Changes in exchange rates:
- make little difference to a firm’s decision to start or stop exporting
- make no difference at all to level of exports of multi-national firms
- make some difference to domestic UK firms — but have modest impact on exports.
Changes in exchange rates have little impact on UK manufacturing exports and are likely to have only a modest effect in reducing the country’s record trade deficit, researchers at GEP — the Globalisation and Economic Policy Centre at The University of Nottingham — claimed today.
The researchers analysed exchange rate movements and export patterns of over 23,000 UK manufacturing firms over a 17-year period from 1987 to 2004 — the most comprehensive research of its kind carried out here.
In a paper to be presented at the Royal Economics Society Annual Conference next week, the GEP team say that changes in exchange rates have no impact on a manufacturer’s decision over whether to start — or stop — exporting.
Report co-author, Dr Richard Kneller, Associate Professor of Economics at The University of Nottingham, where GEP is based, said: “Our research shows that a drop in the value of the pound will not suddenly persuade British manufacturers to get out their foreign phrase books and start trying to sell overseas.“
He said the analysis also showed that changes in exchange rates make no difference to the level of exports of multi-nationals based in the UK.
Dr Kneller said: “It would appear that multi-nationals are better able to internalise and offset currency risks. In the last few years there has been a huge amount of foreign direct investment in the UK, which means that multi-nationals now account for at least a third of total UK exports.”
But the report shows that exchange rates do have some effect on individual domestic UK manufacturers. For every one per cent increase in an exchange rate index a firm’s exports will drop by 1.28 per cent. Usually exchange rate indices change by between three and 10 index points in a year.
But Dr Kneller said: “You have to put this into context — on average, exports account for just 5.6 per cent of a domestic UK manufacturers business — so, on average, a ten point change in the exchange rate index will make about half a per cent difference to total sales for a firm.
“The findings may surprise many people — intuitively you would expect a strong pound to be bad for exports and a weak pound to lead to much greater exports, but this research shows a different picture. It means those concerned about the size of the trade deficit should not see a devaluation of sterling as a magic bullet solution to closing the gap.”
Notes to editors: GEP — the Globalisation and Economic Policy Centre — is based at The University of Nottingham and is the major centre in Europe studying the impacts of globalisation and economic policy. It receives substantial financial support from The Leverhulme Trust.
The University of Nottingham is Britain's University of the Year (The Times Higher Awards 2006). It undertakes world-changing research, provides innovative teaching and a student experience of the highest quality. Ranked by Newsweek in the world's Top 75 universities, its academics have twice won Nobel Prizes since 2003. An international institution, the University has campuses in the United Kingdom, Malaysia and China.
The research paper Exchange Rates and Exports: Evidence from Manufacturing Firms in the UK David Greenaway, Richard Kneller and Xufei Zhang, will be presented at the Royal Economic Society’s Annual Conference at Warwick University in April.
*Latest Government statistics show that in December 2006, the UK imported £7.1 billion worth of goods more than it exported. Last year the UK’s deficit on goods and services rose to a record £55.8 billion for the year as a whole, compared with a deficit of £44.6 billion in the previous year. Balance of Trade figures from the Office of National Statistics. See: http://www.statistics.gov.uk/cci/nugget.asp?id=199
For more information and a fuller background briefing for journalists further summarising the research, contact Martin Stott, Bulletin PR, on +44 (0)115 922 8264, 07956 917 978, mstott@bulletinpr.co.uk or Tim Utton, Media Relations Manager in the Media and Public Relations Office at The University of Nottingham, on +44 (0) 115 846 8092, tim.utton@nottingham.ac.uk