European policymakers should spend less time helping large exporters crack new markets and focus instead on increasing the number of internationalised firms, argues a report from research network European Firms and International Markets (EFIM).

EFIM’s research on the features of European firms that compete in international markets reveals that European countries’ international performance is driven by a handful of high-performance firms.

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In The Happy Few: The Internationalisation of European Firms, Gianmarco Ottaviano of Bruegel and Thierry Mayer of the Centre for Economic Policy Research wrote that what matters most for a country’s trade performance is how many firms engage in export, not the average amount exported per firm.

“Today governments put a lot of effort into promoting already big exporters to new markets. The findings in this report show that trade missions do not necessarily improve trade; policies to increase the number of firms competing internationally by lowering barriers to export and fostering performance in terms of employment and productivity, are more important,” the authors wrote.

The report presents an analysis of the characteristics of European firms that are involved in international activities through exports or FDI (internationalised firms) and comes to a few general conclusions about them.

The first is that such firms are “superstars” – they are rare and their distribution is highly skewed. Only a few firms account for the bulk of aggregate exports and FDI. And those firms are different from others: they are bigger, generate higher value-add, pay higher wages, employ more capital per worker and more skilled workers, and have higher productivity.

The second conclusion is that the pattern of aggregate exports, imports and FDI is driven by the changes in two “margins”. The “intensive margin” refers to average exports, imports and FDI per firm. The “extensive margin” refers to the number of firms involved in those international activities. The latter is more important because the reaction of aggregate trade and FDI flows to country fundamentals takes place mostly through that margin.

Such findings lead to six clear implications for policymaking at all levels, the authors suggested: promoting intra-industry competition; increasing the number of exporters and multinationals; not wasting time helping the incumbent superstars; nurturing the superstars of the future; fighting to reduce small trade costs; and assessing the export and FDI potential of European industries.