Calif_export_promotion

California Center September 2012

Strategies for Expanding California’s Exports

Kevin Klowden and Michael Wolfe

California Center September 2012

Strategies for Expanding California’s Exports

Kevin Klowden and Michael Wolfe

ACknowlEdgmEntSThe authors would like to thank State Controller John Chiang, his staff at the State Controller’s Office,

and Milken Institute Director of Research Perry Wong for their feedback and support.

About thE milkEn inStitutEA nonprofit, nonpartisan economic think tank, the Milken Institute works to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital, and enhance health. We produce rigorous, independent economic research—and maximize its impact by convening global leaders from the worlds of business, finance, government, and philanthropy. By fostering collaboration between the public and private sectors, we transform great ideas into action.

© 2012 Milken Institute

ExEcutivE Summary .................................................................................................................... 1

introduction ................................................................................................................................. 3

Why Export Promotion? ............................................................................................................. 4

California’s Export Competitiveness .................................................................................... 4

The Unique Case of Texas ......................................................................................................... 8

The History of Export Promotion in California .............................................................. 10

What Can California Do? ......................................................................................................... 10

BESt PracticES for ExPort Promotion .................................................................... 13

Best Practices in Other States ............................................................................................... 13

Export Promotion in Other Countries ............................................................................... 19

rEcommEndationS ................................................................................................................... 21

Conclusion ................................................................................................................................... 22

EndnotES ......................................................................................................................................... 23

aBout thE authorS ................................................................................................................. 25

ContEntS

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Just as the California economy grew in the post-World War II era, so has the state’s connection grown to the global economy and international trade. Not only does California have the largest economy of any state, but it retains the largest manufacturing base and level of agricultural production, not to mention a role in technology and design that is envied throughout the world. However, despite these advantages, the lack of a coherent trade policy when one existed combined with a lack of export growth in many of California’s key sectors have seen the state fall far behind Texas to second place among exporting states. Further, California’s export growth rate since 1998 has been less than half the U.S. national average.

To address the key challenges facing California’s exports, we have recommended the following steps:

• Take advantage of resources within the state

• Leverage private sector expertise

• Contract out foreign offices

• Create a comprehensive performance measurement system

• Develop targeted strategies for key export destinations

• Utilize metrics, research, and trade data

• Take advantage of national programs supporting export promotion

• Develop and execute a comprehensive export promotion strategy that affects statewide and international efforts

By developing an effective strategy for coordinating and promoting exports, California has an opportunity to reinvigorate an important section of the state’s economy and improve the competitiveness of state businesses. With California opening its first foreign trade office since 2003 in China, an opportunity for action exists. But it is first necessary to examine where California has fallen behind, and what other states and countries can teach California.

The decline of California’s relative position in exports is most starkly reflected when compared to Texas and other leading states that have implemented strong export promotion strategies. As can be seen in table 1, Texas has seen its exports grow more than three times as fast as California’s since 1998. Although Texas has benefited significantly from its proximity to Mexico and Latin America, especially after the implementation of the North American Free Trade Agreement (NAFTA), several other factors have come into play. As a result, Texas exported $249 billion in goods in 2011, compared to California’s $159 billion, and claimed a share of total U.S. exports comparable to what California enjoyed before the dot-com bubble burst in 2001.

exeCutive SuMMary

Strategies for expanding California’s exports

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Table 1. Export growth, California vs. selected states

StatePercent growth

(1998–2011)

UNITED STATES 139%

Texas 217%

Alabama 181%

Florida 165%

Pennsylvania 157%

California 66%

Source: International Trade Administration.

One of the most significant advantages Texas has over California is a strong perception of being a lower-cost, more business-friendly environment. However, the state has also used its strong links to Latin America, and even Canada, to create new markets for its goods, and has benefited from a more diversified set of industries for export. Even when Texas’ advantages are taken into account, California has underperformed as an exporter, as can be seen when comparing California to other states that have instituted export strategies.

While California has repeatedly shifted its export strategies since opening its first overseas trade office in 1960, it has lacked any coordinated efforts since the abolition of the state Technology, Trade, and Commerce Agency in 2003. Meanwhile, Florida, Alabama, and Pennsylvania have implemented trade strategies that involve partnerships with private industry, overseas trade promotion, and trade assistance. Each has seen its exports grow twice as fast as California’s since 1998. Massachusetts, like California, is a technology-dependent state that has performed below the national average in exports. However, Massachusetts recognized the weaknesses in its position and implemented a comprehensive trade strategy in 2010.

Other examples of effective trade promotion and coordination can be found overseas. Germany and South Korea have the advantages of national coordination of their trade strategies and direct investment in export promotion, but they also have used tools California can adopt. In particular, Germany provided effective loan guarantees to even small and medium-sized enterprises engaged in exports, while South Korea did due diligence in identifying growing markets for goods and helping its companies to penetrate those markets. Taiwan and Hong Kong have been aggressive in promoting their goods in overseas markets and using their vast networks of overseas offices to help penetrate local markets. If size and cost are issues, it is worth noting that California has 38 million residents compared to Taiwan’s 23 million and Hong Kong’s 7 million.

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California is one of the top exporters in the United States. In 2011, the state exported $159 billion in merchandise. Unfortunately, the state has been lagging most of the country in terms of growth for the past decade. While Governor Brown recently announced that California would open a trade office in China to help boost exports, this is only one small step and more must be done to ensure that the state maximizes its export potential. We looked at best practices in other states and prepared recommendations to help increase California’s business exports. We propose that the state:

1. Take advantage of existing export promotion resources

2. Create a synchronized export promotion agency

3. Leverage private-sector expertise

4. Open more (but well-targeted) trade offices and contract them out

5. Build a comprehensive performance measurement system for export-promotion efforts

6. Take advantage of national and local programs supporting export promotion

7. Develop an effective and comprehensive trade-promotion strategy, following up on prior recommendations by the Department of Business, Transportation & Housing

iNtrODuCtiON

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Why Export promotion?

Marketing and selling a product abroad poses challenges that businesses do not face when operating domestically. Firms are often unfamiliar with or unable to overcome these challenges because of the cost; overseas sales are especially difficult for small and medium-sized businesses (SMEs).1 This is why governments often offer services that encourage and promote exports.2 Export promotion has the potential to increase export growth and encourage businesses to start exporting or to expand into new markets. Export promotion is most commonly done at the national level, but increasingly state governments perform these tasks to some degree.3 Currently, the majority of states in the U.S. have agencies and foreign trade offices involved in export promotion, but until very recently, not California.4

The main purpose of these agencies is to identify market opportunities and encourage existing companies, or attract new businesses, to provide a product to meet this demand.5 Governments have tried a wide range of policies and programs to help companies export. The most basic of these activities begin with providing information on opportunities and emerging or compatible markets in other countries. However, export-promotion agencies may also take a far more direct approach, assisting with the design and implementation of marketing and sales initiatives.6 Some of the most common activities export-promotion agencies engage in include:

• Information provision

• Export-related skills

• Domestic and foreign contacts

• Additional funding

• Trade exhibitions and foreign trade missions

California’s Export CompEtitivEnEss

California used to be the country’s largest exporter, but the state has been losing ground to Texas since 2002. In 2011, Texas exported $249 billion in merchandise compared to California’s $159 billion.7 Table 2 shows that exports account for a greater proportion of Texas’ economy than California’s.

Table 2. Exports, California vs. Texas

2010 GDP $ (mil) GDP/capita $ Exports/GDP

California 1,936,400 51,914 8.20%

Texas 1,207,432 45,940 20.70%

Sources: Bureau of Economic Analysis and International Trade Administration.

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As Texas and California are the nation’s largest exporters, comparing the two helps draw attention to how poorly California has performed over the past decade. Table 3 shows the percent growth of California’s exports against the national average, Texas, and other states recognized as having effective export promotion. (The strategies these states employ will be touched on later.)

Table 3. Export growth, California vs. selected states

State Percent growth (1998–2011)

UNITED STATES 139%

Texas 217%

Alabama 181%

Florida 165%

Pennsylvania 157%

California 66%


Figure 1. State exports, totals, 1998 – 2011


California’s export growth has been well below the national average over the past decade. (See table 3.) Compared to Texas’, California’s growth is abysmal. Figure 2 tells more of the story. While Texas experienced tremendous growth, California has been gradually losing its share of national exports. Texas’ current share is just about equal to what California’s was in 2001 (just before the technology sector collapsed).

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Figure 2. State share of total U.S. exports


Figure 3 shows that California has failed to adequately diversify within the five largest export industries in the country.i

Rather, the state’s exports are heavily concentrated in computers and electronics. California has benefited greatly from such exports, but this sector never fully recovered after the 2001 recession. (The state’s exports of computers and electronics are just now returning to their 2001 levels.) Goods from this sector composed more than half of California’s exports — far greater than the proportion represented in the national average and Texas. Because of this, Texas was far more protected when the industry contracted. California was hit quite hard.

Figure 3. Top 5 export industries by proportion

Source: Moody’s Analytics.

i These are the five largest export categories in the United States and make up 60 percent of all exports.

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Table 4. Indexed growth, top 5 export industries

Indexed growth (1998–2011) CA TX

Total 69.5 132.4

Petroleum and coal products 39.2 108.6

Chemical 98.8 129.4

Machinery 80.8 108.3

Computer and electronics 70.9 150.2

Transportation equipment 82.9 116.2


Table 4 shows the growth of exports in individual industries for California and Texas indexed to the nation’s growth. A score of 100 would indicate growth equal to that of the nation as a whole. California’s growth is below the national average in all five of the top export sectors, while Texas performs well above in all areas.

Both the slowdown in semiconductor production in California and the rapid growth in petroleum products in Texas are quite telling; however, this industrial shift is not the only problem affecting the state’s exports.8 A shift-share analysis helps to pinpoint areas where California is over- or underperforming. The shift-share analysis looks at three growth factors and isolates each. It examines how the nation’s overall growth (national share) affects a region, how the industrial composition (industry mix) of a region affects overall growth,ii and how the individual competitiveness (regional shift) of the region itself affects growth. Essentially, the regional shift is the unaccounted-for growth after the national share and industry mix components have been subtracted from the total growth.

Table 5. Shift-share analysis of California and 3 other states, in millions of dollars

National share Industry mix Regional shift Actual growth 1998–2011

California $133,671 -$20,059 -$50,231 $63,586

Texas $109,895 $30,637 $30,427 $170,985

Florida $34,088 -$4,662 $10,855 $40,304

Alabama $8,878 -$903 $3,544 $11,521


ii A good example is how California was negatively affected by the 2001 economic contraction as it was disproportionately supported by the computer and electronics industry.

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Table 6. California shift-share analysis, in millions of dollars

National share Industry mix Regional shift

Exports: total $ (mil.) $133,671 -$20,059 -$50,231

Petroleum and coal products $999 $12,629 -$8,726

Chemical $5,700 $2,830 -$154

Machinery $11,736 -$1,866 -$3,518

Computer and electronics $63,504 -$44,156 -$18,875

Transportation equipment $14,245 -$6,378 -$3,100


Table 5 shows a shift-share analysis of export growth for California, Texas, Florida, and Alabama. (Florida and Alabama have had impressive growth in part due to their export promotion.) The “national share” column shows what a state’s export growth would have been had it kept pace with the nation.

The nation’s overall growth would have contributed more than $130 billion in export growth for California and $109 billion for Texas. However, California’s exports only grew $63 billion in value.9 This is because the “industrial mix” and the state’s regional competitiveness both negatively affected California’s export total, reducing the potential export growth of the state.

In addition, California’s slow export growth over the past decade was influenced by countrywide and global economic trends as well as poor export promotion. Semiconductors and aerospace components contributed significantly to the state’s export portfolio. Semiconductor production has largely shifted overseas, and aerospace production has been moved to a number of other states around the country (Texas in particular).10,11 It’s not surprising that with the erosion of these industries California has struggled to grow its exports at the same pace as other states.

If California’s industrial composition were closer to the national average, the state would have performed better. In addition, the shift-share analysis shows that the state is suffering from competitiveness problems as well. The “regional shift” column has California losing more than $50 billion in potential export growth due to specific regional characteristics. Texas on the other hand has more than $30 billion in export growth here due to its competitiveness (most likely the low cost of doing business in the state). To compete with a state like Texas, California needs a more efficient and effective export-promotion service that will help it overcome its inherent weaknesses.

thE UniqUE CasE of tExas

Although we cited Texas to illustrate California’s shortcomings, it is not a model that California should or can replicate.iii Texas has advantages that most states (especially California) will not be able to duplicate.

While the low costs of running a business in the state have contributed to Texas’ success (indeed, many low-cost Southern states have shown appreciable growth in exports over the past decade), this is not the only factor. More importantly, Texas has benefited from the growth in Mexico’s economy. Texas accounts for 44 percent of all U.S. exports to Mexico, and Mexico accounts for 35 percent of Texas’ exports, far greater than any other single export destination (see figure 4). Table 7 shows a shift-share analysis of the major export categories in Texas. Unlike California, Texas is regionally competitive in every one.

iii Texas is one of the few states without an explicit export promotion agency. Most successful export states do engage in export promotion and have seen positive outcomes from it. Texas is a unique case.

Introduction

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Table 7. Texas shift-share analysis, in millions of dollars

National share Industry mix Regional shift

Exports: total $ (mil.) $109,895 $30,637 $30,427

Petroleum and coal products $3,291 $41,616 $4,042

Chemical $16,268 $8,078 $10,602

Machinery $16,332 -$2,597 $2,113

Computer and electronics $27,353 -$19,020 $14,049

Transportation equipment $14,655 -$6,561 $3,009


NAFTA, Mexico’s growing economy, and the high prevalence of maquiladoras along the Mexico-Texas border are the primary reasons for Texas’ high share of exports to Mexico. The maquiladoras have played a critical role.12 Maquiladora plants receive materials and components from the U.S. (often Texas) and process or assemble them to be shipped back to the United States as finished products. The cost of labor in the maquiladoras is extremely low. Mexico’s close proximity and the NAFTA accord have allowed U.S. firms (especially Texas ones) to take advantage of lower labor costs in the maquiladoras to reduce manufacturing expenses.13

California does not enjoy the same level of trade with Mexico as Texas. California’s exports to Mexico are only 13 percent of the national total, and exports to Mexico make up only 16 percent of all California exports. Texas relies on Mexico for much of its export growth, and California is not situated to compete with Texas in this area.

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Figure 4. Texas exports by destination Figure 5. California exports by destination


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thE history of Export promotion in California

California’s efforts to boost exports were the subject of much criticism before they were shut down in 2003.14 However, this was due to poor execution, not because export promotion is ineffective. The state never took a strategic approach. Implementation was haphazard and often politically motivated.15 Looking at the state’s history in this area illustrates why California needs a new, coordinated approach.

Export promotion has a tumultuous history in California. The first foreign trade offices opened in London and Frankfurt in 1960,16 only to close in 1967 amid a budget crisis. In 1977, the state created the Department of Economics and Business, which would later become the Department of Commerce. This department contained the Office of International Trade, which had a broad mandate to promote trade and investment.17 Five years later, in 1982, the California State World Trade Commission (CWTC) was established and given similar responsibilities. Soon after this, the Department of Food and Agriculture and the California Energy Commission set up programs to support trade in their respective sectors. Unfortunately, these efforts were not coordinated. This fragmented approach was inefficient and, arguably, ineffective.

In 1993, the California Trade and Commerce Agency was established and merged the CWTC, the Department of Commerce, and the existing foreign trade offices (FTOs). The California Trade and Commerce Agency was later renamed the California Technology, Trade, and Commerce Agency (CTTCA), and additional FTOs were created between 1993 and 2003. In addition to managing the foreign trade offices, the CTTCA was responsible for domestic activities and programs that continued to grow until the agency closed in 2003 during a budget crisis.18

The merging of so many programs prevented the CTTCA from operating effectively. Seemingly haphazard location choices for the foreign trade offices drew criticism. To make matters worse, the CTTCA did not track their accomplishments properly, which made it impossible to verify efforts and outcomes.19 California has never had an effective, synchronized export strategy. Previous efforts failed because of their lack of focus, political issues, and a failure to follow best practices.

What Can California Do?

California does not have a centralized agency that facilitates trade promotion. Still, a number of uncoordinated activities continue. The surviving trade programs are administrative and will not help to improve California’s export industry.20 The state could benefit from a synchronized system of export promotion.

The California economy has been especially hard-hit by the recent recession. Unemployment is unacceptably high, and few sectors have seen growth over the past couple of years.21 However, the export industry has quickly recovered, and it is one of the few areas of growth in the state.22 Californians need to take advantage of this growth and find ways to encourage and expand the export industry, as it will be a key factor in the state’s economic recovery. California has many advantages to build on. The state has the infrastructure as well as the cultural connections and proximity to Asia to be the leading export center of the United States.

California has the world’s sixth-largest port by traffic volumeiv and the largest in the United States.23 In total, there are 11 ports in California, and the Los Angeles International Airport is one of the busiest cargo airports in the world.24 In addition, the state is close to and has cultural connections with many rapidly growing Asian markets.25 Finally, although growth has stalled, California has been one of the largest exporters in the U.S. for many years and has access to tremendous expertise in this area. The key will be to use this knowledge to revitalize export growth in the state.

Small and medium-sized businesses (SMEs) are vital to California’s economy, yet they perceive exporting as a high- risk endeavor.26 SMEs make up slightly over 50 percent of California’s employment and more than 85 percent of all

iv It is the sixth-largest port when counting the Long Beach and Los Angeles ports together.

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establishments. Currently, close to 46 percent of California’s export value comes from SMEs.27 This is impressive, but could be improved with more effective support. It takes considerable resources to expand into new foreign markets, and SMEs often do not have the capital to do it. Large corporations can afford to spend millions of dollars to engage in foreign trade.

Cost is a competitive disadvantage for California, and the state will have to find creative ways to overcome this. In addition, many key industries in the state have contracted, which has affected the growth of exports. While good industrial policy is vital to export growth, an export-promotion agency and targeted foreign trade offices can help with these challenges as well as regulatory barriers.

The International Monetary Fund (IMF) has forecast that 87 percent of world economic growth over the next five years will occur outside of the U.S.28 This presents a great opportunity for the export industry in California, especially given how connected the state is to Asian markets. Additionally, within the same industry, firms that export tend to pay higher wages than firms focused solely on the domestic market.29 Thus focusing on exports can help increase the number of good-paying middle-class jobs.

Despite the potential that exports hold for California’s economy, the state does little to coordinate and encourage them. The Business, Transportation & Housing Agency is, in theory, in charge of export support. Unfortunately, its programs focus more on regulations, and this leaves California without a functional and synchronized export-promotion strategy.

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Even among those who endorse governmental support of exports, there is no consensus on the best way to accomplish the task. In almost all cases, the differing circumstance of each state demands a unique approach. Also, due to many factors, it is difficult to demonstrate a direct cause-effect relationship between export activity and promotion efforts. Compounding this problem, most export-promotion agencies have a poor record of tracking their own effectiveness.

The California Business, Transportation & Housing Agency, through focus-group testing, found that the top barriers to exporting identified by businesses included30 regulatory problems, access to capital, business development (companies had trouble finding partners abroad or making the required business connections), lack of internal resources and market knowledge, and the fragmented state of trade services offered in California.v When asked how the state could support exports, participants most frequently described an office that provides extensive services (closely resembling a foreign trade office). Also discussed was the need for the state to operate in a coordinating role, directing businesses to the appropriate existing services.

The specifics of how an export-promotion agency is set up and run will be critical to long-term success. Any agency created in California should follow these criteria. It must take advantage of and synchronize the resources available in the state. There are trade organizations, state programs, and non-profit groups that focus on trade promotion to some degree. Unfortunately, these efforts are not coordinated.

Additionally, the agency should tap private-sector expertise to keep staffing levels low and allow the program to be more flexible. Similarly, foreign trade offices should be contracted out, not run by state employees.

The agency should be tasked with finding synergies between state and national export-promotion programs. One example is the newly created National Export Initiative (NEI). In recognition of the growing global demand for exports, the Obama administration recently created the NEI. The NEI focuses on trade promotion, helping with access to credit, and removing barriers to trade abroad.31 The NEI program will provide further benefits to export promotion in California; already the state has been granted $2.5 million.vi

In addition, most export-promotion efforts do not adequately track their impact, which makes identifying well-run programs difficult. Developing a comprehensive performance-measurement system is critical for any export-promotion initiative.32 Finally, export-promotion strategies are often a response to political pressures instead of smart trade policy, a mistake to avoid repeating in California.

BEst praCtiCEs in othEr statEs

Figure 6 offers a brief description of states’ export-promotion activities that closely represent the principles identified above. These programs have been recognized by others as innovative or following best practices.

v The absence of a dedicated foreign trade office was specifically cited as a concern and barrier.

vi The program focuses specifically on SMEs. It will provide additional support (including greater access to credit through the Export-Import Bank) and increase the promotion of U.S. exports worldwide. The initiative will develop specific commercial strategies for emerging markets such as Brazil, India, and China. A state export-promotion agency would help maximize support and build synergies with this national initiative.

BeSt praCtiCeS fOr expOrt prOMOtiON

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Figure 6. Export growth in states with best practices Relative to national level


All the states used as examples below have seen their exports grow faster than California’s. The growth in these states cannot be attributed solely to export promotion, but each state’s efforts in this regard have been effective. Figure 6 shows the five best-practice states discussed here and California’s export growth indexed against the average for the nation. The U.S. average is represented by the 100 mark on the index. Massachusetts’ growth rate has lagged the nation’s, but that state still outperforms California. Massachusetts is included here to show how a state similar to California is improving its export-promotion efforts.

Florida

Florida’s export-promotion agency does a good job using the private sector to provide expertise.33 The state’s export growth has been impressive. Figure 7 shows Florida’s export growth against the United States’ and California’s, with 1998 = 100 on the index.

Florida has a decentralized export-promotion strategy. Enterprise Florida (EFI) — the main economic development agency — coordinates promotion activities. Enterprise Florida provides companies with data, offers an easily searchable export directory, and heavily markets the state’s exporters. EFI is a public-private partnership that operates in conjunction with a statewide network of economic development agencies. Enterprise Florida runs 12 foreign trade offices and seven in-state offices.34

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Best practices for export promotion

Figure 7. Export growth in Florida


However, the most interesting component of the state’s export-promotion efforts is the Florida Trade Partners Alliance (FTPA). The FTPA is a statewide group consisting of 23 organizations, each involved in the export industry. It was formed in 1997 by Enterprise Florida and the U.S. Export Assistance Centers of Florida, and it is unique in the country. The alliance provides assistance through a wide range of programs offered by its member organizations. With the creation of the FTPA, Enterprise Florida united and integrated the many different and isolated export initiatives in the state.

Ultimately, what makes the organization effective is that all of the participating groups contribute funding to support the group. This money goes toward administrative and event expenses. It allows the Florida Trade Partners Alliance to increase the scale of its operations and the events it supports.

massachusetts

Massachusetts is the only state referenced here with export growth slower than the national average (see figure 8). However, it is still above California, and officials are taking steps to improve the state’s performance. Figure 8 shows Massachusetts’ growth indexed against the United States’. The state’s recent efforts focus on coordinating existing assets more effectively to boost exports.

Figure 8. Export growth in Massachusetts


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In 2010, the Massachusetts Technology Collaborative (a public economic development agency) released a detailed international strategy for the state, endorsed by the governor and with specific recommendations to increase exports. The report recommends that the Massachusetts Office of International Trade and Investment (MOITI), which was reinstated by Gov. Deval Patrick, be the coordinating body for export promotions. The report provides a blueprint for the development of a successful export-promotion policy with clear and manageable goals. Most importantly, it demonstrates how to string together Massachusetts’ export assets in a coordinated manner.35

The report states that “MOITI should serve as the Secretary’s lead agent and be responsible for day-to-day coordination and operations related to the strategy.” The report further clarifies roles and responsibilities among the relevant organizations in Massachusetts — assigning points of contact for activities involved in export promotion. The report identifies costs that can be reduced as well as areas suitable for expansion.

Finally, the report points to local advantages that can help the state improve its export base and suggests small support programs (such as grants to SMEs) aimed at improving involvement in international activities. There are many similarities between California and Massachusetts. This report and Massachusetts’ ongoing efforts may prove a model for California.

Alabama

Alabama has seen a surge in export growth in the past decade. Many new businesses have opened operations in the state to take advantage of its low costs. The Alabama Development Office (ADO) runs the state’s export promotions. The ADO’s international trade office helps businesses through statewide professional trade-development programs. In addition, the office conducts targeted trade missions and publishes frequent reports. The ADO’s services are free, and the organization limits the scope of its activities by focusing on specific industry sectors. It chooses its sectors based on growth and potential.36

Figure 9. Export growth in Alabama


The ADO’s international trade office is small but effective. Its services include information on key foreign markets, distribution of contacts and investment opportunities, marketing of Alabama businesses, and training to help companies navigate the global marketplace.

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The Export Alabama Alliance is another key player. It is a network of trade agencies within Alabama, including the U.S. Chamber of Commerce and U.S. Department of Commerce Export Assistance Center, which provides coordinated assistance to companies.37

Pennsylvania

Pennsylvania has created a comprehensive system to track the impact of its export promotions.38 Most states do not adequately understand the effect their efforts are having. This has been a recurring problem in many export-promotion programs. In 2005, the Center for Trade and Development (CTD) in Pennsylvania worked to overcome this problem by instituting a detailed goal-assessment system.

Five goals are measured. Among them are the number of firms served, the number of actions taken to help the client, and the number of companies that have reported export sales. These five goals are measured individually in each of the CTD’s regional partners and in its foreign office. The CTD sets the level it expects to achieve, and each partner is encouraged to meet these targets. The targets are unique to each partner and based on the level of funding or grant assistance they receive from the CTD. Finally, each partner is urged to excel in each measured area, and this is encouraged by an overall performance measure that tracks progress toward all the goals.

Figure 10. Export growth in Pennsylvania


The CTD’s efforts have, reportedly, been successful with a $60 return per dollar in the 2008–2009 fiscal year.39 The CTD can evaluate, very precisely, areas of weakness and determine which partners are not achieving the goals and on which measurements.

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Export promotion in othEr CoUntriEs

While many states in the U.S. now promote exports, for many years these activities were more common at the national level. Almost all countries promote exports to some degree. Below is a brief discussion of four countries whose promotions have led to notable economic success. Table 8 compares the U.S. with these countries in terms of both total export value and the export value’s percentage of GDP.

Each of these countries stands out in its own way. Given the size of its economy, Singapore’s volume of exports is impressive. Similarly, Germany is in its own class in terms of the volume it exports relative to the size of its economy. With an economy only a fifth the size of the United States’, Germany exports almost as much in value. South Korea and Thailand have outstanding export records. Each country has focused on building its export base through targeted initiatives. While not all of their strategies can be replicated by California, each demonstrates that export promotion can produce impressive outcomes.

Table 8. How the U.S. compares to four other countries in exports

Country Exports as % of GDP

Total export value 2011 (US$ billions)

GDP 2011 (US$ billions)

United States 9 1,480 15,040

Germany 46 1,408 3,085

South Korea 36 557 1,549

Hong Kong 130 427 350

Singapore 130 409 314

Sources: CIA World Factbook and World Bank development indicators.

germany

Not all of Germany’s success is due to export promotion. The nation has benefited from its excellence in high-value manufacturing (particularly in machinery and transportation equipment). This has allowed Germany to enter developing and emerging markets. In addition, the country’s proximity to Eastern Europe has allowed it to tap into a cheaper labor force. However, Germany has also made improving and maintaining its level of exports a governmental priority.

The main agency that addresses export-related issues in Germany is the Office of Economics and Export Control, and as the name would indicate the agency understands that exports are critical to economic health. The Office of Economics and Export Control supports small and medium-sized companies through grants and export funding. The agency also works closely with the Federation of German Industries (BDI), the main trade association, to represent and promote German companies abroad. In addition, BDI maintains a worldwide network of liaison offices. These offices help BDI’s member companies make contacts abroad and reduce risks associated with exporting.40

One example of BDI’s role was its response to financing constraints caused by the global recession. BDI lobbied the federal government, encouraging it to provide greater liquidity to exporters. This helped to offset the dearth of financing from banks.

South korea

Over the past 50 years, South Korea has experienced remarkable economic growth. Much of this is linked to the development of its export industry. South Korea’s exports in 1963 were $87 million. In 2011, they were $557 billion. Beginning in the mid-1960s, the government targeted the textiles and garment industry (an area in which South Korea had a competitive advantage) for export promotion, offering tax incentives for exporters. In the 1980s, the government began to promote research and development, and the nation saw an increase in the export of high-technology electronics.41


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The Seoul government developed a long-term strategy based on exports to help revitalize the nation’s economy. The government’s promotions included tax incentives, financial inducements, free-trade zones, and support for trade organizations. On top of this, the government worked with developing countries to open new markets for its exports. Some calculations put the government’s early support of exports at 31 percent of total export cost, a subsidy that has paid off over the years.42

hong kong

Hong Kong’s exports have in part been driven by the success of its economy. As in many thriving Asian economies, the early years of economic growth were fueled by the garment and clothing industry. The government operates 11 overseas trade offices and three in China. Hong Kong also has a strong trade agency, the Hong Kong Trade Development Council (HKTDC), with which the government works closely. HKTDC has over 40 offices around the world. The organization is governed by a 19-member council of government officials and business leaders. The council runs an online marketplace where buyers have easy access to suppliers, and it publishes more than 15 product magazines that promote Hong Kong companies. HKTDC also publishes research reports on its industries and has resources aimed at SMEs.44 Finally, the country has almost no tariffs or excise taxes on goods moving through its ports. This has made it an attractive location for multinational firms.

Singapore

Singapore’s story is somewhat similar to South Korea’s. In the late 1960s, Singapore turned to exports to help the country industrialize. Manufacturers that planned to export were granted lower tax rates. Singapore quickly became attractive to multinational companies seeking to invest in Asia. Additional policies aimed at promoting exports helped boost the country’s output.

The Singapore government has constantly adapted its export strategy to remain competitive. The current export-promotion agency, International Enterprise Singapore, was rebranded in 2002 and represents a shift away from pure export promotion toward the development and overseas growth of Singapore companies. International Enterprise Singapore has more than 35 overseas offices in 20 countries.43

taiwan

Taiwan, like all of the Asian tiger economies, achieved its economic growth through trade. Taiwan has a large and well-developed apparatus to promote exports. Most of the state’s operations are centralized and run by the Taiwan External Trade Development Council (TAITRA). TAITRA is a non-profit organization, sponsored by government, trade associations, and some commercial organizations. Exports from Taiwan grew more than 12 percent from 2010 to 2011.45 TAITRA’s initiatives and trade offices are largely responsible for this growth.

TAITRA runs 46 trade offices abroad and has an additional ten offices in mainland China. Combined, these offices serve as a globalized trade network for Taiwan and help Taiwanese companies explore foreign markets before investing in them.46 TAITRA’s foreign offices assist the head office with trade missions and exhibitions, initiate contact between buyers and sellers, and support Taiwanese companies seeking to expand their trade operations.

TAITRA has been expanding its reach into emerging markets through trade missions and business-talent incubation programs. China has also been courted with more than seven trade fairs in 2011. Finally, through TAITRA, Taiwan had a presence at over 30 major international trade exhibitions, ensuring that the state’s economic ties with the developed world continue to grow.

Lastly, Taiwan recently signed an agreement with China that will allow more than 500 products made in Taiwan to enter China with low or no tariffs applied. Taiwan is exploring a similar agreement with Singapore.47

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As mentioned, California is one of the few states in the country that does not have an office devoted to foreign trade. The California Trade, Technology and Commerce Agency failed (political problems aside) because its efforts were not based on best practices. Looking to what others have identified as effective mechanisms for export promotion, we recommend a set of strategies that any new agency in California should follow.

1. take advantage of existing resources within the state.

• California has a wide range of programs and services that support exports and are tailored to the state’s businesses and industries. Any new program should position itself to enhance and supplement what is already offered. Duplicating available activities would be wasteful (particularly in light of the state’s current budget situation).

• The export agency should be responsible for coordinating the many programs offered now, to help businesses to find the ones they need. In addition, the quality of these programs differs considerably.

2. take advantage of private-sector expertise.

• In a comprehensive review of other nations’ export-promotion agencies, the World Bank found that the most successful programs had a large portion of their boards represented by private executives, with public funding backing the operation. (Critics had questioned the expertise of the CTTCA staff.) Working with the private sector would give an agency a wider knowledge base.48

• Most agencies should retain a small number of staff to handle coordination and run daily operations.

• The model of the Export-Import Bank should be examined to create a template for export promotion similar to the California Infrastructure Bank. Establish a public-private partnership for funding, drawing on the example of Germany, where the primary trade association is directly involved in export promotion.

3. Contract out foreign offices.

• It has been shown that contracting out the operations of foreign offices reduces operating costs. The practice is becoming more common, with many U.S. states and Canadian provinces taking this path.49 This also creates the option of hiring private talent, which might not normally be available at public-sector wages.

• Many of the foreign offices operated by the CTTCA were contracted out. It is impossible to say which arrangement worked better for the CTTCA, but there is a precedent for this approach.

• Larger markets may warrant a fully staffed office.

4. Create a comprehensive performance-measurement system.

• One of the difficulties in assessing the value of export promotions is that few offices track their achievements adequately. Doubts about results plagued the CTTCA and led to an increasingly skeptical public perception of the organization.

• Any export-promotion agency needs up-to-date market analysis so it can respond quickly to new challenges.

reCOMMeNDatiONS

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• Agencies must also track their own performance so they can make adjustments and operate in a cost-effective and useful manner.

• Recommended performance metrics include companies served, deals signed, export-related jobs created (and existing), newly created export sales, and tax receipts from export promotions.

• The amount of money states and nations spend on export promotion varies widely. In the United States, it ranges from a few hundred thousand to over $20 million. Research has found that there are diminishing returns when it comes to export promotion.50 It is important that any export effort in California is not under- or over-funded.

5. develop targeted strategies for key export destinations, utilizing metrics, research, and trade data.

• Review trade data for the past decade to determine which countries show the most promise for continued growth in importing goods from California.

• Determine preferences in key markets for goods that are currently being exported from areas other than California.

• Survey businesses exporting or intending to export goods to key overseas markets to determine the key barriers to entry or expansion they face that can be assisted by state-coordinated efforts.

6. take advantage of national programs.

• The federal government is pushing exports as a way to rejuvenate the economy. California can take advantage of new programs at the federal level to help bolster its own export efforts.

• The National Exports Initiative and the State Trade and Export Promotion (STEP) program run by the Small Business Administration (SBA) could be valuable sources of funding and resources.

7. develop and execute a comprehensive export-promotion strategy that affects statewide and international efforts.

• The Business, Transportation & Housing Agency, which currently manages the state support programs for international trade and investment, has suggested that if a new export strategy is developed it should link “international trade and investment programs to a comprehensive economic development strategy.”51

• In addition, a new California agency could protect and represent California’s export interests at the national level.

ConClUsion

Export promotion is effective and relatively easy to implement. Despite the devastating effects of the recession, California exports continue to grow. A more synchronized approach to export promotion could be beneficial. Countries such as Germany and Taiwan have shown clear benefits from providing export finance assistance and promoting international trade. States with comprehensive trade policies have continued to see a rise in their exports at a higher level than California and the national average. California has already shown it is strongly connected to economies in Europe and Asia. It needs to position itself and its businesses to more effectively benefit from these connections.

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1. Nathan Associates Inc. “Best Practices in Export Promotion,” technical report, April 2004.

2. International Encyclopedia of the Social Sciences, 2nd edition. Macmillan Reference USA, November 2007.

3. State International Development Organization (SIDO). State Trade Directory. http://www.sidoamerica.org/State-Trade-Directory.aspx (accessed May 20, 2012).

4. Los Angeles Times. “California to open two trade offices in China,” February 17, 2012. http://articles.latimes.com/2012/feb/17/news/la-california-trade-china-20120217 (accessed May 20, 2012).

5. United Nations. “Introduction to Export Promotion.” http://www.unescap.org/tid/publication/tipub2107_chap3.pdf (accessed February 24, 2012).

6. Koehler, Gus. “California Trade Policy,” California Research Board, November 1999.

7. International Trade Administration. http://tse.export.gov/TSE/TSEhome.aspx (accessed February 24, 2012).

8. Kleinhenz, Robert, et al. “International Trade Outlook Southern California, 2012–2013,” Los Angeles County Economic Development Corporation, May 2012.


10. Platzer, Michaela. “U.S. Aerospace Manufacturing: Industry Overview and Prospects,” Congressional Research Service, December 2009.

11. Government Accountability Office. “U.S. Semiconductor and Software Industries Increasingly Produce in China,” Report to Congressional Committee, September 2006.

12. Vargas, Lucinda. “Maquiladoras: Impact on Texas Border Cities,” Federal Reserve Board of Dallas, June 2001. http://67-208-42-166.neospire.net/research/border/tbe_vargas.pdf (accessed February 22, 2012).

13. Ibid.

14. Bonner, Dale E., and Garrett P. Ashley. “Toward a California Trade and Investment Strategy,” California Business, Transportation & Housing Agency, October 2007.


16. Smurr, Douglas. “California Adrift Internationally: Resetting Course of the 21st Century,” Journal of International Business and Cultural Studies, Vol. 3, May 2010.

17. Ibid

18. Ibid.


20. Hoffman, Megan, et al. “Advancing California’s Competitiveness Through Trade,” Loyola Marymount University, May 2011.

21. Sidhu, Nancy, et al. “2011–2012 Economic Forecast and Industry Outlook,” Los Angeles Economic Development Council, February 2011.


23. World Shipping Council. http://www.worldshipping.org (accessed May 15, 2012).

24. Airport Information: Statistics. http://www.lawa.org/welcome_lax.aspx?id=798 Los Angeles World Airports (accessed May 20, 2012).

25. CAEDC Asia report

26. Sidhu, Nancy et al. “Growing Together: China and Los Angeles County,” Los Angeles Economic Development Council, 2011.

eNDNOteS

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27. “California: Exports, Jobs and Foreign Investment,” International Trade Administration, March 2012. http://www.trade.gov/mas/ian/statereports/states/ca.pdf (accessed May 15, 2012).

28. International Trade Administration. “National Export Initiative,” http://trade.gov/nei/ (accessed February 20, 2012).

29. “Report to the President on the National Export Initiative,” September 2010. http://www.whitehouse.gov/sites/default/files/nei_report_9-16-10_full.pdf (accessed May 20, 2012).

30. Bonner, Dale E., and Garrett P. Ashley. “Toward a California Trade and Investment Strategy,” California Business, Transportation, & Housing Agency, October 2007.

31. “Report to the President on the National Export Initiative,” September 2010. http://www.whitehouse.gov/sites/default/files/nei_report_9-16-10_full.pdf (accessed May 20, 2012).

32. Katz, Bruce, and Emilia Istrate. “Boosting Exports, Delivering Jobs and Economic Growth,” Brookings Institute: Project on State and Metropolitan Growth, January 2011. http://www.brookings.edu/research/papers/2011/01/26-exports-katz-istrate (accessed February 20, 2012).

33. Ibid.

34. Enterprise Florida. http://www.eflorida.com/ContentSubpage.aspx?id=206 (accessed May 20, 2012).

35. Massachusetts Technology Collaborative. “An International Strategy for Massachusetts. A report for the Executive Office of Housing and Development,” July 2010. http://www.masstech.org/international/international_for_press.pdf (accessed May 20, 2012).

36. Alabama Development Office. http://www.ado.alabama.gov (accessed February 24, 2012).

37. Hoffman, Megan, et al. “Advancing California’s Competitiveness Through Trade,” Loyola Marymount University, May 2011.

38. Center for Trade and Development. http://www.newpa.com/build-your-business/explore-international-opportunities/trade/promotion

39. Katz, Bruce, and Emilia Istrate. “Boosting Exports, Delivering Jobs and Economic Growth,” Brookings Institute: Project on State and Metropolitan Growth, January 2011. http://www.brookings.edu/research/papers/2011/01/26-exports-katz-istrate (accessed February 20, 2012).

40. Federal Office of Economics and Export Control (BAFA). “Trade Promotion.” http://www.bafa.de/bafa/en/trade/index.html (accessed May 7, 2012).

41. Mah, Jai S. “Export Promotion Policies, Export Composition and Economic Development of Korea,” Law and Development Review, Vol. 4, Issue 2, 2011.

42. Ibid.

43. International Enterprise Singapore. “Driving Singapore’s External Economy.” http://www.iesingapore.gov.sg/wps/portal (accessed May 7, 2012).

44. Hong Kong Trade Development Council (HKTDC). “About HKTDC.” http://www.hktdc.com/mis/ahktdc/en/s/abt-hktdc-about.html (accessed May 7, 2012).

45. Branding Taiwan. “About TAITRA.” http://www.brandingtaiwan.org/AboutUsEN/TAITRA (accessed May 7, 2012).

46. TAITRA. “TAITRA Services.” http://www.taitra.com.tw/services_01.asp (accessed May 7, 2012).

47. Ibid.

48. Lederman, Daniel, et al. “Export Promotion Agencies: What Works and What Doesn’t,” World Bank Policy Research Working Paper 4044, November 2006.

49. Lederman, Daniel, et al. “Export Promotion Agencies: Do They Work?” Journal of Development Economics, Vol. 91, Issue 2, March 2010.

50. Ibid.

51. Bonner, Dale E., and Garrett P. Ashley. “Toward a California Trade and Investment Strategy,” California Business, Transportation, & Housing Agency, October 2007.

25

Kevin Klowden is director of the California Center at the Milken Institute, where he also serves as managing economist in the research group. He specializes in the study of demographic and spatial factors (the distribution of resources, business locations, and labor), how these are influenced by public policy, and how they in turn affect regional economies. Klowden has addressed the role of technology-based development in publications such as “North America’s High-Tech Economy” and in location-specific studies on Arkansas and Arizona. In addition, he oversaw the year-long Los Angeles Economy project, which examined key workforce and economic development issues in Los Angeles. Klowden was the lead author of “Film Flight: Lost Production and Its Economic Impact in California” and “The Writers’ Strike of 2007–2008: The Economic Impact of Digital Distribution,” both of which analyze the changing dynamics of the entertainment industry. He has also written on the role of transportation infrastructure in economic growth and job creation in reports such as “California’s Highway Infrastructure: Traffic’s Looming Cost” and “Jobs for America: Investments and Policies for Economic Growth and Competitiveness,” as well as in several publications including The Wall Street Journal. Klowden earned an M.A. in economic geography from the University of Chicago and an M.S. in politics of the world economy from the London School of Economics.

michael Wolfe is a research analyst at the Milken Institute. He is interested in regional and economic development, transportation issues, as well as innovation and growth. Previously, Wolfe was at the Martin Prosperity Institute in Toronto where he worked on the Ontario in the Creative Age project, which set out to define the province’s future economic and growth prospects. He has also been involved in a number of other projects looking at the innovative capacity and competitiveness of regions. Wolfe recently completed his master’s degree in urban planning from the University of California, Los Angeles. Before that he studied at Queen’s University in Kingston, Ontario, where he graduated with a bachelor’s degree in economic geography.

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