Comings and Goings: A Snapshot of Middle Market Trade
This post is part of a series based on the research report Winning in the Americas by the National Center for the Middle Market in partnership with FedEx and Nextrade Group. Download the full report here.
While just 5% of all U.S. companies export, and even fewer import, about half of middle market businesses are internationally active, according to a recent study by the National Center for the Middle Market. The study reveals that mid-sized businesses that operate globally tend to bU.Se larger and faster growing than their domestic-only peers. Despite the relative prevalence of globalization among this group, and the clear link between internationalization and better performance, little is known about the middle market’s trade practices, performance, and future plans.
The Center’s study helps fill the gap and paint the picture of what international trade looks like for the middle market. Here’s a closer look at what we learned:
U.S. middle market businesses prefer to trade on their own side of the world.
Internationalized middle market companies tend to look north and south, as opposed to east and west, for trade opportunities. They rank Canada and Mexico as their most important trading partners. Specifically, 63% of middle market exporters ship to Canada and 39% export to Mexico. While China is the main source of imports for the middle market, as it is for all U.S. businesses, 24% of middle market importers receive shipments from Canada, and 19% import from Mexico.
Why the focus on the Americas? Because Western Hemisphere countries—and Canada, the Caribbean, and Central America in particular—are seen as easier markets to enter, requiring fewer resources to get started. Rising labor costs in China and the negative impacts of Brexit further solidify the Americas as top prospects for trade.
Most internationalized middle market companies are two-way traders.
Among internationally active middle market companies, 58% engage in both exports and imports. About a quarter export only while just 16% only import.
Exporters go abroad in search of new customers and new revenues. They primarily send finished products across the boarder, and they typically sell to other businesses as opposed to direct to consumers. Middle market exporters receive roughly a third of their revenue from foreign sales, mirroring overall U.S. trade patterns, and Canada leads as the destination for foreign sales.
Importers tend to bring in raw materials, parts, and components versus finished products. Imports make up a third of total raw material purchases for these businesses. Middle market importers are motivated by lowering their costs and leveraging the strength of the dollar. They are also looking to gain access to raw materials and strengthen their supply chains.
Globalized middle market companies are relatively diversified.
Middle market companies do better than the U.S. average when it comes to diversifying their export market. While 43% of middle market exporters sell to just one or two foreign markets, the majority sell to three or more markets, with 16% selling to more than five.
Interestingly, the most diversified exporters tend to be among the most productive companies. Slower-growing firms are more likely to trade with Canada and Mexico only, while fast-growing companies do business is many Latin American markets.
The best-performing middle market companies carefully manage internationalization risks.
Diversification doesn’t happen all at one once for global middle market firms. Rather, they tend to test the waters in Canada, Mexico, and Europe first before entering other markets. Those that are relatively new to exporting focus mostly on Canada, while companies that have been exporting for a decade or more are more exposed to Mexico and China.
Internationalization is both challenging and rewarding.
Middle market companies claim that doing business abroad is more challenging than anticipated. But it’s worth it. The vast majority of middle market exporters say that international sales have either met or exceeded their expectations. What’s more, nearly all (92%) of globalized middle market companies intend to do even more business outside the U.S. in coming years, with more than half (55%) intending to expand in the Americas.
For more details on these findings and an in-depth look at middle market trade, see the Center’s full research report, Winning in the Americas.
Next in this series
Post 2: How to Succeed as a Middle Market Exporter
Others in this series
Post 3: Barriers to Internationalization: What Keeps Middle Market Companies Home?
Post 4: Harnessing Opportunities for International Growth: Why Look to Latin America?