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Article Excerpt
Abstract
It is foreseeable that the integration of domestic economies into a single market (globalization) will have a direct consequence on firm profits. Firms will see their returns converge in the long-term towards an equilibrium value that is identical to that of diverse firms coming from other economies. The authors' objective is to test the existence of a process of convergence between economies. Thus, they analyze the evolution of the competitive process of the manufacturing sector in eight countries. The results suggest that even though the competitive forces that operate at an international level will result in the convergence of the respective returns of firms in the long-term, the convergence process is only partial. (JEL L6)
Introduction
One of the basic propositions of economic theory sets forth that, under conditions of perfect competition, the excess profits of firms are transitory by nature, such that all firms and industries of an economy tend towards a common return in the long term. Thus, if a firm earns excess profits in a particular market, competing firms will enter that market by offering similar products at lower prices, thereby reducing the profit margin of the incumbent firm. The competitive process will continue as long as the profits being earned in that market are greater than the average profit in the economy. Alternatively, a profit that is below the normal profit causes disinvestments and capital movements towards markets where the income is more attractive. The competitive process thus makes positive or negative excess profits disappear in the long term.
Several papers in international literature have verified this hypothesis of competitive markets. Some of the more prominent papers are those by Mueller [1986], with respect to the United States; Odagiri and Yamawaki [1986], as regards Japan; Goddard and Wilson [1996], regarding Great Britain; Schohl [1990], with respect to Germany; and Espitia and Salas [1989], regarding Spain. They all reach similar conclusions, and a certain process of convergence is observed in each one of these countries. This process tends to bring the returns of the firms closer together in the long term, even though this process is incomplete, given that the excess profits are not completely eliminated.
In these studies, the analyses focus on a single country, without thereby taking into account the inter-relationships existing with other countries. Some authors have made international comparisons, but not in an integrated manner. They limit themselves to commenting on the results obtained in one country or another. Thus, Geroski and Jacquemin [1998] analyze the competitive forces among firms, industries and countries in a sample of large European firms (from France, Germany, and Great Britain). Jacquemin and Saez [1976], even though they use a methodology that is different from previous studies, analyze the persistence of profits in a sample that includes firms from the former EEC, Great Britain and Japan. Recently, Geroski and Gugler [2001] presented a paper that studies the convergence of the corporate growth of various industries from a group of 14 European countries.
Nevertheless, as of the end of the twentieth century, firms have been facing a new economic environment that is evolving towards the globalization of markets and therefore towards the integration of the various domestic economies. It is foreseeable that the integration of the various domestic economies into a single market will have a direct consequence on firm profits due to an easing of the barriers that protect the markets in which domestic firms operate. This is being driven by the new information technologies that allow the distances between countries to be reduced and allow greater knowledge to be obtained about other countries or that allow consumer needs to be homogenized. By giving rise to broader markets, this process of integration will generate competitive dynamics to which firms will progressively adapt.
A shift has been made from sectors of local or multi-domestic competition, in which the competition in one country is essentially independent from the competition in other countries [Porter 1986a; b], to sectors of global competition where there is growing interdependence among the various domestic markets [Ghoshal, 1987]. As a result of the competitive process, of the international mobility of capital and firms, and of the homogenization of demand, domestic economies will tend towards homogenization. Therefore, the final result of this process will be the convergence of domestic economies towards a global economy. Firms, if they cannot design strategic barriers of protection for their relevant markets, will see their returns converge towards a long-term equilibrium value. It could be inferred that a homogeneous, long-term convergence return might be derived from this process of integration for all of the firms that form a part of a single economy after the process of integration. Therefore, we herein analyze if convergence exists in the manufacturing sector of eight developed countries (six members of the European Union, the United States and Japan) and if the convergence value tends towards the average global return. In other words, this analysis endeavours to detect the evolution of the competitive process in the manufacturing sector at an international level. To do so, we have used a methodology that allows us to infer the degree of competition existing in the markets based on an analysis of the evolution of firm profits over time.
In order to carry out the objective of this study, the following section presents the models that have been applied and provides information on the database that has been used. The third section sets forth the methodology that was followed and the main results obtained. The main conclusions are in the last section.
Models and Sample Used
Convergence Models
Following authors such as Mueller [1977], Odagiri and Yamawaki [1986], Schohl [1990], and Goddard and Wilson [1996], the authors have used ad hoc models in order to verify the effectiveness of the competitive process. These models allow making inferences based on the modelling and study of the behavior of the returns variable. Through these models, the value at which firm returns in the various countries converge in the long term can be estimated.
The Return on Assets (ROA) is used as a measure of the returns, which is calculated as the profit before interest and taxes or total net assets. (1) Nevertheless, and given that the competitive process is motivated by the existence of profits that are above or below the average profit, the ROA of the manufacturing firm representative of each country has been standardized, thus, its deviation with respect to the average ROA of the group of manufacturing firms of all the countries in the sample has been calculated. (2) Moreover, this standardization of the measure, as Goddard and Wilson [1996] point out, allows elimination of the effects on profitability by the cyclical factors that operate in the aggregate scope:
(1) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII],
where [[PI].sub.jt] is the standardized ROA of the representative firm of the manufacturing sector from the country j in the period t and RO[A.sub.jt] is the ROA of the representative firm of the manufacturing sector from the country j in the period t.
As Odagiri and Yamawaki [1986] point out, in order to obtain a measure of the long-term returns, a time series model is needed that fulfils the condition that the limit of [[PI].sub.jt] be finite when t tends towards infinity. A simple model that fulfils this condition is the following:
MODEL 1 [[PI].sub.jt] = [a.sub.j1] + [b.sub.j1]/t + [[epsilon].sup.'.sub.jt], t = 1, 2, ..., n.
This model, which was presented by Mueller [1977] and subsequently used by Odagiri and Yamawaki [1986] and Schohl [1990], assumes the existence of a process of monotonous convergence of [[PI].sub.jt] towards [a.sub.j1] * [a.sub.j1] is the permanent advantage...
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