Target State Export Assistance on Companies Ready to Expand Their Exports

The Legislature should direct the Texas Department of Commerce (or successor agency) to target its business development services on industries that are ready to expand their exports.


Background
As the second-largest export state, Texas is an important player in international trade. The leading destinations for Texas exports are Mexico and Canada. From 1987 to 1991, exports to Mexico rose by 240 percent, while those to Canada increased 173 percent . Also rising in importance is Texas export trade with the Far East Taiwan, Singapore and China and Middle Eastern countries, including Saudi Arabia, the United Arab Emirates and Kuwait. 1

Across the United States, just 15 percent of all companies account for 85 percent of all exports. 2 These tend to be larger companies; many small firms do not export at all due to their lack of expertise, information or finances and to the perceived risks associated with exporting. 3 One of the biggest challenges facing Texas economic development programs is providing services that will encourage exports by small and medium-sized companies.

As in many other states, Texas economic development programs tend to favor high-profile activities, rather than high-yield ones. One of the goals of the Texas Department of Commerce (TDOC) is to improve the state s economy through business creation, retention and expansion and greater diversification of the state s economic base. 4 The agency s performance measures include national and international trade leads generated through TDOC-sponsored trade events and the number of companies given export assistance. 5 H owever, critics sometimes charge that these types of goals and measurements do not demonstrate the value of the programs and do not reliably account for returns from the state s investment. 6

TDOC s international program maintains offices in Japan, Taiwan, Germany and Mexico. While the agency s expenditures for trade missions and foreign offices have been criticized, TDOC is competing with other states that have similar offices, such as California and Illinois, which both recently opened offices in Mexico. However, foreign offices achievements are extremely hard to quantify, and Texas has these offices primarily because other states do. 7

In Europe, experienced export-assistance groups have found that resources spent to help companies that are not ready to export is wasteful. Such groups target their efforts on companies that want export assistance and do not try to convince other companies of their export potential.

European export assistance often begins with an export audit to determine whether exportin g is a logical development for a given company. Export-assistance groups in Europe work with companies on a deal-by-deal basis and use customized start-to-finish services that are paid for partly or wholly by the companies. Charging for export services ens ures that only companies that genuinely want export assistance receive the aid. Consequently, the quality of services is higher and so is the demand for them. 8

This approach is also being used in certain areas of the United States. The Port of New York an d New Jersey and Washington state have imitated the European model and charge for services. These groups require contracts that allow for fees and commissions after an export sale is completed. Companies that succeed in these programs pay for the services they receive, while the economic development agencies can quantify the performance of their export assistance.

TDOC provides direct business assistance and training to individual businesses, local economic development organizations and local governments. These services include economic- and business-development plans for communities and businesses, management training seminars, information on exporting, international trade fairs, trade contacts and financing, loan applications and technical assistance on r ural community development. However, the agency lacks partnerships with financial institutions that would facilitate private financing and customized programs for specific regions, industries and export transactions. Individual businesses have received mos t of these services in training and advice; about 45 percent, or 4,000 businesses, requested the export advice. Fees are charged primarily for financing programs, with general revenue supporting most business development and community technical assistance. 9

In the past, these services have duplicated efforts of other much larger organizations, such as the Small Business Administration s 60 small business assistance centers and its 34 small business institutes, federal agencies and public utilities. However , TDOC has reduced some of this duplication as it has shifted its resources from direct help for individual companies to training support and assistance for small business development centers that provide similar services.

TDOC (or its successor agency) should develop clearer goals for export and trade development and should analyze and identify specific industry groups for its export assistance. Currently, TDOC serves most businesses who request assistance without emphasizi ng the businesses most likely to be ready for exporting. Moreover, the agency measures its performance in general terms that are not truly useful to determine program effectiveness.


Recommendations
A. The Legislature should direct Texas Department of Commerce (or its successor agency) to focus its business development services on increasing export sales by providing export assistance to specific industries, particularly small and medium-sized busines ses that are ready and able to expand their export sales.

(See a separate recommenda tion in this report concerning the consolidation of the Texas Department of Commerce into a new Commission on Commerce and Labor). The agency should identify specific industry targets for its export assistance, with an emphasis on smaller businesses that a re most likely to be ready for exporting.

The agency should provide direct technical assistance either in-house or by contract, whichever is most cost-effective. These services should include an export audit to determine companies export potential, stu dies of markets and competition, development of pricing strategies, arrangement of shipping and the financing and closing of deals. The agency should form partnerships with financial institutions to facilitate such transactions.

The agency should develop transaction-based performance measures focusing on export sales to provide a clearer picture of the state s return on its economic development efforts. Measures based upon deal closings should be transaction-oriented and provide an accurate indicator of performance. 10 These measures would force the agency to focus on performance that can be measured in export sales gains to Texas.

The agency should evaluate the cost effectiveness of basing personnel in regional offices to coordinate community-assistance programs.

B. The Legislature should mandate that TDOC (or its successor agency) charge for its technical assistance services (except for those provided under their rural community-development activities) and reduce general revenue appropriations to TDOC by $570,000 in each year of the 1994-95 biennium. Through a rider in the General Appropriations Act, the Legislature should provide that the agency be allowed to temporarily use general revenue appropriations from other current TDOC programs pending receip t of these fees. The Legislature should provide through a rider in the General Appropriations Act that unexpended balances of such fees received, after reducing all indirect and direct costs, be carried forward from fiscal 1994 to 1995.

Companies that be nefit from these services should pay fees and commissions when export sales are made. State administrative offices and any foreign offices also should be required to charge fees for their services. The agency should charge fees for its management training services or eliminate such services if they are not self-sustaining. These fees should equal the actual costs of providing such services.

This recommendation is not intended to restrict the agency from reducing fees for or exempting certain small or rura l businesses when it determines that they would create a financial hardship. However, overall costs charged as fees should include a subsidy for these hardship cases. Arrangements should be made to recover exempted or reduced fees upon the closing of export deals when possible.

This recommendation does not include fees for rural community development technical assistance. However, it is recommended that the agency attempt to better coordinate rural community development and rural small-business developmen t to maximize the effectiveness of these efforts.


Implications
Based on other states and European experience, these recommendations should improve the quality of Texas export services, resulting in increased demand for them. The agency will be able to report its impact on export business development more accurately with a transaction-based funding system. Fees and commissions will provide a gauge for the success of the program and allow its expansion as the market demands.


Fiscal Impact
According to TDOC, the agency spent $570,000 in fiscal 1992 on direct business development technical assistance. 11 Included in this were amounts for technical assistance in the Texas Marketplace program, advanced technology program, international trade program, international offices, export program and the Quality Texas program. No rural community-assistance costs were included in the savings.

Fiscal Savings to the Change
Year General Revenue Fund 001 in FTEs

1994 $570,000 0
1995 570,000 0
1996 570,000 0
1997 570,000 0
1998 570,000 0





Endnotes
1 Massachusetts Institute for Social and Economic Research (MISER), Foreign Trade Division, U.S. Department of Commerce and Research and Planning Division, Texas Department of Commerce.
2 Ibid.
3 Ibid.
4 Texas Department of Commerce, Requests for Legislative Appropriations for Fiscal Years 1994 and 1995 (Austin, Texas, September 11, 1992), p. 2.
5 Ibid., p. 23.
6 William E. Nothdurft, The Export Game, Governing (August 1992), p. 57.
7 Ibid., pp. 58-59.
8 Ibid., pp. 60-61.
9 Telephone interview with Karl Spock, Assistant Director, Texas Sunset Commission, Austin, Texas, January 4, 1993; and interview with Cyndie Schmitt, Analyst, Texas Sunset Commission, Austin, Texas, January 6, 1993.
10 Nothdurft, p. 61.
11 Texas Department of Commerce, Business Development Technical Assistance Analysis, Austin, Texas, May 1992, pp. 1-4 (unpublished document).