Back to Free Trade: Are We Prepared?By R. E. Burnett
From Farms, Factories and Free Trade
pp. 33-38, published 1995
For Kentucky businesses that have long been engaged in exporting, there is little problem continuing to do so, as long as they monitor their markets and plan accordingly. For many smaller businesses, even those with a relative advantage in export potential, the probability of success is much lower due to a number of obstacles which serve to deter, and, at worst, defeat the effort altogether. In order for Kentucky's businesses to reach their export potential and further assist economic development in the state, the obstacles to exporting must be defined and strategies for overcoming them must be created and implemented. This mission is the primary goal of Kentucky's export consortia and the International Trade Office in Frankfort.
The fundamental problem which inhibits growth in exports (in terms of new exporting businesses) in Kentucky is simply that a majority of Kentucky providers of goods and services continue to focus only on domestic markets. There is much evidence to suggest why this is so, but, essentially, Kentucky businesses have developed in accordance with the market forces of a "middle America" and a regional economy. This market traditionally has not been connected to the global economy except for certain sectors, such as energy (coal and oil), transportation (autos and auto parts), and agriculture (tobacco and corn). Logically, these industries have developed with export markets and are the largest exporters in Kentucky today.
Many Kentucky industries, however, conduct business in a traditional manner. They have not developed a viable research component to continually identify and define potential market opportunities. As a result, they are often completely unaware of services that are available here at home that could assist them with these and other important tasks and services that facilitate exporting.
These perceptions are further substantiated when one attends many of the international trade shows conducted around the state each year to bring importers and potential Kentucky exporters together, to impart knowledge about foreign markets and the export process and to motivate Kentuckians to complete export transactions. Many Kentucky business owners or their principal representatives leave these meetings uncommitted to following through on an export deal. The reasons for this are many, but, typically, exporting is viewed as being too complicated, too expensive and too demanding.
Kentucky businesses often consider themselves to be too small with too little knowledge and sophistication to understand foreign markets and their diverse cultures. Few rural and small Kentucky businesses have staff who are fluent in a foreign language and knowledgeable about foreign cultures and who also have good business skills. Persons with these skills have advanced training and experience and command higher salaries than many small Kentucky businesses can afford to pay. So basic knowledge of how to deal with foreign markets, how to contact them, how to market to them and how to negotiate with them, is a commodity that is in short supply for many Kentucky producers.
Ironically, at a time when global markets offer the greatest opportunity, the architecture for international trade has never been more complicated. In fact, new international agreements designed to open and ease trade have had quite the opposite effect. Local businesses and governments must make sense of new paperwork and increasingly rely on specialized attorneys and trade analysts to interpret the new rules and regulations—a time-consuming and expensive process. The first two or three years of the implementation of NAFTA will primarily serve as a transition period during which government and private attorneys must interpret this architecture for their business clients. For the small or rural Kentucky business, the expense and complexity that is associated with exporting within such a regulatory environment is a powerful disincentive.
Perhaps the most imposing obstacle to exporting is a difficult financial environment. Kentucky businesses are risk-averse when it comes to exporting within the scope of uncertainties that arise from a shifting regulatory environment. However, their potential financiers (banks) are even more risk-averse upon examining the creditworthiness of small- and medium-size businesses seeking to export to uncertain markets for the first time.
Banks are notorious for refusing credit to enterprises that need it the most—usually smaller businesses attempting to establish themselves in a new market or with a new product. An export arrangement involving foreign markets and foreign banks adds significant risk to the deal. Understandably, a bank may balk at providing credit in such an arrangement. If it does decide to extend credit, it may charge a premium fee (to protect itself) that renders the deal unaffordable to the local exporter. The end result is that small- and medium-size Kentucky businesses may decide they want to export and perform all of the hard work necessary to do so, only to come up empty-handed when seeking credit. For many, this is the "coup de grace." It sends an inestimable number of would-be exporters fleeing from any real discussion of what, where or how to export products and services.
Clearly, we can do more to help Kentucky reach its export potential in the years to come by focusing directly on the problems indigenous businesses face and by seeking homegrown solutions. First, there is a great deal of work to be done at the grassroots level among the state's small- and medium-size and rural businesses. As the Kentucky Long-Term Policy Research Center’s manufacturing survey reveals, what is missing among Kentucky businesses is a fundamental commitment to exporting. Kentucky's businesses, government, universities and international citizens must work together to help those who are not exporting "get into the game." There is no ready substitute for a hands-on approach to cultivating export potential. The first international business transaction for most small businesses will have to be conducted principally by those who have the knowledge and networks necessary to conduct export business. And, importantly, this transaction will have to be conducted in a manner that teaches and trains novice exporters so they can assume responsibility for future export growth.
We will get more "bang for the buck" through grassroots efforts to help businesses arrange and conduct initial export transactions. Unfortunately, such partnerships are often discussed but seldom achieved. Achieving them will require extensive work in numerous localities throughout Kentucky over time. There is no alternative to the kind of intense, one-on-one work with small and rural businesses required to boost engagement in international trade. The International Trade Office is developing this type of model in an effort to cultivate the skills businesses need to create a successful export component of their operations.
Second, businesses must acquire or develop the international skills (language, knowledge of culture and political risk, and specialized business and financial knowledge) needed to conduct a successful export operation. Businesses must accept and commit to paying the premium necessary for such skills, an expense that is readily justifiable given the increased sales and profits exports are likely to bear. Industrial networks offer a possible means to affordable international skills that could enable groups of businesses to engage in exporting. Furthermore, Kentucky must increasingly produce this kind of talent through its secondary and higher education systems by utilizing the international educational programs that exist and by enhancing them with new resources and missions.
Third, we must recognize that the regulatory environment surrounding exports is largely beyond the control of Kentuckians. This makes it very difficult to achieve a comparative advantage in terms of regulation. Instead, we must seek a comparative advantage here for our businesses. To accomplish this we must have in place capable individuals in both government and the private sector whose job it is to stay abreast of daily developments in international trade architecture and to provide analysis and legal interpretation to exporting businesses quickly and competitively.
Fourth, we must seek new strategies for financing exports from small businesses in a risky business environment. We are not alone in attempting to enhance our export effort in this important category. Numerous other American states are frustrated with the less-than-optimal financial conditions surrounding their fledgling export efforts. Wisconsin, already a leading exporter, cites the lack of export finance as a principal factor in limiting future export growth. However, the state's Export Commission also concluded that Wisconsin (or any other individual state) can do very little to increase the availability of funds for potential exporters operating in a tight credit environment. Their plan is to educate exporters about existing Small Business Administration and Eximbank programs ("Program Profile," 1995).
Though the Kentucky Task Force on Creating a Globally Competitive Business Environment has recommended that the Kentucky Economic Development Cabinet's Financial Incentive Office review the possibility and desirability of developing a state-sponsored export finance program, the state will be hard-pressed to do so in tight economic times where real and political demands for state dollars are highly competitive. As in the case of Wisconsin and other states, we will have to put our efforts into making those businesses which seek to export more competitive for funds from the Small Business Administration and Eximbank.
Participating in the global marketplace is key to the future economic health of Kentucky’s rural communities. World Bank data show that world trade is continuing to exceed world economic output. This means that export activity will invigorate local economic health more so than business betting on overall economic growth. Unfortunately, Kentucky faces several obstacles in seeking to increase its export earnings. Knowledge of foreign markets and cultures, international trade regulations, and export finance are substantial obstacles that Kentucky businesses must overcome. At the same time, Kentucky's sister states are also working very hard to be successful in this arena, creating a more competitive export environment. While most states are developing in-state architecture in an effort to give their indigenous businesses a competitive advantage in world markets, it is suggested here that efforts placed at the "grass roots" level will achieve the greatest gains over time.
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