ORIGINAL ARTICLE Open Access Openness and productivity of the Swiss economy Reto Föllmi 1* , Angela Fuest 2 , Philipp an de Meulen 3 , Martin Micheli 2 , Torsten Schmidt 2 and Lina Zwick 2 Abstract This paper analyzes the connection between openness and economic performance in Switzerland. Considering different dimensions of openness, we show that the Swiss economy is classified as relatively open. Nevertheless, there still is potential to further increase international integration, particularly through deregulation in the services sector. We also show that for some branches in the Swiss manufacturing sector, increases in international trade are associated with higher productivity in the long run. With regard to financial openness, we show that in the aftermath of the financial crisis, Switzerland mainly suffered from capital retrenchment. Foreign capital inflows were of minor importance. Short-run costs due to high volatility of capital flows might therefore be lower than widely perceived. Keywords: Productivity, Openness, Trade barriers JEL: O40, F10, F30 Introduction The growth of labor productivity in Switzerland has been low compared to many other advanced economies in recent decades. In developing economies, productivity growth even improved substantially (OECD 2015a). The acceleration of economic growth in emerging economies came in hand with an integration into global value chains, resulting in increased international trade in goods and services as well as international financial flows. This raises the question of how globalization and productivity are related and why the Swiss economy was not able to benefit so much from these developments. The process of globalization that started in the mid-1980s not only offers new opportunities but also involves risks for advanced economies. With regard to openness to inter- national trade, taking advantage of comparative advantages and offshoring relatively undemanding jobs to developing economies changes job profiles in advanced economies. However, adapting to globalization might foster productivity growth. The economic literature emphasizes three channels through which international trade might spur productivity. First, the international trade increases the competition on domestic markets and forces domestic firms to raise productivity (Melitz 2003). Second, it supports the diffusion of knowledge (Grossman and Helpman 2015), and third, it raises market sizes that allow for economies of scale (e.g., Alesina et al. 2005). Empirical studies support the positive relation between trade openness and productivity growth (Edwards 1998). However, in order to exploit productivity gains from globalization, advanced economies need to remain innovative and stay ahead of the product cycle (e.g., Foellmi et al. 2018). With regard to financial openness, free movement of capital allows for a balancing of capital scarcities and surpluses. It should therefore result in a more efficient allocation of capital. Additionally to that, capital flows might affect the production technology, especially if capital inflows are connected to foreign investments. Kose et al. (2009b) show this positive effect of financial openness on productivity growth empirically. However, the authors only find evidence for a positive relation between de jure financial openness and productivity. The link between de facto financial openness and productivity is less clear. A drawback of financial openness is a short-run downside risk, even for advanced economies with highly developed financial markets, due to the high volatility of financial flows. In this paper, we explore the connection between international interconnectedness, defined as trade and * Correspondence: reto.foellmi@unisg.ch 1 SIAW-HSG, Universität St. Gallen, Bodanstrasse 8, 9000 St. Gallen, Switzerland Full list of author information is available at the end of the article Swiss Journal of Economics and Statistics © The Author(s). 2018 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. Föllmi et al. Swiss Journal of Economics and Statistics (2018) 154:17 https://doi.org/10.1186/s41937-018-0021-3