Kati Suominen: 3 Ways To Navigate The Ambiguity Of Growth

This article first appeared in: http://www.gereports.com/kati-suominen-3-ways-to-navigate-the-ambiguity-of-growth/

Amid global economic uncertainty, here are three levers for topline growth.

Not a day goes by without news about a slowdown in the world economy. Yet paradoxically, a recent Pricewaterhouse survey revealed that while 70 percent of global executives said it is more difficult to find profitable growth opportunities now than 10 years ago, 74 percent also said there are more profitable growth opportunities now a decade ago.

In other words, people on the frontlines of the world economy – executives in leading companies – know opportunities exist, but can’t see them. Growth is like a needle in a haystack.

Fortunately, amid the fog are three clear opportunities, opened by what is called the 4th Industrial Revolution and what I call Globalization 4.0:

1. Embrace the digital revolution.

Digitization is revolutionizing the economics of global production and trade. Digitization unlocks for companies new efficiencies, markets and innovations — without necessarily upsetting companies’ core business. Often, it makes it better:

These efficiency gains are far from fully harnessed even in advanced economies, with McKinsey finding that the U.S. economy is only realizing 18 percent of its digital potential. Some of the largest sectors — healthcare, construction, manufacturing — face the biggest gaps.

We found that U.S. middle market companies are only marginally satisfied with their own digitization practices, in a new study sponsored by Magento and co-authored by Nextrade Group and theNational Center for the Middle Market. These companies — a key engine of economic growth and job creation, with $10 million to $1 billion in revenue — gave themselves a “Digital Grade Point Average” of 2.8 on a scale of 0-4. That’s the equivalent of a C+.

In Europe, while almost all companies have broadband Internet access, according to the World Bank, only 19 percent use the Cloud, 15 percent have online sales, and 4 percent use RFID technology.

These low numbers imply tremendous opportunity: the coming embrace of digitization is poised to generate hundreds of billions of dollars in efficiency gains.

2. Go Mobile with Emerging Market Millennials

The second growth lever is mobile — specifically, the nexus of mobiles, Millennials and emerging markets.

Today, 98 percent of people in advanced economies own a mobile phone, as do 80 percent in the developing world, according to World Bank. However, just 31 percent of people in developing countries use their mobile phones to get online, versus 80 percent in advanced economies.

This is changing, with the number of smartphone users expected to more than double by 2020 to 6.1 billion. Thanks to phone upgrades and cheapening 4G subscriptions, most smartphone users will hold the Internet in their hand — before they ever have used a PC. Mobile-wielding netizens globalize globalization. Sales channels leading straight to the shopper’s handheld mean that companies can sell to anyone, anywhere, anytime.

Meanwhile, 85 percent of world’s workforce will be Millennials by 2025. Socialized by B2C social media, ecommerce and the sharing economy into mobile purchases, Millennials will also make B2B searches online. Already, Millennials account for nearly half of all B2B purchases, and 42 percent of searches for B2B purchases come from mobile phones — a three-fold increase from 2012.

As smartphones proliferate, B2B companies have great opportunities to translate Millennials in new markets into sales.

3. Drive for Better Policy

The Internet may seem ubiquitous, but we are still in the early days of achieving its full potential — something that savvy public policy and public-private partnerships can help unlock.

One area is digital protectionism — countries censoring websites, blocking the flow of cross-border data flows or mandating that foreign companies set up servers in-country for market access. These policies cost up to 2 percent of national GDP – for the country imposing the restrictions.

Narrowing digital divides would also spur growth. Only 46 percent of people globally use the Internet, and most of them are in advanced economies. Emerging markets still significantly trail advanced economies in Internet connectivity and technologies riding on the Web — as do rural areas behind urban centers, the old behind the young and women behind men.

‎Bridging certain “digital disconnects” could yield giant gains:

  • Harmonizing mobile spectrum in Asia could save the region $1 trillion each year.
  • Making the many national online payment platforms interoperable would boost cross-border online sales by billions.
  • Establishing regional Internet exchange points in Latin America would save the region 33 percent in cross-border data transit costs.

The long-term growth of companies and countries alike is largely determined not only by the amount of labor and capital, but also total factor productivity (TFP) — magic pixie dust that includes human capital, technology, good institutions, rule of law and other such hard-to-measure variables. At some point, labor and capital hit diminishing returns. Indeed, today’s concerns about secular stagnation owe partly to the fact that capital investments have run their course in China and other emerging markets.

‎TFP, meanwhile, is limitless. With determination and imagination, executives can take advantage of new technologies and better policies to draw out more TFP — and keep expanding topline growth. Global growth will follow.

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Silver bullet for helping small businesses trade: Plurilateral agreement on de minimis

This article first appeared at: http://e15initiative.org/blogs/silver-bullet-for-helping-small-businesses-trade-plurilateral-agreement-on-de-minimis/

On February 11, 2016, the US Senate passed the Trade Facilitation and Trade Enforcement Act of 2015, which, among other things, raises the threshold for de minimis – the maximum value of an import that is exempt from customs duties and complicated rules of origin – from $200 to $800. This move should help especially for micro- and small businesses and individuals that use ecommerce to import single shipments and small parcels. It is now time to raise these levels internationally to further spur US trade, through a plurilateral agreement on de minimis.

The new US de minimis level, long championed by trade associations, express shippers, and others in the international trade community, will deliver economic gains. The Peterson Institute has estimated that the net payoff of an increase in the de minimis threshold to $800 would be $17 million annually, taking into account the cost savings at each stage of the delivery chain, minus the revenue that is not collected by customs on shipments in the $200-$800 range. Concretely, the study calculates that it affects 3.8 million shipments handled by express shipment firms. The gains are probably even greater now – the study was published in 2011.

The new law can stimulate new trade that has been altogether “frozen” because of difficulties for exporters and importers in meeting what can be very complex trade rules for shipments above $200. The legislation helps especially the “little guy” – small businesses and individuals who, by using ecommerce, are increasingly engaged in export and import activities with overseas buyers and sellers, yet who lack the capacities to comply with complex trade rules.

The legislation also formalizes the so-called “informal entry” regime, where incoming shipments below $2,500 can benefit from expedited customs clearance, do not need a surety bond, and have reduced paperwork requirements and fees (the $25 minimum merchandise processing fee is lowered to $2 for entries filed electronically).

These policies cut time and paperwork across players in the trade supply chain – importers, express shippers, postal services – and free up resources for identifying serious threats, from terrorism to counterfeit merchandise, illegal drugs, and unsafe food products. Customs security is still a priority: full manifest detail and pre-arrival information is required for all shipments, regardless of declared value.

Now more needs to be done, globally.

Most countries have very low de minimis values. China’s de minimis is $15, Mexico’s $50, India’s $170, and European Union’s about $150 (150 Euro). The level is absurd in some countries – for example, the Philippine de minimis is 48 cents. There are two reasons behind these low numbers: governments’ reluctance to forego revenue from import duties; and protectionist lobbying by domestic retailers. Yet it is the country’s consumers who typically get hurt, facing markups due to the very duties and taxes charged at the border.

Raising de minimis levels would unlock new trade that would outweigh the revenue losses. In a study of 12 Asia-Pacific Economic Cooperation (APEC) economies (Canada, Chile, the People’s Republic of China, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Thailand and Vietnam), raising the de minimis to just $200 would generate gains of $5.4 billion a year, equivalent to some $12 billion for all 21 APEC members. The gains would be multiple if the de minimis was raised higher, say, to $1,000.

A way to unlock these gains is to negotiate a plurilateral agreement on de minimis with key US trading partners. As multilateral trade talks among the 164 WTO members remain clogged, plurilateralism is emerging, alongside regional trade agreements like the Trans-Pacific Partnership agreement, as a key means for countries to negotiate trade agreements. Several WTO members are engaged in plurilateral talks in key sectors – the main one being the Trade in Services Agreement (TiSA) currently negotiated among 50 WTO members that cover 70 percent of the world’s services economy.

To be impactful, the de minimis plurilateral should aim to raise the members’ thresholds to $1,000. After all, if $800 was fixed as the target, the United States would not have any bargaining chips. The deal could be started by some of the most important US trading partners – such as the European Union, Canada and Mexico.

The de minimis plurilateral would be formed among a “coalition of the willing” that assumes the rights and obligations of the agreement. Non-members would not benefit from the higher de minimis the members apply to each other. However, just like the Information Technology Agreement (ITA) that was reached in 1996 among 29 Asia-Pacific economies, including the United States, and that has since expanded to cover 81 nations, the de minimis plurilateral should be open for outsiders to join.

To accommodate the prospective member countries’ different starting points and political concerns, the plurilateral on de minimis could, as with many trade deals, have customized schedules for countries to work toward the $1,000 threshold.

In developing countries, the deal could be introduced as a pilot supported by development banks and donors who help compensate the developing country governments for any foregone customs revenue during the pilot, and assess their net gains after the pilot.

The plurilateral on de minimis would expand opportunities for small businesses and consumers to sell and buy products across borders, accelerate customs clearance, and boost US small business exports. It would also be great foreign aid policy with a special carrot: acceding developing countries would be able to enjoy greater market access for their small business exporters in the advanced economies that are members.

If governments are serious about helping small business export, and companies and consumers access a wide variety of products to lower cost, a plurilateral on de minimis is just about the silver bullet.

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How Can We Revitalize America’s Global Competitiveness?

Today I had the honor to speak on a panel “Power Play: How Can We Revitalize America’s Global Competitiveness?” at the Pacific Council’s members’ weekend. It was a terrific debate – below are my opening remarks and some conclusions:

U.S. competitiveness is a big topic, with several possible definitions – each of which may lead one to somewhat different conclusions. To kick our conversation off, I would like to offer three comments:

First, while there might be reasons to worry about our competitiveness, there are many reasons to celebrate. Consider that:

  • Our corporations are the most productive and resilient in the world
  • Our tech companies are global trendsetters that not only have revolutionized industries, but also created entirely new ones
  • We have figured out the technology to tap into new energy sources that reduce our energy costs
  • We are home to 27 of the 30 universities that produce the most-cited scientific research

We also do exceedingly well in indices that can be seen as proxies of our competitiveness:

In other words, there are many parts of America that work.

Second, if we adopt the definition of competitiveness as the extent to which our companies compete successfully in the global economy, we are well-placed for two reasons:

The first reason is that the global economy of the 21st century is a digital economy. It is an economy where goods and services are digital and bought and sold on digital platforms, with transactions concluded with digital payments. It is an economy where companies that leverage technologies riding on the Internet, such as 3D printing, ecommerce, Big Data, and virtual wallets dramatically reduce the costs for companies to make, market, and move products and services.

The United States is set up for this economy: we have the technologies and our companies and consumers are adopting them. We have the capital and market to scale technologies. Contrast this to Europe: Europe has gone from digital leader to laggard, not least because it is not yet a single digital market. While physical goods travel freely across borders in the EU, digital goods and services still do not. For example, in the U.S., Netflix can stream content just as easily in Alabama as in Alaska; in EU, Netflix is blocked from streaming online content in any of the 28 EU nations without country-specific licensing deals.

EU’s being fragmented into different digital markets I would imagine stifles investment in tech companies. It is not accident that Google, Facebook, Twitter, Uber, and many others grew up in the United States, a single digital market, or that Alibaba took off in China, similarly a single digital market. It is also no accident that 54 percent of online services in Europe are provided by American companies.

The next frontier in our digitization is ensuring that our originally “non-digital” companies – companies in manufacturing, food and beverage, financial services, retail, and so on – adopt and use digital technologies.

The second reason why I feel optimistic about our ability to compete is our trade policy is also setting us up to compete. Like many others, I was concerned about the statements of candidate Obama on the campaign trail in 2008, when he talked about the need to renegotiate NAFTA, hit the pause button on trade negotiations, and focus on trade enforcement.

Positively, our trade policy has become very forward-looking and strategic. TPP was just concluded, opening vaster access to the Japanese market, and once TTIP gets done, we have carved new market access in countries making over half of world trade. We will also have set the de facto multilateral trade rules for the 21st century. The Trade in Services Agreement (TiSA) talks that we are leading and that encompass 50 nations will bolster these gains further in services, the high-growth sector of our economy. Our trade policy has also been very strategic, forcing BRICs to choose between market access in the liberalizing coalition of willing we lead, or the status quo.

In a tennis analogy, in our trade policy, we are taking ball on the rise, and playing smarter than any other nation.

Of course, trade deals we lead like TPP and TiSA are also helping other member economies succeed and gain competitiveness. Just like we do, Japan, Vietnam, and Australia will all gain from TPP, as will 8 other members (and so in fact do other trading partners due to the growth gains in the TPP countries, which boost their overall demand). This is good news: when one stops looking at the world economy as a mercantilist zero-sum game and sees the connections between our and other nations’ prosperity, our trading partners’ growth and prosperity is hugely positive to us.

The third comment is the “however”. What, then, worries me?

First, I worry about creeping regulations and taxes – that one day, after many reactionary moves as in financial regulations after the financial crisis, we wake up and find ourselves having sapped the vigor of our innovation economy and the quintessential American opportunity to make it big here. The debate here must be about smart regulation, not black-and white no regulation vs. lots of regulation.

Second, education is and is not a source of concern. Education is investment in human capital, a driver of total factor productivity and growth, and typically also of incomes of individuals. In other words, quality K-12 education fuels our upward mobility. At the same time, we want to be mindful of keeping investing in our higher education and the best and the brightest, the captains of industry. It is also always useful to talk about STEM – but we should not lose sight of the bigger picture that tech and math are not everything. Even if we get STEM right, we still need 21st century workers – and they are not only statisticians or engineers, but also savvy negotiators, strategic thinkers, great designers, and good collaborators with sound judgement and poise and flair to persuade.

Steve Jobs stressed that Apple products had not only technology but also humanities and liberal arts in them. The best tech companies do not turn on tech alone. Computers  meanwhile, handle many things we do need to get right in the 21st century – math, logic, and shifting through massive amounts of data – I only wish I could scan thousands of journal articles within seconds! But computers are and will be pre-schoolers in the softer tasks that winning in the emerging economy requires. We need STEM, but we need a lot more: measuring the ROI of our K-12, fueling our higher ed to ensure the best ones can truly soar, and educating for the manifold types of roles workers play in the 21st century knowledge economy.

Third source of worry for me is our leadership in the world economy. In the aftermath of the financial crisis, there was a great deal of talk about “American decline” and about the idea that BRICs and other emerging economies would be the locomotives of the global economy. I was so frustrated that I wrote an entire book called Peerless and Periled: The Paradox of America’s Leadership in the World Economic Order (Stanford University Press, 2012), where I argued that emerging markets had structural and institutional defects that would make them run out of steam at some point – and that they were not able to exercise the kind of global, benevolent leadership we have exercised all these years.

Rather, I argued, it is our economy that must power the world economy, and it is out leadership in global trade, finance, and macroeconomic issues – and certainly in other areas as well – that is critical in years to come, in order for us and the world economy to prosper and grow.  I worry that at some point we stop seeing the critical role of American leadership in the world, how peerless it is, and without which how periled our futures can be.

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New thought leadership on digital trade: reforming trade policies, customs regulations, and development solutions for the global digital economy

Disruptive digital technologies — the cloud and digitization, ecommerce, 3D printing, big data, holograms, Internet of Everything, peer-to-peer lending, virtual currencies, and so on — 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. Digitization opens tremendous opportunities for countries around the world to drive exports, entrepreneurship, and inclusive economic growth. Many of my company Nextrade Group clients too are now gaining interest in ways to drive the digital revolution, and many of my other company TradeUp‘s clients ride on the digital economy.

Yet, there are several barriers to the expansion of digital trade and ecommerce, such as digital protectionism – barriers to the movement of goods, designs, services, investments, and data in the digital economy – and the fact that most people and businesses around the world do not have regular access to the Internet or use the web to engage in exports or create new value.

I have over the past several months been active in several global dialogues to tackle digital protectionism and advance the access to and use of the Internet for trade and development around the world. Recent efforts and outputs include:

  • On November 17-18, 2014, I presented a working paper “Aid for e-Trade: Accelerating the Global e-Commerce Revolution” at the Center for International and Strategic Studies (CSIS), the third largest U.S. think-tank where she is Adjunct Fellow, and at the World Bank’s Trade & Competitiveness Global Practice and the Development Research Group in Washington. Sponsored by eBay Inc., the paper shows that 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. The paper proposes a concerted global public-private initiative, “Aid for eTrade,” 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. See more in video here, and OpEd on the idea here.

  • On 3 December 2014, I published an Oped in BRINK, Marsh & McLennan-sponsored forum on global risks, called “How Digital Protectionism Threatens to Derail 21st Century Businesses.” The article argues that the emerging global digital economy is at risk: It lacks the liberalizing policies that powered the 1990s wave of globalization.  Rather, digital protectionism is on the rise. Just like tariffs that splintered the world in the 19th century, digital protectionism risks balkanizing the global digital economy before it even starts, squashing the potential of hundreds of millions to prosper in the global economy, and derailing relations between nations. I propose a new effort, the Seoul Consensus, a set of principles for countries around the world to nurture the global digital economy and battle digital protectionism. The Seoul Consensus, named to celebrate Korea’s rapid ascent to a leading digital economy), would be modeled after the Washington Consensus of the early 1990s, which set off a wave of deep trade and investment liberalization across the developing and post-communist world, paving the way for the Flat World wave of globalization. Read more here.

  • On 23 April 2015, I presented the “Aid for eTrade” concept to a team from the Economic Growth, Education and Environment Bureau (E3) from the U.S. Agency for International Development. The office offers technical leadership, research, and field support for worldwide activities in the areas of Economic Growth and Trade, Infrastructure and Engineering, Education, Environment and Global Climate Change, Water, and Gender Equality and Women’s Empowerment. E3 represents the Agency on relevant technical matters in the Inter-agency and with Congress, outside partners, other donors and multilateral institutions. The event was organized by Carana Corporation, a great partner and leading designer and director of economic growth strategies for countries, businesses and donors.

  • On 24 April 2015, I presented a policy paper “Fueling the Online Trade Revolution: A New Customs Security Framework for Secure and Facilitate Small Business eCommerce” at the Center for International and Strategic Studies (CSIS) in Washington. Sponsored by eBay Inc and also featured in a BRINK article, the report shows how across America, individuals and small businesses are increasingly buying and selling goods and services online. 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. Yet the rise of ecommerce creates new risk scenarios and considerations for customs agencies—in particular, what security frameworks ought to look like in a world where millions of businesses and individuals around the world increasingly engage in billions of micro-transactions, often resulting in shipments of small parcels from small businesses to other small businesses or individual consumers. The paper proposes an 18-month pilot program “eTrade Track,” a comprehensive initiative run by U.S. Customs and Border Protection (CBP) to secure and fuel small business and online trade. The event also featured a keynote by Devin Wenig, President of eBay Global Marketplaces, and panel discussion with Alan Bersin, Assistant Secretary and Chief Diplomatic Officer for the U.S. Department of Homeland Security (DHS) Office of Policy. See video here.

  • On 13 May, I joined in New York the E15 Expert Group on The Digital Economy, convened by the World Economic Forum and the International Center for Trade and Sustainable Development (ICTSD). The meeting was led by Theme Leader Merit E. Janow, Dean of the School of International and Public Affairs (SIPA) at Columbia University. Discussions focused on the challenges and opportunities that the growth of the digital economy creates for trade and development. Suominen discussed in particular ways in which ecommerce and digitization can advance trade and development around the world, and called for a new global effort, Aid for eTrade, to undo barriers for businesses and entrepreneurs around the world to access and use of ecommerce. I also discussed ideas on ways to advance ecommerce through the implementation of the Trade Facilitation Agreement, and my concept Seoul Consensus, a set of principles for countries around the world to nurture the global digital economy and battle digital protectionism. Here I explain the aims of the E15 event: 

  • On 19 May, I joined a World Bank conference “Harnessing Digital Trade for Competitiveness and Development” as moderator of a panel on policies and investments conducive to digital trade. Though an increasing number of producers in developing countries are selling their wares on the Internet, either through their own websites or through web portals such as eBay and Alibaba, they also face significant impediments to fully exploiting the Internet for exporting – from infrastructure weaknesses to unreliable online payments and complicated customs regulations. The conference brought together entrepreneurs, policy experts, and development practitioners to brainstorm ways that the World Bank Group and other stakeholders can work together to break down these barriers.

  • On 28 May, I presented with Alisa DiCaprio from the Asian Development Bank a draft report I have been authoring on the opportunities and challenges of digital trade in the Asia-Pacific to Asian ambassadors to the World Trade Organization in Geneva. The report shows how digitization is opening entirely new opportunities for Asia-Pacific economies to export and create jobs, and advocates pro-active policy reforms and investments to improve the region’s Internet connectivity, logistics, e-payments, and firms’ capacity to use ecommerce. Gaining positive reception among the ambassadors, the report will be highlighted at the Fifth Global Review on Aid for Trade at the end of June, featuring ADB’s president.

  • Also on 28 May, I joined the World Summit on the Information Society Forum 2015 in Geneva. My panel International e-Commerce for Developing Countries: Practical Case Studies in Overcoming Barriers to Trade through Digital Channels reviewed the challenges for enterprises from developing and least developed countries to engage in international trade through ecommerce, and discussed initiatives to reduce the barriers and cases in the field. I presented my idea on Aid for eTrade; presentation is available here. The panel was organized by the United Nations Conference for Trade and Development (UNCTAD), the International Trade Center, and the United Postal Union.

    Stay tuned for more on digital trade – a new report with the Asian Development Bank, idea generation with the World Bank, a new platform for global digital policies, and a book. Coming up!

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What Is the 2015 State of SME Finance in the U.S.? Read Our New White Paper

Small and medium-sized enterprises (SMEs), firms with fewer than 500 employees, are the backbone of U.S. economy. They make up 99 percent of all firms, employ over 50 percent of private sector employees, and generate 65 percent of net new private sector jobs. SMEs account for over half of U.S. non-farm GDP, and represent 98 percent of all U.S. exporters and 34 percent of U.S. export revenue.

To thrive, SMEs need access to credit and cash flow. Credit conditions for SMEs deteriorated drastically in the wake of the financial crisis. However, even if not matching pre-crisis levels, SMEs’ loan availability improved notably in 2014. Small business owners are also more optimistic than a year ago about their economic prospects and the availability of credit. Venture capital investments also recovered significantly in 2014, and were particularly robust for companies seeking expansion capital.

This TradeUp Capital Fund / Nextrade Group White Paper deepens on the state of SME finance in the United States in 2015. We review trends in lending and equity financing to SMEs, discuss emerging financing sources for SMEs, and assess the future of SME finance in light of the rise of alternative, online lenders and crowdfunding platforms. We also analyze the specific financing issues faced by SMEs that seek growth through exports.

The summary highlights are as follows:

  • Bank lending to SMEs has improved, but has yet to return to pre-crisis levels. In December 2014, the latest date for which data is available, the loan balances for commercial and industrial (C&I) loans of $1 million or less stood at $302.6 billion, $34 billion below the levels of June 2008 preceding the Great Recession.
  • Business owners appear more upbeat about their funding prospects than a year ago. In the January 2015 Wells Fargo/Gallup quarterly survey of 600 small business owners, 34% of respondents stated that it was somewhat or very easy to obtain credit over the past 12 months, up from 28 percent in January 2014.
  • Federal government sources have played a complementary and to an extent countercyclical role during the past few years in SME lending. In FY 2014, the Small Business Administration (SBA) supported $29.6 billion in lending to small businesses, with its 7(a) loans topping the levels of the prior two years. The Export-Import Bank supported export credit insurances and export working capital for SMEs at $5.1 billion in 2014, somewhat below authorizations in 2011-13. SBA-backed Small Business Investment Company (SBIC) financings increased to $3.4 billion in 2013, the latest year for which data are available and a five-year high.
  • Several online lending platforms have sprung up in the wake of the recession to offer small businesses relatively quickly disbursing credit, typically for loans of less than $250,000. According to estimates, online lending platforms loaned record $8.6 billion in 2014. One element of uncertainty in the sector is potential future government regulation.
  • In terms of venture capital investments, 4,356 deals received $48.3 billion in 2014, highest since the dot com boom of 2000, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). Internet and software deals dominated. Expansion-stage deals received the greatest amounts of investment, while early-stage deals dominated the number of deals.
  • Angel investment has become a strong complement to venture capital. In the first two quarters of 2014 for which data are available, angels invested a total of $10.1 billion, an increase of 4.1 percent over the first half of 2013.
  • Crowdfunding, which enables companies to raise donations, debt, and equity from individual and institutional investors, gained steam in 2014. According to recent estimates, the global crowdfunding industry has grown explosively to nearly $10 billion in 2014 from $1 billion in 2010. Some estimates put crowdfunding at $500 billion in 2020.

As the U.S. economy recovers, 2015 can be a year of further recovery in bank lending to SMEs. However, due to regulatory constraints, bank lending especially to small businesses will unlikely rise above pre-crisis levels. Alternative sources, such as online lenders and equity crowdfunding, are well-placed to secure wider acceptance in the market, contingent on developments in the regulatory landscape. While there are concerns about a new tech bubble that would undercut VC investments, evidence so far indicates these concerns may be overblown.

Download full report here

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How U.S. State Governments Can Help Small and Mid-sized Firms Become Exporters

This is co-authored with Jessica Lee, Senior Fellow at the Brookings Institution, and highlights our new report.

Out of all the companies in the United States, only 4 percent are exporters.

This statistic is surprising given the outsized role that exports played in helping the United States recover from the Great Recession. During the initial recovery period, nearly 40 percent of U.S. GDP growth came from exports.

Today, almost 80 percent of global purchasing power resides outside the United States. Rising global demand—especially in emerging markets, with their expanding middle-class consumer bases—has heightened U.S. firms’ interest in exporting.

Becoming an exporter requires investments of time and money. International marketing and sales, order fulfillment and distribution, and trade compliance all add up. Harder still can be securing longer-term loans and equity finance to fuel a company’s international growth. For small and medium-sized enterprises (SMEs)—those employing fewer than 500 workers—the cost of entering new markets poses a sizable challenge. Without access to capital, many of these smaller firms forego lucrative export opportunities that would enable them to grow and create jobs in the United States.

SMEs typically have a harder time securing export financing than large firms do. Their smaller size and limited assets, along with elevated loan processing costs, make banks less interested in working with them. Meanwhile, most SMEs are unaware of the export financing programs offered by the Export-Import Bank, the Small Business Administration, and other institutions.

There is an opportunity for state governments to take steps to improve SMEs’ access to export financing. By incorporating export support into their broader economic development strategies, states can increase the number of exporters, which in turn will boost job creation and strengthen their metropolitan areas’ economies.

Our new brief—“Bridging Trade Finance Gaps: State-Led Innovations to Bolster Exports by Small and Medium-Sized Firms”—offers three complementary approaches that states can adopt in their efforts to address the SME export financing shortfall.

First, states can work to raise awareness among SMEs and financial institutions about existing federal and private instruments and sources of export financing. This action will encourage greater numbers of firms and banks to take advantage of proven solutions to the export finance challenge.

Second, states can offer additional financial instruments to help reduce SMEs’ barriers to exporting. Direct loans and loan guarantees, royalty-based financing, and accounts receivable financing, among other interventions, make it easier for potential SME exporters to expand into new markets. And in addition to compared to banks, Sstates can work with a broader set of actors—such as with factoring companies and equity funds—to meet theSME’s diverse export finance needs.

Third, states can set up new finance entities that provide direct export finance support exclusively targeted to SMEs. A state-level export-import bank—perhaps akin to the California Export Finance Office (CEFO), which offered a variety of guarantees for smaller export-related loans from its inception in 1985 until 2003, when state budget problems forced its closure— could be able to offer flexible, tailored solutions to the needs challenges facing these smaller firms.

State-level efforts are no replacement for federal programs like the Export-Import Bank, which plays a critical role in helping U.S. companies compete in the global marketplace. But state strategies can provide a much needed supplement to federal export finance programs by bridging the gaps in the current system. By implementing innovation solutions to the challenges facing potential and current SME exporters, states can help SMEs expand into new markets and bolster economic growth in the process.

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Will Globalization Be Obama’s Greatest Foreign Policy Legacy?

This article appeared in Zocalo on 29 December 2014: http://www.zocalopublicsquare.org/2014/12/29/will-globalization-be-obamas-greatest-foreign-policy-legacy/ideas/nexus

A President Who Came Into Office a Free Trade Skeptic Is Now on the Brink of Brokering Two Big Deals

Battered by crises and maligned by critics, globalization is regaining momentum. And this is good news for America’s global leadership. Negotiations for an ambitious Trans-Pacific Partnership (TPP) trade deal involving a dozen countries from Asia and the Americas are quietly nearing the finishing line. Another historic agreement, the Trans-Atlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, also shows signs of becoming a reality.

Not long ago, the idea that two landmark U.S.-centered trade deals could be the pillars of President Obama’s foreign policy legacy would have seemed laughable. As a presidential candidate in 2008, Obama was a trade skeptic, painting deals like NAFTA as job-killers, which played well with unions weary of import surges from China. Once in office, however, Obama warmed to trade expansion as presidents tend to do, given the dependence of the American economy and jobs on exports and global supply chains. In 2010, Obama issued a call to double U.S. exports, with trade deals forming part of the package–only now they were described as “partnerships” that would open new markets to American businesses big and small, rather than “free trade agreements” associated, even if falsely, in the public’s mind with offshoring and job losses.

As an economist who has for years worked to advance free trade in both the public and private sector, I could not be more elated by the prospect that these major deals now look achievable. For more than a decade, ambitious global efforts to liberalize cross-border trade and investment had stalled. The promise of the Uruguay Round of negotiations, which in 1994 produced the crown jewel of the global trading system, the World Trade Organization, appeared to have been lost. The Doha Round–the multilateral talks that were supposed to expand on the Uruguay Round’s gains–have been going on for 13 years, with few tangible results because of disagreements between emerging markets such as Brazil and India (who resist opening their markets to foreign manufactured products and services) and the U.S. and Europe, which are reluctant to free their agricultural markets.

With any one of the WTO’s 160 member nations able to scuttle any global agreement, countries have turned to regional trade agreements or country-to-country pacts as alternatives. Since the United States, Canada, and Mexico launched the North American Free Trade Agreement (NAFTA) two decades ago, no fewer than 400 trade deals have been concluded or are under negotiation, coupling such players as Chile and China, Japan and Mexico, and the United States and Singapore, to name a few. Such deals are easier to get done than a universal WTO deal. They also tend to go deeper than WTO efforts, pioneering in the regulation of such matters as e-commerce, intellectual property, and state-owned enterprises. But for globalizing companies, they also create tremendous new complexity–a patchwork of rules and standards that differ from one market to the next.

The two trans-oceanic pacts that would link us to Asia and Europe, though, would resurrect the momentum for a more comprehensive global agreement. They would also deliver considerable economic benefits. The Trans-Pacific deal (TPP) will boost U.S. annual gains by $77 billion, and Japan’s by $104 billion. The TTIP deal, by integrating markets in the U.S. and the EU, would generate $130 billion annually in economic gains for the United States, and $162 billion for Europe. As such, it is estimated that TTIP will boost U.S. household incomes by $865 annually and create 750,000 new U.S. jobs, while TPP would generate about $1,230 per household by 2025–a great boost without a dime of deficit spending, and a strong bonus on top of the $10,000 annual income gains American households havealready scored due to post-war trade opening.

These trade deals, by locking in deeper access for American interests in overseas markets, could give U.S. companies the confidence needed to unlock their considerable cash holdings and invest in the production of more export goods and the hiring of more U.S. workers. While big business spearheads the trade lobby, “Main Street” small businesses stand to gain from greater access to foreign markets and the harmonizing of product standards and regulations across borders.

These new trans-oceanic deals, if achieved, would also make it costlier for nations who have opposed lowering barriers to stay their obstructionist course. The most cantankerous player in the global trading system, India, risks being left out. Ever pragmatic, China has become interested in joining TPP, in part as a means of counteracting the country’s economic slowdown and driving reforms of inefficient state-owned enterprises.

In our hemisphere, Brazil has not been interested in joining trade agreements, seeking leadership instead of its own dysfunctional Mercosur alternative. Its strategy stands in stark contrast to that of Mexico, which has forged free trade deals with partners covering some 90 percent of its trade, such as North America, the EU, and Japan. As a result, Mexico has emerged as a global manufacturing hub and anchor of Latin America’s Pacific Alliance bloc, which includes the more market-oriented nations of Colombia, Peru, and Chile. Brazil’s industrial lobbies, once champions of protectionist policies, now worry about the effect of high tariffs and about being left out of global supply chains, and have broken with the government to call for a reset of the nation’s trade policy

With the Ukraine crisis, the Israeli-Palestine imbroglio, and our messy departure from Iraq and Afghanistan all stunting Obama’s foreign policy achievements, the once stalemated issue of trade expansion now looks far more doable and desirable on the Obama administration’s menu of possible legacy options. To be sure, the White House is facing complicated talks with Congress over the trade promotion authority (TPA) needed to successfully negotiate a trade deal and get it through Congress. Such a legislative license to jumpstart globalization will likely be opposed, much like the recent budget agreement was in Washington, by both the left wing of the Democratic Party and the Tea Party right within the Republican Party. This may be yet another reason that a trade legacy looks appealing to President Obama: It will take a purple coalition to do the right thing.

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