Next Big Player in U.S. Trade: Small and Mid-Size Companies

My company TradeUp has a new White Paper U.S. SME Exporters as New Asset Class. Why would we ever claim that small business exporters are a big deal? For three reasons:

1. Record Numbers of SMEs Seek Growth through Exports

Small and mid-size enterprises with fewer than 500 employees are the backbone of the U.S. economy, and make up 98 percent of the 300,000 U.S. exporters. Most of these companies are small, with fewer than 50 employees. Just like in other economies, overall U.S. trade is still driven by large companies and multinationals, but SMEs have in the past few years gained ground and now make up over a third of U.S. exports.

Overall, U.S. SMEs are still focused on serving the domestic market only: merely 5 percent of the 6 million employment-providing SMEs export. The United States has tremendous latent SME export potential. In contrast to other advanced economies, U.S. SMEs appear to under-export – have a lower export participation rate than economies of comparable size, such as many European and East Asian and economies. For example, export participation rates for South Korean SMEs is 19 percent, and European SMEs some 25 percent.

However, the share of U.S. SMEs that export is poised to grow, possibly dramatically. Record numbers of U.S. SMEs are seeking growth through exports. In a 2010 HSBC survey, 72 percent of surveyed SMEs planned to increase their overseas sales in the coming years, up from 9 percent in 2008. In an HSBC survey in California, some 70 percent of exporters said they were seeking seek further export growth, while 22 percent of non-exporters planned to start to export. In UPS’s 2012 survey of 125 U.S. high-tech companies (of which 64 percent were likely to be SMEs, with revenues between $5 million and $1 billion, while the rest were larger), only 23 percent of companies had seen export growth in the prior two years, but 74 percent expected to see export growth in the next two years, in 2013-14.

In a 2013 NSBA survey, as many as 63 percent of small businesses responded yes to question “would you be interested in selling merchandise or services to a foreign customer in the future, if some of your concerns could be addressed?’, up from 43 percent in 2010. Concerns in the question here related to lack of knowledge about exporting and costs of exporting, among others.

A key cited factor driving interest in exporting is emerging markets’ growing purchasing power: the expansion in discretionary spending resulting from the rise of an estimated 1.5 billion middle class consumers in these nations in the coming decade is expected to add $10 trillion to the global GDP, a vast new market for American businesses. This will drive demand consumer goods, electronics, food processing, fashion, and entertainment. Also energy and water demand will soar on the back of urbanization and population growth, opening opportunities for energy, clean tech, and water technology companies.

Also driving business owners to export are the forthcoming U.S.-led free trade agreements with European Union and East Asian economies, and the coming investments in infrastructure and manufacturing capacity in the developing world, which drive demand in such sectors as industrial machinery, transportation equipment, IT equipment, and business and engineering services. Trade in infrastructure and manufacturing-related goods is estimated to soar to 54 percent of total global goods exports by 2030, from 45 percent today. U.S. companies are among the most competitive in the world in transport equipment and industrial machinery, which gives them an edge as exporters in the main demand centers – India, China, Vietnam, Malaysia, Indonesia, Bangladesh, and Turkey and Egypt.

2: Macroeconomic and Technology Drivers Favor SME Exporters

Trade forecasts speak to these macroeconomic trends. According to recent estimates, growth in world trade in goods is poised to reach nearly 5 percent in 2014, more than doubling 2013 growth figures. Global trade in services – such as engineering, legal, technical, accounting architecture, or any service where the provider is in one country and the buyer in another – continue growing robustly. These trends are very positive after the 12 percent plunge in world trade in 2009 and the lackluster growth in trade over the past few years. 

The long-term view is even better. World trade in goods will grow 8 percent annually through 2030. This means that world trade will double between 2013 and 2022, and triple by 2028. Trade will yet again outpace global GDP growth, as it has over the past several years. In 1950-2005, world GDP grew about 5 times, but world trade grew 11 times. According to HSBC, 2016 is a major inflexion point: exports from advanced economies, particularly the United States, are set to expand very rapidly in 2016-2020.

Over the past few decades, the growth in trade has been driven by four main factors – global economic growth, trade liberalization, reduction in transport and communications costs, and the build-out of corporate global supply chains by such giants as Apple, Boeing, and IBM, which radically increased trade both in final products such as iPhones, and especially trade in parts and components.

These drivers will still be very important going forward. In the next decade, trade will be boosted by the global recovery and the above macroeconomic factors, trade facilitation, such as faster port clearance and customs procedures, further reductions in tariff and non-tariff barriers particularly in the context of regional trade agreements, and new technologies such as cloud computing, ecommerce, and high-speed travel that will obliterate distance and cultural barriers that still hamper trade. Already, a stunning 97 percent of American micro and small businesses that sell on eBay also export – vastly more than the 5 percent of small businesses that export offline.

These developments all favor in particular smaller companies seeking growth through exports: the costs of doing international business have never been as low; the opportunity never so large.

Yes, there will be  Fed tightening that can lead to a stronger dollar. But taking a long-view, structural changes in the U.S. economy are also hugely propitious for SMEs’ export growth. A widely cited 2012 Boston Consulting Group report shows that by 2020, declining energy costs and increasingly competitive wages will give America as large as a 25 percent export cost advantage over Japan and several Western European nations, including Germany, a global export might. BCG estimates that the United States will experience a manufacturing renaissance and reshoring from such locations as China particularly starting in 2015, and will eventually add 2 million to 3 million jobs and an estimated $100 billion in annual output in a range of industries.

3: SME Exporters Outperform the Broader Market

Academic research has firmly established that exporters are more productive than non-exporters before they even commence their export journey. Compared to non-exporters, exporters are typically larger and more productive, have higher sales, pay higher wages, and are more skill-intensive.  In the United States, for example, leading trade economists show that exporters are larger than non-exporters in employment (by 119 percent) and sales (148 percent), are more productive (by 26 percent in terms of value added per worker and 2 percent in terms of total factor productivity), and use higher levels of capital per worker (32 percent) and have higher skill intensities (19 percent). 

This has two reasons: yes, exporting makes companies better, but it is also the case that better companies become exporters: in other words, high-productivity companies self-select into exporting. This is an impressively robust finding across studies, and implies that exporters are stand outs, not necessarily only because they export, but because they are better to begin with.

One reason for why better companies export is that only these companies are able to become exporters. Exporting has high sunk entry costs that only the best companies are able to manage.  Consider a simple yet renowned economic framework to explore this further. In order to sell part of its output abroad, a company has to pay not only variable costs involved with the transaction (such as shipping and tariffs), but also a sunk entry cost (such as costs involved with identifying new markets and customers, adapting products to foreign customers’ needs, and meeting international standards). More productive companies earn higher profits, and hence are better positioned to cover these sunk costs. Thus only a subset of companies, those that are sufficiently productive and typically also larger, will be able to export.

What is more, such high-productivity companies are also likelier to seek export opportunities particularly actively and strategically. These companies typically have superior managerial assets and organizational capabilities to pursue international growth. Take a recent GE Capital and Ohio State University study on U.S. SMEs with $10 million to $1 billion in revenue: the top-10 percent best-performing companies are also ones that are most aggressively seeking international opportunities.

It is also the case that the act of exporting on a sustained basis makes companies more productive. In fact, there are at least five specific channels through which exporting can result into greater productivity:

  • “Learning-by-exporting”: Exporters are poised to gain information from their international buyers, distributors and competitors, which leads to discovery of new market opportunities and improved management decision-making.
  • Innovation: Exporting can increase companies’ propensity to innovate and invest in R&D, as exporters seek to improve products and processes in order to respond to customer demands and competitive pressures.
  • Revenue diversification: Revenue diversification across different international markets often reduces the volatility of the company’s sales along with vulnerability to downturns in any one market.
  • Capacity utilization: In companies and industries with opportunities for scale economies, selling in international markets increases capacity utilization and reduces average costs.
  • Competitiveness: Exporters are generally exposed to intense foreign competition, which forces them to pursue greater efficiencies so as to survive in the global marketplace.

More generally, exporters can be incentivized to upgrade their technologies, improve distribution channels, and enhance the composition of their labor force so as to compete harder, increase market penetration, conquer new markets, and introduce new products.

Productivity is not the only aspect that improves with exporting. Research has also found that once companies export, they experience greater access to credit than domestic companies do – which suggests that exporting loosens companies’ credit constraints, perhaps by making companies more productive and by playing a countercyclical role when domestic markets flail.

When small businesses themselves were asked by NSBA what the benefits of exporting are, the top three answers were: increased sales and profits; diversified and expanded customer base; and increased economic stability in light of U.S. economic difficulties.

Gains from exporting are found to happen both overnight and over the course of several years. There are many reasons for the lag. For example, gains may kick in only after the sunk costs involved with new market entry and product launches are recouped, and after the firm has time to absorb and translate the many gains from exporting, from innovation to enhanced managerial capabilities. “Survival” in export markets is essential for the company to reap substantial growth gains from trade. Exporting once in one year and again once a few years later is not the best means to harness exports for growth: rather, sustained exporting is needed. Persistent exporters gain most.

Further, companies that are more export-intensive (have a substantial share of their sales coming from exports), and multi-product exporters that have diversified their export markets and products tend to see higher productivity gains from exporting than do companies with low export intensities or companies that are single export products and/or single export markets. The key factor by which a company becomes a multi-product, multi-market exporters is survival in its core export markets and export products. Recent research on U.S. and German companies finds that the number of products exported and the number of export destinations are significantly related to the firm’s total exports, exports of the firm’s largest product across all markets, and firm productivity.

In sum, the ranks of U.S. SME exporters are growing, and they are outperforming companies. They are also different: they make up an asset class with unique growth drivers and challenges than faced by the broader market.  Paradoxically, they also cite lack of capital as the leading constraint to trade. That’s the gap that TradeUp is bridging.

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2 Responses to Next Big Player in U.S. Trade: Small and Mid-Size Companies

  1. Thank you for sharing valuable information. Nice post. I enjoyed reading this post. The whole blog is very nice found some good stuff and good information here Thanks..Also visit my page accounting services

    • Kati Suominen says:

      Belated thanks for these very kind comments ad congratulations on all the great work you are doing! Best wishes, Kati

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