Do foreign workers reduce trade barriers? Microeconomic evidence

• Author: Martyn Andrews,Thorsten Schank,Richard Upward
• DOI: http://doi.org/10.1111/twec.12486
• Published date: 01 September 2017
• Date: 01 September 2017

ORIGINAL ARTICLE

Do foreign workers reduce trade barriers?

Microeconomic evidence

Martyn Andrews

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Thorsten Schank

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Richard Upward

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University of Manchester, Manchester, UK

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Johannes Gutenberg-Universit€

at Mainz, Mainz, Germany

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University of Nottingham, and GEP, Nottingham, UK

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INTRODUCTION

In their review of the large literature on trade costs, Anderson and van Wincoop (2004) conclude

that trade barriers associated with national borders are large, but that policy barriers, in the form of

tariff and non-tariff barriers, are only a small fraction of the total border effect. Instead, informal

trade barriers are the largest component of the cost of trading goods across national borders. These

barriers include language, cultural differences, information costs and contracting costs. Evidence

on the importance of these informal trade barriers comes almost exclusively from studies of aggre-

gate trade flows between countries. A separate literature has used firm or establishment-level data

to examine the factors which determine entry into export markets (e.g., Bernard & Jensen, 2004;

Roberts & Tybout, 1997). The two key findings of this literature are, first, the importance of firm

heterogeneity and, second, the role of sunk costs in causing persistence of exporting behaviour.

These two findings interact because more productive firms are better able to overcome the sunk

costs and hence more likely to enter export markets. It is also likely that firms differ in the size of

the sunk costs they face. If informal trade barriers differ between firms, this would also explain

why some firms export and others do not.

This paper examines whether the presence of foreign employees can provide one explanation why

some firms export and others do not. Our basic hypothesis is that firms’foreign workers can reduce

trade costs, because foreign workers help establishments to overcome language, cultural and informa-

tional barriers to trade. It seems plausible that, for example, an employee who speaks a particular lan-

guage or has ties to a particular country may help their firm to export to that country. Aggregate gravity

models have established that the presence of migrants can increase trade between countries. This paper

shows that this mechanism operates, at least partly, via the employees of firms.

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Using a representative panel of German establishments over the period 1993–2008, we can

identify both the nationality of each worker within each establishment and the exporting behaviour

of these establishments. We then examine whether the proportion of foreign workers in an estab-

lishment has a causal impact on the probability that an establishment exports. We deal with the

potential endogeneity of the establishment’s workforce by controlling for observable characteristics

such as the establishment’s location (including distance to the German border), size, sector as well

as characteristics of workers in the establishment, and by constructing instruments for the share of

foreign workers in an establishment.

DOI: 10.1111/twec.12486

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2017;40:1750–1774

The richness of the data allows us to go beyond examining the simple hypothesis that establish-

ments with more foreign workers are more likely to export. We test a number of related hypothe-

ses which shed more light on the mechanism by which foreign workers affect establishments’

exporting behaviour. First, we expect that employees’influence on their establishments’exporting

capabilities is greater for more senior workers and workers who have a direct link to customers.

Aleksynska and Peri (2014) have recently shown that the stock of migrants in what they call “busi-

ness network occupations”have a significant effect on trade flows in a bilateral gravity model,

over and above the effect of the migrant stock more generally. Occupational information on each

worker allows us to test this hypothesis directly at the establishment level. Second, we test whether

establishments are more likely to export to a particular destination if they employ foreign workers

from that destination. An alternative hypothesis about the role of foreign workers is that they have

more general positive impacts on productivity in the firm, rather than a more narrow effect on

exporting to a particular destination.

We find evidence of a relationship between the proportion of foreign workers in an establish-

ment and the probability of exporting. OLS estimates suggest that a one-standard deviation

increase in the share of foreign workers in an establishment increases the probability of exporting

by 1.5 percentage points. 2SLS estimates suggest that the effect is larger, about 7.5 percentage

points, although these estimates are less precise. The effect is not driven by foreign workers who

originate from those Southern European countries which sent large numbers of (largely unskilled)

manual workers to Germany in the 1950s and 1960s under the so-called Gastarbeiter programmes.

An additional effect is observed for foreign workers who are in managerial positions within the

establishment. Further, the effect is driven by foreign workers whose nationality matches the

export destination, rather than to third-country destinations. This supports the idea that foreign

workers lower export barriers to those countries from which they originate (as in a gravi ty model)

rather than to foreign markets more generally.

The paper is organised as follows. Section 2 briefly reviews the two relevant literatures on trade

costs and on firm exporting behaviour. Section 3 describes the data and presents evidence that

there is a strong correlation between the nationality of workers and their establishments’exporting

behaviour. Section 4 explains our econometric methods, which address the possible endogeneity of

the workforce. Section 5 describes the results, and Section 6 concludes.

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LITERATURE REVIEW

Rauch and Casella (2003, p. 21) argue that, “as tariffs and transportation costs have come

down, research has increasingly focused on informal barriers to trade.”These informal barriers

include information, business contacts, language, contract enforcement and preferences. Of these

barriers, at least the first three might potentially be mitigated by the presence of foreign work-

ers in a firm.

At the aggregate level, there is considerable evidence of a link between trade flows and stocks

of migrants. For example, Gould (1994) estimates a gravity model of trade between the US and

j=1,..., 47 trading partners. The model includes measures of the number of immigrants from

country j, the skill intensity of those immigrants and their average length of stay. Gould finds sig-

nificant import and export effects and also finds that only small numbers of migrants are required

for the export effect, relative to import effects. He also argues that the information channel is less

important for homogeneous goods where the price provides better information, and, consistent with

this hypothesis, there are larger effects for less homogeneous products.

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