A European report says that there is a striking consistency in the findings across the countries researched in terms of the features of European firms that compete in international markets; the firms involved in international activities are few in number, bigger and more productive than other firms. Only a handful of firms account for the bulk of aggregate exports and foreign direct investment (FDI).

The report, The Happy Few: The internationalisation of European firms, published by the Bruegal think-tank, says firstly, international competition triggers a selection process where more productive firms replace less productive firms, which benefits countries’ productivity, GDP and wages. Secondly, what matters most for a country’s trade performance is how many firms engage in export, not the average amount exported per firm. Today governments put a lot of effort into promoting already big exporters to new markets. The findings in this report show that trade missions do not necessarily improve trade, policies to increase the number of firms competing internationally, by lowering barriers to export and fostering performance in terms of employment and productivity, are more important. Finally, small trade costs therefore matter since they reduce the number of exporters. Policies like the single market, that lower trade costs and favour access to export, are thereby beneficial for productivity and wages.

An interesting example of the importance of the firm-level data analysis is the comparison between France and Germany. The greatest contribution to German exports comes from firms exporting between 50% and 90% of their turnover. In France on the contrary a larger contribution to exports comes from either firms exporting from 10% to 50% of their production/turnover or entirely globalised firms which are exporting more than 90% of their turnover. These new data support previous research showing that one of the strengths of German industrial structure compared to France lies in the larger set of medium-size firms heavily involved in exporting.

Gianmarco Ottaviano, economics professor at the University of Bologna and co-author of the report, says: “If you look at the performance of Germany and France in exports you see that Germany is doing much better. But this better performance is driven by the medium-sized firms.”

The report recommends that governments help companies expand by lowering barriers to entry and cutting administrative costs. The authors say a lack of financing also restricts some European companies from developing. “If Bill Gates were Italian, Microsoft would not exist,” Ottaviano says.

The authors suggest these constraints mean European companies are not as good as their US counterparts at reallocating labour and capital resources from failing to expanding companies. European governments need to inject greater competition into their domestic industries to increase efficiency and export effectiveness.

“In the US, firms are created and, if they are good, they survive and grow. If not, they shut down and exit. In Europe you have a forest of small companies that simply survive and do not exit, and absorb resources that could be better deployed elsewhere,” Ottaviano says. “I have the feeling that there is some sort of general consensus in Europe that these issues are important and this is the way we will move.”

Figure 5: The rising foreign ownership of European exporters

The report gives six clear policy proposals:

1. Promote intra-industry competition

Trade and FDI opening triggers a selection process whereby the most productive firms substitute the least productive ones within sectors. This is good for productivity, GDP and wages even when it does not lead to sectoral specialisations.

2. Increase the number of exporters

What matters most for a country’s trade and FDI performance is first of all how many of its firms engage in export and FDI. So governments should focus on policies that broaden the export base.

3. Forget the incumbent superstars

To broaden the export base the existing superstar exporters and multinationals are less important. Instead of travelling far away with superstars, heads of government should rather work on lowering barriers to export and FDI.

4. Nurture the superstars of the future

Governments should not only try to have more exporters and multinationals but should also create the conditions for small exporters to grow.

5. Keep up the fight against small trade costs

Small (fixed) costs of internationalisation matter because they reduce the number of exporters.

6. Assess the export and FDI potential of your industries

Some industries are more likely than others to expand the numbers of exporters and FDI-makers in response to improved policy conditions. Hence, governments should focus their efforts on industries which feature a large unexploited export and FDI potential.

In 2006 research centres from different European countries created a network under the coordination of Bruegel and CEPR (Centre for Economic Policy Research). The aim of the project is to work on policy-relevant questions that are best treated using firm-level trade and FDI data: What are the features of European firms that successfully compete in international markets? What policies can further foster their performance? What policies can promote the participation of other European firms that are currently excluded from international markets? How can European firms best cope with the adjustment required by globalisation? What policies can smooth that adjustment?