Size matters: the global operations of European firms

Gianmarco Ottaviano interviewed by Viv Davies, 27 August 2010

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<p><span class="Apple-style-span" style="font-family: Verdana, Arial, Helvetica, sans-serif; font-size: 12px; border-collapse: collapse; color: rgb(17, 17, 17); line-height: 19px; -webkit-border-horizontal-spacing: 1px; -webkit-border-vertical-spacing: 1px; ">
<p style="padding-top: 0px; padding-right: 0px; padding-bottom: 0.5em; padding-left: 0px; margin-top: 0px; margin-right: 0px; margin-bottom: 0px; margin-left: 0px; "><em>Viv Davies interviews Gianmarco Ottaviano for Vox</em></p>
<p style="padding-top: 0px; padding-right: 0px; padding-bottom: 0.5em; padding-left: 0px; margin-top: 0px; margin-right: 0px; margin-bottom: 0px; margin-left: 0px; "><em>August 2010</em></p>
<p style="padding-top: 0px; padding-right: 0px; padding-bottom: 0.5em; padding-left: 0px; margin-top: 0px; margin-right: 0px; margin-bottom: 0px; margin-left: 0px; "><em>Transcription of an VoxEU audio interview []</em></p>
<p><strong>Viv Davies:</strong> Hello, and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I'm Viv Davies from CEPR. It's the 19th of June, 2010, and I'm in Rome at CEPR's annual European Research Workshop in International Trade which is being held jointly with the EFIGE scientific workshop and policy conference. I'm talking to Professor Gianmarco Ottaviano about a recent policy paper he co authored on the global operations of European firms. I began by asking Gianmarco to explain what the paper was about.</p>
<p><strong>Gianmarco Ottaviano:</strong> OK, this is a paper that is part of an ambitious project on the European Firms in a Global Economy, and it is being funded by the European Commission. And it's the first time that we have a clear view of how European firms operate in different markets through a comprehensive survey across seven of our European countries. It is a project that involves several research centers in Europe, possibly the top in their field, and also several institutions, central banks, and the OECD. Well, the purpose of this database is really to get a view of how different countries are operating around the world and what is their success in these operations.</p>
<p>And what we find is that there is a lot of asymmetry, a lot of heterogeneity in the way firms behave, but most of all in the way they perform in international markets. This means that, for example, we see that German firms are outperforming other firms along several dimensions, and this is clearly what is bringing their overall performance, the overall performance of Germany ahead of the pack of other countries.</p>
<p>But the key point of this research based on firm level data is that there is something that is not really understood, and has not been really understood so far because of the lack of information, or if you want, a priori, the debate among policymakers and the business community has been shaped.</p>
<p>So when we think about competition internationally, typically we think about countries that are competing, or possibly sectors that are competing, but nations do not compete. It's actually nations do not produce, do not trade, do not compete. It is firms that produce, trade and compete. And the same is true for sectors. It is not sectors that produce, trade, or compete, but it is firms that produce, trade, and compete.</p>
<p>This way this seems like a very simple truth, but this very simple truth makes it clear that understanding the firm level effects is essential to good policymaking. And some dimensions are really driving at the micro level the macro performance of countries.</p>
<p>For example, what comes out is that exporters are typically very different from other firms, or firms that are not active in international markets. They are better along several dimensions, and they're better in terms of productivity, typically also in terms of quality. They tend to be better in innovation, and they tend to hire a workforce that is more qualified.</p>
<p>But most of all, they're bigger than other firms. So size tends to be important and tends to be important in a somewhat sophisticated way.</p>
<p><strong>Viv:</strong> So size matters. Why should size matter? I mean isn't the quality of the product more important than the size of the firm?</p>
<p><strong>Gianmarco:</strong> So size per se matters not simply because you have to be big. I mean the thing is more sophisticated than that. Being big helps because substantial fixed costs on international operations, which means that if you have to set up...well, if you have to gather information, if you have to search for customers, if you have to reach distant markets, then there are substantial fixed costs that only firms that are big enough, meaning they're able to generate enough turnover, are able to cope with.</p>
<p>And it is not only exporting that makes size important. Even more, producing abroad makes size important. So if you look at these firms, those who are active in international markets through production, through foreign direct investment, they tend to be bigger, and as I said before, better along several dimensions than other firms. In particular, they are better than firms that simply export, but firms that simply export, they are better than firms that are not exporting at all.</p>
<p>Of course this depends on products. Some products are simply non tradable, and so you shouldn't expect this sort of ranking to apply to all sectors. And also you should not expect this ranking to apply to all sectors because there are some product specificities that allow firms in specific sectors to become world leaders even if they're not that big.</p>
<p>So medium sized firms, we see they are market leaders in several niche markets but provided it is indeed a niche market. And so there seems to be these two ways towards competitiveness for firms in global markets.</p>
<p>One is, you grow, you're big, and you can essentially compete in all markets you choose, or you go for quality, you go for innovation, you go for niche markets, and then you can become a leader in your niche and still be very competitive in your niche without being too big or hugely sized.</p>
<p><strong>Viv:</strong> So what are the real policy implications for the study? I mean what are the issues that various government departments around Europe should be thinking about and picking up on? What's the message for them?</p>
<p><strong>Gianmarco:</strong> So first a caveat is in order, meaning that we have gathered this data through a long process, very detailed, very accurate, statistically solid, and this has taken us a lot of time, meaning that we've started with a questionnaire on which the survey is based. This has been created by a pool of top economists in the field, both through the partnerships that are in this project, but also through the scientific advisory board that is part of the project.</p>
<p>The same time this has been shaped by interaction with the policy advisory board composed by leaders in policymaking and in the business community and this has taken some time. Then we went through this data gathering through a professional data collector, and we just received the full data set.</p>
<p>So this publication we're talking about is the first based on this data set that has been given to us just at the end of May.</p>
<p>This means that more than telling now what are the things that policymakers or government should be doing, what we are able to tell is we're probably--we have to search and how to exploit this study to shed light on this issues that has to be searched.</p>
<p>So the crisis has brought policy action to the forefront. I mean for a while we thought that the markets could work on their own, and now government see a bigger order, bigger responsibility, if you want, for their actions.</p>
<p>And while governments are trying to find ways to help the economy and the business community out of the crisis, old ghosts are materializing again, so we start...we see more and more talks about sectoral policies, sectoral interventions, and picking the winner approaches to policymaking.</p>
<p>And these are things that have not worked in the past and probably will not work in the future. And indeed what seems to come out from the study of this firm level information is that sectoral policies seems to be much less important than horizontal structural policies promoting innovation cooperating in organizational change.</p>
<p>In other words, rather than trying to fix problems or issues that are sector-specific, the priority should be given to fixing problems that are horizontal across sectors and so are in some way creating barriers to firms in terms of innovation, again, quite updating the organizational change.</p>
<p><strong>Viv:</strong> So the study you've undertaken is a component of a much larger collaborative project that's being undertaken by a number of European research institutions, and it extends over several years. What's next for the project? Where do you expect to take it from here?</p>
<p><strong>Gianmarco:</strong> So indeed, this study is just the first product of a much bigger project that is called EFIGE, meaning &quot;European Firms in a Global Economy.&quot; Subtitle is &quot;Internal Policies for External Competitiveness.&quot; This is a project, a large scale project financed by the European Commission under the Seventh Framework Programme. And this Programme, I mean this Seventh Framework is the EU chief instrument used for funding research that will go on, well starting 2007, and will go on until 2013.</p>
<p>So EFIGE, European Firms in a Global Economy, has several partners that are participants into the project. Some of them are leading research centers around Europe. Others are big institutions like the Bank of Belgium, the Bank of Spain, the Bank of France, the Bundesbank, the Bank of Italy, the OECD. We have a private partner, which is UniCredit, the largest Italian bank, and CEPR is part of this big project coordinated by Bruegel, a think tank in Brussels.</p>
<p>The main output, or if you want, intermediate output, of this project has been the creation of a firm level data set across the biggest European markets, and a couple of smaller markets and this dataset that collects information about the global operations of Europeans firms, but not only that, also information about the local operations.</p>
<p>And this type of information is not available in standard balance sheets, and that is why the service is being created in a way that the new information arising from the survey will be matched with balance sheet information. So the idea here is really to have the instrument, the data set, to portray the full picture of Europeans firms and their international competitiveness.</p>
<p>Where the project will go from here.I mean it's a complex project. There would be scientific output. There has been already a lot of scientific output because the topics and the idea that you should get into firm level data to see, to understand how the aggregate economy works is an idea that is at the frontier of current research into international economics.</p>
<p>And this means this the output of this project is going to be at the frontier of scientific research. At the same time, the interest of the European Commission and all the institutional partners is to get new ideas, new insights, that are able to shape the policy interaction between the business community, the academic community, and the policymakers.</p>
<p>And so together with this scientific output, there is going to be a policy output. The study that has just been presented is probably the first output of this effort, and reports will come in the next years addressing different bottlenecks that are preventing the full exploitation of the competitiveness of European firms.</p>
<p>At the same time, this policy output will be linked to important policy events. And the reason is that the project is being shaped by the interaction and engagement of stakeholders from the business community, the policy community, and the academic community.</p>
<p>And two significant events have already taken place in Spain hosted by the Bank of Spain, and in Italy also by the Bank of Italy. And these events have really brought together business, policy, and academic communities.</p>
<p>Next year a similar event will take place in the UK, and we hope to engage the UK government and business community in helping to further develop the policy recommendations and the policy insights that are coming out from this large scale project precisely because it is a common effort, not only of academics, but of business leaders and leading policymakers to use this new available information in terms of data sets to shape the future competitiveness of European firms.</p>
<p><strong>Viv:</strong> Gianmarco, thank you very much for talking to us today. I look forward to hearing the policy results of the project and how it advances in the future. Thanks very much indeed.</p>
<p><strong>Gianmarco:</strong> And thank you very much for this interview.</p>
<p><strong>Viv:</strong> Thank you.</p>

Topics:  Industrial organisation

Tags:  FDI, outsourcing, firm size, European firms

The policy paper ‘The Global Operations of European Firms’ (Navaretti, Bugamelli, Ottaviano, Schivardi) can be downloaded here.

Professor of Economics, Bocconi University; and CEPR Research Fellow


CEPR Policy Research