Firm‐Level Evidence for the Language Investment Effect on SME Exporters
| Published date | 01 September 2015 |
| Date | 01 September 2015 |
| DOI | http://doi.org/10.1111/sjpe.12072 |
| Author | Peng Zhou,James Foreman‐Peck |
FIRM-LEVEL EVIDENCE FOR THE
LANGUAGE INVESTMENT EFFECT
ON SME EXPORTERS
James Foreman-Peck* and Peng Zhou**
ABSTRACT
Both analysis of international trade and the knowledge resource theory of the
firm imply that language skills should play a vital role in exporting. This may be
apparent to large multinationals with sites in many different linguistic locations,
but we show it is less obvious to smaller companies. With data on the language
used by each of a large sample of European small- and medium-sized enterprises
in their export markets, we test and estimate the effects of language assets on
language performance in export markets and on export sales. Controlling for the
possibility that language skills may be acquired by exporting, we find a very sub-
stantial export return to linguistic expertise, indicative of unexploited gains from
investment in languages. There is also evidence of greater under-investment in
language skills in English-speaking Europe.
Only a minority of firms export and of these most only serve a few foreign mar-
kets, selling mainly to domestic customers (Bernard and Jensen, 1999; Eaton
et al., 2004; Bernard et al., 2007; Mayer and Ottaviano, 2007). The smaller the
company, the less likely it is to export (European Commission, 2011; Table 1).
Underpinning these characteristics, it has long been noted that lack of informa-
tion, risks and costly procedures have especially been barriers to exporting and
reasons for restricted export performance (e.g. Verhoeven, 1988).
Smaller businesses are disproportionately affected by the costs of entering
foreign markets; such costs not only include conforming to foreign regulations
but language and cultural difficulties as well (United States International
Trade Commission, 2010 6-2. 6-8). Consistent with this observation, an
OECD/APEC international study found that a majority of smaller firms rated
barriers related to internal capabilities and access as more significant obstacles
to internationalisation than those to do with the business environment (Fliess
and Busquets, 2006). Among the most important barriers for such companies
were identifying foreign business opportunities and limited information to
locate/analyse markets (OECD, 2009; European Commission, 2011, figure 37).
*Cardiff University
**Cardiff Metropolitan University
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12072, Vol. 62, No. 4, September 2015
©2015 Scottish Economic Society.
351
These obstructions are likely to stem significantly from cultural and linguis-
tic differences. Unlike many other trade barriers, they can be reduced by
investment in learning, but the considerable uncertainty about foreign market
opportunities may encourage a less than ideal commitment of resources. With-
out good communications, trade may not take place. In Lazear’s (1999)
model, individuals are randomly matched to trade with each other with the
consequence that communication difficulties reduce the efficiency of interac-
tions. Casella and Rauch (2003) consider a search or network view of interna-
tional trade in which imperfect information about foreign countries (caused
partly by cultural differences) acts as a barrier to trade. Information-sharing
networks can help clear this blockage, but language learning is not modelled
explicitly. Konya (2006) allows that agents recognise the language investments
of their trading partners –generally by reducing their own. He derives an
expression for under-investment in learning.
Communication and therefore trade can occur as long as one party learns
the language of the other. Church and King (1993) propose that the collec-
tively efficient language learning solution is for the smaller language group to
learn the language of the larger group. This maximises the excess of communi-
cation benefits over learning costs. They contend that communication benefits
are the same whichever group becomes bilingual, and the costs are lowest if
the fewest possible acquire the extra language skills. The language learning
decision is determined by specialisation in Choi’s (2002) model. He finds that
countries specialise in learning when their wages are low, except for small
open economies.
The large trade boost from a common official language shown in bilateral
aggregate international trade studies indicate that language acquisition matters
a great deal. Not sharing a common language is a significant barrier to trade
(Frankel and Rose 2002; Hutchinson, 2002; Anderson and van Wincoop,
2004; Helpman et al., 2009; Melitz, 2002, 2008). Greater linguistic difference
from English reduces an economy’s trade with the United States, controlling
for migrants and networks (Hutchinson, 2005). Conversely, Ku and Zussman
(2010) show that the ability to communicate in English has a strong effect in
promoting trade across the world.
Estimates of the trade barrier of language for smaller businesses based on
such aggregate national trade analysis could be too low. Generally, big busi-
nesses are more likely than nationally confined SMEs to be sensitive to the
linguistic needs of trade, by virtue of their multiple locations and multi-
linguistic staff, as well as their greater resources (Barner-Rasmussen and
Bj€
orkman, 2005; Buckley et al., 2005). Large multinational companies may
choose to communicate across borders in the language of their headquarters
country, as Siemens insisted on German. But even for large businesses, there
will be pressures to use the language native to the majority of participants in
transactions (Loos, 2007).
Disaggregated studies of smaller enterprises are therefore valuable for under-
standing the contribution of investment in language skills to export perfor-
mance. This article undertakes such an exercise. Because of the distinctive
352 JAMES FOREMAN-PECK AND PENG ZHOU
Scottish Journal of Political Economy
©2015 Scottish Economic Society
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