A Study On Firm Heterogeneity And Internationalization

The purposes of international trade theories are to explain the foundation and effect of trade, and their interaction with economic development.These theories reveal the causes and the utility of trade at the macro level, but there is a common implicit assumption—firms are homogenous, which means all firms are represented by a "representative" firm, the internal characteristics of different firms are ignored. However, researches during the past ten years had proved that firms are heterogenous. For example, the productivity of each firm is different from others. Empirical studies have generally shown that there was a close connection between firm heterogeneity and its internationalization. Therefore, this paper is going to explore how the heterogeneity affects firm's transnational behavior based on the framework of Heterogeneous-Firms Trade Theory.This paper presents a general equilibrium model to study two types of firm internationalization processes: random versus conscious selected into foreign markets. If firms are randomly selected into foreign markets, they are facing not only fixed entry costs and additional overhead costs, but also additional fixed costs of sales and variable costs of transport while exporting to other markets. When firms approach other markets in the way of foreign direct investment (FDI), they are facing fixed entry costs, additional fixed costs of sales and duplicate overhead costs. Only those firms with higher productivity are more likely to enter international market, in which the most productive firms could directly ivest in other countries, while others could only export to foreign markets. Of all firms, some less productive ones continue to produce only for the domestic market, and the least productive ones will exit. The background of firms consciously deciding whether to export/FDI or not is closer to reality. In this case, firm's initiative is fully considered. The technology that firms adopted and the labor that firms employed are different among all firms, which mean each firm is facing different marginal cost and fixed overhead cost. Firms with high technology have to pay lower marginal costs and higer costs of fixed overhead. On the contray, firms with low technology have to pay higher marginal costs and lower costs of fixed overhead. The highter productivity of firms, the more likely they participate to international markets. In this situation, the effect of intra-industry reallocations is still obvious.The hypothesis of firm heterogeneity opens up the"black box"of previous economic research, and intoduces the internal charactersitcs of firms into standard economic analysis. However, productivity or size are often used as the heterogeneity variable in the analysis of Heterogeneous-Firms Trade Theory, it comes out a common conclusion that only firms with higer productivity or larger size are like to realize internationalization.This conclusion is more suitable to explain those large multinational companies'international behavior. However in reality, small and medium enterprises (SMEs) have increasingly become the most active internationalization participants. There are much more SMEs in international markets, but the productivity or size of these firms are lower or smaller than large firms. Therefore it is not appropriate to only use productivity or size to represent the heterogeneity of firms, especially for SMEs.In order to explain SMEs'internationalization better, this paper expands the content of firm productivity. We believe that firm productivity is a variable that could represent firm's discrete or comprehensive nature and is different from other firms. It may be some special description of firms, such as productivity, size, labor quality, ownership structure, product characteristics, management effectiveness, entrepreneurship, network capacity, innovation efficiency, organizational structure, corporate culture, incentive mechanism etc. and can also be a comprehensive summary of these peculiarities. Firm heterogeneity is dynamic, cumulative, effective, complementary, learning and not easy to be detected. The heterogeneity of SMEs mainly reflected in the aspects of product characteristics, entrepreneurship, network capacity, innovation and efficiency, organizational structure and corporate culture. SMEs are important subjects of modern internationalization; these typical heterogeneties could affect SMEs'business activites through relevant channels. For example, SME could cultivate its unique corporate characteristics by the main products, and its heterogeneity of product characteristics could help itself penetrate foreign markets with advanced technology and low costs. Meanwhile, there is a trend that the internationalization of heterogeneous SMEs becomes born global. More and more niche markets increases market demand for this trend, scientific and technological progress provides technical support for this trend, clusters of heterogeneous SMEs provides network for this trend, and policy and financial support provides external power for this trend.The practice of internationalization of some major developed countries and regions proves that there are close contact between SMEs'heterogeneity and multinational operations. SMEs in the U.S., EU and Japan occupy an important position in their national economy, and they are important subjects of internationalization of these area. Those American SMEs which participate in international operations usually have strong heterogeneities in the aspects of innovation efficiency and organizational structure. Those EU SMEs which participate in international operations usually have a strong comprehensive heterogeneity of entrepreneurship, product characteristics, innovation efficiency and network capacity, etc. and there are many born global companies in EU. Those Japanese SMEs which participate in international operations usually have strong heterogeneities in the aspects of productivity and innovation. During this Financial Crisis, SMEs from these there contries or region have suffered severe failures. Bankruptcy, unemployment, import and export decline and other phenomena all appeared in these countries or region. In order to help SMEs ride out this economic storm and develop more international markets, these countires or region have introduced many policies. These policies have provided a favorable external environment for SMEs internationalization, and gradually resumed SMEs'positivity of particiapating in international operations.Since 30 years ago, lots of Chinese firms have participated in international markets; they went abroad in the ways of export and foreign direct investment etc. Manufacturing enterprises in China account for a large proportion of international operations, more and more high-tech enterprises is participating in internationalization, enterprises from eastern coast of China are relatively active in internationalization. The Chinese SMEs which participate in international operations usually have strong heterogeneities in the aspects of ownership and network capability. The heterogeneity of ownership is mainly reflected in two aspects: on the one hand, state-owned enterprises occupy a large part in import and export trade based on their advantages in scale of production, factor inputs and use of policies; on the other hand, foreign-invested enterprises have becoming an important subject in international operations since Chinese Reform and Opening up. The heterogeneity of network capacity is reflected in that many Chinese enterprises participate in overseas markets through their network with customers, other businesses and intermediaries, which compensate the shortage of Chinese firms'low level of productivity and technology. In addition, the Chinese heterogeneous SMEs also play an important role in participating in international operations. They account for 70 percent of Chinese international trade; processing trade is one of their main ways of exporting. Meanwhile, more than half of China's foreign investment is also realized by SMEs, such enterprises are more concentrated in the Pearl River Delta and Yangtze River Delta. These Chinese SMEs which participate in international operations usually have strong heterogeneities in entrepreneurial skills, network capacity and product characteristics, which enhance the success rate of their internationalization.The spread of the new round of financial crisis revealed some shortages of Chinese firm heterogenety. Chinese firms should strengthen the sense of crisis, establish an effective early warning mechanism, and work hard on improve their productivity, innovation efficiency and network capacity. They should actively integrate into the new round of revolution in science and technology, upgrade their brand with innovative products, cooperate with other firms in an open cluster, and occupy a favorable position in international competition.