Globalisation , Productivity and Technology Research Paper 2006 / 11 Overseas Trading Costs and Firm Export Performance

The recent micro economic literature concerning exports has highlighted the importance of firms characteristics and trade costs for export decisions. Although the presence of trade costs (i.e. sunk and variable costs) are essential to describe the different export choices firms with different level of productivity make, little is known about them. The previous literature has concentrated mainly on the tariff barriers exporting firms face. The aim of this study is to provide evidence on a different aspect of trade costs, those of overseas trading costs. Firstly, we model theoretically the effect of a reduction in the cost of doing business in foreign countries. Secondly, using a data set of UK manufacturing firms we test these predictions. Controlling for firm and industry level covariates we find that: 1) improvement in the business environment of foreign countries led to an increase in the export intensity of established exporters rather than additional export market entry; 2) the change in exports was almost exclusively explained by the reform took place within Europe; 3) multinationals responded disproportionately to these changes; 4) exports responded most to changes in the rules governing ownership, labour market regulation and international capital markets. JEL classification: D24 F14, F23