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Exporting Makes British Firms More Productive

The experience of beginning to export to foreign markets makes British firms more productive, according to new research by Professor David Greenaway and Dr Richard Kneller, published in the February 2007 issue of the Economic Journal. They call on the government to find ways to encourage exporting without the use of subsidies.
Professor Greenaway says:

''The evidence shows that when they compete with overseas rivals on foreign turf, British businesses learn to sharpen up their acts and become more competitive.''

''Rubbing up against different kinds of companies teaches them to make things better, organise themselves better and adopt best practice management and manufacturing techniques.''

The report, which draws together research from all over the world, shows that firms have to raise productivity even before they try to export in order to help generate the capital required to venture overseas.

Professor Greenaway says:

''Entering export markets costs money – market research has to be done, existing products have to be modified and new distribution networks set up.''

The research suggests that many firms which could benefit from international exposure, are likely to be put off by the costs incurred, and that governments can improve the likelihood of firms exporting by offering help with things like market research, and arranging meetings with clients, authorities and overseas experts.

It also suggests that firms with export ambitions consciously improve their productivity with the international market in mind and that simply by encouraging firms to think about exporting, Governments may help set this train in motion.

In addition, when firms export, it helps raise the productivity of the whole industry, claims Professor Greenaway:

''Exporting increases profits for firms, which induces the entry of new firms to the market, driving out less efficient competitors. At the same time, exporting allows the most productive firms to expand and this causes less productive firms to contract. The combination of the two raises average industry productivity.''

''The Department for Trade and Industry estimates that in some industries, the best firms are eight times more efficient than the worst firms. Anything that increases productivity is good for economic growth, and it is clear from the large amount of recent research that encouraging firms to start exporting leads to increased productivity.''

''The challenge for governments is to find ways of doing this without subsidising firms. Subsidies tend to soften up an organisation rather than make it tougher.'' 

''Firm Heterogeneity, Exporting and Foreign Direct Investment'' by David Greenaway and Richard Kneller is published in the February 2007 issue of the Economic Journal.