Exchange rate effects and competitive performance: A comparison of UK and Irish firms exporting into the EU

Headnote

Exchange rate stability is generally perceived as key to the businessman's ability to compete internationally. This article explores the relationship between business perception of future stability in exchange rate and the relative EU export competitive performance of Irish and UK firms. Four measures suggested by the Buckley et al. (1988) 3-P model of international competitiveness are used; these are export market share, export dependency, export growth and profitability. The results are reported of a postal questionnaire sent to companies in Ireland (where the government is committed to the EU's Exchange Rate Mechanism and the proposed single EU currency) and the United Kingdom (where the government has no specific exchange rate policy). A series of post-test interviews contributes qualitative depth to the postal survey.

Headnote

Overall, the results indicate a significant positive linkage between business perception of currency stability and export dependency. In addition, weak support is shown for linkage of currency stability and profitability, whilst export market share is linked to currency stability in the long term. Membership of the EU single currency will be beneficial to EU export activity, and this paper lends support to the Irish government in its commitment to this policy; continuing indecision by the UK government is hindering development of its industrial base.

Introduction

A body of opinion exists that perceives exchange rate stability as inextricably linked to the businessman's ability to compete internationally. This view is commonly cited in support of membership of the proposed single EU currency, yet there is a singular lack of empirical evidence regarding this aspect of the debate. In the UK, much of the current argument in favour of joining the single currency reflects the late 1980s debate on membership of the Exchange Rate Mechanism (ERM), and an analogy may be drawn between these two situations. During the late 1980s, the Confederation of British Industry (CBI, 1990) estimated that removal of excess volatility of sterling against other major European currencies would provide a significant boost to UK exports; over five years, manufacturing exports to the EU would increase by 4.3 per cent (4.0 bn) and hedging costs of 155m could be avoided, providing a further boost to exports. Although the CBI study was conducted in the expectation that the UK would remain...