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Global Competition Affects Local Businesses

Understanding Global Business Impact On U.S. Small Businesses

The business world has become the business world.

The concept of "local business" has taken on a fuzzier definition in our shrinking world. Even the corner drugstore that was explained as having a geographic monopoly in our Econ 101 class faces global based competition. Yes, there is still a good degree of geographic monopoly in play at the corner drugstore. However, Walgreens and CVS recognize the need for a large parking lot that caters to a customer base that is increasingly mobile. If customer buying habits are less local, certainly, the purchasing power and management of these corporations is anything but local.

In decades past, U.S. small business had the realm of "local business" largely to themselves. This is no longer the case. We have all read the stories about small town America being impacted by the new, "local" Walmart. Unfortunately, the impact on small business in America by globalization does not stop with retail goods.

On initial examination it would appear that some industries (i. e. service and construction) are somewhat immune from the impact of globalization. But a closer look at all the variables reveals that no U. S. business is entirely local anymore. While we are unlikely to call a plumber in Shanghai to service our sink in Pittsburgh, the local plumber in Pittsburgh has indirect global interface that impacts both volume and profit. That "interface" involves purchasing of foreign produced products priced globally. It even impacts the ability to grow the business and, for that matter, stay in business. Those potential plumbing customers working for global companies in the U.S. (Pittsburgh) who have been laid off or seen a cut back in pay will only "interface" with their plumber if absolutely necessary. And then, they will fiercely compare pricing with competing plumbers.

Firms with fewer than 100 employees account for 31% of the non-government payroll dollars in the U.S. and 26% of the revenue generated. Larger firms account for 69% and 74% respectively.1 We need these larger firms to grow and export from the U.S. If large corporations fail to compete effectively globally our GNP suffers. This translates into less consumption of goods and services at nearly all levels, including locally focused small businesses. The truth is, our large corporations are not exporting at the level needed to drive our economy. Setting up a plant in China to sell into Chinese markets is not exporting and does nothing for U.S. economic well being, particularly if much of the ownership of the large corporation is outside the U.S. This longer term systemic problem has not received the media attention given the "financial crisis" but it is the 800 pound gorilla in the room.

From a global perspective, the United States has gained in prominence as a market for the world but has lost some of its importance as a supplier. In spite of the decline in the global market share of U.S. exports, the nation's international activities have not been reduced. On the contrary, exports have grown rapidly and successfully. However, many new participants have entered the international market. Competitors from both Europe and Asia have aggressively won a share of the growing world trade with the result that U.S. export growth has not kept pace with total growth of world exports.2

Although US exports of goods and services have grown on average by 10 percent each year over the last 50 years, they currently constitute only a little more than 10 percent of GDP, considerably less than the world average (see table 1). By contrast, exports of goods and services are 40 percent of GDP in Europe, 40 percent of GDP in China, 36 percent of GDP in Canada, 22 percent of GDP in India, and 16 percent of GDP in Japan.3

Table 1 Export of goods and services

Country   Percent of GDP
Singapore   243
Hong Kong, China   206
Euro Area   40
China   40
Canada   36
World Average   28
Average for High-Income OECD Countries   24
India   22
Japan   16
United States   11
Source: World Bank, World Development Indicators, 2009.

Exporting more alone will not be enough to solve all our economic ills. Given its level of development, the US economy must export high value-added goods and services that require highly skilled workers in order for an export-led growth strategy to result in sustainable improvements in US living standards. In other words, we need to improve both the quantity and quality of the goods and services we produce and export.3

The economic downturn we are presently in did not start because U.S. small business became less efficient or made poor financial choices. The downturn is the result of erosion of our world trading position. Addressing all the factors attributable to that erosion would require another paper. There is plenty of blame to go around. While the financial crisis was a crisis is its own right, it exacerbated the problems of our deteriorating global position.

Can U.S. small business somehow assist in increasing U.S. exports? To a degree they can, but foreign markets are not, as a practical matter, available to most smaller companies. There are exceptions. Some U.S. government programs exist to aid small business exports. They fall short of programs in competing countries. Furthermore, U.S. commercial banks do not have a history of financing this arena.

U.S. exports need to increase and U.S. small businesses will have little impact in making this happen. However, they will certainly feel the impact if it fails to happen.

  1. 2002 and 2004 U.S. Census Data
  2. Czinkota, Michael R., Ilkka A. Ronkainen and Michael H. Moffett. Fundamentals of International Business. Mason: South-Western, 2004.
  3. Rosen, Howard F. The Export Imperative, Testimony prepared for the Senate Finance Committee Subcommittee on International Trade. (December 2009)

by Charles F. Andrews


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