Innovation, exports and technical efficiency

What are the effects of the size of the market in which a firm operates on the efficiency and productivity of the firm? According to a new working paper by M. Ángeles Díaz-Mayans and Rosario Sánchez-Pérez those Spanish firms involved in exporting, and thus facing a market much larger than just the local market, are more efficient and productive.

The abstract of the paper reads,

This paper analyses the relationship between exports, innovative activities and size and their effect over firms’ technical efficiency and then over their productivity. The analysis takes, also, into account other variables that could affect productivity as industrial sector, or firms’ financial conditions. We use a micro panel data set of Spanish manufacturing firms, during the period 2004–2009, to simultaneously estimate a stochastic frontier production function and the inefficiency determinants. The data source is published in the Spanish Industrial Survey on Business Strategies (Encuesta sobre Estrategias Empresariales, ESEE), collected by Fundación SEPI. Our results show that exporting firms are more efficient than non-exporting firms; and that small and medium-sized firms’ tent to be more efficient when they focus on international markets.

An obvious question this gives raise to is, Why? From the conclusion of the paper,

The inefficiency determinants can be due to environmental or firm specific factors. Here we focus on these firms specific factors to provide an explanation to the differences in technical inefficiency across Spanish manufacturing firms. Inefficiency tends to be smaller for firms with a higher ratio of gross investment over capital. Firms that account for this kind of investment become more competitive as a consequence of having a higher efficiency in their production process.

Also, we found that exporting firms are closer to the stochastic frontier. They have to be more competitive to sell in international markets. Only the most efficient firms survive in the highly competitive international market.

Size is another determinant of technical efficiency. Even though the impact of size in technical efficiency is not clearly determined in empirical and theoretical frameworks, here we obtain a positive and significant effect over efficiency. What it means that large firms are closer to the efficient frontier.

In addition, efficiency tends to be smaller for those firms with a higher proportion of external funds over value added.

None of these results seem counter-intuitive but you may ask about causation in some cases. For example does size help determine efficiency or does efficiency help determine size? That is, it is the more efficient firms that grow?

Anyway, more reasons for supporting free trade.