Small Businesses and Globalization

Stephen DeAngelis

February 21, 2011

During his State of the Union address, President Barack Obama stated, “To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 -– because the more we export, the more jobs we create here at home.” Such broad-brush statements are easy to make. As the old saying goes, “The devil is in the details.” In order to increase exports, you have produce something that people around the world need or want. In a post entitled Entrepreneurs, Medium-Sized Companies, and the Global Supply Chain, I discussed how mid-sized German companies (called Mittelstand) represent “80% of the world’s medium-sized market leaders” and have made Germany “the world’s largest goods exporter after China despite high labour costs and a strongish euro.” Perhaps the President has noticed the German model and hopes to replicate it in the United States. Although he didn’t single out small- and medium-sized businesses in his address, the President is apparently going to send “top U.S. trade officials … across the country this year to recruit small-business owners in the administration’s effort to double exports by 2015.” [“Government to Urge Small Businesses to Export,” by Tom Barkley, Wall Street Journal, 28 January 2011]. Barkley reports:

“A year after President Barack Obama announced the export initiative to help tackle stubbornly high unemployment, the administration is trying to reach out to the group of business owners that account for nearly two-thirds of job creation but less than a third of total goods sold abroad. ‘For America to win the future, more small and medium-size businesses must export, because the more small businesses export, the more they produce; the more they produce, the more workers they need, and that means good-paying jobs here at home,’ U.S. Commerce Secretary Gary Locke said in a statement announcing the outreach program.”

Barkley notes that “out of the nearly 30 million small and medium-size firms in the country, only 1% market their goods abroad.” U.S. Trade Representative Ron Kirk “wants to double that number.” He told Barkley, “We know that firms that export grow faster, add jobs more quickly and pay better wages than those that don’t.” He believes that doubling the number of small- and medium-sized businesses that export their products is realistic because he sees a number of companies that represent “low-hanging fruit” that, with a little help, could start exporting overseas in the near future. Barkley continues:

“A senior Commerce official said the outreach effort has made some headway so far, with small and medium-size businesses accounting for over 85% of the 5,500 companies that the commercial service division helped to increase exports last year. Still, 58% of such companies export to only one country, so Commerce has set a goal of increasing by half the number that export to more than one market.”

Barkley notes that the passage of trade deals that began during the Bush administration would help the Obama administration achieve its goal but additional help is also required. An official from the Commerce Department told Barkley, “The National Export Initiative takes a comprehensive, multi-pronged approach, because while trade agreements are important—especially to small businesses, which often lack the resources to deal with barriers and tariffs—they will not by themselves allow the U.S. to reach the goal of doubling exports by 2015.” In support of this initiative, the U.S. Export-Import Bank announced that it hopes “to spur exports by increasing small-business loans to $6 billion this year and $9 billion a year by 2015.” [“Export-Import Bank to Increase Small-Business Loans,” by Jamila Trindle, Wall Street Journal, 18 January 2011]. Trindle continues:

“Ex-Im Bank officials said the goal is to bring 5,000 new small businesses into the bank’s lending program by 2015. The bank lent $5 billion to small businesses in 2010. ‘We can’t grow our economy without growing export sales and we can’t grow our export sales without small businesses,’ said Ex-Im Bank Chairman and President Fred Hochberg. Big companies are concerned with competing internationally, but small businesses need access to capital and expertise, Mr. Hochberg said. According to Ex-Im Bank statistics, small-business exports have grown by 80% since 2003 to $500 billion in annual sales, but still only make up 30% of total U.S. export revenue.”

Some of the businesses that will help the administration reach its export goal may not even exist today. Elsewhere in his State of the Union address, the President declared:

“We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world. We have to make America the best place on Earth to do business. We need to take responsibility for our deficit and reform our government. That’s how our people will prosper. That’s how we’ll win the future. And tonight, I’d like to talk about how we get there. The first step in winning the future is encouraging American innovation. None of us can predict with certainty what the next big industry will be or where the new jobs will come from. Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution. What we can do — what America does better than anyone else — is spark the creativity and imagination of our people. We’re the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook. In America, innovation doesn’t just change our lives. It is how we make our living. Our free enterprise system is what drives innovation. But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That’s what planted the seeds for the Internet. That’s what helped make possible things like computer chips and GPS. Just think of all the good jobs — from manufacturing to retail — that have come from these breakthroughs.”

Although it is clear that the President is most interested in getting manufacturers to sell their products abroad, opportunities also exist for all sorts of U.S. companies to set up business overseas [“For Small Businesses, Big World Beckons,” by Justin Lahart, Wall Street Journal, 28 January 2011]. Lahart begins his article describing a wide array of companies that plan to or are expanding their operations internationally. He writes:

“Husband-and-wife business partners Matt and Rene Greff are on track to open the first out-of-state branch of their Michigan brewpub later this year—in Bangalore, India. At Peter Frykman’s Palo Alto, Calif., irrigation-equipment company, seven of the 20 employees are located outside the U.S., in China and India, while Gangesh Ganesan’s communications-chip firm, in San Jose, has about a quarter of its staffers in Istanbul, and others in Tokyo and Taipei. While big companies have been the trailblazers of globalization, a growing number of relatively small businesses are following in their footsteps. Like their larger counterparts, they are drawn by new markets that are often growing much faster than those at home.”

Although U.S. workers have lost their manufacturing jobs to overseas workers, employees in that global workforce may yet prove to be customers for goods produced in the United States — thus helping to bring manufacturing jobs back to America. I’ll talk more about the emerging global middle class in a future post. Most people believe that globalization has helped developing countries more than developed countries; but some developed world companies are learning that globalization is also a boon for them. Lahart continues:

“Forays abroad [by small U.S. companies] are made possible by technologies like file sharing and video conferencing, which allow managers to communicate easily across continents. Though these technologies aren’t new, their price has fallen sharply over the past decade, putting them within reach of more companies.”

For company owners, expanding abroad provides both opportunities and challenges. Lahart explains:

“Crossing borders doesn’t come easily. Advances in technology haven’t done away with the need for small-business owners to spend face time with employees and clients in other countries. PharmaSecure Inc., for example, is based in Lebanon, N.H., but Chief Executive and co-founder Nathan Sigworth says he has been spending more time in India, his primary market, than at home. Venturing abroad also requires small companies to put a lot of care into choosing the employees or local partners who will represent their interests overseas. The task often requires bridging cultural differences and navigating complex and unfamiliar bureaucracies.”

I have some experience in this area and I can tell you that Lahart is right on target. Hiring the right local employees can make all difference. Lahart continues his article with the back story behind the Greffs’ plan to open a brewpub in Bangalore. He writes:

“The Greffs, in Ann Arbor, Mich., were skeptical when Gaurav Sikka, a former University of Michigan student, approached them last year about opening a brewpub in Bangalore. Mr. Sikka, a native of India, was a regular at the couple’s 200-seat Arbor Brewing Co. The couple had recently opened a small brewery in nearby Ypsilanti, and worried about stretching themselves too thin. ‘We said no, we don’t have any time or money,’ recalls Mr. Greff. ‘He said: “Don’t rule it out of hand.”‘ The Greffs traveled to India, where they came to believe Mr. Sikka’s idea was feasible. They found that southern India had a beer-drinking culture, as well as lots of U.S.-educated professionals, including plenty of University of Michigan grads. Moreover, it was an untapped market for traditionally crafted microbrews like the ones the Greffs serve in Michigan. Now, a group of local investors, led by Mr. Sikka, is supervising arrangements for the Bangalore opening. The Greffs will have a stake in the new brewpub, and will receive consulting and licensing fees.”

Lahart reaffirms the statistics noted above (i.e., “according to the Census Bureau just 2% of U.S. companies with fewer than 100 employees sell their goods in overseas markets) but notes that “there are no hard figures available [for] the number of small businesses that have invested directly in overseas operations.” Although I’m sure the administration won’t object if small companies invest abroad, it is much more interested in companies exporting goods produced in the United States. Lahart notes that investing abroad “typically requires a bigger financial commitment than exporting.” I suspect that a growing number of small- and medium-sized U.S. companies will adopt a hybrid business strategy that includes both increasing exports and setting up business abroad. Lahart continues his article with the back stories of the companies mentioned earlier in his article. He begins with the story of Driptech:

“Mr. Frykman, the irrigation-gear executive, was part of a group of Stanford University graduate students who in 2008 came up with a method for making drip irrigation systems inexpensively. After testing them in Ethiopia, ‘we saw that this could help farmers across the world,’ he says. He put his plan to get an engineering Ph.D. on hold and formed Driptech Inc. A pilot project in India went well and caught the eye of Chinese officials. In 2009, the company made its first sales, in India and China, and began to seek angel investors. Last spring it raised $900,000 in funding. Seven of Driptech’s employees are now working in its offices in Beijing and outside of Mumbai, and Mr. Frykman expects that within a few months half of its workers will be overseas. Having offices in three countries is a challenge, he says, but thanks to the revolution in communications technology he is able to hand off work in the evening to his co-workers in Asia, and pick it back up in the morning. ‘If you get the rhythm right, you can really be working around the clock as an organization,’ he says.”

I first wrote about Driptech in December 2009 in a post entitled Start-Ups that are Expected to Do Well Despite the Recession. Apparently the prognosticators were right about the company. It is doing well despite the recession. The next company discussed by Lahart is a small pharmaceutical firm — PharmaSecure.

“PharmaSecure got its start in 2007 when [Chief Executive and co-founder Nathan] Sigworth and his friend Taylor Thomson came up with a low-cost way to combat counterfeit drugs, a big problem in the developing world. PharmaSecure’s system, which combines mobile-software apps and databases, allows customers to send text messages containing the codes printed on drug packages and get a reply indicating whether the code is legitimate. After a year of traveling, the partners decided that India, the source of much of the developing world’s drug supply, was the best place to begin. Now, most of the company’s 15 employees work out of New Delhi. Mr. Sigworth says the ability to communicate cheaply has been crucial. ‘We use [Internet telephone service] Skype a lot; we use email a ton,’ he says, but he adds that just as important has been the company’s ease and comfort working across cultures. Born in Germany, Mr. Sigworth grew up in Connecticut, and spent summer breaks from high school working in Botswana. Many of the company’s Indian employees went to U.S. universities or have worked for major U.S. multinationals.”

To learn more about the problem of fake drugs, read my post entitled Drug Safety and the Supply Chain. The final company discussed by Lahart is in the information technology sector.

“Ubicom Inc., which produces chips for products such as wireless routers, made its first international foray three years ago when it tapped a Turkish employee to start an office in Istanbul. Now about 20 of its 85 employees work there. Ubicom also has offices in Taipei and, as of this month, Tokyo, as well as a group of engineers in the U.K. To videoconference, chat and work together on projects, Ubicom’s offices use technology that would have been too costly for the company a decade ago, says Mr. Ganesan, the CEO. He adds that he doesn’t think a company like his can do without an overseas presence.’Even though we’re a small company, our customer base is truly global,’ he says.”

The bottom line of this post is that small- and medium-sized companies hold the to key to future prosperity. At least that is the opinion of a number of business and government analysts. As I noted in the conclusion of my post on medium-sized companies mentioned earlier, William Shakespeare reminded us centuries ago, “All the world’s a stage, and all the men and women merely players.” If you don’t see the world as your stage, you may not be a player in the future.