Productivity and Globalization

Firms who are competing globally should be very concerned about their productivity. Productivity differences translate into performance differences between firms. Firms with lower productivity have higher marginal costs, meaning they are less profitable when competing in integrated markets.

Market integration through globalization exposes firms to increased competition from international trade. In this arena of intensified competition, performance differences between firms matter a great deal. Firms which suffer from poor performance are hit hardest and, in some cases, may be forced to exit the industry. The corollary to this is that the best performing firms will benefit from access to the larger integrated market, and are likely to grow as a result.

Cost differences between firms can translate into performance differences. If all firms in an industry are facing the same demand curve, the firms which have lower productivity will be at a disadvantage. This is because these firms will be producing with different (i.e., higher) marginal cost levels than rivals. Compared to higher marginal cost producers, firms with higher productivity and therefore lower marginal costs will be able to set lower prices with a higher markup over marginal cost, produce more output, and earn higher profits. In international trade, productivity can be the difference between being in the game and having to sit out.

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