STRATEGY

Trading Places: Small Businesses and Global Trade

Economist David L. Birch on the state of our global competitiveness and the surprising truth about small exporters.
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Small companies don't export -- I hear it all the time. Join a discussion about the state of our global competitiveness any you'll hear it, too. Perhaps you'll be the one who says it.

We all worry, justifiably, about the inability of our industrial giants to compete abroad -- about their inability to innovate and create attractive products at attractive prices in world markets. Though highlighted by the recent, massive trade deficit (itself highlighted by the recent, massive stock-market collapse), the problem has been gnawing at us since the mid-1970s. And if big companies can't win overseas, how on earth can smaller ones? What company of, say, 100 employees can overcome all the barriers caused by distance, language, currency, and culture? . . . Or so the hypothesis goes.

This, to some, spells trouble. I've noted before that a changing of the guard is taking place among U.S. businesses, particularly in the manufacturing sector. There has been a general decline of larger companies, offset by smaller enterprises that are growing rapidly and taking up the slack. To theorists of the small-companies-don't-export variety, the increasing significance of smaller businesses means one thing: no hope for the trade imbalance.

Fortunately, and surprisingly, the theory is wrong.

Data exist for about 40,000 companies involved in international trade, 34,000 of which export (the rest are importers only). It's not a complete sample. The international activities of many smaller companies are hard to track, so the database inevitably overemphasizes -- and better represents -- larger manufacturing-related companies. Still, what it indicates about smaller companies is fascinating.

First, the businesses most likely to be exporters today are small, not large. The second biggest group of exporters consists of companies with just 20 to 49 employees (see figure 1).

While statistics suggest that it's difficult for enterprises with fewer than 20 employees to reach beyond U.S. borders, trading abroad becomes common among companies that have crossed the 20-employee threshold.

In fact, more than half of all exporters have fewer than 100 employees. Even more significant, the proportion of 50- to 99-employee companies that export is greater than the proportion of 500-plusemployee companies that do. Of course, this is not to say that the smaller businesses export more in aggregate than the larger ones; they don't. But it is true that small, dynamic companies can export successfully. They are doing so in large numbers -- a finding made more remarkable by their underrepresentation in the data. So much for the myth that such companies can't export.

"Fine," a skeptic might respond, "I can imagine some smaller companies selling abroad, but they're all high-tech companies pushing a few exotic products." When it comes to basic industry, this sort of argument continues, the world is taking us to the cleaners, even in the small-business universe.

Again, not true. Small exporters tend to be found in stable or declining industries, many of which contain a large number of expanding companies. This makes sense. Small exporters are found in industries in which the changing of the guard is taking place the fastest. The very decline of such industries provides opportunities for smaller companies to identify a niche and figure out a clever way to exploit it -- clever enough, in many cases, to support sucessful marketing abroad. Lots of small companies are exporting sawed lumber, steel forgins, jewelry, or toys.

The number of such low-tech exporters significantly exceeds the number of exporters of more exotic products such as computers, electronics components, or medical instruments. Almost three times more companies sell metalworking machinery abroad than export computers and office machines. And, as figure two shows, many of these low-tech exporters are smaller, not larger companies. The much-publicized woes of our basic industries appear to represent a great opportunity for small enterprises within them.

All of this would suggest that dynamic smaller businesses, already regenerating our domestic economy, might begin closing the trade gap. There's one problem: it takes smaller companies a long time to get going in export markets, and therefore a long time to make their influence felt. Almost 80% of small exporters are more than 12 years old, and virtually none are less than 4 years old. This contrasts sharply with big-company exporters, 44% of which are less than 12 years old.

It figures, in a way, that smaller companies would take longer to feel a need for foreign business, and to marshal the resources to get it. But 12 years is a long time. Given that these are the businesses that create most of the New Economy's jobs, might there be an enormous opportunity to expand exports simply by encouraging smaller businesses to cross national boundaries sooner?

Well, maybe. But we should remember that the export activity of such companies may already be better than we think. I suspect that many smaller, growing companies are selling abroad without us knowing about it. My own company has sold overseas and is not listed among the exporters in the database. Businesses that don't put their products in boxes and ship them on planes or boats (with the necessary permits) are often not listed as exporters simply because there's no way to track what they do abroad. The federal statistical system can't follow them, except through aggregate currency exchanges.

We know, for instance, that aggregate U.S. service exports are beginning to approach aggregate U.S. goods exports ($148 billion for services versus $224 billion for goods in 1986), yet nongoods exporters represent only 4% of our database.

The federal government has expressed similar concern about its own ability to monitor service exporters. The truth is, we don't really know how well a major component of the New Economy -- the service sector -- is doing abroad.

From what we do know, however, it's clear that exporting is not limited to large manufacturing or trading companies. We know that tens of thousands of smaller companies are selling their products and services all over the world. Many thousands that we don't know about are probably doing likewise.

For owners and managers of smaller companies who haven't thought of exporting as being feasible, these facts can serve as admonition. And inspiration, too.

Last updated: Apr 1, 1988




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