Costs, Firm Size and
International Trade Intensity
Small Business Economics
21: 257–271, 2003.
2003 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. The costs of paperwork and delays needed to
clear international customs are generally perceived as a time-
consuming impediment to international trade. However, few
studies have empirically examined the determinants and the
impact of this type of government-imposed transaction costs.
This paper analyses the role of firm size as a determinant of
customs-related transaction costs, as well as the effect of firm
size on the relationship between these costs and the interna-
tional trade intensity of firms. The results of this study indicate
that customs-related transaction costs repress international
trade activities of firms, even at low levels of these costs. The
paper identifies transaction-related economies of scale, sim-
plified customs procedures and advanced information and
communication technology as main determinants of customs-
related transaction costs. It is shown that when these factors
are taken into account, firm size has no effect on customs-
related transaction costs. Policy implications are considered
for firm strategy and public policy.
KEY WORDS: firm size, international business strategy, inter-
national trade intensity, trade barriers
JEL CLASSIFICATION: F1, H3, K4
Transaction costs are generally higher for inter-
national trade than for domestic transactions.
Obvious differences are taxes and tariffs, but there
are also higher transportation costs, as the goods
have to be transported over longer distances.
Another element of the costs of international trans-
actions is the costs of dealing with the delays and
the paperwork involved in customs clearance.
Such government-imposed transaction costs can
be an important determinant of international trade.
In the last decades, visible trade barriers such as
tariffs and import licensing systems have been
reduced, but, at the same time, there has been an
increase in the use of non-tariff trade barriers such
as customs regulations as a hidden trade barrier
(e.g., Krugman and Obstfeld, 2000; Biederman,
Recently, Obstfeld and Rogoff (2001) showed
that even a small difference in transaction costs
between home and foreign goods can be detri-
mental to international trade, resulting in a large
home bias in trade. More importantly, their results
indicate that the marginal effect of international
trade costs increases with the level of these costs.
Consequently, customs-related transaction costs
might have a larger impact in a setting where there
are substantial international trade costs, which is
generally the case for international transactions.
Therefore, customs-related transaction costs could
be important, even though they are not the largest
part of the transaction costs for international trade.
Because of economies of scale in transaction costs
and the limited availability of resources, customs-
related transaction costs might be even more
detrimental for the international trade activities of
small firms than for those of larger firms.
The importance of international trade activities
is clear, as they provide employment, create
backward and forward linkages, and ultimately
increase the standard of living. Furthermore,
international trade can provide a competitive
advantage, increase capacity utilisation and raise
technological standards (e.g. Terpstra and Sarathy,
2000; Levy et al., 1999; Leonidou and Katsikeas,
1996). In addition, Wagner (1995) finds that inter-
national trade increases the growth of firms and
Final version accepted on November 11, 2001
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