Doctoral Dissertation Research
Submitted to the Faculty of Argosy University, Twin Cities Campus Graduate School of Business & Management
In Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration
by Ralf Donald Keysser, CM&AA
Small and medium size businesses (SMBs) contribute the largest percentage of total and new jobs created, GDP creation, and innovation within the U.S. economy, yet they have a low rate of exporting, measured by their international sales as a percentage of total sales. Since many experts on business development argue that increasing exports has considerable potential to enhance the enterprise value of SMBs, why is there this contrast between a dynamic SMB economy in the U.S., and yet a relatively low rate of participation by SMBs in exporting? This study looks at the export development process and exporting behavior of SMBs, and discusses some of the characteristics of SMBs that may be associated with the export development process. A survey of manufacturing SMBs located in Minnesota, U.S., was conducted, and those results were compared with the findings of other export studies. Measurements of the ‘propensity’ to export and the ‘intensity’ of exporting were developed and correlated with five characteristics that may affect the export development process of SMBs: the nature of the SMBs’ management structure, the size of the SMBs, the location of the SMB (rural versus urban), the industry cluster of the SMBs, and the access SMBs perceive they have to the external resources they need for export development. The results were used to develop recommendations on the development of exporting by Minnesota manufacturing SMBs and on the opportunities for stakeholders who work with SMBs.
Several themes emerge from this analysis, and they will be discussed more fully in Chapter 5. Some of the findings from the literature reviewed were reinforced by this study’s results, while some were not supported.
• The relationship between management structure and exporting activity was supported, with the finding that moving from family management to non-family outside management was associated with a somewhat greater level of exporting activity, as measured by intensity, although less the case with propensity. However, some of the findings that came out of the correlation analysis differ somewhat from the findings of the cross-tabulation, in terms of family-management having higher propensity, which will be discussed in more detail in Chapter 5.
• The correlation between exporting and an urban location, however, was not reaffirmed; while the correlation between propensity and intensity remained moderately significant when controlling for location, there was a slightly stronger correlation between intensity and a rural location, contrary to what the literature suggested.
• The ability of SMBs to access capital was stronger than had been assumed by this author. However, this relationship should be viewed with caution; SMBs seem to have adequate access to capital for domestic activities, but since a majority of the SMBs here are not engaged in exporting to any significant degree, that still leaves open the question of whether or not they are able to access the capital needed to become exporters; this is a topic for further research, as later suggested in Chapter 5.
• Given the extensive federal and state governmental resources made available to SMBs in Minnesota, including the U.S. Commercial Service, the Export-Import Bank, and the Minnesota Trade Office, it was surprising to note how little those resources were used by Minnesota SMBs. The SMBs did report a strong usage of private resources, including financial institutions and private service providers, suggesting the value that private resources play in the economy of Minnesota SMBs.
• There was a clear link between the perception of the access to resources by the participating SMBs, and both their intensity of exporting and their propensity to export. As postulated in the literature, the perception that resources are not accessible was paired with lower measures of intensity and propensity.
These findings are discussed in more detail in Chapter 5, including a suggestion of future research topics, and a review of recommendations, both to SMBs and to their stakeholders.
CHAPTER FIVE: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
This study began with the question: why do U.S. SMBs export at a relatively low rate? The estimate of the number of SMBs that engage in some level of exporting range from 5% to under 15%, depending on the survey, the percentage of exporting sales considered significant, and the sector of the economy. Given the potential benefits to exporting described previously, and the strong emphasis on promoting exporting by SMBs at the governmental level, the question then becomes what factors, or company characteristics, might be related to the exporting behavior of U.S. SMBs, which:
• Represent over 90% of employer firms;
• Generate over 64% of net new jobs in private-sector;
• Represent over 40% of total private-sector payroll;
• Provide 46% of private-sector output; and
• Create majority of growth and innovation.
The author, as a consultant to manufacturing SMBs, regularly encounters SMBs that do not engage in a significant level of exporting, whether out of disinterest, an exclusive focus on domestic markets, or a fear of the unknown complexities inherent in initiating exporting. In posing questions regarding exporting to clients, several answers have emerged:
“we don’t need to export; the domestic market is big enough”
“we would like to explore exporting, but have no idea how to begin”
“the risks are too high for us”
These are certainly valid reasons. At the same time, there is considerable evidence in the literature, both academic and business, of the advantages that can accrue to an SMB that does engage in exporting, as cited earlier, potentially including:
• An increase in enterprise value;
• Expanded market opportunities and exposure to a new customer base;
• Improved cashflow and increased revenues;
• Mitigation of single-market risk, as exporters diversify into other economies and countries;
• Gain in knowledge of new technologies and ideas;
• Decrease in production costs through greater economies of scale and improved global supply chain; and
• Extension of product life cycle, and increased net margins.
None of these outcomes are assured or panaceas; exporting is a complex and risky enterprise. However, over 90% of the world’s population and 70% of the world’s purchasing power lie outside the U.S., and several recent studies (Baily, 2012; Corsini, 2013; Daud, 2013; Freund, 2014; Gootman, Slo, Shenkar & Stewart, 2014; McCracken, 2013; NFIB, 2012) have shown an increased interest by U.S. SMBs in exporting, suggesting the importance of identifying how SMBs can be assisted in increasing their level of exporting. Business consultants regularly advise their manufacturing SMB clients to give serious consideration to exporting, and to defining the internal and external resources needed for such a strategic choice.
This study is not intended to answer the question of “why don’t SMBs export at a higher rate?” That answer would suggest causality, and a different type of analysis. Instead, the purpose of this study was to measure the propensity (interest in exporting) and intensity (actual level of exporting) among the Minnesota manufacturing SMBs that participated in this survey, and the relationship between those two variables, and to determine the extent to which such a relationship is changed by specific company characteristics: type of management structure, size, location, industrial cluster, and access to outside resources. In this way, the study is intended to consider factors that may be associated with levels of exporting.
The study included an on-line survey distributed to all 375 members of a local trade association, the Manufacturers Alliance, which consists almost exclusively of Minnesota-based manufacturing SMBs. There were 79 responses, for a response rate of 21.1%. The data was analyzed using SPSS. A series of cross-tabulations was generated on the bivariate distribution of the participant population by intensity and propensity, and by the company characteristics. A series of Pearson correlation coefficients was calculated, both for the relationship between propensity and intensity on their own, and then for this relationship controlled by the series of five company characteristics identified above.
Summary of Descriptive Data
• 85% of the participating SMBs were at 250 FTE size or smaller, following the SBA’s definition of an SMB based on size.
• 95% of the respondents were at 500 FTE size or smaller, using the ITA’s definition of an SMB.
• 64%, of the participating SMBs fit into the ‘general manufacturing’ cluster.
• 8% of the SMBs fit into the ‘medical device’ cluster.
• 27% of the participating SMBs are managed wholly or mostly by family members.
• 48% of the SMBs are managed wholly or mostly by outside managers.
• 25% of the SMBs are managed by a balanced mix of family and outside managers.
• 55% of the participating SMBs reported international sales of less than 10% of total sales.
• 80% of the SMBs reported international sales of less than 20%.
• 20% of the SMBs reported international sales of 30% of greater.
• 4% of the SMBs reported international sales of 50% or greater.
Degree of Active Involvement
• 21% of the participating SMBs reported very low degree of active involvement in exporting.
• 44% reported low – medium degree of active involvement.
• 11% reported high degree of involvement.
• 21% of the participating SMBs had very-low to low propensity to export.
• 20% of the SMBs had low-medium to medium propensity.
• 19% of the SMBs had high to very-high propensity
Use of Resources
• The private resources (local financial institutions and private service providers) were often used by the participating SMBs.
• The public resources (governmental agencies) were rarely or never used.
• The non-profit resources (Universities, trade associations and chambers of commerce) were used much less frequently than the private resources, although more frequently than the public resources.
Accessibility of Resources
• Capital Resources
27% of the participating SMBs stated that capital resources were not accessible, or relatively difficult to access.
39% of the SMBs stated that capital resources were relatively accessible, or easily/routinely accessible.
• Technical Resources
27% of the participating SMBs stated that the technical resources useful for initiating exporting were not accessible, or relatively difficult to access.
44% of the SMBs stated that these resources were relatively accessible, or easily/routinely accessible
• Marketing Resources
59% of the participating SMBs stated that marketing assistance resources were not accessible or relatively difficult to access.
15% of the SMBs stated that marketing resources were relatively accessible, or easily/routinely accessible.
• Joint-Venture Resources
75% of the participating SMBs stated that resources needed to evaluate and enter into joint ventures relationships were not accessible or relatively difficult to access.
6% on the SMBs stated that those resources were relatively accessible, or easily and routinely accessible.
• Legal Resources
52% of the participating SMBs stated that legal resources, needed for initiating exporting, were not accessible or relatively difficult to access.
17% of the SMBs stated that legal resources were relatively accessible, or easily and routinely accessible.
• 76% of the participating SMBs are located in the Twin Cities metro area
• 24% of the SMBs are located outside of the Twin Cities metro area (out-state).
Several interesting patterns emerged from this data and analysis. First, the participating SMBs made generally frequent use of the private resources, including local financial institutions and professional service providers, but almost no use of governmental programs and resources, despite their ubiquity and frequent promotions, and this relationship held when compared against the responses to propensity and intensity questions. Of particular interest was the SMBs regular and frequent use of local financial institutions. This author had begun his research assuming that SMBs were struggling with access to capital, especially capital specifically oriented towards exporting. Although the survey question did not specify whether or not the SMBs had access to the types of capital needed to support exporting (often a different form of capital than is needed to support domestic activities), there did seem to be a strong level of usage of local financial institutions. What remains unanswered in this research is whether or not SMBs, that had good financial resources for their domestic activities, found less response from financial institutions when they began to explore international activities. For example, very few accounts/receivable (A/R) factors will accept foreign A/R, posing a problem to SMBs that rely on factoring as a source of capital. A similar observation can be made for purchase/order (P/O) financing, which is rarely available for foreign orders (making the reluctance to use the Export-Import Bank that much more puzzling).
The SMBs were asked about their perception of the accessibility of resources, as distinct from their use of those resources. It is possible that an SMB may perceive a resource to be available, such as the Export-Import Bank, but not avail itself of that resource. Capital resources were generally thought to be accessible, which corresponds to the level of use of that resource. For some of the more complicated and export-unique technical resources, however, the SMBs reported far less accessibility, including the availability of assistance on forming joint ventures and strategic partnerships overseas, marketing research assistance, and legal assistance.
The participating SMBs in general reported a higher propensity to export than they did intensity of exporting. Their interest levels in exporting, and the importance they attach to exporting, appear to be higher than their actual levels of exporting.
There was a moderate relationship between management structure and intensity, with the more outside-managed SMBs showing a higher intensity of exporting. However, this relationship did not hold up when considering management structure and propensity. It would seem that outside managed firms have a higher level of intensity in exporting, but not necessarily a higher level of propensity, perhaps suggesting that family-managed firms have an interest in exporting but have not yet successfully initiated exporting.
Summary of Frequency Distributions and Cross-tabulation Distributions
When measuring size against both propensity and intensity, a modest association emerged that the larger SMBs tended to have a higher intensity of exporting, and a higher propensity to export.
Approximately half of the participating SMBs reported a management structure that was either mostly or 100% outside management, and there was a modest association between that management structure, and a higher intensity. The pattern between management structure and propensity was less clear; if anything, there seemed to be a weak relationship between propensity and the family-management for of management structure, while there was a stronger relationship between intensity and the outside management form of management structure. It is possible that family-managed SMBs have an interest in exporting but have failed to follow-up on this interest, while outside managed SMBs have taken more of the steps needed to initiate exporting, and are therefore starting to record international sales.
There was a similar pattern for both propensity and intensity when paired with the use of resources. The majority of the SMBs never or rarely used the governmental resources available to them, but made fairly regular use of the private resources of local financial institutions and private service providers.
A similar pattern for both propensity and intensity held for the perceived access to resources, as did for the use of resources. Almost all of the respondents did not view the public resources as being accessible, but a significant percentage of them found the private resources to be accessible.
There was a modest relationship between Degree of Involvement, and both propensity and intensity. This seems logical, since a higher Degree of Involvement would most likely lead to a higher propensity, and in some cases a higher intensity.
The location variable, when matched against propensity and intensity, showed mixed results. The non-metro SMBs had a slightly higher intensity of exporting, but a slightly lower propensity of exporting, compared to metro-area SMBs. The industrial cluster variable also showed mixed results, with ‘general manufacturing’ showing a slightly higher propensity than ‘medical device’, yet little difference in intensity.
The discussion on the association between Level of Interest and other characteristics showed some interesting patterns. There was a clear association between the level of interest and management structure, where outside managed firms (and balanced/mix management firms) presented a stronger level of interest in exporting than the family-managed firms. The participating SMBs in the general manufacturing category indicated a higher level of interest, relative to their total sample size, compared to the medical device SMBs. There was also an association between level of interest and perceived access to resources, with a higher percentage of participating SMBs showing a link between an interest in exporting and relatively accessible resources.
Summary of Correlation Analysis
Several issues in the literature were supported by the results of the study. First, the reasonably strong correlation between propensity and intensity suggests that there is a higher level of interest of SMBs in exporting than in the actual level of engagement in exporting. The correlation would suggest that a higher level of interest should result in a higher level of activity. Yet it is reasonable to conclude from the data that there are more SMBs interested in exporting than are engaged in exporting. It is not apparent whether this data means that there are SMBs who are interested in exporting but have not yet made the decision to initiate exporting, or SMBs that are interested and have started exporting, but so far without success (since intensity only measures successful results, not efforts). The question then becomes what company characteristics influence that engagement in exporting.
Second, the type of the management structure seemed to influence exporting behavior, in that the correlation between propensity and intensity varied by form of management structure. As suggested in the literature, SMBs that bring in at least some outside management had stronger correlations between propensity and intensity than SMBs that had 100% family management, a finding that also emerged from the cross-tabulations. There appears to be an advantage, in terms of facilitating exporting behavior, in bringing in outside management, in terms of new skill sets and experience, and a heightened willingness to accept the risks of exporting.
Third, there was a relationship between the perceived access to resources, and the correlation between propensity and intensity. SMBs seemed to engage in exporting to the extent that they perceived a reasonable level of access to those external technical resources needed to engage in exporting successfully. At the same time, it was interesting to note how few of these resources are actually used by SMBs. Governmental resources, including the SBA, the Export-Import Bank, the Trade Office, and the U.S. Commercial Services are virtually unused by SMBs. The only resources used by SMBs on a regular basis were the private resources: local financial institutions, for capital, and professional service providers, for technical assistance.
Finally, there is a moderate correlation between propensity and intensity with SMBs in the medical device cluster, suggesting that these firms, being very high-tech and engaged in an industry that is global by its nature, are successfully engaged in exporting. However, the cross-tabulations analysis showed a slightly higher level of interest in exporting among general manufacturing SMBs.
Several implications can be drawn from this analysis, especially as it concerns the potential for stake holders to work with the SMBs represented in this study. First, the greatest potential for affecting export intensity lies in working with SMBs that fit some or all of the descriptions of: non-urban; either the very smallest SMBs (1-25 FTEs) or the largest SMBs (251-500 FTEs); who have some significant level of outside management (either in the ‘balanced mix’ category or the ‘mostly outside’ category); and/or in the general or medical device industries. The lowest probability of success most likely lies with SMBs that are managed by family members (although here the opportunity lays in offering outsourced management services) in the area of ‘other manufacturing’, and who are based in urban areas. On the other hand, there are more SMBs located in the urban areas, and the resources that SMBs report an interest in accessing are more prevalent in urban areas than in rural areas. Finally, one could argue that a greater awareness of the resources available to SMBs may not increase their propensity, although as shown in the discussion concerning Table 51, there is evidence to suggest that an increased awareness of resources availability could be associated with an increased level of intensity of exporting.
Importance and Significance of the Results
The purpose of this study was to examine the correlation between the levels of interest SMBs have in exporting (propensity), and their actual engagement in exporting (intensity), controlling for specific company characteristics, to assist in understanding the factors affecting export development for Minnesota manufacturing SMBs.
There is a concern at both the federal and state level, including at the State of Minnesota, that SMBs fail to engage in international activities to a meaningful level. This is a concern because SMBs play a vital role in the economy and form the cornerstone of any local, state or national economic development strategy, yet the SMBs do not in general take advantage of the growth opportunities potentially accruing from exporting. While the benefits of internationalization for SMBs are potentially significant and documented, relatively few SMBs in the U.S. actually engage in a significant amount of international business. Both the federal and state governments have a strong interest in promoting a higher level of internationalization among SMBs, especially manufacturing SMBs, as a way of expanding employment within the state and the U.S., increasing innovation and generally strengthening the manufacturing sector of the U.S. economy.
A related matter of policy implication is that there is a growing consensus among some observers that the U.S. is approaching a new renaissance in domestic manufacturing, due to several factors:
• Rapid expansion in the availability of domestic energy through fracking and new explorations, leading the U.S. to becoming a net exporter of energy rather than a net importer;
• Energy costs that are lower than those of many other parts of the world, including the EU and China;
• Increased competitiveness of U.S. labor, as our labor costs have stagnated while those in China and other emerging markets are increasing;
• A renewed concern about quality control, supply chain management, and the understanding that these issues can sometimes outweigh the labor-cost advantages of foreign markets;
• An increased awareness of the importance of combining the functions of designing and engineering with the functions of manufacturing, which argues for co-locating;
• The increased use of automation in the U.S. leading to reduced needs for labor;
• Continued growth in free trade agreements, including the impending Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) agreements;
• The growth in sophistication (and reduced costs) of e-commerce, enabling SMBs to secure international orders with minimal expenditures, without setting up sales networks in other countries;
• Reduced shipping costs and expanded capabilities of global distribution and fulfillment;
• The continued expanding mobility of intellectual property, technology, labor and capital; and
• Rapidly growing new technologies like 3D printing, robotics and genetic engineering, in which the U.S. has an early dominant lead.
All of these factors indicate the possibility of a growing resurgence of R&D and manufacturing in the U.S., which the early data supports (Freund, 2014; Gootman et al., 2014; Istrate & Macchio, 2012; Lawrence, 2012; NFIB, 2014; Simonds, 2013), suggesting renewed opportunities for manufacturing SMBs to increase both their level of activity and their ability to engage in international business through exporting, direct investments, joint ventures, and co-licensing (De La Cruz, 2010).
Furthermore, as the multinational clients of SMBs continue to expand their operations and sales internationally, it is possible that they will seek to bring their SMB vendors along with them, as part of their increasingly global supply chain. The insights discussed in this study may be useful for both SMBs and export promotion agencies to better understand the process and underlying factors of exporting, and to strengthen the export capabilities of SMBs. This also offers a significant role to the private sector service providers in working with SMBs to enhance their capacity and ‘readiness’ to export.
Policy Implications and Recommendations
Some of the discussions in the literature as cited in Chapter 2 are reinforced by this study. The effect of management structure on exporting appears to be supported by this data, as does the impact of SMB size. The data on location did not support the current literature, although it is not clear why that would be the case, other than the data showing that Minnesota has very aggressively pursued non-metro economic development, with the result of many high-tech companies locating in non-metro locations (Autry, 2013; Autry, 2014).
The discussion on perceived access to resources seems to support the literature, although it was somewhat surprising to note how few of the governmental resources are in fact used by Minnesota SMBs. The implications for academia are that a number of these areas merit further study, such as the influence of capital resources on exporting, and the influence of exporting on enterprise value. As family-owned SMBs transition into new ownership, in many cases ownership by strategic investors or financial investors (such as private equity groups), an interesting area of research would be to see how this transition influences exporting behavior. Other areas of additional research are suggested below.
SMB owners and managers who are interested in initiating or expanding exporting, but are uncertain of the directions to take and methods to employ and are frustrated at what they perceive to be impeding factors, may take some value from this research. First, there seems to be an advantage to bringing in outside senior management, or outsourced private service providers, for their skills and experience, their higher tolerance for risk, and their capacity for new ideas.
Second, it is imperative that SMB managers take full account of, and make the best use of, the considerable resources that are available to them, especially at the governmental level. The political debate in 2014 about the re-authorization of the Export-Import Bank, for example, with the repeated emphasis on the fact that the most frequent users of the Bank were large corporations like Boeing, may have turned away the types of SMBs for which the Bank was intended. These resources, especially the financial guarantees provided by the Export-Import Bank, the in-country marketing assistance offered by the U.S. Commercial Services, and the financial assistance from the SBA, are invaluable tools that seem to be rarely used, but can be critical to the success of an exporting initiative. Third, as SMBs develop their long-term strategic plans, the element of exporting, and otherwise developing an exporting presence (including joint ventures, contract manufacturing, licensing, and all of the other choices a firm has in developing an international strategic goal), should become integral parts of this planning process (Curry-Brooks, Paglia & Everett, 2014).
SMBs can also consider the impact on their planning of the continued implementation of Free Trade Agreements (FTAs). The current negotiations for the development of the Transatlantic Trade and Investment Partnership (TTIP) have focused on: (a) the reduction or elimination of some or all of the tariffs between the EU and the U.S., and (b) a liberalization of trade policies extending well beyond reductions or eliminations of tariffs. One analysis of TTIP has noted that “while a pure tariff elimination would have positive welfare and employment effects for the EU and the United States, the positive effects of deep liberalization are many times greater . . . this emphasizes the special significance of a comprehensive liberalization in giving a detectible stimulus to the economies on both sides of the Atlantic” (Felbermayr, G.; Heid, B. & Lehwald, S. 2013, p. 479). Similarly, the negotiations for the Trans Pacific Partnership (TPP) will also hold potential benefits for SMBs. The larger corporations are already actively engaged in trade; the beneficiaries of the new FTAs, including TTIP and TPP, may very well be the SMBs that have felt shut-out of international trade in the past.
The recent Brookings study on “Accelerating Export in the Middle Market” noted that “most American middle market companies remain solely focused on their domestic market, despite expanding global opportunities . . .as a result of this unrealized potential, these businesses forgo greater profitability, diversification, and other competitive advantages derived from engaging internationally” (Gootman et al., 2014, p. 4). While the risks can be significant, the benefits and rewards from even a limited strategy of international engagement can be substantial, and move the SMB into higher levels of profitability and enterprise value.
The insights on company characteristics that influence exporting behavior should be of value to SMBs in their planning process. For example, SMBs can re-evaluate their organizational structure to bring in outside management as a way of reinvigorating their skill sets and stimulating the risk-tolerance needed for exporting. SMBs may also sharpen their focus on seeking out and exploiting the many resources available to them to stimulate exporting. As one example, SMBs may find that their local bank is not adequate to the task of supporting the capital needs of exporting, and the SMBs can initiate a search for a larger bank that has more international sophistication and resources.
This author’s view, based on the preliminary literature review and on his own experience as a consultant to this type of clients, is that SMBs face two primary obstacles, perceived or actual, to engaging in exporting:
1. As an internal factor, a lack of in-house knowledge and expertise in these SMBs concerning the complexities of international business, and a sense that the problems associated with international business are potentially overwhelming; as noted by one study, “the main reason why local SMEs do not export is fear of the unknown, in the form of regulations, currency risks, taxes, language, and cultural differences (Istrate & Marchio, 2012, p. 17).
2. As an external factor, a lack of access to the resources needed to pursue exporting. Among these resources is sufficient capital to conduct international business, given that the sources of capital normally used by SMBs are inadequate or inappropriate to international endeavors. Although this study found that the SMBs surveyed here made ample use of capital resources, the fact that most of them don’t engage in exporting suggests that these SMBs have not yet encountered the problem of insufficient capital resources for exporting activities, or if they have, that is one reason why they are not more active in exporting.
To a significant degree, these two problems are related. To the extent that SMBs lack the specialized knowledge and expertise needed to engage in international business, this may also contribute to a lack of understanding and experience in obtaining the types of capital they need for international business, from the funding sources that are uniquely specialized and focused on international business. At the same time, to the extent that SMBs experience a lack of access to capital, this may inhibit their ability to acquire the skills and knowledge needed to engage in international business successfully.
SMBs in the manufacturing sectors have on-going capital needs to run their businesses, including inventory financing, trade financing, accounts/receivable financing, purchase order financing, term loans, mortgage loans, equipment leasing, and working lines of credit (Slee, 2011). Without a ready and reliable access to these forms of working capital, SMBs find it very difficult to continue operations, and to grow. For domestic business activities, most SMBs have at least some level of access to these forms of capital, including from local commercial banks, asset-based lenders (ABLs), equipment lessors, and accounts/receivables factors.
Most of these funding sources, however, are not capable of fully understanding and accepting the added risks of international business, an area further discussed later (Hill, 2009). The funding sources more acquainted with the added complexities of international business are often not geared towards working with SMBs due to the relatively smaller size and capital needs of SMBs, compared to larger corporations. One purpose of this research was to test and document that assumption.
The issue of expertise is similar, in that the knowledge and expertise needed to deal with international business is typically not found in SMBs. Compared to domestic activities, international business brings with it a large number of added complexities, including, to name only a few:
• cross-border shipping,
• insurance, tariffs and duties,
• export documentation,
• taxes, regulations and approvals,
• patent protection,
• labor and human resource issues,
• quality control, and
• the enforcement of contracts and related legal issues (Hill, 2009).
While the knowledge to deal with these issues is usually available in larger companies, because international activity is a fundamental part of their business, such knowledge is less common in SMBs.
There are a number of stakeholders who may benefit from some of the insights in this study, including the private service providers (such as consultants, attorneys and CPAs), the non-profit groups that serve SMBs (including chambers of commerce and trade associations) and governmental export promotion entities (including the MTO, Export-Import Bank, and the U.S. Commercial Services). In the private sector, financial institutions who want to further serve their existing clientele in the SMB community may realize that they have to offer more international services to retain these clients, or syndicate with larger financial institutions, as the international activities of their SMB clients grow.
The professional service providers who serve the SMB market can take away a renewed commitment to assisting and guiding their SMB clients, especially as they consider implementing international strategies, and consider such issues as senior staffing, capital resources, and access to governmental resources such as the Export-Import Bank. Of specific interest, these service providers should renew their focus on those SMBs who articulate a strong propensity and a low intensity, of which there are many, as shown in the data from this study, as well as the SMBs that show even a moderate propensity and a low to medium intensity. In all cases, these are the firms that have an interest in exporting, but for any of several reasons, have not yet successfully initiated exporting, or increased exporting beyond a minimal base, and therefore represent a significant opportunity for service providers (Janavaras, 1998). The opportunity for the private service providers that supports SMBs lies in the area where propensity is higher than intensity. Likely targets of focus include: non-urban SMBs, very small (1-25 FTEs) or larger (251-500 FTEs) SMBs, those SMBs that have some level of outside management present, and SMBs that are in the medical device or general manufacturing categories (as opposed to the ‘other’ category).
In the public sector, the responses in this study should be a reminder to governmental providers of export resources that they are not well known or well understood, or appreciated as potential sources of assistance. This suggests a renewed campaign of promotion and outreach; there seems little reason why SMBs cannot be more aware of, for example, the Export-Import Bank and the U.S. Commercial Services. Those SMBs that have made use of these governmental resources, similar to the SBA-guaranteed loan programs used by SMBs for domestic lending, have discovered the significant benefits of these programs in mitigating some of the risks inherent in exporting, such as the accounts/receivable guarantee program of the Export-Import Bank.
Policy makers at the state and federal level, who have a commitment to encouraging and facilitating international business as a component of economic development, job creation, and tax-base creation in the U.S., and who are seeking a better understanding of the dynamics affecting SMBs’ decisions on engaging in international business, can similarly have an appreciation for how little their efforts actually impact their intended client base. These agencies can benefit from a more aggressive export promotion campaign, and a campaign focused on how these agencies can directly benefit their intended clients.
In the non-profit sector, trade associations (like the Manufacturers’ Alliance) and the various chambers of commerce provide significant exporting resources for the SMBs, yet they are insufficiently used. There are also a number of foreign chambers of commerce located in Minnesota (including German-American, French-American, Swedish-American, Norwegian-American, Israeli-American) all of which offer resources and assistance to Minnesota SMBs seeking entry into those respective countries.
It is interesting to note that a previous doctoral dissertation (Martinoff, 1988) made a number of specific policy recommendations on governmental financial assistance to SMB exporters, and observed that the respondents to his survey indicated that “any export financing package developed to meet their needs should include specific export payment services, export credit facilitation services, and services to reduce exporter’s cost of capital” (Martinoff, 1988, p. iii). Written 26 years ago, many of the same issues and recommendations would still apply today.
One analysis has suggested that “Economic policies aimed at export promotions have been widely supported by the argument that exposing firms to international markets through exports leads to increased productivity of exporters. However, empirical evidence shows that these efforts may not work as well as thought, if not combined with important innovation efforts by the firms” (Cassiman & Golovko, 2010, p. 69). This is a valuable point; like most forms of assistance, the client/user must make the effort to use that assistance. It is not clear, in this study, why SMBs are not using the governmental programs – lack of knowledge and awareness, fear of complexity? This author works closely with many SMBs who routinely access SBA-guaranteed loans, despite the paperwork and bureaucratic complications, so there may be other issues involved in this reluctance to use governmental resources.
Potential for Rapid Shift in Patterns of Internationalization
The analysis in this study may have some value for SMBs as they consider a new age of exporting. Some analysts have suggested that we are experiencing a “Cambrian Explosion” of international trade opportunities, especially for smaller companies, a paradigm shift in the potential for the more rapid internationalization of SMBs. This is due to:
• The increased number of multi-nation Free Trade Agreements (FTA); most recently, Columbia and South Korea, and the impending Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
• Continued expansion of capabilities and reduced costs of e-commerce, enabling even small firms to easily access global market without necessarily incurring the costs and complexities of building an in-country sales network.
• Continued expansion of global distribution and fulfillment capabilities, as companies like UPS, FedEx, and Amazon build low-cost and efficient networks of shipping and warehousing and fulfillment infrastructure to enhance the ability of small firms to quickly and relatively inexpensively ship their products globally
• Continued and expanding mobility of intellectual property, technology, labor and capital, creating truly global market places for even smaller firms, replicating the advantages of larger multi-national corporations.
These points tie back into the argument that there are considerable benefits, although not without risk, of SMBs more aggressively engaging in exporting, and the question becomes how to assist them in initiating and expanding exporting.
SMBs may think that they are trapped in a circle: they lack the internal resources to engage in international business, so they do not engage in international business, and therefore are unable to develop those resources needed for international business through experience. Furthermore, these sources of expertise are expensive to obtain, whether hiring internally or outsourcing to consultants, which raises again the issue of capital constraints
There seems strong evidence of the benefits of exporting, despite the risks inherent in exporting. The challenge for SMBs is to develop the internal resources necessary, including management, and to make better use of the external resources available to them, including governmental resources and export-focused capital, and to manage the risks of exporting through a rigorous planning process.