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Triggering competitiveness: A 'decalogue' from new firm-level evidence

Competitiveness is one of the most debated issues in policy circles. But, what triggers it? Capitalising on the first existing harmonised cross-coun

Publishing date
23 August 2012

A version of this column was published in VOX

Competitiveness is one of the most debated issues in policy circles. But, what triggers it? Capitalising on the first existing harmonised cross-country dataset measuring the entire range of international activities of firms in seven European countries, this column identifies the triggers of competitiveness. It argues that policymaking could be improved by firm-level evidence if there were less reluctance to the use of micro-founded indicators to inform policy decisions.

The ability to 'grow out' of the crisis is now widely recognised as the only viable long-term option for maintaining the Eurozone (Delbecque 2012), keeping the EU vibrant and assuring the sustainability of the European social-market-economy model. Enhanced ‘competitiveness’ at the EU level is required, which would allow the EU to capture growth currently taking place mainly in emerging markets.1

In our paper (Altomonte et al. 2012), we focus on a specific dimension of competitiveness, that is external or international competitiveness, defined as the ability to exchange the goods (and services) in which a country is abundant for the goods and services that in the same country are scarce. The latter turns out to be intimately related to the productivity of firms operating in a given country. Exploiting the first existing harmonised cross-country dataset measuring the entire range of international activities of firms in seven European countries (EFIGE), we discuss the limits of some competitiveness’ measures (e.g. unit labour costs) which are widely used in policy contexts. Moreover, we are able to identify a set of features which make firms internationally competitive. The dataset combines measures of firms' international activities with balance-sheet figures (from Amadeus, Bureau van Dijk) as well as quantitative and qualitative information on around 150 items ranging from R&D and innovation, labour organisation, financing and organisational activities, and pricing behaviour. Data consists of a representative sample (at the country level for the manufacturing industry) of almost 15,000 surveyed firms in seven European economies; roughly 3000 for Germany, France, Italy and Spain, slightly more than 2000 for the UK and approximately 500 for Hungary and Austria. The wealth of these data allows us to come up with several policy-relevant results.

Main results

Firms in our (representative) sample are very heterogeneous across and within countries and industries (hence, describing them in terms of the characteristics of the 'average firm' is of little practical use) and exhibit a clear rank in terms of internationalisation strategies. Indeed, after controlling for country and industry characteristics, international exposure is positively correlated with total factor productivity and labour productivity at firm level. Moreover, in line with economic theory, total factor productivity and labour productivity are also positively correlated with the complexity of firms’ internationalisation activities, with complex activities (e.g. FDI) more strongly associated with higher productivity than simpler activities (e.g. imports or exports). Outsourcing, which typically involves an intermediate level of complexity, is associated with the middle of the productivity range. Such a correlation, however, holds to a lesser extent when productivity is measured in terms of (the inverse of) unit labour costs, thus highlighting the importance of non-price determinants of competitiveness (a finding already pointed out by Rodríguez Crespo et al (2012) in the competitiveness analysis of Spain).2

Furthermore, the EFIGE dataset also allows us to identify what makes some firms move, over time, from below to above a minimum performance threshold (or 'productivity cut-off') required to become active in the international environment. To identify what 'triggers' such a minimum level of competitiveness, we test the characteristics of firms that manage to overcome such a cut-off over time using several variables constructed from the dataset. Specifically, we partition the firms in our sample in three groups depending on their distinct internationalisation trajectories and label them accordingly. 'Remain below' refers to those firms whose average total factor productivity was below the relevant cut-off for internationalisation in the period 2001-2007, and that also remain below the cut-off in 2008-2009. 'Move below' indicates those firms that worsened their performance relatively to the identified total factor productivity cut-off. “Remain above” refers to firms that over the period 2001-2009 have always been above the TFP triggering-competitiveness threshold identified in the analysis (some 2,850 large and well capitalised firms in our sample). Finally, 'move above' indicates the 'switchers'; some 940 firms that were able to overcome the critical productivity cut-off from the period 2001-2007 to the period 2008-2009.

When testing the probability of a given firm characteristic to be significantly associated to the status of 'switcher', we find that, irrespective of their countries of affiliation, their starting levels of productivity and their sectoral specialisation, firms that go international have a quite similar set 'growth friendly' characteristics related to:

  • Innovation (human capital and R&D intensity).
  • Finance (adequate capital in the form of equity).
  • Human resources and management (the use of performance-based salaries and a reduced presence of managers belonging to the family, if the firm is family owned).
  • Ownership structures (affiliation to a foreign group).

Firms with the right balance of these characteristics are able to grow and become successful internationally. In so doing, they become larger than the average domestic firm (140 versus 31 employees in our sample). Firms that do not strike that balance remain small and domestic, thus not contributing to their country’s external competitiveness.

Policy conclusions

From a policymaking perspective, these findings have several implications:

  • If the objective of policy is to foster a country’s ‘competitiveness’, the ultimately firm-driven nature of this process is such that aggregate measures of competitiveness are subject to a number of biases that have to be appropriately taken into account when interpreting aggregate statistics. There is no 'average' firm, rather, firms are very heterogeneous within countries and industries.
  • Successful international companies invest in human capital and R&D, rely on equity finance, motivate their human resources through performance-based incentives, do not necessarily loathe family ownership but do draw a line between the family owner and the firm’s management, and do not see foreign capital as an intrusion but rather thrive on the synergies it creates and the international opportunities it opens up, via both imports and exports, and in general via the participation in global value chains.
  • Small is not beautiful per se. It is true that a significant part of employment and productivity growth comes from small firms. However, these are not any small firms. They are firms that start small and, in the process of getting bigger, become more productive and start to hire more employees. In this respect, the key question for policy aimed at small and medium companies should not be how to help small firms to survive as they are, but should rather be how to help small firms adopt the right attributes that promote not only survival but also growth.
  • Specific incentives (both market- and government-based) should be created in the areas of innovation (e.g. tax credit schemes for R&D expenditures), finance (e.g. via the liberalisation and simplification of a cross-border pan-European market for private equity and venture capital), human resources (e.g. promoting lifelong training programmes and securing an improvement in national education systems), management (e.g. via a better link between wages and productivity), and ownership (fostering the attraction of foreign investment and the participation of domestic firms in global value chains).
  • There is no need for specific incentives in the area of internationalisation (with the possible exception of providing better information on foreign opportunities), as more productive firms (i.e. those firms acquiring the above characteristics and thus overcoming the critical productivity cut-off) become quite naturally international, while the opposite is not necessarily true (domestic firms receiving an incentive for their internationalisation process do not necessarily become more productive).
  • More generally, the promotion of productivity growth and competitiveness can and should go beyond the traditional exercise of educated guesswork, targeting instead the specific structural aspects that make firms inclined to acquire the ‘right’ set of characteristics, beyond the worn-out generic mantra of ‘flexibilities versus rigidities’. Such an approach, still popular in policy circles, is no longer justifiable in the era of firm-level data.


Altomonte, C., Aquilante, T. and Ottaviano G.I.P. (2012) “The Trigger of Competitiveness - The EFIGE Cross Country Report", Bruegel Blueprint Series. Volume XVII, July 2012, Brussels.

Altomonte, C, Barba Navaretti, G., Di Mauro, F. and Ottaviano, G.I.P. (2011) "Assessing competitiveness: how firm-level data can help", Bruegel Policy Contribution 2011/16, November 2011, Brussels.

Delbecque, Bernard (2012), “Saving the euro requires restoring Spain’s competitiveness”, VoxEU.org, 30 July.

Rodríguez Crespo A., Gabriel Pérez-Quirós and Rubén Segura Cayuela (2012) 'Competitiveness indicators: the importance of an efficient allocation of resources', Economic Bulletin (January), Banco de España.

1 On these issues see for example the activities of the Competitiveness Research Network (CompNet) set by the ECB.

2 See Altomonte et al. (2012) for a discussion on the aggregation biases which might affect unit labour costs.

About the authors

  • Gianmarco Ottaviano

    Gianmarco Ottaviano, Professor of International Economics at the London School of Economics and Political Science, UK, joined Bruegel as a Non-Resident Senior Fellow in September 2006. His research is mainly focused on spatial economics, international trade, development and growth, capital movements and multinationals. At Bruegel he coordinates the project European Firms in a Global Economy (EFIGE).
    After obtaining a Ph.D. in Economics from the Université Catholique de Louvain, he held teaching positions in Italy, Belgium, and Switzerland. He is affiliated with the Centre for Economic Policy Research (CEPR) in London and is a member of the Editorial Board of the Journal of Economic Geography.

  • Carlo Altomonte

    Carlo Altomonte is Professor of Economics of European Integration at the Social and Political Sciences Department of Bocconi University, and a core faculty member of SDA Bocconi School of Management, where he teaches International Business Environment. He has received the SDA Bocconi Teaching Excellence Award in 2007 and the Bocconi Teaching Innovation Award in 2016. He has been a founder, and the first Director, of the World Bachelor in Business, a unique undergraduate triple degree in Business jointly developed by Bocconi University, the University of Southern California and the Hong Kong University of Science and Technology.

    He is currently the Director of the Globalization and Industry Dynamics unit at the Baffi-Carefin centre of research of Bocconi University, a Non Resident Fellow at Bruegel, a EU think tank, and a Senior Researcher at ISPI, the Italian centre of Studies on International Politics. He has been visiting scholar at the Centre of Economic Performance of the London School of Economics and at the Research Department of the European Central Bank. He has been a visiting professor at the Paris School of Economics (Panthèon-Sorbonne, Paris, France) and KU Leuven (Belgium), and has held short teaching courses at the Wagner School of Government (NYU, New York), Keio University (Tokyo), Fudan University and CEIBS (Shanghai) among others.

    He has been regularly acting as consultant for a number of national and international institutions, including the Italian Government, the United Nations (UNCTAD), the European Parliament, the European Commission and the European Central Bank, analysing the role of international trade and investment and their implication for competitiveness.

    His main areas of research and publication are international trade and investment, the political economy of globalization and its implication on competitiveness. He has published in several leading academic journals, among which Journal of Industrial Economics, European Economic Review, Economic Policy, International Journal of Industrial Organization, Journal of Economic Geography, Journal of International Business Studies, Oxford Bulletin of Economics and Statistics.

  • Tommaso Aquilante

    Tommaso Aquilante is an Assistant Professor of Managerial Economics at the Birmingham Business School. He was awarded his BA and MSc in Economics from Bocconi University in Milan and his PhD in Economics from ECARES, at Solvay Brussels School of Economics and Management, in Brussels.

    Tommaso worked as Affiliate Fellow and Research Assistant at Bruegel. Prior to that, he worked as a research assistant in the Econometric Modelling Division at the Directorate General Research of the European Central Bank in Frankfurt. He also worked at FEEM (Fondazione Eni Enrico Mattei) and at Bocconi University."

    Tommaso‘s main research interests are international trade, political economy and competitiveness

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