Middle Market Companies Excel By Exporting

Zach Brooke
Marketing News
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Key Takeaways
​​What? A new survey of 400 C-level middle market executives found that 54% of respondents export to foreign markets while 48% import.​

So what? Research over and again shows exporters outperform nonexporters across metrics.

Now what? Take advantage of several public-sector resources that are available for middle market businesses looking to step into international trade.

Jan. 1, 2017

As a new administration prepares to enter the White House with an eye toward revising trade agreements, research shows half of all middle market firms do business abroad

Experts have said that middle market companies don’t have the same level of exposure to the global economy as the largest firms. Though that’s generally true, it doesn’t mean U.S. middle market companies operate entirely within the domestic economy. Recent research from the National Center for the Middle Market found that roughly half of all middle market organizations have an international presence, up significantly from two years ago. 

A survey of 400 C-level middle market executives found that 54% of respondents export to foreign markets while 48% import. The number of exporters is particularly notable, as it shows a 14% increase from a 2014 survey by the National Center for the Middle Market and the Brookings Institution. Of those companies that either import or export, 58% said they do both. Overall, middle market exporters derive 33% of total revenue from international sales.

“I expected the figure for middle market exporters to be smaller, perhaps 30-40%,” says Kati Suominen, founder and CEO of Nextrade Group, which helped conduct the survey. "This may mean that middle market companies have diversified their markets after the Great Recession so as to spread their exposure across more markets. It may also indicate that middle market companies are using more technologies, like e-commerce, that tend to increase the odds for a company to become an exporter.”

It’s easy to see why middle market companies are looking abroad for suppliers and markets. Businesses that import say they do so to leverage the buying power of the strong American dollar and to secure raw materials and product components at lower costs than are obtainable stateside. Respondents say they sell internationally to meet demand for their products and services, to gain access to more consumers and more lucrative markets and as a guard against negatively trending economic conditions in any single country. 

These lines of thinking appear to be paying off. The research found that heavy international traders are generally the fastest-growing middle market companies. “Research over and again shows exporters outperform nonexporters across metrics: productivity, wages, skill-intensity, etc.,” Suominen says. “Best-performing companies self-select into exporting. These companies then grow even better by virtue of scaling and diversifying globally.”

The survey also found that not all regions of the globe are created equal with respect to middle market trade. The top destination for middle market goods and services is Canada, with 62% of exporters naming America’s northern neighbor as a market. Mexico was second at 39%. The main source of imports was China, with 37% of middle market importers bringing in goods from the country. Overall, the study shows the best growth opportunities are located in the Western Hemisphere, rather than in Europe or Asia.

“Many markets in the region are growing. We have free-trade agreements with many Latin American markets, and in many ways doing business for U.S. executives is easier in Latin America than it is in Asia,” Suominen says. “It is also far easier to set up elaborate supply chains within the Americas than with far-flung Asian economies. Research also tends to show companies typically internationalize by starting out in their own region, such as the NAFTA zone [for American companies] or the EU for many European companies, as they venture to learn about exporting and as a springboard to further nonregional markets. Our work corroborates that.”

Trade issues were a dominant topic of debate in the 2016 presidential election, and the incoming presidential administration has already put the nail in the coffin of one proposed agreement—the Trans Pacific Partnership—while signaling the terms of NAFTA will be under review. The end results of these strategies are impossible to predict. But the uncertainty makes analysts nervous. Revoking trade agreements might return the global economy to the period where every nation imposed tariffs on international business and granted favored-nation status to key allies. 

“Most favored national tariffs are quite low in the region, so I imagine we can do business without [free-trade agreements] as well. However, I do not see how we would ever cancel deals like NAFTA, CAFTA or U.S.-Chile, U.S.-Colombia or U.S.-Peru FTAs,” Suominen says. “Our middle market companies and their employees benefit enormously from the market access and investor protections those deals offer, as this research shows. It makes no sense for the United States to cancel these hard-won deals our companies now leverage to win new customers and streamline their operations.”

Some industries may be more susceptible to changes in global trading conditions than others. Previous research found that middle market companies are disproportionally composed of manufacturers. According to James Cassel, cofounder and chairman of investment banking firm Cassel Salpeter & Co., these companies are highly dependent on market conditions existing as a result of trade agreements now in place.

“Most of the companies that manufacture in the U.S., part of their components come from abroad. It’s rare that they would be manufacturing with 100% U.S. components. The potential of broad-based tariffs will certainly affect their ability to buy components,” Cassel says. “We are a global economy. We talk about it in an abstract sense, but it’s reality.”

Cassel is suspicious of calls to renegotiate free-trade agreements, but does concede that there are areas of the status quo that can be improved for middle market organizations involved in the global economy. But, he says, it’s the enforcement of existing agreements that needs to be revisited, not the terms.

“Most people I do business with think the U.S. does have some unfair trade agreements,” he says, “[but] I think it’s the implementation of those agreements. China is not supposed to dump products on the U.S. (Look at the solar industry.) Or you’re supposed to have certain [market conditions] that are equal. But they subsidize. What Trump is trying to explain is that we need a level playing field.” 

Even if existing trade agreements are not touched, results from the National Center for the Middle Market survey show some middle market companies are leaving chips on the table. Specifically, the survey found there are several public-sector resources that are untapped by middle market businesses that would most benefit from their assistance. 

The U.S. Commercial Service maintains a regional presence through Latin America to identify potential foreign customers and partners. The U.S. Export-Import Bank and Small Business Administration are available to help secure capital for export transitions. And the District Export Councils train executives about the logistics of exporting, in addition to multiple very qualified consultants and advisors, including at local and regional chambers of commerce. 

“There are so many outstanding and affordable resources available,” Suominen says. “It takes CEO-level commitment to exporting and dedicated staff to identify and put all these resources to use.”

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Author Bio:

Zach Brooke
Zach Brooke is a staff writer for the American Marketing Association. He can be reached at zbrooke@ama.org.
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