Firm size and export performance

Economic analysis based on the Theory of the Firm shows that the exporting firm can be conceptualized as a discriminating monopolist, facing several demand curves. The analysis shows that under these conditions, and assuming certainty, the larger the firm, the higher the ratio of exports to total sales.When uncertainty is introduced into the model, the conclusion regarding the relationship between size and the ratio of exports to sales is reinforced. Large firms can afford to assume more risks than small ones; in addition, their risks from foreign operations are less than those of small firms because the large firms benefit from economies of scale in foreign marketing. Consequently, the risk premium demanded by large firms from foreign marketing is less than the premium insisted upon by small firms. Large firms therefore tend to export a higher share of their output. These theoretical constructs are confirmed by empirical analysis performed on a sample of several hundred firms from six industries in Denmark, Holland and Israel. The figures confirm, with few exceptions, that the size of firms is indeed positively correlated with the ratio of exports to sales.The normative conclusion which can be drawn from the above is that economic policy-makers who wish to increase the export potential of industrial firms, should adopt policies which will encourage large firms to come into being through mergers, take-overs or simply fast growth.