European deep integration and firm welfare

Purpose This paper examines the impact of deep integration within the European Union (EU) on firm welfare in member countries. We use data from the 8th Vintage of Competitiveness Research Network (CompNet), which provides micro-aggregated, industry-level data derived from firm-level information from 2000 to 2018. Design/methodology/approach We construct a novel country-level Deep Integration Index (DII) by exploiting the information on a country's adherence to key pillars of EU integration, e.g. the customs union, the Single Market Act, the adoption of the common currency, and Lisbon Reforms. We employ two principal measures of firm welfare: firm-level markup and total factor productivity, which respectively reflect firm-level profitability and productivity. Findings Contrary to our initial expectations of a welfare-enhancing effect, a 1% increase in DII growth is associated with a 0.023% increase in overall markup growth, a 0.077% increase in labor input markup growth, and a 0.015% increase in intermediate input markup growth, but no detectable effect on productivity is found. We attribute this no result to the limited effect of deep integration on trade flows, thus depriving firms of productivity gains. Notably, the observed markup effects are primarily observed for firms in non-founding EU member countries and those existing in highly concentrated industries. Concerning firm age, we find that younger firms observe markup increases due to improved pricing power, whereas older firms can exploit economies of scale, observing productivity increases. Finally, the markup effect of deep integration is short-lived, disappearing entirely within 4–7 years. We check the main findings for their robustness and discuss their policy implications. Originality/value This paper contributes to the trade literature by constructing country-level DII to examine its effect on firm welfare. This is a valuable addition, as prior literature only focuses on shallow trade integration, overlooking the trade integration complexities associated with the EU. Additionally, we provide unexplored heterogeneous evidence on the relationship of interest.