CHAPTER 2

Why the United States? Bright and Dark Sides of Doing Business in America

The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.

—Alexis de Tocqueville (1805–1859), a French diplomat, political scientist, and historian

The United States in the Global Marketplace: Comparative Business Potential and Attractiveness

Strategic decisions in international business are driven by multiple, often conflicting forces, pulling (attracting) or pushing (forcing) small and medium size enterprises (SMEs) in different directions. Companies looking for expansion to overseas markets rationalize their choices by taking into consideration how these markets compare against each other in terms of their strategic benefits, business costs, and potential risks. By comparing and contrasting countries on their global marketing potential and possible threats, SMEs narrow their focus on a target country with the view of the best combination of strategic benefits, costs, and risks associated with the expansion and operation in this new market. How attractive is the U.S. marketplace relative to other countries from a foreign-based entrepreneur or SME’s standpoint?

We begin by examining the United States’ economic role in the world. As of 2016, the United States, the world’s fourth largest geographic area, had a population of 326.6 million people, comprising 4.4 percent is too low. 5+ percent given 6+ billions world total population (third largest out of the 237 countries worldwide). It registered $18.6 trillion in GDP, purchasing power parity, comprising 15.6 percent of the world total and placing the nation third (after China and the EU) among 229 nations. United States GDP per capita, a comparative measure of economic achievement, reached $57,400 in the purchasing power parity, 20th out of 230 nations. Exports of goods and services were at $1.471 trillion or 12 percent of the world total, giving the nation a global rank of 2 (after China). Life expectancy at birth for the total population, a key measure of human/social development, was 79.8 years, 42nd of 224 worldwide (World Factbook, 2017). The United States’ rank in the Yale University’s environmental performance index (2017) was 26 out of 180. Its human development index was 10 out of 188 countries and territories (Human Development Report, 2017). Adding to this picture is the country’s 14th out of 155 rank over 2014 to 2016 in the World Happiness Report (2017).

The World Factbook (2017) characterizes the United States as the most technologically powerful economy in the world, with U.S. firms being at or near the forefront in technological advances, especially in computers, pharmaceuticals, and medical, aerospace, and military equipment; however, their advantage has narrowed since the end of World War II. Private individuals and business firms in the United States make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. U.S. business firms tend to enjoy greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay off workers, and to develop new products. At the same time, U.S.-based businesses face higher barriers to enter their rivals’ home markets than foreign firms face entering U.S. markets.

Long-term problems for the United States include stagnation of wages for lower-income families, inadequate investment in deteriorating infrastructure, rapidly rising medical and pension costs of an aging population, energy shortages, and sizable current account and budget deficits. With that, depending on whether one sees the proverbial “glass half full, or half empty,” these problems may be viewed as just problems. In contrast, offering and commercializing solutions to these problems may generate lucrative business opportunities.¹

The onrush of technology has been a driving factor in the gradual development of a two-tier labor market in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits. But the globalization of trade, and especially the rise of low-wage producers such as China, has put additional downward pressure on wages and upward pressure on the return to capital. Since 1975, practically all the gains in household income have gone to the top 20 percent of households. Since 1996, dividends and capital gains have grown faster than wages or any other category of after-tax income.

Imported oil accounts for nearly 55 percent of U.S. consumption and, with this staggering share, oil has a major impact on the overall health of the American economy. Crude oil prices doubled between 2001 and 2006, the year home prices peaked; higher gasoline prices ate into consumers’ budgets and many individuals fell behind in their mortgage payments. Oil prices climbed another 50 percent between 2006 and 2008, and bank foreclosures more than doubled in the same period. Besides dampening the housing market, soaring oil prices caused a drop in the value of the dollar and a deterioration in the U.S. merchandise trade deficit, which peaked at $840 billion in 2008. Because the U.S. economy is energy-intensive, falling oil prices since 2013 have alleviated many of the problems the earlier increases had created (World Factbook, 2017).

Gross national saving rates in the United States tend to be low compared with other countries, suggesting a tendency to spend rather than save—good news to the marketers. In 2016, U.S. savings stood at 18.6 percent of GDP, placing the country 105th out of 181 countries worldwide and below the 28.6 percent world average. Table 2.1 contrasts U.S. current macroeconomic structure with that of China, Germany, and Japan.² Table 2.1 reveals the Unites States’ comparatively larger share of private household consumption, lower share of investment in fixed capital, and smaller role of exports/imports in the national economy. Additionally, while services generate a dominant share of economic output, industry plays a lesser role in the national GDP.

Table 2.1 The United States, China, Germany, and Japan: selected comparative macroeconomic indicators, % of GDP, 2016 (est.)

According to Euromonitor International (aka Passport), a leading international marketing consultancy, American agriculture accounts for a small portion of GDP and employs just 1.6 percent of the workforce; farming is predominately large scale and generally efficient and competitive. The United States is among the world’s major exporters of foodstuffs and processed foods. Increased productivity is the main driver of agricultural growth. The manufacturing sector contributes 12.4 percent of GDP and employs 10.4 percent of the workforce. Leading industries include aerospace, telecommunications, chemicals, electronics and computers. Services account for 79.2 percent of GDP. The most important activities in the service sector include real estate, transport, finance, healthcare, and business services. In the financial sector, lending standards are being tightened. The real value of tourist receipts rose by 0.5 percent in 2016 and growth of 3 percent was projected for 2017. The slowdown in tourist receipts is partially due to the rise in the value of the U.S. dollar against other currencies. Retail sales were expected to rise in 2017 but consumers’ shift away from brick-and-mortar shopping is hurting many big retailers (U.S. Country Profile, 2017).

The United States’ attractiveness as a marketplace relative to other countries can be assessed by looking at two dozen global indexes (rankings) on the United States’ country page at globalEDGE (2017). For example, some global indexes reveal that U.S. corruption perception index is 18/176; DHL global connectedness index, 27/140; ease of doing business rank, 8/190; global manufacturing competitiveness index, 2/40; and international logistics performance index, 10/160. In rationalizing a country selection decision, a company contemplating international expansion to the United States can compile and prioritize a list of global indexes and take the country’s standing on those dimensions into consideration in its expansion decision.

Further steps in analyzing the United States’ national business landscape may involve Trading Economics (2017): This statistical portal contains more than 200 macro indicators characterizing the United States’ socioeconomic profile and developments nationwide as well as selected economic sectors and areas. Even a simple cross-country analysis on the basis of 11 parameters in Trading Economics provides a visual picture of the country’s comparative attractiveness from a macroeconomic perspective. Examining some of the macroeconomic indicators of critical importance and relevance to a specific industry under consideration in a more detailed comparative format (the United States versus alternative country comparator) may also be a useful part of the background research.

In addition, indicators of global competitiveness can serve as a critical measure of the nation’s attractiveness in international business: National rankings and profiles in the global competitiveness surveys are essentially determined by the factors similar to those making this nation an attractive marketplace. Situationally, these factors may range from strengths of its political–economic institutions to quality of the infrastructure, to innovations. In this context, the latest annual Global Competitiveness Report (GCR 2017) positions the United States as the world’s second most competitive nation out of 137 countries included in the survey. Figure 2.1 represents the United States’ global competiveness and by extension—business attractiveness—in comparison with the European and North American regions over the past few years. As the chart shows, in the latest 2016 survey, the United States demonstrates superior competiveness against both the European and the North American regions on most of the parameters except for the macroeconomic environment category where the U.S. position is weaker.

Figure 2.1 The United States vs. Europe and North America: performance in global competitiveness

Source: Global Competitiveness Report 2017–2018. 2017. http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf

Another authoritative source of information and analytical tool in cross-country global competitiveness is the annual World Competitiveness Yearbook (WCY). The latest 2017 survey places the United States’ global competitiveness at 4, following Hong Kong SAR, Switzerland, and Singapore (World Competitiveness Yearbook, 2017).

Going international places the company in an external political–economic environment that may be very different from that of its home country. In a broad strategic sense, the business environment can be defined as a set of interdependent factors or variables that together comprise the political, economic, social, technological, legal, and environmental (PESTLE) framework.³ PESTLE parameters and their importance vary across countries and have an impact on the country’s attractiveness in the company’s comparative strategic perspective in relation to the company’s situation context. Different mixtures of these variables across countries translate into different business outcomes, including effectiveness (maximizing results), efficiency (minimizing costs), and risks (that can be optimized/mitigated in a strategic decision). Although, unlike big corporations, SMEs have limited power in influencing the business environment in a host country due to their small size, they still should be aware of PESTLE’s state, trends, and dynamics in order to stay viable and competitive.

• PESTLE Analysis Political may examine the impacts of government type and dynamics; democracy, freedom of press, rule of law, law enforcement, and levels of bureaucracy and corruption; trends in deregulation and privatization; social and employment legislation; tax policy and trade and tariff controls; and trends and likely developments in the political environment.
• PESTLE Analysis Economic may examine the impacts of stage of business cycle, current state and projected economic growth, inflation and interest rates, unemployment and labor supply and costs, levels of disposable income and income distribution, globalization, likely technological or other change on the economy, and likely changes in the economic environment.
• PESTLE Analysis Social may examine the impacts of demographics (population growth rate and age composition); population health, education and social mobility, and attitudes toward these; population employment patterns; job market freedom and attitudes toward work; press attitudes, public opinion, social attitudes and taboos; lifestyle choices and attitudes toward these; sociocultural trends and changes; and health consciousness.
• PESTLE Analysis Technology may examine the impacts of emerging technologies; the Internet, reduction in communication costs, and increased remote working; R&D activity; technology transfer; degree of automation; and rate of technological change.
• PESTLE Analysis Legal may examine the impacts of antitrust law, consumer law, discrimination law, employment law, and health and safety laws.
• PESTLE Analysis Environmental may examine the impacts of weather, natural disasters, climate, climate change, environmental taxes, and demand for green products (University of Central Florida Libraries 2017).

More specifically, the selection and prioritization of the United States’ PESTLE parameters in an SME’s strategy depends on its background, current business position, future aspirations, strengths and weaknesses, industry it operates in, market drivers and constraints specific to this industry and markets, and other conditions.

In addition to awareness of the general characteristics of the marketplace, an SME doing business in the United States needs to take into account the state, trends, dynamics, competitive environment, and outlook specific to the industry in which it operates.

In general, industry analysis involves assessment of:

• industry size (output, supply, demand), industry leaders, their output shares, and strategic positions in the market;
• industry structure (concentrated versus fragmented);
• developmental drivers and constraints and patterns and trends in performance and output over a period of time (upward, downward, or stagnant; stable or erratic; cyclical or random);
• growth rates and patterns over a period of time.
• future trends, development, and opportunities (products, technologies, processes, markets);
• economic dynamics (profitability, return on investment);
• cost structure (main cost factors, dynamics over a period of time);
• marketing mix (the 4Ps—products, pricing, place/distribution, promotion—and their trends and dynamics);
• critical success factors (innovation, cost efficiency, global outreach);
• social, environmental, sustainable performance (external environmental factors: regulations, policies and politics, social responsibility norms; internal environmental factors: prevalent corporate internal attitudes toward employees, customer, and shareholders);
• competitive analysis (industry’s competitive environment along the SWOT, Porter’s 5-force competitive framework, or 4Ps marketing mix framework (global, geo-regional, national, or regional levels).

There are numerous public and commercial databases containing industry and market reports specific to the United States. Some examples of the databases in public access are globalEDGE/countries/United States (2017), Los Angeles Economic Development Corporation (2017), and Export Development Canada (2017). Some examples of the commercial databases are IBIS World (2017), Euromonitor International (2017), and Business Source Complete (2017). Access to commercial databases tends to be expensive, but many of them can be accessed by qualified users complimentary at universities of higher education and major national public libraries in the United States.

A country as large and diverse as the United States is characterized by remarkable political–economic, demographic, and cultural variations across states, regions, and municipalities. The importance of this regional analytical dimension is compelled by cross-state and cross-regional dissimilarities that result in different comparative business pros/cons, costs, and risks. There is a vast array of rankings, analytical frameworks, databases, and sources of regional information and assistance in the United States ranging from government agencies to private sources to nonprofit organizations and universities. In the interest of space and time, we will just mention three public sources of analytical information that can be useful for a comparative assessment of business environment and attractiveness at the state and municipal level.

U.S. News & World Report (2017) publishes its annual “Best States Rankings” report that measures outcomes and attractiveness for citizens on the basis of more than 60 metrics. The report ranks the 50 states of the United States on the basis of the following criteria important for business in various ways: overall, state health care, education, crime & corrections, infrastructure, opportunity, economy, and government. Table 2.2. provides an example illustrating California’s rankings. In addition to numerical rankings across seven criteria, the Best States Rankings database offers access to extensive statistics comparing California and the 49 other states with “comparator states” on multiple parameters.

Table 2.2 California’s ranking among the 50 states of the United States (1 is the best, 50 is the worst)

The globalEDGE (2017) database provides another analytical alternative and access to state information in the business context. Under the rubric “Global Insights,” section “By State,” there is an information designated for international business and trade on the 50 states in the United States. In addition to demographic, economic, and historical information on each state, the database hosts data on corporations with headquarters in the state and links to state-specific resources.⁴ The section “Resources” opens access to additional sources of analytical and factual information from state government agencies and nonprofit organizations. Figure 2.2 provides a screenshot of the State of California’s home page in the globalEDGE database.

Figure 2.2 State of California in globalEDGE

Source: globalEDGE. 2017. https://globaledge.msu.edu/

SizeUp, a business analytical portal hosted on the U.S. Small Business Administration (SBA) site, is yet another useful tool. As a major federal agency charged with facilitation and support of small business and entrepreneurship nationwide, SBA provides a range of services that includes free information support and business counseling. SBA’s database contains “Business Guide” that offers extensive resources on planning, launching, managing, and growing small business. These resources include the SizeUp analytical tool.⁵ SizeUp allows small business owners and entrepreneurs to compare how their business stacks up with the competition in order to succeed. SizeUp helps managing and growing business by benchmarking it against competitors; mapping customers, competitors, and suppliers; and locating the best places to advertise (U.S. Small Business Administration, 2017). Figure 2.3. exemplifies the SizeUp analytical framework. After completing a free registration, the user is asked to enter the following nine parameters in the section “My Business”: annual revenue, year the business was started, average annual worker salary, number of full-time employees, cost effectiveness, revenue generated per community resident, local turnover (percentage of workers newly hired), health care costs per employee, and workers’ compensation premium per employee. A local map generated in the section “Competition” shows competitors, customers, and suppliers specific to the local geographic area and the industry. The section “Advertising” generates another map, which marks the best places to advertise that are specific to the local geographic area and the industry on the basis of the indicator of total revenue. In the latter case, the SizeUp tool provides several links, each leading to a market profile for a respective location specific to the inquiry.

Figure 2.3 SizeUp analytical tool

Source: U.S. Small Business Administration. Office of Advocacy. 2017. https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf.

Figures 2.4 and 2.5 represent an example of a market profile for West Carson, a town in Greater Los Angeles, on the SizeUp analytical radar. By critically examining this profile and putting it in a comparative market perspective against other alternative regions or municipalities, an SME or individual entrepreneur can better rationalize a decision in regional strategic targeting within the United States.

Figure 2.4 Community profile for West Carson (a)

Source: SizeUp. 2017. https://www.sizeup.com/

Figure 2.5 Community profile for West Carson (Los Angeles County) CA (b)

Source: SizeUp. 2017. https://www.sizeup.com/

Costs and Risks of Starting and Doing Business in the United States

Earlier, we emphasized the strategic triad in business decision making that includes benefits, business costs, and potential risks. By comparing and contrasting countries on their global market appeal, SMEs can select their target country with the best combination of strategic benefits, costs, and risks associated with the expansion and operation in a new market.

With the United States’ reputation as the world’s prime and potentially attractive market for many industrial products and consumer goods and services, for expanding to and doing business in the United States the second item of the triad—costs—should be taken into consideration. These costs vary across economic sectors and industries. One of the best public sources of comparative information on the ease and cost of doing business at the national level is the annual “Doing Business” survey (World Bank 2017). The latest “Doing Business” report⁶ ranks the United States eighth in the world. Figures 2.6 through 2.8 and Table 2.3 depict America’s comparative profile in this latest survey.

Figure 2.6 How the United States and comparator economies rank on the ease of doing business

Source: Doing Business 2017. Economy Profile 2017. United States. World Bank Group. http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/usa.pdf and United States (2017).

Figure 2.7 Rankings on “Doing Business” topics—United States: ease/cost of doing business

Source: Doing Business 2017. Economy Profile 2017. United States. World Bank Group. http://www.doingbusiness.org/~/media/wbg/doingbusiness/documents/profiles/country/usa.pdf and United States (2017).

Figure 2.8 Number of small businesses in the United States

Source: U.S. Small Business Administration: Office of Advocacy. 2016. Small Business Profile. https://www.sba.gov/sites/default/files/advocacy/United_States.pdf

Table 2.3 Selected indicators of the ease/cost of doing business: the United States vs. comparator countries

The cost of doing business in the nation varies across regions/municipalities and industries.⁷ Therefore, it is imperative to engage regional—particularly state-specific—sources for a more detailed cost analysis. For example, in the case of California it may be beneficial to begin by examining the California Government (2017) site and, depending on the specific situation, interest, or issue, continue analysis by tapping selected California government agencies (the list of agencies on the California Government site includes 157 entries).

The California Governor’s Office of Business and Economic Development (GO-Biz, 2017) offers a range of specific services tailored toward business owners. These services include attraction, retention, and expansion services; site selection; permit assistance; regulatory guidance; small business assistance; international trade development; assistance with state government; and much more. Companies and entrepreneurs interested in starting and growing a business can find information and government assistance on starting a business, relocating or expanding a business, international trade and investment, financial assistance, closing a business, and emergency preparedness and recovery (GO-Biz, 2017).

Within the state of California, the largest in the nation, many counties, cities, and rural municipalities have their own government agencies, information resources, and business development and government assistance programs. Examples of these regional units include the County of Los Angeles (2017), the Los Angeles Economic Development Corporation (2017), and the city of Carson (2017). Numerous think tanks (Milken Family Foundation, 2017), nonprofit organizations (California Center for Jobs and the Economy, 2017; World Trade Center Los Angeles, 2017), academic institutions such as the Institute for Strategy & Competitiveness at Harvard Business School (Porter, 2012), business consultancies (McKinsey, 2017), private sector sources, and periodical publications can be also engaged, depending on the scope, depth, time, and other situational parameters and constraints involved in a specific business research. As in the California example, this approach with necessary modifications can be applied to conducting business research in other states across the United States.

Small Business and Entrepreneurship in the United States: Environment and Dynamics

Small business and entrepreneurship⁸ is a foundation of the U.S. economy and historically has played a vital political–economic and societal role. The SBA defines small business in general as an independent business having fewer than 500 employees.⁹ In the following paragraphs we summarize major facts about the U.S. small business sector that may be of interest to individual entrepreneurs and SMEs aspiring to start and grow business in the country.

As of 2014, there were 29.6 million registered small businesses in the United States. Eighty percent, or 23.8 million, of these businesses had no employees (they are termed nonemployers); 20 percent, or 5.8 million, had paid employees. The number of small business employers has increased after a decline during the recession and the number of nonemployers has gradually increased, from 15.4 million in 1997 to 23.8 million in 2014 (Figure 2.9).

Figure 2.9 Distance to frontier scores on “Doing Business” topics— The United States’ distance to frontier scores on the cost/ease of doing business

Source: Small Business Profile, 2016.

Distribution of small firms by industry in the United States is presented in Figure 2.10. As this chart reveals, professional, scientific, and technical services; construction; and health care and social assistance industries tend to have the highest representation of small firms across all four categories: firms with 1–499 employees, 1–19 employees, nonemployer firms, and the total number of small firms. The real estate and rental and leasing industry also demonstrates a high presence of small firms in the nonemployer category and total count.

Figure 2.10 U.S. small firms by industry

Source: U.S. Small Business Administration. Office of Advocacy. 2017. https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf.

Small businesses constitute 99.9 percent of all registered firms in the United States, 99.7 percent of firms with paid employees, 97.6 percent of exporting firms (287,835 small exporters), 32.9 percent of known export value ($440 billion out of $1.3 trillion), 47.8 percent of private sector employees (58 million out of 121 million employees), and 41.1 percent of private sector payroll. Out of all new business establishments started in 2015, 79.9 percent survived until 2016, the highest share since 2006. From 2005 to 2015, an average of 78.5 percent of new establishments survived 1 year. About half of all establishments survived 5 years or longer. In the past decade, this ranged from a low of 45.4 percent for establishments started in 2006, and a high of 51 percent for those started in 2011. About one-third of establishments survive 10 years or longer. Some data sources suggest that about two out of three establishment exits are the result of firm closures (Small Business Data Resources, 2017; U.S. Small Business Administration: Office of Advocacy, 2016).

The small business start-up rates only slightly exceed the closure rates: In 2014, there were about 404,000 start-ups (firms less than one year old) and 392,000 firm closures. As illustrated in Figure 2.11, market forces and dynamics create a very competitive environment for small business and entrepreneurship in the United States, where, to use the Darwinian phrase, only the fittest can survive and succeed. Put simply, everybody here has the freedom to pursue an entrepreneurial dream, but the flip side of this is a similar freedom to fail.

Figure 2.11 Employer firm start-ups and closures in the United States

Source: U.S. Small Business Administration: Office of Advocacy. 2016. Small Business Profile. https://www.sba.gov/sites/default/files/advocacy/United_States.pdf

Indicatively, about one-seventh, or 14.4 percent, of business owners in the United States are immigrants. The industries with the greatest share of immigrant owners tend to be accommodation and food services (29.1 percent of owners were foreign born) and transportation and warehousing (27.5 percent). About one in five firms (19.3 percent) is family owned. Of these family-owned firms, about half are equally owned, that is, 50 percent owned by one or more men and 50 percent owned by one or more women. Hence, about one in 10 firms is both family owned and equally owned. The industries with the highest share of family-owned firms are management of companies and enterprises (46.4 percent of firms in this industry are family owned), real estate and rental and leasing (37.3 percent), and accommodation and food services (33.2 percent). The industries with the highest share of equally owned firms are real estate and rental and leasing (18.6 percent of firms in this industry are equally owned); mining, quarrying, and oil and gas extraction (16.9 percent); and accommodation and food services (16.9 percent). A home-based business is operated primarily out of one’s home, but business activities may take place at other locations as well. The share of businesses that are home based has remained relatively constant over the past decade, at about 50 percent of all firms. More specifically, 60.1 percent of all firms without paid employees are home based, as are 23.3 percent of small employer firms and 0.3 percent of large employer firms. The industries in which businesses are most likely to be home based are information (70 percent), construction (68.2 percent), and professional, scientific, and technical services (65.3 percent). Meanwhile, 2.3 percent of nonemployer firms, 5.3 percent of small employers, and 9.6 percent of large employers are franchises.

The economic size of start-ups has fluctuated over the past decade, but in 2014 an average employment reached a four-year high of 6.1 employees. Average employment at firms of all ages has increased slightly during this period, from 22.4 employees per firm in 2005 to 23.5 employees per firm in 2014. The most common source of capital to finance business expansion is personal and family savings (21.9 percent of small firms), followed by business profits and assets (5.7 percent), business loans from financial institutions (4.5 percent), and business credit cards from banks (3.3 percent). In fiscal year (FY) 2016, 24.3 percent of contracting dollars went to small businesses, down from 25.8 percent in FY 2015 and 25.1 percent in FY 2014. Of agencies with at least $1 billion in eligible contract dollars, the ones that awarded the highest share of contracting dollars to small businesses were the U.S. Departments of the Interior (59.8 percent), Agriculture (56.3 percent), and Transportation (52.0 percent) (Small Business Dashboard 2017; Small Business Data Resources 2017).

In 2014, there were 248,122 small employer firms in high-tech industries, representing 98.5 percent of all employer firms in these industries. The majority of these small firms provide services in either computer systems design or architecture and engineering (Figure 2.12). Among small firms, the industries with the highest growth from 2012 to 2014 were software publishers and computer systems design services (Figure 2.13).

Figure 2.12 Small firms in high-tech industries in the United States, 2014

Source: U.S. Small Business Administration: Office of Advocacy. 2017. https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf.

Figure 2.13 Percent change in the number of high-tech firms by industry in the United States, 2012–2014

Source: Small Business Dashboard, 2017.

The latest Global Entrepreneurship Monitor¹⁰ 2016/17 (2017), an annual publication by the Global Entrepreneurship Research Association, incorporates data on 65 world economies. According to this report, the United States holds 24^th rank among 65 countries in Total Entrepreneurial Activity (TEA)¹¹ (Figure 2.14).

Figure 2.14 Total early-stage entrepreneurial activity, the United States in the group of innovation-driven economies

Source: Global Entrepreneurship Monitor. Global Report 2016-2017. 2017. file:///C:/Users/azhuplev/Downloads/gem-2016-2017-global-report-web-version-updated-210417-1492789938%20(2).pdf

According to GEC (2017), about 13 percent of the 326.6 million strong U.S population participates in TEA. The United States’ high TEA level in the group of innovation-driven economies is surpassed by only three countries: Australia, Estonia, and Canada. The United States’ latest country report (Global Enterprise Monitor 2015 Team, 2016) highlights some important trends in the state and dynamics of the entrepreneurial landscape in the country.

Opportunity perceptions among U.S. entrepreneurs dropped from a high of 51 percent in 2014 to 47 percent in 2015. This is the first drop since these perceptions began to rise in 2010. While the United States reports the highest level of capability perceptions (56 percent) at the innovation-driven development level, one-third of these economies report higher opportunity perceptions than the United States. This suggests that Americans remain highly confident in their abilities to start a business, but are seeing fewer opportunities to do so.¹²

The United States reports the highest level of opportunity-motivated entrepreneurs who are improvement driven among the 24 innovation-driven economies. Sixty-nine percent of entrepreneurs in the United States stated that they were motivated to start by the pursuit of opportunity and desired to increase their income or the level of independence in their work. Nationally, 12 percent of Americans are leading and/or trying to start a social enterprise. On average, these enterprises engage a median number of seven paid workers and five volunteers. Although these entrepreneurs tap a variety of funding sources, government funding is the most popular source, revealing the importance of the government in helping entrepreneurs create social value. Entrepreneurship peaks among 35 to 44 year olds at 17 percent, and this age group is also most likely to engage in entrepreneurial employee activity. The high activity rates in this age group are accompanied by the highest levels of opportunity and capability perceptions as well as personally knowing an entrepreneur. Individuals in this age group are likely to have accumulated experience, credentials, relevant networks, and other resources they can leverage for their businesses. Workforce participation rates among the population aged 55 and older suggest that entrepreneurship, as well as established business ownership, is a key means of employment for those still working in their older years.

Age patterns in TEA rates by gender show low rates (7 to 9 percent) among younger women (18 to 34 years) and older women (45 to 64 years), with a spike upward to 15 percent in the middle (35 to 44 years) age group. Men maintain high rates throughout their working ages, declining substantially only after age 55. Additionally, while gender gaps exist in TEA rates, they are greater among established business owners and employee entrepreneurs, indicating the importance of looking across age groups, business phases, and contexts where this activity occurs.

Innovation levels among women dropped in 2015 to 32 percent of entrepreneurs, compared with 41 percent in 2014. This represents a reversal of a 4-year trend where women reported higher innovation rates than men. The decline in TEA rate was accompanied by reductions in impact indicators. Among a smaller number of entrepreneurs that were starting and running new businesses in 2015, fewer operated in the business services sector, and fewer expected to create six or more jobs in the next 5 years.

Job creation and profitability declined among established business owners: 22 percent added at least one job in the prior 2013 year, down from 27 percent in 2014. In 2015, 61 percent expected to be profitable, down from 91 percent in 2014. In 2015, 10 percent of entrepreneurs were starting businesses based on new technology, continuing a fluctuating but generally upward trend since hitting a low level of 4 percent in 2009. Entrepreneurs needed a median level of $17,500 to start their businesses in 2015, up from $15,000 three years prior, when finance questions were added to the 2012 survey. Financial requirements increased with greater job creation ambitions and for entrepreneurs in the extractive, transforming, and business services sectors. Entrepreneurs financed a dominant 57 percent of their funding needs themselves. Beyond personal sources, banks were the most popular funding source for entrepreneurs, with 36 percent of entrepreneurs stating that they used bank financing to start their business. Government sources also play an important role in business starts, providing funding to 22 percent of entrepreneurs. Crowdfunding, a still emerging source, contributed to the financial needs of 12 percent of entrepreneurs.

An in-depth examination of five states (California, Florida, New York, Ohio, and Texas) showed that New York and Ohio reported lower TEA rates than the U.S. national average. Contributors to these low rates include low opportunity motives among entrepreneurs, low activity among the middle age groups, and low and declining male participation in entrepreneurship.

While the United States tends to exhibit low international sales in general, the five states examined in depth all showed higher internationalization levels than the national average, with particularly high levels in Florida. This follows an increase in four of the states, while California declined from previously high levels (Global Enterprise Monitor 2015 Team, 2016).

Borrowing from e-commerce in its categorization of business formats, the most common of them are business-to-business (B2B), business-to-consumer (B2C), business-to-government (B2G), business-to-manager (B2M), consumer-to-business (C2B), and consumer-to-consumer (C2C). Proliferation of these formats, their role, and prevalence in the United States mean different opportunities for companies of different types and sizes operating in different industries. From a foreign-based company’s business perspective in the United States, deciding on whether it should target the end consumers (B2C), business customers (B2B), or customers in government agencies (B2G) depends on the company’s background, current mission, size, business model, product/market positioning, current strategic posture, drivers and dynamics, business experience, and the scope of its presence in the United States, the host country.

The international trade and foreign direct investment landscape in the United States as measured in value (in dollar terms) is dominated by large corporations with a global outreach. In general, compared with SMEs, large corporations possess vast internal resources, market access, business expertise, access to outside financing, and management expertise and enjoy cost advantages from economies of scale. Large corporations in general are better positioned to compete by leveraging their power in strategic global presence and positioning and absorb the uncertainties and shocks of the start-up costs and risks in international expansion.

In general, foreign-based SMEs are not well positioned to partake in B2G and B2B commerce. Apart from competitive cost disadvantages against large corporations in the economies of scale, SMEs are often not capable of fulfilling sizeable orders and meeting logistical requirements needed for participation in government procurement programs and the big scope industrial supply chains. Government-imposed regulatory constraints, performance and reporting requirements, and possibility for negative customer perception effects of foreignness that overseas-based SMEs suffer from without having well-recognized brands may create strategic disadvantages for these companies.

Large-size foreign-based corporations can more effectively overcome some obstacles of doing business in the United States by leveraging their extensive financial resources, business expertise, brand power, and ability to sustain long-term presence in the host country. In contrast, small companies lacking these competitive advantages are often constrained in their business format largely to B2C only or, at best, can pursue B2B and B2G on a limited scale as part of their strategic alliances/joint ventures (JVs) with U.S.-based SMEs (Zhuplev, 2016b).

Business Start-up Logistics in the United States

As discussed in Chapter 1, due to dissimilarities in the critical impact factors and dynamics between the marketing-related and manufacturing-related overseas expansion alternatives, the approaches and logistics in these two forms of international business differ. A marketing-driven expansion tends to be simpler, less costly, and less risky than a manufacturing-driven expansion. In essence, a typical export transaction involves just logistics of goods and services characterized by shorter time frames, smaller financial commitments, and limited risks. In contrast, manufacturing-driven expansion may involve a sizeable long-term financial commitment for foreign direct investment; higher costs, liabilities, and risks; and complex logistics and management issues associated with expansion and operations in a host country.

Companies contemplating their international expansion in the U.S. market should weigh the following priorities:

• Is the contemplated expansion a good strategic fit with the company’s background, organizational culture, and existing strategic mission?
• Does it enhance the company’s strategic strengths and mitigate its weaknesses?
• Are there sufficient internal and external resources available for expansion?
• What are the short-term and long-term business benefits, costs, and risks associated with expansion? How do they balance against each other in the overall context? Do the benefits outweigh the costs and risks in the case of action versus no action?
• Which countries, markets, or global regions should be targeted in the first order of priority?
• What is the best entry mode/strategy for international expansion?
• Should the company expand early or late?
• Should the expansion be pursued on a small or large scale?

Some additional considerations may address further entrepreneurial start-up processes and dynamics, operational logistics, and growth in their entrepreneurial and managerial aspects, as well as strategies for steering the business through stages of growth, maturity, and eventually deciding on a possible market exit (Zhuplev, 2016a).

SMEs can find specific advice on doing business in the United States by reviewing government resources and manuals. For example, the USA.gov database contains a massive amount of useful information on doing business in the country.¹³ Foreign government agencies responsible for trade promotion in English-speaking (e.g., Australia, Canada, or the United Kingdom) and other countries offer useful practical guides on various aspects of doing business in the United States (The Canadian Trade Commissioner Service, 2016; UK Trade & Investment, 2017a, b). Although these guides are designated for home-based small and medium size companies in those respective countries looking to do business in the United States, any entrepreneur or SME can access and take advantage of these resources.

For example, earlier, we discussed the Four Stages in Export Development (2017) framework (Figure 1.4) that outlines and integrates key stages (Build Export Capacity, Develop Export Markets, Make Sales/Get Paid, and Deliver the Goods) in the holistic export development process and recommends the necessary steps for each stage. In this context, a guide developed for Canadian businesses by the Canadian Trade Commissioner Service provides concise and yet reasonably comprehensive practical insights on priorities associated with export-related expansion to the United States. A synopsis of this guide, conveying the scope and topics covered in this export manual specifically tailored toward the United States (for details see The Canadian Trade Commissioner Service, 2016), follows:

1. Before You Head South: The Canada–U.S. trade and economic relationship, Understanding Canada–U.S. relations, Understanding the North American Free Trade Agreement (NAFTA), Understanding the U.S. market, Market access issues, Global value chains and the U.S. market, Information sources for the U.S. market.
2. Preparing to Export to the United States: Is there a market for your company? Researching specific target markets, Assessing your company’s readiness, Creating your export plan, Selecting your market, Developing your export marketing plan, Government services for exporters, Government training programs for U.S. bound exporters, Sourcing business opportunities.
3. Entering Your Chosen U.S. Market: Direct selling; Payments, returns, and warranties; Selling through intermediaries; Finding and checking out an intermediary; Working with your intermediary; Partnerships, investments, and acquisitions; U.S. government procurement; Market entry for service exports; Special issues for service exports (Cross-border movement of workers; Service exports and U.S. immigration classifications); Innovation: Science and technology exports.
4. The Legal Side of Exporting to the United States: NAFTA; Dealing with U.S. taxes; U.S. sanctions laws and regulations; Bribery and corruption legislation; Export contracts for goods; Export contracts for services; Obtaining contract insurance and bonding; Patents, trademarks, and copyrights; Protecting intellectual property from theft; Litigation in the United States; Product liability litigation.
5. The Basics of Export Financing: Types of financial assistance, Obtaining financial assistance, U.S. buyer financing, Payment methods, Dealing with nonpayment, Reducing financial risk through buyer credit checks, Reducing financial risk through export insurance, Currency fluctuations.
6. Business Travel to the United States: Documentation required for entering the United States, Entering the United States under NAFTA classifications (Business visitors, Professionals, Intra-company transferees, Traders and investors), Entering the United States under non-NAFTA classifications, Travelling with samples and business gifts, Managing entry problems (Immigration issues for construction services, after-sales services, trade shows and sales staff, artists and craftspeople).
7. Labelling, Marking, and Standardization: Country of origin, Harmonized System (HS) codes, Technical regulations, standards and conformity assessment, Labelling and marking requirements of U.S. agencies (Federal Trade Commission [FTC], Food and Drug Administration [FDA], U.S. Department of Agriculture [USDA], Bureau of Alcohol, Tobacco, and Firearms and Explosives [ATF], Customs and Border Protection [CBP], Environmental Protection Agency [EPA], Consumer Products Safety Commission [CPSC], Department of Labor [DOL]).
8. Packing and Shipping Your Goods: Basic packing and shipping requirements; Shipping labels; Shipping methods; Reporting your exports; Controlled, prohibited, and regulated exports; Using freight forwarders; Insurance.
9. The Canada–U.S. Border: The Canada Border Services Agency, Canada–U.S. trusted trader programs, U.S. legislation affecting exporters.
10. Dealing with U.S. Customs: Customs brokers and what they do, Formal/commercial entry of goods, Required documentation for formal entry, Informal entry of goods, Clearing U.S. Customs, Duty deferral and duty relief, Penalties and seizures (The Canadian Trade Commissioner Service, 2016).

Keeping up with these multiple priorities and logistics in export-related expansion to the United States and the dynamic changes taking place in America’s business environment and competitive marketplace, SMEs need to maintain a grasp of the big picture and megatrends. Euromonitor International publishes informative reports on multiple consumer and industrial markets, including its flagship “Consumer Lifestyles” report series. The latest Consumer Lifestyles in the United States (2017) report provides a wealth of useful market information and identifies the top five consumer trends in the United States.

Consumer Confidence Strong in an Improved Economy

A strong job market and rising incomes have been major factors behind American consumers’ growing confidence. According to data published by the U.S. Labor Department, unemployment rates fell to 4.9 percent in October 2016 while U.S. Census Bureau data revealed that after years of stagnation, median household income increased by 5.2 percent in 2015, the highest growth since 2007. As a result, consumer spending, which accounts for nearly 70 percent of economic activity in the United States, has recorded considerable growth. In particular, there has been a significant increase in the demand for big-ticket items such as cars.

According to recent data released by the Conference Board, optimism about the economy hit a nine-year high in November 2016, with the group‘s consumer confidence index rising from 100.8 in October 2016 to 107.1 in November 2016. This increase appears to be consistent with an improving labor market and a solid growth in the consumer spending index, which has been at its highest since July 2007.

According to the recent data from the University of Michigan Survey of Consumers, consumer confidence is expected to continue its growth. “The latest reading indicates sentiment remains strong after President-elect Donald Trump’s November victory, with Americans and businesses betting that tax cuts and looser regulation will help bring more opportunities for jobs and higher wages. At the same time, the survey showed a significant minority of respondents expected a negative impact from the new administration’s policies, indicating a deep partisan divide over the outlook.”

Record-Breaking Consumer Demand for Solar Energy

According to GTM Research and the Solar Energy Industries Association (SEIA), 7,286 MW of solar power was installed in 2015, an increase of 1,000 MW from 2014. SEIA believes that 2015 was a monumental year for the U.S. solar industry, which is poised to continue reaching unprecedented heights as our nation makes a shift toward a carbon-free source of energy that also serves as an economic and job-creating engine.

This increase was largely because of U.S. consumers warming up to solar energy. Tax credits, lower costs, and improved efficiencies have played a major role behind the growth in consumer demand, with more than one million homes having installed solar panels by 2016—in comparison to just 30,000 in 2006.

Consumers Making Healthier Choices

Greater public awareness of the health risks associated with obesity, combined with health campaigns and high health care costs, has prompted many consumers to question their lifestyle choices and seek healthier options. As a result, more U.S. consumers are incorporating exercise and recreational sports into their lives. Euromonitor’s 2016 Global Consumer Trends survey results show that participation rates (at least once a week) in intensive physical activities such as yoga and dancing have increased from 30.6 percent in 2013 to 37.6 percent in 2016, while participation rates (at least once a week) in team sports have increased from 11 to 14.2 percent during the same time period.

At the same time, more consumers are moving away from dietary fads to healthier eating habits. One of the likely reasons behind this trend is that many people have become disillusioned with the various diets and programs. With each subsequent failure, people become more skeptical about the products. Some give up on losing weight altogether. As a result, Americans are increasingly counting ingredients, not calories, and avoiding heavily processed foods in favor of fresh and natural offerings. Consumers are looking to eat better and have become less concerned with counting carbohydrates, calories, or grams of fat. They are increasingly reading ingredients labels and are particularly interested in products that have a short list of ingredients they know and can pronounce.

Streaming Becomes Mainstream

According to an eMarketer report, 2016 was forecast to be the first time over half of the population watched digital TV. The report forecast that 50.8 percent of the population would watch TV shows online at least once a month, up from 47.8 percent in 2015. At the same time, a survey conducted by technology consulting firm Activate predicts that by 2020, 62 percent of consumers would subscribe to at least two streaming video applications. eMarketer’s latest forecast of digital TV and movie viewership points to a growing embrace of over-the-top video, partly at the expense of traditional TV. This trend is driven by an expanding range of viewing devices, by favorable shifts in consumer behavior, and by a flood of new content from streaming services. Netflix, Amazon, and Hulu now compete elbow-to-elbow with TV networks and film studios for original programming. At the same time, consumers, especially Millennials, are increasingly using their smartphones to stream and watch movies and TV shows. According to Pew Research, the proportion of smartphone owners who used their phones to watch paid subscription services like Netflix and Hulu Plus has more than doubled in the past few years, increasing from 15 percent in 2012 to 33 percent in 2015. Younger Millennials, who came of age in the YouTube era, see digital video as a pervasive activity that cuts across genres and screens. They’re among the heaviest users of smartphones and tablets, and they routinely use those devices—along with laptops and connected TVs—to watch everything from how-to clips, gaming streams, humor videos, and news blurbs to sports highlights, educational content, music clips, and scripted dramas.

The Sustainable Consumer

Sustainability is playing an increasingly important role when it comes to consumer purchasing behavior with 62 percent of online consumers stating that they tried to have a positive impact on the environment through their everyday actions, according to our survey results.

Additionally, according to the 2015 Tork Green Business Survey, 78 percent of consumers said that they purchased sustainable products and services, up from 75 percent in 2014. Furthermore, the survey found that 46 percent of Americans were willing to spend more money on products that were guaranteed to have followed ethical and responsible manufacturing practices, while 26 percent said that they knew if green claims were true or not on the basis of their own research. As consumers grow increasingly inclined to use their purchasing power toward environmentally sound products and services, the availability of and competition between these products will also increase. Brands and companies not only need to consider offering these products, if they do not already do so, but also need to seriously consider how they position the products and services in the marketplace, as that will impact their success.

At the same time, the 2015 Cone Communications Millennial CSR Study found that 91 percent of Millennials would switch brands if it were associated with a cause, in comparison with the U.S. average of 85 percent. Moreover, 66 percent used social media to engage around CSR¹⁴ (versus 53 percent U.S. average). The report also states that Millennials are more enthusiastic in their support of corporate social and environmental efforts and are, above and beyond, more likely to say that they would participate in CSR initiatives if given the opportunity. Millennials are also prepared to make personal sacrifices to make an impact on issues they care about, whether that’s paying more for a product, sharing products rather than buying, or taking a pay cut to work for a responsible company (Consumer lifestyles in the U.S., 2017).

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¹Numerous business periodical publications discuss entrepreneurial business venture ideas, start-ups, and success stories. For example, Entrepreneur profiles the latest trends and insights on business opportunities (https://www.entrepreneur.com/bizopportunities); Forbes publishes the annual list of 25 young U.S. companies with a strong chance at reaching a valuation of $1 billion or more (https://www.forbes.com/sites/susanadams/2017/09/26/the-next-billion-dollar-startups-2017/#3d8ba6ba4447); Fortune publishes useful articles under the Entrepreneurship rubric (http://fortune.com/tag/entrepreneurship/). Bloomberg Businessweek, the Wall Street Journal, and many other U.S.-based publications also publish stories offering advice, analysis, and inspiration on entrepreneurship and start-ups in the United States.

²Germany and Japan are included for contrast as comparators as world’s largest powers from the category of innovation driven economies. China illustrates patterns of a major global power categorized in the Global Competitiveness Report (2017) at Stage 2: Efficiency-driven (30 economies).

³A PESTLE analysis looks at a framework of macro factors used in the business environmental scanning aspect of strategic management. Sometimes instead of PESTLE, a narrower PEST format is used in the same analytical context by excluding from separate consideration legal and environmental components.

⁴The site also provides states’ rankings on 20 socio-economic parameters making it an effective analytical tool in cross-state comparisons.

⁵It can also be accessed directly at SizeUp (2017).

⁶The Doing Business 2017 is the 14th in a series of World Bank’s annual reports investigating regulations that enhance business activity and those that constrain it. The report provides quantitative indicators in 190 economies covering 11 areas of the business environment: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting minority investors, Paying taxes, Trading across borders, Enforcing contracts, Resolving insolvency, and Labor market regulation (World Bank, 2017). In addition to global rankings, Doing Business contains specific information on the ease/cost of doing business within each of these categories for each country.

⁷Industry cost structure is determined by factors of production. Depending on these factors, industries may be labor intensive, capital intensive, require significant amount of land, involve high level of education, skills, be economically driven by burden of regulatory compliance, litigations, or environmental compliance. For example, the biennial “Competitive Alternatives” survey by KPMG, a global business consultancy, provides information on business costs and compares these costs across 19 industries in more than 100 cities in 10 countries worldwide, including the United States (Competitive Alternatives, 2016).

⁸The term entrepreneur is often used in a similar context or even interchangeably with the term small business. While most entrepreneurial ventures are originally born as a small business, not all small businesses are entrepreneurial. Many small businesses in the United States are sole proprietorships consisting just of the owner, or they have a small number of employees; many of these small businesses offer an existing product, process, or service, and they do not aim at growth. These small businesses are sometimes categorized as lifestyle ventures. In contrast, genuine entrepreneurial ventures tend to offer an innovative product, process, or service, pursue a competitive business model, and the entrepreneur typically aims to scale up the company by adding employees, seeking international sales, and so on, a process that is financed by banks, venture capital, angel investments, or even government sources. Successful entrepreneurs have the ability to lead a business in a positive direction by proper planning, to adapt to changing environments, and to understand their own strengths and weakness (Driessen and Zwart, 2010). Being driven by competitive market forces and their own motivations often funded by outside sources, entrepreneurs tend to be more prone to risk taking and a pursuit of aggressive growth of their business ventures compared with small business owners. For additional details please refer to Shobhit (2017).

⁹Industry-specific definitions of small business used in U.S. government programs and contracting vary (for details see www.sba.gov/content/small-business-size-standards).

¹⁰The Global Entrepreneurship Monitor (GEM) is a global study conducted by a consortium of universities. It aims to analyze the level, patterns, trends, and dynamics of entrepreneurship occurring across multiple countries. It examines entrepreneurship through both surveys and interviews to field experts, conducted by the teams of each country. The main indicator used is called TEA (total early-stage entrepreneurial activity), which assesses the percentage of working age population that is about to start an entrepreneurial activity and that has started one from a maximum of 3 years and half. The report also looks into societal values and self-perceptions about entrepreneurship, phases/types of entrepreneurial activity, motivations for early-stage entrepreneurial activity, job creation projections, innovation, gender and age distribution of early-stage entrepreneurial activity, industry sector participation, the entrepreneurship ecosystem, etc.

¹¹Global Entrepreneurship Monitor measures TEA rate as the percentage of the adult population (18 to 64 years) that is in the process of starting or who has just started a business. This indicator includes individuals who are participating in either of the two initial processes of the entrepreneurial process: nascent entrepreneurs—those who have committed resources to starting a business, but have not paid salaries or wages for more than three months—and new business owners—those who have moved beyond the nascent stage and have paid salaries and wages for more than three months but less than 42 months.

¹²To some extent these dynamics might have been determined by the 2008 economic crises, the postcrisis economic revival, and the robust and improving state of the current U.S. economy, including its large corporate sector. With this, some people shift from their pursuit of entrepreneurial opportunities toward more predictable corporate jobs outside small business.

¹³For instance, the section “State Business Resources” contains extensive information on small business in California. It includes detailed guidance and description of state government programs on opening a business: Start or Relocate a Business in California, Checklist for Starting a Business in California, California Secretary of State Business Programs; access to financing: Financing Startup Business in California, California Business Financing Portal, CA Business Portal State Incentives, Tax Credits and Funding; and contracting opportunities: Doing Business with the State of California, California eProcurement Portal & State Bid Opportunities, Federal Bid Opportunities in California (USA.gov, 2017).

¹⁴CSR stands for corporate social responsibility.