Elizabeth Asiedu

James A. Freeman

English

Research Papers in Economics

Revised version published in American Economic Review Papers and Proceedings, 
May 2007, 97 (2), 368-372 
 
The Effect of Globalization on Firm Profits: Do Owners’ Race/Ethnicity Matter?  
Elizabeth Asiedu, Department of Economics, 
University of Kansas, email: asiedu@ku.edu
James A. Freeman, Department of Economics, 
Wheaton College, jfreeman@wheatoncollege.edu
∗
Small and Medium-sized Enterprises (SMEs)—i.e., firms with less than 500 employees, 
play an important role in the U.S. economy. SMEs represent 99.9 percent of the 25.8 million 
businesses and have generated 60-80 percent of net new jobs annually over the last decade. Thus, 
in order to understand the effect of globalization on the U.S. economy, one has to know how 
globalization affects SMEs.  This paper examines whether firms that operate in more globalized 
regions earn less profit. We carry out a separate analysis for white-owned and minority-owned 
firms because the determinants of profits are different for the two types of firms and therefore 
estimates from an analysis using pooled data will be biased. We use total exports, exports by 
SMEs and assets of multinational corporations (MNCs) as measures of globalization. Exports by 
SMEs reflect the extent of globalization-induced competition by small firms and the assets of 
MNCs is measure of competition by foreign firms and also a proxy for foreign direct investment 
(FDI) in a region.
1 Furthermore, the measures capture two important aspects of globalization: 
international trade and FDI.
2 
Our work is related to the literature that examines the effect of globalization on firm 
performance (e.g., Jen Baggs, 2005). Many of the studies use trade-related variables as measures of globalization.
3 In addition, the analysis focus on the within-industry effect of globalization—
i.e., analyze the extent to which globalization in the industry in which a firm operates affect the 
firm’s performance. The literature also suggests that the effect of globalization on firm 
performance depends on firm size (e.g., Mei Hsu and Been-Lon Chen, 2000). However, as 
pointed out by Baggs (2005), a lack of data has resulted in small firms being understudied. Our 
analysis extends this literature in three important ways: (i) we add to the thin literature that 
analyzes the effect of globalization on small firms; (ii) we examine the effect of trade as well as 
FDI on firm performance; and (iii) we examine the within-region effect of globalization—i.e., 
analyze the extent to which the level of globalization in the region in which a firm operates 
affect its performance. Note that focusing on the within-industry effects of globalization as done 
in previous studies may not capture the full impact of globalization if there are significant spill-
over effects to other industries.   
Another contribution of the paper is that we employ firm-level data from the 2003 Survey 
of Small Businesses (SSBF) for our analysis.
4 In contrast most of the previous studies on 
minority-owned businesses have utilized data from the Survey of Minority Owned Business 
Enterprises (SMBOE) which is aggregated at the industry, state or metropolitan area level.
5 
Using aggregate data is problematic because it precludes one from analyzing how firm-specific 
attributes affect firm performance. Furthermore, it raises the potential problem of an aggregation 
bias.  The SSBF dataset contains detailed information about individual firms thus allowing us to 
examine the effect of globalization on a direct measure of firm performance, i.e., profits. This is 
an improvement over previous studies that have had to impute profits from data based on 
aggregate financial information (e.g., Gregory N. Price, 2005). Finally, by using data from 2003 
for our analysis, we address the concern raised by John Owens and Robert Pazornik (2003) who 
  2after conducting a comprehensive and the most recent study of globalization and minority-owned 
businesses note that “an updated survey of minority businesses will be critical to crafting useful 
policies and helping minority businesses move into the global economy.” 
I. Globalization and the Performance of SMEs: A Brief Discussion 
We discuss three channels through which globalization can affect the performance of 
SMEs: linkages, competition and labor market. The linkages between MNCs and SMEs (e.g. 
outsourcing, transfer of technology and the training of local suppliers) can create business 
opportunities and enhance the productivity of SMEs. Also, an increase in the number of 
exporters or MNCs implies more intense competition. However, the overall effect of competition 
on the performance of SMEs is unclear. On the one hand, increased product market competition 
may cause SMEs to reduce their price markups. On the other hand, the “learning by competition” 
analogy suggests that the pressure to survive may speed up the adoption of new technologies and 
thereby enhance the productivity of SMEs. With regards to the labor market, higher wages paid 
by multinationals and exporters may have spillover effects to other industries, resulting in an 
increase in the cost of production for SMEs.
6  Furthermore, by providing better remunerations to 
workers, MNCs are able to attract more productive workers, thereby lowering the quality of the 
employee pool available to domestic firms and possibly reducing average productivity levels.  
Thus, the overall theoretical effect of globalization on the performance of domestic firms is 
unclear and therefore has to be determined empirically. 
II.  The Data and the Variables 
The data on firm variables are obtained from the SSBF, a nationally representative 
sample of 4,250 SMEs that were operating in the U.S. at the end of 2003. The characteristics of 
the firm owners such as level of education, years of experience, race and ethnicity were created 
  3from a weighted average of the individual owners’ characteristics (up to three largest owners), 
where the weights are ownership shares. We define a business as minority-owned if at least one 
of the three largest owners is non-white; otherwise the business is white-owned. Our full sample 
consists of 4,055 firms, of which 376 are minority-owned and 3,679 are white-owned. For 
confidentiality purposes, information about the location of firms is available only at the regional 
level. We therefore aggregated the globalization variables at the regional level and scaled them 
by the GDP in a region to account for the size of the regions. As shown in Table 1, a majority of 
the businesses (60 percent of minority-owned and 45 percent of white-owned) are concentrated 
in fairly globalized regions—the Pacific, West South Central and South Atlantic.   
The dependent variable is the full year equivalent of firms’ total profits in 2003. The 
literature suggests that firms with more intangible assets tend to me more productive (James R. 
Markusen, 1995). Following Elizabeth Asiedu and Hadi S. Esfahani (2001), we use sales/assets 
as an indicator of the firm's richness in intangible assets. We also include the number of 
employees to examine whether firm size has an effect on profits after controlling for firms’ 
intangible assets. The literature also suggests that the attributes of the owners of small firms, 
affects the firm’s performance (e.g., Timo Lautanen, 2000).  We therefore include the weighted 
average of the years of the owners’ management experience and education in our regressions. 
We also include per capita income to capture income levels in a region. Income per capita may 
serve as a proxy for the purchasing power in the region, suggesting a positive association 
between income and profits. However, higher incomes may also reflect the fact that wages and 
therefore employer cost is higher.
7 Thus, the overall effect of per capita income on firm profits is 
unclear. Finally, we include two-digit industry dummy variables to account for unobserved 
industry effects. A majority of the firms (75 percent minority-owned and 60 percent white-
  4owned) are concentrated in the services and retail industries. The summary statistics for selected 
variables are reported in Table 2.  
III. Estimation Results  
We use a survey-based OLS estimation technique that accounts for complex survey 
design, stratification, and population weight. This technique uses additional information about 
the survey design, population weights, and sampling stratification in constructing estimates and it 
produces unbiased population estimates and standard errors. We estimate equation (1): 
(1)   Profit ij = α + θ Firmij + ζ Industryi + β Globalizationj +γ ln (Income per Capita) j + εij    
where the i ’s index firms and the j’s index regions.  
Table 3 reports the empirical results. The estimated coefficient of all the three 
globalization measures is negative and significant at the 5 percent levels for the minority-owned 
sample, but not significant for the white-owned sample. For both minority-owned and white-
owned firms, profitability increases with firm size, firms’ intangible assets and the managerial 
experience of the owners of the firm. However, the effect of education and some of the industry 
dummy variables (e.g., manufacturing, transportation and services) are different for the two 
samples. The estimated coefficient of education is positive and significant for the white-owned 
sample but insignificant for minority-owned sample. Also note that the R
2 for the regressions for 
the white-owned sample is very low compared to the minority-owned sample: 0.03 compared to 
0.20. Indeed, these results lend credence to our assertion that minority-owned firms are in some 
sense “different” from white-owned firms.   
A plausible explanation of our result is that minority-owned firms lack access to 
mainstream markets and therefore are unable to establish linkages with MNCs.
8 Our policy 
recommendation is that policies designed to increase FDI and exports should not only be tailored 
  5to increasing the positive effects of FDI and exports expansion on SMEs but also to ensuring that 
both minority-owned and white-owned firms have equal access to the benefits of globalization.   
  6Table 1— GDP per Capita, Globalization Measures and Distribution of Firms by Region 
Region GDP 
per 
Capita 
($) 
Total 
Exports/
GDP 
(Percent) 
 
SME 
Exports/
GDP 
(Percent) 
MNC 
Assets/GDP 
(Percent)  
 
White- 
Owned 
(Percent) 
 
Minority- 
Owned 
(Percent)  
New England  34,010  5.85  1.72  9.74  6  2 
Middle Atlantic  35,223  4.54  1.95  9.48  12  11 
East North Central  30,071  7.55  1.56  11.19  16  10 
West North Central  28,765  5.20  1.23  6.47  9  4 
East South Central  25,156  7.86  1.56  13.82  5  7 
West South Central  25,816  12.29  3.13  14.32  9  12 
Mountain 27,705  4.98  1.04  7.64  8  5 
Pacific 31,217  8.48  2.93  10.71  16  26 
South Atlantic  31,474  5.15  1.62  8.64  17  22 
 
Notes: The regions are New England (Connecticut, Maine, Massachusetts, New Hampshire, 
Rhode Island,Vermont); Middle Atlantic (New Jersey, New York, Pennsylvania); East North 
Central (Indiana, Michigan, Ohio, Wisconsin); West North Central (Iowa, Kansas, Minnesota, 
Missouri, Nebraska, North Dakota, South Dakota); East South Central (Alabama, Kentucky, 
Mississippi, Tennessee); West South Central (Arkansas, Louisiana, Oklahoma, Texas); Mountain 
(Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming); Pacific (Alaska, 
  7California, Hawaii, Oregon, Washington); South Atlantic (Delaware, District of Columbia, 
Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia) 
Table 2 — Summary Statistics  
Minority-Owned (376 Firms) White-Owned (3679 Firms) Variable        
Mean  Std. Dev.  Mean  Std. Dev. 
Profit ($100,000)  4.83  33.97  4.98  35.55 
Log  (Sales/Assets)  0.98  1.51  1.03  1.37 
Number of Employees  26.8  54.78  31.4  56.83 
Education (Years)  5.04  1.87  4.68  1.87 
Managers’ Experience (years)  17.83  10.37  21.78  11.52 
 
Table 3—Effect of Globalization on Profits  
(Dependent Variable: Firm Profit ($100,000). Robust P-values in Parenthesis) 
Total Exports  SME Exports  Assets of MNCs  Variables 
Minority-
owned 
White-
owned 
Minority-
owned 
White-
owned 
Minority-
owned 
White-
owned 
Globalization  -0.462** 0.084  -1.457** 0.373  -0.390** 0.067 
 (0.018)  (0.400)  (0.013)  (0.238) (0.023) (0.450) 
Log  (Sales/Assets)  1.090** 0.418** 1.113** 0.417** 1.111** 0.418** 
 (0.015)  (0.010)  (0.014)  (0.010) (0.014) (0.010) 
Number  of  Employees  0.096** 0.110***  0.095** 0.110***  0.094** 0.110*** 
 (0.015)  (0.000)  (0.016)  (0.000) (0.016) (0.000) 
Education    -0.300  0.224***  -0.331  0.222***  -0.347  0.225*** 
  8 (0.462)  (0.006)  (0.432)  (0.007) (0.416) (0.007) 
Managers’  Experience  0.178** 0.025** 0.176** 0.025** 0.176** 0.025** 
 (0.034)  (0.029)  (0.036)  (0.027) (0.037) (0.028) 
Manufacturing  0.347 -3.081**  0.392 -3.058**  0.409 -3.081** 
 (0.794)  (0.045)  (0.770)  (0.046) (0.757) (0.044) 
Construction  -3.059** -2.673*  -3.062** -2.647*  -3.110** -2.675* 
 (0.045)  (0.073)  (0.043)  (0.074) (0.031) (0.073) 
Transportation  6.891 -3.232**  6.715 -3.212**  6.699 -3.225** 
 (0.161)  (0.033)  (0.178)  (0.033) (0.177) (0.033) 
Finance    15.093* -0.332  14.820* -0.314  15.320* -0.322 
 (0.064)  (0.862)  (0.070)  (0.869) (0.067) (0.865) 
Retail  1.645 -2.698*  1.642 -2.682*  1.658 -2.703* 
 (0.205)  (0.076)  (0.211)  (0.078) (0.208) (0.076) 
Service  0.002 -3.647**  0.014 -3.637**  0.186 -3.649** 
 (0.999)  (0.016)  (0.991)  (0.016) (0.883) (0.016) 
log (GDP per Capita)  8.375  -0.788  15.244*  -2.118  8.055  -0.980 
 (0.240)  (0.607)  (0.088)  (0.221) (0.295) (0.491) 
Constant -86.501  9.330  -158.28*  23.069  -82.215  11.234 
 (0.242)  (0.566)  (0.088)  (0.210) (0.306) (0.456) 
R
2 0.204 0.032 0.202 0.033 0.200 0.032 
 
Notes: * significant at 10 percent; ** significant at 5 percent and *** significant at 1 percent. 
  9References 
Asiedu, Elizabeth, and Hadi S. Esfahani. 2001. “Ownership Structure in Foreign Direct 
Investment Projects.” Review of Economics and Statistics, 83(4): 647-662. 
Baggs, Jen. 2005. “Firm Survival and Exit in Response to Trade Liberalization.” Canadian 
Journal of Economics, 38 (4): 1364-1383. 
Bates, Timothy. 2001. “Minority Business Access to Main Stream Access.” Journal of Urban 
Affairs, 23 (1):41-56. 
Bernard, Andrew, and J. Bradford Jensen. 1999. “Exceptional Exporter Performance: Cause, 
Effect or Both?.” Journal of International Economics, 47: 1-25. 
Hsu, Mei, and Been-Lon Chen. 2000. “Labor Productivity of Small and Large Manufacturing 
Firms: The Case of Taiwan.” Contemporary Economic Policy, 18 (3): 270-283. 
Lanoue, Gregory R. 1995. “Understanding the Political and Legal Context of MBE Programs.” 
Journal of Urban Affairs, 17 (1): 23-25. 
Lipsey, Robert E.1994.  “Foreign-Owned Firms and U.S. Wages.” National Bureau of 
Economic Research Working Paper No. 9293.  Cambridge , MA: National Bureau of Economic 
Research. 
Lautanen, Timo. 2000. “Modeling Small Firms’ Decision to Export-Evidence from 
Manufacturing Firms in Finland.” Small Business Economics, 14 (2): 107-124. 
Markusen, James R. 1995. “The Boundaries of Multinational Enterprises and the Theory of 
International Trade.” Journal of Economic Perspectives, 9(2): 169-189. 
Owens, John, and Robert Pazornik. 2003. “Globalization and Minority-Owned Businesses in 
the United States: Assessment and Prospects.” Unpublished. 
  10Price, Gregory N. 2005. “Consumer Discrimination and Black Firm Entrance Deterrence: Some 
Reparable Damage Estimates.” The Review of Black Political Economy, 32 (3), 121-139. 
                                                 
∗ We thank Barry Hirsch, Kwabena Gyimah-Brempong, Donald Lien, Francis Owusu and 
Gregory Price for helpful comments. 
1 We use assets as a proxy for FDI because data on FDI are not available by region. 
2 There are three aspects of globalization:  trade, foreign direct investment and immigration. 
3 A few exceptions include Mei and Chen (2000) who use both FDI and exports as measures of 
globalization to analyze the effect of globalization on labor productivity of SMEs in Taiwan. 
4 The data are available at http://132.200.33.130/pubs/oss/oss3/nssbftoc.htm.  
5 A few exceptions include Timothy Bates (2001). 
6 Robert E. Lipsey (1994) finds that MNCs in the U.S. pay higher wages and that wages are 
higher in industries and in states that have more foreign firms. Andrew Bernard and J. Bradford 
Jensen (1999) also find that exporters pay higher wages than non-exporters.  
7 We also experimented with the share of workers that belong to a union as a measure of labor 
cost; however, it was not significant.  
8 Bates (2001) attributes the lack of access to markets to discrimination. Gregory R. Lanoue 
(1995) on the other hand argues that minority-owned firms do not have the capacity to compete 
in the market place.  
  11

The Effect of Globalization on Firm Profits: Do Owners’ Race/Ethnicity Matter?

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The Effect of Globalization on Firm Profits: Do Owners’ Race/Ethnicity Matter?

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