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Amy Liu: Stuck in the Middle — Unlocking the Potential of Mid-Size Exporters

Trade policy tends to focus on multinationals and small businesses, but mid- market companies represent an untapped source of American exports.

 

The trade debate in Washington is rife with new studies and changing political alliances that either support or thwart the pending trade agreement with Asia, fast-track authority and the future of the Export-Import Bank. Missing in all this drama is an awareness that too few U.S. firms even take advantage of lower trade barriers, at least when it comes to exporting. Easing global trade barriers makes sense, but only if it benefits more than the same stable of companies.

To be fair, the number of firms exporting is on the rise, reaching more than 300,000 in 2012. However, for communities and workers to experience the benefits of good jobs created by exports, the U.S. needs more firms to participate in global trade.

Just 5 percent of U.S. firms with employees are currently exporting. Of the 302,000 firms that do sell a product abroad, fewer than 200,000 are exporting year after year. This implies that many firms may not have the resources to export consistently — or they are simply reacting to global opportunities rather than integrating international markets into their business. Furthermore, most firms export to only one country, whereas the U.S. has free-trade agreements with 20 nations, meaning that firms may be missing opportunities to expand their activities to new markets.

To date, policies to boost exports are focused on sustaining the practices of our country’s largest firms or shoehorning our smallest firms into the global market. Small firms of less than 100 employees comprise 92 percent of all American exporters, but they generate just a quarter of all export sales. Mid-sized firms, meanwhile, account for less than a tenth of exports, despite representing a third of U.S. output. Thus, mid-sized, middle-market firms offer the greatest potential to expand exports and ensure broader benefits from future trade agreements.

Yet despite this potential, just 40 percent of mid-market companies make exporting part of their business model, according to a recent study from the National Center for the Middle Market (NCMM) and the Brookings Institution. With $10 million to $1 billion in revenues, these mid-market companies have the capacity to invest in exports and absorb some risks from entering the international marketplace.

Mid-market firms that export perform better than their peers. Whether in manufacturing or services, exporters tend to generate stronger revenues and overall growth — and report strategic and operational benefits from global engagement. For example, four out of 10 mid-market executives who took part in an NCMM survey said going international has made them better competitors in the U.S. Citing research and development costs on the road bikes his company sells around the world, Trek CEO John Burke told the survey, “If I bring out that product just in the U.S., I can leverage the cost over only x number of units. But if I’m selling that product globally, I can leverage over global markets.”

For cities and metro areas that are home to many mid-sized firms, firm expansion through global sales is a tangible way of ensuring that hometown employers continue to innovate and grow in a fast-changing, hyperconnected global economy.

So what has worked?

First, the top executives of mid-sized exporters are making a conscientious decision to act globally. Taylor Guitars, a high-end manufacturer of acoustic guitars in the San Diego area, made a series of strategic actions over the past two decades to transition from being an unintentional exporter to ultimately opening its own distribution warehouse in the Netherlands in 2010. After making some early bets on the right talent, time and resources, measurement-equipment maker INFICON of Syracuse, N.Y. is in the middle of a $13 million expansion of its manufacturing facility to keep up with the global demand for its tools and instruments. These companies have also used distributors and other supply-chain partners to help make new customer connections abroad.

Second, U.S. metro areas are targeting mid-market firms in their export strategies. After several years of designing and executing strategies to expand trade, many of the 28 metro areas involved in the Global Cities Initiative — a joint project of the Brookings Institution and JPMorgan Chase — have prioritized outreach to firms with proven products and capacity to play on the global stage. Business, economic development, government and other regional leaders can help mid-market firms succeed by connecting them to the right export services and making those services and other programs — like freight investments and MBA talent — more coordinated and transparent.

In the NCMM survey, mid-market firms cited the need for talent, capital and leadership commitment as essential to entering the global marketplace. As Washington finalizes negotiations on the Trans-Pacific Partnership, the dealmakers should not forget that trade agreements are only as good as their use. To maximize trade, the U.S. also needs to open up the pipeline of firms — especially mid-market firms — doing business abroad.

 

Amy Liu is a Senior Fellow and Co-director of the Brookings Metropolitan Policy Program.

 

 

 

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