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Just How Good Are Exports for Your Company, Your Employees and the United States?

Published on Thursday, October 08, 1998

Most politicians, scholars and business people agree that exports are good for the United States and participating companies. But just how good has been difficult to determine. And the impact on U.S. workers has been questionable for some time.

Over the past few years, however, more data has been collected and analyzed. And the quantifiable results are very positive.

The Benefits Are Vast

It stands to reason that selling your products in more markets, located throughout the world, will not only raise your corporate sales figures, but spread the risk, should a particular country or region experience a period of slow or negative economic growth. But that’s not all.

According to the report, Why Exports Matter: More!, published by the Institute for International Economics and The Manufacturing Institute, “in U.S. plants that export, worker productivity is higher, jobs are compensated better and technologies are adopted more aggressively than among non-exporters.”

Exporting Plants Perform Better

The report contends that since the late 1980s, plants and firms that have sustained an export commitment, or that have initiated exports, experienced almost 20% faster employment growth than those that never exported or stopped exporting. Additionally, these plants and firms were 9% less likely to go out of business in an average year.

During the period of 1987 through 1992 (latest available statistics), employment at a typical plant fell 2.5%, while employment at exporting plants grew approximately 18%, indicating better corporate performance. In fact, the report states communities that hosted exporters benefited from a stable, growing high-performance workforce and tax base.

How Much More Do Workers Earn?

According to the Office of the Chief Economist at the Department of Commerce, workers in jobs supported directly by exports earn 20% more than the average national wage. Workers in high-technology jobs supported directly by exports receive 34% more. And workers in jobs supported both directly and indirectly by exports are paid 13% more.

Foreign Economies Adjust: Traders and Investors Must Reassess Target Markets

Published on Thursday, October 01, 1998

What began last year as a financial crisis in one country has led to global financial turmoil today. In order to successfully navigate these uncharted waters, U.S. exporters need to develop finance strategies to retain existing customers, and explore new markets here and abroad.

The Dominoes Fall Harder

A decade ago, the currency collapse in a developing country barely would have been felt in the United States or elsewhere. Today, however, the impact has profound consequences.

In 1995, Federal Reserve Chairman Alan Greenspan said that the highly efficient and increasingly sophisticated international financial system “has the capability to rapidly transmit the consequences of errors of judgement in private investment and public policies to all corners of the world at historically unprecedented speed.”

This was exemplified by the Mexican peso crisis, which was ignited on December 20, 1994. What began as a short-term liquidity problem quickly sparked panic and resulted in the fall of investor confidence, followed by a precipitous drop in the Mexican stock market.

Perceiving that the crisis would erupt in other developing countries sharing similar economic and political characteristics, investor fear spread to Brazil and Argentina. As a result, their stock markets also fell, along with those of other developing countries worldwide.

Asian Crisis Fallout Continues

Having surveyed the tornado-like path produced by the Mexican peso crisis, it appears that the Asian crisis, although more severe, is following a similar course.

The financial problems that began in Thailand in 1997 quickly have spread throughout East Asia. They have added to the severe economic difficulties experienced by Japan in recent years, and have put pressure on China to devalue its currency in order to remain globally competitive.

The Indian subcontinent has not been spared. Poor East Asian economic performance has closed export doors for Pakistan, a country experiencing debt problems. India, too, is facing economic difficulties.

The Impact on Russia

Believing that too many eggs in the emerging market basket is risky, many global investors have pulled their money from Russia.

This has resulted in a downturn of the Russian stock market, the devaluation of the ruble, and increased fears of default on foreign debt by the Russian government and domestic banks. These events have compounded the country’s economic troubles caused by the failures of central planning and the dissolution of the Soviet Union.

In an attempt to stabilize the economy, retain existing investment and attract new funds, newly appointed Russian Prime Minister Yevgeny Primakov recently said Russia intends to meet its domestic and foreign debt obligations, and continue with free market reforms, with some modifications.

Although Russia’s economy is relatively small and has minimal impact on capital and trade flows, it has exposed economic vulnerabilities not only in Eastern Europe, but in other corners of the globe, as well.

Latin America and Canada Feel the Pain

The fallout of the Russian crisis is now being felt in Latin America. Venezuela and Brazil’s currencies are under pressure and stock markets throughout that region significantly have decreased in value.

As prices for commodities fall, resulting from lower world growth forecasts, countries rich in natural resources are feeling the pinch. Depressed oil prices are impacting Venezuela and Mexico, which rely heavily on oil export revenue, while Chile and Peru are hurting from the drop in copper prices. And, Argentina is marred from the fall in agricultural prices.

Even the Canadian economy is affected, primarily due to its exposure of forest products, coal and base metals. Other developed countries sharing these difficulties include Australia and New Zealand.

Creative Finance Is Required

Due to the Asian financial crisis, many companies located in impacted countries are finding it difficult to obtain financing for their purchases. In an attempt to continue exporting to these customers or to attract new buyers, U.S. exporters need to offer longer and more flexible terms. In order to limit your risks, consider utilizing export credit insurance or government guarantees.

Explore New Markets

To compensate for declining exports resulting from the financial turmoil, consider tailoring your product to satisfy the needs of new foreign markets.

Sound economic structures in Canada and the European Union should keep the crisis from doing real damage there. Durability derived from newly enacted reforms in Latin America will likely deter severe fallout. Consequently, these export destinations should remain relatively vibrant.

Also, consider domestic markets in which you’re currently not selling. For instance, from 1996 through 2020, the world’s elderly population consisting of those age 65 and over, will rise almost twice as fast as school or working age groups. You may wish to cater to the tastes of this fast-growing U.S. and world market segment.

Carefully Analyze the Opportunities and Risks

With change comes opportunities—and risks. Whichever strategy you choose to pursue, be sure to analyze the short- and long-term ramifications, and balance the potential rewards with the risks.

What Strategy Should Your Company Use to Expand Internationally?

Published on Thursday, October 01, 1998

In today’s highly competitive business environment, expanding globally can be a very profitable venture. But choosing the right strategy can be a difficult task — whether it’s exporting, establishing a joint venture or strategic alliance in a foreign market, acquiring a firm through direct investment, or by licensing technology abroad.

The benefits and risks associated with each method are contingent on many factors. These include your type of product or service, the need for support, and the foreign economic, political, and cultural environment you are seeking to penetrate.

However, your decision ultimately will be dependent on the level of resources and commitment, and degree of risk you are willing to incur. In addition to exporting, consider the following alternative methods.

Is a Joint Venture Right for You?

A joint venture is a cooperative business venture established by two or more companies. Prior to commencing operations, partners usually allocate resources, consign risks and potential rewards, and delegate operational responsibilities to each other while preserving autonomy. Upon completion of the project, the joint venture is usually disbanded.

This approach may enable you to establish a marketing or manufacturing presence abroad with the assistance of a local foreign partner, who may provide you with knowledge of government workings, regulations, internal markets, and distribution know-how.

A joint venture is an ideal strategy if you have limited capital, manpower and knowledge of the foreign market, or wish to mitigate your risks.

On the downside, your profits will be shared, and disagreements over marketing efforts and management philosophies can create difficulties. Consequently, the level of compatibility between you and your partner is extremely important.

Investigate a Strategic Alliance

A strategic alliance is similar to a joint venture — yet different. It may be formed by granting a foreign company the authority to exploit your technology, research and development knowledge, marketing rights, etc. It does not create a separate entity.

A simple strategic alliance can be a basic manufacturer-foreign sales representative relationship. To solidify this arrangement, a simple written agreement may suffice. This market entry method is often less formal and used as a preliminary step to creating a joint venture. Importantly, it allows partners to quickly respond to a changing environment and contribute complementary strengths to seize opportunities.

Is a Foreign Company Interested in Your Technology?

Through a strategic alliance or joint venture, you may wish to license your technology, know-how or designs to a foreign company for use in a geographic area for a limited period of time. This may include patents, trademarks, production techniques, and technical, marketing and managerial expertise.

Licensing is particularly attractive to small- and medium-size firms because it affords international expansion while limiting risks. It rarely requires capital investment and does not require the parties to work closely together or demand your continuous attention.

In many cases, licensing is the only viable strategy to securely enter a foreign market that lacks hard currency, severely restricts the repatriation of profits and foreign direct investment, maintains unreasonable trade barriers, and/or is economically or politically unstable.

As with each market-entry method, licensing has its disadvantages. For example, the licensor loses control over the quality, distribution and marketing policies, and essential support services employed for the purpose of selling the product or technology.

If compensation is based on sales volume, the licensor may have to rely on the honesty of the licensee to report units sold.

A typical licensing agreement may call for an up-front fee, royalties based on a percentage of future earnings, and consulting and training assistance. Many licensing agreements evolve into joint ventures, while some joint ventures or strategic alliances are eventually converted to simple licensing agreements when one party’s interests diverge from the original purpose.

Is a Foreign Acquisition Best?

Through foreign direct investment, you can acquire an interest in another firm located abroad. More often, a company will complete a foreign acquisition once a market is proven, usually after years of exporting or if a high degree of success has been experienced through a preexisting joint venture.

If you obtain controlling interests, you’ll have full authority over all policies, including marketing strategies, financing, cost cutting, expansion programs, production, and quality control. However, keep in mind that a very successful acquisition strategy is one where the new owners study preexisting management styles and seek to understand what management thinks of proposed policy changes, and then incorporate this input.

Foreign acquisitions usually require an abundance of resources, and the exposure to risk is higher as compared to other methods of foreign market entry. Thus, changes in government policy can adversely affect your company’s operations. On the other hand, foreign acquisition benefits often exceed other methods of market entry.

Choose The Strategy That Best Satisfies Your Long-Term Needs

Different strategies will satisfy different needs. To determine what may work best for you, study your options on an in-depth basis. This may include seeking legal and/or expert advice on the methods and markets that interest you.

Importantly, look at the long-term ramifications, especially the level of resources required and risks involved, and analyze this in terms of your expected returns. In many cases, a combination of strategies, employed one after another, may be the right mix.

Recent Granting of Most Favored Nation Trade Status to China More Important Than Ever for WNY

Published on Saturday, August 01, 1998

To the benefit of Western New York, Congress recently decided to grant China Most Favored Nation (MFN) trade status for another year. But this year the stakes are higher.

In 1996, New York State ranked 41 out of 50 states in private-sector job growth. Even as New York's manufacturing sector has declined, exports sustained approximately 650,000 jobs in 1997. And compared to other U.S. states, New York ranked as the third largest merchandise exporter to the world, with shipments of approximately $50 billion.

According to a report published by the Business Council of New York State, Inc., export-related production is the primary source of new jobs in New York's manufacturing sector. The report also indicates that merchandise exports from New York have grown more than twice as fast as the state's economy since 1994, clearly indicating a strength that needs to be nurtured.

Exports also are essential to our country's prosperity. During the past decade, U.S. exports of goods and services accounted for one-third of U.S. economic growth. In 1997, exports reached $930 billion, rising 74 percent since the decade's beginning. According to the U.S. Trade Representative Office of Economic Affairs, U.S. exports of goods and services supported approximately 12 million jobs in 1997. And many of these jobs are in high-tech sectors.

The Office of the Chief Economist, Department of Commerce, estimates that high-technology industry jobs supported directly by exports pay 34 percent more than the average national wage; jobs supported directly by exports pay 20 percent more; and workers in jobs supported both directly and indirectly by exports are paid 13 percent more.

Furthermore, companies that export expand their employment base approximately 20 percent faster than others, and are 10 percent less likely to fail. Thus, exports are very important to the prosperity of New York companies and workers.

As the relationship between exports and our national and local economies becomes more entwined, China becomes a more important export destination. In 1997, the United States exported $13 billion in exports to China. This sustained approximately 170,000 American jobs. In relation to other states, New York was the fourth largest exporter to China, shipping $776 million there. And New York's primary exports to China are high-technology products — manufactured by highly-paid skilled workers.

But that's not all. The six largest New York State export industries, responsible for 84 percent of all manufactured goods shipped to China, also employ roughly half of all manufacturing workers in New York State. These goods include industrial machinery and computers, food products, transportation equipment, electric and electronic equipment, chemical products, and scientific and measuring instruments. Consequently, the Chinese market has become very important to the welfare of state and local workers.

This year, the Asian financial crisis has elevated China's importance to the United States. According to Federal Reserve Chairman Alan Greenspan, “With the crisis curtailing the financing available in foreign currencies, many Asian economies have no choice but to cut back their imports sharply. Disruptions to their financial systems and economies more generally will further dampen demands for our exports of goods and services."

Certain U.S. regions that are more dependent on exports to East Asia will be affected to a greater extent than less dependent regions. Western states are expected to be affected the most; Northeastern states are anticipated to be affected the least. Nevertheless, New York is not out of the woods.

In 1997, approximately 25 percent of New York's exports were destined for the "Asian 10," which is comprised of China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand. Most of these countries have been severely impacted by the crisis. And primarily for other reasons, Japan is undergoing one of its worst economic slumps in recent history.

China, however, has emerged relatively unscathed by the Asian financial crisis. Its economy, currently the world's third largest, is still anticipated to continue growing at one of the fastest rates in the world to become the world's largest early in the 21st century. As New York exports to other East Asian countries drop as a result of the Asian crisis, more exports could be redirected to China, home to 1.2 billion consumers with fast-growing incomes.

Now, U.S.-Chinese relations are even more important as a result of heightened tensions between Pakistan and India. As those two countries attempt to flex their military muscle and display their new nuclear capabilities, China and the U.S. need to cooperate as never before in order to check the increasing probability of a military miscalculation.

How does MFN trading status impact U.S.-China trade and relations? Despite its name, MFN is granted to 220 of our 228 trading partners. When a foreign country has this status, its goods enter the United States at a normal duty rate. If not, its goods are assessed duty rates exceeding 50 percent, making them noncompetitive here. Denial of MFN for China would result in the United States imposing such high tariffs on Chinese products that their access to our market would virtually cease. Those who believe our global trade deficit would decrease are mistaken. The import gap would quickly be filled by other Asian suppliers.

In response, the Chinese would retaliate and severely restrict or totally eliminate our access to their market. This greatly would hurt New York companies and workers. Additionally, denying China MFN trade status would inevitably lead to deteriorated U.S.-Chinese relations, fostering an environment of alienation and suspicion. Any U.S.-Chinese cooperation for the purpose of reducing Chinese trade barriers on U.S. goods and services, eliminating tension between Pakistan and India, or maintaining stability of China's currency — which is under competitive pressure to devalue as a result of fallen currencies in other East Asian countries — would be highly unlikely.

If MFN is not granted, our access to the Chinese market would undoubtedly come to an end. On the other hand, granting China MFN trade status will give U.S. and New York State companies secure access to that tremendous market. The United States, which accounts for only 4% of the world’s population, needs to sell to the other 96%. Passing MFN legislation will help us to achieve this. And although trade is not a panacea, it is one of the best tools we have to influence foreign government policies with which we don't always agree.