The Relationship Between Firm Size And Export Rate

Factors affecting the Export Rate of a Firm

The economic development of a country depends a lot on the goods and the services that are exported to different countries. Thus, one of the most important factor in the annual financial strategy developed by a country is the business run by exports. This exporting business helps a country to accumulate the reserves which will in turn be used to import necessary goods for the country. Keeping this in mind, a lot of researches have been conducted based on the size of the firm and the exporting business conducted by that firm. According to most of the researchers, they have come to the conclusion that a direct and significant relationship exists between the intensity of exports conducted by the firm and the size of the firm. The main reason behind this has been identified by Bernard et al. (2014) that there are more resources in a large scale firm and less in a small scale firm. Thus, a large scale firm can export a larger volume than the small scale. This research is aimed to find and prove this statement of relationship. Other factors that can affect the export rate of a firm would also be tried to be identified in this research.

This research is mainly aimed at assessing the relationship between the size of a firm and the rate of exports conducted y that firm. Further, evaluations will be made on identifying other factors that can affect the export rate other than the firm size. Critical analysis of different research papers will be conducted to identify this matter.

This research study is not restricted within Australia. Research papers have been evaluated from various different countries and their export statistics has been observed. Based on the data over various different countries, the research questions of tis research will be attempted to be answered. Thus, the scope of this research is not limited, it is quite wide.

Financial and human resources are required in a large amount in order to conduct business in exports. The business also requires a lot of dealings with export policies and procedures that the government of a particular country has implemented. The average cost that is beared by transactions of same type in a large amount is usually less than a single transaction. The economy of scale theory states this concept. Considerably large amount of transaction orders is not usually given to a small sized company at the starting stage. This is because, export duty on the orders will have to be paid before the collection of payment from the organization who have given the orders (Verwaal & Donkers 2002). In the initial stage, it might not be possible for the small sized industry to bear such a large cost for one export order. On the other hand, a large organization has a much higher availability of financial resources than a small organization. Thus, the advantage of the economy of scale is gained by the large organizations on the affordability ground (Amornkitvikai, Harvie & Charoenrat 2012).

The Benefits of a Large Scale Industry in Export Business

An organization can gain easy access to foreign market business with the help of this exporting business but this task involves a lot of cost. It is extremely costly to export the products from one country to the other, earn the order from the countries and deliver the order to them as per the order. A small scale industry might not be able to bear such a huge expense as this amount of financial or resources might not be available to them (Monteiro 2013). Moreover, if the company can afford such an extensive cost, they might not be allowed to take such huge orders. The large scale industries thus enjoy the benefit of the economy of scale allocation of the common expenses is better for these companies. The common expenses that are considered for the exporting business are transportation cost, marketing cost, cost of insurance and alongside these costs another cost that is mostly incurred is the cost of the risk of finance and operations, which is extremely high. Thus, from the above discussion it can be said that the size of the firm has a positive impact on the export of products of a firm (Dalsgaard & Choquette 2015).

There are a lot of other factors that put a large scale industry at an advantageous position than a small scale industry for the exports business. These factors include abilities of taking risks, reduction of prices, research and development, etc. The cost of export cannot be reduced by a small scale industry. Thus, the reduction in the cost of the products is beyond the imagination of the small scale industries for the orders of export (Monteiro, Maria do Rosário & Sousa 2013). On the other hand, as a result of the allocation of common costs, a large scale industry can provide the same products at a lesser price. A small scale industry will be affording all its available resources on a large export order. Thus if any payment related issue arises with the industry that has given the order, the repercussions will be huge and the small scale industry might not be able to overcome that. Due to the availability of less financial resources, the companies are not able to afford a huge risk. A situation like this may abolish the company and make them bankrupt. A scale industry on the other hand will be able to overcome such a risk and hence this will help them to develop their internal growth. Thus, from this discussion also it can be clearly stated that a large scale industry has a much positive advantage over the small scale industry in terms of the export business (Balassa 2014).

Economy of Scope and Competitive Advantage

The economy of scope is another theory that explains the superiority of the large scale industry over the small scale industry in running this export business. According to the theory, some companies have a high availability of resources and some others do not have that availability (Thirlwell 2017). Depending on this availability, the companies will be able to produce products and services in a wider variety. The business of exports can be run based on this theory. There is a huge availability of resources in a large scale industry. Thus it will be possible for them to meet the demands of a wide variety of products and services. The customer satisfaction will in turn be increased as they will be able to find all the necessary products at one place. On the other hand, a small scale industry cannot provide this type of facilities to the customers and cannot deal with such a wide range of products and services. Thus in a situation like this, the preference of a customer will also be towards the large industry than the small scale industry as they will be able to fulfil all their needs in a large scale industry as a huge range of products and services will be available there. This will reduce the time of purchase as well (Gabbitas & Gretton 2003).

There are three different types of resources that are available to an organization That has a contribution to the advantage of the competition. The resources are technological, organizational and entrepreneurial. A large scale industry is more likely to possess these resources compared to a small scale industry when it comes to the export business (Mittelstaedt & Ward 2017). The possibility to hire more employees based on their qualities can be large scale industries. Justification of these recruitments can be given by the finances and the workload, based on which these recruitment decisions will be taken. Thus, a large scale industry can become an entrepreneur. Today, the businesses run in a completely different light and technological support is necessary for each and every business organization irrespective of their business nature. These developments in technology involves huge cost and research which will not be affordable for the small scale industries due to the availability of very little resources. Thus, there is the advantage of competition for the large scale industries over the small scale due to the operation of the size of the firm (Liamputtong 2013).

Data Collection and Analysis

The export market has increased in the last ten years. The Australian Bureau of Statistics (ABS) website has records of certain statistics. According to these information, among the large scale industries in Australia, 29 percent of the industries has an employee strength of more than 250 employees. 15 percent of the medium sized companies has more than 250 employees. In case of small scale industries, this ratio decreases to 7-8 percent. Thus, from this data it can be said clearly that the size of the firm positively affects the exports value of the firm (Arteaga-Ortiz, San Emeterio & Fernández-Ortiz 2013).

Most of the researchers agree to the fact that there is a direct and positive relationship between the firm sizes and the exports conducted by the firm. Thai is, with the increase in the firm size, there is also increase in the export values of the firms. According to some other researchers, firm size is not the only factor that affects the export values of the firms. There are various other factors that affects the export values of a business organization, be that a large scale or a small scale firm (Best & Kahn 2016).

To conduct a research, it is very important to collect data which is related to the subject of the research. This data can be primary as well as secondary. In this research, the aim is to compare and evaluate the relationship between firm size and export rate is different countries. Export rate is a factor which is distributed all over the world and is conducted in large scale. Thus, it is impossible to collect a primary data in this situation (Jongwanich & Kohpaiboon 2008). Thus, secondary data has been collected for this research. The data on exports has been selected from the official website of OECD and other related information has also been collected from public reports, government statistics, etc.

From the extensive data available in the OECD website, all the information on all the available countries will not be considered for research. Thus data will be selected from the whole available data randomly.

A sample of 20 large scale exporters and 30 small scale exporters has been selected randomly from the available data. Data on the exports of these selected 50 countries will be collected for the purpose of comparison.

Analysis has been conducted on the collected dataset. From the analysis, it can be seen clearly that the small scale industries of Australia exports products to a large variety of countries. Among the chosen 30 countries, it can be seen that most of the exports is done with Germany (DEU). The average export value is maximum with Germany. Following Germany, export value is second highest for Italy and the third highest export is done with Netherlands. Figure 4.1 shows the data graphically.

Figure 4.1: Average exports to different countries by small scale industries

It can also be seen from figure 4.2 that the average export values of the small scale industries are highly fluctuating over the years. The sales are usually around 30,000 million USD which has peaked in the year 2011. After that, the export value has shown a huge fall in 2012. The export value was stable until it showed a decrease in value again in 2015.

Figure 4.2: Average exports over the year by small scale industries

Figure 4.3 shows that most of the exports done by large scale industries is with Germany. The highest average export is with Germany. On the other hand, it can be seen from figure 4.4 that the average exports have been increasing significantly over the years. There has been a drastic fall in the average export in 2015 just like the average sales in 2015.

Figure 4.3: Average exports to different countries by large scale industries

Figure 4.4: Average exports over the year by large scale industries

Data on exports has been collected from the OECD website. The data on the export values is quantitative and analysis using appropriate statistical techniques has been done on the export values. Thus, this is a quantitative analysis. The data is secondary data as it is collected from the OECD website.

It can be seen from the analysis that the average export value for the large scale industry for the 8-year period from 2008 – 2015 is 192209.9 with a standard deviation of 237696.1. The average export value for the small scale industry for the 8-year period from 2008 – 2015 is 29421.49 with a standard deviation 34122.11. This indicates that the export values over the years are highly fluctuating and are not close to the average export value of the years combined as the standard deviation of the export values are extremely high. 50 percent of the export values of Australia is above 14570.45 for the small scale industry and 100193.9 for the large scale industry.

Table 4.1: Descriptive measures of Small Scale and Large Scale Industries

It can be seen clearly from the boxplot given in figure 4.5 that most of the export values are higher than the mean export value. The data on both the export values of large scale and small scale industries are positively skewed.

Figure 4.5: Spread of Average Exports in Different Firm Sizes

Comparison has been done on the average export conducted by both the small scale and the large scale industries. The comparison is shown graphically in figure 4.6. From the figure, it can be seen clearly that the average export value is always higher for the large scale industries than the small scale industries. The export value is quite high for the large scale industries as compared to the small scale industries. Thus, it can be said that there is a correlation between the export rate and the firm size. The export rate increases with the increase in the size of the firm.

Figure 4.6: Average exports by small scale and large scale Industries

It can also be seen from the correlation analysis that there is very strong positive correlation (r = 0.91) between the size of the firm and average exports. For the purpose of this correlation, all the export data and all types of firm sizes has been considered. Only the 30 small scale and 20 large scale industries were not considered for the purpose of correlation.

Table 4.2: Correlation between Firm Size and Average Exports

It has already been observed that the firm size affects the export values of a firm. Thus firm size has already been identified as an important factor affecting the export value of a firm. Other than the firm size, there are a lot of other factors that can affect the export values of a firm. These factors have been identified from various research papers. Thus, this is qualitative analysis. These factors are discussed below:

• Inflation rate of the Country:If the inflation rate of the country is considerably high, the firms of the country will face some problems in exporting the products and services. Thus, fall in the inflation rate will lead the country to be more competitive to the international market and the exports might be increased (Cooper, Hartley & Harvey, 2018).
• Exchange rate of the Country:If the exchange rate of the country falls, the export prices will fall. Thus, more products can be exported and the export values of the products is likely to increase (Li, Ma & Xu, 2015).
• Productivity:If the workers of the country are more productive, there will be a decrease in the labour costs per unit of the product. This will decrease the price of the products. Thus, with the fall in the price of the products, more products will be bought and thus, the export value will increase (Hoekman & Shepherd, 2017).
• Quality:If the product quality produced by the country falls, then the export orders will not be given to that country and will pass to other competitive countries exporting the same product in a better quality. This will decrease the export value of the country (Chen & Juvenal, 2017).
• Marketing:The demand for the export goods is not only determined by the price and the quality of the products but also on the demand of the products in the local market. If the product is not marketed in the local market properly, the people of the locality will not be aware of the product and thus there will not be much demand for that particular product. Thus, the export orders will decrease. Hence, marketing by the foreign markets is a very important factor for the exporting business (Sun, Paswan & Tieslau, 2016).
• Domestic GDP:If the GDP of the country rises, this will indicate that the income of the people of the country has increased. Thus, they will not try to work and would prefer to buy the products that are necessary. This will reduce the production of the country and thus, the exports will fall (Bodenstein, Erceg & Guerrieri, 2017).
• Foreign GDP:If the income of the people of foreign countries rise, people will tend to buy products from outside. This will increase the exports of the home country (Freund & Pierola, 2015).
• Restrictions in Trade:There are a lot of restrictions for a foreign firm to run an exporting business abroad. If the restrictions are relaxed to some extent. The foreign firms will be able to easily swoop in the markets and run their business. This will increase the export value (Chaney, 2016).

Considering all the above mentioned factors, it can be understood that these factors are the supporting factors that are responsible for the export values of a country. The main factor that affect the exports of the country is the affordability of the firm which will be determined by the size of the firm.

Conclusions

This study is mainly aimed to evaluate the effect of firm size on the export rate of the country. It has been observed from various past studies that the export business to other foreign countries is mainly for the large scale industries as they can avail all the costs and the risks of the investment. The small scale industries do not possess this huge amount of resources both financial and in terms of labour. Thus, they cannot be trusted with exports of large volume. Hence, the advantage is for the large scale industries. It has also been observed from the analysis that the value of exports is higher for a large scale industry than a small scale industry. Other than the firm size, there are other factors that affects the exports business. These factors include Inflation rate of the country, Exchange rate of the country, productivity of the firm, quality of the products produced in the firm, marketing of the products in the foreign market, domestic and foreign GDP and restrictions on trade. Considering all these factors, the key factor affecting the export value is the firm size.

References

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