Written submission from Elena Georgiadou, Huw Edwards, Anna Grosman & Tien-Der Jerry Han (ELG0018)

Business and Trade Committee: Inquiry on Export-led growth.

Submission on: ‘A Hybrid Model of UK Export Promotion: Building a Proactive Dynamic Internationalization Capability with Public-Private Collaboration in Commercial Diplomacy[1]

Elena GEORGIADOU*

Huw EDWARDS*

Anna GROSMAN**

Tien-Der Jerry HAN*

* Loughborough University, Loughborough Business School

** Loughborough University, London, Institute for Innovation and Entrepreneurship

Our submission, which reflects recent and ongoing research, addresses two of the call questions:

• What are the new or growing opportunities for exports which can drive UK economic growth? How can these be exploited?
• What do UK businesses need to increase exports? How does the UK compare to other countries in their support for exports?

Executive Summary

In our paper, we review both a series of econometric (quantitative) and qualitative studies, as well as reviewing the current export policy setup in a number of selected countries, which are regarded as leaders in export promotion practice.

We start with quantitative studies addressing the efficacy of commercial diplomacy and other activities in promoting exports. We have reviewed just over 20 econometric studies using a variety of methodologies and covering different countries and different types of export promotion activity. The methodologies can be categorized into four groups: gravity-based studies, firm-level studies, transaction-level studies, and a meta-analysis, each of which is suitable to a different set of subsidiary questions.

While these studies differ in methodology and coverage, some broad themes emerge.

1. Overwhelmingly, the gravity studies confirm a positive effect of diplomatic representation upon trade.

1. Embassies have a stronger effect than consulates. By contrast, trade missions and state visits tend to have either little effect, or short-lasting effect only.
2. Most of the firm-level studies suggest that export promotion tends to have a greater effect upon export market entry (the extensive margin) – although a possibly more rigorous study of Canada found the effect was more on the intensive margin.
3. The transactions-level studies of Spain, the UK and Belgium, all found positive effects upon both the number of products exported, and the Spanish study found transactions per product also increased.

The tentative conclusion is that export promotion activities by embassies and (to a lesser degree) consulates have a significant effect, although more study would be needed to confirm cost-effectiveness. There is serious doubt about the value of diplomatic visits and trade missions.

We have also reviewed 15 papers which use qualitative methods including case studies and showcase the value added of governmental commercial diplomacy for export promotion generally and SME internationalization specifically. The highlights from this review are as follows:

1. There is increasing need for hybrid models of organisation of commercial diplomacy comprising both traditional diplomatic tools and private sector institutions/export agencies.
2. There is heterogeneity among firm needs with regard to internationalisation support and tailored support programmes are required that are appropriate for particular stages and aspects of internationalisation such as negotiating and managing agreements, resolving problems when e.g. borders are closed or import taxes are raised and negotiating IP and contracts.
3. There is increasing need for intensification of representation in embassies from various government departments, academic institutions and specialists to support internationalisation of start-ups and small to medium-sized enterprises (SMEs) in specific industries, such as life sciences and clean energy.
4. Commercial diplomatic services and support mechanisms via embassies are particularly useful for:

a)      Newcomers to a host market or for SMEs with no prior experience in exporting or unwilling to export but forced to do so due to pressures such as a domestic economic crisis.

b)      Bilateral trade relationships of developing countries, especially in view of North–South trade. In these contexts, capitalising on political relationships has a positive effect on allowing SMEs to access networks in host markets.

5. There are two main commercial diplomacy mechanisms that positively influence SME internationalisation: a servicing mechanism and a network mechanism resolving respectively barriers of SMEs’ information asymmetry and lack of professional international management skills partner as well as opportunity/partner identification in foreign business networks.

Submission: The Hybrid Model of UK Export Promotion: Building a Proactive Dynamic Internationalization Capability with Public-Private Collaboration in Commercial Diplomacy[2]

Elena GEORGIADOU*

Huw EDWARDS*

Anna GROSMAN**

Tien-Der Jerry HAN*

* Loughborough University, Loughborough Business School

** Loughborough University, London, Institute for Innovation and Entrepreneurship

[Please note that this document should be considered a working paper].

Our submission, which reflects recent and ongoing research, addresses two of the call questions:

• What are the new or growing opportunities for exports which can drive UK economic growth? How can these be exploited?
• What do UK businesses need to increase exports? How does the UK compare to other countries in their support for exports?

Introduction

1. There is currently considerable interest in export promotion in many countries, but notably in the United Kingdom. In part, this reflects the fact that UK trade with its nearest neighbours the EU faces increased barriers since Brexit, as acknowledged by the ONS and others (ONS(2021), Douch and Edwards 2020 and 2021), while supply chain and other difficulties mean that the performance of exports to other parts of the World, even those with which the UK has been negotiating trade deals, has so far been disappointing.
2. The question is therefore very pertinent as to whether the support which has been provided in recent years to UK exporters or prospective exporters is currently well-geared to cover the needs for UK firms to develop new exporting ties in new, less familiar countries.[3] To the extent that perhaps the UK’s current setup is still less than ideal, we also review practices elsewhere. In particular, we focus on the role of commercial diplomacy, although one of our findings is that the effective integration of this with other aspects of export promotion is important.
3. To address the question, we focus here on a combination of literature reviews and case studies, to address the question systematically. Our structure is as follows:
4. First, we outline the recent UK setup (acknowledging that changes have already started in recent years, but that the support setup is still subject to change and unclear). This is followed by a review of potential sectors. in which the UK might hope to be an exporter, and what the needs might be for each of these sectors.
5. Following that, we carry out two significant literature reviews. The first covers over 20 econometric (quantitative) studies, some of which are widely cited, and which, on balance, provide quite strong quantitative support for the ability of commercial diplomacy and other export promotion activities to support exporters. This is complemented by a review of a series of qualitative (case-study) papers, which provide more specific information on the varied needs of exporting and potential exporting firms.
6. The next step, which is perhaps a novel contribution, is a more detailed review of the export promotion structures in two countries which are widely-acclaimed for their export promotion activities: Australia (which is largely state-driven) and Germany, which has a great deal of private involvement. We also review the setup in Greece, which has successfully revamped its export promotion structure, following the exporting challenges associated with the Eurozone crisis of a decade ago.
7. In our final section, our conclusions are very much in the form of a series of recommendations, based on the notion of a hybrid system, where commercial diplomacy is focused on providing an accessible interface for potential exporters, while building on the experiences of the Australian, German and Greek experiences, to link up well with private as well as public providers.

The recent United Kingdom set-up

8. Britain is currently in a dynamic era. Its decision of leaving the EU is no doubt dominating the international trade strategy of the UK in the foreseeable future. Even though the UK and EU now have the deal settled, with the agreement being in force on 1st May 2021, both UK and EU businesses situated in the UK are facing and feeling the biggest systematic change after the financial crisis in 2008. In February 2023, the Department for International Trade (DiT) and the Department for Business, Energy and Industrial Strategy (BEIS) have merged, and Department for Business and Trade (DBT) is formed, and its exact roles and responsibilities are yet to be fully formalized. It further signifies the change in the dynamic. Last time the UK Government issued trade policy white paper was 2017. Under the backdrop of the impact of UK’s leaving the EU becoming clear and the tension between US and China remaining, with the brief introduction to the involvement of the policy, it becomes understandable that SMEs being less resourceful, they will need strategic assistance to really utilise the assistance provided by the Government.

9. The following figure shows the evolvement of the UK’s trade strategy. “Trade and Investment for Growth White Paper” published in February 2011 stated how the UK should maximise and realise the opportunities for the businesses in the UK to trade and invest. It also illustrates how to attract investment to the UK. The main idea was to strengthen the trading system. In this White Paper, the whole-government approach was adopted to fulfil export promotion, and the Minister of State for Trade and Investment played the leading role through the Cabinet’s Economic Affairs Trade Committee. The committee was to oversee the implementation of detailed action.

10. “Plan for Growth White Paper” published in March 2011 indicated that the UK would work on the removal of trade barriers including the reform of tax system and cutting red tapes.
11. “UKTI’s Five-year Strategy-Britain Open for Business” published in May 2011 set out how UKTI would practically assist exporters and investors to achieve the overarching objective set by the UK government. In this White Paper, it clearly stated that the UK government would stimulate the amount of innovative and high-growth SMEs which do export. It also declared that UKTI would campaign for the highest value opportunities overseas and build strategic relationships with some biggest trade and investment clients.
12. Then in January 2014, “Britain Open for Business: The Next Phase” was published. This is a follow up report of “UKTI’s Five-year Strategy-Britain Open for Business” published by UKTI. The priorities proposed by the latter remained and UKTI increases a list of priorities, which was being very specific about the following that the UKTI would:

a)      Provide tailored support for large companies;

b)      Strengthen the support provided to medium-sized businesses;

c)      Enhance support for SMEs and increase promotion of SME services;

d)      Focus strongly on China and India, with an increased focus on parts of Africa and Central America;

e)      Help businesses to harvest the benefits of FTAs;

f)       Focus on sectors where trade and investment are more effectively supported by the UK government; and

g)      Work more closely with other government and non-government agencies.

13. Then in September 2012, “Industrial strategy: UK sector analysis” was published, which could be understood as the early version of modern Industrial Strategy. It identified 11 existing strength of the UK showing the sectors that could contribute more to the economic growth.
14. In July 2013, “Industrial strategy: government and industry in partnership” was announced.[4] It depicted how the UK government would collaborate with the 11 sectors identified in “Industrial strategy: UK sector analysis”.
15. In January 2014, “Britain Open for Business: The Next Phase” was published.[5] It set out how the government would provide practical support to exporters and inward investors between 2014 and 2016. This report was an update to UKTI’s 5-year strategy announced in 2011.
16. Then in 2016 there was Brexit and the Green Paper of the Industrial Strategy was announced. In 2017, White Paper of the Industrial Strategy was deployed.
17. The very brief policy evolvement shows that the UK government has been working on the trade and economic diplomacy with the consideration of commercial diplomacy for a long period of time.
18. The two series strategy schemes implemented by the UKTI in 2014 and Department of International Trade in 2016 below show the developments of UKTI’s policies. UKTI is now a part of DIT.

Figure : Strategies of UKTI in 2014

Figure : Strategies of UKTI in 2016

19. When comparing the two strategy schemes, the similarities are that both were helping the UK exporters, whereas the drastic difference is that in 2016 UKTI worked closer with other government bodies and UK’s private sector.
20. In 2014, the UKTI worked along in most of the strategies. The only partner was Foreign and Commonwealth Office (FCO). Hence, it is more like the Australian approach. UKTI provided information on the overseas markets, assessed the way companies communicate with overseas customers and offered practical recommendations. UKTI also helped UK companies to visit the markets that the companies interested in and provided funds to support eligible SMEs to attend overseas exhibitions, or conducting research into potential export markets. FOC provided information on country and sector levels. FOC also offered news on overseas events.
21. In 2016, which was the year DiT being established and UKTI became part of DiT, its assessment report (2016) depicted the strategies implemented by UKTI and DiT. The most obvious change was that DiT began to work with other government bodies and private sector actively. “Strategic Relationship Management (SRM)” was such a programme bringing together other government bodies and 84 companies that were strategically important to the UK. The programme was to make those government bodies and companies aware of the commercial agenda of inward investors and exporters. “Global Entrepreneur Programme (GEP)” provided local specialists who assist the development of the reginal entrepreneurial network and connect them to other emerging entrepreneurial communities across the globe. “Exporting is GREAT campaign” was supported by 50 external partners from businesses and industry. They worked with UKTI to increase the supply of available export opportunities for the UK businesses including SMEs. “Trade Envoys Programme” was a programme that provided specialists with skills and knowledge of particular sectors or markets to provide more sophistic information. “Overseas Business Network Initiative” is a programme that focuses on building relationships with the businesses having the ability to yield high value successes for the UK. “Global Commercial Partners Initiative (GCP)” was a programme that utilised the strength of the UK’s financial sector. GCP built the relationship with Deloitte, EY, KPMG, PwC, Barclays, HSBC, Lloyds, RBS, Stander and Standard Chartered to support a greater number of UK exporters and investors.
22. It is very clear that the UK began to notice that the strength of the private sector is important, and utilising it is crucial, which was the characteristic of German commercial diplomacy.
23. The figure on the following page shows overall framework of the UK for its commercial diplomacy. It can be seen that the UK government is adopting the whole-government-approach to commercial diplomacy. Under the cabinet, there is a sub-committee overseeing the commercial diplomacy. DiT, BEIS and UKEF are the three pillars in the government to fulfil the responsibilities. FOC and DiT jointly form the FCO-UKTI commercial diplomacy task force. In the private sector, there is British Bankers ‘Association working with UKEF providing financial support. However, such an organogram was constructed before Brexit, and since Brexit, the UK government has beem reformed significantly. Hence, to what extent such a scheme has been modified remains to be observed and explored.

Where does the UK lead in terms of exports?

24. The UK is a leading economy in exporting from the following six sectors, financial and professional services, technology, clean energy, life sciences and healthcare. We briefly introduce the export dynamics in each of these sectors, highlighting the particular approach in each sector to export promotion through commercial diplomacy.

Financial and Professional Services

25. Services are a significant component of the UK's export economy, comprising approximately 50% of the total exports. The UK has a vibrant creative sector, including film, TV, music, gaming, and design. Exporting creative content and services, such as film distribution, licensing, and expertise in visual effects, can drive economic growth. The UK's education system is highly regarded globally. Exporting educational services, such as English language training, higher education courses, and vocational training, can be a significant opportunity.
26. Services exports differ from goods, in that there are few tariff barriers, but often nontariff barriers, and World Bank studies[6] show that issues such as passporting (the ability to open subsidiary offices), and for staff to visit either regularly or for quite long periods, are essential to developing services trade relationships.
27. Soft diplomacy, which includes fostering positive international relationships, promoting cultural exchange, and supporting legal frameworks, is crucial for the success of professional services exports, as well as facilitating travel and ensuring the enforcement of contracts in international trade. Collaborating with major financial institutions globally enhances the UK's position as a financial hub and facilitates the export of financial services. Building strong partnerships and alliances with renowned companies through soft diplomacy can attract foreign investment and expand the reach of UK financial services internationally. To foster collaboration and facilitate service exports, it is crucial to have skilled professionals who can bridge cultural and linguistic gaps, understand international business practices, and establish strong relationships with clients and partners. Therefore, visa support through soft diplomacy is essential for facilitating the work and study of skilled individuals abroad, thereby boosting the export of services in finance, business, creative industries, and education.

Technology

28. The UK is the science and technology superpower, leading Europe and the world in areas such as AI, cybersecurity, fintech and software development. [provide stats]. The UK produced far more tech unicorns (100) than Germany (42), France (22) or the Netherlands combined. The UK is the third largest destination for investment in fintech, holding 10% of the global market share. Emerging fields, such as AI and robotics, have attracted £1.47 billion and £0.5 billion respectively. Expanding exports in areas such as software development, cybersecurity, fintech, AI and robotics. This can be achieved by promoting UK expertise abroad through commercial diplomacy, trade missions, and establishing partnerships with overseas companies. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an integral part of the World Trade Organization (WTO) agreements. Complying with TRIPS obligations and actively participating in international discussions and forums related to IP can foster a conducive environment for trade, innovation, and technology transfer. Enforcement of IP rights including diplomatic and legal involvement is of crucial matter for the technology and digital services. Diplomatic channels can play a crucial role in negotiating and securing favourable IP rights agreements with other countries. Diplomats should engage in dialogue, negotiations, and information sharing to protect the interests of domestic industries and creators. Policymakers should prioritize business advocacy and provide support services to help businesses navigate complex IP-related issues. This includes conflict resolution mechanisms, ensuring effective IP protection, providing representation at international forums, and facilitating contract negotiations. By doing so, policymakers can create an environment that encourages exports, investment, and the development of innovative products and services.

Clean Energy

29. With the increasing focus on sustainable development and renewable energy, there is the opportunity for the UK to export renewable energy technologies, such as wind turbines, and solar panels. The UK's expertise in offshore wind energy can be leveraged to develop partnerships and export these technologies to countries investing in renewable energy infrastructure. Commercial diplomacy, alongside energy diplomacy (European Union, 2021), can be used to support these activities. For instance, commercial diplomacy can help renewable energy companies navigate regulatory frameworks and trade barriers in target markets. This could involve diplomatic negotiations, participation in international forums, and lobbying efforts to create an enabling environment for renewable energy trade. Commercial diplomacy can play a crucial role in securing financing for renewable energy export projects.
30. Exports of clean energy, among other environmentally friendly technologies, depend in part upon support of, and advice on, ESG accreditation by firms. Since this often applies to firms’ supply chains, the provision of good quality advice on sourcing supplies to make British exports attractive is an important task.

Life Sciences and Healthcare

31. Commercial diplomacy can play a crucial role in boosting exports of pharmaceutical and healthcare industries, particularly for life sciences start-ups and small to medium-sized enterprises (SMEs). While big pharmaceutical companies often handle their own export promotion, support is needed for emerging companies, including spin-offs from universities and start-ups linked to research clusters. Commercial diplomacy can assist with facilitating market entry and expansion of SMEs and start-ups, in navigating complex regulatory environments and accessing international markets. Diplomatic channels can provide guidance on regulatory requirements, assist in obtaining necessary certifications and licenses, and facilitate introductions to local authorities, regulatory bodies, and potential business partners. Diplomatic networks can offer valuable market intelligence and insights into global healthcare and pharmaceutical markets; and facilitate research partnerships between international universities, research institutions, and local start-ups, enabling knowledge exchange, collaborative research projects, and access to cutting-edge technologies. Commercial diplomacy can help connect life sciences start-ups and SMEs with potential investors, venture capitalists, and international funding sources. Additionally, diplomats can advocate for favourable investment climates, tax incentives, and funding opportunities that support the growth and export capabilities of pharmaceutical and healthcare companies.
32. We continue with a review of existing studies on export promotion, particularly on the role of embassies and consulates. We start with studies relying on an econometric approach (large-scale datasets), followed by a review of studies approaching this topic through surveys and interviews with key respondents

Economic Studies of Export Promotion Activities

33. There has been a range of studies utilising either bilateral gravity data or firm-level data to assess the effectiveness of Export Promotion Activities (EPAs). It is worth noting that there is a variety of both questions which may be asked and of methodologies and databases employed, although a consistent theme seems to be that EPAs are effective in increasing exports in a range of situations.
34. We will start by summarising the methodologies and studies employed, and the results which have been found. We will then proceed to ask whether the questions being asked are appropriate, both in terms of understanding the role of export promotion (from an academic viewpoint), and from carrying out policy assessment.

A. Methodologies and databases employed.

1. Bilateral trade data (gravity).

35. In order to assess the effectiveness of any trade measures (whether tariffs, non-tariff barriers or, in this case, export promotion), a counterfactual is needed. Most studies utilise bilateral trade data (i.e.between country pairs), since this is readily available.
36. Since Tinbergen’s classic (1962) study, it has come to be accepted that trade volumes are closely (positively) related to country sizes and negatively to the distance between them. More recent work (Anderson, 1979; Bergstrand, 1989; Anderson and Van Wincoop, 2003; Baier and Bergstrand, 2007; Head and Mayer, 2014) has emphasised the relationship with theoretical models, so that today’s gravity model, which incorporates relative price (‘multilateral resistance’) effects, is essentially an export demand system, making sophisticated use of fixed effects and dummy variables to proxy the general equilibrium effects.  
37. More recent gravity work has come to incorporate disaggregation by product as well as country pair, and indeed, using a sophisticated (often 6 digit) industrial classification, it is possible to derive and model trade split into extensive margin (in terms of products) and intensive margin.
38. Our database lists the following studies using gravity or bilateral data.

39. The best-known paper in the field is Rose (2007), which found that consulates raise exports by 6-10%, albeit based upon a rather basic cross-sectional model for 2002-3 only (due to a lack of equivalent diplomatic data for other years). This database also formed the basis for a series of subsequent studies: Segura-Cayueba et al (2008) and Visser (2016), while Yakopa and Van Bergeijk (2010) also use cross-sectional data. These studies confirm and refine the positive effect in the Rose (2007) study: it is concentrated in differentiated goods, and in exports to developing countries rather than advanced one.
40. Due to data limitations, these studies are rather limited: most modern gravity studies use panels with fixed effects or dummy variables to identify multilateral resistance following Anderson and Van Wincoop (2003) and Baier and Bergstrand (2009): the absence of fixed effects means that these studies are potentially flawed as a means of comparing border costs, particularly between more remote and less remote countries.  This weakness potentially detracts from the results.
41. The remaining studies utilise panel databases, but are often linked to trade promotion events (for which there are specific dates, which can be regarded as treatments). Hence Head and Ries, 2010, look at trade missions (which are shown not to increase trade), while Nitsch, 2007, examines the effect of state visits, which do have a strong positive effect (but short-lived).
42. For study of the effects of longer-term diplomatic and export promotion agencies, Volpe Martincus et al (2010)  is perhaps the most interesting paper here, covering a series of Latin American and Caribbean countries, and finding different effects by product group. It is perhaps a shame that a wider geographical spread of countries is not examined. Also of interest is Kang et al’s (2011) paper based on Korean export promotion, linking the EPA budget to exports, and rather in line with Hayakawa et al’s (2014) finding, from Japanese and Korean data, that opening an EPA office in a country has similar  effects to a free trade agreement.

2. Firm-level databases and surveys.

43. The use of firm-level data has become increasingly important in international trade, especially in the light of the literature on firm selection into exporting (Melitz, 2002). The main limitation is the need to obtain firm-level panels over time, which integrate export and other firm-level data, and then to match these to treatment data (i.e. whether and when a firm interacted with export promotion agencies). The most valuable databases are transactions-level databases for individual exporter countries, which show not only firm exports over time, but their destinations and volumes: however, only a few countries carry out this kind of statistical exercise (usually for customs and revenue purposes), and access to such data is usually highly restricted.
44. Firm-level surveys typically include firm-level fixed effects, but enable us to study the extensive and intensive margins of exporting, the selection into exporting (including the effects of export promotion) and potentially productivity spillovers from exporting.

45. A summary of firm-level studies in our survey is below.

46. These studies again agree overwhelmingly that there is a positive impact of export promotion activities upon export activity. The finding that EPAs particularly benefit the extensive margin of exports among differentiated products is quite consistent, with one exception – van Biesebroek et al (2015), who find the effect for Canadian exporters is on the intensive margin. Some of the studies contain combined firm- and destination data, while van Biesebroek et al (2015) stands out for the use of pairwise matching of treated and untreated firms. This technique is increasingly popular in the literature, as it is viewed as providing better controls for endogeneity – something which is very important where the decision of firms to use export promotion services is not exogenous (and so controls, such as matching, are needed to confirm the direction of causality).

47. Transactions-level studies are:

48. All three studies are relatively sophisticated in terms of analysis of firms’ responses to specific export promotion programmes, and both find a range of significant positive effects, in particular showing important and lasting effects upon market participation. The latter two studies take considerable care to control for endogeneity, so that the evidence that there is a positive causal relationship is somewhat stronger than with previous studies.
49. Against this, the use of highly disaggregated data means it is perhaps somewhat harder to derive the aggregate trade effects of the treatment response, although Mion and Muuls (2015) do quite substantial simulation work by groups of firms.

3. Meta-analysis

50. Moons and van Bergeijk (2017) carry out an extensive meta-analysis of 32 primary studies (many of them covered in our discussion above). A meta-analysis can be viewed as a joint test of the significance of a number of regression analyses, after taking account of the fact that the countries covered, the number of observations, the time period, the export variable (e.g. probability of export versus volume of exports) and the types of export promotion involved also vary across studies. Due to covering such a variety of studies, the analysis focuses on the question of significance (the ‘t value’) of the estimated export promotion effect. Overall, by pooling a large number of studies, the meta-analysis is believed to improve our overall confidence in whether results are significant or not (although a caution is that publication bias can effect studies).

51. As a broad summary, Moons and van Bergijk (2017) find that choice of embassies as the explanatory variable has a more significant effect than consulates or trade missions, while they do not find a significant effect from state visits. Studies before 2000 had higher overall significance.
52. It is worth bearing in mind that the focus on statistical significance limits the study in two respects. Firstly, from an economic point of view, we cannot necessarily say that a statistically significant effect means that the response of trade to promotion expenditure is sufficient to justify that expenditure. Secondly, a study can sometimes be falsely statistically significant because insufficient care has been taken to control for endogeneity.

C. What questions should be asked, and are they being asked?

53. First of all, the above sections confirm that there is now a considerable body of studies on the effectiveness of EPAs in increasing exports, utilising a considerable variety of data and methodologies, and that the results confirm that, especially in the case of embassies in north-south, south-south and south-north trade, there is a positive effect. Also that most studies find that this effect is on either export market participation, or on the extensive margin (number of products x no of destinations).
54. Despite this, it is premature to say that the studies conclusively show under which circumstances EPAs are cost-effective. Let us address potential criticisms in turn:

i) The additionality issue. EPAs may simply be replacing firms’ own marketing budgets. This ties in with Gencturk and Kotabe’s (2000) finding that firms receiving export subsidies have higher profits but experience no effect on turnover.

ii) The subsidy issue. EPAs may constitute a subsidy to exports, which is not of itself desirable (indeed, a country producing differentiated exports typically has a positive export tax, not subsidy, as its optimal policy – Dixit and Norman, 1980).

iii) The marginality issue. Typically economic policymakers want to know, not just whether they should supply a service, such as EPAs, but also to what extent. We would generally expect, beyond a point, diminishing marginal returns, with the optimum being given at the point where marginal cost equals marginal gain.

55. The additionality criticism is probably the easiest to address. If EPAs simply displaced firms’ own export expenditures, we would expect little positive net impact upon exports: however, this finding is contradicted by the great majority of the studies cited here.
56. The subsidy issue is more significant. Effectively, it raises the question of whether the increase in export demand is sufficient to justify the EPA expenditure. To investigate this, one needs both to derive an economic valuation of a change in export demand (effectively the marginal social benefit from increasing export demand), and compare it with the marginal cost of the EPA. While a number of studies do provide ranges for the response of export volumes to the percentage change in EPA expenditure, these do not, by themselves, provide sufficient evidence to make this judgement. A number of results are cited in Moons and van Bergeijk (2017), from Rose’s now famous 6-10 percent response in exports from opening an embassy, borne out by Hayakawa et al (2014) and Nitsch (2007) finding a similar number for the effect of trade missions, while other studies (van Veenstra et al, 2011) find smaller numbers. However, even given the uncertainties of the export response, more work is clearly needed to derive an economic cost effectiveness measure.
57. The most critical issue, in many ways, is marginality, and this is where the most work remains to be done. Most studies have tested for either i) the percentage effect of a rise in export promotion activity upon export volumes, or ii) the effect upon probability of export – the former being (log)linear while the latter is probably best modelled as a logit function. Nevertheless, these are very restrictive assumptions, which may make it difficult to derive accurately the optimal marginal gain from EPAs in different circumstances. There is some limited confirmation from Lederman et al (2009) that there are diminishing returns to export promotion activity. Indeed, one might infer this in a limited sense even from Rose (2007), since an embassy provides a bigger boost than subsequent consulates (assuming the consulates are subsequent to an embassy). However, important questions remain unanswered, such as the relationship of the marginal effect of embassies/consulates/other EPAs in countries of different sizes, both in terms of population and in terms of geographical area and diversity. Also the extent to which different types of export promotion activity complement or substitute for each other, and what is the optimal mix.
58. In summary, from an economic perspective, analysts should be aiming for a workable appraisal tool for assessing the right level and balance of provision in the case of different countries. While the current analysis shows clearly that there is a role for export promotion and commercial diplomacy, these questions have yet to be answered.

Qualitative studies review: “Commercial diplomacy as a constituent of dynamic internatonalization capability”

59. In the last two decades, the global economic crisis, the preponderance of emerging economies, the shift of global economic power to the East and the emergence of global value chains reshaped international trade (Tajoli & Felice, 2018) and fuelled governmental initiatives to support their national businesses’ involvement in the process of internationalization such as strengthening their embassies commercial diplomacy and adopting whole of government approaches to organise their foreign missions (Georgiadou et al. forthcoming 2023; Ruël & Visser, 2014) Such initiatives have mostly focused on the intensification of internationalisation of small and medium-sized enterprises (SMEs) (see, for example, Gassmann & Keupp, 2007, Narooz & Child, 2017) due to the recognition of the rising importance of SMEs for international marketplaces and value chains (Epede & Wang, 2022; Tarek, Adel, & Sami, 2016).

60. SMEs are the backbone of national economies across the world, constituting about 90% of the economic fabric of most countries (Kuzmisin & Kuzmisinova, 2017). Nonetheless, those firms’ limited resources and liabilities of newness, foreignness and outsidership (Aldrich & Auster, 1986; Johanson and Vahlne, 2009;  Mezias, 2002; Zaheer, 1995 ), combined with challenges stemming from knowledge and information asymmetries ( Mezias, 2002; Zaheer, 1995) render their participation in international networks and global supply and value chains especially challenging (Carr, Haggard, Hmieleski, & Zahra, 2010). This lack of the necessary motivation, resources, and capabilities hinders SMEs from making the most of their potential in foreign markets because (Catanzaro & Teyssier, 2021). 

61. In view of those challenges, Western governments have undertaken various initiatives to promote their SMEs international outreach either in the form of purely governmental mechanisms using as a platform collaboration in science and innovation termed as science or innovation diplomacy (Flink and Schreiter, 2010) or in conjunction with private agencies which focus on export support. The most prominent of those governmental instruments with evident value added for SME internationalisation is commercial diplomacy. Commercial diplomacy involves the cooperation of state and non-state actors, diplomatic channels and instruments, to remove barriers and provide business opportunities to national companies thus facilitating trade and investment (Sakhanienko, 2021). In other words, commercial diplomacy is a governmental service for the business community, which aims at the development of socially beneficial international business ventures (Kostecki & Naray, 2007). It is likely that in the post-COVID-19 era, commercial diplomacy will become even more important as a means contributing to faster economic recovery of countries.

62. A review of the literature and country empirical evidence showcase commercial diplomacy as a key governmental mechanism for accelerating economic liberalisation and business export promotion, especially for countries faced with acute economic hardship or endogenous crises. Specifically, commercial diplomacy has been documented to have a significant positive effect to SMEs in the early stages of internationalisation (Busshers and Ruël, 2012; Lee & Ruël, 2012; Naray, 2012; Workneh, 2012; Penev, Udovič & Dukič, 2014; Visser & Ruël, 2014; American Academy of Diplomacy, 2017; Moons et al., 2017). This due to the capability of commercial diplomacy and its agents to mitigate international trade barriers and stimulate international entrepreneurship by providing linkages between governments, businesses and foreign markets that are necessary for firms to grow as well as access to market intelligence (Lee, 2004; Mercier, 2007; Echague, 2012; Ruël, 2012; Justinek, 2012; Justinek & Sadej, 2012;  Ruël, 2012; Stadman, 2012; Belina, 2014).

63. Commercial diplomacy has been reported to benefit businesses in their overseas operations by creating a central platform for bilateral business, enhancing neutrality and credibility fostering relationships, mitigating market protectionism and government interventionism whilst supporting a firm’s first steps in foreign markets (Kostecki & Naray, 2007; Lee & Ruël, 2012; Naray, 2012; Penev, Udovič & Dukič, 2014; Visser & Ruël, 2014; Visser, 2017). In doing so, governments’ global webs of embassies channel access to foreign markets by penetrating guest country business environments through organising events, fairs and business missions and accessing local business information; a key internationalisation barrier (Moons & Bergeijk, 2017; Naray, 2012). In this sense, commercial diplomacy is potentially capable of surrogating for capabilities otherwise absent among SMEs with little to no history of internationalisation. And even though measuring the direct effects of export support activities can be difficult (Justinek & Sedej, 2012) number of studies, presented in the table that follows, present qualitative and quantitative evidence in support of commercial diplomacy’s positive impact on SME internationalisation.

64. A systematic study conducted by Freixanet (2012) on the impact of export promotion programmes concluded that in our evaluation of these programmes, it is necessary to measure not only their effect on firms’ financial performance but also their intermediate results. These are all foundations that will enable a firm to become internationally competitive and achieve export success. The improvement of those foundations that we call ‘soft’ aspects of performance, such as managers’ export orientation, obtaining information and helping to overcome internationalisation barriers, should become the key objective of EPPs (Spence, 2003; Collins and Francis, 2004).
65. Other studies have showcased that small exporters have the greatest need for export know-how and learning and export promotion services are most beneficially targeted at the early part of the export involvement process (Seringhaus & Botschen, 1991). Specifically, SMEs in the UK, Brazil, Canada, China and Switzerland and Greece benefit from ‘match making’ services organised by commercial diplomats in which companies are matched with potential partners in other countries (Georgiadou, 2018; Kostecki, & Naray, 2007). In a systematic study on Dutch SMEs internationalising in Malaysia, it was found that embassy networks in the private and public sector are very helpful at the early stages of internationalisation and that the embassy’s support towards newcomers is valuable (Haaf, 2010). In a study conducted with
66. Commercial diplomacy’s value added is also showcased by quantitative assessments providing quantifiable evidence for its positive impact on exports and trade. Studies conducted by Rose (2007), Workneh (2012) and Moons (2012) demonstrate a correlation between the presence of overseas commercial diplomatic representation and increase in trade volumes. Commercial missions are shown to help increase countries’ exports by approximately 10% (Lee and Ruël, 2012). Such findings are reinforced by Moons and Bergeick’s meta-analysis (2017) uncovering a positive correlation between commercial diplomacy, trade and investment. Busshers and Ruël’s (2012) empirical research endorses the utility of commercial diplomacy in terms of export support for SMEs aspiring to become internationally-active. Recently, a comparative study on commercial diplomacy policies in EU Member States presents evidence on a sporadic and embryonic commercial diplomatic function targeted specifically at facilitating the first steps of SMEs’ internationalisation by strengthening bilateral business relations with host countries (Zvone, 2014; Stadman, 2012).

Table of Qualitative Studies

WHAT DO UK BUSINESSES NEED TO INCREASE EXPORTS? HOW DOES THE UK COMPARE TO OTHER COUNTRIES IN THEIR SUPPORT FOR EXPORTS?

67. Countries have adopted various approaches in their support of SME exports. Drawing on other country export support models and the case studies of Greece, Australia, Germany, and UK itself, we make some recommendations to enable the development of capabilities. Inheriting from previous sections, this section acknowledges that financial support is one important means to support SMEs to export. However, due to the drastic difference between financial and non-financial support, this section focuses on non-financial support.

Australia

68. Australia is far from major global markets. Australian government understands the nature of this challenge facing its businesses, especially SMEs, and has structurally build up the system of economic diplomacy, which includes commercial diplomacy. According to Australia’s latest Foreign Policy White Paper published in 2017, commercial diplomacy is one key area Australian Government works on.
69. The most noteworthy characteristic of Australia’s economic diplomacy including commercial diplomacy is clarity of the system. However, Australian government does not exploit the strength of the private sector as Germany does. We will discuss how Germany implements commercial diplomacy later on.
70. Under Australian federal government, multiple government bodies are incorporated into the system. It includes Australian Trade and Investment Commission (Austrade), Department of Foreign Affairs and Trade (DFAT), Australian Customs and Border Protection Service, Department of Industry Service and Department of Agriculture. Based on the task allocation and duties distributions,[7] among those government bodies DFAT plays the leading role in economic diplomacy, and Austrade is the main player in commercial diplomacy. It is also evident by the aforementioned White Paper. DFAT’s latest strategy includes four pillars for the economics diplomacy: [8] trade, growth, investment and business. Taking a closer look at the strategy, it can be found that the fourth pillar “business” falls in the scope of commercial diplomacy. It is based on the Charter that promotes the economic interests of Australian businesses overseas, and in this area, DFAT works closely with Austrade.
71. Moreover, DFAT’s work is on the broader level. For example, it leads whole-government efforts in free trade agreement (FTA) negotiations. Moreover, it has “Professional Service Mutual Recognition Unit” to help Australian professionals gain the assess to overseas market by negotiating the international recognition of Australian qualifications and licencing.
72. Austrade primarily provides the support for the businesses by providing a range of services to fulfil commercial diplomacy. To clarify how the whole system works, following organogram shows the framework of the system.

73. The organogram shows that there are two types of assistances provided for Australian businesses including financial and non-financial ones. Both DFAT and Austrade work on non-financial supports while Austrade provides financial support. The role of Australian Embassies to other countries is to introduce Austrade to those who seek for support.
74. According to the latest independent assessment published by Austrade (2017), it can be seen that Austrade provides full-fledged services for the Australian businesses. Citing the assessment report, following figure shows how Austrade service framework.

Figure: Austrade’s service delivery framework

Adopted from “Organisational Capability Assessment Positioning Austrade For the Future”

75. It is very clear the services provided by Austrade include all sorts of support considered in commercial diplomacy. In addition, it can also be seen in the delivery mechanism, DFAT has its irreplaceable role as in many aspects.

Germany

76. Germany is a very special case in commercial diplomacy. Commercial diplomacy is also part of German economic diplomacy and its commercial diplomacy also contains both financial and non-financial supports.
77. An organogram is illustrated bellow to show the commercial diplomacy system of Germany. Very similar to Australia, the structure of German commercial diplomacy is clearly structured.  However, the drastic difference between Germany and Australia is that German government works closely with the private sector. Such a characteristic is unique to German among developed countries.

34

Written submission from Elena Georgiadou, Huw Edwards, Anna Grosman & Tien-Der Jerry Han (ELG0018)

Figure: Economic diplomacy of Germany

34

Written submission from Elena Georgiadou, Huw Edwards, Anna Grosman & Tien-Der Jerry Han (ELG0018)

78. There are three pillars in commercial diplomacy of Germany: Federal Ministry for Economic Affairs and Energy (BMWi), Federal Office of Economics and Export Control (BAFA) and the foreign missions including embassies and consulates.
79. For BMWi, fully funded by BMWi, German Trade and Invest (Gesellschaft für Außenwirtschaft und Standortmarketing mbH, GTAI) is a company working for foreign trade and location marketing. GTAI provides essential information for German businesses to invest abroad (KfW, 2018). The information includes contacts, economic data, legal and customs information, country reports and market analyses.
80. Federal Office of Economics and Export Control (BAFA) is the agency that leads the commercial diplomacy providing non-financial supports to the German businesses. The function of BAFA includes a range of services for the businesses. The services include advisory services and training, helping medium-sized companies to showcase in international and national fairs. It also conducts market research for SMEs.
81. The way BAFA helps SMEs to exhibit in international and national fairs is noteworthy. It not only provides information but also sometimes financially supports SMEs. BAFA itself also offers administrative support by actually participating in the fairs. BAFA’s participation can save significant exhibiting costs for SMEs.
82. As for the foreign missions, the embassies and consulates provide similar functionalities as the counterpart of Australia. However, whether their duties include FTA negotiations or other functions like negotiations of the recognition of German qualifications remains to be explored.
83. For the private sector, we can see that Association of German Chambers of Industry and Commerce (Deutscher Industrie- und Handelskammertag, DIHK) is the German government’s go-to partner in the private sector. According to DIHK’s self-introduction, it represents millions of businesses in Germany.[9] Under DIHK, there is German Chambers of Commerce (Die Deutschen Auslandshandelskammern, AHKs), which coordinates its international network and has delegations and representative at 140 locations in 92 countries, which increases from 80 countries in 2011 (Grigoryan, 2011).
84. The main function of AHK is to advice and consult German businesses. The advice and consultation include economic and legal information, organisation and support, market studies and so on. In Germany, most of often seen tasks in commercial diplomacy are taken care of by both BAFA and AHK.

Greece

85. The case of Greece constitutes a significant example of innovative and entrepreneurial commercial diplomacy with limited resources. Commercial diplomacy became the number one priority of the re-organisation of the Ministry of Foreign Affairs (MFA) and its diplomatic network in 2007 as part of the government’s response to demands imposed by economic globalisation and the Greek economic crisis (Georgiadou, 2013). The centralisation of the function of commercial diplomacy and its re-organisation were necessary to support the massive exodus of Greek SMEs, which albeit previously apathetic to internationalisation, were forced to internationalise to survive due to the abrupt shock of the economic crisis. In this process, a large number of Greek SMEs with limited to no international experience sought support from the Greek Ministry of Foreign Affairs (MFA) and its overseas diplomatic network to enter foreign markets.
86. The strategy of transforming the MFA around the axis of commercial diplomacy for internationalisation culminated in the 2007 MFA reform Charter (Law 3566/2007, art. 14), which re-organized the MFA to reflect the strategic turn towards commercial diplomacy on the basis of adopting a horizontal structure in embassies with representatives of multiple departments and scientific expertise (Georgiadou, 2013). Under the aegis of commercial diplomacy and governed by the diplomatic authorities of embassies new hubs were launched comprising representatives from the Greek Chambers of Commerce, the Greek Exports Council, the MNEC, the Ministry of Agriculture, the Ministry of Transport, the Ministry of Digital Governance, the Ministry of Technology and other Ministries on the basis of SME special demands in host countries. To standardise the processes of commercial diplomacy and assess its quality performance, the MFA introduced ISO 9001.
87. Greek diplomats triggered a “crisis commercial diplomacy” launching a number of tailored events and mechanisms to support SMEs in their search of foreign markets. Specifically,

a)      Created hybrid structures between private export support agencies and existing diplomatic network.

b)      Enhanced representation of technological expertise in diplomatic missions

c)       Updated diplomatic training on the basis of the specificities of SME internationalization needs.

d)      Planned and intensified activity in the two areas of:

1. Servicing mechanism
1. Created of online portal AGORA populated in-real time by diplomats located in host countries. The portal to provided detailed reporting on local economies’ market and exports, business guides, investment information, business news bulletins as well as politico-economic briefs and business opportunity spotting. The portal should have a chat function built in that is accessible at all times.
2. Launched “internationalisation grooming” events to prepare SMEs to go international by training them in internationalisation management and developing their skills in identifying partners and opportunities in foreign markets.
3. Provided consultancy to SMEs in areas such as business planning, sales strategizing and assistance in funding requests to European and international business and entrepreneurship funds. Assisting in business planning involves identification of customers/ investors as well as competitors in targeted foreign markets, market and business cost analyses, business pitching and contingency planning.
4. Provided support to SMEs in business advocacy, conflict resolution, IP protection, representation, and most importantly contract negotiation.

2. Network mechanism
1. Intensified and forged bilateral business relations through Business-to-Business (B2B) matchmaking events in targeted industrial sectors. These events could be co-funded by export branches of trade departments, chambers of commerce, federations of industries, business associations, and the Enterprise Networks as well as banks and interested industries. Such events were reported to bring immediate results.
2. Created ‘Business Hubs’ within embassies worldwide. Business hubs are horizontal constructs, co-run by diplomats in collaboration with the Association of Manufacturers and Exporters, the Department for International Trade, Technology and Innovation and having input from the Chambers of Commerce and scientific/technological expertise.
3. Created “experience sharing clinics” in which firms operating in targeted markets shared their experiences with newcomers, provided knowledge of resources, opportunities, and the client base, navigated the specificities of the regulatory and institutional contexts, provided contacts and introduce newcomers to local businesses. Such forums, whereby knowledge is exchanged, are bound to reduce market uncertainty and the risks involved in going abroad but also breed synergies thus driving internationalisation and intensifying commitment in foreign markets. Most importantly, they encouraged and motivated inexperienced SMEs to undertake internationalisation.

Recommendations and Conclusion

88. The evidence indicates that commercial diplomacy exerts a significant and positive influence on the export activities of SMEs. Based on our research findings, we propose the following recommendations:
89. First, by incorporating successful practices from other countries, we suggest embracing the concept of hybridity in the commercial diplomacy model. This entails fostering synergies between the private sector and government agencies such as embassies and consulates, as governments are increasingly recognizing the importance of private sector support in facilitating effective commercial diplomacy efforts. The collaboration with the private sector is particularly successful in Germany, where banks take a prominent space as providers of capital. Second, and based on the current emerging trend, we recommend intensification of restructuring embassies to ensure representation from different ministries. This approach, known as the "whole-of-government" approach, entails appointing representatives from each relevant ministry or department to provide specialized expertise abroad. This approach albeit existing in the UK to an extent, needs further reconsideration and reinforcement.
90. Third, we recommend a centralized and easy access to information relating to regulation, services and events offered to SMEs in terms of export promotion. Following the examples of Australia and Greece in this space, we suggest creating a dedicated online portal, which would offer comprehensive information on local economies, including market and export reports, business guides, investment information, business news bulletins, politico-economic briefs, and identification of business opportunities as well as online troubleshooting in real time. Additionally, the portal should include a chat function to enable continuous accessibility for users.
91. Fourth, we propose a number of services, based on the case study of Greece which has been very successful in the past at their implementation. We propose initiating events focused on "internationalisation grooming" which aim to prepare SMEs for international expansion. These events would provide training in internationalisation management, equipping SMEs with skills to identify potential partners and opportunities in foreign markets. We also suggest that embassies and consulates should offer consultancy services to SMEs, covering areas such as business planning, sales strategizing, and assistance in securing funding. Business planning assistance involves customer and investor identification, competitor analysis in target foreign markets, market and business cost analyses, business pitching, and contingency planning. Another area of servicing is the support in business advocacy and negotiation: embassies and consulates should provide support to SMEs in various areas, including business advocacy, conflict resolution, IP protection, representation, and crucially, contract negotiation. It might be useful to think of providing bundles of support to SMEs –e.g., tailor-made packages with different expertise on legal, finance or commercial advice.
92. Finally, we propose a number of networking mechanisms. Business-to-Business (B2B) matchmaking events can be organized to strengthen bilateral business relations in targeted industrial sectors. These events can be jointly funded by trade departments' export branches, chambers of commerce, industry federations, business associations, enterprise networks, banks, and interested industries. Such events have been reported to yield immediate outcomes in terms of business collaborations and partnerships. Within UK embassies across the globe, the creation of "Business Hubs" is recommended. These hubs would serve as collaborative platforms managed by diplomats in coordination with the Association of Manufacturers and Exporters, the Department for International Trade, Technology, and Innovation, and involving input from Chambers of Commerce and scientific/technological experts. These hubs facilitate knowledge exchange, resource sharing, and networking opportunities among businesses. Finally introducing "experience sharing clinics" can be valuable for SMEs entering targeted markets. These clinics would enable firms already operating in these markets to share their experiences with newcomers. They would provide insights into local resources, opportunities, client bases, regulatory and institutional contexts, and facilitate connections with local businesses. By reducing market uncertainty, mitigating risks, and fostering synergies, such forums would encourage and motivate inexperienced SMEs to engage in internationalization efforts, ultimately driving commitment in foreign markets.
93. In conclusion, the evolving nature of the UK regulatory, geopolitical and economic landscapes necessitates a dynamic approach to supporting SMEs. It is crucial for the UK government, trade departments, and related entities to continuously adapt and offer accessible resources that enable SMEs to effectively maneuver the ever-changing landscape, ensuring their successful integration into the global market.

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