How internationally competitive are the creative industries?

Creative industries in the global economy

Recent international trends show that the creative industries are gaining pace not only in advanced economies (the so-called global North) but also in less advanced ones (the global South), attracting attention from domestic and international policymakers. This is reflected in the international trade statistics: creative trade is expanding not only along the North-North direction, but also along the South-South one and, thanks to the surge of China as an international creative player, also between the North and the South.

In such a dynamic global environment, the international competitiveness of the UK’s creative industries will become even more important in the future than it currently is.

So, how competitive are the UK’s creative industries? Official statistics allow a broad-brush depiction of the three main dimensions of internationalisation, namely the movement of goods and services, capital and people.

What we know about the internationalisation of the UK creative industries

In trade values, the creative industries are the largest DCMS sector after the digital industries and account for a growing share of UK trade. The UK is both a sizeable exporter and an importer of creative goods and services, a phenomenon known as intra-industry trade pointing to the possible importance of horizontal and vertical product differentiation effects together with the expansion of global value chains (GVCs). Overall, the UK’s creative industries generate a positive trade balance, especially in their growing service component, in line with the service-intensity of UK trade.

Recent efforts by the DCMS in its business demographics look at the trade involvement and foreign ownership status of UK creative firms. When compared with the rest of the UK Non-Financial Business Economy (UKNFBE), creative firms seem both more likely to be involved in international trade (either as exporters or importers) and more likely to be exporters than importers. Business demographics suggest that 1% of creative industry firms are foreign-owned, a percentage in line with the rest of the UKNFBE (Publishing, Advertising and Marketing, and Film, TV, video, radio and photography seem to have a slightly higher foreign ownership). While foreign ownership can be potentially linked to the international trade position of firms, in the creative industries in general this link is more difficult to establish because of data limitations as explained in the DCMS report.

In terms of people, the sector relies on 12.6% of non-UK nationals, of which around 7% are from the EU. Interestingly, there is currently no substantial difference between UK and EU nationals in terms of self-employment (around 35% are self-employed in both cohorts). A smaller percentage of non-EU nationals (25%) is self-employed. In comparison, digital industries have a slightly larger portion of non-UK nationals and a similar smaller share of self-employed both from the EU and from outside the EU.

While aggregate data render an overall picture of the international dimension of the creative industries, they say little of the underlying dynamics of trade, investment and migration decisions. This is coupled with almost no academic research in the area. Yet, these dynamics are critical to understand the creative industries’ international involvement and to inform policies in the future, especially as the UK leaves the European Union. There is clearly a strong need for a wide-ranging research agenda across all the international dimensions of the creative industries.

What we don’t know

International trade theory and empirics have to catch up with the creative industries. The increasing availability of micro-level data for manufacturing has moved the focus of analysts from differences across countries and industries to differences across firms and products. Manufacturing, by comparison, has now robust evidence that exporters are substantially different from non-exporters and trade is dominated by relatively few global firms. Exporting plants are typically larger, more productive, more capital intensive and pay higher wages than non-exporting plants. The most productive firms either self-select into trade or become more productive as they export (described as ‘learning-by-exporting’ in the academic literature). Creative firms tend to have a number of distinctive features, such as human capital intensity, high physical capital intensity, small size, and spatial concentration. These characteristics also vary and may affect trade differently across the different sub-sectors that make up the creative industries, making one-size-fits-all approaches rather limited.

Unfortunately, we know too little of how these features are related to the exporting behaviour of creative industries. Yet, understanding these features is critical for formulating effective internationalisation policies for the (sub-)sector(s). Moreover, sub-sectoral heterogeneity, especially in terms of the different balance between goods and services trade, implies that the trade barriers faced by each sub-sector vary greatly also. And the “cultural” nature of the creative industries means that barriers are more likely to be non-tariff and cultural related (e.g. cultural exemptions) in nature. More and better trade statistics, a task particularly challenging in a sector dominated by services trade, and more information on trade barriers will be essential to inform creative industries policy and industry on the costs and benefits of alternative trade policy agreements post-Brexit.

In a world economy increasingly characterised by vertical integration of production, GVCs and highly mobile skilled human capital, it is impossible to reach a full understanding of the creative industries’ internationalisation without also considering international foreign investment and labour mobility. For example, it turns out that a large portion of FDI is horizontal, i.e. it is a substitute for exporting directly to the destination country in order to avoid barriers. Therefore, the adoption of preferential trade agreements can be linked to FDI flows. Given the relevance of trade agreements and non-tariff barriers especially for services trade, it is likely that as the UK re-negotiates its relationships post-Brexit, there is going to be a lot of readjustment between trade and FDI. Again, there is very little data and essentially no research on the determinants of incoming and outgoing FDI in the creative industries, either at the macro or the micro level.

Finally, the creative industries are by nature highly skilled and rely, more than other sectors, on a highly educated workforce. To remain competitive, there must be continuous upskilling. Given the rapid growth of the creative industries it is likely that there will be an optimal migration rate below which growth may be hampered. Creativity has historically been associated with the prosperity of nations and cities and historical evidence shows that local and immigrant creators tend be present at the same time in the same place, in particular in locations with better institutions. Empirical evidence for the US shows that more highly skilled immigrants, who enter the country as students or trainees, are more innovative and more likely to start their own company than natives. Hence, probably more so than in other sectors, in the creative industries the issue of international migration and attracting talent is connected with that of attracting foreign entrepreneurs and foreign investment. Again, further research in this area is critical to inform the post-Brexit regulatory framework and migration system.

Towards a research agenda on international competitiveness

The PEC is going to investigate these important issues within the theme on International Competitiveness. There is a need to systematically review the fragmented data available from different sources in order to understand better what further data is needed, and in particular to provide sub-sector level analysis. Also, more needs to be known about the determinants of trade participation (why firms export) and trade intensity (how much they export) at the firm level and about the determinants of FDI location. Lastly, it is critical to understand how the UK can increase its attractiveness towards a dynamic and talented international workforce and towards a new generation of international creative entrepreneurs. Please contact me at Giorgio.Fazio@newcastle.ac.uk if you would like to hear more or become involved.

Suggested reading

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