Globalization and firm‐level cost structure

• Author: Ying Zheng,Hui Ding,Xiaoyan Lu
• DOI: http://doi.org/10.1111/roie.12409
• Published date: 01 September 2019
• Date: 01 September 2019

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wileyonlinelibrary.com/journal/roie Rev Int Econ. 2019;27:1040–1062.

© 2019 John Wiley & Sons Ltd

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INTRODUCTION

Globalization is a complex phenomenon with various effects in national economies and the world

economy. The economies of all countries are undoubtedly influenced by the process of globalization,

subject to the level of openness to international trade (e.g., Edwards, 1993) and financial development

(Rajan & Zingales, 2003). To date, the link between international trade and aggregate productivity has

been examined in many studies (e.g., De Loecker, 2007). The higher productivity of firms involved in

international trade, such as import and export decisions, has been explained either as a consequence

of self‐selection (Melitz, 2003) or a learning effect (De Loecker, 2013; Keller, 2010). In addition,

prior research has considered an endogenous expansion in product variety (Krugman, 1979) and the

reduction of markups charged by firms because of the precompetitive effect of trade (Topalova &

Khandelwal, 2011) as sources of gains from international trade.

Received: 1 May 2019

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Accepted: 1 May 2019

DOI: 10.1111/roie.12409

SPECIAL ISSUE PAPER

Globalization and firm‐level cost structure

HuiDing

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XiaoyanLu

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YingZheng

Center for Accounting, Finance and

Institution, Business School,Sun Yat‐sen

University, Guangzhou, China

Correspondence

Xiaoyan Lu and Ying Zheng, Center for

Accounting, Finance and Institution,

Business School, Sun Yat‐sen University,

Guangzhou, China.

Email: luxy@mail.sysu.edu.cn (X. L.) and

zhengy26@mail.sysu.edu.cn (Y. Z.)

Abstract

In this study, we draw on economic theories of cost structure

and the effects of international trade on firms' productivity

to assess firm‐level cost behavior in the context of globali-

zation. We investigate why and how trade openness affects

firms' cost structure by examining the changes of fixed in-

puts along with those in capacity levels. Using a sample

consisting of 25 countries from 2000 to 2014, we find that

trade openness does significantly affect firms fixed and var-

iable cost inputs, which indicate that production uncertainty

along with international trade is essential to the cost struc-

ture decision in terms of cost rigidity. Furthermore, larger

firms are more likely to adopt a rigid cost structure with

higher fixed costs and lower variable costs because they are

more involved in the international economy and more ex-

posed to associated uncertainties.

JEL CLASSIFICATION

F14; F61; G31

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1041

DING et al.

In studies that emphasize the related effects of international trade on productivity, a potential draw-

back is that researchers might have ignored the cost effects on firms' productivity in their analy-

sis. While a trade‐induced productivity change is achieved through market selection effects (Melitz,

2003), the productivity of a firm also depends on the way its production is organized (Caliendo &

Rossi‐Hansberg, 2012). In scheduling production, cost is a critical issue and has implications for

evaluating firms' productivity.

In traditional management accounting, costs are divided into fixed and variable and defined as

cost structure. Fixed costs usually remain at a constant level within the relevant activity base, whereas

variable costs are proportional to the volume change and more flexibly adjusted if the activity lev-

els vary, based on changes in the economic or market environment. The cost structure of a firm is a

central element, but this element might have been largely ignored in research of international trade.

Research into the cost structure of firms generally links it to the areas including financial reporting

quality (Jung, Lee, & Weber, 2014), managerial incentives (Dierynck, Landsman, & Renders, 2012),

employee protection (Banker, Byzalov, & Chen, 2013) and demand uncertainty (Banker, Byzalov, &

Plehn‐Dujowich, 2014). We intend to fill this gap by focusing on cost structure while examining the

productivity of firms involved in international trade.

Banker et al. (2014) use the term “cost rigidity”1

to denote the mix of fixed and variable costs in a

firm's cost structure. The cost rigidity can be interpreted as managers making rational decisions while

they trade off the costs of resource adjustments2

against those of keeping slack resources (Anderson,

Banker, & Janakiraman, 2003; Noreen & Soderstrom, 1997), particularly when firms face demand

uncertainty that affects production capacity and leads to changes of resource commitments. Banker

et al. (2014) assert that, in the case of demand uncertainty, a firm is more likely to adopt a more rigid

cost structure, which gives rise to a higher level of fixed costs and a lower level of variable costs. If the

cost structure reflects the resource commitment decisions of managers facing production uncertainty,

a firm's cost structure should respond to the level of these uncertainties. Therefore, production un-

certainty can be considered as an exogenous determinant of cost structure. We treat the international

trade openness of countries as one source of production uncertainty because international trade has

an influence on production uncertainties, through price uncertainty (Abel & Eberly, 1994), demand

uncertainty (Banker et al., 2014), and exchange rate uncertainty (Baum & Caglayan, 2010). Our study

posits that firms facing higher production uncertainty of international markets are likely to adjust

resource inputs with a rigid cost structure.

In this study, we focus on globalization in terms of international trade openness and investigate

how trade openness affects firm‐level cost structure in an international setting. In particular, we exam-

ine whether trade openness, measured as Tradeshare, Importshare, and Exportshare, affects manage-

ment commitment to fixed resource inputs. Following Banker et al. (2014) and Banker et al. (2013),

our primary analysis is of changes in firms' cost of goods sold, operating costs, selling, general and

administrative costs (SG&A), and the number of employees to proxy for the cost behavior of firms

in changes of sales and their interaction with trade openness measures. Using company data from 25

developed and developing countries from 2000 to 2014, we find that trade openness does significantly

influence firms fixed and variable cost inputs, thus affecting their cost behavior. This relationship is

more profound when various cost categories (cost of goods sold, operating costs, and selling, general,

and administrative costs [SG&A]) proxy for cost behavior, but not significant when they proxy for the

number of employees. Our results are robust to different sample periods, and to a sample excluding

U.S. firms.

To explore the production uncertainties channel through which trade openness affects firms' cost

structure, we further examine whether the relationship between trade openness and cost rigidity is

dependent on firm size. We find that trade openness has a negative effect on firms' cost behavior, and