How to Boost U.S. Small Business Lending? Look to the UK

The following piece by me ran today in Ideas Lab:

After a recent public consultation with the business community and financial services industry, the U.K. government has decided to enact a law that requires large lenders to share information with alternative and smaller lenders about small and mid-size enterprises (SMEs) whose credit applications have been rejected. The sharing of such information — which, in addition to loans, would cover factoring, asset-based lending and trade finance — would occur via online referral portals that help match the rejected SMEs to alternative lenders.

The legislation hits a market failure between the eyes: good, credit-worthy companies unable to access capital due to lack of information about best-fit alternative lenders. It matters: the largest four U.K. banks (Lloyds Banking Group, the Royal Bank of Scotland, HSBC and Barclays) account for more 80 percent of U.K. SMEs’ main banking relationships. In the wake of the financial crisis, banks have typically tightened their underwriting criteria — yet most U.K. SMEs only approach their main bank for finance. An estimated 37 percent give up completely if they are turned down, and only 28 percent approached different providers — and 12 percent used an existing form of borrowing, such as credit cards.

Meanwhile, the U.K., just like the United States, has seen the rise of alternative lenders, such as peer-to-peer lending and crowdfunding platforms. The U.K. government reasons that when one door closes, another one opens; SMEs now only need to be handheld from the former to the latter.

The United States needs to follow suit. Pressed by regulatory heat, U.S. banks too are less interested in small business loans, and will be even more reticent as Basel III capital requirements go into effect in 2015. When asked to name the most severe obstacles to growth in a May 2013 survey by the Federal Reserve Board of New York, 49 percent of 670 surveyed SMEs listed access to capital as the leading challenge.

Continue reading

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How Digital Protectionism Threatens to Derail 21st Century Businesses

The below piece appeared in Marsh & MacLennan’s BRINK on 3 December 2014:

A decade ago, Thomas Friedman’s The World is Flat popularized globalization as a process where Apple, Dell, IBM, and other giant corporations offshored manufacturing to low-cost economies, and outsourced parts and components from suppliers around the globe. China became the world’s factory, mass-producing computers, clothes, and gadgets for U.S. consumers. Southeast Asia prospered as China’s parts warehouse.

The flat world lens, however, is no longer prescient.

Disruptive digital technologies—the cloud and digitization, ecommerce, 3D printing, big data, holograms, Internet of Everything, and virtual currencies—are revolutionizing the economics of global trade and production. They are empowering corporations to dramatically cut costs and encouraging even the smallest of businesses to engage in trade. But the emerging global digital economy is at risk: It lacks the liberalizing policies of the Flat World. Rather, digital protectionism is on the rise. How to tackle it? Continue reading

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Aid for eTrade – Accelerating the Global eCommerce Revolution

Some days ago I presented at CSIS a new paper, Aid for eTrade – Accelerating the Global eCommerce Revolution, that I wrote as CSIS Adjunct Fellow with the support of eBay.

The paper argues that a quiet revolution is taking place in international trade without government policy direction or much public fanfare: the rise of cross-border online trade as individuals and businesses of all sizes engage in trade by selling goods and services online. Lowering the costs for companies to trade across borders, ecommerce holds extraordinary potential for expanding global trade, promoting small business exports and entrepreneurship in the United States and around the world, and boosting export diversification and international development. Yet much of the world and most businesses are still not connected to the web. In addition, several of the countries that have relatively good information and communications technology (ICT) capabilities and Internet usage rates struggle to translate their connectedness into exports and economic gains. What is more, numerous new policy barriers to ecommerce and the global digital economy are cropping up, such as data protectionism.

The working paper proposes forward-looking policies and programs to overcome these challenges and accelerate developing nations’ transition to the digital era and ecommerce. Such policies and programs can be grouped under a coherent framework and initiative, “Aid for eTrade.” Aid for eTrade as proposed here is a close cousin of the global Aid for Trade initiative, which has over the past decade channeled more than $200 billion in bilateral and multilateral trade-related assistance to developing nations. Aid for eTrade has two main legs: (1) $100 billion in public and private investments in 2015-2020 in information technologies, computerization, e-training, and ecommerce-related logistics and capacity-building in developing countries; and (2) robust technical assistance for governments around the world to establish policies and regulatory frameworks conducive to unfettered cross-border ecommerce. While Aid for eTrade would most immediate benefit developing nations, it can also be a powerful catalyst of U.S. small business exports.

Link to event site is here; you can watch event video here:

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New Face of Globalization: Online Shoppers and Sellers

As the world economy digitizes, patterns and players in trade are changing. According to U.S. Census Bureau, the total online transactions in the U.S. grew from $3 trillion in 2006 to $5.4 trillion in 2012, to about a third of U.S. GDP. Increasingly, these transactions are cross-border. By 2017, a third of U.S. business-to-consumer (B2C) and consumer-to-consumer (C2C) ecommerce transactions will be with foreign counterparts, up from 16 percent today.

One driver of these trends are the previously marginal participants in trade – American small businesses, entrepreneurs, and consumers that transact with foreign sellers and consumers online. Ecommerce is propitious for these players: it drastically lowers the costs for buyers and sellers located far apart to gain visibility and transact with each other. But ecommerce is also driven by large companies that leverage ecommerce just like small companies do – as the key and even as the only means to access a foreign buyer. For example, Wal-mart has no stores in India, but does have an e-commerce presence shipping in goods from other countries to Indian customers.

Online trade enhances U.S. productivity and lowers international trade costs, accelerating economic growth and job-creation. In a conservative estimate by the U.S. International Trade Commission, domestic commerce and international trade conducted via the Internet – increased U.S. GDP by 3.4–4.8 percent in 2011, and U.S. real wages by 4.5-5 percent, and created up to 2.4 million new full-time jobs.

As hundreds of millions of individual consumers around the world leverage their laptops, tablets, and phones to buy goods and services online, U.S. companies of all sizes are more likely to be discovered by foreign buyers – and turned into exporters. Given the popularity of U.S. ecommerce sites, the rise in global online trade is likely poised to boost U.S. exports. A 2013 survey of individual cross-border online shoppers in the United States, Australia, Brazil, China, Germany, and UK showed that U.S. ecommerce sites were the most popular destination, cited by 45 percent of the online shoppers. And as businesses abroad develop online stores, U.S. online shoppers have access to an ever-larger variety of products, making themselves importers. Everyone will be better off. The challenge is that old structures, such as customs procedures, are not keeping up with the evolution of the patterns and players in trade.

Exporters and Importers Today…

So far, only a select few U.S. companies engage in trade, and it is the very largest companies that make up the bulk of U.S. trade flows. According to the latest Census data, in 2012, 304,867 companies engaged in exports. This is only 1 percent of all U.S. businesses, and 5 percent of employment-providing businesses (figure 1). There were even fewer importers, or 185,729, in 2012 (figure 2). Some 80,000 companies were two-way traders – exporters that also import. 

Figure 1 – U.S. Exporters’ Number and Share of Total Exporters and Imports, by Number of Employees

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Source: U.S. Census Bureau.

Figure 2 – U.S. Importers’ Number and Share of Total Exporters and Imports, by Number of Employees

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Source: U.S. Census Bureau.

…and Tomorrow

Online buyers and sellers are different from offline sellers in many ways. Of course, they are technology-savvy and intrepid in using online tools to market, sell and purchase products. But they are also very different from traditional players in their engagement in international trade:

  • Online sellers are highly likely to export. On average, 97 percent of American micro and small businesses that sell on eBay also export – in stark contrast to the 1 percent of U.S. small businesses that export in the traditional “offline” way (figure 3). This drastic difference between off- and online sellers occurs in other advanced nations as well as in developing countries. Online platforms dramatically expand buyers’ visibility of sellers even far away: sellers’ products are clearly visible and easy to explore across oceans. Online platforms’ star ratings systems, customer reviews, and payment tools such as Paypal gives the buyer a sense of trust, the lubricant of trade that in the offline economy takes several transactions between buyer and seller to build.
  • In online trade, tools and visibility are similar for all companies, irrespective of their size. As such, small and large online sellers are almost equally likely to export and export as much: even the smallest 10 percent of commercial eBay sellers overwhelmingly engage in exports (94 percent) (figure 4). For small sellers on eBay, exports make up 14 percent of all sales – not very different from the levels of the largest shippers for whom exports make up 18 percent of all sales. What’s more, similar concentration of exports in a few larger companies does not occur in the online economy: small exporters on online platforms make up a much larger share of online exports than they do in the offline world.
  • As opposed to the more than 50 percent of U.S. offline exporters that export to 1-2 countries, 81 percent of online exporters export to 5 or more countries (figure 5). The diversification is very substantial: the smallest 10 percent of U.S. regular online exporters on eBay serve 28 markets on average, and the largest 10 percent sell to 66 different markets (figure 6). This means these companies face multiple distinct trade compliance regimes, a maze for a small business to manage.
  • Online exporters and importers are typically smaller than “offline” exporters and importers: even the largest online exporters on eBay pale before those of the largest corporate exporters. Online importers and exports also tend to be quite new to import and export, and have irregular, sporadic shipments.

Figure 3 – Share of Sellers Exporting on eBay vs. Offline

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Source: eBay (2013). “Enabling Traders to Enter and Grow on the Global Stage.”

Figure 4 – Share of Sellers Exporting and Share of Value Exported, by Deciles

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Source: eBay (2013). “Enabling Traders to Enter and Grow on the Global Stage.”

Figure 5 – Number of Export Destinations – Small vs. Large eBay Exporters (sellers with > $10,000 in exports)

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Source: eBay (2013). “Enabling Traders to Enter and Grow on the Global Stage.”

Figure 6 – Number of Export Destinations, eBay Sellers with > $10,000 Exports, by Deciles of Sales Value

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Source: eBay (2013). “Enabling Traders to Enter and Grow on the Global Stage.”

According to U.S. International Trade Commission estimates, firms in digitally intensive industries exported a total of $223 billion in products and services ordered online in 2012. The top two sectors for exports of products and services ordered online were manufacturing ($87 billion or 39 percent) and digital communications ($59 billion or 26 percent). Large firms made up 92 percent of exports of products and services ordered online. The top destinations for both digitally and physically delivered U.S. exports that were ordered online were North America (primarily Canada), the European Union (primarily the UK), and the Asia-Pacific region (Australia and China) (figure 7).

The value of imports ordered online by U.S. companies in digitally intensive industries was $106 billion, with 94 percent delivered physically rather than digitally to U.S. buyers. Firms in manufacturing ($51 billion), digital communications ($23 billion), and retail trade ($18 billion) had the largest shares of digitally and physically delivered imports that had been ordered online in 2012 (figure 8).

Figure 7 – Top Regions for Exports of Products and Services Ordered Online, by Percentage of Firms, 2012

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Source: U.S. International Trade Commission. 2014. “Digital Trade in the U.S. and Global Economies, Part 2.”

Figure 8 – Imports of Products and Services Online by Sector and Delivery Mode, 2012 (billions $)

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Source: U.S. International Trade Commission. 2014. “Digital Trade in the U.S. and Global Economies, Part 2.”

Emerging Challenges to Online Trade

Online trade is the trade of the 21st century. It has outstanding potential for expanding U.S. exports and entrepreneurship, and boosting welfare around the world. Already, some 2.6 billion people, or 38 percent of the world’s population, use the Internet, and another 2-3 billion are forecast to access to web, typically through smart phones, by 2020, particularly in China, India, and Africa, but also in Brazil and across South America. That more consumers get online should augment B2C and C2C transactions in particular, and open opportunities to U.S. businesses and individuals to sell and buy goods and services around the world. Globally, B2C transactions are expected to soar to $2.4 trillion in 2017 from $1.5 trillion in 2014, with China leading the way.

However, trade compliance is poised to emerge as a challenge.

So far, customs security regimes around the world have been tailored to the patterns of “traditional” trade: large trade volumes shipped by large and mid-size companies staffed to meet trade compliance requirements. Customs regimes are not optimally designed for trade between small enterprises and consumers, where countless of small shipments are sent and/or received by parties with limited trade compliance capabilities.

In online trade, the importer of record is typically an individual consumer, and the exporter is frequently a small business. These players have much more limited know-how to deal with customs regulations than large corporations do. Meeting complex regulations can defeat the purpose of trade: the fixed costs involved with trade compliance, along with shipping and other factors can thus more easily usurp profits of small businesses.

At the same time, governments have legitimate concerns related to small business trade that could accentuate the need for trade compliance: the mushrooming B2C and C2C trade of millions of small parcels criss-crossing the globe makes the risk of contraband, IP infringements, weapons smuggling, and terrorism in international trade appear more fragmented and amorphous. One reason is that the new participants in trade – small businesses and individuals – are just that, new, and thus often lack a robust paper trail and consistent track record in trading across borders that governments could use for risk-targeting.

What is needed are regulatory frameworks and procedures that secure trade without sacrificing the opportunity for small businesses to engage in trade and reach overseas customers in a timely and cost-effective fashion. Stay tuned for next blogs on new ideas to streamline and facilitate this hugely promising part of world trade.

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Digitization and the Future of Jobs: Rise of the Re-Invention Economy

Today I published a piece in GE’s Ideas Lab on why automation and artificial intelligence will create more jobs than they will destroy:

As automation and computerization expand, anxiety about jobs is at a fever pitch.

Some say computers will displace a vast array of human work.Many others argue it polarizes the labor market: in a widely cited paper, David Autor and David Dorn argue that automation has forced middle-class workers easily replaced by machines into low-skilled jobs such as cooking, cleaning and healthcare; high-skilled workers capable of abstract thinking unmatched by computers are also surviving. In another paper with Gordon Hanson, Autor and Dorn show how globalization — import penetration from China — has further hollowed out the middle, or blue-collar U.S. manufacturing jobs.

But as technology and globalization expand, the ends of the barbell economy are feared to be at risk. Is the gloom warranted?

Labor market angst is nothing new. The 1990s kick-started blue collar blues — fears that U.S. manufacturers would either offshore or be demolished by Chinese imports. In the 2000s rose white collar worries — that call centers, data processing, financial analysis, web design and hip surgeries would be outsourced from in India, placing a quarter of U.S. jobs at risk. While not unwarranted, these fears proved much overblown. A more forceful cause of job losses has been technology, as immortalized in Kodak moments, falls of giant corporations and workers unprepared for the digital era.

High-skilled knowledge workers and low-skilled service workers have seemed immune to the twin forces of technology and globalization. But now smart machines are doing what high-skilled do — aptly crafting sales presentations, choosing medical treatments and routinely making the millions of decisions needed to manage complex supply chains. Knowledge work can now be done from anywhere, and not only on the back of the cloud and Skype. Soon executives — as well as financial advisors, accountants, data analysts, coders, etc. — could appear as holographic 3D avatars projected onto venues around the planet right from their home offices. By 2025, hypersonic flights could take an executive from Shanghai to New York in two hours — a doable commute even twice a week.

At the lower end, jobs for greeters, telemarketers, retail workers, waiters, accountants, even carers of the elderly could be offered virtual assistants that work 24 hours a day, seven days a week — and never ask for a raise.

This leads one to believe that those not automated out will be outcompeted by globally footloose virtual and hypersonic workers. Yet five factors paint a much brighter future.

First, as Autor has recently pointed out, knowledge workers are still much less likely to get outsmarted by machines than to use machines to do their jobs better and faster. Excellence (and survival) at work is increasingly about demonstrable abilities to problem-solve, intuit, think creatively and exercise common sense, areas where computers — excelling at optimization, logic, statistics and so on — are still human pre-schooler equivalents. And it is unlikely that everyone would love to be hosted or cared by a virtual avatar if a real human is available for a moderate premium.

Second, smart technologies make the labor markets more adaptive. Predictive analytics will enable workers to anticipate better what jobs are on the rise. With advances in metrics and analytics of employees’ ever-important soft skills and attributes, labor markets can become much more differentiated, with artificial intelligence applications matching workers to jobs much faster globally. The web has already reduced joblessness — in a recent U.S. International Trade Commission study, U.S. unemployment rate was 0.3 percentage points lower in 2012 than it would have been at 2006 Internet usage level. Where the Web is newer, it has squashed unemployment even more — in Russia, by 2 percentage points; in China, by 2.5 points; in Brazil, by 1 point.

Third, makeovers will be easier. Hiring is increasingly for discrete tasks rather than occupations, such as crowdcasting, corporate-sponsored calls for problem-solving among a curated group of people. In a task-based labor market, terminal degrees weigh less than retooling in real time — continued education powered by massive online courses and digital on-the-job learning. Career moves can be less daunting than going from the factory floor to a computerized office — for example, coding, programming and web design are increasingly accessible even to lower-skilled workers.

Fourth, there will be more companies hiring. It is fashionable to argue that digital economy superstars will be skimpy employers. For example, at the same market valuation of $25 billion, the 1990s star multinational Dell employs 111,300 people, while the newer digital superstar Twitter employs just 2,700. But the math is too simple. Technologies from 3D printing to ecommerce and Big Data are making it much easier for small businesses — the backbone of U.S. jobs — to launch, scale and compete globally. If future companies staff fewer people, there will also be far more of them, each offering a differentiated product or service to a global customer base. New companies can also spawn entrepreneurial ecosystems around the planet, not unlike Apple has done for app developers or Uber for drivers.

Fifth, technology unlocks latent economic growth that spurs hiring. Digitization of products cuts the costs of moving goods across borders, a key driver of trade-led growth. Technology can overhaul healthcare and education, sectors with stagnant productivity making up a fifth of the U.S. economy. Strokes of the old-fashioned pen are needed, as well: cutting red tape and boosting regulatory certainty would recharge the U.S. and several major economies, such as France, India and Brazil.

The giant question mark in tomorrow’s economy is the adaptability of workers. Not everyone will thrive on the churn and change and self-reinvent. Existing tools, such as the Trade Adjustment Assistance that has helped retrain more than 230,000 workers impacted by trade over the past decade, are not made for the digital economy — where competition is ubiquitous and amorphous, not only about offshoring or import penetration.

Of course, governments can shut down the virtual highways where tomorrow’s commuters beeline — such as by making overseas nationals more complicated. A better answer would be a public-private partnership between the government and the resented “tech elite” companies such as Facebook to deploy corporate PR and social responsibility dollars to fuel the retooling and rehiring of digital era workers, in exchange for cuts in income and payroll taxes. With some imagination, technology and good policy can be job-creators also in the global digital economy.

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Making Middle Market Companies Realize their Export Potential

New blog on TradeUp:

A new study points out that the latest data show there are almost 200,000 middle market companies. While most companies are smaller and middle market companies account for only 3 percent of all businesses in the United States, these firms created 70 percent of all jobs in 2013, and collectively generate about one-third of all private employment, and of U.S. GDP. Yet middle market companies punch way below their weight, the study finds. Only 40 percent of middle market export, and these companies make up only nine percent of all U.S. exports. Our blog explains why:

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Equity for Exporters

A historic shift is taking place in the world economy: record numbers of small and mid-size companies, microenterprises, and garage entrepreneurs are going global. Before content to sell in the giant U.S. market, now even the smallest American businesses are courting overseas shoppers. One attractive target is middle classes in emerging markets, a $30 trillion market by 2025. Aiding these globalizing companies are disruptive technologies such as digitization of products, 3D printing, Bitcoin, and ecommerce, all of which are shrinking costs for small businesses to do cross-border business.

Today’s exporters are smaller and younger than ever. Many are “born global” companies that internationalize very early in their life cycles, and sell in many markets all over the world. The shrinking of exporters is most intuitive in consumer products sold online: 97 percent of U.S. eBay sellers, most of which are micro and small businesses, also export, to an average of 28 markets – a stark contrast to the traditional pattern where 1 percent of American companies export on average to 1-2 markets. Exporters are small also in such sectors as IT, biotech, and cleantech, where U.S. technologies can be even better suited for emerging markets than they are for the U.S. market. One of countless examples is Sunsaluter that provides energy off-grid for underdeveloped markets, devised by a 21-year Princeton grad Eden Full. But also smaller “heartland” companies in manufacturing, food and beverage, and financial services, among others, have realized that overseas markets are often great fits for what they have to offer.

But problems loom. The export infrastructure writ large, from complex customs procedures to high fixed costs of international transactions and benefits of shipping large volumes in bulk, is created for the traditional engines of U.S exports, giant corporations.

Finance is a particular pain point. Exporting is a capital-intensive endeavor. Globalizing companies need substantially more money than the domestic companies, to cover the many up-front costs associated with going global, such as creating overseas distributor networks and rejiggering products to meet foreign standards. The costs of each transaction also grow in the international context: there are higher shipping, logistics, and trade compliance costs. Companies need quick access to working capital when needing to fulfill large international orders. And toughest of all is to secure growth capital to expand a company’s sales force and production capacity to serve the global buyer.

The new generation of exporters is hard-pressed to handle these costs by borrowing – because many of them are the types of companies that can’t access debt. In the past, companies globalized sequentially – scaled at home first, then started exporting to one market, and then entered one new market at a time. These companies could get loans: they had long-standing relationships with their banks, and a solid borrowing base – and faced none of the post-crisis stringent underwriting criteria. Today’s exporters are turning this sequential model on its head. They have no patience nor reason to grow into large companies at home before going global.

Today’s exporters are “born global” companies that internationalize very early in their life cycles, and sell in many markets all over the world. Being young and small, these companies have much more limited access to traditional sources of capital; being fast-growing gazelle companies, they also need larger injections of capital to fuel their international growth than banks can stomach. Today’s exporters need equity.

Getting equity is tough. A small business owner’s priority is to get clients in the door. If touring the world to meet with foreign customers, she has limited time and bandwidth to court investors, a full time job for three people. This is one reason why only a limited number of companies succeed: only about a fifth of companies that try succeed to secure angel investments, a decidedly easier pathway to capital than venture capital.

The government helps only with debt. The Export-Import Bank and Small Business Administration guarantee a sub-set of export working capital loans issued by banks. The Overseas Private Investment Corporation (OPIC) provides 75 percent of an emerging market project in debt, as long as there is at least 25 percent U.S. equity participation. Canada’s export credit agency, Export Development Canada, helps Canada’s born global companies secure equity from funds and has even made direct investments in some Canadian companies. There is no equivalent in the United States.

Notice: we are not talking about overseas investments or equity in overseas assets. This is equity investing in U.S. companies – only ones that are growing both in the United States and internationally. This is exposure to an American business, with assets in America and a diversified, massive client-base, one in and outside the U.S. This is international upside with U.S. risk. What better deal?

Yet mainstream source of financing for companies, banks have yet to match the needs of the next generation of American exporters, largely because these exporters are too small to interest banks. If we are serious about helping American companies go global in a world where even the most nascent businesses globalize, this has to change. We need equity for exporters. That’s what our company TradeUp does – helps companies gain visibility with a range of equity investors – angels, private equity funds, VCs. We cooperate with lenders, to help their clients and clients-to-be to secure adequate growth capital. And we are supporting policy reforms that will open exporters’ access to capital.

What’s in it for investors? As I laid out in a prior blog, access to globalizing companies, a high-growth, outperforming asset class with global growth prospects and mitigated downside. International upside at U.S. risk. With equity to exporters, everyone wins.

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