Location, Firm Size and International Trade: Simultaneous Measurement of the Effects of Internal and External Scale Economies on Exporting

Abstract

This study examines, simultaneously, the effects of internal and external scale economies upon export decisions. Combining previous results of exporting studies with the predictions of advances in trade theory and economic geography, this study finds that large firms are more likely to export than small firms, urban firms are more likely to export than rural firms, and firms in geographically concentrated industries are more likely to export than those in dispersed industries. This project was funded in part by the United States Department of Agriculture’s Hatch Act (SC-1100572) and was supported by the offices of the Clemson University Center for International Trade, the South Carolina Department of Commerce and the South Carolina State Ports Authority. Location, Firm Size and International Trade: Simultaneous Measurement of the Effects of Internal and External Scale Economies on Exporting INTRODUCTION The purpose of this paper is to examine, simultaneously, the effects of internal and external scale economies on U.S. manufacturers’ decisions to export. Scale economies are reductions in unit costs that result from an increased scale of operation. Internal (or production) scale economies result from increases in plant size or improvements in process because of increases in scale of production, while external scale economies are increasing benefits accrued by a firm because of its location in a metropolitan area, or near other firms in the same industry (Berry, Conkling and Ray, 1997). While internal production scale economies are a cornerstone of business globalization practice (c.f., Levitt, 1983), to date little international business research has focused on the interaction of firm size and location on the decision to export. Most of the business export literature dealing with scale economies has focused on the internal conditions necessary for export success, but not on the choice to export. Even less research exists in the area of international business on the effects of external scale economies on export decisions. Recent research on firm size and exporting indicates that large firms are more likely to export than small ones (Mittelstaedt, Harben and Ward, 2003). We also know that the export decision process is different for large firms than it is for small firms, since the advantages, disadvantages and options for international trade differ for large and small firms (Pope, 2002; Wolff and Pett, 2000). In the new trade theory that parallels the new economic geography literature, external scale economies and their effect on patterns