Competitiveness: a micro-perspective. 4 Key Facts. Hylke Vandenbussche, University of Leuven

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1 Competitiveness: a micro-perspective 4 Key Facts Hylke Vandenbussche, University of Leuven

2 CONTENTS Fact 1: Competitiveness and Unit Labor Cost at firm-level: a strong link? Fact 2: Competitiveness: Productivity or Quality and Taste as determinants of firm export performance? Fact 3: Competitiveness and Firm Size Distribution: strong link! Fact 4: Competitiveness and Global Value Chains at firm-level: revisit trade policy!

3 Fact 1: Competitiveness and ULC - OECD (2012): Unit labor costs (ULC) are a key determinant of the competitiveness of the productive system of a country in both domestic and foreign markets. Unit labor costs reflect the combined evolution of compensation of employees per unit of labor input and of labor productivity... Is ULC a good measure for competitiveness? ECB Compnet 12 December 2013

4 Fact 1: Competitiveness and ULC Firm-level data show a low correlation between ULC and Exports Example : for Belgium: correlation between firm-level ULC and firmlevel Export market share = (very low!! ) Source: Fuss, Konings, De Cramer (2014), National Bank of Belgium working paper

5 Fact 1: Competitiveness and ULC 1,2 1,1 1 0,9 0, Export share Belgium in EU27 (2000 = 1) Relative Unit Labor Cost (ULC Belgium compared to ULC EU) (2000 = 1)

6 Fact 1: Competitiveness and ULC Question: Why study Firms? Why not sectors? Example: The Spanish Paradox (Antras et al. 212) Rising wages and ULC in Spain in all sectors before crisis Growth of market share by exporting firms How can we explain this paradox? Exporters are very different from nonexporters

7 Heterogeneity in the ULC exporters versus non-exporters 1,4 1,3 1,2 1,1 1 ULC DOM ULC EXP 0,9 0, Source: Belgian data

8 Solution to the Spanish Paradox - ULC for exporting firms can be very different than for non-exporting firms and this holds for all sectors - Exporting firms may respond differently to ULC changes than domestic firms Firm heterogeneity is important to understand macroeconomic phenomena such as country competitiveness Firm heterogeneity is important when designing policy

9 Fact 1: Competitiveness and ULC Conclusion: Unit Labor Cost (ULC) which captures wages ànd productivity of workers are not the only determinants of firm export performance No evidence of a strong inverse relationship between ULC and exports, not at macro and not at micro-level

10 Fact 2: Competitiveness, Quality and Taste Quality of Products is just as important as a driver of competitiveness: It determines the price a firm can charge Taste for Products are also an important driver of competitiveness: it determines how much a firm can sell Di Comite, Thisse and Vandenbussche (2014), Journal of International Economics show that quality and taste are just as important as firmlevel productivity in explaining firm-level export performance

11 Source: H. Vandenbussche (2014), Quality in Exports, European Economy, EU Commission Quality of Products sold on the EU market: evidence Low quality High quality

12 Source: H. Vandenbussche (2014), Quality in Exports, European Economy, EU Commission Quality of Products on the EU market: evidence High quality Low quality Low quality peak High quality peak

13 Fact 2: Competitiveness, Quality and Taste Quality and consumer taste are important drivers of competitiveness, in addition to productivity New EU member states export many low quality products and a lower number of high quality products. New EU member states engage most in quality upgrading of products and are moving out of low quality products, in favour of high quality ones. These quality dynamics suggest a lower degree of head to head competition with low quality Chinese products on EU market

14 Fact 3: Competitiveness and Firm Size Distribution There is a positive relation between the number of large firms in a country and export performance In order to export, firms need a sufficient SIZE more large firms, more exports Firm size distributions vary by country. Why? Example: Germany has many more large firms than Italy What hampers firm growth? Financial barriers etc. Source: Product Market Review (2013), EU Commission, DG ECFIN, chapter Firmlevel Productivity and Exports: Diagnosing the role of Financial Constraints. ECB Compnet 12 December 2013

15 Firm Size Distribution for Austria 90 Number of Firms Distribution by Size Class - Austria % _9 10_19 20_49 50_ plus

16 Thous of per worker Productivity by Firm Size Class 120 Labour Productivity Distribution by Size Class - Austria Industry _9 10_19 20_49 50_ plus Size Class large firms are more efficient (productive) Large firms Source: SBS data, EU Commission

17 Firm-Size distribution and Employment 45 Employment Distribution by Size Class - Austria Indus 30 % _9 10_19 20_49 50_ plus Size class

18 Exporters are: The Happy Few typically, 20% of exporters account for 90% of all exports 0 Cumulative export value Cumulative fraction of firms Bernard, Van Beveren and Vandenbussche, 2010, The margins of Trade, National Bank of Belgium working paper

19 Fact 3: Competitiveness and Firm Size Distribution Conclusion: Countries with a firm size distribution with a fat tail on the right, is a reflection of country-level competitiveness Large is beautiful too ECB Compnet 12 December 2013

20 Fact 4: Competitiveness and Global Value Chains Enhancing Competitiveness Mercantilism! Exporting Firms tend to be importing firms More Imports from other countries raises firm-exporting performance (Konings and Vandenbussche, 2010) Blocking imports through trade protection lowers exports and induces firms to engage in input-switching and output-switching resulting in firmlevel productivity losses (Viegelahn and Vandenbussche, 2015)

21 Proliferation of Trade Protection Laws : Situation in 1980: Countries with AD law (34) Countries without AD law (97) Vandenbussche and Zanardi (2007), Economic Policy

22 Proliferation of Trade Protection Laws : Situation in 2003: Countries with AD law (95) Countries without AD law (36) Source: Vandenbussche and Zanardi, (2007), Economic Policy

23 Fact 4: Competitiveness and Global Value Chains Global Value Chains at firm-level are productivity enhancing for firms Trade Protection interferes with global value chains and can result in within-firm re-allocations of inputs and outputs that lowers producticity, reduces exports and lowers competitiveness

24 Overall Conclusion To understand macro-economic competitiveness, we need to understand firm-level heterogeneity and dynamics Macro needs Micro!

CompNet approach to competitiveness: Results and policy use

ECB-UNRESTRICTED Paloma Lopez-Garcia Filippo di Mauro Chiara Osbat CompNet approach to competitiveness: Results and policy use ECB Frankfurt 27 January 2014 Prologue Rubric Definition: A competitive economy,