SME international experience shaped by United States and China

05 Oct 2018

Tags

  • Divya Skene
  • AIBS 2018

In recent years, a debate around international trade and investment has focused on which of our largest economic partners is the most important to Australia.

Two countries put forward regularly in this debate are the United States and China, although Japan has also understandably been included.

A strength of AIBS has been its ability to reflect firm level decision-making of SME businesses - for our sample of internationally active business respondents - and on this basis it offers an interesting perspective on a debate that has traditionally focused on aggregate trade and investment measures.

Over the past five years AIBS has shown that for our respondents, a group of relatively experienced SMEs, both the United States and China are generally equally significant markets. A selection of links to previous AIBS analysis shows that these two markets dominate AIBS respondents’ market experiences when it comes to ‘first markets’ for respondents, ‘ top revenue markets’ , investment markets or future ‘target markets’ .

First markets – the rationale for starting with China is different

This year’s survey sheds additional light on drivers for selecting China as a first market that distinguish it from other popular ‘starter’ destinations. After ‘demand for product’, the top 3 reasons for choosing the United States, New Zealand, United Kingdom and Singapore as a first market were 1) English-speaking 2) transparent business practices and 3) common language whereas key reasons for entering China marked it out from other leading first markets.

Outside ‘demand for product’ the top reasons nominated for China were 1) efficient transportation and infrastructure 2) FTA with Australia and 3) family ties.

China and the US are important SME revenue sources

Respondent firms’ top three markets for international revenue were the United States, China and New Zealand, respectively.

At a firm level, China and the US are leading revenue sources for a combined one-third of survey respondents, with the US the largest source of revenue for 17 percent of respondents and China the leading source for 14 percent. There is slightly more variation when we look at the top two revenue sources - with the United States a two top revenue source for 26 percent of respondents followed by China (19 percent) and New Zealand (14 percent).

On average, the share of respondent’s international revenue that top markets accounted showed a mean of 42% and a median of 41%, indicating that while top revenue markets are significant to firms in our sample, there is evidence of market diversification on average across internationally-active SMEs.

However the United States and China account for larger shares of firms’ international revenue than do other leading markets. A significant majority of firms for whom these two countries are top revenue sources (60 percent of firms with the US as a leading revenue source and 70 percent of firms with China as a leading revenue source) have indicated that over half their total international revenue is sourced from that respective top market.

This graphic provides further detail on top markets and international revenue profiles.

IABs - international revenue and financial outlook

Note: International revenue and financial outlook relates to all international business activities of the firm, not just business conducted in the top revenue market.

Target markets – US and China expansion plans underpin business optimism about international growth

Finally, 442 or just over 70 per cent of companies surveyed aim to expand over the next two years to new target markets.

Forty-five per cent of respondents planned to do business in at least four new markets over the next two years: 24 per cent planned to do business in 4-5 new countries, 12 per cent planned to business in 6-10 new countries, and nine per cent planned to do business in more than 10 new countries over the next two years.

The top five target markets for Australia’s international businesses have stayed the same on each occasion that this question has been asked to survey participants (United States, China, United Kingdom, Indonesia and India), although the rankings have moved around over the period. This year the United States is the most popular market for anticipated generation of new international revenue with 20 per cent of survey respondents planning to expand there. Nineteen per cent have nominated China for expansion and eighteen per cent have nominated the United Kingdom.

The graphic below highlights new target markets for respondents.

Target Markets for Expansion