Spread the risk to better handle crises

Economists from Aarhus University have found out that Danish companies that were more diversified on export markets were better able to cope with the crisis. Their research suggests that companies should be encouraged to spread the risk across a wider range of products and markets.

2013.11.04 | Ingrid Fossum

Given that Denmark is a small country, maintaining a strong economy requires that Danish businesses export to the world market. During the economic crisis in 2008-2009, the export and import endeavours of Danish companies decreased by 16 and 23 per cent respectively. Accordingly, a group of economic experts at Aarhus University have looked into how companies acted to handle the most dramatic crisis since the Great Depression.

Together with his two colleagues, Frederic Warzynski and Valerie Smeets, PhD student Kaleb Girma Abrehahas studied the development of Danish export over the last ten years. Their research has been focused on the universe of Danish companies involved in international trade, analysing the number and value of their products as well as the markets to and from which they export and import. 

“Not only did we identify the prevalent ‘superstar’ companies that export the widest range of products to multiple market destinations. We also found that there are actually certain core products among the companies’ many products that are the primary driving forces behind the companies’ export trade,” explains Abreha.

Spread the risk across several products and markets

Danish companies reacted differently to the financial crisis. Some ceased their export endeavours completely. Others changed the combination of products they were exporting and turned to other market destinations.

However, the most significant adjustment enabling companies to survive the crisis was the approach of the larger companies, which mainly reduced the shipment of their core products to major market destinations only. But this was not an optimal solution for the companies or the Danish economy.  A better strategy would have been to spread the risk across a wider range of products and more markets. This approach would have made the companies less vulnerable during the crisis. Abreha explains:

“By merely relying on the traditional markets, such as the U.S. and Germany, the company puts itself at greater risk of being affected by crises. For instance, China proved to be immune to the recent economic crisis, and therefore companies that had included China in its market strategy were able to keep exporting products to the Chinese.”

Companies and policy makers need to think innovatively

In the period after the crisis, both Danish export and import have managed to recover. The positive research results show that there has been a 7.2 and 7.5 per cent increase in export and import respectively. This indicates that Danish export performance is highly dependent upon the economic performance of a handful of the main trading partners.

But how are we then to ensure that more Danish companies will be better equipped to deal with economic crises in the future? The companies themselves will benefit from exporting more products and reaching more market destinations in order to spread the risk. Moreover, policy makers are encouraged to adjust export regulations in order to enable more companies to start exporting.  This is particularly important given the fact that the number of exporting companies is declining, especially in the manufacturing sector.


Contact: 

Kaleb Girma Abreha
PhD Student

Department of Economics and Business
The Tuborg Research Centre for Globalisation and Firms

Email kgab@asb.dk
web
Phone: +45 87164831

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