Firms who export benefit from a positive feedback loop that boosts their productivity – and which in turn makes them better prepared to trade internationally. That’s one conclusion from a new feasibility study published by the London School of Economics (LSE) for the government.
The learning process
While the authors of the study note that productive firms are already more likely to export as they’re better able to manage market entry costs, they also note that firms improve their productivity when they begin exporting, through exposure to other ways of working:
“UK firms can learn from international clients and competitors and catch up with more productive international peers, especially when exporting to advanced economies.”
If the government seeks to boost the rate at which UK firms export, it should pursue a policy of improving their productivity, particularly of small-to-medium enterprises (SME), the report argues.
The FTA effect
There is a need for a “combined effort” across government departments to create the environment for improved productivity.
One crucial element in this effort should be a focus on providing a stable investment environment, which can be helped by “locking in long-term access to key markets” through trade agreements.
Importance of import
It’s not just exporting that boosts productivity, the authors say, but importing too. By accessing inputs not available in their home country, firms can cut costs, “optimise production processes” and even develop new products.
The report makes the case for lowering tariffs on goods imported into the UK, so that firms can benefit from this process.
Engaging in both import and export provides an even bigger boost, and studies cited by the authors of the report suggest firms that do one are much more likely to do the other, owing to the resources already invested in entering the world of international trade.
Productivity improvements from trading internationally range from 3% to 22%, with a “best central estimate” of 6.7%.
Data deficit
While there is strong data in support of boosted productivity at the level of individual firms who import and export, there is “a lack of evidence” on trade’s role in producing major productivity gains at the national or sectoral level.
Regional improvements are also difficult to ascertain owing to an “absence of research”, the authors say, and call it a “potential area of future study”.
There remain “significant shortcomings” in data on “firm-level trade flows” too, preventing assessment on a large number of UK firms’ productivity relative to trade. The report recommends further research using matched firm-trade data.
Resilience
The paper also calls for a strengthening of firms’ supply chain resilience, as well as “robust systems” for dealing with supply chain shocks, such as the Covid-19 pandemic.
It recommends that firms hold “a sufficient number of inventories to allow the weathering” of these events in order to safeguard the productivity gains of sustained international trade.
'Facts are clear'
Marco Forgione, director general of the Institute of Export and International Trade (IOE&IT), spoke on the benefits to firms of trade yesterday in light of the Conservative Party Conference speech by business and trade secretary Kemi Badenoch. He said:
“The facts are clear. Businesses which trade internationally are more resilient, more sustainable, employ more people and are more profitable.
He echoed the suggestion of the LSE report that stability and support are needed for firms to benefit from international trade – and to pass that benefit on:
“To ensure that more British businesses trade overseas, and bring prosperity to communities across the UK, support and guidance is needed to navigate what is set to be a pivotal period in our history.”