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Small Companies In International Trade

Big or small – it’s still exporting

Stephen K. Craven  Nov 30, 2010

How does the experience of small companies in international trade differ from what is faced by big firms? The International Trade Commission’s latest report on SMEs and exporting takes a look at it. I was struck by a couple of charts that report the things that bother American SMEs most about exporting, comparing their views to large exporters. The charts also distinguish between services exporters and hard goods sellers, turning up some profound differences. The findings are based on a survey of more than 8,400 US companies.

Hard goods exporters have the longer history, so let’s take a look there first. Based on 19 different impediments to trade, here are the top ten worries, in order, for US SMEs selling physical products in foreign markets:

* inability to find foreign partners

* transportation & shipping costs

* foreign markets prefer local goods

* high customs duties

* receiving or processing payments

* obtaining financing

* lack of government support programs

* customs procedures

* foreign regulations

* difficulty establishing affiliates in foreign markets

Frankly, this shows me that basic export education is still woefully lacking in the United States. Finding foreign partners is rather easily done via the US Commercial Service’s Gold Key Program, and it takes good marketing to overcome a consumer’s preference for local products. The Obama Administration could help mightily with high customs duties, customs procedures and foreign regulations if it would get off the dime on trade negotiations and free trade agreements. Shipping costs can be a deal breaker and, from my perspective in Honolulu, we could start by repealing the Jones Act. I constantly hear complaints from SMEs about difficulties in obtaining financing; the issue really seems to be one of local US banks scared witless by the perceived risks of doing something outside the country. Wake up, bankers, most of the world’s markets offer better business conditions than the United States right now!

I was intrigued to see that there are trade impediments that bother the big companies more than they do the SMEs. More of the big guys find that their foreign sales don’t generate enough profit. Is this a matter of expectations, or do smaller exporters benefit from going after niche markets? I wasn’t surprised that the big guys are more bothered by foreign tax issues; SMEs are less likely to have a physical (and taxable) presence in many foreign markets. I was surprised that the big exporters are more worried about intellectual property protection, since they are the ones who can afford to have the legal staff to manage such things. And the large firms are more likely to have problems with US regulations. Is this due to our export controls?

The top ten hindrances to exporting for SMEs selling services overseas are strikingly different from those faced by their hard goods brethren:

* insufficient intellectual property protection

* foreign tax issues

* foreign sales not sufficiently profitable

* obtaining financing

* US regulations

* difficulty establishing affiliates in foreign markets

* difficulty in receiving or processing payments

* language and cultural barriers

* visa issues

* high tariffs

This is more like a list of what bothers big exporters, some of which I’m going to have to mull over. IP issues make sense, since most services revolve around intellectual property of one sort or another. Again, the issue with US regulations is probably export controls. Foreign tax issues, I assume, stem from the need to set up consulting or support operations in foreign markets, which may also reduce profitability. Language and culture are key to service sales, and visa issues could refer to hiring foreign software engineers or getting foreign visas that allow US employees to work in another country. Large, established services exporters tend to have the same concerns as the SMEs, though to a lesser degree, except for the remarkable finding that big service companies have greater concern about locating foreign sales prospects. I can’t explain that one.

The ITC also makes a few points that couldn’t be shown on the charts. Not surprisingly, as SMEs gain more international experience, their perception of these “problems” declines. This is especially true of newer services SMEs, who tend to focus on one region or market, view the problems as more burdensome than do larger firms, and don’t approach exporting as intensively as more established firms. Manufacturing SMEs seem to experience a smoother learning curve than do the services exporters. Unlike service companies, they may not be faced with having to establish a foreign presence to sell their products.
Business Beyond the Reef:

Big or small – it’s still exporting
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