What Makes Exporters Tick

Andrew Bernard makes the case that big, productive exporters—not entrepreneurial newcomers—hold the key to U.S. export growth.

It is an article of faith that small and midsize enterprises offer the quickest route to job cre- ation and national prosperity. Accordingly, President Obama’s National Export Initiative, which seeks to double the dollar value of U.S. exports by 2015, includes special support for such companies seeking to become exporters. Considering the centuries of U.S. entrepreneurial success, it is hard—and politically risky—to argue against the small-business creed. But are they up to the export job? Will investment in creating new, small exporters pay off with big increases in exports?

Andrew Bernard does not think so.

“The focus on helping small and midsize firms become exporters is misguided,” he says. “An increase of the magnitude the administration hopes for can only be driven by expansion of the activities of the largest firms that are currently selling overseas. We could double the number of American firms that export and only marginally increase the value of exports.”

Bernard, who is Jack Byrne Professor of International Economics at Tuck and director of the school’s Center for International Business, bases his opinion on research that investigates exports at the level of firms and products, not from the traditional focus on nations and industries. He and his colleagues have used newly-available data to link international trade transactions with performance measures such as size, productivity, capital intensity, wages, and the like.

“We have been able to create a far more complete picture of exporters than was previously possible,” says Bernard. “We have connected the dots from firm characteristics to rates of success and survival. We can now understand the substantial variation within industries and the influence of exporting on economic prosperity.”

The few, the proud ... the exporters

For all the press it receives, exporting is an exceedingly rare activity in the United States. Just four percent of U.S. firms are exporters, and only the top 10 percent of those account for 96 percent of all the nation’s exports. On the other hand, more than a third of U.S. companies in certain capital- and skill-intensive industries—computer, electronic, and electrical equipment manufacturing and chemical manufacturing—are exporters. This is consistent with the traditional concepts of international trade: who exports what to whom depends on comparative advantage and factor abundance (such as the presence or lack of capital, skilled labor, cheap labor, natural resources, low-cost energy, or infrastructure).

In the 1980s, economists began to acknowledge that a large share of international trade has little to do with comparative advantage; it takes place between partners that are relatively similar, with similar industries and production capabilities. “Bear in mind,” says Bernard, “that Germany and the United States exchange automobiles.” It became clear that economies of scale and a consumer preference for variety spur two-way trade between countries and industries that are essentially identical. So gains for exporters and importers accrue not just from differences in opportunity costs (the traditional view) but from the wider array of products and lower costs that trade makes available to consumers.

New data, new insight

When the U.S. Census and Customs bureaus began to collect and distribute firm-level export data, researchers gained a critical vantage to carry out more detailed investigations. These data include the identity of the exporter, product classification (five-digit SIC codes), quantity and value of export, transportation mode, and destination country. They allow researchers to compare the firms’ extensive margins—the number of products they trade and the number of export destinations—with their intensive margins—the value of trade per country. But there was no immediate “Aha!” moment for Bernard and his collaborators in which they understood the importance of being able to see how exporters adapt to changing conditions. “Frankly, it was like watching one of those old Polaroid photos develop in front of your eyes,” says Bernard. “The possibilities inherent in these new data became sharper and more obvious over time.”

Big, productive, and with lots to sell

With this new tool in hand, the researchers have made several important discoveries. First, exporters are different from other companies in ways that help them succeed, and these differences apparently exist before companies begin to export. “This is not a “learning-by-exporting” situation,” says Bernard. The evidence shows that exporters are significantly larger than non-exporters in both workforce and product shipments, even if they ship a relatively small share of their total product abroad. They pay higher wages, are more capital- and skill-intensive, and grow substantially faster in employment and output than non-exporters.

Exporters are also significantly more productive as measured by value added per worker. “Every study confirms that high productivity precedes entry into export markets,” says Bernard. “It is clear that only the most productive firms are able to afford the cost of entry and remain profitable.” Additionally, when trade policy barriers fall or transportation costs decline, higher-productivity exporting firms grow while lower-productivity firms are likely to fail.

Successful exporters have relatively large product arrays and frequently switch the products they export. The most productive firms manufacture the largest range of products and earn greater revenue, helping them cover fixed costs of new markets and products. Bernard’s research shows that over any five-year period, 80 percent of the growth in U.S. exports comes from these existing exporters. “With trade being extremely concentrated in the largest multinational firms,” he says, “the big will have to get bigger to meet the administration’s export goals.”

Maybe someday

The next Microsoft, Boeing, or General Electric may be working its way from the lab to the marketplace as you read this. However, attaining the short-term goal of doubling U.S. exports will have to come from existing champions. “The United States is no different from any other country: we are all in love with the idea of the small, entrepreneurial firm. But the truth is that the backbone of our exports is in the big firms. For the short term, investing in their success will ensure ours.”

A B Bernard, S J Redding, P K Schott, “Multiple- Product Firms and Product Switching,” American Economic Review, 2010

A B Bernard, J B Jensen, S J Redding, P K Schott, “The Margins of U.S. Trade,” American Economic
Review, 2009

A B Bernard, J B Jensen, P K Schott, “Importers, Exporters and Multinationals: A Portrait of Firms in the U.S. That Trade Goods,” book chapter, 2007

A B Bernard, J B Jensen, S J Redding, P K Schott, “Firms in International Trade,” Journal of
Economic Perspectives, 2007