Export to Expand: the key to small business growth in the UK By Professor Robert Blackburn, Small Business Research Centre, Kingston University
Export to expand Barclays helping businesses discover their ex-port-ential Businesses who have been exporting for more than three years plan on branching out to countries including Hong Kong, India, China and Australia
5 10 6 3
The top ten countries in the world where businesses are branching out to: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Hong Kong India China Australia Canada US Singapore UAE (including Dubai) South Africa Germany
Businesses that export grow by almost a third (30 per cent) in just two years
Over half (54 per cent) said this growth exceeded their expectations
2010 - 2012
82% Eight in ten (82 per cent) businesses experienced a positive impact on their bottom line after two years of exporting.
Nearly a third (31%) of businesses that currently sell overseas say they have had to employ more people in the UK as a result of their exporting activity. This equates to an estimated average of around 336,000 more people being employed across the UK as a result of businesses exporting or selling to overseas customers. Beyond business growth, almost nine in ten (87 per cent) businesses identify other benefits to exporting, including having greater confidence in the longevity of the business (44 per cent), increased productivity (37 per cent), stronger innovation (28 per cent) and a longer lifespan for their products and services (27 per cent). 2
Steve Cooper Vice Chairman, Barclays Business Banking
The Diamond Jubilee celebrations and the London 2012 Olympics have focused the world’s attention on the UK. It has never been a better time to be British, which creates tremendous opportunities for small businesses to trade in international markets such as China, India and the US. The Department for Business Innovation and Skills (BIS) and UK Trade and Investment (UKTI) certainly believe so: they have committed to raising the number of small businesses that export to one in four by the end of 2012. At Barclays we are also committed to helping small and medium-sized enterprises meet the challenge of trading around the world with confidence. Whether a company is ‘born global’ or has been trading solely in the UK for twenty years and is looking to export for the first time, we have the experts in place across the globe to offer advice and support so we can help businesses start exporting now. This research, which includes a detailed analysis undertaken by Kingston University, underpins our conviction that increasing the number of businesses that export will create thousands of jobs and is vital to the UK’s economic recovery and future growth.
Executive summary Exports and exporting are regarded as key factors to help the economy recover from recession and stimulate future economic growth. This new research highlights the experiences of small and medium sized enterprises (SMEs) when exporting. The results are drawn from interviews with owner-managers of 1,500 SMEs, of which 1,000 are exporters. The process of entering export markets varied from some businesses that were ‘born global’ through to those that had first built up a domestic market. Exporting was not necessarily a new activity: a third had been exporting for more than five years. The challenges of exporting included finding contacts for potential customers and partners, understanding different legal and tax structures, language and culture differences and customs procedures. As expected, Europe provided the largest market for SMEs to export to. Of the BRIC economies, China, India and Russia were important destinations. Exporting involves considerable investment and in some cases high levels of risk. However, the overall experience of exporting was very positive for the business. Almost a third of firms saw a positive impact on their bottom-line within six months. Exporters were also more likely to grow than non-exporters. As a result of the need to grow capacity, exporters were recruiting substantial numbers of new staff. This ‘expansion effect’ did not occur without triggering further challenges. SMEs had to recruit people with different skills in order to help meet the challenges of exporting.
In looking to the future, over a half of exporters (52%) said that exporting would increasingly contribute to their bottom line while 42% stated that it would remain the same and only 5% expecting a decrease. Exporting also figured strongly in the growth plans of these firms: over a third (36%) and almost half (48%) said that exporting was very important or important in their growth plans. Clearly, there is a strong link between exporting and growth in these SMEs. The results also show a divergence between those SMEs that are already involved in exporting and those that are not: only one in 10 of those SMEs not exporting were considering doing so in the next year and around a quarter in the next five years. Clearly, encouraging SMEs to export may be a challenge for government and support bodies. However, the new evidence presented in this report demonstrates the advantages to businesses and the economy of doing so.
Introduction It is widely recognised that the exporting of goods and services can significantly contribute to the sustainability and growth of businesses. Exporting is particularly important for the UK economy given its openness and role as a major international trading nation. Currently this significance is especially crucial as a means of enhancing the performance of the economy as it seeks recovery, stability and growth. Small and medium sized enterprises (SMEs) account for 99.7% of all enterprises in the UK and are therefore integral to any exporting strategy. Indeed, Government recognises the significance of SMEs in any export drive and UKTI, along with Barclays, is committed to a raising the number of businesses that export, with a special emphasis on strengthening services for SMEs. The advantages of exporting for enterprises are well rehearsed: they provide an opportunity for businesses to spread and extend their market base as well as helping business growth and innovation (Wheeler et al., 2008). Hence, SMEs and their exporting behaviour should be an integral part of any recovery and growth strategy for the economy. An earlier study by Barclays showed that almost 50% of SMEs are involved in exporting but to varying levels of intensity. This new report builds on this analysis by focusing on those SMEs that are exporting, defined as selling goods and services to overseas customers, from a sample of 1500 firms (1000 exporters and 500 non-exporters). Specifically the report seeks to answer the questions: i. Where in the world SMEs are exporting to and why? ii. What is the impact of exporting on bottom-line growth and job creation? iii. What are the barriers to further exporting? iv. What does the future hold? Overall, the report seeks to build upon the growing evidence-base on exporting and the experiences of those firms that are involved in this vital form of economic activity.
A Profile of UK Exporters: Where are SMEs exporting to and why? Our analysis of the 1,000 shows that exporting activity is not a new activity for these SMEs: on average businesses had been exporting for three years, although a third had been exporting for more than five years (Figure 1). Hence, although many firms do start as ‘born global’, that is selling overseas from day one of their operation, most businesses do serve domestic markets initially, building up capacity and a market presence and then look to overseas customers. Clearly, there are many paths to serving export markets. But what is important to note here is the significance of exporting in the growth process: exporting is often an integral part of the growth process for many firms because of the limit of the extent of the domestic market and the opportunities world markets can offer for expansion. In terms of their geographical customer base, Europe provides a significant export market for SMEs (Figure 2). SMEs are found to sell extensively to France, Germany and Ireland, although they also have
customers from North America (the majority from the USA but also including Canada), Australia and the Far East. Of the newly industrialising economies – the so called BRIC countries – these SMEs were selling to China (16% of all exporters), followed by India (15%) and Russia (13%). One of the challenges of SMEs looking to expand is how to actually find export markets and then work out how to enter these markets. Interestingly, most of the SMEs were involved in exporting directly (71%) although almost a third (31%) sold through local agents or distributors (Figure 3). The latter is particularly important where businesses have little or no previous experience of exporting and so they have to become attuned to local market needs through an intermediary. The results also show that SMEs have developed direct routes to customers – a finding that most probably reflects the widespread use of the internet as well as conventional means such as through trade fairs and business contacts.
Figure 1 Business exporting by years 32% Within the last year Around a year Around two years Around three years Around four years Around five years More than five years
Figure 2 Country by customer base 52%
US France Germany Ireland Spain Italy Netherlands Australia
Figure 3 Operations overseas by firms 71%
Sell direct to businesses or individuals Sell through local agents or distributors Run own distribution or sales office in overseas market Sell through contractual arrangements such as licensing or franchising Other (please specify)
Canada Belgium-Luxembourg Sweden Switzerland Poland China Japan India
Russia Hong Kong UAE (including Dubai) South Africa Singapore Brazil Mexico Other (please specify)
The impact of exporting on bottom-line growth and job creation Exporting can be a risky activity. Exporting may involve additional costs over merely selling to a domestic market. This can include owner-managers’ time to scope out a new market, finding additional resources (raising finance, finding staff etc) to increase output capacity, developing appropriate marketing activities, overcoming language and cultural challenges as well as understanding and meeting different national regulatory standards. Despite such potential costs and associated risks, these SMEs were able to report that exporting positively affected their bottom-line and employment levels. The benefits of exporting also appeared to be better than anticipated: 15% of owner-managers said the experience was much better than expected and 39% better than expected. On the other hand, only 7% said that the impact was not as good on their business as expected (Figure 4). Over 80% of exporters said that exporting had enabled their business to grow, whilst only 15% stated that it had no impact on their bottom-line. The speed of this impact on the business can vary, although it was felt by two-thirds in the first year, suggesting that the pay-off in meeting overseas customers can be rapid. Significantly, from an economic perspective, this growth was manifested in terms of higher financial turnover and employment levels. Almost half (48%) of exporters reported increased sales in the previous two years, and 14% of exporters a decrease in sales, compared to 24% of non-exporters. Given the macro-economic conditions within which the businesses are operating, this finding underlines the contribution that exporting can make to the sustainability and growth of firms. In contrast to the percentage of exporters who reported an increase in sales (48%), only 30% of those firms that were not involved in exporting reported an increase in sales in the past two years.
Exporting businesses on average employed 70 people: higher than those that were not exporting. The effects on employment levels of exporting also appeared positive: 57% of exporters had taken on more staff as a result of their exporting activities either in the UK or overseas; and 39% had taken on more in the UK (Figure 5). Estimates of the additional numbers of people employed as a result of export activity are substantial: an average of 16 additional people are employed by each of these firms of which 15 are employed in the UK. The benefits of exporting were not only in terms of improvements in employment and turnover. Owner-managers of exporters reported higher levels of confidence in the future of their business (44%); gains in productivity (37%), stimulating innovation (28%) and a longer life-span for products or services (27%). Such benefits are critical at a time when the economy and businesses are struggling to come through difficult economic times and can instil in a business a sense of purpose and investment for the future. Barclays customer, Sharda Glass was established in 2006 and started trading internationally five years ago, exporting its architectural glass to the USA, Europe and Middle East. Sunil Sharda, director and owner said, “I started exporting five years ago and have seen an incredible impact on my bottom line. I first started exporting to Dubai and Qatar, and then a year ago won the contract to supply the new World Trade Centre in New York. As a result of my move into exporting, I’ve been able to move into new, larger premises. I travel abroad regularly, which can sometimes be a challenge to juggle everything, but I believe building good relationships with clients is the key to continuing and growing my business abroad.”
Figure 4 Benefits of exporting
Figure 5 Employment levels
It was much better than expected It was a bit better than expected It was about what I expected It wasn't as good as I expected
Yes – I've employed more people in the UK Yes – I've employed more people in overseas market Yes – I've employed more people both in the UK and in overseas markets No
The barriers to further exporting Although this survey focuses on SMEs that are involved in exporting, their experiences and challenges faced in doing so provide valuable insights for all businesses: that is those looking to export; those already exporting; as well as the support agencies and network of advisers seeking to promote export behaviour. The majority of respondents involved in exporting (55%) reported that it was ‘easier’ or ‘much easier’ to do so than they originally thought (Figure 6). However, this should not leave room for complacency as 21% found it a little more difficult than they originally thought. There appears to be a variety of challenges faced by these SMEs when seeking to serve export markets. Finding contacts for potential customers (30%), understanding different legal and tax structures (27%), language and culture differences (20%), customs procedure (21%) and finding contacts for potential partners (17%) are all significant issues when looking to export.
Figure 6 Simplicity of process by businesses’ experiences 39%
Yes, much easier than I thought Yes, a little easier than I thought No, it was a little more difficult than I thought No, it was much more difficult than I thought It was exactly as I expected
Those firms that were fairly new to exporting were more likely to raise the small size of their business and tackle customs requirements as challenges. However, those having been involved in exporting for three years or more were more likely to raise challenges arising from language and culture differences. This suggests that undertaking exporting can present particular challenges at specific stages in the process: from identifying markets through to the delivery of products and services. These findings also provide useful information for support agencies and firms gearing up to export: many SMEs do not have the internal capacity or expert capabilities to deal with the variety of new challenges that exporting presents. Support agencies have been shown to be particularly useful in helping SMEs penetrate new markets and provide them with the necessary contacts and knowledge for the first time.
Clearvision Lighting Ltd. Clearvision Lighting Ltd, based in Aldershot, Hampshire, was founded by Paul Stephenson in the mid 90’s and started as a very niche lighting consultancy, focusing on providing a solution to work spaces with lighting problems, such as underground or subterranean locations. They have since moved into the mainstream and now specialise in offices, and provide low carbon light sources for schools and hospitals. Clearvision had been involved in minor exporting ventures for approximately five years but recently decided to move into exporting because of the opportunities in the Middle East and Eastern Europe. Paul explains the challenges involved in exporting and how he overcame the barriers: “We know there’s a market but lighting is a global business and has established players, if you’re not competitive you can’t export, you have to feel like you’re better than the indigenous companies out there.” “The most important thing is knowing where your product sits competitively in their market – distributors already represent all the biggest lighting companies. Here you can sell a range but in foreign countries you have to know what your best product is and why they should sell it for you.”
The barriers to further exporting cont. As shown above, exporting often involves business growth. However, the growth in employment associated with exporting also provides its own challenges in the sense of recruiting staff with particular capabilities and skills. Having employees who are innovative (22%) and having languages (18%) were regarded important. The latter was especially important for those firms that had been exporting for more than three years. In contrast, those that had been exporting for less than three years placed a greater emphasis on being innovative.
The different demands made on the SME as a result of engaging in exporting often required a change, or development, in their labour force expertise and skills. In their attempts to expand and develop an appropriate workforce, employers were sometimes struggling to find suitable recruits to meet this different skills mix. Over a quarter (28%) of exporters stated that they always have to train new recruits when they join the business and 18% said that they struggled to find suitable recruits (Figure 7). Despite the challenges of exporting 78% of exporters believed that exporting was the easiest way they could have achieved growth.
Figure 7 Labour force skills by difficulty of recruiting
AMBA Dockside Technology Ltd
Family-run AMBA Dockside Technology Ltd is based in Portsmouth and specialises in the repair and refurbishment of straddle carriers that move boxes around terminals in ports around the world. Also manufacturing products that fit onto other company’s machines, AMBA has been exporting since 1999 to Asia, the Caribbean, Southern and Central Africa, New Zealand and Western Europe.
Yes, applicants don't have the skills I need so I struggle to recruit Yes, applicants don't have the skills I need so I always have to train new recruits when they join No, I find applicants have the skills I need
The business started to export due to the global demand for their products and services, as Mark Parnum, one of the family members who runs the business says, “We undertook work for local ports just as engineers but once word got out, we started getting enquiries without even increasing our marketing. The business would not exist without exporting, once we took the step to focus on dockside equipment, we needed to go international to keep the business going.” AMBA’s business deals mainly in products and part numbers, meaning that they did not have to overcome some challenges associated with exporting, such as language and regulation. The exchange rate differences have been the biggest issue, as has the downturn in the European economy. Mark says that “exporting is just another facet of the business” and that for an SME it’s “about the product and how you translate it into cash”, meaning that exporting is something that SMEs can get into and should get into. Mark has a very strong relationship with Barclays and his relationship manager, stating “it’s a relationship not just a bank”.
What the future holds In looking to the future, how does the role of exporting figure in the aspirations and plans of these SMEs? Here there appears to be a duality of responses between those who export and those who do not. Respondents from those SMEs that were already exporting appear to be placing even more emphasis on the contribution of exporting to their bottom line (Figure 8). Over half of these respondents (53%) said that exporting would increasingly contribute to their bottom line while 42% stated that it would remain the same and 5% decrease. Exporting also figured strongly in the growth plans of these firms: over a third (36%) and almost half (48%) said that exporting was very important or important in their growth plans. Clearly, there is a strong link between exporting and growth in these SMEs.
Given the current geographical pattern of sales discussed earlier, which markets are identified by these SMEs as providing future export opportunities? Although the proportion of sales to the BRIC economies was currently low, both China (3rd mentioned) and India (6th mentioned) were amongst those economies regarded as providing SMEs with the best future exporting opportunities: 39% of respondents thought that the USA provided the best exporting opportunity, followed by Germany (36%), China and France (30%) whilst 19% identified India. Clearly, those SMEs that are exporting are not standing still and are already considering expanding their sales footprint beyond their current markets. The challenge is for those firms that are not exporting but have the potential to do so to take the necessary steps to enable them to break into overseas markets.
Of those SMEs that are not currently exporting, less than one in 10 were considering starting exporting in the next year, 23% in the next five years and over half were not considering exporting at all (Figure 9). A further 21% were undecided regarding becoming engaged in exporting. Those less likely to consider exporting tended to be smaller firms underlining the point that exporting activity tends to be linked to smaller and medium sized enterprises rather than micro firms. Clearly, there appears to be strong divide between those businesses that export and those that do not and this presents challenges for both ownermanagers of these businesses and those seeking to support them.
Figure 8 Firms exporting by contribution
Figure 9 Consideration for exporting
I see exporting/receiving overseas customers contributing increasingly to my bottom line I see it staying the same I see exporting/receiving overseas customers contributing less to my bottom line
Yes, in the next year Yes, in the next two years Yes, in the next five years Yes, but beyond the next five years No Undecided
References Wheeler, C., Ibeh, K. and Dimitratos, P. (2008) ‘UK Export Performance Research: Review and Implications’, International Small Business Journal, 26(2): 207-239 Research was carried out by Vanson Bourne during June 2012 on behalf of Barclays amongst 1500 small businesses (1-250 employees) within the UK. These businesses have a turnover of up to £5 million.
Conclusion The rise in the globalisation of business activity provides substantial opportunities for SMEs. This report provides new evidence on the experiences and activities of businesses involved in exporting. The findings show both the additional resources necessary for exporting as well as the rewards from doing so. A number of key points emerge. First, the strategic emphasis on exporting as a one of the means of stimulating economic growth and recovery is confirmed by the findings. Macro economic growth is contingent on what happens within businesses. In this report, the contribution of SMEs to the economy resulting from their export behaviour is clearly demonstrated. Exporting is shown to be associated with innovation and growth in turnover and employment. The impact on the bottom-line as a result of exporting was also relatively quick and it was also found to have beneficial effects on the confidence levels and future plans of SMEs.
Although this report shows the benefits of exporting to SMEs and to the economy more widely, in terms of additional growth and job creation, the above results also imply the need for improved levels of support and advice from organisations seeking to assist SMEs in their exporting activities. There remain many SMEs that do not export that have the potential to do so and other SMEs export but have the potential to do more. The report has provided evidence on the variety of challenges to exporting and can contribute to the development of strategic interventions to help SMEs overcome these barriers. If the opportunities for SMEs in export markets are to be fully realised, the challenges and experiences of those succeeding in global markets have to be built upon and the contributions of SMEs to the economy will then be enhanced further.
Second, the markets that SMEs export to are wide and expanding. Although the USA and Europe comprise the largest market export markets for these SMEs, exporters were also looking to enter and expand into new markets including the newly industrialised economies. This suggests that support may be needed to help them penetrate these new markets. Third, it is evident that exporting requires additional resources and skills over and above those needed when serving domestic markets. The demands of exporting will of course be specific to each enterprise but the findings show that these change depending on the stage of exporting. For many businesses, exporting is merely part of ‘normal’ activity but for others exporting is another frontier that requires careful forethought and planning. Of course, different export markets may require different strategies, putting additional demands on the enterprise. Fine-tuning a product or service to a new market is obviously part of the exporting process.
For more information please see www.barclays.co.uk/businesshub 11