over by coordinated national statistical agencies and EU institutions. In this sense our endeavour should be seen as contributing to the on-going effort at the EU level to provide enhanced policy support and anticipate scientific and technological needs in the wake of FP6 initiatives such as EU KLEMS. Most naturally, the public-good aspect of our project is reflected in free access to our original firm-level dataset after its construction in the wake of the successful experience of EU KLEMS.
By adopting, adapting and extending the cutting-edge tools of related frontier research in theoretical and empirical economics, the other six work packages build on the data gathered and the patterns highlighted in WP3 to investigate major issues for research and policy in six interrelated areas:
WP4 - Size, productivity and internationalisation;
WP5 - Firm organisation and internationalisation;
WP6 - The geographical scope of internationalisation;
WP7 - Skills, tasks and internationalisation;
WP8 - Innovation and internationalisation;
WP9 - Financial constraints to internationalisation;
WP10 - Internationalisation and the Euro.
Interrelatedness makes integration among the seven work packages unavoidable and reinforces the research network interactions. In particular, the work packages share the same methodological framework based on the new perspective on international trade and FDI that stresses the importance of firms rather than sectors to understand the challenges and the opportunities countries face in the age of globalisation. The traditional concepts of 'comparative advantage' and 'comparative disadvantage' are used to identify industries in which a country is stronger than its competitors and those in which it is weaker, meaning industries in which its relative costs of production are respectively low and high. In the global arena industries of comparative advantage are expected to expand while those of comparative disadvantage are expected to shrink. In recent years this 'sectoral view' has been increasingly challenged by the analysis of large firm-level datasets that have unveiled a large heterogeneity in the competitiveness of firms. Within the very same industry, while some firms are not able to cope with international competition, others thrive. The resulting intra-industry reallocations of market shares and productive resources are much more pronounced than inter-industry reallocations driven by comparative advantage.
Project Results:
A. Introduction
Within the framework of the project research has been carried out at the frontier of academic and policy analysis, building on the fact that several researchers in the participant institutions and members of the Scientific Advisory Board are among the leaders in the field. Specifically, the project has produced 62 working papers (31 already published in scientific reviews and journals) and 12 reports (4 policy reports, 7 country reports and 1 cross-country report), from which coherent pictures have emerged on all the seven areas of research of the project concerning: firm size, productivity and internationalisation; firm organisation and internationalisation; the geographical scope of internationalisation; skills, tasks and internationalisation; innovation and internationalisation; financial constraints to internationalisation; internationalisation and the euro. New insights have been gained based on the newly collected data (EU-EFIGE -UniCredit dataset) as well as existing data as long as these allow for the in-depth analysis of specific issues for specific countries.
B. New insights from old and new data
Methodologically the research has developed along two parallel action lines.
The effects of the euro on European firms
First, new insights have been developed based on existing data as long as these allow for the in-depth analysis of specific issues for specific countries. The outcome has been a rich series of working papers distributed among the seven areas of research detailed above as well as the 1st Policy Report titled 'Of markets, products and prices: The effects of the euro on European firms'.
The report, however, also argues that trade effects cannot be measured by trade volumes alone. More trade does not necessarily mean more efficient organisation of production. It is indeed easy to construct examples where efficient organisation (say, the location of all production in the country where costs are lowest) results in less trade than the organisation adopted to protect a firm's profits from the possible effects of exchange rate fluctuations (say, the distribution across several countries of the stages of production). So trade volume can be a misleading yardstick. As important, if not more so, is who is trading and at what price. For allowing more producers to access foreign markets and lowering the price paid by consumers unambiguously result in welfare gains. Here is where this report makes a difference.
The EU-EFIGE/ Unicredit Dataset
While these and other aspects have been fruitfully investigated using existing datasets, the latter constrains several valuable insight to specific issues and/or specific countries. Hence, some of the most enticing research outcomes of the project come from its second action line, along which new data have been collected through harmonised cross-country firm-level surveys in order to create the EU-EFIGE/Unicredit Dataset. This has provided the consortium (and will provide the entire academic and policy community henceforth) with an invaluable mine of information to address research questions that are simply impossible to tackle with previously existing datasets.
The global operations of European firms
To start with, previous data did not even allow researchers to obtain a comparable cross-country mapping of the overall international activities of European firms, something now possible thanks to EFIGE. The 2nd Policy Report on 'The global operations of European firms' fills this gap. Its findings are reassuring for researchers who had previously fathomed the characteristics of successfully internationalised firms using non-harmonized and often patchy cross-country data: the hypotheses they had formed on the basis of theory and partial evidence are by and large confirmed.
As the policy report stresses, the most compelling fact that emerges from systematic comparisons is that firms in different countries behave in a strikingly similar way. To put it in simple words, there is no special gene that explains why Germany exports much more than Italy or Spain. In fact, German firms do not differ markedly from similar firms elsewhere in Europe. Rather, the structure of German industry and especially the density of medium-sized firms (the famous Mittelstand) go a long way towards explaining macroeconomic differences with neighbouring countries. It is therefore on the basis of strong evidence that research can deliver messages about policy. The main message is that, at a time when most governments have put competitiveness at the top of their agenda, they should first and foremost focus on firm-level development. The key questions for policymakers looking for ways to increase exports are how they can foster growth in the size of existing small and medium-sized firms, and how they can promote the entry of new firms. In turn, actions to this end will help improve productivity, foster innovation and enrich skills.
How European firms weathered the crisis
The 3rd Policy Report 'Still standing: how European firms weathered the crisis' zooms on the effect of firms' internationalisation on their resilience to the economic downturn. Exploiting the unique features of the project's dataset, this report provides more, and more precise, evidence of what makes firms successful and therefore also what makes countries successful in the context of globalisation. Internationalisation, however, also makes firms vulnerable to large shocks affecting international trade and may transform them into agents of propagation of global downturns. In this respect, the 3rd Policy Report enriches some of the finding of the 2nd Policy report.
Breaking down the barriers to firm growth in Europe
That this should not be an argument for 'picking the winners', rather to find ways to help 'fatten the tail' of globally competitive firms is one of the key messages of the 3rd Policy Report. How to achieve this goal in a non-discretionary, non-distortive way is the further issue addressed by the 4th Policy Report, which is also the last of the series, titled 'Breaking down the barriers to firm growth in Europe'.
The fact that larger firms export more and innovate more suggests that barriers to research and development and to trade are the main culprits that slow down firm growth. Countries that face higher trade costs provide fewer opportunities for businesses to become large. And a relative absence of R&D spending puts a break on firm growth, leading to a size distribution skewed towards smaller firms. Trade and innovation are not independent; they interact in significant ways. A reduction in trade costs, for example, tends to stimulate innovation, because it allows firms to become larger, thus making it easier for them to bear the fixed costs of R&D.
An important conclusion is that in order to identify the barriers to firm growth, a model is needed that jointly analyses trade and innovation. For example, if trade were to be ignored, the model would predict that both Italy and Spain have high innovation costs. However, once trade is introduced, the model finds that the high proportion of small firms in Italy is mainly due to high innovation costs, whereas in Spain it is due to a combination of high trade and high innovation costs. In other words, if Italy wants to reduce barriers to firm growth, it should mainly focus on promoting innovation, whereas in Spain the emphasis should also be on reducing trade costs and improving access to international markets.
All in all, the overarching message emerging from the original body of knowledge created by EFIGE is that, in assessing country international competitiveness, it is crucial to complement the traditional set of macro indicators with new indicators based on firm-level evidence. This is all the more important now that the debate on how to define, measure and assess 'competitiveness' has taken an unexpected turn, which is easily understandable but rather unwarranted. On the one hand, in line with the approach of the project, the recent literature on trade has increasingly underlined and shown empirically that aggregate industrial performance depends strongly on firm level factors, such as size, organization, technological capacity, as well as on other financial and institutional conditions firms are confronted with in the specific environment they operate. On the other hand, the policy debate in Europe has increasingly singled out macro factors, (such as labour costs or current account dynamics), which are seen as the preponderant determinants of aggregate economic performance, while leaving other factors, if any, to the domain of structural/non-price competitiveness matters, possibly to be tackled within the proposals of the 'Europe 2020' reforms agenda.
Policy impact and the 'Competitiveness Research Network'
This view peddled by the consortium has been sympathetically received by the policy community. In this respect, the best example is probably the creation by the European Central Bank of the 'Competitiveness Research Network' (CompNet) to which EFIGE researchers have been providing key expertise based on the successful experience of the project. The fact that some of the associate partners of EFIGE also rank among the founding members of CompNet further testifies the existence of fruitful cross-fertilization between the project and the policy community. As implied by the findings of the project, CompNet starts from the observation that, from a policy perspective, competitiveness issues have been identified as root causes of the ongoing crisis and have therefore been deliberately included in the surveillance processes being established at EU/euro area and G20 level. Yet, there is still a lack of a commonly agreed unified framework that connects determinants of competitiveness with outcomes. Moreover, there are various views on and definitions of competitiveness, which tend to remain rather polarised and are rarely cross-checked.
The triggers of competitiveness
'The triggers of competitiveness' is the title of the EFIGE Cross-Country Report, which is dedicated to European cross-cutting issues that go beyond the specificities of the countries covered by the project.
Against this background, the cross-country report takes a fresh look by inquiring into the determinants of firm-level international performance, that is external competitiveness. In fact, in the competitiveness debate, it is of crucial importance to understand not only the macroeconomic challenge but also to search for the right policy response that will generate growth and exports. This can be found at the firm level. A number of new results emerge. Firm-level total factor productivity is clearly identified as a crucial determinant of growth and exports. Human capital, R&D, equity finance and performance-based incentives for employees also underpin the success of firms. Moreover, size matters and large firms typically are much better exporters than their smaller counterparts.
A number of important policy conclusions are drawn from the analysis. Central for the promotion of export growth is setting the right conditions for firms to grow and export. It is crucial to remove incentives for firms to stay small. Important factors hampering firm growth are taxes and social and labor regulation. But lack of access to finance also often limits growth. And indeed, one of the most dangerous side-effects of the current sovereign debt crisis is that the financial system in Europe is fragmenting, putting a break on credit as well as equity finance, in particular in crisis countries. Equity finance has always been weak in Europe compared to the United States and this may explain the less dynamic European corporate sector. Finally, all the standard recommendations about R&D and education are confirmed by the report. Adjustment in the euro area will require very comprehensive relative price changes. In the absence of nominal exchange rates, wage and product price inflation need to adjust to create conditions for jobs and growth. Yet, the report reminds us that lasting external competitiveness needs to be underpinned by the right policies for corporations. In this respect, microeconomic data sets and research of the kind employed in this and other EFIGE reports are crucial to define the right policy set. All too often, policy makers ignore the rich potential that microeconomic research offers them.
In a policymaking perspective, the findings from the cross-country report have several implications:
- If the objective of policy is to foster a country's competitiveness, the ultimately firm-driven nature of this process is such that aggregate measures of competitiveness are subject to a number of biases that have to be appropriately taken into account when interpreting aggregate statistics: there is no useful 'average firm' concept, rather, firms are very heterogeneous within countries and industries. As a result, rather than formulating policies in an effort to increase the competitiveness of the average firm, it is much more efficient to stimulate competitiveness by fostering the reallocation of economic activities from less to more efficient firms.
- Among the comparable firm-level measures currently available thanks to EFIGE, the single best predictor of a firm's ability to successfully operate in international markets is its total factor productivity (TFP).
- Successful international companies invest in human capital and R&D, rely on equity finance, motivate their human resources through performance-based incentives, do not necessarily loathe family ownership but do draw a line between the family owner and the firm's management, and do not see foreign capital as an intrusion but rather thrive on the synergies it creates and the international opportunities it opens up, via both imports and exports, and in general the participation in global value chains.
- Small is not beautiful per se. It is true that a significant part of employment and productivity growth comes from small firms. However, these are not any small firms. They are, instead, firms that start small and, in the process of getting bigger, become more productive and start to hire more employees. In this respect, the key question for policy aimed at small and medium-sized companies should not be how to help small firms to survive as they are, but should rather be how to help small firms adopt the right attributes that promote not only survival but also growth.
- In particular, specific incentives (both market- and government-based) should be created in the areas of innovation (e.g. tax credit schemes for R&D expenditures), finance (e.g. via the liberalisation and simplification of a cross-border pan European market for private equity and venture capital), human resources (e.g. promoting lifelong training programmes and securing an improvement in national education systems), management (e.g. via a better link between wages and productivity), and ownership (fostering the attraction of foreign investment and the participation of domestic firms in global value chains).
- More in general, the promotion of productivity growth and competitiveness can and should go beyond the traditional exercise of educated guesswork, targeting instead the specific structural aspects that make firms inclined to acquire the 'right' set of characteristics, beyond the worn-out generic mantra of 'flexibilities versus rigidities'. Such an approach, still popular in policy circles, is hardly justifiable in the era of firm-level data.
Country specificities
While cross-cutting issues are the topic of the cross-country report under the common heading of competitiveness, the seven Country Reports shed additional light on country specificities that the policy reports still highlight as important. In this respect, the country reports offer a unique overview of the opportunities and the challenges faced by the seven countries covered by the project. In so doing, they further reveal the great potential of the project's new perspective on competitiveness - based on micro evidence - as a precious complement to the traditional perspective - based on macro evidence.
In its country report Austria is depicted as a small, open economy characterised by ambitious innovation policies. In the 2000s, the country stimulated its research, technology and innovation policies as a matter of economic policy priority. To foster research and innovation activity, a variety of policies were used, including measures aimed at attracting foreign investment in R&D; it is not a coincidence that Austria is now characterised by a concentration of medium foreign enterprises. In the period 2000-2007, Austria was able to demonstrate the highest rate of change of its R&D intensity in the world (+0.63 percentage points); the corporate sector, including foreign owned enterprises, has contributed significantly to this increase. The results of these striking policies were tested for their resilience in a crisis for the first time in 2008-2009.
The analysis presented in this report is based on a wide range of information on the characteristics of firms and their specific innovation strategy provided by the EU-EFIGE/Bruegel-UniCredit Survey. While the crisis had a considerable impact on exports as prospects were gloomier than expected, the data show that Austrian firms suffered less than other countries surveyed, suggesting that a successful 'system of innovation', which includes the presence of foreign-owned businesses characterised by a high propensity for R&D and innovation, is not neutral. Also small businesses (10-49 employees) have been more able to weather the crisis when compared with other small European companies, and their success is strictly connected to their capability to invest, innovate and compete on quality.
The main policy indication that emerges from this report is the centrality of research, technology and innovation policies. For Austria, as a small country with a number of large firms, including foreign multinationals and many small- and medium-sized firms, it is important to foster innovation diffusion, whether created domestically or abroad, and to make choices that contribute to continuous technological upgrading of the economy, facilitating interaction between all the players in the innovation system.
For France, the corresponding country report also underlines the crucial importance of innovation in building a competitive manufacturing sector. Exporters are more innovative, have a greater tendency to invest in research and development, and are more likely to be certificated over the quality of their products and their production processes (see Figure 5). Hence, success in foreign markets is, before all, related to the overall performance of firms. The report also highlights the crucial role of innovation financing.
Several policy implications emerge. First, as highlighted also in the policy reports, firms' innovation over products and production processes is an important determinant of the success of domestic firms on home and foreign markets. Promoting firms' innovation propensity therefore has the potential of raising the competitiveness of the domestic production structure, as it increases the quality of goods offered by firms. Second, the establishment of vertical relations with other firms, research centres and universities is a critical determinant of domestic firms' innovation propensity. Buying an innovation can help a firm upgrade its technology within a short period of time. Third, investing in R&D is costly and requires external financial resources. When failures in credit markets occur, a public policy may be required so as to allow firms to innovate.
Average percentage change in personnel according to export share
The report goes on to identify the factors that most hampered German exporters and then looks at the means employed by firms to cope with the effects of the crisis. The main policy implication of this report is that the implemented measures of the German government to dampen the effects of the crisis worked well overall, but have failed to reach some types of firms. Exporters that were strongly affected by the crisis, for example, faced severe problems in obtaining credit. Policy instruments have to be more aptly designed in order to make them accessible to a wide range of firms in the event of a crisis.
Turning to Hungary, the corresponding country report documents the internationalisation patterns of Hungarian firms. There are two key features of Hungary that were found important to investigate. First, Hungary is a small, open economy - much more open than any other country in the sample. This materializes also in the export intensity of its firms.
Hungarian exports are heavily concentrated on few firms. These firms are mostly subsidiaries of large multinationals serving EU markets. The quality of Hungarian exports is competitive on the European markets, but this quality is mainly supported by the R&D and innovation of the parent firm. The success of this type of economy depends on how widely and deeply the supply chain is based on the domestic economy. In this respect there seems to be a great divide between firms that are able to be part of the suppliers and those which are excluded. Second, Hungary is known for its political business cycle which has been the strongest of countries that joined the European Union in the 2000s. As a result its macroeconomic policies had to move in an opposite direction when the crisis hit; fiscal and monetary tightening was necessary when most countries could rely on massive temporary relief and easing in order to contain the dire consequences on output and employment. These polices may have affected the performance of companies and represent an interesting angle on the relationship between macro policy and the response of firms.
Four policy conclusions can be drawn. First, it should be noted that firms in Hungary do not behave very differently from other EU countries in many respects. While Hungarian firms are smaller and less open to trade with countries outside Europe, export and innovation performance is not very different. Thus, Hungary may well use policy ideas from other economies such as labor market reforms in Germany. Second, Hungary serves as an export platform for some very large companies, which sell 90-100 percent of their output abroad. Making sure these companies can continue to operate is important for growth. Third, internationalisation is important for Hungarian firms and hence, policies should aim to increase the number of firms not only in exports, but imports, FDI and outsourcing as well. Hungary is lagging behind in terms of contacts with outside Europe; this should be addressed. Fourth, as a consequence of poor policy management before the crisis, fiscal policy was retracting just when it should have been there to cushion the fallout from the crisis. This caused domestic sales to fall more than in other countries and more firms suffered from the crisis. This shows that sound fiscal policy has also an option value - the potential for application in a crisis.
The country report on Italy starts from the observation that competing in a global environment requires an increasing level of 'sophistication' in firms' investment, innovation, internationalisation and organisation strategies. The report focuses on several questions on the Italian manufacturing structure. What is the comparative level of sophistication of Italian firms' strategies? We look at three areas of firm activity (internationalisation, innovation and human capital) by depicting firms' complexity, or their 'quality', through a wide spectrum of variables that capture, in our view, their intangible assets endowment. We single out several indicators of a sophisticated firm and investigate how they are related among themselves and with firm size, comparing Italian firms' performance with respect to France, Germany and Spain. Do Italian firms behave like their European competitors? Along which dimensions do they differ? Do these differences disappear when comparing firms belonging to the same size class? Is the relationship between a firm's quality and size similar across countries? Answering these questions allows us to show whether Italian firms suffer a gap in their degree of sophistication with respect to other European countries, and along which specific dimensions.
As a further step, this report investigates a potentially relevant aspect that can be a driver of firms' strategic choices: their financial structure. More complex strategies imply more elaborated financial needs. Intangible assets do not always embed physical collateral to be held as a guarantee to external financiers. First, we look at the relationship between Italian firms' financial structure and size, investigating whether small- and medium-sized firms are characterised by a different financial structure with respect to larger firms. Then, we investigate whether there is a relationship between a firm's financial structure and its sophistication, as predicted by the abovementioned set of indicators of firm quality.
The gap with the other European countries is not only driven by the Italian firms' size distribution, but also by a lower performance with respect to the main European counterparts within each size class. Also, our analysis shows that large Italian firms are characterised by a less fragile financial structure than small- and medium-sized firms, and that firms with a less fragile financial structure are more sophisticated. Our findings highlight the specific areas where Italian firms lag behind their European competitors and that should be targeted by policy intervention. At the same time, the report argues that, in order to be effective, policy intervention should pay attention to the financial and banking system's ability to assess the intangible assets of firms, which are required in the current global competition environment.
Of the large European countries, Spain has been arguably hit the hardest by the economic crisis. While the extent of the crisis is evident in many aggregate macroeconomic indicators, such as the sharp increase in unemployment and the slow recovery of GDP growth, these indicators mask systematic differences at the firm level. This country report analyses the heterogeneity of firm performance across countries, and singles out differences that set Spanish firms apart. Given the high degree of firm heterogeneity, understanding the crisis at the firm level is key to the designing of targeted policies, and thus improving the effectiveness of economic policy.
The report finds that the poor performance of Spain appears to be mainly accounted for by the relative predominance of small firms. The Spanish firms that clearly fared worse than their European neighbors are the small firms: 65.7% of small Spanish firms (10-19 employees) report decreases in their profit margin while the survey average is 52.4%. For large firms, instead, although there is a larger share of firms reporting a decrease in profit margin in Spain than the survey average, 46.6% versus 43.3%, the share of firms reporting an increase is significantly larger, 24.9% versus 18.4%. These findings suggest that policies should focus on identifying and reducing firm-size distortions that negatively affect the growth of small firms.
Finally, for the United Kingdom, the country report focuses on the impact of the financial crisis. In particular, we study the spatial dimension of the available information and provide a number of indicators of the degree of internationalisation of UK firms across regions. A key contribution of this report, which is particularly relevant to policy makers, is to provide the first firm-level analysis of the response of UK firms to the 2008-09 financial crisis. Thanks to the unique features of the project's dataset, we enrich the body of knowledge about firms and the crisis by investigating its regional dimension.
Conclusions
All in all, from the rich body of new knowledge created by EFIGE, we can draw some broader lessons for fact-based policy making in Europe and beyond.
The first lesson is a methodological one: whereas ten years ago economists and policymakers routinely discussed competitiveness on the basis of aggregate trade and investment flows, it has become unimaginable to overlook the firm-level dimension of international economic performance. Nations do not trade, it is firms that trade. This simple truth has become obvious and to speak of competitiveness without speaking of firms is now as awkward as to speak of employment without speaking of job destruction and creation. We are proud to have contributed to this intellectual and policy revolution.
Second, there is a strong and robust correlation between firm internationalisation and firm performance. Simply put, and as documented again in this report, a firm that exports tends to be also more profitable, more productive and more innovative. Again this may seem evident - but if it were to everyone, would globalisation be so disputed?
Third, the evidence collected within the framework of the project has confirmed to a remarkable extent that in different countries, firms with the same characteristics tend to behave in the same way with respect to international competition. German entrepreneurs may have a stronger propensity to export and invest abroad, but this is not what explains Germany's strong presence on international markets. Rather, it is the density of medium-sized, skill-endowed and innovative firms that explains German export performance. In this respect this report brings new evidence to the fore, showing that in comparison, the less stellar trade performances of Italy and Spain are due to the much higher density of small firms.
Fourth and consistent with the previous findings, to let domestic firms grow is one of the surest ways to improve export performance. But as demonstrated by this report, how to tear down barriers to growth is a country-specific question. Obstacles can be of different natures - they can originate in product, labor, technology and financial markets - and the binding constraints may be different from one country to another. So there is no one-size-fits-all recipe for firm growth and exports, rather each government must do its homework and identify domestic roadblocks.
Fifth, the relationship between firm characteristics and internationalisation is highly non-linear. Exports and FDI involve fixed costs and this gives rise to threshold effects. For this reason, long-distance exports and, to an even greater extent, FDI rely on a tiny group of truly global firms. In comparison to those serving the domestic market, only a minority of firms are serving even the closest neighboring market. From a policy perspective, this implies that the highest returns from public action are to be expected from initiatives that 'fatten the tail' of globally competitive firms. If this can be done without picking the winner is a question of major relevance for all governments looking for ways to improving competitiveness.
As a testimony of the project's socio-economic impact, the findings, the insight and the lessons from EFIGE have received considerable attention by the policy community. EFIGE partners have been invited to present them in high profile events at key policy institutions such the European Commission, the Bank of Italy, the Bank of Spain, the Banque de France, the OECD, the IMF, the World Bank, the WTO, the ILO, the United Nations Conference on Trade and Development (UNCTAD) and, last but not least, the European Central Bank within the CompNet framework. At the beginning of EFIGE there was a clear commitment by the partners to maintaining the momentum after the funding has finished. New far-reaching initiatives like CompNet testify the fulfilment of that initial commitment.
Potential Impact:
A. Socio-economic impact and wider societal implications
The project touches upon the interests both of the EU as a whole and of individual countries. The composition of the Associate Partners and of the Policy Advisory Board testifies to the relevance of the project in terms of its potential implications for national as well as European policy design and implementation. The central tenet is that the international performance of countries is not simply related to their pattern of sectoral competitiveness ('comparative advantage') so that its drivers must be investigated by looking at what happens at the firm level. Firm-level analysis has a very short history in international economics, both in terms of empirics and even more in terms of theory and policy. While most of what has been done so far concerns a single country, namely the US, this project provides a unique cross-country perspective on Europe.
B. Exploitation of results
Four Policy Reports have been produced under the EFIGE project. Each year, the reports summarise the main findings of the consortium, in a non-technical manner, intended for the widest possible diffusion. In order to successfully exploit the results at a policy level, each Policy Report has been completed by a Policy Brief providing concise and up-to-date analysis along with policy recommendations targeted to a policy audience. They are eight pages, easy to read, fact-based and targeted at an audience of executives and decision-makers, with an emphasis on concrete recommendations.
1st Policy Brief
Published at an early stage of the project, the first Policy Brief does not provide recommendations; rather defines the partners' strategy to successfully deliver the key messages for policy-makers, businesses, trade unions and civil society actors. It also raises the main questions to be addressed throughout the overall project:
Because it draws on concrete, individual firm-level evidence, and will lead to new insights into the determinants of performance on international markets, EFIGE research has the potential to change the way policymakers envisage competitiveness policies in the same way evidence based on individual data has changed the way they envisage labor market and welfare policies.
2nd Policy Brief
The findings presented in this Policy Report lends support to fostering structural reforms that allow firms across the board to grow and develop sophisticated technologies, skills and forms of management. It is hard to disentangle the causal link between firm characteristics and performance and international activities and we do not aim to do so at this stage. Analysis of this new data is only starting. Nonetheless, our results so far, which are mostly based on broad correlations, already suggest several areas worth deeper investigation.
1. Firm growth and consolidation, particularly of small-medium companies, could generate a considerable increase in the value of European exports. Firms in industrialized economies are less and less able to compete by cutting costs and prices. They increasingly rely on other competitive factors: quality, technology, branding and so on, which are costly to acquire. Moreover, the broadening of the global span of markets forces firms to operate in several regions, often also to produce abroad. These patterns raise the cost of global competition, often beyond the means of small firms. Consequently, structural reforms that foster firms' growth and favor their move towards sophisticated forms of management, organisation and innovation, favor export growth.
2. Advocating the growth in size of small and medium-sized enterprises does not imply that companies should all become very large. They must be large enough to carry out complex global operations, including global production. A big share of firms in the 50-250 employees category exports, serve a number of markets and have foreign production. Medium sized firms contribute considerably to export performance in most European countries.
3. Structural reforms may be required in several areas, such as labour regulation, taxation and reducing red tape. Also targeted sector-specific training and research programmes can foster export-oriented activities. Several of these measures may have a European dimension and partly be coordinated. Particularly in a phase of sluggish demand and reduced fiscal resources, we should not forget the enormous potential of the European single market as the quintessential quasi-domestic space where firms initially grow and reinforce their global competitiveness. Policy action should then aim at easing even further the movement of goods and factors within the EU, resisting calls for local measures that support firms within national boundaries.
4. Obstacles hindering firms' growth should be lifted through structural policies. But policy measures forcing aggregation and growth could be wasteful and ineffective. Industrial structures often reflect characteristics of the business environment and cannot change unless the business environment also changes. Therefore policies aimed at directly inducing changes in the industry and size composition of activities (vertical industrial policies; incentives for aggregation etc.) could likely be of little effect.
5. Global production strengthens global sales, particularly to emerging markets. Through foreign production, firms can often reduce production costs and make entry into distant and difficult markets easier for themselves. China and India are the countries where European firms most frequently have production facilities outside the EU. Policymakers may want to bear this in mind. Attempts to prevent the transfer of production abroad could severely hinder export growth. At the same time such measures would weaken the global competitiveness of national firms, with long-term negative effects on domestic employment.
3rd Policy Brief
The third Policy Brief is based on the EFIGE Policy Report 'The Impact of the Crisis on the European Firms'. This policy report aims at analysing how the Great Recession impacted European firms. Policy implications and recommendations of the report are summarized by the Policy Brief as follows:
The findings presented in this Policy Report lend support to:
1. Heterogeneity of firms: Policymakers can learn from studying the experience of firms that were relatively successful in weathering the crisis. This heterogeneity also suggests that one-size-fits-all policies might be ineffective. Understanding the patterns emerging from this heterogeneity may enable governments to better target spending and regulations.
2. Short-time work: While short-time work in Europe may be the right instrument to dampen the effect of crises on employment, this report found no support for this. Moreover, our results suggest that temporary workers were fired first, with firms with larger pools of temporary workers actually shedding more employees. In terms of the labor market, we found that skill-composition seems to matter more, as firms with less-skilled workers had to lose more jobs than those with more white-collar and skilled blue-collar labor. Firms prioritised the retention of human capital embodied in skilled labor during the crisis.
3. Network position of firms: Dominant firms centrally placed in the technology, trade and ownership network fared better. Hence, in crises, policy should focus on helping stabilise firms that are in weaker positions, that are owned by foreign firms and producing less skill-intensive and/or specific products for large customers. This raises an important policy trade-off. On the one hand, while export-oriented strategies may improve competitiveness, they also bring about greater exposure to foreign crises. Accessing foreign markets may help firms attain bigger scale, improve productivity or upgrade their products in stable times, but such firms, sectors and countries will also be more vulnerable to crises. The flip side of the same trade-off is that outsourcing to other countries has distinct stabilisation benefits. While many see competition by lower-wage countries as a threat, it should also be clear that these supply chain linkages give greater flexibility when responding to a demand shock. These additional gains from trade for rich countries imply that protectionist instincts during the crisis may be misguided.
4. Credit and finance: Anecdotal evidence suggested that as banks collapsed, trade credit dried up and hence exports fell more sharply than output. Yet, earlier studies found mixed evidence regarding the effect of trade finance. This report falls in line with other papers, finding no convincing result. However, it confirms the importance of pre-crisis external constraints, and adds that a greater reliance on external finance had a negative impact on sales during the crisis. As a further contribution, the report detected that the financial crises affected firms not through major international banks but through smaller and financially weaker local banks. Of course, this may have been a result of government intervention shoring up the capital positions of some large and important banks. Whichever is the case, strengthening local banks may help firms to cope with the consequences of crises.
5. Fiscal policy: While fiscal policy was the main policy tool used by governments, with sizeable new government purchases from the private sector, evidence on the role of the state is scant. The report confirms the role of the general fiscal policy stance and the role of public-sector orders from companies in helping mitigate declining sales.
4th Policy Brief
Policy implications and recommendations of the report are summarized by the Policy Brief as follows:
The findings presented in the Policy Report lend support to:
1. Policies to improve firm growth: If policymakers want to increase firm growth, how does action to reduce trade costs compare in terms of effectiveness to reductions in innovation costs or lower labor taxes? To answer this question, the policy report estimates the effect on firm growth and the firm size distribution of a one percent reduction in the different barriers (innovation costs, trade costs and taxes). It argues that, in all countries, with the exception of Austria, reducing innovation costs has a substantially greater impact than reducing trade costs. On average, a one percent reduction in innovation costs is predicted to lead to an approximately 1.2 percent increase in firm growth, whereas a one percent drop in trade cost would increase firm growth by about 0.6 percent. This implies that policymakers, who need to find a trade-off between the difficulty of reducing certain barriers and the potential returns from doing so, would achieve a much greater impact by focusing on reducing the barriers to innovation.
2. Policies to improve the firm size distribution: Large firms are key to a country's economic performance. Policymakers therefore need to know which policies are more effective in increasing the share of large firms in an economy. In the EFIGE survey, 10.7 percent of German firms reported more than 250 employees. Reducing the innovation cost by 5 percent would increase that share to 12.6 percent, compared to an increase to 11.0 percent when reducing the trade cost by 5 percent.
3. The effect of the crisis: Europe is in the midst of the most severe economic crisis since the Great Depression. Fiscal austerity programmes are biting hard. The breakup of the euro area, once considered a far-off doomsday scenario, is becoming a real possibility. Unfortunately, few models are able to shed light on the economic impact of these shocks. The framework developed in this policy report is well equipped to analyse these questions. The Policy Report estimates the effect of a 20 percent drop in government expenditure on R&D in Spain. Although this drop only amounts to 0.1 percent of GDP, the model predicts it will lead to a welfare drop in terms of consumption of 2.7 percent. Assuming that trade would drop by 10 percent, the model predicts that abandoning the common currency would lead to a welfare drop in consumption of between 7 percent and 15 percent. Larger countries, such as Germany, have larger domestic markets, and would lose less (around 7 percent), compared to smaller countries, such as Austria, which rely more on international trade, and would lose more (around 15 percent). These estimates, already substantial, should be viewed as a lower bound, since they only capture the negative effect the breakup of the euro area would have on trade flows, thus ignoring many other factors.
Research Outcomes
As the research activity is successfully coming to its conclusion along the planned action lines, it is time to draw lessons from its achievements.
As highlighted by Jean Pisani-Ferry, Bruegel's Director, in the foreword to the recently released fourth and last EFIGE Policy Report on Breaking down the barriers to firm growth in Europe, the first lesson is a methodological one: whereas ten years ago economists and policymakers were routinely discussing competitiveness on the basis of aggregate trade and investment flows, it has become unimaginable to overlook the firm-level dimension of international economic performance. Nations do not trade, it is firms that trade. This simple truth has become obvious and to speak of competitiveness without speaking of firms it is by now as awkward as to speak of employment without speaking of job destruction and creation. EFIGE is proud to have contributed to this intellectual and policy revolution.
Second, there is a strong and robust correlation between firm internationalization and firm performance. Simply put, a firm that exports tends to be also more profitable, more productive and more innovative. Again this may look evident - but if it were to everyone, would globalization be so disputed?
Third, the evidence collected within the framework of the project has confirmed to a remarkable extent that across countries, firms with the same characteristics tend to behave in the same way vis-a-vis international competition. German entrepreneurs may have a stronger propensity to export and invest abroad, but this is not what explains Germany's strong presence on international markets. Rather, it is the density of medium sized, skill-endowed and innovative firms that explains German export performance. In this respect EFIGE has brought new evidence to the fore, showing that in comparison, the less stellar trade performance of Italy and Spain is due to the much higher density of small firms.
Fourth and consistent with the previous findings, to let domestic firms grow is one of the surest ways to improve export performance. But as evidenced by EFIGE, how to tear down barriers to growth is a country specific question. Obstacles can be of different natures - they can originate in product, labor, technology and financial markets - and the binding constraints may be different from one country to another. So there is no one-size-fits-all recipe to firm growth and export, rather each government must do its homework and identify domestic roadblocks.
Fifth, the relationship between firm characteristics and internationalisation is highly non-linear. Export and FDI involve fixed costs and this gives rise to threshold effects. For this reason, long-distance exports and even more FDI rely on a tiny group of truly global firms, and the passage from serving the domestic market to serving the neighboring ones is also made by a minority of firms only. From a policy perspective, this implies that the highest returns from public action are to be expected from initiatives that 'fatten the tail' of globally competitive firms. Whether this can be done without picking the winner is a question of major relevance for all governments looking for ways to improving competitiveness.
Publications
The results and findings of the EFIGE project have been regularly published in the form of scientific working papers. Since the beginning of the project, 62 scientific working papers have been produced. A number of them have been published in, or are currently under revision and resubmission for, some of the top economic journals, such as Econometrica, the Quarterly Journal of Economics, the Review of Economic Studies, the American Economic Review (revise and resubmit), the Journal of Political Economy (revise and resubmit), International Economic Review, the Review of Economics and Statistics, European Economic Review, the Journal of International Economics, the Journal of Regional Science, the International Journal of Industrial Organization, Regional Science and Urban Economics, etc. In addition, four Policy Reports, summarising the policy findings of the groups have been published. Finally, using the EFIGE dataset, 7 Country Reports and 1 Cross-Country Report has been produced.
Main Dissemination Activities
1. Events
The network of EFIGE teams had frequent and regular meetings intended to provide direct interactions with the academic community on the results of the research. Another key goal of the project was the diffusion of knowledge to and the collection of feedback from a wider (non-academic) audience.
In total, 4 Policy Conferences and Scientific Workshops were held:
-03-04.06.2009 First Policy Conference and Scientific Workshop, Madrid
-18-19.06.2010 Second Policy Conference and Scientific Workshop, Rome
-08-09.06.2011 Third Policy Conference and Scientific Workshop, Nottingham
-31.05-02.06.2012 Fourth Third Policy Conference and Scientific Workshop, Barcelona
On top of those key events, the EFIGE consortium also either organised or participated in 77 disseminations activities:
-47 Presentations
-15 Conferences
-11 Workshops
-3 Articles Published in the Popular Press (VoxEu)
For the presentations, conferences and workshops the average audience size was 50 participants, the main countries addressed were Europe and the United States and the type of audience was mainly the Scientific Community but included Policy Makers, Industry, Civil Society and Medias.
2. Publications
4 Policy Reports aiming at going beyond technical analyses to make detailed recommendations to policymakers were produced:
-Of markets,products and prices - Lionel Fontagne, Thierry Mayer and Gianmarco Ottaviano, February 2009
-The global operations of European firms - The second EFIGE policy report - Daniel Horgos, Daniela Maggioni, Fabiano Schivardi, Giorgio Barba Navaretti, Matteo Bugamelli and Carlo Altomonte, Jul y 2011
-Still standing: how European firms weathered the crisis - The third EFIGE policy report- Gábor Bekes, Laszlo Halpern, Miklos Koren and Balazs Murakozy, December 2011
-Breaking down the barriers to firm growth in Europe: The fourth EFIGE policy report - by Loris Rubini, Klaus Desmet, Facundo Piguillem and Aránzazu Crespo , August 2012
The Policy Reports were summarised into 4 Policy Briefs to deliver concise and concrete policy recommendations.
The EFIGE Consortium also produced 7 Country Reports and a Cross-Country Report:
-The triggers of competitiveness: The EFIGE cross-country report - July 2012
-AUSTRIA - Austria Felix: The impact of the crisis on a small open economy - February 2012
-FRANCE - How does innovation affect the internationalisation pattern of firms? - February 2012
-GERMANY - How did exporting firms cope with the crisis? - February 2012
-HUNGARY - How did exporting firms cope with the crisis? - February 2012
-ITALY - Investment in intangible assets and level of sophistication: the role of Italian firms' financial structure - February 2012
-SPAIN - Did Spanish firms perform worse in the wake of the 2008 crisis? - February 2012
-UNITED KINGDOM - UK firms, space and the crisis - February 2012
62 EFIGE Working Papers were written and the EFIGE partners published 31 articles in scientific reviews and journals.
3. Integrated Communication Strategy
Project website: http://www.efige.org
