Boosting exports, foreign direct investment a key to recovery
By Bill DeRosa
With unemployment going from 4.4% in January 2007 to a high of 9.2% by February 2010, there is no question that the Great Recession hit Connecticut hard. But without the economic contribution of globally active companies, it’s likely that the impact would have been much worse.
Connecticut is now home to 5,400 companies that export goods or services to foreign countries, says Anne Evans, director of the U.S. Department of Commerce (DOC) Middletown Export Assistance Center. Many of those companies were able to ride out the recession and minimize job losses because they were selling to markets that continued to expand. Take Canada, for example. Connecticut companies export more products to Canada than any other country except France. Because our neighbors to the north were not hit as hard by the recession (employment there fell only 1.8%), sales to Canada remained more robust than sales to many other states and countries.
Indeed, exporting traditionally has been a way for companies to guard against regional or national economic downturns. CBIA’s 2011 International Trade Survey found that more than half (56%) of the 265 Connecticut exporters surveyed said that exporting helped them weather the recession and/or better position their firms for a stronger recovery.
“Exporting helps companies offset domestic economic cycles, because their markets are more diverse,” says John Rathgeber, CBIA’s president and CEO, who compares exporting to diversifying one’s personal investment portfolio as a means of protecting against downturns in any one financial sector.
The state’s economy was also supported during the recession by another kind of globally active company: U.S. subsidiaries of foreign-owned firms.
Connecticut is home to approximately 1,000 U.S. subsidiaries. “We’re lucky to have so many foreign-owned companies,” says Laura Jaworski, director of the state Department of Economic and Community Development (DECD) Foreign Affairs Office. She points out that foreign direct investment (FDI) in Connecticut creates jobs, increases tax revenue, and leads to knowledge transfer and the adoption of new technologies and workforce practices. In addition, when foreign-owned companies locate a subsidiary in Connecticut, their suppliers often come too, adding more jobs and boosting economic growth.
The Export Effect
Connecticut exporters bring billions of dollars into the state, bolstering tax revenues, Gross State Product (GSP), and their own ability to create more jobs.
Over the last decade, sales of manufactured goods by Connecticut companies to overseas markets have grown impressively, nearly doubling from over $8 billion in 2000 to more than $16 billion in 2010. During that time, exports’ share of GSP rose from 4.9% to 6.8%.
In 2010, Connecticut exported $2.2 billion in manufactured goods to France, making that country the state’s top trading partner, followed by Canada ($1.6 billion), Germany ($1.3 billion), China ($1 billion), and Mexico
($1 billion). Belgium, Singapore, the UK, the Netherlands, and Japan rounded out the top ten. Exports of transportation equipment led the way for Connecticut with nearly $7 billion in sales, followed by machinery ($1.5 billion), and computer and electronic products ($1.3 billion).
Exporting’s role in job creation is significant, says Jaworski, noting that for every $1 million in new exports, 13 additional jobs are created. Exports currently support, directly and indirectly, 500,000 jobs in Connecticut—including 24% of the state’s manufacturing jobs.
“Exporting is about 35% of our revenue and so roughly 35% of our 850 jobs. So it’s important,” says Bill Lee, president and CEO of The Lee Company in Westbrook. His firm manufactures miniature hydraulic components and exports them around the world to companies involved in commercial airliner construction.
Selling overseas also sustains many of the state’s small and midsize businesses—companies with fewer than 500 employees. Such companies comprise 90% of Connecticut’s exporters, account for more than one-quarter of the state’s total exports, and average more than $1 million in exports per firm.
“Export sales are about 70% of our total revenues and support about 50 out of 75 jobs,” says Lou Auletta, president and CEO of Bauer Inc., a Bristol-based manufacturer of aircraft component test systems and support equipment. Bauer has been exporting for many years, says Auletta, selling its products to countries in Asia, the Middle East, Europe, South America, and Africa.
According to CBIA’s 2011 International Trade Survey, the vast majority of Connecticut companies (83%) enter foreign markets to increase company sales and profits. However, businesses also benefit from exporting in a number of less direct ways that ultimately boost their bottom line, says Evans.
“Exporting elevates your status and usually makes you a better manufacturer, because you have to meet more standards and certifications,” she says. “Companies that export tend to be successful domestic suppliers, because they have to have a world-class product. It’s a good thing to be able to tell a company in Ohio that you sell worldwide and that your products meet international standards.”
In addition, since 95% of consumers are outside the U.S., exporting is clearly a way for businesses to expand their customer base, says Evans.
Tim Pedrotty can attest to that. Director of global business development at Reflexite Corp. in Avon, Pedrotty attributes much of his company’s success and capacity for job creation to its overseas program. “The international component is a big, big part of our business,” he says. “More than 50% of our sales are now overseas.”
A producer and developer of reflective materials and optics components for a variety of industries, Reflexite has been a global player for more than 25 years and has grown into a multinational company with operations on six continents and 500 employees worldwide.
“We embarked on globalization of our company in the mid-eighties, which first started with exports,” says Pedrotty. “We then moved into joint ventures with overseas partners and grew into having overseas subsidiaries. Not having the international component would have severely constrained our growth.”
Pedrotty says that when Reflexite opens an overseas subsidiary, jobs are created not only in the foreign country but in Connecticut as well. “Growing in an overseas country means we’re better able to penetrate that market, which creates more demand for our products, and that demand is typically filled from Connecticut. So, we may hire someone overseas in manufacturing, distribution, or marketing, but that creates jobs here that we might not have otherwise had.”
Impact of Foreign Direct Investment
Like exporting, FDI supports a significant number of jobs in Connecticut. In 2009, for example, U.S. subsidiaries employed 100,700 people, or more than 7% of the state’s total private-industry workforce, giving Connecticut the third-highest share in the U.S. of workers employed by foreign companies (behind only Delaware at 8.5% and New Hampshire at 7.6%). Thirty-five percent of those workers were employed in manufacturing.
Companies from seven countries accounted for most of Connecticut’s “insourced” jobs in ‘09: the Netherlands (19,600), the United Kingdom (18,300), Germany (10,700), Switzerland (8,600), France (7,400), Japan (6,600), and Canada (6,100).
What attracts foreign corporations to Connecticut? To answer that, says CBIA economist Pete Gioia, it helps to understand what kind of firms come here. “Our companies tend to be at the top of the food chain—the highest of the high end—when it comes to manufacturing, financial services, and research and development,” he says.
Such companies depend on innovation and productivity gains, so they place a high value on a well-educated, productive workforce and the quality of a state’s colleges and universities—areas in which Connecticut has traditionally excelled.
Søren Torp Laursen, president of LEGO Systems Inc. in Enfield, wants to make sure it stays that way. “It is vital to continue to prioritize investments to the education sector so that Connecticut can stay ahead and to foster the growth of future professionals,” he says. Headquartered in Denmark, LEGO employs 500 people here. The iconic toymaker began Connecticut operations in Brookfield in 1973, moving to its current location two years later.
The state’s education environment is the main draw for TRUMPF Inc. President and CEO Rolf Biekert. A German developer and producer of industrial lasers and fabricating machinery, Biekert’s firm employs more than 500 people at its North American headquarters in Farmington.
“Connecticut’s biggest advantage is that it values education,” he says. “Many outstanding academic institutions are located in the state, and according to the DECD, the state’s workforce is ranked nationally as having the most educated labor pool. Employee productivity is at an all-time high, with output per worker more than 33% above the national average. I would say this is something we can all be proud of.”
Nevertheless, Biekert is concerned that Connecticut may be losing its edge when it comes to workforce development. Referring to a growing shortage of qualified workers for the precision manufacturing industry, he argues that Connecticut’s education system must place greater emphasis on science and technology and make sure students understand what modern manufacturing is all about. And, he says, companies like his can help.
“Manufacturers must do their part in reaching out to young people. We need to let tomorrow’s workers know that in the 21st century, this is not your grandfather’s factory floor. Today’s manufacturing facilities are bright and clean, and manufacturing offers interesting, well-paying jobs. We all need to do a better job of presenting manufacturing as a viable career option.”
Another key component of Connecticut’s appeal to foreign companies is its location—a huge plus for German pharmaceutical firm Boehringer Ingelheim. The company began operating in Connecticut in 1971 and employs 2,500 at its Ridgefield R&D and manufacturing facility, the largest of its five U.S. subsidiaries.
“For Boehringer Ingelheim, it’s geography—specifically that we have easy access to resources in places like Boston and New York,” says John Adamou, head of U.S. Strategic Transactions and Alliance Management.
“The strategic advantage that this provides is that it puts us firmly in the center of the knowledge and technology corridor. For instance, for a company in the healthcare or biotech industry, everything is within a reasonable driving distance, including our labor pool and major health, technology, and higher education institutions.”
Despite the high cost of doing business here, Connecticut is often seen as a good business location because of its quality of life, the key advantage for Laursen.
While he extols the virtues of the state’s excellent educational institutions and location between Boston and New York—which, he says, “makes it easy to do business with external partners in both cities”—it’s clear that life in the Nutmeg State is a good fit for LEGO.
“Connecticut is a great place to live, particularly for families with children,” he observes. “The small-town communities provide a high quality of life, which helps support our core LEGO company values. We also like to say we are ‘an hour from awesome,’ particularly for those who are looking for an active lifestyle. Whether it is skiing, nice beaches, or amazing restaurants, the central location of our headquarters offers a variety of activities outside the workplace.”
Laursen admits, however, that LEGO’s north-central location sometimes makes attracting young, single professionals difficult. “We need more areas developed like West Hartford, where people can find a contemporary lifestyle that fits the transition from college to work life.”
Ramping Up FDI
Although global business has had a positive impact on Connecticut’s economy, the state’s slow recovery from the recession and continued high unemployment highlight the need to refocus on economic opportunities afforded by FDI.
“Foreign direct investment is a key strategy for jumpstarting significant employment gains in Connecticut,” says Gioia. “One of the reasons job growth here has been so anemic is that we haven’t paid attention to foreign direct investment as much as other states have.”
Of course, Gioia points out, that wasn’t always the case. During the 1970s and early 1980s, the state was aggressive—and extremely successful—in recruiting foreign firms. In fact, that’s when most of the foreign-owned businesses operating in Connecticut today came here. During that time, says former DECD Commissioner Ed Stockton, the state maintained offices in Frankfurt and Tokyo to facilitate recruitment from Europe and Asia.
“We once had a visit from the chairman of the board of a British company, and Governor Grasso asked him why he came to Connecticut,” recalls Stockton. “He said that his company had put out a notice indicating an interest in establishing a U.S. location and that Connecticut’s European representative was the first person on his doorstep.”
Stockton acknowledges that effective foreign outreach is expensive and would require additional personnel in the DECD’s International Affairs Office, but he believes it’s worth the expense. “You cannot sell Connecticut sitting behind a desk in Hartford. You’ve got to get out and establish relationships. And the way you do that is visiting companies overseas and inviting them to visit Connecticut. It costs money, but the return on investment is enormous.”
The good news is that under Commissioner Catherine Smith’s leadership, the DECD appears ready to renew efforts to attract foreign-owned companies to Connecticut. Jaworski, the sole staff person in the DECD’s International Affairs Office (Stockton recalls there being six during his tenure), says that the department is currently planning strategy and developing action steps. “There is an appetite to get out there and do outreach and globally brand Connecticut,” she says.
Efforts to attract FDI will have a much better chance of succeeding, says Rathgeber, if the state takes a strategic approach. “Clearly we need to understand what types of companies have been successful here and have a good potential for being successful. That’s not picking winners and losers, but there are certain types of business profiles that traditionally have been better able to be competitive from a base like Connecticut.”
As an example, Rathgeber cites German manufacturers like TRUMPF that specialize in high-end capital goods. They’re successful here, he says, in part because they’re not shocked by the structural costs (although they’re not happy about them) and there are markets here and throughout North America for their products. In addition, they need employees with the same advanced skill-sets that they would find at home.
“Conversely,” Rathgeber notes, “we are not going to be successful attracting manufacturers from low-income, low-cost foreign environments that produce marginal-value-added products. They’re not going to be successful in a global economy with the cost structures here in Connecticut.”
Speak the Same Language
Anthony Chirico advocates that the state also take a strategic approach to helping businesses—especially small businesses—meet the challenges of exporting. Chirico is president and CEO of the Chirico Group, and Essex-based consulting firm specializing in international trade. He recommends that the state set up a task force to identify what Connecticut products and services are the best candidates for export and the foreign distributors who could help get those products and services to the right markets. He sees the state’s website as a key tool.
“Let’s say a company in Bristol has a product to export,” says Chirico. “They could go to the website, make a couple of clicks, and find a list of distributors that the state has identified in XYZ countries who are open to a relationship.”
He would also like to see the state’s website available in multiple languages, giving overseas companies seeking business opportunities in Connecticut more ready access to information. “If someone wants to visit here from, say, China or the Arab world and get an idea of where to go, it’s difficult, because everything is in English. In California, the state website is in multiple languages [53, to be exact], so the ease of information access for foreigners is good.”
Gioia has similar advice for companies that want to begin or expand their overseas business. “A lot of companies have a web presence to inform their customers and take orders,” he says, “but very few have foreign-language capacity. You buy in your language, you sell in their language.”
New Export Initiatives
The DECD and the DOC’s Middletown office are planning several new initiatives to support Connecticut companies interested in introducing a product to foreign markets or extending their global reach. Their timing is good, given rising concern about the potential impact of the European debt crisis on Connecticut exports. Five of the state’s top ten trade partners are European countries.
“The European market has been slow for us for the past few years,” says Bauer’s Auletta, “so we would expect it to degrade much more. Any recovery in that market we might have been looking forward to would be a longer time coming.”
The Lee Company also has a lot at stake in Europe, and Bill Lee thinks the debt crisis could have a significant negative impact. “We own five sales subsidiaries in Europe,” he says, “so we have money over there, operating funds in local banks held mostly in U.S. dollars. So we’re watching very carefully.”
The DOC’s Evans believes the European debt crisis will affect Connecticut exports, but her agency is not simply taking a wait-and-see approach. “In the spring, we are doing a large event that will have our senior staff from all over Europe, plus some economists, talking to the region’s companies about the issue,” she says. “Connecticut companies sell a lot in Europe, but our job is to make it so companies are global, so that they’re selling to South America and Asia too. And that’s the key. Diversifying your export markets helps you weather the crisis better.”
Evans’s office is also offering a series of webinars this year to help Connecticut small businesses break into exporting. Topics include global defense market opportunities, export compliance basics, and international standards and certifications. (Register here.)
The DECD is collaborating with the DOC on several new initiatives. “We have a lot of programs happening in the state that would make now a better time than ever to explore other markets,” says Jaworski, who explains that Connecticut was awarded a $546,822 State Trade and Export Promotion (STEP) grant from the U.S. Small Business Administration (SBA). “The grant will allow us to offer programs to educate companies on what it takes to export to different markets and help make that process a little more financially feasible for companies.”
Among upcoming events is a China Trade Day on June 11, designed to teach Connecticut firms the ins and outs of exporting to China. The session will bring in China industry experts to help companies in the manufacturing and service industries find Chinese business partners.
The DECD is holding a Global Trade Summit July 25–27 at the Mohegan Sun in conjunction with the U.S. DOC and the U.S. Small Business Research and Innovation Office. Jaworski urges any company “with a high-tech product ready for commercialization and ready to be exported” to attend.
The DECD also has its sights set on Brazil and is working on a new project with the Eastern Trade Council (ETC) to advance exporting to that emerging market. The ETC comprises New York, New Jersey, Pennsylvania, Delaware, and the six New England states. “Through our ETC budget, we’re in the process of opening an office in Brazil as a six-month pilot program,” says Jaworski, who served as ETC chair in 2011. “The office will be staffed by a representative who will be able to answer basic market-research questions from companies in the 10-state region.”
Jaworski explains that the ETC will cover the costs, but that if the work becomes extensive, a fee-for-service arrangement may be added.
“We selected Brazil as a test market for this pilot project because we see it as a place of growth and a place where companies need some extra help; there seem to be a lot of non-tariff regulatory barriers [in Brazil],” she says. “Right now we’re very excited that for no cost, a company will have access to our contact down there.”
Act Locally, Succeed Globally
One of the most important things the state can do to strengthen its position in the global economy is to improve the business climate right here at home.
“Make it a better environment in general for companies to do business,” says Lee.
Rathgeber agrees. “It’s the same as the priorities for reinvestment in the state’s economic base industries. It’s dealing with long-term fiscal issues so that there isn’t uncertainty in the tax environment. It’s about not having overly burdensome structural costs or regulatory policies. It’s about modernizing infrastructure so that companies can reach their markets. For some, that means roads, bridges, rail, and airports, and for others, it’s bandwidth. And it’s very much about the future workforce’s productivity, innovation, and leadership.”
Although TRUMPF is headquartered in a high-cost country, Biekert believes that Connecticut’s high business costs are the biggest challenge for companies already doing business here and a barrier to convincing others to come. “Connecticut’s utility rates are among the highest in the nation, as are its taxes,” he says. “Reducing taxes and adding tax credits, combined with less governmental interference in the day-to-day operation of business, will help stimulate economic growth by affording Connecticut companies the ability to add new employees to their payroll.”
Biekert sees the state’s cost structure as a workforce issue as well. “Connecticut isn’t just expensive for companies. Our employees are also saddled with personal tax burdens that often make it difficult for them to justify remaining here, and so good people often leave for jobs in other areas of the country.”
Adamou also acknowledges the problem, saying that attracting a talented workforce can be difficult “due to the high cost of living and personal taxes.” He believes that following the October legislative session on jobs, the state can continue to make it easier to do business through regulatory reform and by reducing uncertainty by making the tax system more predictable. Those steps, he says, “would allow businesses to plan and grow.”
As Connecticut’s interests become increasingly dependent on global markets, having a modern, efficient transportation, energy, and communications infrastructure is more critical than ever. Laursen would like to see the state improve rail transportation and local access to international air travel and—in the wake of last October’s snowstorm—its energy infrastructure. “The state needs to continue to prioritize storm preparedness and to invest in infrastructural improvements,” he says.
Adamou thinks Connecticut is moving in the right direction. “There appears to be a heightened awareness around infrastructure improvements,” he says. “The administration and legislature appear to be exploring viable options and solutions to not only improve the energy and transportation systems but to prevent repeat occurrences of system failures.”
Connecticut’s Global Future
Not only did global business cushion the impact of the recession in Connecticut, it is also critical to the state’s future economic competitiveness.
“Although locally-based economies are important to people’s everyday lives,” says Rathgeber, “it’s through exporting products and services and importing wealth through foreign direct investment that we create a bigger economic pie overall, which then helps to sustain more vibrant local economies and Connecticut’s traditionally excellent quality of life.
“It’s clear that emerging markets will create tremendous demand for products and services as they develop a middle-class standard of living. Given the diversity of our state’s industries, Connecticut is in a good position to take advantage of those opportunities.” ■
Interested in Exporting?
International trade consultant Anthony Chirico of the Chirico Group in Essex recommends these steps:
- Identify a foreign market
- Assess the demand for your product there
- Determine pricing
- Learn about the country’s trade regulations
- Develop a marketing/distribution strategy
Here are a few key resources to help you put those steps into action:
- DECD International Affairs Office—Phone: 860. 270.8068; Email: email@example.com
- U.S. DOC Middletown Export Assistance Center—Phone: 860.638.6950; Email: office.middletown@NOSPAM.trade.gov
- CBIA’s International Trade Info
- U.S. Small Business Administration’s Exporting & Importing web page
- Export training videos
- Financing from the Import-Export Bank of the United States
Bill DeRosa is editor of CBIA News. He can be reached at firstname.lastname@example.org.