UK trade and productivity across space

We revisit the presence of international trade activity premia at the firm-level, as well as the presence of agglomeration economies, for the UK over the period 2008-2017. In doing so, we also look at the nexus between agglomeration economies and international trade premia and in particular at whether these two phenomena complement or substitute each other. In other words, are international trade premia higher (lower) in denser places and if so what is the direction of causality? Our analysis indicates that premia are (especially for export) lower and in particular in denser areas there is less need to be productive to select into internal trade activities. In terms of policy implications, our results suggest that regional disparities matter also for international trade in that not only being in a denser area fosters productivity because of agglomeration economies, but it also allows firms to reach more easily international clients and suppliers so boosting participation into exporting and importing activities conditional on productivity.

Non-Technical Summary

Firms that trade internationally—whether by exporting goods or importing materials—are typically different from those that don’t. On average, they tend to be more productive and larger. Economists refer to this difference as the ‘international trade premium’.

At the same time, a separate but related body of research highlights the advantages that come from being based in densely populated areas — such as cities or industrial hubs — where firms can access deeper labour markets, a broader range of suppliers, and more opportunities for collaboration and knowledge-sharing. These advantages are known as ‘agglomeration economies.’

This study asks an important question: how are international trade premia and agglomeration economies connected? Do they reinforce one another—or do they act as substitutes? In other words, does being in a dense area make it easier to trade internationally regardless of productivity, or do firms in such areas still need to outperform their peers?

To explore this, the research uses comprehensive firm-level data covering UK businesses with detailed trade information across all sectors and regions from 2008 to 2017. By examining multiple indicators of firm performance — such as labour productivity, total factor productivity, and price markups — the study takes a detailed look at how firms engage in trade at a fine spatial level based on Travel to Work Areas (TTWAs) defined in the 2011 Census.

The key finding is clear: in denser areas, the trade productivity premium is lower, especially exporting. That is, firms in these regions don’t need to be as productive as others to take part in international trade, because their location already provides significant advantages, like easier access to consumers and suppliers. In contrast, firms in less densely populated areas might face greater obstacles and must be significantly more productive to succeed in international markets.

This finding has important policy implications. It suggests that regional disparities play a major role in shaping firms’ access to international trade opportunities. Firms in already connected and prosperous regions benefit from a virtuous cycle: they have better access to global markets, which boosts their competitiveness, which in turn attracts more investment and talent. Meanwhile, firms in less connected regions face a tougher climb, reinforcing existing economic inequalities across the country.

The takeaway is that simply encouraging firms to trade internationally isn’t enough to create a level playing field. Instead, targeted investments are needed — such as better transport links, faster digital infrastructure, and skills training in under-served areas. These policies could reduce the additional ‘cost’ of distance and help more firms across the UK participate in global trade, boosting their productivity, no matter where they are based. By addressing these regional disparities, trade and industrial policy can support more inclusive economic growth—ensuring that all parts of the UK can benefit from the opportunities of a globalised economy.

Read the Working Paper