Back to Financial CapitalBy Michael T. Childress and Michal Smith-Mello; Peter Schirmer
From Entrepreneurs and Small Business—Kentucky’s Neglected Natural Resource
pp. 58-61, published 1998
Successful young companies tend to have a broad geographic reach. Half of Inc. 500 companies get more than 50 percent of their revenues from sources outside their immediate region and more than a third get at least some sales from international exports. A recent Commerce Department study indicates that, largely due to the declining price of communications technology, the fastest-growing small companies are now important international traders. An estimated 10 percent of small businesses currently produce between 25 percent and 40 percent of all U.S. products and services sent abroad.(1) Among the fastest growing firms in a recent national survey, nearly half (47 percent) were exporting while another 6 percent anticipated doing so within a year.(2)
Some Kentucky firms sell far beyond the Commonwealth’s borders and have developed highly successful global marketing strategies. For businesses like Dippin’ Dots in Paducah, which manufactures novelty ice cream products, the tastes of other cultures are fueling dramatic growth: Dippin’ Dots made its second consecutive appearance on the Inc. 500 list this year. Kentucky’s exports increased from $4.7 billion in 1993 to $6.9 billion in 1996, according to Mary Beth Cordy, director of the Kentucky International Trade Office.(3) Further, Cordy notes in an Associated Press story, a recent study ranked Kentucky sixth in the nation in export growth for the first half of 1997.(4)
Growth is not the only benefit of exporting; it also tends to bring higher wages. Our Survey of Small Business Owners found that the average wages for Kentucky’s professional workers, production workers, and other workers rise as businesses make more sales outside their local areas.(5) As shown in Figure 1, wages are higher even though these externally oriented businesses are slightly more likely to be located in rural counties than locally oriented businesses.
Despite the fact that selling beyond local borders can increase wages and sales, most of Kentucky’s small businesses are very parochial. Eight out of 10 respondents to our Survey of Small Business Owners make at least three fourths of their sales locally, and 4 out of 10 make all of their sales locally.(6) Only 15 percent of businesses make at least half of their total sales to customers located more than a one-hour drive away, and just 7 percent report making any sales abroad at all. International sales usually represent a small share of total sales. About 10 percent say they anticipate exporting their products or services in the future. However, most of these businesses are already externally oriented. Only 6.5 percent of locally oriented businesses expect to sell products abroad in the future, compared with 30 percent of externally oriented firms.
These results corroborate other studies of Kentucky’s businesses. A survey of rural manufacturers we conducted in 1995 found that few businesses know much about global markets or are interested in exporting. While respondents were generally optimistic about the effects of globalization on employment and sales, they indicated little familiarity with the terms of trade agreements or with widely adopted international quality standards. Further, they reported minimal efforts to increase exports.(7) Businesses that were already exporting were not doing much to increase their exports, and businesses that were not exporting showed almost no interest in doing so.(8) An earlier University of Kentucky study of 3,500 manufacturing firms in the state revealed that half of the firms that do not export have the potential to do so.(9)
Anecdotal evidence also suggests that Kentucky businesses may be too insular. A representative of one Nashville venture capital firm believes Kentucky’s business culture is an obstacle to loans.(10) This venture capitalist observed that Kentucky businesses are more inclined to stay within the family, rather than seeking the opportunity to grow and become a public company. Further, MACED concludes that regional insularity among Appalachian entrepreneurs and the community of professional service providers they rely on may limit exposure to ideas that could spawn new ventures and expand markets for established businesses.(11) The impact of this insularity is evident in the limited awareness of financing options and the inattention to marketing that MACED found among the Appalachian entrepreneurs it surveyed.(12) Our survey found that for half of small businesses, their five largest customers account for at least 40 percent of their total business. Eighty percent say word-of-mouth advertising has been most helpful. Simply put, one of the cultural strengths of Kentucky, an internal focus on community and family and what some have suggested is diminished interest in material wealth,(13) may limit entrepreneurial efforts in the Commonwealth.
What kind of support do Kentucky’s small businesses receive if they want to sell goods and services outside of their local areas? Kentucky’s externally oriented small businesses do not receive—possibly because they do not seek—much help from state and federal agencies that provide business services. For example, Table 1 shows that less than 20 percent of externally oriented firms report being somewhat familiar with the Kentucky Economic Development Cabinet, and only 7 percent say they are very familiar with it. A scant 4 percent have used its services. About 50 percent of externally oriented firms are somewhat or very familiar with the federal Small Business Administration, and 7 percent have used services provided by the SBA. Knowledge of small business assistance programs is even lower among locally oriented businesses. Only 13 percent are somewhat or very familiar with the Economic Development Cabinet and 35 percent are somewhat or very familiar with the SBA.
The state agency most directly involved in promoting Kentucky’s exports is the International Trade Office (ITO) of the Economic Development Cabinet. The ITO provides export consulting; documentation, shipping and regulation assistance and information; ISO 9000 (internationally recognized quality standards and practices) training; market data and other services. Only 8 percent of externally oriented businesses and 5 percent of locally oriented businesses are somewhat or very familiar with the ITO, and only a handful of small businesses say they have used any of its services.
Overall, externally oriented and locally oriented businesses are about equally satisfied (or dissatisfied) with the quality of small business assistance services. Obtaining market information is slightly more difficult for externally oriented businesses, as might be expected. Both kinds of firms rate the state’s airport system about equally, too. However, externally oriented businesses are nearly twice as likely as locally oriented businesses to rate the state’s highway system as poor. And externally oriented businesses are far more likely than locally oriented businesses to rate the presence of entrepreneurial role models as poor (40 percent versus 27 percent). Role models can be critical for businesses looking to expand their markets abroad. The perceived lack of role models for such businesses may impede Kentucky’s ability to increase exports by its small firms.
Businesses do not have to be in urban counties to be externally oriented—in fact, they are slightly more likely to be located in rural counties. Nor do they have to be large—the average business has nine employees, just a few more than other businesses. Externally oriented businesses can be found in numerous industries—retail, construction, manufacturing, services and wholesale distributing. One noteworthy difference between externally and internally oriented businesses is that externally oriented businesses are three times more likely to be owned by someone with a graduate degree in business (15 percent versus 5 percent). Still, the overall percentage for either group is small. Despite the fact that there are few prerequisites to being externally oriented, most of Kentucky’s small businesses focus on local markets.
Many of those businesses that are more externally oriented appear to "go it alone." They do not know much about state or federal small business assistance programs. They seldom use the services of the International Trade Office. Less than 20 percent believe they have good entrepreneurial role models. However, it is an open question whether businesses actually choose to be so independent, or simply are so because of inadequate knowledge of the services that are available and the firms that have already begun selling to a national or international market.
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Brokaw
. Return to text.Laura
M. Litvan, "The Hot Zones for Entrepreneurs," Nation’s Business June 1996: 42. Return to text.Bruce
Schreiner, "Kentucky Exports on the Rise," The State Journal 9 Nov. 1997: A6-7. Return to text.Schreiner
. Return to text.The
model we used to estimate the relationship between wages and local sales also takes into account use of computers, location, and industry of the business. See Appendix F for model results. Return to text.In
this discussion, we define local sales as those made to customers who are within a one-hour drive of the business. Locally oriented businesses are those that make at least half of their sales locally, and externally oriented businesses are those that make at least half of their sales outside of their local areas. Return to text.Peter
Schirmer and Melissa Taylor, Farms, Factories and Free Trade (Frankfort: Kentucky Long-Term Policy Research Center, 1995). Return to text.Schirmer
and Taylor 29. Return to text.M
. J. Kane, "An Assessment of the Export Potential of Kentucky Industries: A Manufacturing Profile," College of Business and Economics, University of Kentucky, Lexington, Kentucky, 1990. Return to text.The
venture capital firm was contacted in a Kentucky Long-Term Policy Research Center telephone survey of regional venture capital firms. Return to text.MACED
, Promoting Entrepreneurship 11. Return to text.MACED
, Promoting Entrepreneurship 9, 11. Return to text.Billie
M. Sebastian, "Citizen Participation: An Elusive But Necessary Ingredient in Effective Government," Foresight (Kentucky Long-Term Policy Research Center) Fall 1994. Return to text.