Small Business Labs

Emerging Markets and the Global Economy

Interesting piece by the Economist Intelligence Unit covering the increasing importance of the developing world on the global economy.  Key quote:

"Emerging markets, with their fast growth and hunger for imports, are sustaining the developed economies. If this continues, the global economy will achieve a soft landing. Yet many of these markets are showing signs of overheating: monetary tightening, or indeed the maintenance of high global commodity prices, could depress them and take the developed economies down too."

The EIU predicts a soft landing and positive global economic growth in 2009.  They also point the risks to this forecast due to rising commodity and energy prices and inflation in general.

Also interesting is how they describe different countries growth rates for the first quarter of 08.  According to the article, the eurozone showed "perky" growth of 0.7%, Japan managed "blistering" growth of 0.8% while the "sickly US chalked up a respectable annualized rate of 0.9%." 

U.S. Services Exports and Small Business

The Dallas Federal Reserve Bank has an essay called "Opportunity Knocks - Selling our Services to the World" in their annual report.  Lots of good data, insights and case studies on U.S. services exports.  Key quote:

"We export more services than any other nation—by a long shot. Better still, most of what we sell abroad are highly valued services—industrial engineering, entertainment, health care, and the work of architects, lawyers and other professionals. Our growing services trade supports many well-paying jobs."

According the report, U.S. services exports have grown substantially over the last few decades and should continue to grow.  From the report:

"Goods still account for the bulk of U.S exports, but services have gained ground, rising from 19.6 percent of total exports in 1980to 29.8 percent in 2007."

The report is much more positive about service jobs than the popular press, stating:

"Services are often dismissed as the provence of dead-end jobs and low wages.  Nothing could be more wrong.  Many of our services workers and well educated, commanding high pay because of their ability to add value to what they produce."

This is good news since services make up 4/5ths of the U.S economy.

Small service businesses are increasingly exporters.  For example our mom and pop small business, Emergent Research, is a services exporter.  As the report points out, the Internet and other technologies greatly enable service exports.  And strong overseas economic growth provides growing markets.  Add in a weak dollar it is a good time to be a small services exporter.   

The Rise of Brazil

For many years Brazil has jokingly been referred to as  "a country that will always have great potential."  But over the last decade, and in particular the last 3 years, Brazil has experienced strong economic growth.  Key quote from a recent Wall Street Journal article:

"A recent study by the local office of the French research firm Ipsos found that since 2005 more than 20 million people had entered the middle class, defined here as families with monthly income of around $635. The percentage of middle-class Brazilians has grown to 46% from 34%.

The new middle class has propelled a doubling in the domestic market for cosmetics, home electrical appliances and computers since 2002, according to Euromonitor International. In the computer sector, middle-class buyers are accounting for about 40% of sales, according to market analysts. Brazil now ranks fourth globally in computer sales behind the U.S., China and Japan."

Brazil has always had enormous natural resources and has benefited from the run up in soybean, iron ore,timber and other commodity prices.  While many remain skeptical and major problems like crime and corruption exist, the future looks increasingly bright for Brazil.   

Fear the French

Foreign Policy magazine's article The Coming Euroinvasion is on the weak dollar leading to European firms aggressively buying U.S. companies.  From the article:

""I am not worried about rich Arabs; it’s the French who worry me.” This was the response from a businessman in Clovis, California, reacting to my comment that the U.S. government was concerned about the influence of foreign-owned sovereign wealth funds."

The article goes on to talk about how the falling dollar has made the U.S. a much cheaper place to do business than Europe.  From the article:

"For many companies, moving across the Atlantic is the fastest and cheapest way to cut costs and become more competitive. The average hourly manufacturing wage in Europe is 16 percent higher than in the United States. Social insurance and payroll taxes are far steeper in Europe. As are energy costs: the average price of a kilowatt-hour for industrial usage in Europe is roughly 60 percent more than in the United States. Transportation costs are higher, too. And the cost advantages of operating in the United States don’t stop there. Land is still far cheaper in the United States."

But the appeal of locating in the U.S is not limited to costs.  Many foreign companies want a U.S. presence because of the large market and to access U.S. skills and talent.  Quote from an Italian manufacturing firm choosing to set up in the U.S.:

"It will not only be cheaper, but it will also place me and my engineers in the middle of a large cluster of leading-edge technology companies and in the largest market in the world."

The shifts in cost structures, aided by the falling dollar, is making U.S. businesses much more cost competitive.  In addition to leading to more U.S. exports and export opportunities, it is also resulting in more foreign direct investment in the U.S.  It is also increasing small business globalization - both in terms of driving small U.S. companies export more and by increasing the number of small foreign firms that set up operations here. 

We cover this topic in more detail in our most recent forecast report.

A Rising Wave of Small Business Exports

USA Today has an in-depth look at the growth of small business exports.  Key quote on the substantial rise in exports:

"From 1992 through 2007, exports by U.S. small businesses have soared nearly fourfold to $400 billion, according to a preliminary estimate by economist Harvey Bronstein of the U.S. Small Business Administration."

The article covers the major trends driving this increase and includes several small business export case studies.  Also not to be missed is the list of tips for small business exporters from global trade expert Laurel Delaney, CEO of Globe Trade.

Related to this, the International Herald Tribune has an article on the inflationary pressures that are impacting the developing world, especially in Asia.  From the article:

"First, developing countries now produce nearly half of all American imports. Second, inflation in these countries is coming at the same time that many of their currencies are rising against the dollar. That puts American consumers in a double bind, paying at least some of producers' higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries."

These inflationary pressures are not good for developing economies or the U.S. consumer.  However, they make U.S. produced goods and services more competitive and help drive the growth of U.S. small business exports. 

US News and World Report on Tips for Small Businesses Looking Abroad

US News and World Report has some tips for small businesses looking to sell overseas.  One tip I think is very important is to "budget for the barriers".  Quote from the article:

"...one of the most common mistakes businesses make is getting into a foreign market too quickly before working around all the rules and regulations...recommends that small businesses plan to set aside 5 percent of their expected revenue to pay for these costs."

While exporting has gotten a lot easier and cheaper over the last decade, it is not free.  There are still rules, regulations and expenses associated with exporting.  Small businesses need to be aware of these.

These tips are a sidebar to their "Small Businesses Go Global" article.

Globalization of Universities

The New York Times has a long article called "U.S Universities Rush to Set Up Outposts Abroad."  It is the first in a series of article on examing the globlaization of higher education.  Two key article quotes:

"The American system of higher education, long the envy of the world, is becoming an important export as more universities take their programs overseas."

"....internationalization has moved high on the agenda at most universities, to prepare students for a globalized world, and to help faculty members stay up-to-date in their disciplines."

Colleges and universities are recognizing that both they and they students live in a globalizing world.  This means being global as an institution and providing their students a globally oriented education. 

Our work points to more and more small businesses getting involved in global trade.  One driver of this is education.  As our colleges and universities become more global so will their students - and as these students enter the work force being global will be more natural than prior generations. 

Emerging Markets and Small Business Globalization

Great tidbit on emerging markets from an Economist article on Unilever:

Emerging markets..."are growing so rapidly that within just two years they will account for half of the all the world's consumer spending, estimates Harish Manwani, head of the Asian and African businesses of Unilever, a giant of the world's consumer-goods industries."

If you look at global Internet numbers you will find that over 1 billion Internet users are outside of the US. 

These numbers are several of the many reasons we think US small business globalization and cross-border trade will substantially increase over the next decade.

Waving Goodbye to Hegemony

Long piece (8 pages) called "Waving Goodby to Hegemony" in Sunday's NY Times.  It is on the changing global geopolitical situation.  The basic premise is the world is no longer dominated by the US and that there is now a geopolitical "Big Three."  Key quote:

So now, rather than bestriding the globe, we (the US) are competing — and losing — in a geopolitical marketplace alongside the world’s other superpowers: the European Union and China. This is geopolitics in the 21st century: the new Big Three.

While the focus of the article is on geopolitics, the same forces are impacting global economics.  The US share of global GNP continues to fall as other economies grow.  This is leading to huge increases in global trade.  One quote I really like from the article:

"Globalization apologizes to no one; we must stay on top of it or become its victim."

For US small businesses the growth of the rest of the world is creating many new export opportunities.  Our next forecast report will cover this in more detail. 

Consumption Factors and Global Trade

UCLA professor and noted author Jared Diamond (Guns, Germs and Steel and Collapse) has a great    op-ed piece in the NY Times on consumption factors.  Diamond defines consumption factors as the average rate people in various countries consumer resources.  Key quote:

"The average rates at which people consume resources like oil and metals, and produce wastes like plastics and greenhouse gases, are about 32 times higher in North America, Western Europe, Japan and Australia than they are in the developing world."

Diamond explains that the developing world is on a path to greatly increase their consumption rates due to economic growth.  He points out this potentially a huge problem - the world simply can't support 6-9 billion people consuming at the rate people in developed countries (and especially Americans) do. 

Diamond suggests that the only solution is meeting in the middle with developed countries reducing their consumption rates.  He points out this can be done without negatively impacting living standards in developed countries if we move to more sustainable environmental practices.

While the point of the piece was to highlight the need to cut consumption in the developed world, I was also struck by the numbers and what they mean for global trade.  Diamond points out that most developing countries are working to increase their rates of consumption.  He says:

"People who consume little want to enjoy the high-consumption lifestyle. Governments of developing countries make an increase in living standards a primary goal of national policy."

Rising consumption factors in the developing means increased global trade.  There simply is no way for these countries to grow domestic consumption without cross border trade.  China is an a good example.  Their rapid economic growth has in large been part driven by cross border trade and has resulted in much higher consumption rates. 

The next decade will see dramatic increases in global trade driven by the growth of developing countries.  This will also lead to a wide range of new opportunities for US small businesses to participate in cross border trade.  Hopefully much of this trade will be done with sustainability in mind.