Michael Czinkota Testifies Before House Committee About Export Performance

May 17, 2010 webtwo_czinkota_michael

On Wednesday, April 28, Michael Czinkota, associate professor at Georgetown's McDonough School of Business, testified before the U.S. House of Representatives Committee on Small Business on the topic of "How Government Can Help Increase U.S. Export Performance.” A transcript of his remarks is below.

Honorable Committee Members:

Thank you for inviting me to testify today. It is a great pleasure to do so, since it allows me to use our three decades of research at Georgetown University on export issues and smaller-sized firms in order to provide you with a frank and objective perspective on export promotion activities. I ask that my statement be included in full in the record. Thank you.

Exports are important. They increase the availability and choice of goods and services to individuals around the globe, and improve the standard of living and quality of life. Exports deserve government attention because they can affect currency values and the fiscal and monetary policies of governments, and determine the level of imports a country can afford. Exports also shape the public perception (both at home and abroad) of the competitiveness of a nation, which in turn influences the trust and confidence a nation experiences and can draw on. The impact of exporting has grown substantially during most of the past 40 years, as the value of world exports of goods and services has risen from $200 billion to almost $19 trillion (WTO, 2010). 

On the level of the firm, exports offer the opportunity for economies of scale. By broadening its market reach and serving customers abroad, a firm can produce more and do so more efficiently, which is particularly important if domestic sales are below breakeven levels. As a result of exports, a firm may achieve lower costs and higher profits both at home and abroad. Through exporting, a firm benefits from market diversification and can take advantage of different growth rates and different risk levels in different markets, and gain stability by not being overly dependent on any particular market. Exporting also lets the firm learn from the competition, makes it sensitive to different demand structures and cultural dimensions, and proves its ability to survive in a less familiar environment in spite of higher transaction costs. All these lessons tend to make the firm a stronger competitor both abroad and at home.

A successful export performance is therefore typically proof of a firm's special talents which enable it to prosper. Such a display of economic strength of the firm is, on an aggregate level, also a manifestation of the economic success and security of a nation.

In spite of all these positive aspects of exporting, there are obstacles, both real and perceived, which often prevent firms from exporting. Many U.S. businesses often are satisfied to remain local because of the size and vitality of the domestic market. Many also see only the risks involved in exporting rather than the opportunities that the international market can present. The psychological distance of foreign markets, caused by a lack of familiarity with foreign markets and uncertainty about export processes, is a real barrier to many U.S. managers, particularly small business owners. As a result, the United States under-participates in exports when compared to other nations. On a per capita basis, German exports in 2009 were $13,670 for every man, woman, and child. The figure for Japan was $4,063; for the United States, it was only $3,238. Given our imports of $4,707 (an activity in sharp decline after the global financial crisis), we are encountering on an ongoing basis large trade deficits, which make us indebted to other nations and let them acquire leverage over us. It is therefore worthwhile and necessary to increase the export activities of U.S. firms. 

President Obama has announced the goal of doubling U.S. exports within the next five years. A noble goal, particularly since, for the time being, export growth has been halted on a global level. For example, in the United States, exports in 2009 were below the level of those in 2007. Although U.S. exports had grown at an impressive rate in the 2006 to mid-2008 period, overall, in the 10 years from 2000 to 2010, U.S. exports grew only by about 50 percent. Doubling of exports in five years is an ambitious goal, but a goal which can bring much improvement to the nation.

Key issues are: How we can achieve such a goal? What activities need to be rebalanced or restructured to set us on the right path? Which countries will reduce their participation in world trade in order to afford new opportunities to U.S. firms? Where will the market growth for increased U.S. exports come from? How can, with prudent use of government resources, U.S. firms be enticed to export more?

Particularly the latter question is crucial if we are to achieve major behavior modification by private sector firms. Our research has shown that as a firm starts to export, unusual things can happen to both risk and profit. In light of the gradual development of expertise, the many concerns, and a firm's uncertainty with the new environment it is about to enter, management's perception of risk exposure grows. In its previous domestic expansion, the firm has gradually learned about the market, and therefore managed to gradually decrease its risk. In the course of international expansion, the firm now encounters entirely new factors such as currency exchange rates and their vagaries, greater distances, new modes of transportation, new government regulations, new legal and financial systems, new languages, and often substantial cultural diversity. As a result, the firm is exposed to increased risk. At the same time, due to the investment needs of the exporting effort to provide for information acquisition, market research, and trade financing, the immediate profit performance may deteriorate. Our research has clearly found that export procedural expertise is crucial for successful performance. We find however that such expertise and managerial ability falls short even by experienced large exporters (Czinkota and Kotabe 1998).

Eventually, a firm will become familiar with international markets, and the diversification effects of marketing internationally are likely to reduce the risk below the previous "domestic only" level. Over time, profitability is likely to increase as performance data of exporters have shown. Yet, in the short and medium term (typically during the first two years of exporting), managers may face the unusual and perhaps unacceptable condition of rising risk accompanied by decreasing rewards. Also, mistakes will happen during the export learning process, some of which can be particularly distressing to small businesses. In light of this reality, and not knowing whether there will be a pot of gold at the end of the rainbow, many executives either do not initiate export activities or discontinue them. A temporary gap in the working of market forces seems to exist. Government export assistance can help firms over this rough patch to the point where profits increase again and risk heads downward. Bridging this short-term market gap may well be the key role of export assistance, and the major justification for the involvement of the public sector.
Export assistance can target the organizational characteristics and capabilities of the firm and try to improve them. It can also work on the managerial characteristics and contribute to the improvement of knowledge and competence. Government also needs to be continually involved in the international market environment, in terms of learning, tracking, and negotiating the shape of the environment.

Export assistance will be most effective when it either reduces the risk to the firm or increases its rewards from export operations, particularly when the stage-specific experience and concerns of firms are taken into account. For example, providing information on market potential abroad is likely to decrease the risk (both real and perceived) to the firm. Offering low-cost credit is likely to increase the rewards. Macro assistance in the foreign market environment can consist of international trade negotiations designed to break down foreign barriers to entry. Micro assistance consists of learning from the foreign market and its customers, and passing on that knowledge to enable entering firms to adjust to that market.

Export assistance should be concentrated primarily in those areas where profit and risk inconsistencies produce market gaps and be linked directly to identifiable organizational or managerial characteristics that need improvement. Otherwise, assistance supports only exports that would have taken place anyway. There should be a clear demonstration of export additionality which occurs due to government support. In order to assess such effects, it is important to encourage and devise export performance measurements which don’t just evaluate issues such as governmental budget compliance, but assess bottom-line performance shifts, not just in terms of profitability, but also in terms of major competitive achievements.

There also needs to be consideration of international rules. The regulatory aspects of the trade environment have changed. Decades ago, governments were virtually unrestrained in their export promotion activities. Today, international accords are very restrictive when it comes to such government intervention. NAFTA, for example, sharply limits the extent to which governments can encourage their exports, and provides for very specific and rapid remedies when violations are suspected.

The World Trade Organization has taken a much closer look at export promotion activities, has identified trade distorting practices, and has devised rules which circumscribe the permitted export promotion practices. These WTO rules are particularly opposed to export subsidization, though they are confined mainly to the export promotion of goods rather than services.

Yet, export promotion support is necessary. Every day, new firms are beginning to learn about the international market and are running into barriers to international trade. For example, in any given year, 15 percent of U.S. exporters will stop exporting, while 10 percent of non-exporters will enter the global market (Bernard and Jensen, 1997). The most critical juncture for a firm is when it begins or ceases to export, which is where export promotion may have its greatest impact.

Export assistance should emphasize those areas where government can bring a particular strength to bear such as connections and contacts, prowess in opening doors abroad, or information collection capabilities. Externally, programs should aim at the large opportunities abroad in order to also provide for economies of scale for the governmental assistance efforts. As far as firms are concerned, attention should not just concentrate on assisting or bailing out industries in trouble, but also on helping successful firms do better. There should also be some focus on the benefits triggered by increasing exports. For example, one important reason for export promotion is the creation of jobs and the strengthening of the economy. We know that different industries create different amounts of jobs when they increase their production activities. This difference in jobs created per billion dollars of exports is a function of competence, competition, automation, and the labor intensity of an industry. In prioritizing national expenditures, it might help to consider the job creation as one criterion in the allocation of resources.

SOME SPECIFIC EXPORT ASSISTANCE PROGRAM CHANGES

Traditionally, export promotion has aimed to please the local customer, the constituent – the exporting firm. Given the intent to increase exports, however, it may make sense to devote promotional funds to achieve a better understanding of the actual buyers of exports, namely the customers abroad. What it is they want and need, and what are their alternatives? The goodwill and interest of these customers is crucial, since any promotion of exports will fall short if customers in the target market are not buying.

Such a demand-oriented customer focus requires substantial research activities abroad. Findings could tell us about the weaknesses of export activities. In what areas does an industry or a firm need to improve its export product or export processes? How can it be more responsive to changing demand patterns? For example, is better/faster/safer transportation required? How can transport-tracking systems be linked to facilitate better global supply chain management? A better understanding and meeting of such customer driven needs can help propel the potential exporter to become the winning bidder. 

Making Accidents Happen

Many firms become exporters by accident. Managers often receive unsolicited orders over the transom from abroad, and then have to make a choice as to whether or not to fill these orders. Such unsolicited orders have been found to account for more than half of all cases of export initiation by small and medium sized firms in the United States (Czinkota 1982). Today, due to the growth of corporate web sites, firms can easily become unplanned participants in the international market. For example, customers from abroad can visit a website and place an international order. Of course, the firm can choose to ignore foreign interest and lose out on new markets. Alternatively, it can find itself unexpectedly an exporter. In the services area, specialty retailers such as bookstores and fitness equipment sellers are examples of industries that in this way have become international. 

Export promotion can focus on such unsolicited orders and try to ensure that more of them reach a firm. Key questions are: In which ways can the offering of a firm be disseminated globally so that interested parties learn about the existence of a product? How can such parties then be guided in order to make it easy to submit unsolicited inquiries about such product? How can both the buyer and seller exchange information and develop a trust level to such a degree that order placement and order fulfillment becomes possible?

With regard to specific initiatives which are likely to increase exports, here are some suggestions: Exporting competence and confidence are crucial to our economy. The customer will particularly witness the procedural expertise of firms. The Department of Commerce could encourage, collaborate with, and sponsor a Professional Certification in Exporting. Such professional certification could be taught in business schools and community colleges. It also makes sense to encourage liberal arts students or language program participants to incorporate some international business education in their programs. Exporting must become part of the national game plan, just as it has been for decades in Japanese and German society. The time is right for such an initiative.

In order to learn by example, each state could rally an annual competition for the best case study written on an export entry success by a company in the state. Such studies should present an export problem which needed to be addressed and was solved. A substantial prize for the winner(s) would encourage such work. Just like the peer reference power of adolescents, companies need concrete success stories they can read about to convince them that exporting is worth pursuing and problems can be solved. Preferably such case work would involve support from export assistance centers and chambers of commerce. Hundreds of such short cases a year could be added to national resource centers and be made available online through Department of Commerce centers that would provide for a substantial database which would help in training swaths of interested people.

Today is an era of social responsibility and the awakening of personal participation in major issues. Discussions of public service abound – but, so far, have mainly been confined to issues such as climate concerns, sustainability, and poverty relief. Social service is seen mainly in the context of doing good works for disadvantaged people. Yet, it would seem that exporting should also qualify as a highly desirable social goal. Business schools should encourage their students to carry out unpaid internships in order to help stimulate export growth. Doing so can involve research for government and private sector reports, development of marketing campaigns, or even forming the vanguard for a group of companies in exploring markets abroad.

Collaboration between business schools, export assistance centers, and chambers of commerce should be much greater than it is now, and should be institutionalized rather than dependent on the initiative of individual professors, etc. One could even envision a period of national service devoted to the achievement of national priorities, in this case, to export enhancement.

Finally, it might be useful for Congress to consider the development and implementation of an “export impact statement” in connection with major policy decisions. Export trade considerations should also become an integral part of foreign policy negotiations instead of just an afterthought. It must be recognized that successful international trade leads to a strong U.S. economy, which in turn is a necessary prerequisite for this country to remain the guarantor of its political achievements.

REFERENCES

Bernard, Andrew B. and j. Bradford Jensen, “Exceptional Exporter Performance: Cause, Effect or Both,” Census Reearch Data Center, Pittsburgh, Carnegie Mellon University, 1997

Czinkota, Michael R., Export Development Strategies: U.S. Promotion Policy, Praeger, 1982

Czinkota, Michael R. and Masaaki Kotabe, Trends in International Business: Critical Perspectives, Oxford, Blackwell Publishers, p.8

World Trade Organization (WTO) International Trade Statistics, www.wto.org, accessed April 26, 2010