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Why do so few private companies in London and the South East trade internationally?

Last year’s Brexit vote has put into stark focus the extent to which we rely on trade flows within the EU marketplace, compared with the expansive opportunities which many say lie in international markets beyond the EU. Encouraging small British firms to sell their goods and services overseas is a key plank of government policy – yet there is much to do.

The context

There are 5.5 million privately owned small and medium enterprises across the UK, of which one third (1.9 million) are located in London and South East England. The region is particularly strong across fast growing sectors such as Life Sciences or Technology, as well as more consolidated sectors such as Manufacturing, Construction or Professional and Financial Services, many of which show an interest in engaging in the international marketplace.

Only 20% of the 5.5 million small and medium enterprises in the UK are exporters and only 15% are part of the export supply chain (Department for Business Innovation & Skills, 2016).

While 45% of current UK exports went to the EU in the period from 2009-2016, the exports to non-EU countries have been greater than those to EU countries, especially to the USA. Of the ten largest national export markets for UK businesses, only two lie outside the EU.

The UK ranks amongst the highest across Europe for export levels, forming an international trade landscape worth £700 billion with the EU, the USA and China as leading trade partners. Yet UK small and medium sized businesses still underperform when compared to their EU counterparts. A report by the Enterprise Research Council in late 2015 – even before the Brexit vote - showed that Britain’s productivity is falling behind other economies because it is slower to turn ambitious smaller firms into exporters of innovative new products and services. Why? Is this due to structural issues like lack of access to capital, or perceptual barriers, like lack of confidence?

Although the Brexit decision and negotiation process continue to strain confidence, the reality is that the UK needs to look to other economies as potential trading partners, notably Asia and the US.

The potential

It is estimated that between 9-12% of businesses within the UK SME population could become exporters, with half of the existing exporters being likely to become persistent exporters (Enterprise Research Centre, 2016).

With more support, the Government estimates that up to 110,000 entrepreneurial small to medium-sized enterprises could become regular exporters, adding an extra £1.15 billion in Gross Value Added (GVA) to the economy in the first year alone in the form of new and higher value jobs.

Unable or unwilling?

There are several potential impediments to consider when starting to trade internationally, such as establishing new distribution networks and connections on the ground, commissioning market research or aligning products and services to the international market (Enterprise Research Centre, 2015). The most fundamental challenge is not having a specialist or unique product.

Product innovation and quality: smaller businesses find it easier to export if they have a product that is unique or higher quality than equivalent goods or services that can be found in the target country’s domestic market. A competitive advantage also makes it easier to deal with any currency volatility. Although some sectors, such as technology and life sciences have a good R&D focus, overall, smaller businesses in the UK do not. Only 30% of manufacturing companies in this segment trade internationally for example (DBEIS, 2016).

Exchange rate challenge: of the general challenges that entrepreneurial businesses experience, the most significant is the exchange rate. Many won’t export unless they see an opportunity to make more money overseas than they can in the UK, and that tends to happen when the exchange rate is favourable. Exporters initially fared quite well because of the post-Brexit fall in Sterling, but rates are slowly creeping back up. When the currency is stronger – or in flux - it is harder to remain competitive in foreign markets.

Credit risk: the fear of not getting paid, or of what happens if goods are damaged or seized in transit or involved in other legal entanglements, as well as the expense of researching and travelling to new markets, are all reasons why company owners might hesitate to export. Some have also criticised the complexity and level of paperwork involved in complying with the 2011 Bribery Act.

Having the trust and confidence to grow: there are issues around building relationships with companies on the ground abroad. Having connections you trust and who can be relied upon to fulfil their side of any transaction is critical to successful exporting, and this can be more difficult to find in far-flung markets.

In some companies there seems to be an innate reluctance to grow. Although small and mid-tier firms constitute 99% of British private business fabric, only 26% of small businesses and 36% of medium businesses trading internationally. There seems to be a lack of ambition by UK SMEs when benchmarked against other G8 competitors.

However, the data also shows that, as companies grow, they become more likely to consider international trade as a further marketplace. A survey by the UK Trade & Investment Authority found that 85% of its clients believed that exporting their products and services had enabled them to grow at a rate which otherwise would have been unattainable (Enterprise Research Centre, 2015).

The way ahead

So for many companies, international growth is clearly founded – or limited by – entrepreneurial confidence; whether it’s confidence in their products, confidence to step beyond their traditional marketplaces, or confidence that government and trade bodies are there to guide and support them.

Initiatives such as the Government’s GREAT initiative (https://www.great.gov.uk/uk/) designed to support new or occasional exporters – or to help those already experienced in exporting need to do much to bolster confidence levels. As does seeking the support of advisers with extensive international trading experience – and partner firms in areas in which you are considering trading. The potential is there.

If you would like to speak to one of our international team about expanding or trading internationally, please speak with one of our partners – or contact Clive Stevens, Head of Kreston Reeves’ International programme.

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