The determinants of export behaviour in UK service firms

Abstract

This paper examines the determinants of export behaviour for a panel of UK service industry firms from 1988 to 2001. Export behaviour is modelled in a dual manner: as both the decision to export and the intensity of exporting. The results indicate that firm size, research intensity, average director's pay and the variance of the sterling–dollar exchange rate all increase the probability of becoming an exporter. In addition, the results indicate that the process underlying a firm's decision to export is a separate one from that determining export intensity, implying that the two decisions should be modelled separately.

Acknowledgements

The authors would like to thank seminar participants at the Scottish Economic Association and International Economics and Finance Society conferences for useful comments.

Notes

1. Internationalisation of a firm's activities include contractual arrangements (licensing and franchising) and joint ventures (consortiums and affiliates) with foreign firms joint ventures, wholly owned operations overseas (subsidiary, branch and office) and direct exporting.

2. As noted by Erramilli and Rao 1993, the unique features of service industry production means that application of transaction cost models of entry mode decisions need to incorporate factors that raise the costs of integration or diminish a firm's ability to establish full-control modes. However, because transaction cost theory is appropriate for studies of foreign direct investment, rather than exporting, we do not discuss this literature in any further detail.

3. This variable has been employed extensively in the literature, in particular by Wakelin 1998, Basile 2001, Bleaney and Wakelin 2002, Roper and Love 2002 and Barrios et al. 2003.

4. Sunk costs may include, for example, marketing, distribution and adapting products for foreign markets.

5. Recent survey evidence of UK firms by Grant Thornton 2003 indicates that a major barrier for international expansion is lack of market knowledge.

6. The sterling–dollar rate was chosen at the representative exchange rate because of the global importance of the US dollar as an internationally traded currency. Although a composite (trade) weighted index may more accurately capture the influence of exchange rates for UK firms, the frequency of trade data prevents the construction of an average daily exchange rate index unique to each firm in our sample.

7. The turning point for critical firm size is £5.5 million.