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2 March 2017

Giordano Mion is a Professor of Economics at the University of Sussex and fellow of the UK Trade Policy ObservatoryGiordano Mion

“The people have spoken” on Brexit. The UK is leaving the EU. We now need to focus on how the UK can maintain a leading world trade position in this new scenario.

Brexit has cast a shadow over the future international position of the UK and its trading relationship with both the EU and non-EU partners. Much attention has been devoted to number crunching regarding the costs related to the UK leaving the EU. Whilst some figures look more credible than others, both before and after the vote, there has been large discrepancies – leading to confusion and an overall lack of key message.

The point I want to make in this article is much simpler and pragmatic. The UK is leaving the EU and given this premise I believe the attention should now focus on how the UK can maintain a leading world trade position in this new scenario. The current focus of this line of thought is on trade negotiations with other countries. Yet, I believe there is much to be gained by better exploiting some valuable internal resources. One such resource is the UK Trade and Investments Agency (UKTI). Most of my academic colleagues, including myself a few years ago, believe that trade promotion is mainly about giving away free tickets to participate at international fairs. Although this might be the case of some of trade promotion agencies, it is certainly not the case for UKTI.

The UKTI provides a wide range of tailored services to some 50,000 firms every year (both new and current exporters and importers) and has offices in over 100 UK Embassies, Consulates and High Commissions worldwide. The support that UKTI can provide is often free, or highly subsidised, and in some cases, grants can be made available for a particular activity. Some of its key services include:

  • International Trade Advisors (ITAs) provide advice on export documentation, contacts in overseas markets, market selection, etc.
  • The Export Marketing Research Scheme (EMRS) provide independent advice on carrying out marketing research.
  • The Overseas Market Introduction Service (OMIS) provide in-depth customer-specific and market-based support and plans for entry strategies, possible partners and competitors as well as local conditions and regulations.

In common with other public services UKTI is required to deliver value for money and as part of this effort UKTI offers many valuable services, including monitoring the impact it has on both the trade and overall performance of firms using its services.

Impact of UKTI on a firm’s exports

Evaluating the causal impact of UKTI services on the firms using them is not an easy task. First of all, UKTI clients are very heterogeneous with respect to their profile, industry, size and international experience and engagement. Second, such firms directly ask for UKTI services, meaning that they do not represent a random sample from the population of UK firms. In Mion and Muuls (2015) I address both issues using extremely detailed data on firm-level exports – by product and country of destination – as well as building on an econometric framework explicitly dealing with selection (propensity score matching).

Focusing on the in-depth and resource-intensive OMIS service offered by UKTI I find that:

  1. UKTI support increases both the probability that firms start (4% more) and continue (7% more) exporting two years after receiving export support. This is true for firms of all size-bands as well across the different destination countries we consider.
  2. UKTI support also helps firms to both start with higher exports (46% more) and to grow their current exports more (9% more).

In terms of 1, the 4% and 7% are sizeable numbers when considering the average probabilities to start and continue exporting. The average probability to continue exporting for a firm that is currently exporting is 85% and so the 7% UKTI effect increases this to 92%. That is, OMIS intervention nearly halves the probability that a firm gives up exporting after one year. In terms of the probability to start exporting for firms that are currently not exporting, the average is about 4% meaning that the 4% UKTI effect doubles such probability.

In terms of 2, Table 1 provides a breakdown of the different components of firm-level exports: number of countries served; number of products sold per country; and exports per-country per-product (intensive margin). The product of these 3 components is multiplied to give total firm exports. The Table shows that the overall 8.8% increase in exports growth for current exporters stemming from UKTI support (column 1) is due to the firm expanding the number of destination countries (3.5%) as well as the firm selling more of their products in a given market (5%). At the same time, there is no significant growth in the portfolio of products exported. A very similar picture is portrayed by column 2, which depicts the level of exports after intervention for firms not currently exporting. The overall 46.4% higher exports due to UKTI support is made up of both more countries served (19.6%) and more export per-destination per-product (24.3%) while the product margin does not display any significant pattern.

Table 1: The Effects of OMIS

 

Propensity score matching estimators

Nearest neighbour matching   (random draw)

Average treatment effect on the treated
(ATT)
Firm export status at the time of support Exporting Non-exporting
Change Total exports 0.088 0.464
(0.029)*** (0.210)**
Change Number of countries 0.035 0.196
(0.012)*** (0.078)**
Change Number of products per country 0.002 0.026
(0.010) (0.051)
Change Intensive margin 0.050 0.243
(0.022)** (0.142)*
Treated observations 6066 488
Untreated observations 4167 390

Robust standard errors in parentheses: * significant at 10% level; ** significant at 5% level; *** significant at 1% level.

Source: Mion and Muuls (2015)

The appetite of UKTI for serious programme-evaluation projects is ever growing. The next step in such quest is something which is simply unique: a Randomized Control Trial (RCT) to gain an even sharper insight into the causal impact of the provision of trade services on UK firms. The RCT scheme, in which I participate as an advisor, is currently in its pilot phase and will be based around an export voucher. Firms need to apply to get the voucher to be spent on export support services in the private sector. Some firms will be randomly selected to get the voucher and will be subsequently compared to a control group of firms who applied to the voucher but did not get one. This scheme will establish a better measurement of the value of export promotion, which will contribute to improved use of existing resources and schemes.

In sum, the UK is a thriving trading nation and deservedly so, due to the innovation and competitiveness of its firms and workers, as well as the good work of some government agencies like UKTI. In the wake of Brexit exports are likely to be at a premium and these results suggest that more attention and resources devoted to trade promotion and understanding how it works could make a valuable contribution.

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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