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Trading Up: Being Small and Going Global

As the global economy rebounds, companies around the world are seeking growth through exports. Only the next generation of exporters will not be companies that have matured in the domestic market, but rather “born global companies” that globalize out of the gates.

The costs of doing international business have never been as low; the opportunity never so great.

Small businesses hold enormous latent export and growth potential for economies. This is decidedly the case in America: U.S. products and services are competitive and desired in international markets, yet only one percent of America’s 30 million small- and mid-size enterprises (SMEs) export.

Recent surveys indicate that record numbers of SMEs are looking to start exporting or expanding their exports. The target of executives in these globalizing companies is the growing consumer wallet space and infrastructure spending in the emerging markets, growth in the frontier economies of Africa, Latin America and Asia, and recoveries in advanced markets in Europe and Japan.

Globalization too is back, instilling companies with confidence. HSBC estimates that global goods trade will grow at eight percent annually through 2030, doubling by 2022 from 2013 levels, and tripling by 2028. America’s own recovery and macroeconomic fundamentals—lowering energy costs and competitively priced labor—fuel companies’ optimism and investments.

 

Opening Export Channels
Most significant for the internationalization of SMEs is the ongoing revolution in the economics of trade and production, spurred by emerging technologies such as digitization, ecommerce and 3D printing. For example, digitization radically lowers the unit costs of production—producing an extra unit, such as an e-book, costs a small fraction compared to printing an additional hardcover unit, or manufacturing the next widget in a factory. These economics enable even the smallest businesses to gain global scale economies and cut costs to compete.

Scale economies also kick in for global communications. You can send as many e-mails to Europe, do as many Skype calls to China, and file as many documents in Dropbox bound for Brazil as you want any day, and keep paying a same flat fee for the Internet. The Web also gives small companies and their overseas customers unprecedented visibility to and comfort with each other, and ability to transact in a safe way at a low cost. Data reflects this: 97 percent of U.S. SMEs that sell on eBay also export on eBay—that in contrast to the mere one percent of U.S. companies that export “offline.”

The bulk of the exports in practically all countries are still run by a tiny number of “export superstars,” large companies such as GE, Boeing, and IBM that account for a vast share of export volumes. Technology changes this, opening spaces for small firms to drive trade.

For the first time, small size can be synonymous with global scale. No longer do companies need scale to trade; they need trade to scale.

Small as an Asset Class
Investors and policymakers alike should pay attention to globalizing companies. These firms are outperforming elite companies. Leading academic research across multiple rigorous studies in practically every country and time period has found that exporters outperform firms that do not engage in international trade.

In the United States and elsewhere, SME exporters enjoy what academics call “exporter premia”—they employ significantly more workers, pay higher wages, are more skill-intensive, and have higher sales and labor productivity than SMEs that don’t export. Companies that have investments overseas are even more product.

If there is one iron law in international economics, it is that globalizing companies are superior to domestic-only companies.

This has two reasons. First and most intuitively, exporting makes companies better. It entails revenue diversification across markets that reduces vulnerability to any one market’s business cycles; increased capacity utilization and scale economies due to expanded sales; and “learning-by-exporting,” or improved managerial practices, innovations, and discovery of new market opportunities. These dynamics boost companies’ top-line growth, productivity, and stability. In 2005-09, U.S. SME manufacturers that exported grew by 37 percent, while non-exporter companies saw growth slip into the red, shrinking by seven percent. Exports simply kept U.S. exporters afloat during the financial crisis as emerging markets propelled demand; SMEs targeting only the flailing domestic market lost.

Second, exporters also outperform because it is the outperforming companies that self-select into exporting to begin with. High-productivity companies have superior managerial and organizational capabilities to seek out international growth, and are better placed to overcome the high sunk costs associated with export entry, such as costs involved with locating new markets and adapting products to meet foreign consumer demands and regulations. Laggard companies are less likely to even bother. In a GE and Ohio State University study on U.S. SMEs with $10 million-$1 billion in revenue, the top-10 percent best-performing companies were far more likely than the bottom-90 percent to operate in global markets, see expansion abroad as “absolutely essential,” and be working on global expansion.

Yet, although globalizing companies outperform, as a group they view lack of access to capital as a leading hurdle to trade. In a 2010 U.S. International Trade Commission survey of over 2,351 companies, SME manufacturers rated access to financing as the biggest hurdle to trade, while SMEs in service sectors rated access to capital as the third biggest hurdle to trade, well above such challenges as high tariffs, locating foreign sales prospects, and establishing affiliates in foreign markets. In an OECD survey of 230 SMEs across advanced economies, access to working capital was ranked as the greatest hurdle to trade, out of 47 hurdles. In a European Commission survey of nearly 9,500 European SMEs, 54 percent of SMEs viewed lack of capital as an “important barrier” to doing business in the EU market and 44 percent to doing business in extra-EU markets. No other barrier was considered as important.

Despite growing as a segment and outperforming the broader market, globalizing companies lack adequate financing to realize their international growth potential. Some reasons for this market inefficiency include the elevated additional capital needs required for doing cross-border business, the insipid economy environment and credit conditions as banks have retrenched from the SME market, and SMEs’ profound lack of awareness of government loan guarantees for exporters. This financing gap is a market inefficiency and an opportunity for savvy global investors, just as it is for governments seeking growth.

Kati Suominen is founder and CEO of TradeUp Capital Fund, a new equity crowdfunding platform for globalizing companies, and of Nextrade Group, LLC, consulting firm on leading-edge issues in trade. She is also Adjunct Fellow at the Center for Strategic and International Studies (CSIS), and Adjunct Professor at the UCLA Anderson School of Management, and amid authoring her 10th book, on the future of globalization.

Trading Up: Being Small and Going Global was originally published on Ideas Lab

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