Stay Home?

If the great global future of business is here, so far it's not much to look at. Are you trying to find a path to international success in today's world economy?
From the February 2003 issue of Entrepreneur

For years, Bob Duncan of Leawood Export Finance Inc. in Overland Park, Kansas, was a vociferous advocate of globalization. As president of the B2B export finance firm, which helps U.S. companies expand their export sales, Duncan saw his company grow steadily throughout the post-Cold War 1990s, venturing into one foreign market after another. During that time, Duncan himself talked up the advantages of globalization--a combination of advances in trade, communications and capital flows--to hundreds of small U.S. businesses considering expanding overseas.

But over the past two years, as globalization has undergone its most severe test to date, Duncan's mood has become darker. His company has laid off employees and slashed costs, and he has become less certain of the future of global integration. "The global economic situation has become unclear, and there are clearly major risks," Duncan worries.

His fear is hardly unique. Until early 2001, U.S. entrepreneurs rapidly expanded their global reach, targeting export markets worldwide and strongly advocating freer trade. But in 2001 and 2002, global integration whipsawed, delivering bad news across continents as nations' economic downturns fed on one another and the war on terror heightened security risks and fears. This reverse globalization has dried up some export markets, severely squeezing small businesses. Some entrepreneurs have responded proactively, using careful management to minimize the impact of the global slowdown and strengthen their long-term export markets. Others, however, have been hit so hard by reverse globalization that they are scrambling just to stay alive.

Going Abroad
The 1990s were an era of rapidly accelerating global social and economic integration. During the decade, world trade in goods nearly doubled in value, to $6.4 trillion in 2000, and thousands of companies bet their future on exports. Political leaders like Al Gore celebrated globalization with messianic speeches touting the nearly endless benefits of integration. Businesses ran advertisements featuring executives teleconferencing with partners across the globe and Buddhist monks surfing the Internet from remote abbeys.


"The Web has drastically leveled the international playing field between smaller companies and big business."

Though many U.S. consumers associate globalization with leading multinationals like Coca-Cola or GE that have huge operations in many countries, small businesses have actually been one of the main drivers of global integration. According to the U.S. Department of Commerce, between 1987 and 1999, the number of small and midsized U.S. exporters more than tripled, to 224,000. By 1999, 97 percent of American exporters were small businesses, though smaller exporters still only accounted for one-third of total U.S. export sales.

The increasing diversity of American society only enhanced small businesses' willingness to look abroad. As rising numbers of immigrants came to the United States in the 1990s from Latin America and South Asia and started businesses, large numbers of those foreign-born entrepreneurs naturally looked to their homelands for export markets. In 2000, studies found that nearly one-third of all start-ups in Silicon Valley were led by a person of South Asian descent, many of whom outsourced a percentage of their companies' work to India or Pakistan.

Some American entrepreneurs even started or moved their entire operations abroad, relying on the United States only as a consumer market. "The opportunities here are so much greater than if I had tried to start a small business in the U.S. because I'm closer to the manufacturing in China. I can be at ground level, making sure my suppliers are honest," says Robert Kushner, 36, president of Pacific China Industries Ltd., a toy manufacturer based in Hong Kong.

Several factors combined to create entrepreneurs' love affair with globalization. Most important, the development of the Internet allowed small companies to easily contact clients overseas and ship goods without opening huge representative offices abroad. "The Web has drastically leveled the international playing field between smaller companies and big business," says Daryl McKigney, president of the Small Business Survival Committee, a Washington, DC, advocacy group. "PayPal and eBay allow small companies to handle billing for small orders without complex credit arrangements." In some cases, Web-based B2B marketplaces such as VerticalNet have made it even easier for entrepreneurs to contact potential customers; Forrester Research, a technology research firm, predicts such B2B marketplaces will push global online exports to $1.4 trillion by 2004.

When entrepreneurs did have to leave their desks to meet clients, the expansion of airline route networks in the 1990s allowed them to meet customers face-to-face and be home in 48 hours or less. What's more, the reduction of trade barriers in most major economies during the past decade made it easier for small companies to deal with export regulations, while the Export-Import Bank and private institutions became more willing to provide financing to small exporters.

New World Disorder

Now, however, some of that optimism has dissipated. Synchronized economic slowdowns in Asia, Europe and the United States, the three engines of global commerce, have decimated international trade. The World Bank estimates that last year global trade underwent "one of the most severe decelerations in modern times." Violent antiglobalization protests have become regular events all over the globe. And Al Qaeda's nefarious activities have demonstrated to the world that the open borders, integration and free flow of capital that characterize globalization can be used to brutal ends.

Many small companies that had switched their focus to export markets over the past decade have been hit hard. In August, the most recent month for which statistics were available, America's trade deficit swelled to $38.5 billion, as exports decreased and imports rose. This past summer, small companies' exports fell to their lowest level since January 2000.

Anecdotal evidence supports those figures. Duncan has seen his exports to Mexico drop by more than 30 percent. Patricia Torres, 28, co-owner of Computed Tool and Engineering Inc., a small Anaheim, California, company that designs and manufactures stamping dies, has had nearly half her customers cancel their orders.

In part, small companies' problems stem from their customers' economic weakness. "A lot of foreign customers cannot afford anymore to guarantee payment for exports received," says Duncan. "Bigger businesses can take the chance with such customers because they have legal departments and translators that can deal with foreign claims, but small American companies can't afford to take chances on customers who can't guarantee payment." Consequently, many goods destined for export have been piling up in U.S. and foreign warehouses.

Antiforeign sentiment in countries hurt by the global economic slowdown also works against U.S. exporters. In Argentina, for example, the collapse of its currency, which was tied to the U.S. dollar, has provoked attacks on foreign bank branches and calls for protectionist measures. (However, Argentina's own free-spending politicians are as much to blame: They passed laws that expanded state health care to pay for even liposuction.)

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Some entrepreneurs who expanded too quickly into export markets now are struggling to survive, and some have soured on globalization completely. Export expert Laurel Delaney estimates it takes at least three years for a company to penetrate a foreign market. Many businesses that have used up critical resources just to break into a new country simply can't afford to wait out the current global economic slump.

"[Advocates of globalization] may rethink whether the U.S. should continue slashing trade barriers," says Robert E. Scott, international economist at the Economic Policy Institute, a research organization. However, it is unclear whether small companies would benefit from higher barriers. When the Bush administration slapped tariffs on imported steel in March 2002, hundreds of small companies that consume steel paraded to Congress to protest the regulations.

But some entrepreneurs have responded to reverse globalization with new bursts of innovation. For example, some smaller companies are rediscovering customers close to home. Other small businesses are continuing to push abroad but are focusing their attention on a few key markets and diversifying their investments in those regions. "In the past year, we have opened new sales offices in India and China, places where we know there will be strong growth," says Charles Tharp, president of Environmental Dynamics, a Columbia, Missouri, manufacturer of waste water treatment equipment that brought in $14 million in 2002. "There has been a consolidation in our business, and the companies left will be the ones that export smart, control their costs and develop connections overseas." These connections pay off: Tharp's key salesperson in China is the brother-in-law of one of his employees in the United States.

Other firms are making their operations more flexible to better accommodate foreign tastes. After all, Delaney notes, even behemoth Wal-Mart has realized selling products abroad requires flexibility. Wal-Mart, which often builds cookie-cutter stores in America, sells locally popular products in China, including turtle blood and live frogs. These entrepreneurs hope such malleability will allow them to prepare themselves for the next wave of global integration. "Perhaps compared to two years ago, the situation for small-business exporters looks bleak," says McKigney. "But when you compare it to 1989, when there was so little trade, you have to conclude that exports have been one of small businesses' biggest success stories in recent years."

Where to Look for Advice
Small companies thinking of expanding into export markets often feel lost when they venture overseas and are forced to deal with foreign legal environments, unfamiliar languages and new business practices. But several organizations try to provide information, advice and even financing for entrepreneurs focusing their vision overseas.

1. The Small Business Exporters Association is the nation's oldest and largest trade association devoted to small and midsized exporters. The SBEA lobbies Congress to help small exporters, provides networking opportunities for small companies eager to meet foreign customers, and assists entrepreneurs with some of the legal and procedural challenges of exporting.

2. The International Trade Administration of the U.S. Department of Commerce offers solutions to common global trade problems and country guides to nearly every possible export market.

3. Global TradeSource Ltd. features a newsletter full of comments from small-business people all over the globe who provide vital information about the on-the-ground business climate in various markets.

4. The SBA's Export Assistance Centers, located nationwide, help entrepreneurs get loans for export financing, research foreign markets, and make contacts with customers overseas. Export Assistance Centers are targeted toward entrepreneurs who have not set up export businesses before, so veterans of foreign markets may prefer using Global TradeSource Ltd. or the SBEA, both of which target long-timers.


Joshua Kurlantzick is foreign editor of The New Republic.

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