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An analysis of SME export assistance needs

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AN ANALYSIS OF SME EXPORT ASSISTANCE NEEDS
by
Benjamin H. Chee
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(Economics)
May 1997
Copyright 1997 Benjamin H. Chee
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UMI Number: 1384888
C o p y r i g h t 1997 b y
C h e e , B e n ja m in H. W.
All rights reserved.
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UNIVERSITY O F SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES. CALIFORNIA 90007
This thesis, written by
under the direction of h i&JThesis Committee,
and approved by all its members, has been pre
sented to and accepted by the Dean of The
Graduate School, in partial fulfillment of the
requirements for the degree of
Benjamin H. Chee
Master of Arts
D ie t *
fyu u.
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DEDICATION
This is dedicated to God from whom all blessings flow, and to my dearest dad for
funding four very expensive years of education.
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ACKNOWLEDGEMENTS
iii
I thank Professor Jeffrey B. Nugent for three incredible years of mentoring and
supervision. No amount of words can ever serve justice to the dedication Nugent has,
or for the pride he takes in imparting joy to students under his care in this journey of
learning.
I also thank Professor Quang Vuong and Professor Vai-Lam Mui for
advisement on the project, and for their constant encouragement. Members of this
committee are the very best I have no reservation whatsoever in recommending them
to any student who is serious about maximizing his/her utility for education.
Gratitude is extended to Professor Michael DePrano for his encouragement to
take the thesis option, and for the assurance that Econ 594 will be a trememdous
learning experience. The research experience has been challanging but extremely
enriching. I would never have known what I am leaving out if I had substituted this
experience for some standard mundane examination.
I also express my appreciation to the International Business Education and
Research (IBEAR) program for partial funding of this project, to Ms. Irene Fisher for
her tremendous assistance in ways too numerous to mention, to Peter Hofmann, Jill
Frieze, Caroline Brown, Tricia Snow, Joan Kanlian, Steve Morrison and Corrine
Murat for their assistance in providing us with invaluable information that pertains to
policies governing the existing support systems, to Komal Dhall for her research
assistance in the early stages of this project, to Sheila and Lois from the economics
department for facilitating the mailing process, and to the thousands of participants
who have made this project possible.
I am indebted to the Marie Reyes for taking care of all the paperwork. Her hard
work, patience and “just being there” have made my life so much easier.
Special thanks go to William Hubbard for his contribution to parts of this
thesis, and for being a source of motivation throughout this period of study.
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LIST OF TABLES
TABLE OF CONTENTS
Page
..viii
CHAPTER
1. INTRODUCTION..................................................................................................... 1
2. REVIEW OF THE LITERATURE.......................................................................... 6
I. EXPORTING AND THE FIRM-RELATED ENVIRONMENT........................6
A. Exporting as a Learning Process
B. Miles’ Model and the Task Environment
C. Perceived Barriers
H . MANAGEMENT AND FIRM CHARACTERISTICS....................................12
A. Managerial Commitment to Exporting
B. Managerial’s Experience to Exporting
C. Managerial Age and Education
D. Ability to Adopt New Technologies
HI. MARKETING RELATED CHARACTERISTICS.......................................... 16
A. International Market Selection (IMS)
B. Experiential Knowledge and the Use of Trade Missions
C. Information and Deliberation Councils
IV. THE EXPORT FINANCING RELATED ENVIRONMENT....................... 23
A. The Value of the Dollar
B. The Debt Crisis
C. Withdrawal of Commercial Banks From Export Financing
D. Changes in the Banking Environment and Their Effects on
SMEs
E. Foreign Ownership of US Banks and The Availability of
Loanable Funds to SMEs
F. Interstate Banking and SME Financing
V. PUBLIC AND NON-PROFIT EXPORT FINANCING SUPPORT AGENCIES......33
A. Export-Import Bank (EXIM) vs. Export Credit Agencies (ECAs) of the
European Union (EU)
B. Export Financing Support and Loan Guarantee Programs
C. SBA Loan Guarantee Programs, Banks and SMEs
i. The Program and the Problem
ii. The Incentive Structure of the Program
iii. The Political Context and the Program’s Aims.
VI. THE GENERAL INTERNATIONAL TRADE ENVIRONMENT.................43
A. Political Conflicts
B. New Industries and the Diminishing Technology Gaps
C. Intra-Firm Trading and The New Global Economy
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VH. US INTERNATIONAL TRADE INTERMEDIARIES (ITIs)...................................46
A. The Export Trading Company (ETC) Act of 1982
B. Reasons underlying the Failure of ITIs
i. Dunning’s Eclectic Paradigm and The Survival of ITIs
ii. Some Attitudinal Observations
iii. SMEs Propensity to Switch From Market to Hierarchy
iv. Administrative and Contractual Channels to Enhance
Efficiency
v. Opportunistic Behaviors by the ITI and the ETC Act of 1982
vi. What has Culture to do with the failure of the ETC Act?
3. METHODOLOGY.................................................................................................62
I. CHOICE OF SURVEY PROCEDURE..............................................................62
H . CONSTRUCTION OF THE SURVEY.............................................................64
ffl. INITIAL INTERVIEWS AND THE MAILING LIST.................................... 66
IV. THE MAILING PROCESS AND THE EFFECTIVE SAMPLE SIZE........... 68
V. FURTHER INTERVIEWS...............................................................................71
VI. TEST FOR REPRESENTATIVENESS OF THE SAMPLE...........................72
VH. PREPARATION OF THE DATA.................................................................74
VIE. DATA ANALYSIS.......................................................................................76
4. INTERVIEW SUMMARIES AND COMMENTARY........................................ 78
I. Systems Integrated, Inc......................................................................................78
II. Eximbank........................................................................................................79
m. CEFO............................................................................................................... 80
IV. DOC................................................................................................................ 81
V. LAACC............................................................................................................ 81
VI. Pioneer International Group............................................................................82
VH. Concord Enterprises.......................................................................................83
Vffl. C-Shore International....................................................................................85
IX. Imperial Bank..................................................................................................86
X. National Bank of Southern California..............................................................87
5. EXPORT ASSISTANCE ORGANIZATIONS......................................................90
I. CEFO................................................................................................................. 91
R LAACC............................................................................................................. 92
HI. Eximbank........................................................................................................ 93
IV. SBA................................................................................................................. 94
V. OPIC and AID...................................................................................................95
VI. DOC ITA.........................................................................................................96
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6. RESULTS........................................................................................................... 98
I. FIRM CHARACTERISTICS.......................................................................... 98
A. The Light Manufacturing Sector
B. The Heavy Manufacturing Sector
C. The High-tech Sector
H. MARKETING CHANNELS.........................................................................100
ffl. THE USE OF MARKETING SUPPORT AND THE INTERNET...............101
IV. USE OF PUBLIC EXPORT FINANCING SUPPORT AND FINANCING
RELATED DIFFICULTIES...........................................................................106
V. SAMPLES SEGREGATED BY EXPORT PERFORMANCES....................108
A. THE LIGHT MANUFACTURING INDUSTRY
i. Firm Characteristics
ii. Marketing Channels
iii. The Use of Marketing Support and the Internet
iv. Medium of Payment and the Use of Export Financing Support
v. Export Financing Related Difficulties
B. THE HEAVY MANUFACTURING INDUSTRY
i. Firm Characteristics
ii. Marketing Channels
iii. The Use of Marketing Support and the Internet
iv. Medium of Payment and the Use of Export Financing Support
v. Export Financing Related Difficulties
C. THE HIGH-TECH INDUSTRY
i. Firm Characteristics
ii. Marketing Channels
iii. The Use of Marketing Support and the Internet
iv. Medium of Payment and the Use of Export Financing Support
v. Export Financing Related Difficulties
VI. SUMMARY.................................................................................................133
7. CONCLUSION AND POLICY RECOMMENDATIONS..................................146
I. SUMMARY OF THE FINDINGS.................................................................146
H. POLICY RECOMMENDATIONS.................................................................149
8. SUGGESTIONS FOR FUTURE RESEARCH....................................................155
I. Questionnaire.................................................................................................... 157
II. Mailing Process.............................................................................................158
HI. Sector-Specific Surveys................................................................................ 159
IV. Feasibility.......................................................................................................159
V. Remarks............................. ............................................................................ 160
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vii
BIBLIOGRAPHY............................................................................................................ 161
APPENDICES................................................................................................................. 173
I. SUMMARY DESCRIPTION OF LETTERS OF CREDIT........................... 170
H. THE QUESTIONNAIRE............................................................................... 176
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viii
LIST OF TABLES
TABLE 1..................................................................................................................... 137
TABLE 3SE................................................................................................................ 140
TABLE 4SE................................................................................................................ 142
TABLE 5SE................................................................................................................ 144
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ABSTRACT
In recent years, there has been increasing recognition of the export potential of
Small and Medium-Sized Enterprises (SMEs) to improve the persistent trade and
current account deficit. The needs of SMEs are different from those of Large
Enterprises (LEs). While LEs can generally obtain their own finance and marketing
information with little difficulty, it is generally agreed that SMEs lack ready access to
commercial sources of marketing and finances. While, public support agencies and
export assistance programs have been established on the grounds of market
imperfections and externalities, assessments of their efficiency and the usefulness of
their services to the SMEs are rare.
This paper presents the findings of sample survey on the use by, and usefulness
to, SMEs in southern California of the financial and marketing services provided by
non-profit agencies in that region. In this study, it is evident that government
intervention in the form of public support is justified on the grounds that there are real
externality problems. However, also evident is the fact that the existing public support
may not be addressing the imperfections of the market mechanisms appropriately.
Inefficiencies in the provision of export assistance are found in the areas of both
marketing and export financing support. Based on the evidences provided by the
available literature, and also from the findings of this study, policy recommendations
and guidelines for reform are given.
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1
CHAPTER 1
INTRODUCTION
Ever since the 1980s, the persistent weak world trade position of the U.S. has
challenged policy-makers, businessmen, and scholars to identify ways of reducing the
overall trade and current account deficits. Doing something about the trade deficit is
not simply a national problem, but has also become a major issue to be dealt with at
the state level (Kotabe and Czinkota 1992). While one way to reduce the U.S. trade
deficit would be to impose and legislate import-restrictive measures and policies, such
measures could have harmful consequences for long term efficiency. Arguments
supporting import-restrictive measures are often applied in developing countries,
though less so, of course, in the United States. Even so, however, import-restrictions
have often resulted in counteracting responses from other countries and otherwise
have proven harmful to long run competition, efficiency and economic well-being
(Krugman and Obstfeld 1994; World Bank 1993; Ford et al.1 1987; Cavusgil 1984;
Business Week, 1978 and 1980).
1 This is based on work undertaken by the Developing Country Export Research Group. In addition to
the author, the members of the group are Colaiacovo, Czinkota, Laurent, Leonidou, Opena, Perkal,
Singh, Steward, Tan and Xouris.
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Another more positive way to reduce the U.S. trade deficit would be through
export-promotion. In addition to the direct effect of reducing the trade deficit, export
promotion and expansion can also have the effect of reducing unemployment,
stimulating technological and marketing innovations, and encouraging specialization
and efficiency (Cavusgil 1984; Jain 1989). It has been estimated that one billion
dollars worth of exports create approximately 22,800 to 30,000 jobs (Kotabe and
Czinkota 1992; Perry 1992; Davis 1989; Martinoff 1988; Truell 1987; Robock 1993),
and also generate twice as much worth in GDP, together with 400 million in state and
federal tax revenues (Shaw 1977; Kotabe and Czinkota 1992). In sum, exports are key
to the growth of an economy (Cavusgil 1984; Root 1994; Jain 1989).
Despite the evidence that attests to the benefits of exporting, export data of the
United States reveals the United States to be a passive exporter. While the other large
exporting nations export to an average of 20 percent of their GDP, the U.S. lags far
behind with exports amounting to only 7 percent of GDP. While, U.S. exports
reached 400 billion dollars in 1990, they would exceed 1 trillion dollars if the U.S.
matched the performance of other major exporting nations as a percentage to GDP
(Perry 1992). Today, the “U.S. has reached a watershed in its economic history, and
the nation must either export more or accept a lower standard of living” (Kathawala,
Judd, Monipallil and Weinrich 1989).
Traditionally, the focus of export promotion has been on Large Enterprises
(LEs), but there has been a shift in focus during the wake of the 1980s towards Small
and Medium-sized Enterprises (SMEs) because of the “diminishing effects of export
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3
promotion expenditures on the export behavior of LEs as well as the underutilized
potential of SMEs” whose presence in exporting only recently began to be fulfilled
(Ramaswami and Yang 1990). Indeed, some have estimated that 80 percent of U.S.
exports come from the top 200 companies in the Fortune 500 (Perry 1992; Klein 1990;
Buckley and Brooke 1992; Jain 1989), and that among the SMEs which export, only 6
to 7 percent of their total sales are from foreign markets (Kathawala, Judd, Monipallil
and Weinrich 1989). As an additional indicator of export concentration, it is
estimated that 48 percent of all U.S. exporters sell only to a single market and fewer
than one-fifth sell to more than 5 foreign markets (Rose 1991). Nevertheless,
thousands of smaller firms are capable of exporting (Cavusgil 1984; Klein 1990; Perry
1992; Dichtl, Leibold, Koglmayr and Muller 1984). Today, the penetration of
domestic markets by new foreign competitors, which has eroded the position of SMEs
in domestic markets, causes them to look for new markets, some of which arise from
trade liberalization abroad (Papadopoulos 1987).
Based on the similar studies done on developing countries, the purpose of this
study is to investigate (1) the obstacles faced by SMEs in connection with foreign
market perpetration and expansion, and (2) the effectiveness of public marketing and
export financing support in assisting SMEs.
Chapter two reviews the relevant literature pertaining to studies done on SMEs
in the U.S. .The general trade and financial environment is discussed from the
perspective of their effects on SMEs, as well as documented imperfections in the
existing public and private support systems.
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Chapter three records the interviews that were done prior to and during the
course of the study by our project team. Interviewees include CEOs of corporations,
officers of public support organizations, and officers of various private financial
institutions (i.e. banks).
Chapter four is a discussion on the various export assistance organizations and
their programs. The discussion is confined to the following agencies: (1) the Export-
Import Bank (EXIMbank), (2) the California Export Finance Office (CEFO), (3) the
Los Angeles Area Chamber of Commerce (LAACC), (4) the Small Business
Administration (SBA), (5) the Department of Commerce (DOC), (6) the Overseas
Private Investment Corporation (OPIC), and (7) the Agency for International
Development (AID).
Chapter five is a discussion on the methodology used for this study. This
section includes a brief outline of the data collection process and the research tools
employed for data analysis.
Chapter six records the results of the study. The sample SMEs were analyzed
collectively as well as by sample segregated by sectors. Explanations to the results
were discussed in connection with information derived from the review of the
literature and the interviews.
Chapter seven concludes the findings of the study. Also presented in this
chapter are suggestions for program reform and policy recommendations.
Chapter eight is an outline of suggestions for future research. The suggestions
were based on the experience of members of the project team, and they include ways
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to improve the response rate of surveys, and the investigation of issues that are beyond
the scope of this study.
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CHAPTER2
REVIEW OF THE LITERATURE
A large body of literature has been dedicated to explaining the difficulties that
SMEs face in penetrating and expanding exports in the international markets as well
as documenting the factors underlying export success. Past research has led to the
listing of numerous factors related to export success which can often be summarized
under the following headings: product characteristics, organizational characteristics,
marketing factors, management factors, technological characteristics, and
environmental factors (Kammath, Rosson, Patton and Brooks 1987). In the following
paragraphs we shall discuss some of these factors in greater depth, and in particular
look at the internal factors as well as the external factors that ultimately determine the
export decision of SMEs.
L EXPORTING AND THE FIRM-RELATED ENVIRONMENT
A. Exporting as a Learning Process
Studies that relate internal factors with export success often center around the
idea that export expansion is a learning process (Johanson and Vahlne 1977; Bilkey
1978; Reid 1981; Cavusgil 1982; Beliveau 1987; Cavusgil 1980; Gronhaug 1977;
Johanson and Wiedersheim-Paul 1975; Piercy 1981; Steinmann, Kumar and Wasner
1980; Welch and Wiedershiem-Paul 1980; Wiedershiem-Paul, Olson and Welch 1978;
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Cavusgil 1984). They argue that SMEs approach international business involvement in
an experimental manner, committing resources for the newer management tasks
incrementally. As export experience grows, executives become more optimistic,
revising previous expectations of risk downwards and profits upwards. (Denis and
Depelteau 1985; Cavusgil 1984).
The exceptions to this are Brooks and Rosson (1992) as well as Kotabe and
Czinkota (1992) who did not find a revaluation of profit perceptions among exporters
with an increase in experience. Cavusgil (1984), based on his study of 816 firms in
Wisconsin, argues that it is growth (not profits) that firms seek when they engage in
export activities, and that profits may be viewed as a secondary consideration.
Nevertheless, Kotabe and Czinkota, based on their study of 500 manufacturing firms
in mid-westem states, comment that although the initial expectations of higher
profitability did not materialize, “exporters have become more flexible and resilient
competitors in the domestic market than non-exporters, thanks chiefly to economies of
scale in production, ease of weathering sales fluctuations at home, and prospects of
foreign sales increase in the near future.” Therefore any export stimulus to a firm will
still prove invaluable, regardless of the perceptions of profitability. Based on this
paradigm, many studies have tried to shed light on factors that might impede the
initial stages of exporting.
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8
B. Miles’ Model and the Task Environment
According to Miles (1980) there are two types of models - the contingency
models and the process models. The contingency models emphasize the constraints
posed by the external environment (describe the fit between the organization and its
environment), while the process models focus on the process by which the
organization manage these constraints (stress the process by which those fits are
managed and engineered). Recognizing that both perspectives are needed for a
balanced view, Miles’ integrated model of the “process of organization to the
environment” warrants a better understanding (Percy 1992).
In Miles’ model, because of the existence of personal filters and blind spots
which result in asymmetric view of any situation, the firm is confronted with an
environment divided into objective and perceived components.
The objective component corresponds to the general or international trade
environment which can be further broken down into (1) the economic environment,
(2) the political environment, (3) the legal environment, (4) socio-cultural
environment, and (5) the technological environment (Perry 1992).
The economic environment includes the persistent U.S. trade deficit, the
intractable ballooning external debt of the LDC, the gyrations of foreign-exchange
rates, the decline of U.S. competitiveness, and the entry of new international
competitors. The political environment encompasses the general international unrest,
which disrupts trade, as well as the political influences on commercial policies. The
legal environment refers to the government decisions that affect trade, such as the
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imposition or the relaxation of export controls. The social-cultural environment
accounts for the changing attitudes of consumers towards foreign products, and lastly
the technological environment includes developments in communication,
transportation, data processing, and the like.
Due to a lack of information about future events and the unpredictability of
alternatives of present decisions and their outcomes, the environment creates decision
making uncertainty (Hickson, Hinning, Lee, Schneck and Pennings 1971). When the
firm cannot cope with increased uncertainty, “decision makers have to make strategic
choices involving either a change in or alteration of internal structures or processes
that will result in close alignments with the perceived environment” (in the
contingency approach), “and/or a change in or manipulation of the external
environment” (in the process approach) (Perry 1992). For Miles, the “perceived
environment has greater immediacy than the general or objective environment”
because it is the level at which decision-makers react.
Perry (1992) argues that proper identification of the environment is essential,
since in Miles’ contingency perspective, a good fit between the firm and the
environment is needed for the firm to be successful. As was first developed by Dill
(1958), a more concrete notion that properly addresses this perspective is the concept
of the task environment. The task environment can be regarded as “those stimuli to
which the organization might respond,” which differ from the general (objective)
environment. What the firm perceives of the general environment is important
because unless the effects of the environment is concretely felt at the firms’ task-
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environment level, environment factors are of no value to the export decision
structures of SMEs.
C. Perceived Barriers
Ramaswami and Yang (1990) argue that common problems faced by firms are
“poor knowledge of the market, unknown market needs, a lack of awareness of
available export assistance programs, and a lack of appreciation of the potential value
of exporting.” Therefore, attention should be focused on stimulating SMEs to export,
studying market needs and assisting firms in fulfilling these needs.
Dichtl, Leibold, Koglmayr and Muller (1984) developed the concept of
“threshold fears,” which can be broadly defined as exporting barriers as perceived by
SMEs. They argue that the threshold fears of non-exporting SMEs “according to
objective criteria dispose of unutilized export potential,” and that when these
threshold fears (as the first step) are conquered, then secondary problems such as
“specific marketing strategies pose no fundamental problems.”
The importance of considering perceived barriers into the picture of exporting
is well documented throughout the literature, and is perhaps a variable that has been
associated with exporting more than any other. (Bilkey and Tesar 1977; Lee and
Brasch 1978; Czinkota and Ricks 1981; Huszagh 1981; Dichtl, Koglmayr, Leibold,
and Muller 1984; Bauerschmidt, Sullivan, and Gillespie 1985; Ramaswami and Yang
1990; Kotabe and Czinkota 1992).
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Generally, SMEs tend to have very simple decision structures (Mintz 1967;
Miller and Friesen 1980), and hence the “perception of the decision maker will
inevitably dominate the mere existence of any barriers to exporting” (Ramaswami
and Yang 1990). Unlike LEs who generally possess adequate financial as well as
human resources to engage in sophisticated research before making an international
decision, several studies reveal that SMEs generally make their first international
decision in a non-rational manner (Cavusgil 1980; Kothari 1978; Bilkey 1978; Bilkey
and Tesar 1977; Cavusgil and Nevin 1981; Papadopoulos 1987).
Objective information is perceived differently by decision makers of SMEs
according to the stage and degree of exporting that the firm has been exposed to, thus
the task environment are different for exporters and non-exporters. The implications
for policy makers thus become more profound and complex. Varying task
environments imply that the needs of SMEs vary greatly from one to another. Thus,
unless policies address these different needs, policy outcomes will inevitably be
inefficient. Cavusgil (1984) made it clear that “there are exporters with different
make-ups and different needs. Therefore, promotional assistance designed with a
typical exporter in mind will lead to a waste of resources as well as unsatisfactory
results.”
Kedia and Chhokar (1986) argue that “exposure to or experience in exporting,
however small or limited, can make a crucial difference in the outlook of a company,”
and that the “programs needed to stimulate non-exporters to begin exporting will be
different than those needed to help exporters increase their exporting activities.”
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Further, needs, perceptions and factors which inhibit exporting are different across
industries, thus “broad export promotion programs may not be effective in tapping the
export potential of SMEs as programs intended to meet the needs of individual
industries” (Kedia and Chhokar 1986). Based on their study of ninety-six firms in
Louisiana, Kedia and Chhokar conclude that non-exporters consider the lack of
exporting know-how (which includes knowing how to market overseas, obtaining
information on prospects and foreign markets, knowing foreign business practices,
and knowing export procedures) as major difficulties to exporting. On the other hand,
for exporters, the important inhibitors to exporting vary with the stage of export
process in which the firm finds itself, and that informational barriers tend to dominate
the decisions of new and inexperienced exporters (see also Ogram 1982;
Alexandriedes 1971; Pavord and Bogart 1975), while the financial and marketing
barriers dominate the exporting decisions of experienced firms (Kedia and Chhokar
1986).
n. MANAGEMENT AND FIRM CHARACTERISTICS
A. Managerial Commitment to Exporting
A major predictor of the export behavior is the strength of the commitment of
managers to export, rather than any factor external to the firm (Tesar 1975; Cavusgil
and Nevin 1981; Bauerschmidt, Sullivan and Gillespie 1985; Kotabe and Czinkota
1992; Perry 1992). The management’s interest in pursuing fundamental goals such as
profits, growth and diversification can be crucial to export market performance. Tesar
(1975) maintains that positive perception of profit and growth is a motivator for
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exporting, while negative attitudes tend to inhibit exporting. Cavusgil (1984) asserts
that managerial aspirations and expectations appear to be the best predictors of export
activity within a firm, and that “stepping up of export market involvement is primarily
dependent on how desirable managers view the effects of this activity on growth and
market development.” Simmonds and Smith (1968) contend that “innovative
exporters exhibit the characteristics of enterprise,” and this implies a high degree of
risk tolerance, aggressive drive and profit motivation (Cavusgil 1984).
Conversely, lack of commitment to consistently explore the conditions for
successful foreign market operations often result in SMEs being indifferent towards
exporting (Cavusgil and Nevin 1981). This indifference will in turn lead to a half
hearted attitude toward export sales and failure to adapt to foreign market
requirements (Jain 1989). Those firms that lacked commitment to exporting (does not
necessarily mean they are not exporting) generally regarded export sales as a way of
utilizing surplus capacity. This implies that a low priority is placed on allocating
adequate resources to the appropriate markets according to their relative importance,
which inevitably results in inefficiencies and lost opportunities (Jain 1989).
In view of the fact that the task environment of SMEs differs across industries
and are dependent also on the stage of export process of the firm, Cavusgil (1984)
argues that “to accomplish substantial improvements in exports, government action is
likely to be more effective where it is designed to make an impact on basic
management attitudes and expectations concerning the contributions export marketing
can make on firms’ goals;” and from a firm’s perspective, “since exporting seems to
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14
be closely related to management’s growth expectations and the strength of their
aspiration for growth, achievement and growth should be emphasized in training
managers.”
B. Managerial^ Experience to Exporting
Managerial background and experience has been cited as a contributing cause
to the success or failure of SMEs. Since most of the decisions of SMEs are dictated by
a single manager/owner, or a few partners, the experience of the manager in related
business will be crucial in the overall well-being of the firm. Based on a study of 30
SMEs located in northwest Wisconsin, Steiner and Solem (1988) found that all the
managers of successful firms have prior experience in a related business, whereby
only 75 percent of the managers of the less successful firms have similar experiences
in a related business.
C. Managerial Age and Education
Given the paradigm that views exporting as a learning experience, one would
think that the age and education of the management will be crucial in the success of
the firm. This logic stems from the fact that experience increases with the age of the
management and the assumption that the more education the management receives,
the more able is the management to make decisions on a rational basis, and the more
updated is the management’s perspective on global issues, as well as new marketing
techniques. Hitherto, the relation of age and education to the success of a firm in
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exporting has remain inconclusive. While some have found age and education to be a
variable significant in explaining the export behaviors of SMEs, others did not find
them to be significant (Steiner and Solem 1988).
D. Ability to Adopt New Technologies
Steiner and Solem (1988) maintain that “the ability of a company to adapt its
production operations to changes in markets, products, raw material and labor costs,
labor availability and technology is critical to successful operations over time.” In
their study, Steiner and Solem divided their sample into “successful” and “less
successful” firms, and then comparatively look at the different managerial and
operation characteristics with respect to the two classifications. As noted in their
study, SMEs generally understand the importance of the above-mentioned factors,
however, most SMEs are often slow and reluctant to implement changes in their
production operations, and those who are reluctant to implement these changes often
result in less successful operations. Among the successful firms in their study, half
have indicated a change in their production technology, while only 13 percent of the
less successful firms have done so. In the same sample, 77 percent have acknowledged
that technology within the industry has changed, suggesting “widespread awareness of
the need for such changes.” This failure to adopt new technologies, the authors
suggest, “may be related to financial constraints.” Although managers of both the
successful and less successful firms “complained of less than adequate financial
resources or access to financial resources overall, most of the successful firms had
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adopted new technologies” (Steiner and Solem 1988). They argue that this is because
managers of successful firms tend to perceive the ability of successful operations (as a
result of technological improvements) able to “attract or to locate additional financial
resources.”
HI. MARKETING RELATED CHARACTERISTICS
A. International Market Selection (IMS)
Difficulty in locating foreign opportunities and markets is perceived to be a
major barrier in exporting (Alexandredes 1971; Pavord and Bogart 1975; Ogram
1982; Bilkey and Tesar 1977).
Papadopoulos (1987) argues that taking the appropriate steps towards foreign
expansion can be a “major determinant of the SMEs’ well being in the future,” and
that the selection of target markets is an important step in this direction. Suboptimal
market selection can be costly, especially for SMEs. In addition to the immediate
costs involved in attempting to enter low potential markets o f intense competition,
selecting an unsuitable market can lead to outright failure to penetrate a given market
and may result in dampening the firm’s export enthusiasm (Welch and Wiedersheim-
Paul 1980).
On the other hand, “systematic International Market Selection (IMS) can help
the firm build upon the experience gained in certain markets by applying them to
other countries that are characterized by similar conditions” (Papadopoulos 1987) and
consistent with the learning process paradigm, successful IMS can enhance the
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efficiency of the task of international activity coordination once the company has
expanded beyond its first few foreign markets.
Based on sophisticated manipulation of sets of secondary indicators of market
potential, numerous IMS techniques have been suggested in related literature (Bames
1980; Papadopoulos 1983; Conners 1960; Bartels 1963; Sethi and Holton 1969; Sethi
1971; Etemad 1981; Dole and Gidengil 1977). Indicators that were used typically
include measures of economic growth, industrial development, infrastructure and
political stability. However, apart from the theoretical limitations of these techniques,
and in light of the fact that SMEs rarely possess adequate temporal, financial and
human resources for IMS tasks (Rabino 1980a; Beliveau and Billardon 1984; Denis et
al. 1984; Beliveau 1987), the complexity, costs and information requirements of these
IMS techniques are simply too high for SMEs to use.
In light of the obvious weaknesses of the SMEs, Beliveau (1987) argues for
active government participation by undertaking research at the macro-level by
identifying industries and product classes that represent attractive long-term
opportunities. However, it should be noted that the general performance of
governments in areas of marketing information gathering and export promotion is
often unsatisfactory, even in the developed countries (Ford et al. 1987).
Papadopoulos (1987) identified two factors that are generally operative in the
market selection decision of SMEs: (1) the potential influence of government policies,
as “manifested in the recommendations given to SMEs by public agencies,” and (2)
the ethnic affinities of the SME’s decision makers. While, in principle, public
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agencies can be of great help in advising SMEs on market selection, their advice is
often found to be excessively general, and does not necessarily account for the unique
needs of each specific firm or even sector. The “ethnic affinity” factor in determining
export targets by SMEs is quite understandable, SMEs want to deal with potential
markets which are perceived to be “psychologically near.” A lack of exposure to other
cultures can cause communication barriers (Robino 1980b), and the failure to
understand the cultures and practices of potential foreign markets will result in
psychological distance (Kedia and Chhokar 1986), yet the fact remains that
understanding foreign cultures and practices may not be easy (Bilkey 1978; Tesar and
Tarleton 1982).
It has been estimated that over 70 percent of Canada’s exports to Japan are
made by nine Japanese trading companies located in Canada, much of Canadian-
Italian trade are conducted by Canadian managers of Italian origin, and that a similar
exporting pattern can be said about the Swedish SMEs in Canada (Wright 1984). The
effects of ethnic affinity are also evident in Indonesia among the non-pribumi
(Chinese) exporters, as documented by Levi and Berry (forthcoming). In their study,
Levi and Berry note that in the rattan furniture industry, 63 percent of initial export
contacts of non-pribumi Indonesian firms were made outside the country, while only
15 percent for their pribumi counterparts. And in the garment industry, 53 percent of
initial export contacts of the non-pribumi firms were made from pre-existing networks
outside the country, while none were recorded for the pribumi firms.
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Complementary to this finding on the impact of the ethnic affinities of SMEs’
decision makers on IMS is the issue of managerial’s education and executive
commitment as explained by Kotabe and Czinkota (1992). The authors argue that
while the growth of a firm appears to be a necessary condition for increased export
involvement (see also Cavusgil 1984), it is the executives’ commitment to exporting
as “demonstrated by cultural awareness manifested in their foreign travel experience
and interest in foreign cultures” that appears to be the “underlying force to get their
firms involved in export businesses.” This broader extension reveals to us that
paramount to the executive’s ethnic affinity is the executive’s willingness to learn and
the executives’ interests in other cultures that is key to the growth of exports to a more
diversified portfolio of target countries.
B. Experiential Knowledge and the Use of Trade Missions
Related to the topic of IMS is the influence of the usage of trade fairs and
missions on export expansion. The Denis and Depelteau study (1985) is relevant here,
and although this study was done on samples located in Canada, the conclusions are
generalizable and are relevant to the United States since Canadian trade environment
is similar to that of the U.S-
Based on a sample of 331 manufacturing SMEs located in Quebec, Denis and
Depelteau has focused on the export expansion process of SMEs and some of its
correlates: diversification and geographical market distribution, means of acquiring
information and modes of international distribution. The authors argue that “greater
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the attendance at fairs and missions, and market diversification, the faster the rate of
expansion;” once an exporter has gained experience, export expansion depends
“largely on his ability to diversify into different foreign markets.” Denis and
Depelteau found that information gathering is a constant determining factor in the
process of export expansion, and that the most valuable information is obtained in the
field, in the “course of business transactions rather than through officially established
information services, whether private or public.” Thus the focus of information
activities should be on identifying and satisfying precise information needs, rather
than contributing to the already abundant and often redundant body of general
information available. This study suggests that, since fairs and missions have a greater
impact on propensity to export, government funds should be spent on “field activities”
rather than on expansion of homebased bureaucracies.
C. Information and Deliberation Councils
The transmission of information and the facilitation of communication
between the government and the private enterprises are integral to the constructs of a
good public support system. In the United States, while public agencies like the
Department of Commerce and the EXIMbank have been integral in the formulation of
policies and legislation that pertain to SMEs’ well being, the SMEs themselves, have
not risen to be an active participant in the policy-making process. This implies that
existing policies reflect largely the issues as viewed from the standpoint of the
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agencies, rather than the views of SMEs themselves. This lack of SMEs’ voice in the
deliberation of policies has proved to be costly.
De Nobel, Castaldi and Moliver (1989) note that exporters are generally
skeptical of any government sponsored programs. Based on a study on 129 SMEs in
the states of Oregon, Washington and Idaho, Albaum (1983) indicates that
“government export assistance programs are generally viewed unfavorably by small
business exporters, and that most of the firms in the sample (80 percent) began
exporting as a result of company sales efforts or an unsolicited inquiry.” These
attitudes stems from the generally distrust in the U.S. government to address the issues
as faced by SMEs seriously, indicating a lack of credible commitment in the part of
the U.S. government.
Czinkota and Crick (1995) (see also Czinkota and Rick 1981) reveal in their
study that the issues that SMEs view as pertinent to export promotion have not always
been consistent with the types of assistance that they have requested for from the
public agencies. This mismatch between SMEs’ needs and the assistance rendered by
the public agencies suggests that the programs offered by the various public support
organizations have been utilized inefficiently, and that the cost of these different
programs may have outweighed the benefits from the increase in exports. Czinkota
and Crick point out that “although the government appears to be providing what firms
request,” this often does not register fulfillment of SMEs’ needs, and that the
assistance often do not translate to improvements for SMEs because “firms may
simply be requesting what the government currently has to offer.” This clearly
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suggests that exporters must be more willing to let government policy makers know
exactly what support is required to enhance export performance. A formal quasi
public-private institution established for the purpose of policy making, whereby more
SME voice is incorporated, can mitigate this information asymmetry and increase the
credibility of government programs.
Deliberation councils are formal institutions that facilitate communication and
cooperation between the private and public sectors, and they have been integral to
contribute to the rapid growth in many High-Performing Asian Economies2 (HPAEs)
(World Bank, 1993). In these different countries, deliberation councils are generally
represented by government officials, as well as, representatives from the private
sector, and specifically from business, labor, consumer, and academia.
In Japan, the deliberative councils are organized along two distinct lines - by
function (themes) and by industry. Deliberation councils are always included in the
process of policy formulation, and unless approved by the council, any policy
formulated by the Ministry of Trade and Industry (MITI) “stands little chance of
success” (World Bank 1993).
While the purpose of deliberation councils clearly promote communication
and private-public cooperation, the structure of the council often raises questions
concerning opportunistic and rent-seeking behaviors on the parties involved. However,
as observed in the cases of the HPAEs, and specifically Japan and Korea, rent seeking
behaviors are reduced by mechanisms of contest that were established among firms.
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The success of the deliberation councils, in part, rests on clear rent-sharing
rules and contest. In deliberation councils, where when rent-sharing rules are
transparent and each participant can be assured of a share of rents, “members can
concentrate on market competition and not worry about others trying to curry special
favors from the government” (World Bank 1993). The involvement of the private
sector as an active participant establishes credibility, and because contest was created,
this in part reduces the tendency for cheating and reneging. The various forms of
contest reduce the “private resources devoted to wasteful rent-seeking activities, thus
making more available for productive endeavors.” In view of the fact that private
sector is more active in drafting rules, and “because the process was transparent to all
participants, private sector groups became more willing participants in the
leadership’s development efforts” (World Bank 1993). A successful deliberation
council is a wealth-sharing mechanism, and can prove invaluable to the United States.
IV. THE EXPORT FINANCING RELATED ENVIRONMENT
A. The Value of the Dollar
The high value of the dollar is a dominant factor that has been associated with
the rise in the trade deficit. We know through basic macroeconomic mechanisms that
a rise in the value of the dollar has the effect of making the price of many U.S.
tradables uncompetitive in the world market by making the composite tradables of the
rest of the world relatively cheaper than their U.S. counterparts. However, as Perry
2 The countries included are Japan, Indonesia, Thailand, Rep. of Korea, Taiwan, Malaysia, Hong Kong
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(1992) noted, the converse did not materialize as the value of the dollar depreciated
from its peak in 1985 after concerted efforts by the Group of Five (the United States,
Japan, Germany, England and France). It is believed that the drop in the dollar has not
led to a substantial rise in exports as expected because the dollar dropped against a
handful of currencies (mainly the mark and the yen) but held steady or even rose
against many others. This is evident in countries such as Canada, Brazil and North
Korea whose economies were among the rising competitors for many U.S. industries.
Moreover, the expected changes in the prices of imports and exports were spotty and
uneven, and many consumers were not responding to price changes as was
anticipated.
Between the period of August 1985 to March 1986, the dollar depreciated 24
percent relative to the Japanese yen, and assuming the prices of U.S. goods remained
unchanged in dollars, the landed price in yen of U.S. goods should also have declined
by the same 24 percent and would have been passed on to Japanese consumers by the
Japanese distributors. However, as Kvasnicka (1986) notes, this depreciation was not
passed on to the Japanese consumers. Kvasnicka (1986) notes that due to the
oligopolistic structure that is exhibited in Japanese distributors, most U.S. exporters
and Japanese distributors chose to absorb the implicit price reduction, thereby
increasing their profits. And because the prices of the U.S. goods in yen were left
unchanged, the level of U.S. exports also remained unchanged.
and Singapore.
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Even when the prices were adjusted after the depreciation of the dollar relative
to the Deusch Mark and the Japanese Yen, it has been estimated that the level of
exports of Japanese and German goods actually rose is some regions. It is believed
that many Japanese and German goods are price inelastic relative to U.S. goods, and
are sold on the basis of product sophistication and perceived superior quality (see also
Rudolph 1986; Sease 1987).
In addition, it has also been noted that there has been a rising tendency for
foreigners to produce foreign goods in the United States. For example, Japanese color-
TV manufacturers have been producing in California, Arkansas, and Tennessee (Jain
1989). These arrangements, individually and collectively, have effectively dampened
the positive effects of a depreciating dollar on trade.
B. The Debt Crisis
The 1980s was a decade characterized by a debt crisis for a number of less
developed countries (LDCs), the result of the crisis was a marked decline of
purchasing power in these countries. In order to meet debt obligations, these countries
had to expand exports and reduce imports. It has been estimated that between 1981
and 1983, the decline in exports to Latin America accounted for almost half of the
total decline in exports (Martin 1984).The International Trade Commission concluded
that in 1985 alone, the debt crisis caused U.S. exports to decline by 5 billion dollars
and imports to rise by 8.7 billion dollars (LDC Debt 1987). Besides a decline in
exports, U.S. companies have “suffered from delays in payments and costly red tape”
(Perry 1992). The inability of countries such as Brazil, Mexico, Argentina, Portugal,
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and the Philippines to pay back their foreign loans creates uncertainty for the domestic
exporter about foreign market potential that results from the threat of default,
delinquency or even rescheduling of debt repayment (Jain 1987).
Based on field interviews with thirty-five International Trade Intermediaries
(ITIs), mainly small trading companies, Perry (1992) documents that the debt crisis is
perceived by ITIs to be the dynamic environment factor with strongest impact on their
task environment, next to foreign exchange volatility and increased foreign
competition
C. Withdrawal of Commercial Banks From Export Financing
The impact of the LDC debt crisis on financial institutions has been well
documented. In the late 1970s and early 1980s, along with the government,
commercial banks were among major holders of LDC debt, much of which became
delinquent or in default. In addition, the rise in loan default rate to LDCs has made it
difficult for domestic firms to obtain working capital from banks and other public
institutions to finance operations to these countries. As increasing numbers of LDCs
become incapable of servicing their external debt, U.S. commercial banks are “very
reluctant to offer export financing to the buyers in these highly indebted countries.”
Moreover, many banks have “reached their limits for these countries and are wary of
extending new loans” (U.S. Congress 1988).
Based on the study by the Subcommittee on International Finance, Trade and
Monetary Policy (U.S. Congress 1988), out of a sample of 98 firms surveyed, only 4
percent of the responding companies reported having experienced difficulties in
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obtaining financing for sales to Europe, Canada and Japan. For the Newly
Industrialized Countries (NICs), the percentage of sample firms reported having
experienced this difficulty in financing sales was 13.4 percent. In contrast, 53.1
percent reported having experienced difficulties in obtaining financing for sales in
Latin America; 43 percent in South East Asia, 42 percent in Africa, and 30 percent in
Eastern Europe.
A major factor the study cited for the rising withdrawal of banks from U.S.
export finance is the lack of profitability in export financing. Due to an increased
number of bank mergers and acquisitions, and advancements in automation, as well as
an increase in the amount of deregulation of interstate banking (Nugent 1996), U.S.
commercial banks are now faced with a “greater level o f competition than ever
before,” and this has caused banks to “concentrate more on short term profit oriented
services and less on traditional international lending, including export financing”
(U.S. congress 1988).
Among the reasons for the lack of profitability in export financing are: (1) the
fact that export financing is labor intensive, and therefore more costly, (2) the
allegedly “low success ratio” of most export transactions, (3) the high level of
“overhead cost for providing export financing” relative to the size of transactions, and
(4) changes in the regulatory environment and tax policies.
Two important changes of the latter type are the following. First, tax
advantages, such as the Tax Reform Act of 1986, which allowed U.S. firms to be
credited for foreign taxes paid on export related earnings did not apply to banks This
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effectively reduces the foreign tax credit on interest income received from export
financing - leading to a decline in export financing.
Second, increases in the minimum capital-to-asset requirements in 1981, and
again in 1985, have discouraged banks from international lending and export
financing. Also, measures taken to ensure the soundness of the banking industry, such
as the International Lending Supervision Act (ILSA)3 of 1983 and the Basle
Agreement of 1992, have effectively “increased the administrative burden of
international lending” (U.S. Congress 1988). This has discouraged banks to assume
foreign risks, and has reduced export financing to SMEs.
D. Changes in the Banking Environment and Their Effects on SMEs
It has been an established fact that commercial banks are among the leading
sources of SME financing, as is confirmed in this study as well as by numerous others
(Stanley, Roger and McManisl993, Rose 1986, Eisemann and Andrews 1981, Watro
1982, Glassman and Struck 1982, Whitehead 1982, Dunkleberg and Scott 1985). Also
well established is the fact that the bulk of SME finance coming from commercial
banks is from small and medium-sized banks (SMBs) rather than large banks (LBs)
(Rose 1986, Glassman and Struck 1982, Personal Communications with Frieze, J. 12
Nov. 1996).
3 The International Lending Supervision Act (ILSA) mandates additional reporting and disclosure
requirements ofU.S. bank lending to foreign countries and directed federal hanking agencies to ensure
that U.S. banks maintain adequate reserves against foreign country risks (see Houpt 1988).
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During a field interview with Jill Frieze (12 Nov. 1996), a Vice President at
Imperial Bank, she commented that “Imperial Bank, the eighth largest bank in
California, usually requires that the transaction to be financed be at least one million
dollars. Any transaction under a million is not viewed as a target relevant for Imperial
bank.” She further noted that “larger banks like Bank of America would usually work
only with a customer requesting for a minimum of 3 million dollars credit,” and that
“any customer that is not viewed as a target customer is usually referred to a smaller
bank or public agency for the deal.” As noted earlier, a major reason for this
discriminatory behavior is the fact that export transactions are usually viewed as
unprofitable, especially for smaller transactions where the process is time consuming,
the overhead cost is high and the returns are low.
It has been estimated that 40 percent of the total volume of SME loans are
accounted for by smaller banks, 37 percent of those loans are accounted for by
medium-sized firms, while only 23 percent of the remaining loans are accounted for
by large banks (Glassman and Struck 1982).
As noted by Nugent (1996), recent decades have been marked by an increased
number of bank mergers and acquisitions, and advancements in automation, as well as
an increase in the amount of deregulation of interstate banking. As a result, there has
been a proliferation of studies examining the effects of this trend on SME financing.
While some studies have maintained that the rise in LB acquisitions and in nationwide
banking facilities presents no threat to SME financing (Rose 1986), others have
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argued otherwise (Bolger 1981; Lynch 1980). In the next few sections, various aspects
of this issue will be recapitulated and discussed in the context of SME financing.
E. Foreign Ownership of U.S. Banks and The Availability of Loanable Funds to
SMEs
Based on a study o f608 commercial banks, Stanley, Roger and McManis
(1993) attempt to establish the relationship between the availability of loanable funds
to SMEs and the bank characteristics of size and ownership. They note that the total
loans to assets ratio is similar across banks of various ownership status and size, and
that while this ratio has increased over time, there has been, however, an increasing
trend for banks, in general, to shift their portfolio away from business and consumer
loans towards real estate loans. While this trend was observed in all banks, it was
more significant among domestic commercial banks than among the subsidiaries of
foreign banks.
In their study, Stanley et al. (1993) also note that there exists no evidence of
differences in provisions for loan losses, gross chargeoffs or recoveries across
ownership status, thus implying that the differences in composition of the portfolio
between domestic commercial banks and their foreign counterparts do not create a
systematic bias towards bad loans.
They further point out that, in the restructuring of portfolios by banks, the
distribution of business loans by large foreign-owned banks between domestic and
foreign borrowers has actually shifted in favor of domestic small businesses. Hence,
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in summary, they maintain that “for a small business person seeking a loan, foreign
ownership of a commercial bank is probably beneficial,” and that “this ownership
form not only allocates a higher proportion of loans to the commercial sector, but is
also more resistant to large changes over time.” More speculatively, this might be due
to the greater emphasis on business, and especially SME loans, in their home
countries.
F. Interstate Banking and SME Financing
In light of the fact that the bulk of SME financing comes from the SMBs,
mergers and acquisitions among LBs should therefore harness little effect on SME
financing. It is when LBs acquire SMBs that SME financing could possibly be
adversely affected by a reduction of loanable funds to SMEs.
Rose (1986) has reviewed the literature pertaining to the effects of interstate
banking on SME financing. He focused on the issues of interstate banking effects on
local bank competition and on the supply of loanable funds to SMEs, and concluded
that the available evidence “indicates little reason to expect the supply or cost of small
business credit to be affected adversely by interstate banking.”
Rose refutes the argument that SMBs, which are important sources of SME
credit, are incapable of effectively competing with LBs (see Bolger 1981; Lynch 1980)
by noting studies that have shown LBs to have no significant advantage due to more
efficient operations (Rhoades 1985; Humphrey 1985). As was pointed out by
Humphrey (1985), economies of scale in the banking industry are not large, and tend
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to vanish beyond 50 million dollars in asset size. Rose also points out that following
acquisitions by LBs, affiliated banks have generally recorded little or no increases in
market share, thus affirming the absence of crowding-out of SMBs by LBs.
Rose notes that many existing studies have observed LBs to have higher loan
to asset ratios than SMBs (Guttentag and Herman 1966; Savage 1981; Rhoades and
Savage 1981; 1985; Mote 1974). He shows that the holding company affiliation tends
to generate larger loan portfolio for subsidiary banks (Curry 1978; Dunham 1986),
implying that it is feasible to expect a rise in the supply of loanable funds to SME in
absolute magnitude, even if the total loan to asset ratio of acquired banks is biased
towards LEs.
As deregulation of interstate banking and mergers and acquisitions of SMBs
are increasing. It is relevant to explore the effects of this trend on the effective cost of
credit Is this trend going to increase or reduce the effective cost of credit? Rose
(1986) argues that lower rates can result if these interstate banks enjoy “lower costs
due to economies of scale or significant risk reduction from geographic
diversification.” While the effects of economies of scale are dismissed on grounds of
the evidence presented earlier, Rose believes that, as was suggested by Shull (1981),
the potential benefits from diversification are more likely to have the effect of
allowing LBs to accept riskier loans, and specifically those of start-ups, than SMBs.
Although this may be possible in theory, in practice it is almost never true as was
evident in our interview with several LBs (e.g. Imperial Bank).
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The argument that Rose provides assumes, at least in part, a constant ratio of
SME loans to total loans across time. However, as was noted by Stanley, Roger and
McManis (1993), in the last decade, there has been a shift in portfolio loans towards
real estate loans at the expense of business loans. This shift is evident in all banks, but
is more significant among domestic banks (as opposed to foreign acquired banks), and
specifically domestic SMBs. Although the shift in SMBs’ total loans to asset ratio
towards real estate is more significant than their larger counterparts, it is noteworthy
that the portfolio of SMBs’ business loans is more concentrated towards SMEs than
LEs.
V. PUBLIC AND NON-PROFIT EXPORT FINANCING SUPPORT AGENCIES
There has been much dispute in the literature over the competitive
disadvantage that domestic SMEs face with regards to the export assistance rendered
by domestic Export Credit Agencies (ECAs) and those of foreign competitors. The
literature as well as several interviewees in our study have suggested that domestic
agencies are inefficient due to the lack of experience that U.S. firms and these
agencies have in exporting relative to those in foreign countries which export much
larger percentages of their GDP. However, the literature has lacked specificity in
identifying which areas are deficient and little work (if at all) has been done to show
why these deficiencies arise and how they can be removed. Hence, a closer look at the
policies and practices o f domestic agencies and those of their foreign counterparts is
warranted for a more objective view of the allegations. Due to limited studies
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available, the inconsequential role some agencies play in assisting exporters, and the
overlap in programs offered by the myriad of agencies, we shall focus our attention on
the Export - Import Bank of the United States (EXIM) and the Small Business
Administration as representative of public export financing support.
A. Export-Import Bank (EXIM) vs. Export Credit Agencies (ECAs) of the
European Union (EU)
Because of the need to comparatively analyze the structure of EXIM, we shall
also look at the policies and practices of the ECAs in EU, and in particular the five
EU member states of France, Germany, Italy, Netherlands, and the United Kingdom
(UK). The review on these EU member states is relevant because these European
states are major competitors of the United States, and collectively, they represent an
economy about 83 percent of U.S. (for 1993). In addition, these EU member states are
also more dependent on the export market that the United States (GAO 1995).
In response to a request by congressional decision makers to provide them with
information on the key differences of EXIM and the EU’s ECAs, the General
Accounting Office (1995) reviewed the issue objectively and has articulated key
differences in risk-sharing behavior and budgeting practices. These differences will be
recapitulated and discussed in the following paragraphs.
Budgeting Practices of the various ECAs differ in that while EXlM’s budget is
determined by prior estimates of its loans and guarantees for the year, the EU ECAs’
budgets for their export financing operations are determined on a cash-flow basis (the
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35
exception to this is the UK ECA). The Federal Credit Reform Act of 1990 requires
EXIM to estimate the total long term costs of its direct loans and guarantees in the
year they are authorized, therefore under this act EXIM may not incur new obligations
or commitments unless Congress specifically appropriates the budget authority for
these transactions in advance. On the other hand, the ECAs of the four EU member
states (excluding the UK ECA) are financed on a cash-flow basis, where receipts are
recorded when received and expenditures are recorded when paid regardless of the
accounting period in which receipts are earned or the costs incurred. Unique to UK is
that it requires its ECA to be self-funding on any new cover business undertaken after
1991, thus implying that UK ECA should financially break even. This is achieved by
establishing sufficient reserves and charging higher risk-based fees and premiums for
an export transaction to high risk markets.
In general, EXIM assumes more of the risks of an export transaction than do
ECAs in the five EU member states reviewed. (1) EXIM gives exporters 100 percent
political and commercial risk protection on most medium and long term covers it
issues, while most ECAs of the EU member states require exporters and banks to
share about 5 to 15 percent of an export transaction risk. (2) EXIM’s medium and
long term business are unconditional,4 while four of the five ECAs5 in the EU
reimburse claims only if specified conditions are met. It should also be noted that
4 In the event of a default due to political or commercial risks, the exporters or participating banks are
unconditionally reimbursed.
: The exception to this is the Export Credit Guarantee Department (ECGD) in the UK, which offers an
unconditional 100 percent risk coverage.
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despite offering unconditional and greater risks coverage, EXIM generally charges
lower premiums than their EU counterparts.6
Although EXIM’s unconditional risk coverage attracts exporters, it reduces the
incentives for cautious lending behavior among banks that obtain these guarantees,
thus implying that EXIM assumes more responsibility and the associated
administrative costs of reviewing applications for financial assistance. This difference
in risk-sharing proportion has also translated into differences in time spent in
reviewing applications. Because ECAs in the EU member states require some
minimum level of private-sector risk sharing in most transactions, they need to spend
less time scrutinizing applications - believing that exporters will make more
responsible judgments since they stand to lose money in bad deals. On the average, the
ECAs in the EU member states take one to two days to review an application, while
EXIM’s processing time is considerably longer.
On the other hand, it should also be noted that while EXIM takes more time
reviewing applications, they spent a significantly shorter time reimbursing claims
(within a week for loan guarantees), while their EU counterparts can be expected to
take months for the same operation. A Dutch banking official noted that the waiting
period for claims reimbursements is typically 3 to 6 months from when losses occur,
and a French official noted that small claims of 3000 dollars or less are reimbursed in
two months and all other claims takes approximately 5 months from when these
claims are submitted.
6 The exception to this being premium charged for medium-term financing to Iow-risk countries (GAO
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Long processing times and excessive paperwork performed in the United
States are often perceived as major obstacles to exporting. This perception is due
largely to the asymmetric view of the objective environment by SMEs because the
tradeoff between the time reviewing applications and the time for claims to be
reimbursed are not usually factored into the SMEs’ task environment. When smaller
firms engage in an export transaction, the perception of the risks of default is almost
always undervalued (if the risk is perceived at all). In fact, as we shall see in our study,
the default rates of foreign transactions as faced by our sample of firms are negligible,
and in every case, the domestic default rates have been higher than foreign default
rates.
B. Export Financing Support and Loan Guarantee Programs
The California Export Finance Office (CEFO), EXTM-bank, SBA and the
Overseas Private Investment Corporation (OPIC) are among the agencies that offer
export financing services to SMEs in California. While some agencies provide direct
loans and insurance to foreign buyers, a major proportion of the public agencies’
activities centers around the provision of loan guarantees and insurance to domestic
SMEs. Any discussion on the existing export financing support by public and non
profit agencies, therefore, inevitably boils down to a discussion on loan guarantees
and insurance.
1995).
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38
Loan guarantee programs being the standard for public export financing
support suggests that it should be an effective source of support for SMEs, and more
importantly, it should be a program that is cost effective for taxpayers. However, while
the effectiveness of loan guarantees to the SMEs remains difficult to verify, the
literature has indicated that such programs are in reality very costly. As of 1988, the
average default rate for all SB A loan guarantees is approximately 25 percent, which
means that one out of every four loans SB A guaranteed went sour, at the expense of
tax-payers (Rhyne 1988).
Due to a lack of empirical research done to study the effects of loan guarantees
on banks and SMEs, and in light of the fact that the programs offered by different
agencies are not significantly different from one another, we shall confine our
discussion to the SBA loan guarantees. This discussion on SBA is drawn heavily from
a study by Rhyne (1988). Although, some of the policies governing the SBA loan
guarantee programs have changed over the preceding decade, much of the problems
and characteristics associated with the program during the period of study are still
relevant to SBA today, and to a large extent, this discussion can be generalized to all
loan guarantee programs.
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C. SBA Loan Guarantee Programs, Banks and SMEs7
i. The Program and the Problem
Under the SBA 7(a) loan guarantee program, 90 percent of all loans up to
155,000 dollars are guaranteed, while a 70 to 85 percent guarantee percentage is used
for larger loans. When a borrower is sixty days in arrears, either the SBA or the bank
can call the guarantee into effect, and on demand, the SBA will purchase the
guaranteed portion of the loan. The guarantee covers the principle as well as any
unpaid interest.
Majority of the loans are medium to long term and carry maturities of five,
seven or ten years. The average size of the loans in 1984 was about 167,000 dollars,
and this was larger than the average a bank would usually lend to a firm without a
guarantee. Other extension programs of the SBA 7(a) loan guarantee program are the
(1) Certified Lender program, (2) the Preferred Lender program and the (3) SBA
Secondary Market program.
The Certified Lender and Preferred Lender programs have the purpose of
reducing loan processing delays. The key to these programs is the greater delegation
of authority to banks. All banks with a good history in handling SBA loans are
qualified to become a certified lender, and by doing so they are assured of a response
from SBA in no longer than three days. Banks that demonstrate competence as
“certified” lenders may also qualify to become “preferred” lenders. Preferred lenders
are given authority to make SBA-guaranteed loans without prior review by SBA, in
7 This section is based on the discussion by Rhyne, E. (1988), Small Business, Banks and SBA Loan
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40
exchange for a lower guarantee percentage and greater liquidity responsibility. Similar
programs that delegate authority to banks are also present in the EXIM-bank’s
programs.
Under the terms stipulated by the SBA secondary market program, banks have
the right to sell off the guaranteed portion of the SBA loan in a secondary market to
investors at an interest rate unbounded by the initial loan. Since the loans are
guaranteed by SBA, it is essentially a risk free investment, with returns slightly higher
than Treasury bills. As of 1987, approximately 40 percent of all SBA loans are traded
in the secondary market, and smaller banks are among the more active participants in
this program (Rhyne 1988).
The problem as mentioned earlier was the enormous default rate of loans
guaranteed under this program. While some argue that the high default rates are the
result of SBA’s target group, Rhyne (1988) identified four major contributors to the
problem: (1) the incentive structure of program, (2) the conflicting goals of the agency
and the purpose of the program, (3) the lack of reasonable cost-benefit analysis, and
(4) the lack of SME voice in public policy.
ii. The Incentive Structure of the Program
The role of banks in this program, in part, contributes to this problem. While
the SBA reviews most of the applications (except for loans made under the preferred
lenders program), the responsibility for borrower selection rests on banks. At the
Guarantees. New York: Quorum Books.
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41
guarantee percentage of 90 percent, banks find little incentive to improve the borrower
selection process. Although it is found that banks do not make excess profit on SBA
loans, “ they tolerate a number of defaults among SBA loans that is ten times as large
as the number they tolerate in their regular portfolios” (Rhyne 1988). Based on
empirical results, Rhyne also indicates that there remains little incentive for banks to
verify the adequacy of collateral coverage for SBA loans. And as noted in a GAO
(1983) report, lenders often “submit inaccurate, improper or incomplete credit
analyses.”
According to survey data, one of the most cited reasons for bank participation
in the SBA program is the ability to make loans to new businesses, or as Rhyne (1988)
puts i t , the program “allows a bank to try out unknown borrowers” at low risk. This is
also evident by the fact that 25 percent of all SBA loans are to new firms. As
evidenced by Rhyne (1988) it is also clear that the SBA programs are viewed by some
banks as a development tool where inexperienced junior employees are assigned to
handle SBA loans as a form of training for borrower selection.
Rhyne maintains that the default rate is a function of the guarantee percentage,
and that a reduction in the guarantee percentage will result in a subsequent reduction in
the default rate. Rhyne’s hypothesis stems from the finding that preferred lenders,
whose SBA loans are guaranteed up to only 75 percent, tend to have lower default
rates than the average banks.
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iii. The Political Context and the Program’s Aims.
As economic theory suggests, government intervention is appropriate only in
situations when social outcomes are inefficient as a result of market imperfections.
The creation of loan guarantees stems from the premise that the credit market is
flawed, and deserving SMEs are not able to obtain credit as a result of the
imperfection. SMEs, in general, have little access to bonds and equity markets, and are
often denied assistance by banks due to the high overhead costs relative to the profits
incurred from making SME loans. However, choosing loan guarantee programs as a
market correcting mechanism does not address the real structural problem (i.e. the high
administrative overhead costs), but instead addresses the risk of SME loans, which is a
flaw of the borrowers. Further, a default rate of 25 percent cannot be efficient by any
market correction standard. As with any public program, when there are conflicting
goals within the agency, the terms of the programs will be determine by the major
constituents of the political structure. Rhyne (1988) points out that although SMEs are
the intended beneficiaries, they are “relatively weak as an interest group,” and that
“banks, who are not the intended beneficiaries but are employed as vehicles for
providing assistance, form a more effective constituency.” Moreover, because “no
clear group is hurt noticeably,” this “frustrates the development of a cohesive
opposition” (Rhyne 1988). This suggests the need for more SME voice in the policy
making process.
As with any publicly funded programs, justification of its existence should
come from the externalities that spill over from the activities of the beneficiaries.
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However, from a cost-benefit analysis performed on the SBA loan guarantee program,
Rhyne (1988) concludes that “the knowledge of general characteristics of the
borrowers help little in ascertaining whether SBA firms produce more social and
economic benefits than the average firms in the economy.”
VI. THE GENERAL INTERNATIONAL TRADE ENVIRONMENT
Discontinuities in international market environments pose considerable
uncertainties for firms. These discontinuities may arise from the volatility of
international relations changes in national economic climate (Dichtl and Koglmayr
1987), trade policy changes at home and abroad as well as changes in exchange rates,
foreign exchange controls, etc. Evaluating foreign market risk is a formidable task for
any firm, but more so for SMEs who generally do not have adequate facilities for
gathering and interpreting the appropriate information so as to properly assess the risks
associated with doing business in specific counties. In this section, we shall look at
some of the general issues that dominate both the general (objective) environment as
well as the task (perceived) environment of SMEs.
A. Political Conflicts
Political conflicts have often affected international trade and commercial
activities. Political embargoes have barred exporters to expand sales to countries such
as Saudi Arabia and other Arab states as well as the former Soviet Union. The Gulf
war was among many examples which has “resulted in the loss of well-established and
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44
profitable markets.” Terrorism which often leads to economic retaliation has “also
affected U.S. firms doing business with countries like Iran, Syria, and Libya” (Perry
1992).
B. New Industries and the Diminishing Technology Gaps
Root (1994) maintains that accelerating rates of technological change,
interacting with accelerating rates of globalization, are causing a “migration of
tradition industries from the industrialized countries of Europe, Japan, and the United
States to the developing countries of East Asia, Latin America, and Eastern Europe.”
In the process of reallocating resources from capital and labor intensive industries to
new technological and skill-intensive industries, the United States, Japan and Europe
have created new competitors and new markets.
New industries, which are centered on electronics, differ from traditional
manufacturing industries in that they are critically dependent on technological
innovation. The fact that these products are high in unit costs makes transportation
costs an insignificant barrier to international trade, and because the products are
knowledge and service intensive, they “allow for rapid reallocation of new production
anywhere in the world through international investment and other entry modes” (Root
1994).
The forces of technological innovation and globalization are narrowing the
international technology gaps and bringing about a convergence of demand
preferences across the industrial countries, and are subsequently compressing the
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45
duration of international product life cycles. As the real per capital incomes approach
parity in developed countries, demand preferences in these countries are converging
for both industrial and consumer goods and services. This convergence has already
sharply cut the time it takes for a product introduced in one country to gain acceptance
in other countries (known as international demand lag).
Half a century ago, U.S. companies possessed an extraordinary technological
lead that enabled them to dominate both the domestic as well as foreign market.
However, since that time, many European and Japanese firms have acquired U.S.
technology through licensing and other channels, and have built their own R&D
capabilities. Today, these foreign firms have moved from being technological imitators
to being technological innovators. Technology gaps are also further squeezed by the
fact that HPAEs as well as Mexico and Brazil are actively manufacturing and
exporting high-technological products. This shrinks demand and imitation lags which
sharply reduces the life-cycles for many products (Jain 1989; Root 1994). As the life
cycle of these products are reduced, the need for companies to speed up entry into
domestic and foreign markets increases, in order to recoup R&D expenditures and
make profits. Once a company’s product reaches maturity, manufacturing at low costs
and high quality becomes key for market success.
C. Intra-Firm Trading and The New Global Economy
It has been estimated that at least 35 percent to 40 percent of U.S. imports and
exports move between members of the same firm (Little 1986), and that nearly 80
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46
percent of U.S.-Japanese trade, 40 percent of U.S.-EC trade, and 55 percent of EC-
Japanese trade are between parent firms and their foreign subsidiaries (Root 1994).
These intra-firm trades stem from the inherent operative advantage of Multi-National
Corporations (MNCs) which possess the capabilities to “move resources, products and
capital internationally to respond to changing market conditions” (Papadopoulos
1987). However, in practice, MNCs’ huge financial stake in overseas production,
combined with foreign government pressures against worker layoffs, often “inhibits
cutback of foreign output in order to step up exports in the U.S.” (Jain 1989).
Although in general, “successful SMEs appear to have developed a strategy of
competing in small, defined segments of the market-place with little or no direct
competition from larger Companies (Steiner and Solem 1988), the impact of MNCs’
operations often possesses the ability to affect the SMEs. It is characteristic for MNCs
to introduce new products simultaneously in response to the rapid reduction of the life
cycles of many products (as cause by the narrowing of technology gaps and the
accelerating globalization rates), and this in a way also adds to the reduction (Root
1994), thus further reducing the market success for SMEs who may be producing
complements of those products offered by the MNCs.
Vn. U.S. INTERNATIONAL TRADE INTERMEDIARIES (ITIs)
A. The Export Trading Company (ETC) Act of 1982
The ETC Act of 1982 was designed in light of the fact that SMEs were not
capable of exploiting foreign markets on their own, and with the help of trading
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companies, businesses without international knowledge are now able to enter global
markets. However, the ETC Act of 1982 was not the first legislation to stress the
importance of the middle man function; trade intermediaries have entered the U.S.
trade scene since 1918 with the enactment of the Webb Pomerene Act (also known as
the Export Trading Act of 1918). The emergence of the ETC Act of 1982 was largely
due to the fact that the existing U.S. intermediaries prior to 1982 have failed to meet
the needs of those clients they were set up to serve (Perry 1992). However, with the
entry of the ETC Act, the general exporting behavior of SMEs has not significantly
changed.
An ETC is defined as a “U.S. company organized and operated principally for
the purpose of exporting goods and services produced in the U.S.,” and more
specifically, “to increase United States exports of products and services by
encouraging efficient provision of export trade services to United States producers and
suppliers by establishing an office within the Department of Commerce to promote the
formation of export trade associations and export trading companies, by permitting
bank holding companies, bankers’ banks, and Edge Act Corporations that are
subsidiaries of bank holding companies to invest in export trading companies, by
reducing restrictions on trade financing provided by financial institutions and by
modifying the application of the anti-trust laws to certain export trade” (U.S. Congress
1982).
It has been pointed out by many researchers that the assistance to SMEs by the
ETCs remains inadequate (Martinoff 1988; Czinkota 1984; Czinkota and Johnston
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1981; Perry 1992; De Nobel, Castaldi and Moliver 1989; De Nobel and Belch 1988).
In the five years since the inception of the Act, the “positive results envisioned by its
proponents have failed to materialize” (De Nobel, Castaldi and Moliver 1989). By the
end of 1985, the Department of Commerce has issued export trading certificates of
review to only 57 trading companies nationwide, out of which 40 have been formed by
bank holding companies (bank ETCs). Yet even with the establishment of ETCs, De
Nobel et al. (1989) note that “many smaller firms capable of producing exportable
products have not widely embraced ETCs as vehicles to assist in entering international
markets.” They argue that the problems that surround the failure of the ETC Act stem
largely from the SMEs’ attitude towards ETCs. The authors identified two major
factors that seem to explain the failure of the ETC Act. The first major factor that
inhibited the success of ETCs lies in the “various attitudes that tend to preclude
smaller domestic firms from exporting in the first place” (De Nobel et al. 1989).
These attitudes stem from the “complexity small firm owners/managers believe is
involved in planning, organizing, and adjusting products for foreign markets, along
with their belief that implementing export strategies is expensive, and their general
lack of awareness about or trust in government-sponsored export programs.” The
second major factor “relates directly to the range and type of services that ETCs
typically provide their export clients,” and in particular, the possibility that “services
currently offered by ETCs are not perceived as germane or helpful to small firms that
desire to export their products to foreign markets” (De Nobel et al. 1989).
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Two identical studies done on samples located in southern California (De
Nobel and Belch 1988) and New Jersey (De Nobel, Castaldi and Moliver 1989)
conclude that exporters primarily seek transaction-creating services, while ETCs seem
to be more proficient at providing physical-fulfillment services. The results of their
study reveal that the most important services SMEs desire from ETCs are (1) the
ability to discover or open new foreign markets, (2) the establishments of personal
contacts with potential foreign buyers, and (3) knowledge of the foreign markets’
competitive conditions (all of which are considered transaction-creating activities).
While the least important services desired by SMEs are: (1) consolidation of orders
from overseas customers, (2) consolidation of orders from overseas shipments with
products of other exporters to lower freight costs, and (3) advice about the
arrangement for export packaging (all are considered physical-fulfillment activities).
On the other hand, the services provided by ETCs with the highest performance ratings
are (1) assistance with export documentation requirements, (2) arrangements for cost,
insurance, and freight quotes, (3) advice about arrangements for export packaging and
marketing, and (4) the assumption of responsibility for physical delivery of products to
foreign buyers (all of which are considered physical-fulfillment activities). This lack
of congruence between what services SMEs desire from ETCs and the services ETCs
perform well, in part, explains why SMEs that are interested in starting or expanding
exporting endeavors may not employ the services of export intermediaries. Moreover,
the authors also note that transaction-creating types of activities are not performed by
ETCs at an acceptable level. If the original mission of the 1982 ETC Act is to be
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fulfilled, export intermediaries must adapt to the needs of current and potential
exporters.
The problems of ETCs are profound, and in order to better understand the
failure of the ETC Act, we need to understand these problems from the ETCs’
perspective. We need firstly to understand the roles, functions, and evolution of ETCs
and, in general, those of the international trade intermediaries (ITIs). In the ensuing
sections, related issues will be discussed in greater depth, and in the context of their
relations with the SMEs.
B. Reasons underlying the Failure of ITIs8
i. Dunning’s Eclectic Paradigm and The Survival of ITIs
De Nobel et al. (1989) note a mismatch between the types of services SMEs
generally expect from the ETC and the types of services the latter generally perform
well in. In view of the agency theory, one can conjecture that the behavior of the ETCs
is in fact rational, and is very much consistent with the factors that are crucial for their
survival. Perry (1992) argues that the behavior of ETCs lies in the mechanics of
Dunning’s Eclectic Paradigm, which explain the phenomena in terms of (1) ownership
advantages, (2) internalization advantages, and (3) location advantages.9 In particular,
it is the need of internalization by the ITI (which is crucial if they are to survive) that
8 This section is based on the discussion by Peny 1992.
9 Location advantages are of little relevance in explaining this phenomena and will not be discussed in
this section. Location-specific advantages are those that “result from the assets owned and internalized
by the firm in conjunction with the resources of foreign countries that offer location-specific or
comparative advantages.’’
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inevitably results in the lack of congruence between what the SMEs desire from ETCs
and what ETCs perform well.
Ownership-specific advantages refer to those advantages that make it
possible for individual firms to successfully outcompete their rivals by some sort of
market imperfection or due to imperfect competition from “size, proprietary products
and technologies, economies of scale, or degree of diversification” (Perry 1992). In
this case this advantage arises out of the sheer size of the organization (economies of
scale) or/and the monopolization of a market, a product, or a process (e.g. exclusive
rights to a certain product, expert knowledge in exporting, and the like). Buckley and
Casson (1976) note that seasoned knowledge of international marketing and their
access to information are key ownership advantages that ITIs possess; and by
“exclusive employment of actors with advanced knowledge, skills, expertise and
connections”, ITIs acquire “expert power” (Thomas 1978), and hence monopoly
benefits (Perry 1992). ITIs will be in demand as long as (1) “it can handle the export
process better and at a lesser cost than the manufacturer,” or (2) “it is the only one
capable of handling the entire export process.”
Yet, central to any ownership advantages of an m is the “need for recognition
by the U.S. manufacturers and foreign clients that it is, indeed, in possession of such
advantages, which the latter cannot acquire or could only exercise at higher costs in
foreign location” (Perry 1992). The ITIs must be seen as the “only one with the
knowledge, information, and experience, or at least the greatest efficiency in carrying
out the export process,” but in order to remain the only or the most efficient vehicle,
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an m must carefully “safeguard its ownership advantages and prevent their diffusion”
(Perry 1992). This is done through internalization.
Internalization-specific advantages are defined as those advantages that
“arise after the firm has incorporated control mechanisms to achieve some degree of
protection from uncertainties by creating an internal market within the confines of the
firm” (Perry 1992). These advantages or benefits are acquired when ITIs keep those
ownership advantages (e.g. economies of scale, expert experience, exporting secrets
unavailable to others) to themselves. This process of internalization is crucial for ITIs
to exist.
In a transaction cost framework, the question of whether the manufacturer
handles his own international marketing or turns it over to the middle man is a
function of the comparative costs of “doing it himself’ (internalization of the export
process, by the exporter, through a hierarchical structure), or “relying on the
middleman to do it by hiring his services” (thereby bypassing the internalization
process in favor of the market).
From the manufacturers’ perspective, they will employ the services of the ITIs
if the ITIs’ cost of increasing export sales is less than in-house cost (Miller 1982), and
when the manufacturer chooses the market (as opposed to hierarchy) in view of the
comparative costs, they resort to a functional spin-off1 0 (Stigler 1951). It should also
1 0 As explained by Madden (1973), it is beneficial for the manufacturer to spin-off to marketing
specialists those distributive functions which exhibit decreasing costs with respect to increases in
volume when a firm has a relatively small volume. Assuming that the specialist faces the same costs as
the manufacturer, the individual producer will experience a higher level of average costs for the same
function than the specialists who benefit from economies of scale. Thus, if the middle man passes on all
or some of the lower costs, the producer’s total average costs will decrease as a result of the spin off.
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53
be noted that costs and benefits may not always be easy to calculate. Miller (1981a,
1981b) points out that some of these costs and benefits (which are necessary to be
considered) may be less quantifiable, such as the benefit of having the ITIs deal with
the handling of foreign receivables (which tend to be slower than domestic ones), or
the cost of dealing with a financially weak m that is unable to extend credit to the
foreign-based customer and still pay the manufacturer on time, or an ITI that skimps
on market research, advertising, and the like.
In employing transactional cost-benefit calculus to shed light on this subject of
internalization, it is important not to constrain this framework to a comparative static
setting, but to extent this framework to a dynamic one due to the learning process
involved. For when the upstream manufacturer or the downstream buyer may welcome
the services of the ITIs, they may also “have or may develop internalization goals of
their own” (Perry 1992).
It is imperative to understand that the internalization by the m precludes
internalization by the two other members, and vice versa. “Internalization by any
channel member is at the exclusion of the others, thus the m exists only by default of
internalization by the domestic manufacturer and/or the foreign buyer” (Perry 1992).
And it is perhaps this truth that has led to the lack of congruence between what
services SMEs desire from ETCs and the services ETCs perform well as documented
by De Nobel et al. (1989).
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ii. Some Attitudinal Observations
As pointed out in numerous studies, those exporting SMEs who are currently
not employing the services of an m , will generally not be attracted to ITIs’ services at
any later time (regardless of transaction costs calculus); while those SMEs who are
users of these intermediaries will continue to employ their services until they have
enough incentive to switch to hierarchy and internalize those distributive functions. In
general, non-exporters usually exhibit favorable attitudes toward the services of ITIs,
thereby “indicating the tendency for non-exporting executives to begin exporting by
way of an indirect channel” (Perry 1992). This suggests that the pool of new potential
clients is constrained to only non-exporters. In addition, a switch to direct exporting is
also anticipated since it is found that both users and non-users, as well as non
exporters tend to have more positive attitudes towards direct exporting channels vis-a-
vis indirect methods.
iii. SMEs Propensity to Switch From Market to Hierarchy
The transaction cost framework that was established (in the earlier discussion
on internalization-specific advantages) to show the reason underlying the use of an ITI
is based on the assumption that the decision to use an intermediary is really a function
of comparative costs. However, as we have discussed earlier, reasons underlying
export decisions of SMEs are not always dictated by expectations of profits but rather
by expectations of growth (Cavusgil 1984). Thus it follows that “it is not possible for
the firm and the intermediary to grow together, considering that manufacturers’ growth
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expectations either preclude using an intermediary or entail dropping it as soon as
feasible” (Perry 1992). Some ITIs accept with “equanimity the cycle of working with a
manufacturer until he is ready to take on his own international marketing and of
moving on to another client, to start the cycle all over again,” but still this cycle is
considered a “serious and debilitating problem in the industry” (Perry 1992).
In a principal-agent framework, the ITI is faced with the problem of controlling
the opportunistic behavior of the manufacturer (principal) “who uses an agent only
until he has reached a high enough volume to make it advantageous to drop the m, or
until he has penetrated the ITTs secrets and no longer needs its services.” Here, the m
is placed in a difficult situation, where it must meet the clients’ needs, but at the same
time it is forced to hold something back to prevent the manufacturers from becoming
so successful that they will switch to hierarchical integration in favor of hierarchy. On
the other hand, the ITI also do not want to decrease the quality of its services so
drastically that firms will switch to integration as a result of dissatisfaction with the
ITI. By acting defensively and reducing the quality of service rendered to the
manufacturers, the ITI will also be faced with a more difficult time trying to attract
new customers. Thus, if the ITI is still to captivate its current pool of clients, the ITI
has to reduce the transaction costs associated with its activity (thus assuming the ITI
possesses some monopoly power), “but not to the point of creating an appearance of
facility in the export process that could incite the manufacturer to handle it himself’
(Perry 1992). Thus m is put in the position of having to treat different types of clients
differently depending on the export stage of the manufacturer. Further, complications
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may arise when the ITT is serving a manufacturer who is producing different products
at different times (i.e. when the manufacturer is at different stages of the international
selling cycle at the same time).
iv. Administrative and Contractual Channels to Enhance Efficiency
In light of the fact that over time the benefits of using an intermediary decrease
and the costs of forgoing internalization increase for the manufacturer, there exists no
substantial reasons for ITIs to have the assurance of any long-term relationships with
its clients. This insecurity will bring inefficiency into this indirect exporting channel.
Bello and Williamson (1985) argue that the “effectiveness of indirect export channels
is a function of the economic structure of the relationship defined by contractual
agreement between the actors.” If ITIs operate without a formal long term agreement
(referred as a “conventional” structure), the ITT will view the manufacturer as a
potential future competitor, and thus “will not risk pioneering a brand only to see the
manufacturer take over once it is established” (Perry 1992). However, in the case of a
formal (referred as a “contractual” structure) agreement (which usually stipulates
exclusivity and sales quota), the stability of the relationship is enhanced, and the m
“will make every effort to honor the contract and promote the manufacturer’s
product.” An administrative channel (defined as any informal agreement) will also
bring “similar benefits to both parties, but at a somewhat reduced level.” Thus
administrative and contractual structures promote channel stability and “as a result,
efficiency.” It follows, therefore, that channel performance is “associated with the
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perceived stability of internalization by the ITI,” the higher the level of perceived
stability of internalization by the ITI, the more willing is the ITI to “fulfill the export
function as efficiently as does its Japanese counterpart.”
v. Opportunistic Behaviors by the ITI and the ETC Act of 1982
Put differently, internalization by the m becomes a question of cultivating the
principal’s (manufacturer) dependency on the ITI, and this is done through “careful
manipulation of the transaction costs to be borne by the manufacturer” (Perry 192).
This suggests that the channel control lies in the possession of the ITI. El-Ansary and
Robicheaux (1974) define control as the “ability of a channel member to cause another
channel member to do what he is not going to do.” It is the ITI’s ownership advantages
that will generate the manufacturer’s dependency on it for his export assistance needs,
and minimizing transaction costs (which includes lower service and agency1 1 costs)
subject to the manufacturer’s “switch to internalization1 2 ” constraint, is a measure
directed towards this end. Keeping the manufacturer’s export volume below the point
where it becomes profitable for the manufacturer to internalize is another measure to
maintain this goal.
The ITI’s control of the channel is therefore a function of its expert power,
which, Stem and El-Ansary (1982) argue, is perishable. Perry (1992) notes that
1 1 Mitnick (1974,1976) identified three forms of agency costs, (1) specification costs (to tell the agent
what to do), (2) monitoring costs (to measure the agent’s performance), and (3) policing costs (to
constraint and correct the agent’s behavior) (Perry 1992).
1 2 This is the point in which the manufacturer will choose internalization given an additional unit of
lowered transaction costs, which Buckley (1985) argues is a value that is quantifiable and can be
predicted by the ITI (Perry 1992).
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preserving expert power (on the part of the ITI) requires “updating of the export
process” by the ITI with “new and better market opening measures, which will keep it
ahead of the manufacturer.” However, she also notes that to effectively safeguard its
expert power from spilling over to the manufacturer, it must turn to “market closing
measures.”
This suggests that strategies employed to safeguard such spillovers will
inevitably focus on preserving the information asymmetry. Such strategies undertaken
by ITIs include hiding “overseas clients and marketing data from their
principals”(Miller 1981a), and removing “products from supplier packaging and
[refusing] to tell buyers the name of the manufacturer.”
The ETC Act of 1982 has, in practice, been implicitly favorable to such
safeguards, but perhaps too excessive to a point where it promotes opportunism on the
part of ITIs. Here, Congress has “unwittingly discouraged manufacturers from working
closely with the ITIs to develop stable channels of distributions. Instead, in order to
take fear and risk out of foreign sales, it favored intermediaries taking possession of
goods destined for foreign markets and therefore acting as merchants rather than
agents.” This indicates a complete lack of marketing control (Czinkota 1984) on the
part of manufacturers which, as noted by Perry (1992), puts the manufacturer in a
position of a “third world country barterer who loses track of his product, which is
eventually sold to an unknown buyer,” and who in the process has “forsaken all
opportunities to learn how to become a competitive international marketer and
manufacturer.” However, a more fundamental problem this transference of full control
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entails is the fact that now, “under the guise of taking risk away from international
sales, the merchant ITI has rendered the manufacturer harmless” to the former’s goal
of internalization, and hence assuring the ITI of the latter’s dependence. Thus the ITI
can “indeed engage in opportunistic behavior, exploiting the free riding potential and
possibly jeopardizing future sales of the manufacturer.” This is in direct contrast to the
general practices of the sogoshosha, which is the model the ETC Act of 1982 is based
on, where activity is “conducted for the client’s account, based on a fee” (Perry 1992).
vi. What has Culture to do with the failure of the ETC Act?
The ETC Act is designed based on the success of the giant Japanese trading
companies, sogoshosha. Yet, it is important to understand that the success of the
sogoshosha has a lot to do with the socio-cultural environment that it interacts with.
Drucker (1985) points out that “the greatest cultural problem for Westerners
doing business in Japan is the need for the ‘go-between’ and the ‘dependence’ on
him,” implying that Westerners are in general not comfortable with the concept of go-
between (Perry 1992), and that they lack “understanding and appreciation for the
function of the intermediary (i.e. go between).” This sheds light on the “attitude of
domestic manufacturers who consider fees paid to ITIs as expenses to be eliminated at
the earliest possible time,” and also gives “partial explanation for such U.S. legislation
as the Foreign Corrupt Practices Act.”
Congress had in mind the advantage of size as realized by the sogoshosha
when it passed the ETC Act of 1982. Perry (1992) notes that by “granting limited
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antitrust protection, it encouraged ITIs to be large; and by allowing bank participation,
it intended to make capital available for its expansion.” However, the collusive
overtones that accompany this factor are not always viewed in the same way by both
cultures.
Another key difference that separates the sogoshosha and the domestic H is is
the “articulation by the Japanese culture of what has been referred to by Ouchi (1980)
as ‘clan’ transactions, and by Boisot (1986) as ‘federative’ transactions.” Perry (1992)
asserts that at a legislative level, this distaste for clan/federative “transactions was
embodied in the antitrust laws,” thus, “it should come to no surprise that after a
century of strict enforcement of these laws, U.S. firms are not comfortable with the
idea promoted by the ETC Act of joining together for the purpose of exporting.”
It has been long established that the sogoshosha’s success is a result of the
“Japanese custom of long-term business relationships,” which makes internalization a
concept inappropriate for explaining the sogoshosha’s system. As their culture
sanctions, the sogoshosha are able to draw resources from its “affiliation with its
keiretsu group,” which is “a close-knit association of manufacturers, banks, insurance
companies, and shipping firms.” Moreover, unlike the U.S., the Japanese view
business not as an “activity but a commitment,” and that Japanese manufacturers are
“willing to forego selfish short-term interests to promote the long-term welfare of the
system in exchange for the many benefits likely to accrue to them in the course of their
long-term association with the many faceted sogoshosha.” In sum, the Japanese
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superior cultural comparative advantage vis-ei-vis the United States has been integral
to point out that the sogoshosha is a system unsuitable for the United States.
In spite of cultural differences, there are correcting mechanisms that are able to
prolong the ITI-SME relationship, and in turn enhance stability in this marketing
channel. Some of these measures include the implementation of (1) a target date at
which the firm will graduated from the services of the ITI, (2) a penalty fee to be
incurred by the firm if it chooses to internalize the export process prior to the date
agreed upon, and (3) forfeiture of any benefits (monetary or otherwise) to the ITI if the
firm does not profit as a result of using the m. These recommendations will be
discussed in greater depth in Chapter 7.
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CHAPTER3
METHODOLOGY
Underlying this study is the belief that no inferences can better be drawn than
from the words of the subjects themselves. In the case of this study, the subjects were
SME exporters and their support organizations. The objective was thus to collect as
many accounts of the present state of export finance as possible, while maintaining a
standard of statistically quantifiable data and working within the limitations of time
and personnel. If possible, qualitatively descriptive feedback would be collected as
well. This objective motivated the methodology of this study.
The description of the methodology of this project is divided into the following
logical steps, which are roughly sequential as well: choice of survey procedure,
construction of the survey, initial interviews and the mailing list, mailing process and
the effective sample size, further interviews, test for representativeness of the sample,
preparation of the data, and data analysis.
L CHOICE OF SURVEY PROCEDURE
Our chosen method o f data collection was a mailed questionnaire. This is in
contrast to the technique of the survey of Korean SMEs by Nugent and Kim
(forthcoming), which composed solely of personal interviews to fill out each
questionnaire. Although such a methodology is more thorough, such an effort would
have been a logistical impossibility for this study. A possible alternative to a mailing
survey is a telephone survey. Given the sample size, this was also impractical. A
further weakness is the lack of credibility a telephone researcher has. A mailed survey
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was feasible, and presented the advantage of reaching the largest number of potential
subjects with the credibility of a letterhead for the researchers and the anonymity of
the postal service for those so desiring it. Mailed surveys are used extensively for
research, and several studies on export assistance have used mailed surveys with
considerable efficacy (Czinkota and Ricks 1981; Czinkota 1984; Martinoff 1988;
Rhee 1991; and Kotabe and Czinkota 1992).
Two limitations of this method of surveying are of particular interest. First,
questionnaires may be returned with answers to certain questions withheld or filled in
inappropriately. Second, the representativeness of the data is uncertain. In fairness to
this method of surveying, it is doubtful that any other survey approach would
eliminate these uncertainties. Regarding the first point, firms (at least in the relevant
business environment) are known to be extremely jealous of their company-specific
information, particularly financial data. The fact that export finance has been a
relatively neglected area of survey research is no doubt a product of this widespread
reluctance to disclose detailed information. As far as questions receiving
inappropriate answers, a survey conducted with personal interviews would have been
remedial to a great extent. The mailed survey was simplified to prevent such
problems, and few occurred.
Regarding the second point, the low response rate of mailed surveys raises the
question of representativeness. The representativeness of the replies will be covered
in greater detail below, note here that other survey methods would have required an
initial limitation of the sample by the researchers, which would have been a possible
source of further bias. In any survey, the subjects are ultimately self-selecting, and a
mailing which contacts as many firms as possible is likely to yield the most
representative sample.
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n . CONSTRUCTION OF THE SURVEY
Nugent and Kim's (forthcoming) questionnaire is a comprehensive forty-two
page survey which took a three-hour personal interview to complete. Finding willing
subjects for such a questionnaire, even if personal interviews were feasible, would
have been difficult among southern California SMEs. Their questionnaire, which
form the basis for this study’s questionnaire, was pared down to be as short as possible
and, naturally, specifically relevant to the SME exporter of southern California. This
process was made difficult by the trade-off between brevity and the desire to maintain
the general structure of the original questionnaire, which collected general vital
statistics of the firm and a background of the firm's export behavior to frame the
feedback on the export assistance services. The vital statistics are useful for assessing
the character of the respondents to the survey, and specifically for creating profiles of
the types of firms which most need help from export assistance agencies. This could
then be compared to the types of firms on which the agencies focus their efforts.
The questionnaire was organized into five broad types of questions (see
appendix II for the questionnaire). It began with a request for basic background
information on the entrepreneur filling out the survey and the name of the firm. This
information was labeled "optional," in order to maintain the confidentiality of those
who wished to preserve it. Next were general questions about the products, size, and
export history of the firm (these two sections were listed under the heading "I.
Overview"). The next two sections were devoted to evaluation of difficulties present
and assistance available in the areas of marketing (under the heading "II. Marketing
Support System") and finance ("III. Financial Support System"). The final section was
a completely open-ended request for commentary on the firm, its experience,
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exporting, or support organizations ("IV. Additional comments/Recommendations").
The entrepreneur was offered a copy of a report of the findings as an incentive for
participating in the survey. A respondent who wished to maintain confidentiality of
information needed not enclose a business card or reply address, but could simply
mail a request for the report separately.
The inclusion of a separate section on finance and requests for estimates of
important financial data were the section added which represented a break with the
traditional thrust of surveys on export assistance. A review of the literature on this
subject conducted as the survey was constructed revealed the area of finance to be
underrepresented in the body of literature. The field of export assistance gained
impetus from the large merchandise trade deficits of the 1980s, but research in that
area centered around marketing support.
Several drafts were written, evaluated first by the project advisor, then by
personnel at the export support agencies who would ultimately use the data collected.
These revisions culminated in a final draft which included a checklist of all major
export assistance programs available to the subjects of the survey, which would
provide an overview of program use. The questionnaire was designed to be completed
in about 20 to 25 minutes. In order to facilitate rapid completion, wherever possible,
questions were posed as a choice among designated alternatives or a selection of a
number on a scale. Those questions which could not be completed in such a manner
were constructed to be answerable with a very brief written reply. Thus, most of the
questionnaire required only checking blanks or boxes and circling numbers. As most
of the questions requested only estimates, this procedure did not significantly affect
the exactness of the question. Since exact data is often considered confidential and
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was unlikely to be available for past periods relevant to the research, the questionnaire
asked only for estimates.
HI. INITIAL INTERVIEWS AND THE MAILING LIST
In preparation for the mailing of the questionnaire, several interviews were
held with experts from government agencies as well as a prominent small exporter.
These interviews sought to clarify the exporting process, to scrutinize the drafts of the
questionnaire, and to offer a southern Californian perspective on export assistance that
cannot be gained from the literature. Interviews were conducted with Susan Corrales-
Diaz, President of Systems, Inc. and Irene Fisher, a SCORE consultant and former
CEFO head; with Tricia Snow, Eximbank Business Development Officer, Caroline
Brown, Senior Loan Officer at CEFO, and Joan Kantian and Steve Morrison,
International Trade Specialists from the DOC, and Corinne Murat, Program Director
of the LAACC. The interviewees not only provided first-hand accounts of their roles
in the exporting process but a wealth of literature published by the various export
support organizations.
Each of these experts reviewed the questionnaire and pointed out possible
ambiguities and questions they felt were not relevant to this region's business
environment One of the major differences between the original questionnaire for
Korea firms and the final draft of this survey was the omission of subcontracting
material from the latter, due to its minor importance to southern Californian SMEs as
a route to developing exports. Also, OPIC, PEFCO, and USAID, which appear often
in the literature, had their presence in the survey reduced to reflect their limited
applicability to SMEs.
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Crucial to this study were the lists of exporting or international-trade-oriented
firms which the export assistance agencies provided. Mailing lists from Eximbank,
DOC, CEFO, and LAACC were combined to form the master list of firms which
would form the sample population of the study. Together, these lists formed a quite
comprehensive list of firms which are using, had used, or had tried to use export
assistance programs in this region. The total number of entries on this master list was
more than 3000; the Eximbank lists had almost 2000 entries, the DOC had almost
1216, CEFO had 215, and LAACC had 74.
Unfortunately, the Eximbank list, by far the longest of the four, was not
composed solely of exporters nor of SMEs. Partly for reasons of information
confidentiality, and partly due to the unwieldy size of the list, Eximbank was unable to
edit the list for the purposes of this survey. Further, a considerable number of entries
on the DOC and Eximbank lists were duplicates. A few firms on every list were
service firms, and a small percentage of firms appeared on more than one list. Some
telephone sampling was conducted in order to create a feel for the proportion of
importers and service firms on the Eximbank list. Although this required some
judgment on the parts of the researchers, considerable editing of the DOC and
Eximbank list yielded a final list with around 2000 entries. Duplicates, firms outside
the geographical region under study, and service firms were eliminated without much
difficulty. The geographical limits of this survey were defined as the city of
Bakersfield and all points south in California. Beyond those discovered by a limited
telephone survey, however, importers could not be eliminated with regularity from the
list. The presence of firms which imported but did not export likely had a small effect
on the effective sample size of firms. This, and other determinants of the effective
sample size are discussed below.
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Previous surveys on export assistance (such as those listed above) have not
relied on agency-provided lists to create their samples of firms for their study. The
exception is MartinofF(1988), who combined an SBA list with a random sample of
firms and banks to form a master list The break in methodological practice that this
study represents is not coincidental and is of methodological importance. The primary
concern of this study is the evaluation of export assistance programs (with a focus on
finance). Thus, only firms with exposure to such programs need be included in the
study. A random sample which included firms without experience with export
assistance would be of little use. It should be clear that the master list of firms is in no
way a random sample of the population of SME manufacturers in southern California,
nor even those interested in exporting. It is however an extensive list of those which
have had contact with export assistance programs, and thus is not a sample burdened
by any selection bias for the purposes of this study.
IV. THE MAILING PROCESS AND THE EFFECTIVE SAMPLE SIZE
Once the master list was acceptably lean, a cover letter was written introducing
the researchers and explaining the purpose of the survey. It introduced the
researchers, summarized the objectives of the survey, expressed the importance of
each firm responding and stressed that responses would be kept in strict
confidentiality. A summary of the study's results and further information on export
assistance programs were offered as incentive to those who completed the
questionnaire and wished to receive them. Firms were reminded that the results of
this survey would be given to local export assistance agencies. The cover letter was
revised after review by export assistance agency personnel.
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MartinofF(1988) explains in his methodology that the inclusion of
endorsements from the U.S. Senate and SBA gave credibility to his survey and yielded
a very high response rate from subjects. Although the endorsement of Eximbank,
CEFO, DOC, and LAACC was offered, the potential benefits of those endorsements
were outweighed by a potential drawback. By tacitly affiliating the survey with
certain export support organizations, the cover letter could prompt respondents to feel
less free in replying candidly about the support organizations in question. The
possibility of an inherent bias in the surveying process made any agency endorsement
undesirable.
Before the initial mailing of questionnaires, a sample of Eximbank firms was
chosen for address verification and telephone contact. The Eximbank list was chosen
because it was the largest and contained the largest proportion of non-SME, non
exporter firms which, if found in the sample, could be eliminated. Thirty-four firms in
the 213 area code were looked up in the Los Angeles 213 area code telephone
directory (White Pages). The addresses of twenty firms were confirmed, but ten firms
had different addresses, one had a different contact person, and three numbers were
disconnected. Another sample of Eximbank firms from outside the 213 area code was
taken from the 11 Million Businesses Phone Book (1995) and the addresses found
were compared with the addresses on the list Of the 33 firms in the sample, 5 were
not listed or were listed but the phone had been disconnected when contact with them
was attempted. A further 9 were listed but the contact person listed was no longer
with the firm. These samples indicated that a good number of addresses on the list
were no longer good, or the contact persons listed may no longer be with the firm in
question. In either case, a response would be unlikely. This small sample indicated
that a good number of surveys may be either undeliverable or, if delivered, unopened.
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Two thousand questionnaires were mailed out during July 1996. A follow-up
letter was sent to all firms in the CEFO, LAACC, and DOC lists during August 1996,
except those who had returned their questionnaires and identified themselves and
undeliverable addresses (see below). Ninety-one, or about five percent, of the initial
mailing and follow-up letters were returned as undeliverable. As none of the
addresses returned as undeliverable during the initial mailing were sent a follow-up
letter, it became apparent that a great deal of the initial mailing was neither delivered
nor returned as undeliverable mail. It became obvious that the nominal sample size of
2000 was not indicative of the actual number of firms reached. An estimate of the
effective sample size was thus constructed.
A computer generated random sample of 100 firms from the master list was
looked up on the 11 Million Businesses Phone Book (1995). Of the 100 firm sample,
39 firms could not be found at all, and 10 were found, but at different addresses than
those given. Forty-nine firms, or virtually half, of the sample was by this measure
undeliverable. The sample included 3 firms whose questionnaires had been returned
as undeliverable. Interestingly, all of these firms were listed in the directory. This
indicated that being listed in the directory, which was current for 1995, was not
sufficient to guarantee delivery. The sample also included 8 firms who returned
questionnaires; 2 of those firms were not listed. This suggests that a significant
number of unlisted firms had deliverable addresses—a liberal induction from the data
suggest perhaps a third.1 3
1 3 Given virtually equal numbers of listed and unlisted addresses and 2 responses from the former and 6
from the latter, one can infer the above proportion by assuming a constant rate of response from both
groups. An estimate of the proportion of deliverable unlisted addresses based on a comprehensive
examination of the master list would be preferable, but not a sensible expenditure o f time to gain what
would be a rough estimate.
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This sample would then suggest that perhaps 5 percent of listed and 67 percent
of unlisted addresses are undeliverable. This translates to 65 out of 100 firms in the
sample being deliverable. This is consistent with the fact that 58 percent of the
smaller Eximbank sample was able to be reached. To say that 60-65 percent of the
letters mailed were delivered implies a response rate of around 8 percent. This is a
lower rate than most of the surveys listed above, but a response rate of 5-10 percent
was the predicted return rate. This prediction of a lower response rate (relative to
other surveys) reflects the greater length of the survey, the fact that a portion of the
Eximbank list were importers, and the predictions of interviewees at the export
support organizations. To summarize, o f about 2000 questionnaires, maybe 1300
were delivered, and 111 or 8.5 percent were returned. 104 were sufficiently complete
to enter into a Microsoft Excel spreadsheet to form the data set for the study's analysis.
This data set included three questionnaires that were completed in personal interviews
by the researchers after receiving requests for face-to-face interviews.
V. FURTHER INTERVIEWS
Three firms which received the survey replied with requests to meet face-to-
face to discuss their opinions on their present exporting situation. These interviews,
which lasted between one and three hours in length, yielded a considerable amount of
anecdotal evidence as well as an opportunity to complete the questionnaires for the
three firms. By coincidence, all three firms that requested interviews were not
themselves manufacturers, but exporters of manufactured products (and in one case of
agricultural goods also). These interviews offered the kind of depth of inquiry that
unfortunately could not be attained for the entire sample, but provides the researcher
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with responses detailed enough to aid in the interpretation of more general,
quantitative results.
Also, to complete the picture of export finance, an interview was conducted
with Jill Frieze, VP of the International Division of Imperial Bank. Imperial Bank
caters to medium-sized firms, and is representative of medium-sized and larger-banks
interested in export finance but generally unwilling to finance small businesses. Peter
Hofmann, Vice President and Manager of the International Division of National Bank
of Southern California, was also interviewed. He lent the perspective of a banker
interested in export finance who caters specifically to SMEs.
VI. TEST FOR REPRESENTATIVENESS OF THE SAMPLE
Because the survey is an attempt to estimate unknown population parameters,
it is impossible to determine the representativeness of the sample, given that the
sample is not random, but, rather, respondents are self-selecting. Nonetheless, to
some extent one can infer a sense of the representativeness (or at the very least
internal consistency) of the sample from a comparison of respondents to the initial
mailing of questionnaires and later responses (either to the follow-up letter or to
personal contact). If no systematic difference between the two groups can be found,
then the responses from various methods of contact can be pooled into a single data
set (Martinoff 1988).
Furthermore, firms in the latter (late response) group did not fill out the
questionnaire sent in the initial mailing. If there is no systematic difference between
the group that did fill out the initial questionnaire and a group which did not, this is an
indication that no significant differences exist between respondents and non
respondents. This inference should not be drawn too far, but if there is no significant
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difference between the groups, one can be reasonably confident of the
representativeness of the sample under the circumstances which inevitably surround
such a survey procedure.
To compare the initial responses with the follow-up responses, the sample was
segmented into two groups along those lines. Seven individual question responses
were chosen for the testing procedure. Four represented quantitative firm data; of
these two gauged export experience (EXPSME and EMPXMKT) and two estimated
firm size (EMP95 and SALES95). Two were qualitative assessments of the firm's
performance (GROWTH and REDUCE EX), and one was an assessment of the firm's
efforts to obtain additional information on exporting (INTERNET; see the table for
details). For each, a difference-of-means t test was done for a null hypothesis of no
difference between the two segments. The alternate hypothesis of inequality implied a
two-tailed test. The results are given below:
Variable EXPSME EXPXMKT EMP95 SALES95
Prior
experience of
entrepreneur in
an SME
(dummy
variable)
Other employee
experience in
exporting or
export mar
keting (dummy
variable)
Number of
employees in
1995
Amount of
Sales in 1995
(estimated; in
dollars)
t statistic .6749 .0353 -.3200 -.9355
Degrees of
freedom
14 14 13 10
Critical value
for p=.05
(approx.)
2.145 2.145 2.160 2.228
Ho:p i -^2=°
Not Rejected Not Rejected Not Rejected Not Rejected
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Variable GROWTH REDUCE EX INTERNET
Self-assessment of
firm growth (five-
point scale)
Percentage by which
exports would fall
without the help of
the export assistance
the firm received
(estimated)
Whether the
entrepreneur has
used the Internet to
find information on
exporting (dummy
variable)
t statistic .2836 -.3582 .0519
Degrees of freedom 14 14 14
Critical value for
p=.05 (approx.)
2.145 2.145 2.145
Not Rejected Not Rejected Not Rejected
None of the null hypotheses are rejected; in fact, the t statistics indicate some
of the subsample means are remarkably close. These results provide a safe indication
that the sample is internally consistent and likely to be representative of the
population.
VIL PREPARATION OF THE DATA
Information from completed questionnaires was entered into a spreadsheet,
and from the spreadsheet summary statistics were generated. T-statistics for
comparisons between different segments of the sample were also generated. The
questionnaire responses were divided in the following ways to form several segmented
versions of the sample. The firm characteristic of export experience had five
components: 1) prior experience of the entrepreneur in a SME (coded under
EXPSME), 2) prior experience of the entrepreneur in a large enterprise (EXPLE), 3)
prior experience of the entrepreneur in a firm that was a subcontractor for a firm that
exported (EXPSUB), 4) other prior entrepreneurial experience (EXPOTH), and 5)
other employees with experience in exporting or export marketing (EMPXMKT).
Five segmented versions of the sample were created; each one with two segments
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75
representing firms that had and did not have one of the above characteristics. A sixth
version divided the sample between firms with any form of experience and those with
none at all.
Next, self-assessment of firms in the areas of growth, profits, and exports
(coded under variables of the same names) was used to create three more segmented
versions. The first based on whether the firm has rated its growth with a "1," "2," or
"3" (low or average growth group) or a "4" or "5" (high growth group). The second
and third applied the same principle to profits and exports, respectively.
Firms were then divided by industry sector. Five sectors covered the entire
sample. Each firm's list of primary products for 1996 (PRODl-96, PROD2-96,
PROD3-96) determined its sector. High-tech firms were defined as firms engaged in
production of new technology, exporting products such as scientific instruments,
medical equipment, optical materials, pharmaceuticals, testing equipment and sensors,
and so forth. Heavy industry was defined as firms producing heavy machinery,
specifically large machinery and machine parts used as intermediate goods. This
would include vehicles, lifting equipment, and most intermediate machinery and
components. Light industry was defined as consumer and non-mechanical
manufacturing, including items as diverse as toys, clothing, tools, and computers.
Agricultural and food firms were those few firms which exported food or food
products. Finally, service firms were defined as firms whose primary product was a
service of any sort. These five segments comprised a single segmented sample.
The countries to which firms exported provided another way to divide the
sample. For ease and clarity of analysis, firms were divided into three groups based
on the historical reliability of debt repayment. The questionnaire categories of
CANADA, EUROPE, JAPAN, and entries under OTHER which named Australia
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76
were condensed into a single category representing countries with high credit ratings
and reliable reputations. The areas of the Middle East, Africa, and Latin America
(coded under MID EST, AFRICA, MEX, and OTH L.AMER.) were grouped into
countries which have in the past experienced debt crises and which banks tend to
hesitate exporting to (Personal Communications with Frieze, J. 12 November 1996).
Firms which exported solely to the first group were placed in the segment labeled "1st
World." Firms which exported solely to the second group of nations were placed in
the segment labeled "Debt." All other firms were placed in the category "Other."
Note that the three segments of this sample do not overlap and thus form disjoint sets.
Firms were lastly divided by support system use. The five primary providers of export
assistance to firms in this sample, CEFO, Eximbank, DOC, SBA, and LAACC,
defined the categories into which firms went. All firms which have utilized a support
organization, either in the past or presently, were included in the segment for that
organization. Thus, segments in this segmented set were not disjoint and thus not
independent of each other.
VIIL DATA ANALYSIS
Once the sample had been divided into the appropriate segmented sets, t-tests
of the differences of means between segments were performed. In all cases the null
hypothesis was of no difference between means, and the tests were performed to
determine differences in export performance, difficulties, or circumstances between
groups. In addition, a regression was constructed to test whether leaming-by-doing
reduces perceptions of financial difficulties of exporting. The data set was reduced to
include only the relevant variables, and then was converted from Excel to text for use
with SAS. Using SAS, ordinary least square regressions as well as limited dependent
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77
variable techniques were employed. In particular, six different indicators of export
performance were analyzed: (1) the share of exports in total sales in 1995
(XSHARE95), (2) the share of export in total sales in year of first export
(XSHAREFX), (3) the firm’s self-assessment of their export performance
(EXPORTS), (4) the number of countries to which the firm exported in 1995
(NCON), (5) the number of foreign buyers (NXBUYR), and (6) the number of annual
shipments (NSHIP). Regressions were constructed to measure the extent to which (1)
export experience reduces perceptions of financial obstacles between time of first
export and the present, (2) firm characteristics influence export performance, (3) use
of marketing support influence export performance, and (4) use of export financing
support influence export performance.
Finally, beyond the results of the statistical approach, the researchers reviewed,
summarized, and interpreted comments and other non-quantifiable feedback from
questionnaire as objectively as possible.
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INTERVIEW SUMMARIES AND COMMENTARY
A number of face-to-face interviews with officers from support organizations
supplemented the literature on those agencies, as interviews with concerned exporters
added to the feedback garnered from the returned questionnaires. An initial interview
provided an overview of export finance from the perspective of a successful
businessperson and an expert in the field. All the interviews with the support
organizations were conducted in the spring of 1996. The interviews with firm
entrepreneurs were held in response to replies to the questionnaire mailing in July.
Finally, two interviews were held with bankers was held in November and December
1996. The interviews are handled below in chronological order. The summaries and
commentary cover content of the interviews that is not redundant with information
found in the literature.
L Systems Integrated, Inc.
Susan Corrales-Diaz, President and CEO of Systems Integrated, Inc., a small
and successful exporter, hosted an interview with herself and Irene Fisher, a
consultant for SCORE. Ms. Fisher pointed out that many SMEs stumble upon export
opportunities but are unprepared for the risks. SMEs are particularly vulnerable
because they do not have the resource for absorbing any losses. While firms tend to
concentrate on reaching the market and selling the product, they often overlook the
need for financing and are ultimately stymied by financial limitations.
Ms. Corrales-Diaz elaborated on Ms. Fisher's comments. Cash flow is a major
problem SMEs face, since deliveries and payments may be few and irregularly timed.
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79
To fulfill an order with delivery and payment often a year or more in the future, a
small firm needs extensive financing to cover operating costs. Banks will only
provide a letter of credit, guaranteeing payment to the seller, if the firms puts up 100
percent of its value in collateral. The greater sense of risk leads banks to require
much greater amounts of collateral when lending to finance exporting than to finance
domestic business. Difficulty in judging creditworthiness of the buyer is a major
factor in the conservative approach most banks take to export finance.
Ms. Fisher offered another thought: virtually every other country's economy
relies on exporting, and so their government are effectively and extensively involved
in export assistance. In the U.S. there is no sense of urgency or priority in government
or even private banks. This in turn generates a widespread lack of expertise in export
assistance and financing.
These comments are particularly relevant in light of the fact that in both
academic and governmental circles, the primary focus of export assistance is
marketing support. This is the area where inexperienced firms are most likely to seek
help, as indicated by Ms. Fisher’ s comments. However, given the lack of resources
and expertise devoted to export support, this focus on marketing implies that what
little assistance is being given is largely misdirected.
IL Eximbank
Tricia Snow, Business Development Officer of Eximbank, discussed
Eximbank's role in financing SMEs. She began by acknowledging Eximbank's
reputation as a big business bank. Eximbank does not work with businesses just
beginning to export; it requires a year of export experience and demonstrate net worth.
This limits the numbers of firms it can serve. Nonetheless, within these restrictions,
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Eximbank has greatly expanded its efforts to reach SMEs that it can serve. She
claimed the turnaround time for an application for a loan guarantee is about six to
eight weeks.
Eximbank does offer Export Credit Insurance to small firms, something
private insurance providers tend to offer only to large firms. In her experience it has
been successful and has not been abused ever in the ten years of her experience.
Although Eximbank's Working Capital Guarantee to small exporters covers 90 percent
of the amount of the loan, banks still feel uncomfortable with the 10 percent that
remains a risk. Ms. Snow did not perceive there to be a secondary market for such
loans.1 4
This interview raised three major points of concern: first, whether there is an
agency that is willing to finance firms that are new-to-export; second, the extent to
which a turnaround time of six to eight weeks handicaps firms attempting to arrange
export transactions; and third, the reasons behind banks' seemingly excessive aversion
to export finance risk. To some extent all three of these points were illuminated in
later interviews.
m . CEFO
Caroline Brown, Senior Loan Officer, offered a very different view of export
finance from Ms. Snow. She said that most banks do not mind the 10 percent
unguaranteed portion of their working capital loans. Only at a lower rate of coverage,
say 75 percent, would banks withdraw financing She described CEFO guarantees as
providing an "added comfort level" to banks. Also, CEFO is an economic
1 4 There is, in fact, such a secondary market; this fact came to light in later interviews.
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81
development agency, and it recognizes and does not shy away from the risk inherent in
developing export markets. Nonetheless, CEFO has experienced few defaults.
In spite of the fact that CEFO has been so successful, Ms. Brown notes that
banks remain wary of financing small firms. They are concerned about the solvency
of a firm for which one shipment may represent 10 percent of its budget. CEFO is
necessary to establish the relationship between the bank and firm, which, once
solidified, can continue without CEFO involvement.
The success of CEFO has allowed it to become more selective among firms,
which has had the unfortunate effect of reducing the likelihood of very small, riskier
firms from gaining access to guarantees and thus financing. This is an opening that
needs to be filled.
Reflection on these comments yields the following question: if CEFO only
provides an "added comfort level" to banks, why are banks which are aware of the low
default rate CEFO experiences so unwilling to provide financing on their own to
firms?
IV. DOC
An interview at the DOC office in the USEAC in Long Beach with Joan
Kanlian and Steve Morrison, International Trade Specialists, was composed of an
outline of DOC administrative units and programs and an extensive review and
revision of the questionnaire. A number of new support organizations were added to
the questionnaire.
V. LAACC
Corinne Murat, Program Director, talked about the relationship between the
LAACC and other chambers of commerce. Within the five county Los Angeles area,
there are over 240 chambers of commerce, she pointed out, which each lobby for the
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82
needs and pool the resources of their constituent firms. All chambers of commerce
engage in legislative advocacy, lobbying to further the interests of their member firms.
The LAACC has partnerships with World Trade Centers in Long Beach, Orange
County, Oxnard, and with the Inland Empire Economic Partnership. With these
partners LAACC provides counseling for firms interested in or presently exporting.
LAACC is also working with the DOC to provide counseling through LA Trade, a
special program to provide free export counseling. LA Trade offers TradePort, the
web site for export assistance.
VL Pioneer International Group
The first of the three interviews with firms was held with John Alikani,
President of Pioneer International Group. Pioneer is a subsidiary of All-Grain
International Export Group; Alikani founded Pioneer in 1987 to do research and
investment for All-Grain. Since All-Grain withdrew a promising project from Russia
in 1994, however, Alikani has attempted to create his own export trade, particularly
with leads in Russia. He is also marketing the product Allvita, a food and animal feed
preservative.
In this last year he has received a couple of large orders for Allvita, and needed
financing for the shipments. He filled out a large amount of paperwork, which he
exhibited during the interview, but was turned down even after demonstrating the
quality of his product and documenting his buyer's 20 percent down payment He has
had to settle for a shipment one-fifth the size of the order, where the original down
payment became the entire cash payment.
Mr. Alikani sees the bureaucracy of the export finance assistance as his
undoing. He argued that paperwork intended to prevent fraud actually invites it.
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Instead of detailed paperwork, export finance offices were staffed by three experts
who would give a guarantee after a face-to-face meeting. European countries, he
stated, with their traditional reliance on trade, provide fast and liberal guarantees to
earnest exporters. They also provide credit to buyers, which is a critical edge over
small American firms that European firms enjoy.
The case of Pioneer is a clear example of the necessity of export financing
assistance to small firms. It is not surprising that a firm so small and with few assets
would be rejected by Eximbank for financing. What was not clear was whether this
had been made clear to Mr. Alikani. What is likely is that he would be doing a lot
bigger business if he had gotten financing. He is understandably reticent about
approaching other agencies now. Like most firms in this study's sample, he is
preoccupied with security of his firm's information, and is loathe to deal with more
agencies and additional paperwork.
This case highlights the importance of financing to the small business export
process. Pioneer is an export trading company, a subsidiary of a larger exporter, and
Mr. Alikani has extensive experience in exporting. It is evident in this case that the
sole limiting factor in the failure of this transaction was financing. Difficulties in
marketing the product or lack of familiarity with export transactions played no part. If
Alikani's experience is at all typical, the lack of resources devoted to finance (first
considered under "Systems Integrated, Inc." above) is serious problem that should be
remedied.
VIL Concord Enterprises
Originally an importer, Concord now does most of its business exporting.
Mike Shayan, a buyer for Concord, now spends much of his time as a seller of
Concord's exports traveling to various consumer markets. Concord is a medium-sized
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importer/exporter that is able to sell smaller batch to small markets that larger firms
ignore. Serving smaller buyers, however, means that financing is harder come by,
since banks prefer to finance only shipments between large firms.
Mr. Shayan sees problems of collection as important as problems of financing.
Since Concord is an established medium-sized firm, this is not surprising. But
measures to promote or ensure collection from buyers overseas would indirectly
benefit seekers of financing if providers of financing saw collection as more likely.
One way to achieve this end, he believes, is for support organizations to provide
information on the various customs and instruments in different countries, and their
reliability. He also describes how overseas chambers of commerce, such as Hong
Kong's, are fast acting and aggressive, while American services are slow and less
effectual.
Mr. Shayan recommends a free zone as the best thing Los Angeles could offer
importer/exporters.1 5 Large quantities of goods flow through LA; in his case, he
handles goods from East Asia bound for Latin America. It would bring a lot of
businesses in Los Angeles from South America in his opinion, and will help American
firms take advantage of the tremendous but under-appreciated potential of the
Mexican market that he sees.
The emphasis of Mr. Shayan's points betrayed a concern with special services
to exporters over a need for financing. It would seem reasonable to assume this
attitude distinguishes more established, medium-sized firms from newer and smaller
firms. With the exception of the perhaps DOC, none of the export support
1 3 There do exist, in fact, free zones (called Foreign Trade Zones; they are areas where goods can be
imported without customs duties being assessed until they are shipped out of the Foreign Trade Zone
and into the rest of the United States) in the Los Angeles area. There is a Foreign Trade Zone in the
Port of Los Angeles and one in the Port of Long Beach, as well as numerous smaller zones throughout
the Los Angeles. Apparently they are not as well publicized as they ought to be.
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85
organizations included in this study would have the resources to implement a program
to increase collections in foreign markets. A focus on the more modest, transaction-
oriented needs of smaller firms seems to be a sensible priority for support systems
given these circumstances.
VHL C-Shore International
C-Shore is a small export trading company owned by Jacques Isaac. He has
been in business for the past eight years, and presently exports various agricultural
commodities to countries in east Asia and the Middle East. Like Pioneer, C-Shore
buys products from domestic suppliers and exports them under its own brand name.
Because Mr. Isaac has established a reputation and developed relationships
with suppliers, he usually does not need working capital, since the suppliers trust he
will pay on time. When there is a very large order, or an unfamiliar supplier, he needs
to provide cash up front and must appeal to a government agency for assistance. He
says he used to have a line of credit with CEFO, but now CEFO offers only
transactional credit This is a handicap because it takes about two to three weeks to
gain approval for the working capital loan, in which time the relevant letter of credit
has expired. Mr. Isaac adds that although CEFO has been flexible in the past, it has
reduced its services recently, and denied his 750,000 dollar Pre-Shipment Working
Capital Loan Guarantee request on the grounds that he did not have sufficient assets
for collateral. He also approached a Small Business Development Center and
completed their paperwork, but did not receive any financing.
He believes that the government needs to provide financing with lines of
credit This speeds up the filling of orders and gives more flexibility to firms; for
example, it would allow Mr. Isaac to offer his buyers open accounts rather than letters
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86
of credit, which are costly. Without government lines of credit, small firms such as
his have to turn to private finance companies, which charge prodigious amounts of
interest. He expressed some pessimism about the prospect of improvements in export
finance assistance, saying that new regulations and budget cuts are forcing agencies to
become more conservative.
IX. Imperial Bank
An interview with Jill Frieze, Vice President of the International Division of
Imperial Bank, provides a banker’ s perspective on export finance. Ms. Frieze
explains the role of Imperial Bank in exporting and provided a perspective on the
involvement of banks in general in export finance for small business. Imperial Bank
is a southern California-based bank which serves "middle market" firms, with sales
from approximately 5-50 million dollars. It is very involved in export finance.
Ms. Frieze says agencies such as CEFO and Eximbank do not often refer firms
to banks, but rather banks refer their clients to such agencies when they are
considering an export financing loan. Additionally, banks frequently refer firms to
other banks which are more willing to provide loans for exporters. Although Imperial
does serve more small firms than larger banks such as Bank of America, it serves
fewer than small community banks. Imperial Bank does not even consider very new
or very small firms for loans; if such a firm approach Imperial for a loan, she would
refer it to a smaller bank. Imperial generally does not consider small loans because
they do not generate the required profit margins, since their fixed costs—paperwork
and monitoring—are as high as for larger loans.
Often times small firms come across an export opportunity far larger than
anything they have done before. Banks tend to be hesitant to finance such transactions
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87
because the exporter’ s ability to perform has not been established for a shipment of
such a magnitude. Banks do not lend much weight to letters of credit, as they do not
guarantee payment, but are contingent upon conditions on both the buyer and
exporter. Rather, Imperial (and most banks) is an asset-based lender, requiring three
years of financial statements and often a record of exporting for firms without a
relationship of standing with the bank.
Since the Latin debt crisis in the 1980s, banks have been loathe to provide
loans for exporting to Mexico and other countries in Central and South America. In
the last few years they have begun to service the Mexican market, but not without
government guarantees. This fact, however, can be generalized to all export
transactions: without a guarantee, only exporters with a spotless export history and
exceptionally safe circumstances for exporting would have a chance to receive an
unguaranteed export loan. Even guaranteed loans, since they are rarely 100 percent
guaranteed, banks sell on the secondary market.
In response to the question of whether banks would finance exports in the
absence of guarantees by the government, Ms. Frieze said they would, but only in the
complete absence of any government guarantees—not before then. As long as there
are guarantees, banks will be unwilling to provide financing without the security
government finance provides. In defense of this stance, she points out that guarantees
provide banks with more funds available for borrowing and allows banks to provide
more cash up front to the exporter for a foreign receivable.
X. National Bank of Southern California
Peter Hofmann, Vice President and Manager of the International Division,
explains the alternatives that banks can offer small start-up firms without the capital
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88
or track record to qualify for export finance loans. As National Bank of Southern
California serves primarily small- and medium-sized businesses, Mr. Hofmann is
heavily involved in export finance for SME exporters. Like other banks, he says, his
bank requires collateral and at least a year of export experience before it will provide
a loan. A small firm in need of working capital which lacks sufficient collateral for
the loan it needs may be able to get a loan guarantee from an agency, but a firm
without the export experience will not qualify for such guarantees. Thus, in order to
finance a small start-up firm, a bank would have to "go out on a limb," and, given the
high degree of regulation banks face, such a bank would be "relatively squeezed."
What Mr. Hofmann does for such firms is to suggest alternative ways of paying
their suppliers (payments for raw materials, or, in the case of export trading
companies, finished products create some or even virtually all of the need for working
capital). He suggests arranging for payment through a transferable letter of credit,
which allows the exporter to transfer a portion of the value of the letter of credit to its
supplier, thus guaranteeing payment to the supplier (contingent upon satisfactory
delivery) rather than paying the supplier up front. For many exporters, a transferable
letter of credit sidesteps the entire problem of working capital. Mr. Hofmann
emphasized the fact that back-to-back letters of credit do not serve this end, and that
only a transferable LC can circumvent the need for collateral on the part of the
exporter.
Mr. Hofmann is optimistic about the recent attention government has been
paying to exporting and the easing of the export process for smaller firms, saying, "A
different wind is blowing." Nonetheless, most firms, with the exception of very large
ones, are ignorant of exporting. He outlined "four pillars" of exporting: marketing,
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89
insurance and transportation, legal, and finance. Although most firms are very aware
of the marketing needs they have, they do not understand export finance at all.
Finally, Mr. Hofmann points out some things that firms can do to give
themselves an edge. Beyond the general need to develop an export culture in the
United States, a couple of specific things exporters can do to expand their circle of
buyers is to offer terms in the buyers' currency and to work with foreign-based
international banks that have stronger ties to the regions to which you export than
American ones. For example, a firm may need to contact a British bank in order to
confirm a letter of credit with a buyer in a former British colony who uses a local
bank.
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90
EXPORT ASSISTANCE ORGANIZATIONS
There are a number of organizations and government agencies whose aim, in
whole or in part, is assistance with small business exporting and specifically the
provision of export loans and loan guarantees. Among these are the California
Export Finance Office (CEFO) and Los Angeles Area Chamber of Commerce
(LAACC) serving this region, and the Export-Import Bank of the United States
(Eximbank), the Small Business Administration (SBA), the Overseas Private
Investment Corporation (OPIC), and the Private Export Funding Corporation
(PEFCO), all of which operate on the national level.
Also providing assistance are local world trade centers and chambers of
commerce. Counseling and marketing-related services are also provided by the
Department of Commerce International Trade Administration (DOC ITA) and the
Service Corps of Retired Executives (SCORE), an SBA program. Recently, U.S.
Export Assistance Centers (USEACs) have been formed, which bring together several
support organizations, such as those above, into one office. The SBA has organized
numerous Small Business Development Centers (SBDCs) throughout the country.
Below is a brief description of each of the relevant agencies serving California
exporters, including an assessment, based on the literature, of the degree to which
each is used. These summaries draw heavily from similar summaries in Wells and
Dulat (1996) and MartinofF (1988) and are supplemented by information from
personal interviews and updated where necessary. These other sources will be
documented individually.
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91
I. CEFO
Probably the most highly acclaimed export finance entity is CEFO, a small but
successful office created in 1985 that now operates under the California Trade and
Commerce Agency (CEFO 1994). It provides only loan guarantees, not direct loans.
It presently has a fund balance of about 11.4 million dollars which can be leveraged 4
times to guarantee a total of 45.7 million dollars in loans at any given time (CEFO
1996). CEFO caters specifically to small exporters, and has a maximum guarantee of
750,000 dollars on a loan; as the guarantee is for 90 percent of the total amount of the
loan, CEFO can finance transactions of size up to 833,000 dollars.
CEFO offers three basic loan guarantee plans:
• Pre-Shipment Working Capital G uarantee covers loans used to allow a firm to fill
an order and continue operation before payment.
• Post-Shipment Accounts Receivable Guarantee allows firms to offer terms of
payment to foreign buyers by covering risk of default, inconvertibility, or political
risk. This is done in conjunction with Eximbank's Umbrella Policy.
• Combination Guarantee combines both Pre- and Post-Shipment guarantees.
Besides the appropriateness of its guarantees to SMEs, CEFO has relatively
loose requirements for their guarantees which qualifies many more SMEs for
assistance from CEFO than from other agencies. In contrast to Eximbank, "CEFO
takes big risks" (Snow 1996). CEFO has nevertheless been effective in maintaining a
low default rate, paying only 3.6 million dollars on 19 claims since its creation (CEFO
1996).
The demand for CEFO services has risen faster than its budget, allowing it to
become more selective in choosing financing projects. While this reduces the risk of
future defaults, very new and very small exporters are no longer receiving the
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92
assistance that CEFO previously provided (personal communication with Brown, C.,
29 March 1996).
ILLAACC
The LAACC is the largest of over 240 Chambers of Commerce in the five
counties comprising the Los Angeles area. Its assistance to exporters is limited to
counseling. A 2.6 million dollars grant from the DOC Export Development
Administration has allowed the LAACC to create LA Trade, an entity designed to help
LA area exporters through technical assistance and counseling (personal
communication with Murat, C., 26 April 1996). LA Trade has established a number
of local Trade Centers which offer assistance to businesses in the Los Angeles area.
LA Trade provides service in 4 main areas:
• Export counseling.
• Market support including trade shows and "International matchmaker missions."
• Export finance assistance limited to loan counseling and referencing to financing
agencies and programs.
• On-line export assistance and trade data, provided through TradePort.
The most innovative project of LA Trade is TradePort, a virtual library of
export advice, trade and export assistance directories, and general information on
exporting and preparation for export The huge, award-winning web site is easy to use
and comprehensive. Its directory information is the most extensive the researchers
have encountered, but it is spread over several pages, with a considerable degree of
redundancy without apparent reason.
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ED. Eximbank
Eximbank's express mission is the support U.S. exports and the
competitiveness of U.S. exporters by providing financing where private sources are
insufficient. To this end, the Eximbank offers direct loans and loan guarantees to both
U.S. exporters and foreign buyers of U.S. exports. Most support is in the form of
guarantees and insurance rather than direct financing (personal communications with
Snow, T., 1 March 1996). Eximbank does not compete with the private sector, and
will not offer assistance without a "reasonable assurance of payment." Because it has
traditionally financed large projects and demands "reasonable assurance of payment,"
Eximbank has historically provided very little assistance to small business, who rarely
have the required assets or cash flow.
In the last decade, however, it has taken steps to offer assistance specifically to
small businesses and to become more accessible to SMEs in general. These changes
have met mixed results. Eximbank's monetary commitment to SMEs has grown: it
provided 1.7 billion dollars in support to small businesses in fiscal 1994 including 181
million dollars in Working Capital Guarantee financing, which is specifically aimed at
small business (Eximbank 1994a). Nonetheless, Eximbank continues to have
relatively strict conditions on firm creditworthiness. It is an asset-based lender, which
means a letter of credit, which guarantees payment, will nonetheless not be considered
collateral; rather, at least one year of export experience and a positive net worth are
required for assistance (personal communications with Snow, T., 1 March 1996).
Both of these requirements can be substantial impediments to small firms, especially
those intending to break into exporting. This issue we will take up later in our results
and conclusions.
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Eximbank offers the following policies aimed at small business (Eximbank
1994b):
• Small Business Insurance is a short term (180 days or less) policy for small, less-
experienced exporters. It covers 95 percent of the commercial risk and 100 percent
of the political risk. This is a multi-buyer policy.
• Umbrella Policy is administered by a private intermediary between Eximbank and
the exporter.
• Short-term Single Buyer Policy is short-term insurance for an exporter who does
not want to insure all short-term credit sales, as under a multi-buyer policy.
• Working Capital Guarantee Program guarantees 90 percent of the principle and
interest on working capital loans from commercial lenders to small business, up to
a limit of 2 million dollars.
In support of Eximbank's loan guarantees, PEFCO acts as a lender of last resort
if commercial banks are unwilling to finance a qualified firm. Eximbank also
discounts its loan guarantee arrangements through PEFCO in order to maintain
liquidity to provide additional financing. Beyond these functions, however, PEFCO
plays little part in the financing of the exports of SMEs.
IV. SBA
The SBA serves businesses that qualify as small businesses by its standards,
which vary by industry, but generally describe small- or medium-sized enterprises as
defined in this paper. It offers both counseling and financing. Although the focus of
the SBA is solely small business, it has no specific export emphasis. Because of this,
its effectiveness to small exporters is not certain.
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The SBA does have several programs which cater to exporters. It has offices
offering export assistance in all the USEACs. Counseling is provided at SBDCs as
well as at the larger offices of the SBA. The most highly regarded program of the
SBA is SCORE, composed of retired executives with export experience and expertise
who offer their consultative services to new exporters.
A number of loan and loan guarantee programs are offered as well. The
Export Working Capital Program is essentially identical to Eximbank's working
Capital Guarantee and the two organizations have coordinated their programs, so that
the SBA provides guarantees to small firms with needs for loans under 833,000
dollars, and Eximbank provides guarantees for larger loans. The SBA's Regular
Business Loan Program guarantees medium- and long-term loans of similar size, but
covers only 85 percent of the loan for loans greater than 155,000 dollars. The SBA
has recently added the Low-Documentation Loan Program to its list of offerings,
which should ease the requirements on very small firms and the traditionally
considerable paperwork they face.
V. OPIC and AID
OPIC is a self-financing quasi-govemmental organization committed to
assisting projects of American businesses in developing nations. Most of financing
offered by OPIC is devoted to direct investment projects. Although it does offer
exporter insurance, this is limited to contracts with foreign governments or, for other
contracts, is limited to losses incurred due solely to political violence. Its usefulness
to the southern California SME is further limited by the fact that OPIC generally deals
with larger contracts and in all cases covers dealings only with developing countries.
China and Mexico are excluded from the list of OPIC-eligible countries. Nonetheless,
firms exporting to particularly unstable areas may find OPIC indispensable.
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The U.S. AID provides export financing for trade with developing countries as
well, but is generally restricted to contracts with foreign governments that are
additionally deemed beneficial and important to the county's development. Although
both of these organizations are available to small exporters, they are not likely to be
major suppliers of loans and guarantees.
VI. DOC IT A
The DOC is a large agency offering a great number of services, export-related
and otherwise. The vast majority of export services are provided by the ITA, and thus
any discussion of the DOC's role in export assistance will revolve around the ITA.
The ITA is composed of four basic units which each provide services to the exporter.
The division can be summarized as follows:
• U.S. and Foreign Commercial Service (U.S.&FCS) offers the greatest breadth of
service. It is outlined in more detail below.
• International Economic Policy Unit provides information on market and political
characteristics and marketing strategies for all of the U.S.'s trading partners. It
gives country-specific information.
• Trade Development Unit provides counseling and offers programs to assist firms
based on their industry affiliation, rather than their geographic objectives.
Programs include trade fairs, seminars, and trade missions.
• Import Administration Unit assists firms who may be victims of unfair trade
practices of firms exporting to the U.S..
The U.S.&FCS has two primary objectives: to counsel new exporters or
exporters wishing to expand their export involvement; and to provide access to useful
databases that the U.S.&FCS compiles. The largest and most useful such database is
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the National Trade Data Bank. Also, the extensive overseas network of U.S.&FCS
offices is in itself a considerable resource.
The U.S.&FCS attempts to meet its objectives through a number of activities.
In addition to basic export counseling, it organizes trade fairs and missions, promotes
technology sharing, establishes contact between exporters and U.S.&FCS offices in
other countries, and acts as an advocate for U.S. firms in foreign countries (personal
communications with Kanlian, J. and Morrison, S., 1 April 1996). The U.S.&FCS,
nor any other unit of the DOC ITA, does not provide export financing or loan
guarantees.
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CHAPTER 6
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RESULTS
This chapter discusses the findings of our research. The discussion is broken
up into the following sections: (1) firm characteristics, (2) marketing channels, (3) the
use of marketing support and the internet, (4) the use o f public export financing
support and financing related difficulties, and a discussion on (5) samples segregated
by export performances. A summary of the findings is given at the end of the chapter.
I. FIRM CHARACTERISTICS
A. The Light Manufacturing Sector
As exhibited in Table 1, the light manufacturing sector has the least number of
CEOs with prior work experience in a SME (EXPSME) as well as in subcontracting
firms for exports (EXPSUB). This sector also has the most firms with employees
skilled in some specific export experience or in export marketing (EMPXMKT),
which suggests that firms in this sector are, on average, more committed towards
exporting. The variable EMPXMKT can be seen as a proxy for the firm’s commitment
towards exporting because employing people skilled with export specific experiences
is in part a conscious effort on the part of the firm to allocate resources toward
exports. However, the average light manufacturing firm also has the least number of
annual shipments (NSHIP) as well as the least number of foreign buyers (NXBUYR)
compared to the heavy manufacturing and high-tech firms. Overall, the export
performance in this sector ranked second after the high-tech industry in terms of the
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CEO’s subjective ratings (EXPORT) as well as the firm’s export share in total sales in
1995 (XSHARE95) as well as in the year of first exports (XSHAREFX).
B. The Heavy Manufacturing Sector
On average, the heavy manufacturing sector has the highest composition of
CEOs with prior work experience in a subcontracting firm (EXPSUB). This sector
also has the worst export performance as reflected by the subjective ratings
(EXPORT) by the CEOs. The mediocre export performance is also reflected in the
fact that the heavy manufacturing firms, on average, have the lowest share of exports
in total sales in both 1995 (XSHARE95) and the year of first exports (XSHAREFX),
and also the fact that they export to fewer countries (NCOUNTRIES) than any other
sector.
C. The High-tech Sector
There are a total of 27 firms assigned to this sector. Notably, there are more
CEOs in this sector that have prior work experience in a SME (EXPSME) and in a LE
(EXPLE) than any other sector. 44.4 percent of the high-tech firms have CEOs with
working experience in SMEs, compared to only 27 percent of those in light
manufacturing and 35 percent of the heavy manufacturing firms. 33.3 percent of the
high-tech firms, compared to only 27 percent of the light manufacturing and 25
percent of the heavy manufacturing firms are endowed with CEOs with prior work
experience in a LE. On average, the high-tech industry has the best export
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performance (EXPORT), exports to more countries (NCOUNTRIES), has more
foreign buyers (NXBUYR) and more shipments (NSHIP) than the manufacturing
sectors. On average, the high-tech industry has the fewest firms having employees
with some export specific experience or skilled in export marketing (EMPXMKT),
which suggests that the high-tech firms, on average, are less committed towards
exporting than the other sectors. However, as we shall see later, the variable
EMPXMKT is actually a significant determinant of export performance within the
sector.
n. MARKETING CHANNELS
In general, all the sectors have rated RI196 (the relative importance of the
direct efforts of firms to access the export market) as most important, followed by
RI296 (the relative importance of the initiatives of foreign buyers to access the export
market). This systematic pattern may be a bias inadvertently captured by the
questionnaire and should be discounted. However, there is more variations in the
scores for RI396 (the relative importance of the initiatives of subcontractors to access
the export market) and RI496 (the relative importance of support by public or non
profit agency to penetrate the export market). On average, the manufacturing sectors
have ranked RI396 before RI496, while the high-tech sector has ranked the public
marketing support (RI496) as more important than the initiative of export
subcontractors (RI396). This pattern in the responses by the various sectors is, in part,
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due to the specificity of the product inherent within the sector. This will be explained
in the following section.
III. THE USE OF MARKETING SUPPORT AND THE INTERNET
On average, the high-tech firms have used the most of the various types of
marketing support as well as the internet, and this is followed by the heavy
manufacturing firms and finally the light manufacturing firms.
While 54.3 percent of light manufacturing SMEs and 57.1 percent of heavy
manufacturing SMEs have used information provided by public agencies to penetrate
the export market, 70.8 percent of high-tech SMEs have done so. While 25.7 percent
of the light manufacturing and 47.6 percent of the heavy manufacturing sector have
been introduced to a foreign buyer or foreign export agent by a public agency, 50
percent of the firms in the high-tech sector acknowledged receiving help in this area.
A little less than 40 percent of the light as well as heavy manufacturing firms reported
having participated in trade fairs as compared to half of all the firms in the high-tech
sector that have previously participated in trade fairs. Only 23 percent of the light
manufacturing and 19 percent of the heavy manufacturing firms have been assisted in
becoming familiar with foreign laws, compared to 30 percent of the high-tech firms
that have been helped in this area. While 23.5 percent of the light manufacturing and
35 percent of the heavy manufacturing firms have used the internet to access
information on export promotion, approximately 44.4 percent of the high-tech sector
has done so.
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The progression in the use of the existing types of marketing support from the
light manufacturing sector to the high-tech sector can be explained by (1) the
specificity of the sector’s product for the public agency to handle adequately, (2) the
efficiency of the ITIs to handle the sector’s marketing needs, and (3) the public
perception of the sector’s benefit potential, which consequently results in the
distribution of resources for marketing support among the sectors.
If use of public marketing support can be equated with the effectiveness of the
public support to meet the sector’s marketing needs, we see that the use of public
marketing support is an inverse U function of product specificity across sectors.
Product specificity is defined here in terms of the range of products within the sector.
The wider the range of products within the sector, the less efficient are public support
able to manage those marketing needs adequately, and hence resulting in lesser use of
public marketing support in that sector. On the other hand, as the product becomes too
specific, the public support system also becomes inadequate in meeting those
marketing needs, hence resulting in lesser use of public support by certain firms. This
is evidenced by the fact that use of public marketing support is least among the light
manufacturing firms (the sector with the widest range of products), while the high-
tech firms (the sector with the smallest range of products) are among the most active
users of marketing support. However, as we shall see later, within the high-tech sector,
firms that are relatively more successful in terms of export performance tend to use
less marketing support, suggesting a downward relationship between the use of
marketing support and export performance. Also, within the light manufacturing
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sector, we see the reverse pattern to that of the high-tech sector. Although firms in the
light manufacturing sector are the most passive among users of public marketing
support, the successful firms tend to use more marketing support than their less
successful counterparts. If export performance can be seen as a direct result of the
effectiveness of the marketing channel, then it follows that the effectiveness of public
support is marginally negative in the high-tech sector, while it is marginally positive in
the light manufacturing sector.
Intuitively, it is clear that arranging a trade fair or gathering export information
for a wide range of products is more difficult than for a sector that has high product
homogeneity and greater substitutability among the products. To get a feel for the
product range, products of the light manufacturing sector includes toys, tools, and
jewelry, while those that pertain to the heavy manufacturing sector includes
automobile parts, naval equipment and aeronautic parts.
The second hypothesis, that use of marketing support is a function of the
efficiency of the ITIs, stems from the tenets of laissez faire and the theory that public
intervention is appropriate only when social outcomes are sub optimal as a result of
market imperfections. In this framework, we can view the use of public support as a
direct result of the adequacy of the ITT, or the lack thereof (the market imperfection),
to meet the marketing needs of the various sectors. It is noted that, unlike the other
sectors, SMEs in the high-tech sector tend to rate the relative importance of the export
agencies (RI496/FX)as more important than the initiatives of subcontractors
(RI396/FX) to access the export market. Their lesser dependence on the initiatives of
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subcontractors relative to their dependence on the initiatives of public agencies may
be due to the high and perhaps accelerating rates of technological change that is
inherent in the industry, which Root (1994) maintains contributes to the convergence
of demand preferences across countries, and also to the compression of the duration of
international product life cycles. The short product life cycle, Perry (1992) asserts,
discourages a long-term relationship between an ITI and the exporter from being
established and hence eliminates the ITFs assurance of enjoying future benefits from
the exporter. This implies increased practice of opportunistic behaviors by the IT T and
inefficiency in the marketing channel. De facto, this inefficiency of the ITI as a
marketing channel results in the dependence of high-tech firms on existing public
marketing support.
The third hypothesis is basically a recapitulation of the second hypothesis from
a policy maker’s point of view. As pointed out by Levy, Berry, Itoh, Kim, Nugent and
Urata (forthcoming), leading sources of support come from private channels, and that
the most promising public programs are those that accommodate the private
environment rather than crowd them out If inefficiency of the ITI is a justification for
public intervention, then public support for the light manufacturing sector will receive
little justification relative to the high-tech sector. Moreover, the light manufacturing
sector is often viewed as one of low-benefit potential, thus suggesting that public
officers may have tendencies biased against them in the distribution of resources.
While the efficiency of private channels, and in particular of the ITIs, in the light
manufacturing sector is questionable, it follows that with a biased allocation of
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resources to the light manufacturing sector, the efficiency of public support for this
sector will consequently decrease. With a decrease in the effectiveness of public
marketing support, this will subsequently lead to lesser use of the programs by the
light manufacturing firms. A reduction in the allocation of resources to this sector may
take the form of a narrowing of product range in which the public agencies will
service (e.g. trade fairs are available for manufacturers of toys and tools, but not
available for manufacturers of toothbrushs and garments). If this is true, it partially
explains why the marketing support is the least used among the light manufacturing
firms, and at the same time, the users tend to be more successful in terms of export
performance. Hence, public marketing support is least used by the light manufacturing
firms because they are not available to the majority of those firms.
As seen in Table I, the heavy manufacturing sector has expressed the greatest
dependence on the initiatives of the ITIs (RI396), and also the least dependence on
public marketing support (RI496). It should also be noted that the heavy
manufacturing sector has the most CEOs with prior work experience in an export
subcontracting firm. While the relationship between the two facts is ambiguous, it
remains true that the elements inherent in the heavy manufacturing sector are
conducive to stability in the working structure between the ITIs and the firms. The
heavy manufacturing sector has, in general, the longest product life cycle, and this
allows enough time for the m to specialize and achieve efficiency as a marketing
channel. Unlike the light manufacturing sector, where toys and garments are
constantly changing with consumer trends, or the high-tech industry where change is
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an inherent quality, the heavy manufacturing sector suffers little from the rapid
technological change, in fact some products (e.g. nuts and bolts) are guaranteed to be
resistant to time. This explains the pattern in the heavy manufacturing sector.
However, as seen in Table 1, the heavy manufacturing sector also tends to use more
marketing support than the light manufacturing sector, but has rated RI496 as less
important than the light manufacturing sector.
IV. USE OF PUBLIC EXPORT FINANCING SUPPORT AND FINANCING
RELATED DIFFICULTIES
Public-agency supplied export financing support is mainly comprised of loan
guarantees and insurance. Providers of export financing support included in this study
are CEFO, EXIMbank, SBA and OPIC. The most active users of public export
financing programs are the high-tech firms, while the most passive users are the heavy
manufacturing firms. In total, 38 percent of the high-tech firms, 28.6 percent of the
light manufacturing firms and 19 percent of the heavy manufacturing firms have used
at least one of the export financing programs from the various agencies.
The fact that the heavy manufacturing sector is relatively older than the other
sectors may contribute to their lesser dependence on the public guarantees and
insurance programs. 77 percent of the heavy manufacturing firms were established
before 1985, compared to only 61 percent of the light manufacturing firms and 44
percent of the high-tech firms. The fact that heavy manufacturing firms are relatively
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107
older suggests that they may have a credit history and a reputable track record in
existence, and thus need to rely less on public guarantees.
On the other hand, the light manufacturing firms lesser dependence on the
export financing programs relative to the high-tech firms reflects a more profound
problem with the provision of public export financing support. It should be pointed
out that the light manufacturing sector, on average, has rated the problem of the
limited availability of financing (DIFF296) as most important among the sectors in
1996. In fact, the light manufacturing sector is the only sector that has encountered a
worsening in this problem in 1996 from the year of first exports (DIFF2FX), indicating
that the limited availability of credit is a big problem that is not improving over time.
This problem may, in part, be attributed to the sector’s small average transaction size
relative to the heavy manufacturing and high-tech sectors. The small transactions size
makes extending credit to light manufacturing firms expensive in light of the high
overhead costs (U.S. Congress 1988), making banks reluctant to extend credit to such
firms. While, this resistance in credit flow is an institutional problem (high
administrative costs), loan guarantees and insurance programs, on the other hand, are
directed towards the risk of loan, a flaw inherent in the borrowers (Rhyne 1988). This
problem of the limited availability of financing (DIFF96/FX) can also be explained
from the public agencies’ point of view.
Like public marketing support, justification for any publicly funded program
comes from the social externalities that are spilled over to the public by the
beneficiaries of the assisted programs (Rhyne 1988). The light manufacturing sector is
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108
often regarded as one of low-benefit potential, hence suggesting that agencies are, in
general, more reluctant to help light manufacturing firms in obtaining guarantees, and
that the lesser dependence on export financing support by the light manufacturing
sector is a supply side problem. If this hypothesis is true, it partially explains why the
high-tech sector (a sector of high benefit potential) has leaped from the sector that
viewed the limited availability of financing as the bigger problem in year of first
exports (DEFF2FX) to the sector that viewed this difficulty as less of a problem than
any other sector in 1996 (DEFF296).
V. SAMPLES SEGREGATED BY EXPORT PERFORMANCES
Exhibited in Table S3E, S4E and S5E are the different descriptive statistic of
the successful exporting firms (SEFs) and the less successful exporting firms (LSEFs)
within the light manufacturing industry (sector 3), the heavy manufacturing industry
(sector 4), and the high-tech industry (sector 5). Success in exporting categories are
constructed based on subjective ratings from the CEOs themselves (EXPORT), on
how they view the export performance of their firm on a scale of 1 to 5. Firms with
responses 4 or higher are assigned to the SEF category, while those that rated 3 or
lower are assigned LSEF.
A. THE LIGHT MANUFACTURING INDUSTRY
Exhibited in Table S3E are shared characteristics and differences between the
SEFs and LSEFs in the light manufacturing sector. After accounting for missing
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observations, there were 16 and 19 firms assigned to the LSEF and SEF category
respectively.
i. Firm Characteristics (Light Manufacturing Sector)
Notably, among the light manufacturing firms (1) there are more CEOs among
the SEFs with prior export specific experience in a SME (EXPSME), (2) most SEFs
are newer relative to the LSEFs (53 percent of SEFs compared to 33 percent of the
LSEFs are established after 1985), (3) SEFs tend to be smaller with fewer employees
in both 1995 (EMP95) and in the year of first exports (EMPFX), (4) SEFs tend to have
significantly better profit assessments (PROFIT) and better growth assessments
(GROWTH), (5) SEFs are more likely to have employees with specific experience in
exporting or export marketing (EMPXMKT), (6) the SEFs tend to export to more
countries (NCOUNTRIES), to more foreign buyers (NXBUYR), and with more
shipments (NSHIP), (7) the SEFs tend to have a larger share of exports in total sales in
both 1995 (XSHARE95) and year of first exports (XSHAREFX), and (8) that SEFs
tend to have lower default rates both domestically (DEFLT-D) and abroad (DEFLT-F).
In order to test for the hypothesis that firm characteristics are important
determinants of export performance in this sector, we ran ordered probit regressions
with EXPORT (the subjecting ratings by the CEOs of the export performance of their
firm) and XSHARE95 (share of exports in total sales in 1995) as dependent variables
and the individual firm characteristics as explanatory variables. The results indicate
none of the variables were significant.
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ii. Marketing Channels (Light Manufacturing Sector)
Among the SEFs and the LSEFs in the light manufacturing sector, we note that
SEFs and the LSEFs have ranked RI196 as most important, which is followed by
RI296, RI396 and RI496. The explanation for these rankings is mentioned above.
However, we also note that SEFs tend to rate most of the marketing channels as less
important than LSEFs. The exception being RI1FX, which asked the firms to rate on a
scale of 5 (5 being more important) the relative importance of direct efforts to
penetrate the export market in the year of first export. Employing t-tests to test for
mean differences between the groups, in the case of RI296 and RI396, such a
difference proves to be significant RI296 refers to the relative importance of the
initiatives by the foreign buyers or export agents to access the export market in 1996.
RI396 refers to the relative importance of the initiatives of subcontractors, domestic
trading companies or factoring companies to access the export market in 1996. The
dependence of LSEFs on the initiatives of the foreign buyers or export agents to access
the export market may be due to the fact that, on average, SEFs are relatively younger
than the LSEFs (there are 8 SEFs as compared to 5 only LSEFs that are established
after 1985). Being exposed to the exporting business for a longer time, LSEFs
presumably have a better network of clients for accessing the export market The
lesser dependence on the initiatives of subcontractors by the SEFs may be due to the
fact that the SEFs are the more active exporters, which is also reflected in the fact that
the SEFs are more “committed” to exporting as measured by the variable EMPXMKT,
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and thus would rely less on the initiatives of others. Another explanation for the lesser
dependence of SEFs on the initiatives of ITIs may be the inefficiency of the ITI as a
marketing channel for this sector.
iii. The Use of Marketing Support and the Internet (Light Manufacturing Sector)
Consistent with the findings of Dennis and Depelteau (1985) which
maintained that information gathering is an important factor determining export
expansion, and that the most valuable information is obtained in the field rather than
through officially established information services, we see that the SEFs tend to use
more experience related types of support (e.g. the variable INTRODUCE, TDE FAIR,
FN LAWS) rather than informational typed (e.g. the variable MKTTNFO and
INTERNET) marketing support.
60 percent of LSEFs but only 44.4 percent of SEFs have received information
on export market opportunities from a government or non-profit agency (MKTINFO).
When asked if the firm has ever used the internet to obtain information that pertains to
export promotion (INTERNET), 28.6 percent of the firms among the LSEFs but only
22.2 percent of the SEFs said ‘yes.’ On the other hand, 27.8 percent of SEFs compared
to 20 percent of LSEFs have been introduced to foreign buyers or export agents by a
government or non-profit agency (INTRODUCE). Also, 38.9 percent of the SEFs
compared to only 33.3 percent of LSEFs reported that they had previously participated
in a trade fair (TDE FAIR). In addition, 27.8 percent of SEFs but only 20 percent of
LSEFs said they had requested and received help on becoming familiar with relevant
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112
foreign laws (FN LAWS). This overall greater use of marketing support by the SEFs
tend to suggests that marketing support, especially experiential types of marketing
support, is very helpful for improving export performance in this sector.
To test the hypothesis that marketing support is crucial in determining export
performance in this sector, ordered probit regressions were used with EXPORT and
XSHARE95 as the dependent variables and the individual types of marketing support
as explanatory variables. The results, however, reveal none of the individual types of
marketing support to be statistically significant. To further test for this hypothesis, the
variables MSUPC, MSUPEC and MSUPD and MSUPED were created. MSUPC
records the number of types of marketing support used by the firm, while MSUPEC
records the number of experiential typed marketing support used by the firm. MSUPD
assigns a value one if the firm has used at least one type of marketing support and zero
otherwise, while the variable MSUPED assigns a value of one if the firm has used at
least one of the experiential typed marketing support. Using the same dependent
variables, ordered probit regressions were then run with the new variables as
explanatory variables. Once again, none of the results were significant Ordinary least
square regressions were then employed with the variables NSHBP (number of annual
shipments) NXBUYR (number of foreign buyers), and NCOUNTRIES (number of
countries exported to) as dependent variables, and using MSUPC and MSUPD as
explanatory variables. We found the variable MSUPC to have a significantly positive
effect on the variable NSHIP. This implies that use of marketing support, although not
improving the firm’s subjective evaluation of export performance, improves one
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objective measure of export performance, namely the number of annual shipments
(NSHIP). All effects of marketing support on export performance were positive,
although most of them were insignificant.
iv. Medium of Payment and the Use of Export Financing Support (Light
Manufacturing Sector)
Overall, the use of export financing support by the SEFs and the LSEFs are
very similar. Although the use by the SEFs may be slightly higher in some cases, the
average usage of the support between the SEFs and the LSEFs is not significantly
different. On average, the SEFs tend to use more letters of credit (LT CRDT) than the
LSEFs as a medium of payment which is consistent with the fact that the SEFs are by
definition more active exporters, and thus would make substantially more use of
letters of credit than the LSEFs. When asked if a firm has been helped by an agency to
identify an appropriate institution to obtain financing (IDENT), there are 23.5 percent
among the SEFs but only 6.7 percent among the LSEFs that responded ‘yes.’
However, when asked to rate on a scale of 5 (1 being 0 to 20 percent and 5 being 81 to
100 percent) if a firm had not been able to use any of the external sources of support
from the government or non-profit agencies, by what percent would their realized
1995 exports have been reduced (REDUCE EX), the average ratings by the LSEFs are
1.364 as compared to only 1.077 by the SEFs. This suggests that, although, the more
successful firms tend to request more assistance, the assistance do not seem to be
effective in this sector. The ineffectiveness of export financing programs in this sector
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are due to reasons mentioned earlier. Overall, there are more LSEFs that used EXIM-
bank for financial assistance, while there are more SEFs that used CEFO for financial
support. The most utilized programs from the EXIM-bank are the small business
export credit insurance and the umbrella programs, while the most utilized programs
from CEFO are the pre-shipment working capital guarantee and the post-shipment
account receivable guarantee. The other program that is widely used by both is the
SBA’s 7(a) business loan guarantee programs.
To test for the effect of export financing programs on export performances, the
variables FINUSEC and FINUSED were created. The variable FTNUSEC records the
number of export financing programs (i.e. loan guarantees and insurance) used by the
individual firm, and the variable FINUSED assigns a value one to the firm if the firm
has used at least one of the export financing programs. Together with the variable
IDENT (which assigns a value one if the firm has been helped by a public agency to
find an appropriate institution for obtaining export financing) and the variable
REDUCE EX (the firms ratings on how much their 1995 exports would have been
reduced if they had not used any of the public support) as explanatory variables,
ordered probit regressions were performed. The results show that the variable IDENT
is the only variable that has a significantly positive effect on XSHARE95. It is not
surprising that the variables FINUSEC and FINUSED are not significant because the
number of firms that has used public agencies assisted export financing programs are
almost equal among the SEFs and the LSEFs. The significant effect of referrals by
agencies to banks on export performance (IDENT) may, in part, be due to the fact that
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115
the light manufacturing firms are relatively older (61 percent of firms are established
prior to 1985) and hence may have sufficient credit history to borrow from banks
without a guarantee. However, it should be noted that the variable IDENT only
indicates that firms have been previously referred to banks, while the actual flow of
credit is not guaranteed here. The hypothesis that guarantees are not crucial in
determining export performance in this sector also stems from the fact that the
average transaction size is often considerably smaller here than in the heavy
manufacturing and high-tech sectors. However, as also mentioned earlier, the variable
DIFF296 (the problem of the limited availability of financing) is rated the highest by
the light manufacturing sector as a whole. This further supports the hypothesis that
export financing programs (mainly guarantees and insurance) are not adequately
meeting the needs of the exporters, in that banks are not given the right incentives to
extend credit to firms in this sector.
v. Export Financing Related Difficulties (Light Manufacturing Sector)
With respect to the 12 export financing related difficulties, we see that the
responses are mixed. There were 7 questions which the SEFs felt were less of a
problem and 5 questions which they have rated higher than the LSEFs. The 5
questions that the SEFs felt were more of a problem were DIFF196, DIFF1FX,
DIFF296, DIFF2FX and DIFF6FX, although it should be noted that none of the
differences are statistically significant Yet again, employing t-tests for mean
differences in the responses of these questions, we found DIFF596 and DIFF5FX to be
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significant. DIFF596 and DIFF5FX refers to the firm’s perceptions of the uncertainty
of payments from abroad in 1996 and in year of first exports. The fact that the SEFs
felt that the uncertainty of payments from abroad in 1996 is less of a problem affirms
the view that exporting is a learning process where the perceptions of the risks and
benefits decreases and increases respectively with the increase in export transactions.
The fact that the SEFs tend to enjoy better profit and growth assessments also help
increases their perception of the benefits involved in exporting. While the causality is
unclear, it should be noted that the LSEFs also tend to experience larger foreign rates
of default, and this may have increased their perceptions of the risks involved in
exporting relative to the benefits. This also explains why the LSEFs view this
uncertainty was more of a problem. The fact that the SEFs felt that the uncertainty of
payments from abroad was less of a problem in the year of first exports is a little less
clear, and this may presumably be a factor exogenous to the export process. Being
exogenous, this suggests that the CEOs of the SEFs may be less risk adverse. While
how much this hypothesis explains the better present export, growth and profits
assessments is unclear, this would shed light on the higher level of export shares in
total sales in year of first exports ( XSHAREFX).
To test for the hypothesis that export financing related difficulties is a major
impediment to the export process, ordered probit regressions were used with EXPORT
and XSHARE95 as dependent variables and the current financing related difficulties
(i.e. DIFF196, DEFF296, JDIFF696) as explanatory variables. The results reveal
that DIFF496 (time delays in receiving payments from abroad) and DIFF596
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(uncertainty of payments from abroad) to have significantly negative effects on
EXPORT. This may be due to the fact that firms in the light manufacturing sector
reported a higher foreign rate of default in such payments than any other sector. This
may also shed light on the fact that in 1996, the light manufacturing firms are the
largest user of letters of credit as a medium of payment. An alternate explanation
would be to view the causality of this significant relationship to flow from the export
performance to the perceived financing difficulties. This explanation is consistent
with the view of the export process as a learning process.
To further test for this hypothesis, variables DIFF11M,...JDIFF6IM were
created. These variables measure the improvements in the firm’s perception of export
financing related difficulties (e.g. DIFF1IM=DIFF1FX-DIFF196). Ordered probit
regressions were then run with the new variables as dependent variables. The results
indicate XSHARE95 to have a significantly positive effect on DIFF3IM. This
improvement in the firm’s perception of the complexity of financing arrangements can
be seen as a direct outcome of the firm’s export exposure.
B. THE HEAVY MANUFACTURING INDUSTRY
Exhibited in Table S4E are shared characteristics and differences between the
SEFs and the LSEFs in the heavy manufacturing industry (sector 4). After accounting
for missing observations, there were 13 and 8 firms assigned to the LSEF and SEF
category respectively.
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i. Firm Characteristics (Heavy Manufacturing Sector)
The following comparisons should be noted: (1) CEOs of SEFs are more likely
to have had experience in a SME (EXPSME) and in an export subcontracting firm
(EXPSUB) but significantly less likely to have had prior experience in a LE (EXPLE)
than LSEFs, (2) most SEFs are newer than the LSEFs (there are twice as many firms
among LSEFs that were established before 1985 than among SEFs), (4) that SEFs tend
to have better profit assessments (PROFIT) and better growth assessments
(GROWTH), (5) that SEFs are more likely to have employees with specific experience
in exporting or export marketing (EMPXMKT), (6) that SEFs tend to export to more
countries (NCOUNTRIES), to more foreign buyers (NXBUYR), and with more
shipments (NSHIP), (7) that SEFs tend to have a lesser share of exports in total sales
in year of first exports (XSHAREFX) but a larger share in 1995 (XSHARE95) relative
to LSEFs, and (8) that SEFs tend to have higher default rates both domestically and
abroad (DEFLT-D/F).
In order to test for effects of firm characteristics on export performance in the
heavy manufacturing sector, we ran ordered probit regressions with EXPORT and
XSHARE95 as the dependent variables and with the individual firm characteristics as
explanatory variables. The results indicate EXPLE to have a negative effect on
XSHARE95. The negative effect of the CEO’s prior work experience in a LE
(EXPLE) on the share of exports in total sales in 1995 (XSHARE95) suggests that the
exporting needs between the SMEs and LEs are significantly different within the
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SEFs and may have established a network of clients that they are dependent on to
access the export market. However, it should be noted that the ratings of each group
for RI396 and RI496 are very similar, indicating that there are no significant
differences in the way LSEFs and SEFs view the relative importance of subcontractors
and export agencies. Employing t-tests to test for mean differences between the groups
found none of the responses between the groups to be significantly different.
iii. The Use of Marketing Support and the Internet (Heavy Manufacturing
Sector)
We note that SEFs tend to use more of each type of marketing support The
exception to this is the use of trade fairs (TDE FAIR) where usage by SEFs is slightly
lower than that by LSEFs.
When asked if the firm has received information on export market
opportunities from government or non-profit agencies (MKTINFO), 62.5 percent of
the SEFs compared to only 53.8 percent of the LSEFs responded ‘yes.’ When asked if
the firm has been introduced to a foreign buyer or export agent by any public agencies
(INTRODUCE), 62.5 percent of the SEFs said ‘yes,’ while only 38.5 percent of the
LSEFs responded similarly. 25 percent of SEFs has been assisted by a public agencies
in becoming familiar with relevant foreign laws (FNLAWS), compared to only 15.4
percent of the LSEFs. On the other hand, 38.5 percent of the LSEFs compared to only
37.5 percent of the SEFs that have used trade fairs to penetrate the foreign market
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119
heavy manufacturing sector. The relatively small share of exports among firms with
CEOs who have prior work experience in LEs may also reflect the concentration of
domestic operations, which is a characteristic among LEs (Rose 1991). To further test
for this hypothesis, we extend the list of dependent variables to include
NCOUNTRIES, NXBUYR and NSHIP as indicators of export performance. The
results reveal the CEO’s prior work experience in a export subcontracting firm
(EXPSUB) to have a positive effect on the number of countries the firm exports to
(NCOUNTRIES). This may be indicative of the informational advantage
subcontracting firms have in terms of export market opportunities as a result of their
specialization in export operations.
ii. Marketing Channels (Heavy Manufacturing Sector)
Like the light manufacturing sector, the average firm in this sector has ranked
RI196 as most important, followed by RI296, RI396 and finally RI496. For reasons
mentioned earlier, RI196 and RI296 may be biased and should be discounted. The
explanation for these rankings were discussed in the cross-sectoral discussions earlier.
Unlike the light manufacturing sector, we note that the SEFs tend to rate most of the
marketing channels as more important than the LSEFs. The exception being RI296,
which asked the firms to rate on a scale of 5 (5 being more important) the relative
importance of initiatives of foreign buyers to penetrate the export market in 1996. The
lesser dependence of SEFs on the initiatives of foreign buyers to access the export
market in 1996 (RI296) may be due to the fact that LSEFs are relatively older than the
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(TDE FAIR). This heavy dependence of marketing support by the SEFs suggests that
marketing support is crucial in determining the export performance in this sector.
To test the hypothesis that marketing support is crucial in determining export
performance in this sector, ordered probit regressions were used with EXPORT and
XSHARE95 as the dependent variables and the individual types of marketing support
as explanatory variables. The results reveal none of the individual types of marketing
support to be significant. To further test for this hypothesis, the variables MSUPC,
MSUPEC and MSUPD and MSUPED were used as explanatory variables. The results
indicate that MSUPED has a positive effect on EXPORT. This suggests that
experiential typed marketing support is more crucial in determining export
performance in this sector. Ordinary least square regressions were then employed with
the variables NSHIP (number of annual shipments), NXBUYR (number of foreign
buyers), and NCOUNTRIES (number of countries exported to) as dependent
variables. None of the effects of marketing support on these variables were significant.
iv. Medium of Payment and the Use of Export Financing Support (Heavy
Manufacturing Sector)
Use of export financing support in the heavy manufacturing sector is
considerably greater among SEFs than among LSEFs. The SEFs have made
significantly more use of letters of credit than the LSEFs (100 percent of the SEFs use
letters of credit as compared to only 58.3 of the LSEFs). However, When asked if a
firm has been helped by an agency to identify an appropriate institution to obtain
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financing, 87.5 percent of the LSEFs but only 50 percent of the SEFs responded ‘yes.’
This lesser dependence of SEFs on the referrals of agencies to banks may be due to
the fact (1) that SEFs tend to enjoy better growth and profit assessments and hence
have a more favorable track record, or (2) that SEFs had greater prior experience in
exporting and export a larger percentage of their output, making it more likely that
they would know better how to proceed with exports and their finance.
In this sector, only the SEFs used agencies for export financing support, and
most of programs used are from the EXIM-bank. The most utilized programs are the
medium term insurance, small business export credit insurance and the umbrella
programs.
To test for the effect of export financing programs on export performance,
ordered probit regressions were run with EXPORT and XSHARE95 as dependent
variables and FINUSEC, FINUSED, IDENT and REDUCE as explanatory variables.
The results reveal FINUSEC and FINUSED to have significantly positive effects on
EXPORT, which suggest that export financing programs are important for export
success in this sector. This may, in part, be due to the fact that the average transaction
size in this sector is considerably larger than that of the light manufacturing sector,
thus firms in this sector will generally find little resistance from banks, in terms of
acquiring loans, as long as they are guaranteed by a public agency.
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v. Export Financing Related Difficulties (Heavy Manufacturing Sector)
With respect to the 12 export financing related difficulties of the heavy
manufacturing sector, we see that the responses were mixed. There were 3 questions
which SEFs felt was less of a problem, and 9 questions which they have rated as more
of a problem, than the LSEFs. The 3 questions that SEFs felt were less of a problem
were DIFF296 (limited availability of financing in 1996), DIFF396 (complexity of
financing arrangements in 1996) and DIFF696 (size of collateral requirements in
1996), which yield an improvement in half the financing-related difficulties by the
SEFs. Employing t-tests to test for mean differences in the responses of these
questions, only DIFF5FX (uncertainty of payment from abroad in year of first
exports) was found to be significant. The cause of this uncertainty in year of first
export is unclear, and may be due to the fact that SEFs are just a more risk adverse
group of exporters. This would explain the relatively low share of exports in year of
first exports (XSHAREFX). The fact that SEFs share of exports in total sale in 1995
(XSHARE95) is larger than that of their less successful counterparts attests to the
forces of export experience on the perceptions of the risk and benefits of exporting.
To test for the hypothesis that export financing related difficulties is a major
impediment to the export process, ordered probit regressions were used with EXPORT
and XSHARE95 as dependent variables and the current financing related difficulties
(i.e. DEFF196, DEFF296, JDEFF696) as explanatory variables. The results reveals
DEFF196 and DDFF596 to have significantly negative effects on XSHARE95.
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The explanation for the apparent considerable lack of information on possible
sources of financing in 1996 (DIFF196) is surprising since firms in the heavy
manufacturing sector are generally older than those in the high-tech and light
manufacturing sectors. This should suggest that the heavy manufacturing sector
should have more information on sources of financing than any of the other sectors.
Whatever the explanation for it, this dearth of information sheds light on why export
financing programs are least used by the firms in this sector. Only 19 percent of heavy
manufacturing firms, compared to 28.6 percent of the light manufacturing and 38
percent of the high-tech firms have used at least one of the export financing programs.
The problem of uncertainty of payments from abroad in 1996 (DIFF596) is
also a little puzzling because the level of foreign default rate in this sector is the
lowest. The mean foreign default rates among the SEFs and the LSEFs are below one
percent. However, this result supports the earlier hypothesis that the SEFs in this
sector may just be more risk adverse than other others. This view is also further
supported by the fact that 100 percent of SEFs compared to only 58.3 percent of
LSEFs use of letters of credit (LT CRDT) as a medium of payment. A letter of credit
is a form of risk reduction mechanism for the exporter, thus it follows that higher
usage by SEFs would reflect their intolerance for risk.
To further test this hypothesis, ordered probit regressions were employed with
EXPORT and XSHARE95 as dependent variables and DIFF1IM,...,DIFF61M as
explanatory variables. The results reveal that DIFF1IM, DIFF3IM and DIFF6IM to
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have significantly positive effects on EXPORT, and also that DEFF1IM and DIFF5IM
to have significantly positive effects on XSHARE95.
The positive relationship between improvements in information on possible
sources of financing (DIFF1IM) and the firm’s subjective ratings on export
performance (EXPORT) suggests that exporting is a learning process where pertinent
information is obtained as the export experience of the firm increases. However, this
may also suggest that improvements in the distribution of information on sources of
finance is crucial to the export success of this sector, and ought to be a priority that
public agents should encourage. The positive relationship between the complexity of
export financing arrangements (DIFF3IM) and the firm’s subjective ratings on export
performance (EXPORT) deserves the same explanation as was given to the former
relationship.
The causality of the positive relationship between the improvements in the size
of collateral (DIFF6IM) and the subject assessments on export performance
(EXPORT) is more likely to flow from the former to the latter. Although the effect of
collateral size on the default rates of bank loans is unclear, this result suggests that a
reduction in the size of collateral should be a proposal that the public support system
may prove helpful in.
C. THE HIGH-TECH INDUSTRY
Exhibited in Table S5E are shared characteristics and differences between the
SEFs and the LSEFs in the high-tech industry (sector 5). After accounting for missing
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observations, there were 9 and 17 firms assigned to the LSEF and SEF categories
respectively.
i. Firm Characteristics (High Tech Sector)
Within the high-tech sector, we note that there are (1) SEF CEOs have more
prior work experience in a SME (EXPSME) and LE (EXPLE), (2) that most SEFs are
newer relative to the LSEFs (there are more than twice as many firms among the SEFs
than there are among the LSEFs that are established after 1985), (3) that SEFs tend to
be smaller with fewer employees in year of first exports (EMPFX) but larger (with
more employees) in 1995 (EMP95), (4) that SEFs tend to have significantly better
growth assessments (GROWTH) and better profit assessments (PROFIT) than LSEFs,
(5) that SEFs are significantly more likely to have employees with specific experience
in exporting or export marketing (EMPXMKT), (6) that SEFs tend to export to fewer
countries (NCOUNTRIES), but to more foreign buyers (NXBUYR), and with more
shipments (NSHIP), (7) that SEFs tend to have a larger share of exports in total sales
in both 1995 (XSHARE95) and year of first exports (XSHAREFX), and (8) that SEFs
tend to have lower default rates both domestically (DEFLT-D) and abroad (DEFLT-F).
In order to test for the hypothesis that firm characteristics are crucial in
determining export performance, we ran ordered probit regressions with EXPORT and
XSHARE95 as dependent variables and with individual firm characteristics as
explanatory variables. Firm characteristics that are significant include EXPSME,
EXPLE and EMPXMKT, all of which have a positive effect on EXPORT. The
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significant positive effects of EXPSME and EXPLE on EXPORT suggest that any
prior working experience that CEOs have in a SME or LE is important in determining
the management’s success in exporting for this sector. This, in part, also suggests that
the differences between the determinants of exporting in LEs and SMEs within the
high-tech sector are not significant. The positive effect of having employees with
specific experience in exporting or export marketing (EMPXMKT) is consistent with
the hypothesis that managerial commitment towards exporting is a strong determinant
of export performance (Tesar 1974; Cavusgil and Nevin 1981; Bauerschmidt, Sullivan
and Gillespie 1985; Kotabe and Czinkota 1992; Perry 1992).
ii Marketing Channels (High Tech Sector)
Among the SEFs and the LSEFs, we see that the SEFs tend to rate the relative
importance of the marketing channels RI196/FX to RI396/FX very similarly to the
LSEFs, but they tend to rate the relative importance of public marketing support
(RI496 and RI4FX) as less important than the LSEFs. This lesser dependence on the
government and non-profit agencies for assistance in penetrating the export market
affirms the earlier mentioned explanation that, although publicly funded assistance is
crucial in this sector, it does not guarantee success in the export business. This may be
due to the fact that the high-tech products may be too specific for the agencies to
assist adequately. Overall, a larger improvement in the variable RI296 from RI2FX
(the relative importance of the initiatives of foreign buyers or export agents) is also
exhibited among the SEFs. This may be due to their better track record in terms of
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profit and growth assessments. This have subsequently attracted the initiatives of
foreign clients over their years in operation.1 6 A t-test to test for mean differences
between the responses between the SEFs and LSEFs found none of the variables to the
significantly different.
iii. The Use of Marketing Support and the Internet (High Tech Sector)
LSEFs seem to be greater users of the available marketing support than SEFs.
Apart from the use of agency-assisted information (MKTINFO), the LSEFs have used
more marketing support than their more successful counterparts. 66.7 percent of the
LSEFs compared to only 44.4 percent of the SEFs have been introduced to a foreign
buyer or a foreign export agent by a public agency (INTRODUCE). 55.6 percent of
the LSEFs acknowledged participation in trade fairs at one point in time or another
(TDE FAIR), compared to only 43.7 percent of the SEFs. Also, in the area of
becoming familiar with foreign laws (FNLAWS), LSEFs were more likely to have
been assisted than SEFs (55.6 percent of the LSEFs compared to only 17 percent of
the SEFs).
In summary, we see that the high-tech industry as a whole is heavily dependent
on the existing marketing support to penetrate the export market. Yet, the use of
marketing support is greater among LSEFs. This suggests that the use of marketing
support in the high-tech industry may be a necessary but not sufficient condition for
success in penetration of the export market Dependence on the available marketing
1 6 it should be noted that the SEFs are newer firms relative to the LSEFs and thus the improvement of
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support for the industry as a whole may stem from the failure of other traditional
marketing channels (e.g. the ITI) as was mentioned in the cross-sectoral discussion
earlier.
The hypothesis that marketing support is crucial to the success of exporting in
this sector is an interesting one. As we have discussed earlier, the high-tech industry is
the heaviest user of marketing support among the sectors, however as we have also
noted, users of the marketing support are generally among the LSEFs. To test for this
hypothesis, we ran ordered probit regressions with EXPORT and XSHARE95 as the
dependent variables and the 5 types of public agency assisted marketing support as
well as the variable INTERNET as explanatory variables. The ordered probit
regressions found none of the variables to be significant. Thus we failed to reject the
hypothesis that the use o f marketing support has no effect on export performance.
iv. Medium of Payment and the Use of Export Financing Support (High Tech
Sector)
On average, the SEFs of the high-tech industry tend to use more export
financing support than the LSEFs. Use of letters of credit is more frequent among the
SEFs than among the LSEFs (97.5 percent of the SEFs as compared to only 55.6
percent of the LSEFs). The use of agency-assisted programs is also dominated by the
SEFs. Among users of agency-assisted guarantees and insurance in this sector, 70
percent are SEFs, while 30 percent are LSEFs. The most utilized agency among the
the variable RI296 from RI2FX cannot be attributed to more time exposure to the export market.
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SEFs is CEFO (there are only 2 recorded occurrence of usage of CEFO’s programs by
the LSEFs, compared to 13 by the SEFs).The most utilized CEFO’s programs include
the pre-shipment working capital guarantee and the post-shipment account receivable
guarantee.
However, when asked if the firm has been helped by an agency to identify an
appropriate institution to obtain financing (IDENT), 44.4 percent of the LSEFs but
only 30.2 percent of the SEFs responded ‘yes.’ This lesser dependence of the SEFs on
the referrals of agencies to banks may be due to the fact that the SEFs tend to enjoy
better growth (GROWTH) and profit (PROFIT) assessments and hence are more likely
to be familiar and have good working relations with a suitable bank. The SEFs have
also, on average, rated the variable REDUCE EX lower. This may reflects the
independence of export performance and export financing support. However it should
be noted that the difference in the ratings between the LSEFs and the SEFs is not
significant.
To test for the hypothesis that export financing support is crucial in
determining export success in this sector, ordered probit regressions were used with
EXPORT and XSHARE95 as dependent variables and FINUSEC and FINUSED as
explanatory variables. From the regression results, we see that the variable FINUSEC
is significant at a 10 percent level, and has a positive effect on EXPORT. This
indicates that as the use of export financing programs increases, we have a higher
probability of seeing a firm in a higher EXPORT category. This suggests that export
financing is indeed crucial for success in the business of exporting, and the lack
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thereof could prove to be a serious obstacle for the high-tech industry to penetrate the
export market and expand internationally.
v. Export Financing Related Difficulties (High Tech Sector)
Among the SEFs and the LSEFs, we see that the SEFs have rated most of the
difficulties lower. The exceptions are DIFF1FX and DIFF2FX, both of which were
not significant Employing t-tests to test for mean differences between the groups, we
found DIFF396 (complexity of financing arrangements in 1996) and DIFF596
(uncertainty of payments from abroad) to be significant. The reason underlying the
lower rating (i.e. less of a problem) in the question DIFF396 by the SEFs may be due
to the fact that they are more active exporters, more familiar with the paperwork
involved in exporting, and thus do find it a much less serious problem than when they
first started exporting (as seen in the big improvement in the ratings of RI3FX to
RI396). This familiarity with the paperwork involved is also reflected in the fact that
there are more SEFs using letters of credit than LSEFs (97.5 percent of the SEFs
compared to only 55.6 of the LSEFs that have used letters of credit as a medium of
payment). Like the light manufacturing sector, the fact that the SEFs felt that the
uncertainty of payments from abroad in 1996 was less of a problem affirms the view
that exporting is a learning process where the perceptions of the risk and benefit
decreases and increases respectively with the increase in export transactions. On the
other hand, it should be noted that the LSEFs also tend to experience larger foreign
rates of default, and this may have increased their perceptions of the risks involved in
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132
exporting relative to the benefits, thus also explaining why the LSEFs view this
uncertainty as more of a problem.
To test for the hypothesis that export financing difficulties are major
impediments to the export process, we ran ordered probit regressions with EXPORT
and XSHARE95 as dependent variables and the different export financing-related
difficulties as experienced in 1996 as explanatory variables (i.e. DIFF196 to
DIFF696). The results indicate that DIFF396 (complexity of financing arrangements),
DIFF496 (time delays of payments from abroad) and DIFF596 (uncertainty of
payments from abroad) have significantly negative effects on EXPORT. As with the
other sectors, it is likely that the causality for the negative relationship between
DIFF396 and EXPORT to flow from the latter to the former. On the other hand, the
relationships between DIFF496, DIFF596 and EXPORT, in part, suggest that these
problems which emanate from the foreign buyer can be major impediments to the
export process. While the cost of foreign buyer financing programs to domestic
agencies are not known, a push for similar programs that will reduce the uncertainty
and time delays from abroad should be an area worth investigating further.
To further test for effects of export financing difficulties on the export
performance of the firm, ordered probit regressions were used with DIFF1IM,...,
DIFF6IM as explanatory variables and with EXPORT and XSHARE95 as the
dependent variables. The results reveal DIFF1IM (lack of information on possible
sources of financing), DIFF2IM (limited availability in financing) and DEFF3IM
(complexity of financing arrangements) to have significantly positive effects on
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133
EXPORT. In light of the view that familiarity with the export process increases with
more export exposure, the causality for the relationship between the improvements in
the lack of information on possible sources of financing (DIFF1IM) and export
performance (EXPORT) is more likely to flow from the latter to the former. The same
can be said for the relationship between the improvements in the complexity of
financing arrangements (DIFF3IM) and the subjective assessments of export
performance (EXPORT). On the other hand, the causality for the relationship between
improvements in the limited availability of financing (DIFF2IM) and the export
performance (EXPORT) is more likely to flow from the former to the latter. This
suggests that the availability of funds accessible to the high-tech exporter is crucial for
success in the high-tech exporting business, and improvements in this area should be
of concern to policy makers.
VL SUMMARY
In general, we see that SEFs across industries tend to experience better growth
and profit assessments, thus affirming the benefits of exporting. Among firm
characteristics, we note that CEOs of SEFs in all sectors are more likely to have prior
work experience in SMEs (EXPSME) than those of LSEFs. This indicate that any
prior experience in a SME can be crucial for the exporting success of the firm, and
this, in part, also suggests that the exporting needs of SMEs are different from those of
LEs. Also, we note that SEFs in all sectors are more likely to have employees with
specific experience in exports or export marketing (EMPXMKT) than LSEFs. As
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134
mentioned before, employing persons with specific export-related experience can be
seen as a conscious effort on the part of the management to allocate resources to
foreign operations. This, in part, reveals the firm’s commitment towards exports, and
consistent with the literature, we note that the management’s commitment towards
exports is an important determinant of success in the business of exporting.
A progression in product heterogeneity and specificity is evident across
sectors. The light manufacturing sector has the widest product range, which is
followed by the heavy manufacturing sector and finally the high-tech sector. It is
noted that use of marketing support is heaviest in the high-tech sector, and is the
lightest in the light manufacturing sector. Also, as revealed in this study, use of
marketing support by the light manufacturing firms is heavier among the SEFs than
among LSEFs, while the use of marketing support by the high-tech firms is heavier
among the LSEFs than among SEFs. Hence, use of marketing support can be seen as a
inverse U function of product homogeneity and specificity.
The lesser dependence on marketing support by the light manufacturing firms
can be attributed to the limited availability of marketing support for that sector.
Reasons for the limited availability of marketing support stem from difficulties in
designing a marketing support program that encompasses the myriad of products
inclusive in this industry. The fact that the light manufacturing sector is often viewed
as a low-benefit potential sector may attribute to a biased allocation of publicly
funded resource for marketing support away from this sector, which may result in a
support system that is selective in assisting only particular groups of firms within the
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135
sector. The fact that users of marketing support in this sector tend to be SEFs suggests
that marketing support is crucial for improvements in the export performance of light
manufacturing firms. Tests performed on the light manufacturing sector reveal that
use of marketing support has a significantly positive effect on the number of annual
shipments of the firm (NSHIP).
The heavier dependence on marketing support by the high-tech firms can be
attributed to failure of the private support mechanisms, in particular the ITIs, to
effectively assist firms to access the export market The inadequacy of the ITIs to
assist high-tech firms in the export process results from the short average product life
cycle that characterizes this industry. The short product life cycle of high-tech
products causes instability in the ITI-firm working relationship, and hence inefficiency
in the marketing channel. The fact that users of public marketing support tend to be
LSEFs suggests that use of marketing support may be a necessary, but not sufficient,
condition for high-tech firms to be successful in the business of exporting. The
inadequacy of marketing support to guarantee success for high-tech firms may be due
to the high specificity which characterizes many of the high-tech products.
Use of export financing support is heaviest among firms of the high-tech sector
while lightest among the heavy manufacturing firms. Almost ail of the export
financing programs are in the form of loan guarantees and insurance. The use of
export financing programs can be seen as a negative function of a firm’s age.
A progression in the relative age of the firm is noted across sectors. 77 percent
of the heavy manufacturing firms were established before 1985, compared to only 61
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136
percent of the light manufacturing firms and 44 percent of the high-tech firms.
Reasons for the lesser dependence on export financing support by the older firms, vis-
a-vis newer firms, stem from the fact that older firms may have a credit history and a
more reputable track record, and thus need to rely less on guarantees and insurance.
Use of export financing support among the high-tech and the heavy
manufacturing firms tend to be heavier among SEFs than among LSEFs. Tests
performed on the heavy manufacturing sector and the high-tech sector reveal that use
of export financing support significantly improves the chances for export success.
Use of export financing support by the light manufacturing firms tend to be
very similar among the LSEFs and SEFs. Tests performed on this sector reveal export
financing support to have no significant effect on export performance. The
ineffectiveness of export financing support on this sector may be due to the fact that
the transaction size in this sector is considerably smaller than those of other sectors.
This small transaction size makes extending loans to these SMEs expensive in light of
the high overhead costs which are incurred by banks. Hence, the existing export
financing support, which mainly comprises of loan guarantees and insurance, does not
address the real financing problem (i.e. high administrative costs) faced by light
manufacturing firms. This hypothesis is further supported by the fact that the light
manufacturing firms have, on average, rated the limited availability of financing
(DIFF296) as “more of a problem” than firms of other sectors.
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Table 1:
Characteristics of Firms Segregated by Sector
Code Definitions Mean Scores
Light Manu Heavy Manu High
CEO's Experience Endowment facturing facturing Tech
EDUC Education of CEO1 2.250' 2.368 2.556
EXPSME if CEO has prior work experience in a SME 0.270 0.350 0.444
EXPLE if CEO has prior work experience in a LE 0.270 0.250 0.333
EXPSUB if CEO has prior work experience in a subcontracting firm for exporters 0.000 0.100 0.037
EXPOTH if CEO has any other prior export experience 0.189 0.200 0.148
Finn's Export Commitment and Actual Export Performance
EMPXMKT if firm has employees with specific experience in exports or export marketing 0.541 0.450 0.370
XSHARE95 Share of exports in total sales in 1995 3.097" 2.750** 4.000
XSHAREFX Share of exports in total sales in year of first export 2.571 2.000** 3.130
XSHDIFF Change in share of exports in total sales between year of first exports and 1995 0.679 0.833 0.783
EXPORTS Subjective assessment of export performance by CEO 3.514 3.143 3.760
NCOUNTRIES Number of foreign countries that firm exports to 11.824' 11.524b 20.962
NXBUYRS Number of foreign buyers that firm does business with 24.800 37.350 45.038
NSH1P Number of shipments per year 56.500 108.286 136.462
Use of Public Marketing Support and the Internet
MKTINFO if firm has received information on export market opportunities by public support agencies 0.543 0.571 0.708
INTRODUCE if firm has been introduced to foreign buyers or export agents by public support agencies 0.257' 0.476 0.500
TDEFAIR if firm has participated in trade fairs 0.371 0.381 0.500
FN LAWS if firm has been assisted in becoming familiar with relevant foreign laws 0.229 0.190 0.292
STDY if firm has been helped with doing feasibility studies 0.057 0.048 0.000
INTERNET if firm has used the internet to access information that pertains to export promotion 0.235' 0.350 0.444
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(Table 1 continued)
Code Definitions Mean Scores
Light Manu Heavy Manu High
The Relative Importance of Marketing Channels to Access Eiport Market (on a scale of 5) facturing facturing Tech
R I 196 direct efforts by firm to contact foreign buyers or export agents in 1996 4.056 4.100 4.500
R11FX direct effons by firm to contact foreign buyers or export agents in year of first export 3.800 3.688 3.565
Rl 296 initiatives by foreign buyers or export agents in 1996 3.200 3.211 3.269
RI2FX initiatives by foreign buyers or export agents in year of first export 2.697 3.067 2.565
RI 396 initiatives by subcontractors, domestic export trading or factoring companies in 1996 1.912 2.278b 1.640
RI3FX initiatives by subcontractors, domestic export trading or factoring companies in year of first export 1,774c 2.000h 1.273
RI496 support by public or non-profit agency in 1996 1.857 1.556 1.960
R14FX support by public o t non-profit agency in year of first export 1.839* 1.333 1.826
Medium ol Payment and the Use of Export Financing Support
CASH PAY use of cash as a medium of payment 0.722 0.850 0.815
LTCRDT use of letters of credit as a medium of payment 0.889 0.750 0.852
OPEN AC use of open accounts as a medium of payment 0.622“ 0.737 0.852
ID ENT if firm has been assisted by agency to find an appropriate financial institution 0.147 0.714 0.370
RDUCEEX % of 1995 exports which would have reduced if fum has not been assisted by public agency 1.200“ 1.400 2.043
Export Financing Related Difficulties (on a scale of S; l=not a problem, and 5=a serious problem)
D IFF196 lack of information on possible sources of financing in 1996 2.967 3.154 2.852
D1FF 1 FX lack of information on possible sources of financing in year of first export 3.143 3.000 3.500
DIFF 2 96 limited availability of financing in 1996 3.571 3.308 3.074
D1FF2FX limited availability of financing in year of first export 3.417 3.333 3.500
DIFF 3 96 complexity of financing arrangements in 1996 3.600* 3.077 2.846
D1FF3FX complexity of financing arrangements in year of first export 3.480 3.083 3.409
DIFF496 time delays in receiving payments from abroad in 1996 3.000 2.917 2.769
DIFF 4 FX time delays in receiving payments from abroad in year of first export 2.640 3.000 2.545
DIFF 5 96 uncertainty of payments from abroad in 1996 2.630 3.083 2.692
DIFF 5 FX uncertainty of payments from abroad in year of first export 2.667 3.083 2.955
DIFF696 size of collateral in 1996 2.966 2.667 3.000
DIFF6FX size of collateral in year of first export 2.875 2.667 3.476
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(Table 1 continued)
Code Definitions Mean Scores
Light Manu Heavy Manu H I*
Age and Size of Firm facturing facturing Tech
YRSTART year of startup 1978.971* 1971 1979
YRFX year of first export 1985 1982 1984
EMP95 number of employees in 1995 95,405 54.381 47.889
EMPFX number of employees in year of first export 32.636 25.632 14.167
Other Firm Characteristics
DEFLT-D Domestic Default Rate 4.100 3.000 7.804
DEFLT-F Foreign Default Rate 3.850* 0.375 3.320
GROWTH subjective assessment of growth performance by the CEO 3.771 3.476 3.346
PROFIT subjective assessment of profit performance by the CEO 3.457 3.571 3.400
N ate:1 EDUC=1 if no education, EDUC=2 if received secondary education, EDUC=3 if attended college, EDUC=4 if received post graduate education,
'means between the light manufacturing sector and heavy manufacturing sector are significantly different at a 10 percent level,
“ means between the light manufacturing sector and heavy manufacturing sector are significantly different at a 5 percent level.
W ans between the heavy manufacturing sector and high tech sector are significantly different at a 10 percent level.
W eans between the heavy manufacturing sector and high tech sector are significantly different at a 5 percent level.
'means between the light manufacturing sector and high tech sector are significantly different at a 10 percent level.
"means between the light manufacturing sector and high tech sector are significantly different at a 5 percent level.
vO
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Table S3E:
Characteristics of Light Manufacturing Firms Segregated by Export Performance
Code j Definitions
Mean Scores
CEO's Experience Endowment LSEFs SEFs
EXPSME if CEO has prior work experience in a SME 0.250 0.316
EXPLE if CEO has prior work experience in a LE 0.375 0.211
EXPSUB if CEO has prior work experience in a subcontracting finn for exporters 0.000 0.000
EXPOTH if CEO has any other prior export experience 0.125 0.211
Finn's Export Commitment and Actual Export Performance
EMPXMKT if firm has employees with specific experience in exports or export marketing 0.563 0.579
XSHARE95 Share of exports in total sales in 1995 1.583** 4.222
XSHAREFX Share of exports in total sales in year of first export 1.100** 3.389
EXPORTS Subjective assessment of export performance by CEO 2.188 4.632
NCOUNTRIES Number of foreign countries that firm exports to 11.286 12.579
NXBUYRS Number of foreign buyers that firm does business with 14.400* 33.263
NSHIP Number of shipments per year 25.667** 85.056
Use of Public Marketing Support and the Internet
MKTINFO if firm has received information on export market opportunities by public support agencies 0.600 0.444
INTRODUCE if firm has been introduced to foreign buyers or export agents by public support agencies 0.200 0.278
TDEFAIR if firm has participated in trade fairs 0.333 0.389
FN LAWS if firm has been assisted in becoming familiar with relevant foreign laws 0.200 0.278
STDY if firm has been helped with doing feasibility studies 0.000 0.111
INTERNET if firm has used the internet to access information that pertains to export promotion 0.286 0.222
The Relative Importance of Marketing Channels to Access Export Market (on a scale of 5)
RI 196 direct efforts by firm to contact foreign buyers or export agents in 1996 4.333 3.737
RI 1FX direct efforts by firm to contact foreign buyers or export agents in year of first export 3.857 4.053
RI 296 initiatives by foreign buyers or export agents in 1996 3.733* 2.778
RI2FX initiatives by foreign buyers or export agents in year of first export 3.000 2.667
RI 396 initiatives by subcontractors, domestic export trading or factoring companies in 1996 2,467** 1.471
RI3FX initiatives by subcontractors, domestic export trading or factoring companies in year of first export 2.154 1.471
RI 496 support by public or non-profit agency in 1996 2.200 1.500
RI4FX support by public or non-profit agency in year of first export 2.308 1.529
* significant at a 10 percent level **significant at a 5 percent level
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(Tabic S3E continued)
Code | Definitions Mean Scores
Medium of Payment and the Use of Export Financing Support LSEFs SEFs
CASH PAY use of cash as a medium of payment 0.667 0.737
LTCRDT use of letters of credit as a medium of payment 0.867 0.895
OPEN AC use of open accounts as a medium of payment 0.625 0.632
IDENT if firm has been assisted by agency to find an appropriate financial institution 0.067 0.235
RDUCE EX % of 199S exports which would have reduced if firm has not been assisted by public agency 1.364 1.077
Export Financing Related Difficulties (on a scale of 5; l=not a problem, and 5=a serious problem)
DIFF 1 96 lack of information on possible sources of financing in 1996 2.786 3.200
DIFF 1 FX lack of information on possible sources of financing in year of first export 3.000 3.357
DIFF 2 96 limited availability of financing in 1996 3.250 3.933
DIFF 2 FX limited availability of financing in year of first export 3.364 3.500
DIFF 3 96 complexity of financing arrangements in 1996 3.714 3.600
DIFF 3 FX complexity of financing arrangements in year of first export 3.667 3.417
DIFF496 time delays in receiving payments from abroad in 1996 3.286 2.786
DIFF 4 FX time delays in receiving payments from abroad in year of first export 2.833 2.500
DIFF 5 96 uncertainty of payments from abroad in 1996 3.455** 2.067
DIFF 5 FX uncertainty of payments from abroad in year of first export 3.636** 1.917
DIFF 6 96 size of collateral in 1996 3.077 2.933
DIFF 6 FX size of collateral in year of first export 2.818 3.083
Age and Size of Firm
YRSTART year of startup 1974.267* 1982.944
YRFX year of first export 1985.357 1985.882
EMP95 number of employees in 1995 102.500 53.526
EMPFX number of employees in year of first export 33.769 31.474
Other Firm Characteristics
DEFLT- D Domestic Default Rate 5.783 2.562
DEFLT-F Foreign Default Rate 7.670* 0.588
GROWTH subjective assessment of growth performance by the CEO 3.500 4.000
PROFIT subjective assessment of profit performance by the CEO 3.125* 3.737
* significant at a 10 percent level “ significant at a 5 percent level
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Table S4E:
Characteristics of Heavy Manufacturing Firms Segregated by Export Performance
Code iDefinitions Mean Scores
CEO's Experience Endowment LSEFs SEFs
EXPSME if CEO has prior work experience in a SME 0.250 0.500
EXPLE if CEO has prior work experience in a LE 0.417** 0.000
EXPSUB if CEO has prior work experience in a subcontracting firm for exporters 0.000 0.250
EXPOTH if CEO has any other prior export experience 0.250 0.125
Firm's Export Commitment and Actual Export Performance
EMPXMKT
if firm has employees with specific experience in exports or export marketing 0.417 0.500
XSHARE95 Share of exports in total sales in 199S 2.667 2.875
XSHAREFX Share of exports in total sales in year of first export 2.200 1.750
EXPORTS Subjective assessment of export performance by CEO 2.308 4.500
NCOUNTRIES Number of foreign countries that firm exports to 9.923 14.125
NXBUYRS Number of foreign buyers that firm does business with 12.167 75.125
NSH1P Number of shipments per year 94.154 131.250
Use of Public Marketing Support and the Internet
MKTINFO if firm has received information on export market opportunities by public support agencies 0.538 0.625
INTRODUCE if firm has been introduced to foreign buyers or export agents by public support agencies 0.385 0.625
TDE FAIR if firm has participated in trade fairs 0.385 0.375
FN LAWS if firm has been assisted in becoming familiar with relevant foreign laws 0.154 0.250
STDY if firm has been helped with doing feasibility studies 0.077 0.000
INTERNET if firm has used the internet to access information that pertains to export promotion 0.250 0.500
The Relative Importance of Marketing Channels to Access Export Market (on a scale of S)
RI 196 direct efforts by firm to contact foreign buyers or export agents in 1996 3.846 4.571
RI 1FX direct efforts by firm to contact foreign buyers or export agents in year of first export 3.222 4.286
RI 296 initiatives by foreign buyers or export agents in 1996 3.333 3.000
RI2FX initiatives by foreign buyers or export agents in year of first export 2.500 3.714
RI 396 initiatives by subcontractors, domestic export trading or factoring companies in 1996 2.273 2.286
RI3FX initiatives by subcontractors, domestic export trading or factoring companies in year of first export 2.000 2.000
RI 496 support by public or non-profit agency in 1996 1.545 1.571
RI4FX support by public or non-profit agency in year of first export 1.250 1.429
* significant at a 10 percent level ^^significant at a 5 percent level
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(Table S4E continued)
Code | Definitions Mean Scores
Medium of Payment and the Use of Export Financing Support LSEFs SEFs
CASH PAY use of cash as a medium of payment 0.833 0.875
LTCRDT use of tetters of credit as a medium of payment 0.583** 1.000
OPEN AC use of open accounts as a medium of payment 0.727 0.750
IDENT if firm has been assisted by agency to find an appropriate financial institution 0.875 0,500
RDUCE EX % of 1995 exports which would have reduced if firm has not been assisted by public agency 1.000 1.857
Export Financing Related Difficulties (on a scale of S; 1-not a problem, and 5=a serious problem)
DIFF 1 96 lack of information on possible sources of financing in 1996 3.143 3.167
DIFF 1 FX lack of information on possible sources of financing in year of first export 2.429 3.800
DIFF 2 96 limited availability of financing in 1996 3.571 3.000
DIFF 2 FX limited availability of financing in year of first export 3.000 3.800
DIFF 3 96 complexity of financing arrangements in 1996 3.286 2.833
DIFF 3 FX complexity of financing arrangements in year of first export 3.000 3.200
DIFF 4 96 time delays in receiving payments from abroad in 1996 2.714 3.200
DIFF 4 FX time delays in receiving payments from abroad in year of first export 2.571 3.600
DIFF 5 96 uncertainty of payments from abroad in 1996 2.571 3.800
DIFF 5 FX uncertainty of payments from abroad in year of first export 2.428* 4.000
DIFF 6 96 size of collateral in 1996 2.857 2.400
DIFF 6 FX size of collateral in year of first export 2.286 3.200
Age and Size of Firm
YRSTART year of startup 1967.308 1977.375
YRFX year of first export 1979.417 1985.625
EMP95 number of employees in 1995 54.077 54.875
EMPFX number of employees in year of first export 25.727 25.500
Other Firm Characteristics
DEFLT- D Domestic Default Rate 2.538 3.857
DEFLT-F Foreign Default Rate 0.115 0.857
GROWTH subjective assessment of growth performance by the CEO 3.308 3.750
PROFIT subjective assessment of profit performance by the CEO 3.462 3.750
* significant at a 10 percent level ^^significant at a 5 percent level
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Table SSE:
Characteristics of High-tech Firms Segregated by Export Performance
Code (Definitions Mean Scores
CEO's Experience Endowment LSEFs SEFs
EXPSME if CEO has prior work experience in a SME 0.222 0.512
EXPLE if CEO has prior work experience in a LE 0.222 0.401
EXPSUB if CEO has prior work experience in a subcontracting firm for exporters 0.111 0.006
EXPOTH if CEO has any other prior export experience
0.444**
0.025
Firm's Export Commitment and Actual Export Performance
EMPXMKT if firm has employees with specific experience in exports or export marketing 0.111** 0.506
XSHARE95 Share of exports in total sales in 199S 3.500 4.194
XSHAREFX Share of exports in total sales in year of first export 2.625 3.352
EXPORTS Subjective assessment of export performance by CEO 2.333 4.431
NCOUNTRIES Number of foreign countries that firm exports to 23.444 19.858
NXBUYRS Number of foreign buyers that firm does business with 30.444 51.525
NSHIP Number of shipments per year 25.778 185.654
Use of Public Marketing Support and the Internet
MKTINFO if firm has received information on export market opportunities by public support agencies 0.667 0.711
INTRODUCE if firm has been introduced to foreign buyers or export agents by public support agencies 0.667 0.444
TDE FAIR if firm has participated in trade fairs 0.556 0.437
FN LAWS if firm has been assisted in becoming familiar with relevant foreign laws 0,556* 0.170
STDY if firm has been helped with doing feasibility studies 0.000 0.000
INTERNET if firm has used the internet to access information that pertains to export promotion 0.556 0.420
The Relative Importance of Marketing Channels to Access Export Market (on a scale of 5)
RI 196 direct efforts by firm to contact foreign buyers or export agents in 1996 4.667 4.627
RI 1FX direct efforts by firm to contact foreign buyers or export agents in year of first export 3.250 3.883
RI 296 initiatives by foreign buyers or export agents in 1996 3.222 3.425
RI2FX initiatives by foreign buyers or export agents in year of first export 3.125 2.408
RI 396 initiatives by subcontractors, domestic export trading or factoring companies in 1996 1.667 1.667
RI3FX initiatives by subcontractors, domestic export trading or factoring companies in year of first export 1.500 1.179
RI 496 support by public or non-profit agency in 1996 2.444 1.778
RI4FX support by public or non-profit agency in year of first export 2.333 1.595
* significant at a 10 percent level *: ‘significant at a 5 percent level
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(TABLE SSE continued)
Code (Definitions Mean Scores
Medium of Payment and the Use of Export Financing Support LSEFs SEFs
CASH PAY use of cash as a medium of payment 0.667 0.870
LTCRDT use of letters of credit as a medium of payment 0.556** 0.975
OPEN AC use of open accounts as a medium of payment 0.889 0.827
IDENT if firm has been assisted by agency to find an appropriate financial institution 0.444 0.302
RDUCE EX % of 199S exports which would have reduced if firm has not been assisted by public agency 2.286 2.018
Export Financing Related Difficulties (on a scale of 5; l=not a problem, and 5=a serious problem)
DIFF 1 96 lack of information on possible sources of financing in 1996 3.333 2.574
DIFF 1 FX lack of information on possible sources of financing in year of first export 3.333 3.564
DIFF 2 96 limited availability of financing in 1996 3.444 2.802
DIFF 2 FX limited availability of financing in year of first export 3.222 3.556
DIFF396 complexity of financing arrangements in 1996 3.556* 2.444
DIFF 3 FX complexity of financing arrangements in year of first export 3.556 3.274
DIFF 4 96 time delays in receiving payments from abroad in 1996 3.444 2.556
DIFF 4 FX time delays in receiving payments from abroad in year of first export 3.111 2.316
DIFF596 uncertainty of payments from abroad in 1996 3.444* 2.438
DIFF 5 FX uncertainty of payments from abroad in year of first export 3.111 3.009
DIFF696 size of collateral in 1996 3.750 2.691
DIFF6FX size of collateral in year of first export 3.500 3.346
Age and Size of Finn
YRSTART year of startup 1978.000 1978.412
YRFX year of first export 1981.625 1985.039
EMP95 number of employees in 1995 25.889 59.716
EMPFX number of employees in year of first export 15.750 14.172
Other Firm Characteristics
DEFLT- D Domestic Default Rate 9.638 7.508
DEFLT- F Foreign Default Rate 8.750 1.279
GROWTH subjective assessment of growth performance by the CEO 2.889* 3.549
PROFIT subjective assessment of profit performance by the CEO 3.222 3.484
* significant at a 10 percent level **significant at a 5 percent level
CHAPTER 7
146
CONCLUSION AND POLICY RECOMMENDATIONS
This study has investigated the use of public marketing and export financing
support by 104 sample SMEs in the southern California region. A summary of the
findings is recapitulated and policy recommendations are given in the ensuing
paragraphs.
L SUMMARY OF THE FINDINGS
Firm characteristics identified among the more successful exporters are (1)
better self assesments of growth performance, (2) better self assesments of profit
performance, (3) greater likelihood of prior work experience in SMEs (EXPSME),
and (4) greater likelihood of having employees with specific experience in exports or
export marketing (EMPXMKT). While better profit and growth assessments are seen
as direct correlates of success in the business of exporting, the latter two
characteristics suggest that prior experience in a SME and having a management
committed towards foreign operations are crucial for the improving the firm’s export
performance.
From evidence on the way firms rate the relative importance the various
marketing channels and their respective use of marketing support (RI196/FX, .
RI496/FX), we see that use of marketing support results from inefficiency in the
private channels, and specifically the use of domestic export agents. These
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147
inefficiencies vary across sectors, and are partly dependent on (1) the specificity of the
product type and (2) the average life cycle of the product (see pages 134-135). On the
first point, we see that firms which are more dependent on the services of the private
export agents are generally concentrated in the sector where the range in product type
is smallest. Efficiency of the private export agents to handle the marketing needs of
these firms results from the fact that with a higher level of specificity in product type,
specialization of the marketing tasks by the private export agent is facilitated. The
heavy manufacturing sector is a good example of this. On the second point, we see
that firms that are more dependent on the use of private export agents tend to be in a
sector of activity in which the demand for their products are more resistant to the
effects of time. Conversely, we also see that the firms that are least dependent on the
initiatives of the private export agents are those firms that belong to a sector of
activity in which the average product life cycle is generally short. The high-tech sector
is an example of this. In the high-tech sector, we see that their lesser dependence on
the initiatives of private export agents relative to their dependence on the initiatives of
public agencies is due to the high and perhaps accelerating rates of technological
change that is inherent in the industry, which Root (1994) maintains contributes to the
convergence of demand preferences across countries, and also to the compression of
the duration of international product life cycles. The short product life cycle, Perry
(1992) asserts, discourages a long-term relationship between an ITI and the exporter
from being established and hence eliminates the ITI’s assurance of enjoying future
benefits from the exporter. This implies increased practice of opportunistic behaviors
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148
by the ITI and inefficiency in the marketing channel. De facto, this inefficiency of the
ITI as a marketing channel results in the dependence of high-tech firms on existing
public marketing support.
Use of public marketing support is lightest in the light manufacturing sector
and heaviest in the high tech sector. It is also noted that use of marketing support has a
positive marginal effect with respect to export performance in the light manufacturing
sector, while it has a negative marginal effect with respect to export performance in
the high-tech sector.
Most of the public export financing support available to SMEs are in the form
of loan guarantees and insurance. Use of export financing support by the sample
SMEs can be seen as a function of the firm’s age and average transaction size (see
page 136). The older firms tend to be less dependent on export financing support than
newer firms. Also, firms that have a relatively large average transaction size tend to
use more export financing support. The light manufacturing firms tend to have
considerably smaller transaction size compared to the heavy manufacturing and high-
tech sectors. In general, export financing support has a positive effect on export
performance in all sectors, although not all the effects are statistically significant.
With respect to the 12 export financing-related difficulties, our results have
registered positive relationships between improvements in the various problems and
export performance. While the causality for the relationships is not always clear, to
some extent, this suggests that export financing-related difficulties can be major
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149
impediments to the export process, and improvements in the financial environment
may be crucial for the well being of SMEs.
n. POLICY RECOMMENDATIONS
In this study, it is evident that government intervention in the form of public
support is justified on the grounds that there are real externality problems found in
some sectors with regards to private provision of marketing and financing support.
However, also evident is the fact that the existing public support may not be
addressing the imperfections of the market mechanism appropriately. From the
evidences provided from the available literature, and also the findings in this study,
policy recommendations and guidelines for reform are provided here.
With respect to the existing marketing support, we note that public support is
most crucial in the sectors in which the private networks, and in particular the private
export agents, are failing. Sectors in which improvements in public support are more
necessary are the light manufacturing and the high-tech sector.
The light manufacturing sector proves to be inadequately assisted by both the
available private as well as public support The fact that, on average, SEFs tend to
rank the relative importance of the use of public support (RI496/FX) before the
relative importance of the initiative of subcontractors or export agents (RD96/FX) to
access the export market is the strongest evidence that private support, and
specifically the private export agents, are not efficient as a market channel for the
light manufacturing firms. This hypothesis is also supported by the fact that SEFs tend
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150
to rate, on average, the relative importance of the initiative of the subcontractor or
export agent (RI496/FX) as less important than their less successful counterparts. On
the other hand, the evidence that public support may not be an efficient marketing
channel stems from the fact that SEFs, on average, tend to rate the support by public
agencies to penetrate the export market as less important than LSEFs.
The inadequacy of both the public and private marketing support systems to
assist the light manufacturing sector can be attributable to the inadequate supply of
marketing support by the respective support providers. The failure of private trade
intermediaries as efficient marketing channels results from the heterogeneity and
diversity of light manufacturing products. This heterogeneity in product type impedes
the specialization process of ITIs, and hence results in inefficiency in that marketing
channel. The same reasoning may also be applied to explain the inadequacy of public
support to assist certain firms in the light manufacturing sector. Also, failure of public
support as an efficient marketing channel may be due to the fact that the light
manufacturing sector is often regarded as a low benefit potential sector. This may
imply a biased allocation of publicly funded resource for marketing support away
from this sector, which may result in a support system that is selective in assisting
only particular groups of firms within the sector. If this hypothesis is true, then the
public marketing support does no good to assist firms unless it is targeting a certain
group of exporters that are not helped by the ITIs. The validity of this argument has
not been verified in this study, and should be an issue worth investigating further.
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151
If upon future investigations the supply side hypothesis should hold true to
some extent, it would imply that there are some SMEs that are neither supported by
both the existing ITIs nor by the available public support programs. If so, and if it can
be accomplished in a cost effective manner, public agencies should: (I) identify the
neglected group and then either (2) assist the private sector in the formation of a
sector association to meet the needs of the specific group, or (3) change the incentive
structure of ITIs, through tax credits or similar measures, so as to make the specific
group more attractive to be assisted.
On the other hand, the heavier dependence of high-tech firms on the available
marketing support clearly grew out of the inefficiency of the ITIs as a marketing
channel. The inefficiency can be attributed to the short average life cycle that is
inherent in many of the products of the industry (see page 104). However, we have
also noted from the findings that LSEFs are among the more active users of marketing
support within that industry. The fact that SEFs are less dependent on the public
marketing support suggests that high tech products may be too specific for public
agencies to handle adequately. This is consistent with studies done on developing
countries by Levy, Berry, Itoh, Kim, Nugent and Urata (forthcoming) which suggest
that marketing support is most efficient when provided by private sources, and that
public agencies should make it first priority to ensure the efficacy of private marketing
support rather than to design support programs that crowd them out. Hence, it should
follow that bringing stability to the ITI-finn relationship should be the first priority of
policy makers. Factors that causes stability and instability to the ITI-finn relationship
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152
have been mentioned and discussed extensively in our review of the literature (see
pages 50-61).
In light of the fact that assurance of a long term working relationship is
integral to the stability and efficiency of the use of ITIs as a marketing channel, the
implementation of a graduation fee as a correcting mechanism can serve to decrease
the incentives of ITI to engage in opportunistic activities.
Deviating from the standard models of ITIs, where an infinite term of contract
is thought to be optimal, a target date for the graduation of the firm from the services
of the ITI can be set and agreed upon by both parties. After the introduction of a
graduation date, a graduation fee calculated in present value can be implemented as a
penalty incurred by the firm if the firm finds itself able to internalize prior to the date
agreed upon. The graduation fee would serve to reassure the ITI of a reasonable return
for its efforts even if the firm internalizes prior to the targeted date and indeed may
reward it for successfully transferring know-how to the firm in the shortest possible
time. To safeguard the firm from the opportunistic tendencies of the ITI, we can
implement a policy whereby a firm that has not been profitable (e.g. bankrupt) is
released from all liabilities to the m if the firm chooses to internalize prior to the
targeted date of graduation.
Reform is also desirable in the case of export financing support As we have
seen before, export financing needs are less sector-specific and less product-related.
As noted from this study, use of export financing support is a function of the firm’s
age and the firm’s average transaction size. While the existing export financing
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153
programs are directed, in part, to help those deserving SMEs who may not be able to
access private financial sources due to a lack of credit history as a result to their lack
of operational experience in business, it does not address the needs of deserving SMEs
who may not have a transaction size that is viewed profitable for banks to extend
credit to. Public agencies should focus on measures in which the high administrative
costs of extending SME credit may be reduced. Another way to overcome this
problem of limited availability of financing for SMEs is to push for more use of
financial secondary markets in which SME debt can be traded. This suggestion has
been discussed extensively in the literature, but has not been covered in our study.
Among proponents of the secondary market are Martinoff (1988), Beshouri and Nigro
(1994), and Moller (1996).
Problems pertaining to the existing loan guarantee and insurance programs
have been summarized in the review of the literature (see page 38-42).
Recommendations for reforming the existing export financing support have been
suggested by Rhyne (1988), and they include (1) the reduction of the guarantee
percentages to that of the preferred lender program, and a subsequent push for the
preferred lender program if the reduction in the guarantee percentages proves to be
effective, (2) the adoption of a single policy goal, (3) the implementation of more
stringent guidelines for borrower selection, (4) the provision of specialized programs
for target groups, and (5) the use of private insurance for bank loans.
As we have seen, many of the programs have not been effective in meeting the
needs of SMEs. Much of this problem stem from a lack of effort on the part of public
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154
agents to identify the real problems that are faced by SMEs. This strongly suggests a
need for more SME voice in the policy making process. Deliberation councils1 7
modeled after those of successful exporting countries may be a start towards a better
knowledge of where the need for public support is felt most by the beneficiaries - the
SMEs.
1 7 Recommendations for the design of deliberation councils have been reviewed in the literature (see
page 21).
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CHAPTER 8
155
SUGGESTIONS FOR FUTURE RESEARCH
A study such as this one offers to the business and government community
concrete recommendations for improving the effectiveness of export assistance.
It should be clear that SMEs require certain types of assistance to overcome
obstacles that are due to apparent market failures. Such assistance to SME exporters
and would-be exporters that various export support systems provide is thus easily
justifiable to a broad ideological spectrum. That these support organizations face
constrained budgets and limitations of personnel is obvious. Thus, it is desirable that
agencies and firms are able to continually reassess each other's capabilities and
objectives, in order to maximize the value of these programs, most of which taxpayers
pay for.
To some extent this dialogue is very much a continuing interchange between
agency and firm. Evidently, this process is not perfect, and part of this is due to an
inability or unwillingness of the agents to speak candidly to each other, and in part to
a slow or lacking response to firms' needs by agencies. It is these problems that a
study such as this addresses. One point emphasized to the firms in this study was that
the researchers were independent, unaffiliated with any commercial or governmental
organization, but who would be taken very seriously by the organizations in question.
The anonymity and remove from (at least some) bias provided to firms a chance to be,
and a reason to be, frank in their appraisals of the support systems. Likewise, the view
of both users and non-users of their programs offered to export assistance agencies a
chance to see why they were not reaching certain firms. It would be very hard for an
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156
agency to discover what it is failing to do by asking only those firms who currently use
its services.
In serving as a bridge between firms and support systems, this study is
valuable. It is thus desirable that this sort of independent, systematic, and analytically
rigorous feedback be updated on a regular basis. The lack of literature on export
finance alone is a serious impediment to policy improvements. That there is virtually
no literature on specific agencies that is up to date essentially guarantees that no
program improvements can be brought about by the small body of literature that does
exist on the subject. Studies such as these should be regularly conducted in order to
reassess and critique the progress of export assistance programs in providing well-
tailored, cost-effective counseling and financing.
Unfortunately, the nature of an extensive mailed survey is that it involves
considerable expenditure of effort and expense to complete the correspondence stage
of the study. This will be reduced over time if research is revised continually, with
respect to previous surveys. Several suggestions for improving both the content and
effectiveness of the surveynot only help remedy this problem, but also improve the
usefulness of any individual study.
One of the difficulties that arose as the study came to completion was the
difficulty of reconciling the dual objectives of the study: to replicate the thorough
overview that Nugent and Kim’s (forthcoming) study gave with needs of brevity in a
mailed questionnaire targeting southern California businesses. The desire to reach
firms across various manufacturing sectors in this study made a limited sample of
personal contacts impossible, and thus future research in this area will have to
sacrifice the ends that Nugent and Kim’s paper sought. Such detailed, sectoral
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157
analysis becomes useful at a later stage of export assistance refinement, and this will
be discussed below.
I. Questionnaire
Given the utility of the continued use of surveys of export-oriented firms, the
results of this study point to a desirable methodology for such future studies. The key
element of this methodology is the construction of the questionnaire. It is likely that
the length of this study's questionnaire and its content (questions on financial history
and assessments of firm characteristics and export difficulties at time of first export)
had a deterrent effect on firms who would otherwise have completed the survey or
filled it out more completely. Although effort was made on the part of the researchers
to limit the length of the questionnaire, the desire for a sensible overview of the firm's
history and characteristics prevented a survey that was both easy to fill out and not
bulky in size. The use of check-boxes and scales, which is virtually necessary to
facilitate rapid completion of a questionnaire, also contributes to its length; in spite of
the assurance that the survey could be completed in 20-25 minutes, its nine pages may
have been intimidating to some recipients of the questionnaire.
Additionally, some portions of the survey's contents were not adequately filled
out by a large percentage of firms, and so contributed little to the study. The portions
were questions relating to the history of the firm: sources of financing during the year
of start-up, difficulties in export financing in year of first export, the usefulness of
various marketing programs and initiatives in the year of first export. As answers to
these questions were often missing or incomplete, such questions relating to past
periods should be dropped. As comparisons between periods are useful, they need not
be avoided. However, they would be better attained by comparing sequential studies
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158
of identical firms, a process that should naturally arise out of the continuation of this
research.
Thus, the questionnaire should be limited to requesting essential firm
characteristics that can be reliably gathered (size, measured by employees; age; sector)
and should focus on an explicit assessment of agencies and rating of areas of greatest
need in export finance assistance. Sections on marketing can be eliminated if the
focus of the study is narrowed to finance. Such a questionnaire would take less than
ten minutes to complete and would comprise a shorter document. A study using such
a questionnaire would only be able to test very specific hypotheses, but could still
make important recommendations. The lack of general information to put in context
any results would be more than made up for by the increased rate of response and
completeness and reliability of the responses.
II. Mailing Process
Future studies should seek an even larger pool of user firms to contact. A
study should be conducted every perhaps three years to update the information and
assess any progress that has been made in areas of need, as well as new challenges or
opportunities for the export support organizations. These studies should use the same
questionnaire, which should be updated only to accommodate changes in assistance
programs or recent developments in the exporting environment.
The fact that the mailing lists tend to include a great number of undeliverable
addresses is a problem that cannot be overcome without a tremendous expenditure of
effort.1 8 This problem will be mitigated to the extent that support organizations
1 8 One relatively easy way to improve the number of delivered questionnaires was suggested by Hofmann
(personal communications, 5 December 1996). Since a number of addresses bore the correct street
address but an out of date name of the contact person, he suggested that names be supplemented by the
words "or current chief executive officer."
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159
update their own files; in spite of the unreliability of their lists, those lists are the most
appropriate source of firm addresses for studies of this scope. The problem will also
be reduced over time as a body of firms becomes a reliable subset of the responses in
each study and more and more addresses of firms that are unreachable are expunged
from the lists. It is likely that firms which return the questionnaire for a survey one
year will be willing to do so for the next study. Over time, a sample of firms for
longitudinal study could be constructed.
m . Sector-Specific Surveys
One of the complaints that arose in the replies to this study's questionnaire was
the lack of sector-specific expertise among export support organizations, especially in
the area of high-tech. Once more general problems in the provision of export finance
assistance are clarified, it would be beneficial to focus on the needs of individual
sectors and the assistance programs tailored to them. Ideally suited to this line of
inquiry is, of course, the methodology of Nugent and Kim’s (forthcoming) study and
its questionnaire design.
IV. Feasibility
To actually implement suggestions for future research of this type requires
significant expenditure for the survey process. This expense, given the immediate
applicability of the results to activity of significant economic benefit, is justifiable,
and should decrease over time. If sponsorship of the affected agencies could be
obtained, independence of the research could likely be maintained while allowing the
primary beneficiaries of the studies, the agencies (whose task is to assist exporters), to
internalize the costs.
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V. Remarks
This study observed the importance of direct appraisal of export support
organizations in the quest to improve the export involvement of U.S. firms. To do so
effectively, it focused on firms in a geographically defined region with substantial
export orientation. It recognized the importance to exporting and the special needs of
SMEs, and it discovered a severe shortage of useful studies on export finance. The
seriousness of this gap cannot be overstated, as the requirements for capital are
disproportionate for exporting and SMEs more often than not lack the collateral or
established good standing to acquire sufficient financing on the market.
The results of this survey are thus an important first step in the study of export
finance assistance for SMEs by practical, result-oriented means. A new data set,
constructed solely for the study, is compiled directly from those entities involved, and
the results of the survey are specific and usable recommendations to those who offer
the export assistance. This straightforward approach is useful, and should be
continued, to the benefit of the region and the national economy.
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Aspinwall, R. and Eisenbeis R. (Eds.), Handbook For Banking Strategy (pp. 617-
645). New York: John Wiley.
Kamath, S., Rosson, P., Patton, D. and Brooks, M. Research on Success in Exporting:
Past, Present and Future. (1987). In Philip Rosson and Stanley Reid (Eds.), Managing
Export Entry and Expansion (pp. 398-422). New York: Praeger.
Kvasnicka, J. The Dollar-Trade Puzzle. (1986) In FRS, International Letter (p. 560).
Chicago: The Federal Reserve Bank of Chicago.
Mintz, I. Cyclical Fluctuations in the Exports in the United States since 1879. (1967).
In NBER, A Longitudinal Analysis o f Total US. Exports. New York: National Bureau
of Economic Research.
Nugent, J. B. Capital Flows to and From the United States: Past Trends and Future
Prospects. (1996). In PECC, Capital Flows in the Pacific Region: Past Trends and
Future Prospects (pp. 489-544). Osaka: Japan Committee for Pacific Economic
Outlook.
Nugent, J.B. and Kim, L. Korean SMEs and Their Support Mechanisms.
(forthcoming). In Levy, B. et al., Can Intervention Work? Successful Small and
Medium Enterprises and their Support Systems. World Bank.
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Ogram, E. W. Exporters and Non-exporters. (1982). In Michael Czinkota and George
Tesar (Eds.), Export Management: An International Context (pp. 70-84). New York:
Praeger.
Papadopoulos, N. Approaches to International Market Selection for Small and
Medium Sized Enterprises. (1987). In Philip Rosson and Stanley Reid (Eds.),
Managing Export Entry and Expansion (pp. 128-158). New York: Praeger.
Papadopoulos, N. Assessing New Product Opportunities in International Marketing.
(1983). In ESOMAR, Mew Product Development (pp. 69-89). Amsterdam: ESOMAR.
Ramaswami, S. and Yang, Y. Perceived Barriers to Exporting and Export Assistance
Requirements. (1990). In Tamer Cavusgil and Michael Czinkota (Eds.), International
Perspective on Trade Promotion and Assistance, (pp. 187-206). Connecticut: Quorum
Books.
Savage, D.T. American Commercial banking Structure and Small Business Lending.
(1981). In Studies o f Small Business Finance (December). Washington D.C.: The
Interagency Task Force on Small Business Finance.
Shull, B. Changes in Commercial Banking Structure and Small Business Lending.
(1981). In Studies o f Small Business Finance. Washington D.C.: The Interagency Task
Force on Small Business Finance.
Tesar, G. and Tarleton, J. Comparison of Wisconsin and Virginia Small and Medium
Sized Exporters. (1982). In Michael Czinkota and George Tesar (Eds.), Export
Management (pp. 85-112). New York: Praeger.
Watro, P. Financial Services and Small Business (1982). In FRS, Economic
Commentary, (January), Ohio: The Federal Reserve Bank of Cleveland.
Books
Buckley, P. and Casson, M. (1976). The Future o f the Multinational Enterprise.
London: Macmillan Inc.
Buckley, P. and Brooke, M. (1992). International Business Studies: An Overview.
Blackwell Publishers.
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Davis, L.A. (1989). Contribution o f Exports to U.S. Employment: 1980-87.
Washington D.C.: U.S. Government Printing Office.
Dunkleberg, W.C. and Scott, J.A. (1985) Credit, Banks and Small Business: 1980-
1984. Washington D.C.: National Federation of Independent Business.
GAO (1983). SBA’s Certified Lenders Program Falls Short of Expectation.
Washington D.C.: United States General Accounting Office.
GAO (1995). Export Finance: Comparative Analysis o f U.S. and European Union
Export Credit Agencies. Washington D.C.: United States General Accounting Office.
Jain, S. (1989). Export Strategy. Connecticut: Quorum Books.
Levy, B., Berry, A., Itoh, M., Kim, L., Nugent, B., Urata, S. and Escandon, J.
(forthcoming). Can Intervention work? Successful Small and Medium Enterprises and
Their Support Systems. Washington D.C.: World Bank.
Martinoff, J. (1988). A Survey of Export Financial Services Required By Small and
Medium Sized Businesses to Increase Their Participation in International Trade, PhD.
Dissertation, The Claremont Graduate School.
Miles, R. (1980). Macro Organizational Behavior. California: Good Year.
Mitnick, B. (1974). The Theory of Agency: The Concept of Fiduciary Rationality and
Some Consequences, PhD . Dissertation, University of Pennsylvania.
Perry, A.C. (1992). The Evolution o f U.S. Trade Intermediaries: The Changing
International Environment. Connecticut: Quorum Books.
Rhee, C. (1991). Factors Related to the Export Decisions of Small and Medium Sized
U.S. Manufacturers, PhD . Dissertation, United States International University.
Rhyne, E. (1988). Small Business, banks and SB A Loan Guarantees. New York:
Quorum Books.
Root, F. (1994). Entry Strategies For International Markets. New York: Macmillan
Inc.
Shaw, R. (1977). Commerce and State Department's Export Promotion Programs.
Washington D.C.: U.S. Government Printing Office.
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Stem, L. and En-Ansary, A. (1982). Marketing Channels. Englewood Cliffs, New
Jersey: Prentice-Hall.
Tesar, G. (1975). Empirical Study of Export Operations Among Small and Medium-
Sized Firms, Ph.D. Dissertation, University of Wisconsin.
Wells, L. and Dulat, K.B. (1996). Export From Start to Finance. New York: McGraw-
Hill.
Wright, R.W. (1984). Japanese Business in Canada: The Elusive Alliance. Essays in
International Economics. Montreal: The Institute for Research on Public Policy.
World Bank (1993). The East Asian Miracle. Washington D.C.: Oxford University
Press.
Interviews
Alikani, John M, President of Pioneer International Group. September 1996. At
Pioneer International Group, Los Angeles, California.
Brown, Caroline V, CEFO Senior Loan Officer. March 29,1996. At California
Export finance Office, La Palma, California.
Corrales-Diaz, Susan, President and CEO of Systems Integrated, Inc., and Irene
Fisher, SCORE consultant. February 2,1996. At Systems Integrated, Inc., Los
Angeles, California.
Frieze, Jill, Vice President of the International Division of Imperial Bank. November
12, 1996. At Imperial Bank, Los Angeles, California.
Hofmann, Peter, Vice President and Manager of the International Division of National
Bank of Southern California. December 5,1996. At University of Southern
California, Los Angeles, California.
Isaac, Jacques, Owner of C-Shore International. September 24,1996. At C-Shore
International, Los Angeles, California.
Kanlian, Joan, and Steve Morrison, DOC International Trade Specialists. April 1,
1996. At Department of Commerce, USEAC, Long Beach, California.
Murat, Corinne, LAACC Program Director. April 26,1996. At Los Angeles Area
Chamber of Commerce, Los Angeles, California.
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172
Shayan, Mike, Buyer, Concord Enterprises. September 5, 1996. At Concord
Enterprises, Los Angeles, California.
Snow, Tricia L., Eximbank Development Officer. March 1, 1996. AtEximbank,
USEAC, Long Beach, California.
Other Works Cited
CEFO (1994). Export Loan Guarantee Program. La Palma, California: CEFO.
CEFO (1996). CEFO Update January, 1996. La Palma, California: CEFO.
Eximbank (1994a). Annual Report. Export-Import Bank of the United States.
Eximbank (1994b). Small Business: A "Main ” Focus. Export-Import Bank of the
United States.
LA Trade (1995). LA Trade. Los Angeles: LA Trade.
11 Million Businesses Phone Book (1995). Computer software (CD-ROM).
American Business Information.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
173
APPENDICES
L SUMMARY DESCRIPTION OF LETTERS OF CREDIT
The Letter of Credit (LC) is a crucial instrument in export finance, virtually
necessary for a firm to do business with buyers in other countries. There are a number
of different types of LCs, but they all operate under the same principle. Wells and
Dulat (1996) give a thorough overview of important terminology used in LCs as well
as the various types of LCs and their uses. Below, the basic procedure for drawing up
and utilizing a LC is covered, with specific reference to the value of a transferable
LC. The basis for this description is Wells and Dulat (1996) and Hofmann (1996).
Both exporters and buyers reduce their risks by negotiating letters of credit as
means of payment. A LC guarantees payment to the seller (exporter) contingent on
delivery of the product under specific conditions to the buyer. The buyer’ s bank
makes the guarantee, and by offering its own credit makes the guarantee more
reliable. Thus, the seller needs not be concerned with the financial strength of the
buyer, but can be confident that payment will be made. Likewise, the buyer does not
have to pay for the merchandise until it is delivered.
A letter of credit is issued as follows: the buyer approaches its bank, with
which it presumably has a line of credit or an account, to open the LC. The buyer's
bank (the opening bank) issues the letter of credit. In so doing, the opening bank
agrees to pay the seller's bank (the paying bank) the amount specified once the seller
has provided the paying bank proper documentation proving shipment of the goods.
Upon fulfilment of all of the conditions stipulated in the agreement, the paying bank
then pays the seller, while the opening bank debits the buyer.
The letter of credit is often the best way to provide both buyer and seller with
security that they will not be cheated. The letter of credit does, however, involve
some expense and considerable attention to detail and paperwork. If the exporter fails
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174
to meet the specifications of the LC, the opening bank is not required to pay upon
shipment. Wells and Dulat (1996) cover important aspects of the contract as well as
various discrepancies that may arise and ways to resolve them.
Finally, the transferable letter of credit is an instrument that may be
indispensable to a small firm that is new to export. Most banks and export assistance
agencies do not provide export financing without a sufficiently strong financial
statement. Further, virtually every bank and export assistance agency requires
exporting experience. Thus, a new, small firm will not be able to get the working
capital it needs for exporting. If the firm needs working capital primarily to pay
suppliers, then, as Hofmann (personal communications, 5 December1996) points out,
a transferable LC may be the solution to its problem.
A transferable LC is a LC with an additional clause stipulating that a portion of
the value of the LC may be transferred to another party, who then has the same duties
as the seller, and who receives the same guarantee of payment. The exporter, when
shipping its product, simply substitutes its documents for the ones its supplier
provided to the paying bank, and the paying bank pays both the exporter and its
supplier. The transferable LC is no different with respect to the buyer or the opening
bank. Thus, an exporter may transfer a portion of a transferable LC to its supplier.
Although the supplier has not been paid, it has a guarantee that it will be paid, and the
transferable LC acts as a way of circumventing the exporter’ s need for working capital.
This technique will not always work. Because the guarantee of payment that
the LC provides is contingent upon the timely and proper shipment by the exporter,
the supplier must have some confidence in the exporter's ability to perform to accept
the transferable LC in lieu of payment in advance. Also, a request for a transferable
LC by the exporter indicates to the buyer a degree of financial weakness.
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175
Nonetheless, when affordable financing is not available, a transferable LC may be the
best alternative.
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II. THE QUESTIONNAIRE
List o f E xport Support Organisations
176
IMPORTANT: This information will be held confidential. All the information you provide in this
questionnaire will be used for the sole purpose of economic research and any names given will be
held in strict confidence.
In several places in this questionnaire, we ask about support organizations which may have assisted your
firm. Below is a list of some organizations which you can use as a reference. Please indicate which
programs you have heard o f used, or are using in the spaces below.
Support Organization name (Bold)
and Program name
Heard
of?
Ever
used?
Using
now?
■ ........... . ;
State of California:
01 California Export Finance Office (CEFO)
02 Pre-Shipment Working Capital Guarantee
03 Post-Shipment Accounts Receivable Guarantee
04 Combination Guarantee
05 Office of Export Development
06 Trade fairs and missions
07 California State Foreign Trade and Investment Offices
(Tokyo, Frankfurt, Mexico City, etc.)
1 1 Export-Import Bank (Ex-Im Bank)
12 Working Capital Guarantee Program
13 Short Term Multibuyer Credit Insurance
14 Medium Term Insurance or Guarantee
15 Small Business Export Credit Insurance
16 Umbrella Export Credit Insurance
21 Department of Commerce/International Trade
Administration (TTA)
22 IT A International Economic Policy
23 ITA Trade Development
24 ITA U.S. and Foreign Commercial Service (USFCS) Trade fairs
and exhibitions
25 ITA USFCS Export counseling
26 ITA USFCS Overseas offices
27 National Trade Data Bank
. . . „ .. , . .
*
31 Small Business Administration (SBA)
32 7(a) Business Loan Guarantee Program
33 Export Working Capital Guarantee Program
34 Small Business Investment Company
35 Service Corps, of Retired Executives (SCORE)
36 Small Business Development Center
(continued on next page)
- •
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177
Support Organization name (Bold)
and Program name
Heard
of?
Ever
used?
Using
now?
41 Trade and Development Agency (TDA)
42 Technical Assistance
43 Grants
44 Feasibility studies
45 Orientation visits
•
51 Overseas Private Investment Corporation (OPIC)
52 Direct Loan Program
53 Loan guarantees
54 Insurance
61 Agency T or International Development (USAID)
62 USAID financed project contracts
62 Forfait Guarantee Program
-
71 LA Trade
72 TradePort
73 Technical assistance and export counseling
- • « .
81 LA Area Chamber of Commerce
82 Legislative advocacy
83 Export counseling
91 Other Chambers of Commerce
Domestic:
Foreign :
92 U.S. Export Assistance Center
Location:
93 World Trade Center
Location:
94 Center for International Trade Counseling
Location:
95 Other organization
Name:
96 Other organization
Name:
- -
. . , -
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Questionnaire
178
Date: / /_____
IMPORTANT: This information will be held confidential. All the information you provide in this
questionnaire will be used for the sole purpose of economic research and any names given will be
held in strict confidence.
I. Overview
1. [OPTIONAL] Name of business:_________________________________ Phone:
2. Information on the Entrepreneur:
a) [OPTIONAL] Name:_____________________________________ Age:____
b) Position/Job Title:_____________________________________
c) Education: Years:_____ Major, if attended college:_____________
d) What is your export experience prior to joining/starting this firm?
(1) Worked in a small firm that exported
(2) Worked in a large firm that exported
(3) Worked for a subcontractor for exporters
(4) Other:________________________________
e) Are there any other employees with specific experience in exports or export marketing?
Yes No
3. What was your year of start-up (firm established)?__________ of first export?__________
(NOTE: questions below will refer to “year of 1st export” and “year of start-up” or “year est’d.”when
asking for information from those years.)
4. What was the number of employees in 1995?__________ in your year of 1st export?__________
and in your year of start-up?__________
5. What is the form of your firm’s ownership?
(1) Sole Proprietorship or Partnership
(2) Corporation
(3) Joint venture with foreign firm
Equity share: your firm______ % foreign firm_______ %
(4) Subsidiary of larger corporation.
[OPTIONAL] Name of corporation:__________________________
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179
6. List your three leading products or services in order of their importance and their share in total sales.
1996 Leading Items Share: 1-20% 21-50% 51-80% 80-100%
1) _____
2) _____
3 )____________________ _____ _____ _____ _____
Start-up Year Leading Items Share: 1-20% 21-50% 51-80% 80-100%
1) _____
2) _____
3 )____________________ _____ _____ _____ _____
7. Please provide estimates of your sales and exports.
Estimated Sales Exports as % of Sales
(Sthousand)
1995 _________ ___0-5% 6-15% 16-30% 31-50% 50+%
Year of 1st _________ ___0-5% ___6-15% 16-30% 31-50% 50+%
Export
Year Est’d. _________ ___0-5% 6-15% 16-30% 31-50% 50+%
8. Assess your performance using the following scoring system.
Very Poor Poor Fair Good Very Good
1 2 3 4 5
(1) Growth _____ _____ _____ _____ _____
(2) Profitability _____ _____ ____ _____ _____
(3) Exports _____ _____ _____ _____ _____
9. With how many foreign countries do you do business?__________
10. With how many foreign buyers do you do business?__________
11. How regularly do you export (approximate number of times per year)?____________
12. To what regions do most of your exports go? Circle one or more.
Europe Canada Mexico Other Latin America
Japan China Other Asia Africa Middle East
Other:_______________________
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180
n. Marketing Support System
1. In which of the following ways have government or non-profit agencies helped your firm to penetrate
export markets? If you benefited from it, how usefiil was it?
Yes/
No
Name of
Supporting
Institution
(Use Acronyms
provided below)
Usefulness
not very
useful usefiil
(1) Providing information on export market
opportunities
1 2 3 4 5
(2) Introducing buyers or export agents to your firm 1 2 3 4 5
(3) Helping you participate in trade fairs in the U. S.
or overseas
1 2 3 4 5
(4) Helping your firm become familiar with relevant
foreign laws (e.g. foreign quality standards or import
regulations)
1 2 3 4 5
(5) Doing feasibility studies 1 2 3 4 5
(6) other: 1 2 3 4 5
List of Supporting Institutions.
CEFO (California Export Finance Office) OPIC (Overseas Private Investment Corporation)
OED (Office of Export Development) USAID (Agency for International Development)
EXIM (Export-Import Bank) LAT (L.A. Trade)
SBA (Small Business Administration) LAACC (L.A. Area Chamber of Commerce)
TDA (Trade Development Agency) OCC (Other Chambers of Commerce)
DOC (Department of Commerce / International OTHER (Name of Institution that is not listed
Trade Administration) above)
2. On a scale from 1 (lowest) to 5 (highest), rate the relative importance of each of the following in
facilitating access to export markets:
1996 Year of 1st Export
(1) Direct efforts by firm to contact foreign 1 2 3 4 5 1 2 3 4 5
buyers or export agents
(2) Initiatives by foreign buyers or export 1 2 3 4 5 1 2 3 4 5
agents
(3) Initiatives by subcontractors,
domestic export trading or 1 2 3 4 5 1 2 3 4 5
factoring companies
(4) Support by public or non-profit agency for 1 2 3 4 5 1 2 3 4 5
your firm to penetrate export market
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181
HI. Financial Support System
1 . Identify the financial source, amount, and usefulness of each of the following when your firm first
exported and in 1995.
1995
Yes
/No
Amount (in S000)
0- 5- 10-
5 10 50
50-
100
100
+
Usefulness
not very
useful usefiil
(1) Venture capital firm or
investment associations
1 2 3 4 5
(2a) Bank loans 1 2 3 4 5
(2b) Loan guarantees 1 2 3 4 5
(3) Self Finance 1 2 3 4 5
(4) Corporate bonds and
issue of Commercial Paper
1 2 3 4 5
(5) Other private loans 1 2 3 4 5
(6) Relatives, friends 1 2 3 4 5
(7) Parent firm 1 2 3 4 5
(8) Support organization
Acronym:
1 2 3 4 5
(9) Forfaiting house 1 2 3 4 5
(10) Factoring house 1 2 3 4 5
Year of first Export
Yes
/No
Amount (in $000)
0- 5- 10- 50- 100
5 10 50 100 +
Usefulness
not very
useful usefiil
(1) Venture capital firm or
investment associations
1 2 3 4 5
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182
(2a) Bank loans 1 2 3 4 5
(2b) Loan guarantees 1 2 3 4 5
(3) Self Finance 1 2 3 4 5
(4) Corporate bonds and
issue of Commercial Paper
1 2 3 4 5
(5) Other private loans 1 2 3 4 5
(6) Relatives, friends 1 2 3 4 5
(7) Parent firm 1 2 3 4 5
(8) Support organization
Acronym:
1 2 3 4 5
(9) Forfaiting house 1 2 3 4 5
(10) Factoring house 1 2 3 4 5
2. What terms of sales do you offer to your foreign buyer? (ie. how are you paid)
Yes/No Percentage
(1) Cash %
(2) Letter of Credit %
(3) Open Accounts %
(4) Other:______________________________ %
3. What percentage of domestic customers to whom you provide credit fail to pay their
debts?______ % What percentage of foreign customers?_______ %
4. Are you able to discount (rediscount) any Account Receivables (A/R) ? Yes No
If yes, to which of the following?
(1) Bank
(2) Other Firm
(3) Individual
(4) Other:__________________
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183
5a. Are there any business advantages to exporting (eg. Foreign Sales Corporations)? Yes No
If yes, please describe.
5b. If you have answered “yes”, but you are not making use of the advantages, what is the reason?
6. Please rate the following statements pertaining to difficulties in obtaining financing for expons.
Not
A
Problem
Now
A
Serious
Problem
Year of First Export
Not A
A Serious
Problem Problem
(1) Lack of information on possible sources
of financing
1 2 3 4 5 i 2 3 4 5
(2) Limited availability of financing 1 2 3 4 5 1 2 3 4 5
(3) Complexity of financing arrangements 1 2 3 4 5 1 2 3 4 5
(4) Time delays in receiving payments from
abroad
1 2 3 4 5 1 2 3 4 5
(5) Uncertainty of payment from abroad 1 2 3 4 5 1 2 3 4 5
(6) Size of collateral requirements 1 2 3 4 5 1 2 3 4 5
7. Did any of the agencies (mentioned on page 5) help you in identifying an appropriate financial
institution (e.g., banks)? Yes No______
If yes, how helpful was this agency in guiding you on how to be successful in obtaining financing?
Now Year of First Export
Not Very Not Very
Helpful Helpfiil Helpful Helpful
1 2 3 4 5 1 2 3 4 5
8. In your opinion, if you had not been able to use any of the external sources of support from the
government or non-profit agencies, by what percent would your realized 1995 exports have been
reduced. (Please circle one)
1-20% 21-40% 41-60% 61-80% 81-100%
9. Have you ever used the internet to obtain information that pertains to export promotion?_ _ Y N
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IV. Additional Comments/Recommendations
184
THANK YOD VERY MUCH FOR COMPLETING THIS QUESTIONNAIRE.
Would you like a copy of the results of this survey?___ Yes No
If yes, please enclose your business card.
Alternatively, you may also request for the results by sending us your business card separately.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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Asset Metadata

Creator Chee, Benjamin H. W. (author)

Core Title An analysis of SME export assistance needs

School Graduate School

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Commerce-Business,Economics, Finance,economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Nugent, Jeffrey B. (committee chair), Mui, Vai-Lam (committee member), Vuong, Quang (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-11268

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Rights Chee, Benjamin H. W.

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Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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