FINAL DISCUSSION DRAFT

Potential Global Initiatives and Regional SME Exporting Strategies

for the Eastern Upper Peninsula Regional Planning & Development Commission (EUPRPDC)

MSU Center for Community and Economic Development

September 24, 2012

Table of Contents

Introduction .................................................................................................................................................. 1

Overview of Partner Regions’ Attributes .................................................................................................... 2

Immediate Project Background ................................................................................................................... 4

Global Initiatives and Regional SME Export Strategy Goals ....................................................................... 4

Relationship of Export Strategy to Comprehensive Economic Development Strategy (CEDS) ................. 4

Potential Global Initiatives and Regional SME Exporting Strategies .......................................................... 5

I. Assess the regional export infrastructure ..................................................................................... 6

II. Create and retain export related jobs ........................................................................................... 7

III. Leverage higher education resources to assist in regional planning and SME exporting ............ 7

IV. Mainstream exports ...................................................................................................................... 7

V. Identify supply chain integration opportunities and upgrade/modernize existing trade transportation infrastructure to support and increase exporting ................................................ 8

VI. Develop global mind-set and promote multi-cultural awareness in region ................................. 8

VII. Develop and promote a regional identity on a global scale ......................................................... 8

VIII. Revitalize or obtain U.S. Foreign Trade Zone (FTZ) designation ................................................... 9

IX. Create a strong foreign direct investment (FDI) strategy to attract innovative firms that fill gaps in key manufacturing clusters .................................................................................. 9

X. Build and maintain strong bi-national collaborative relationships with border and near-border regions .............................................................................................................. 9

Appendix 1: Assessment of Company Export and Product Readiness ....................................................... 10

Appendix 2: Strategic Freight Planning Process for Multimodal Transport Chain Performance ............... 11

Appendix 3: U.S. Foreign Trade Zones ........................................................................................................ 12

Introduction Michigan companies make things and provide services that people want to buy. This is the underlying economic principle driving the Regional Export Strategies for the EMCOG and EUP Regions’ Project1. In order to increase small and medium- sized enterprise (SME)2 exports, the East Michigan Council of Governments (EMCOG) and Eastern Upper Peninsula Regional Planning & Development Commission (EUPRPDC) have partnered with a team of experts at Michigan State University3 to develop region-specific strategies with the goal of enhancing export market awareness and expanding SME export markets. These regional export strategies represent an important new component of broader regional development strategies compiled in the U.S. Department of Commerce, Economic Development Administration Comprehensive Economic Development Strategies (CEDS) prepared by Economic Development Districts across the U.S. Exporting has long been viewed as a complicated undertaking reserved for big, well-established businesses. Historically, the advantages conferred by oligopoly positions and brand loyalties have given large companies dominance over SMEs in international commerce. However, globalization with lower shipping costs and easier market entry through the internet has opened up significant new opportunities for SME exports. Global trade also demonstrates the importance of collaboration between large firms and SMEs. The potential of expanded markets and increased sales has created an inviting environment for SME exporting. In 2009, a total of 269,269 SMEs exported from the U.S., accounting for 97.6% of all U.S. exporters4. In the EMCOG and EUPRPDC regions 99.2% of business establishments are classified as SMEs (16,088 of a total 16,218 companies)5. As the number of SMEs deciding to export increases, the specific challenges and barriers associated with export market entry must be identified and addressed with suggested solutions. Principal exporting barriers include access to information regarding financing, trade regulations, specific market information, identifying potential customers, exchange rates, and foreign cultures and customs6. It is imperative that U.S. and state agencies and public and private organizations collaborate to overcome these barriers and use a knowledge platform for their actions. Better yet, creating a regional strategic framework that supports and encourages SME exporting could be a valuable regional asset.

1 The formal project title is the Innovative Regional Infrastructure to Support Export Market Entry and Expansion for Small and Medium Businesses Project funded by the U.S. Economic Development Administration, Department of Commerce. 2 SMEs have less than 500 employees. 3 In addition to the Center for Community and Economic Development, participating Michigan State University units include the Canadian Studies Center (CSC), Center for Economic Analysis (CEA), Department of Geography Urban & Regional Planning Program, Department of Supply Chain Management, and International Business Center (IBC). 4 International Trade Administration .“Small & Medium-Sized Exporting Companies: Statistical Overview, 2009”. 2009. 5 U.S. Department of Labor .“America’s Labor Market Information System”. 2010. 6 Michigan State University Center for Community and Economic Development. “East Michigan and Eastern Upper Peninsula SME Exporting Survey Analysis and Annotated U.S. Export Assistance Directory”. 2012.

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In March 2010, President Barack Obama announced the National Export Initiative with the goal of doubling U.S. exports by the end of 2014. Significant progress has been made toward achieving this goal, including here in Michigan. Despite the dismal conditions of the Great Recession precipitated by the 2008 financial crisis, U.S. export sales grew by more than 11 percent in 2010, the fastest growth rate since 1997. In 2010 and 2011, exports accounted for 46 percent of the growth in the U.S. economy. This export-intensive shift created over 600,000 new export-supported jobs in 2010 and will continue to generate jobs throughout the U.S7. Export strategies have traditionally had a broad purview, usually with a focus on increasing national export levels. In 2011, the Brookings Institution established a Metropolitan Export Initiative (MEI) to assist political and business leaders in creating and implementing customized Metropolitan Export Plans. These plans apply information gleaned from market assessments to the development of specific strategies that help regions connect their firms to international clients. Brookings recently developed export strategies for four metropolitan areas (Los Angeles, CA; Minneapolis-Saint Paul, MN; Portland, OR; and Syracuse, NY). Using the Brookings Institution’s export strategies as a frame of reference, the MSU Project Team drafted the export strategies here for two diverse partner regions in Michigan. Overview of Eastern Upper Peninsula Attributes The three-county Eastern Upper Peninsula region is predominantly rural (less than 1% urbanized) and sparsely populated with 56,264 persons, according to the 2010 U.S. Census (approximately 12 persons per square mile). Surrounded by water on three sides, the region is home to tourism and service clusters. Logging and mining are also important economic sectors; 80% of the land in the region is forested. A major alternative energy facility is planned in Kinross (Chippewa County). The EUP is connected to the Lower Peninsula by I-75 and the Mackinac Bridge (see page 4 for a map of the EUP region). The International Bridge spanning the St. Mary’s River connects Sault Ste. Marie, Michigan and Sault Ste. Marie, Ontario, Canada. The EUP has eight ports of entry. Sault Ste. Marie, the region’s major city, is home to Lake Superior State University (LSSU), the only four-year university in the EUP region. Sault Ste. Marie hosts one of Michigan’s six U.S. Foreign Trade Zones (FTZ). These federally-designated zones allow businesses to treat goods as being outside the country. Customs duties and excise taxes are deferred until the merchandise is shipped from the zone to a U.S. market. Manufacturers also pay lower duty rates for finished products than would be paid on individual components making up the final products. FTZ designations can be attractive features for international clients and could be used by SMEs that locate in Sault Ste. Marie and Port Huron.

7 Emilia Istrate and Nicholas Marchio. “Export Nation 2012: How U.S. Metropolitan Areas Are Driving National Growth”. 2012.

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The 3-County EUP Region, with its international crossing at Sault Ste. Marie, MI.

Sault Ste. Marie also hosts a SmartZone, which is a partnership between the LSSU Prototype Development Center, Michigan Small Business and Technology Development Center, and City of Sault Ste. Marie Economic Development Corporation. The SmartZone will work mainly with entrepreneurs and businesses to develop and manufacture products, with assistance in the design and development through production phases. The SmartZone functionality is currently expanding to include a “breeder” facility for business plan and manufacturability analysis and an “incubator” facility for commercialization and business launch assistance to supplement the currently-existing Prototype Development Center.

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Immediate Project Background In the preparation to develop regional exporting strategies, the MSU Project Team conducted an online survey to identify the current and potential extent of exporting and the types of assistance needed to increase exporting by SMEs in the EMCOG and EUPRPDC regions. Particularly significant findings were that 90% of companies already exporting want to expand their export markets and the greatest percentage of survey respondents (42%) were in the manufacturing sector. Another hugely important finding was the lack of awareness of federal export assistance resources (the survey was conducted prior to the announcement of the MEDC STEP program with its resources). Major barriers to exporting include the lack of knowledge about export regulations, foreign markets, and logistics/transportation (78% of companies surveyed). Financial barriers such as insufficient working capital and labor resources, prohibitive administration costs, and excessive financial risk were cited by 74% of respondent companies. Respondents also cited regulatory and infrastructure barriers to exporting. This baseline survey data was used in the development of the regional exporting strategies described in this paper. Global Initiatives and Regional SME Export Strategy Goals The development of regional exporting strategies includes two complementary goals: 1) identify, develop, and expand global niche markets for SMEs and 2) empower regional and local policy planners and community stakeholders to develop and refine local and regional export strategies. Relationship of Export Strategies to the Comprehensive Economic Development Strategy The overall purpose of the 10 objectives described below is to help the 3-county Eastern Upper Peninsula (EUP) region become more competitive trading regions in the global economy by building a robust export capacity. With the development of their respective regional export strategies, the EUPRPDC can provide a framework for increasing global trade and a way to benchmark export-related assets with the regional export infrastructure assessment tool. These regional export strategies should also be embedded in the region’s Comprehensive Economic Development Strategy (CEDS) required by the U.S. Department of Commerce, Economic Development Administration of economic development districts (EDDs) across the U.S.

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Potential Global Initiatives and Regional SME Exporting Strategies The following 10 strategic objectives are intended to create a coherent regional framework to support and increase SME exporting at a global scale in the partners’ regions. Specific actions are also suggested to achieve these objectives. The scope of the suggested actions is not exhaustive. Future discussions with local EDCs/EDOs and other stakeholders are expected to elicit new insights and identification of specific actions to achieve regional export market development objectives. Additional strategic objectives may also be identified and others removed. The major thrust here is to stimulate robust discussion of viable local and regional SME export strategies to revitalize local and regional economies and create new jobs. The 10 elements of regional export strategies that EDDs can adopt to support and enhance SME exporting include:

1) Assess the regional export infrastructure. 2) Create and retain export-related jobs. 3) Leverage university/community college resources to assist in regional planning and SME

exporting. 4) Mainstream exports. 5) Upgrade/modernize existing trade transportation infrastructure to support and enhance

exporting. 6) Develop a global mindset and promote multi-cultural awareness in the region. 7) Develop and promote a regional identity on a global scale. 8) Revitalize or obtain U.S. Foreign Trade Zone designation. 9) Create a strong foreign direct investment (FDI) strategy to attract innovative firms that fill gaps

in key manufacturing clusters. 10) Build and maintain strong bi-national collaborative relationships with Michigan-Canada border

and near-border regions.

The following section will elaborate on each objective.

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I. Assess the regional export infrastructure Identification and targeting the use of regional export infrastructure assets represents a fundamental first step to increase SME exports. With this assessment in hand, community stakeholders and local planners will have a clearer picture of the assets and gaps in the region’s export capacity. Ideally, regions will fully leverage their existing assets to encourage SME export market entry/expansion and take steps to cure identified weaknesses.

* Cross-cultural Knowledge Capacity: The purpose of this category is to assess the export readiness of enterprises and the community in terms of the need for understanding socio-cultural differences and customs. A greater understanding of socio-cultural differences between the home community and current and potential trading partners can enhance the development and quality of trade relationships and promote understanding between trading partners.

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II. Create and retain export related jobs8 A. Use existing informal networks of exporting expertise to maintain the location advantages that

brought companies to or nurtured companies in the EUPRPDC region. B. Define relationships with local, state, and federal SME export service providers that work

effectively and economically for EDD and stakeholders. C. Create or support creation of a regional export website in cooperation with local EDCs and

export assistance service providers. 1. Provides a roadmap of export service providers.

a. Information on/links to funding opportunities, agencies, services, and programs. b. Use the company export readiness assessment (see Appendix 1). EDD region can act as a

facilitator in using the assessment. EDDs often do not directly work with individual businesses. Perhaps a region can arrange for a workshop; although MEDC/EDC’s may provide another partner for conducting an assessment.

2. Link to programs such as the Michigan Economic Development Corporation (MEDC) State Trade and Export Program (STEP) to reimburse SMEs for export-related activities. a. Overseas trade mission participation b. Overseas trade show participation c. Foreign market sales trips d. Subscription to U.S. Department of Commerce services e. Foreign language translation services for export

D. Facilitate or support trainings and provide export materials to local economic development professionals to support SME export assistance/referrals. 1. Participate in export-related workshops or training programs. 2. Participate in international trade shows or scoping missions.

III. Leverage higher education resources to assist in regional planning and SME exporting A. Collaborate with Lake Superior State University, MEDC STEP, and Sault Ste. Marie, Ontario

Economic Development Corporation in creating an export assistance center. B. The reciprocal tuition agreement between Lake Superior State University, Algoma University in

Ontario, and the Sault College of Applied Arts and Technologies in Ontario provides a model that could be applied to higher education institutions in other regions.

IV. Mainstream exports A. Promote and highlight exporting in the Comprehensive Economic Development Strategy (CEDS). B. Make exports an important indicator of regional economic performance and growth9 through

the analysis of data such as: 1. Total foreign sales 2. Total foreign goods/services sold 3. Output per export job 4. Share of local businesses that export 5. International visits 6. Number of foreign students 7. Employees in export companies 8. Exports as a percentage of regional GDP 9. Amount of Foreign Direct Investment

8 Brookings Institution. “Greater Portland Export Plan”. 2012. 9 The Brookings Institution. “Centerstate New York Export Plan”. 2012.

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V. Identify supply chain integration opportunities and upgrade/modernize existing trade transportation infrastructure to support and increase exporting A. Identify specific freight transportation/logistics needs and improvements.

1. Obtain stakeholder input to identify essential improvements10. 2. Identify multimodal transportation components that support supply chain development

(regional ports, airports, rail and other resources). 3. Identify potential multi-modal opportunities that could be applied to enhance commodity

and product movement effectiveness. 4. Collaborate with MDOT and access MDOT resources, programs, and assessments to

inform/support regional/local economic development. 5. Work with international partners to assess infrastructural opportunities and challenges in

border regions.11 6. Collaborate with Sault Ste. Marie, Ontario EDC and Sault Ste. Marie, Michigan EDC to

identify multi-modal opportunities. Leverage the availability of Chippewa International Airport (see below) in order to fully integrate a bi-national multi-modal transportation hub.

7. Chippewa County International Airport potential for multimodal transport hub. a. Consultant recommended $20 million investment for fully-functioning cargo airport. b. Adjacent to I-75 and access to Canadian railways.

VI. Develop global mind-set and promote multi-cultural awareness in region A. Increase awareness of cultural differences to promote understanding between trading partners.

1. Understand differences in introductions, use of names, body language, relationships, presentations, negotiating, and entertaining.

B. Increase multilingual competence in communication by promoting the study of foreign languages.

C. Implement immigrant attraction and retention initiatives. 1. Create immigrant-stakeholder advisory network to provide input in H1-B visa issues and

support immigrant communities in economic development initiatives. D. Develop Sister City/Sister Region relationships with the express purpose of advancing

international trade.

VII. Develop and promote a regional identity on a global scale A. Promote regional products and clusters.

1. Encourage sales of products currently available for export. 2. Start or increase international advertising.

B. Collaborate with Lake Superior State University School of International Business on marketing of regional products. 1. Develop a website highlighting products manufactured in the region 2. Product research conducted by LSSU students 3. Use MSU IBC GlobalEDGE resources.

C. Develop a branding technique for products originating from each region. 1. Model after USDA or Pure Michigan branding techniques.

a. Develop brand identity b. Develop marketing plan and materials

10 National Association of Development Organizations (NADO) and the Research Foundation Center for Transportation Advancement and Regional Development. “Freight Transportation and Economic Development: Planning for the Panama Canal Expansion”. Feb 2012. 11 NADO/Research Foundation Center for Transportation Advancement and Regional Development. Feb 2012.

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c. Promote bi-national and regional vision 2. Market the bi-national “Twin Saults” Region

D. Market the brand internationally and strategically to key global target niche markets. 1. Utilize trade missions, conferences, and business advocates. 2. Consistent use of the region-specific brand across all media (traditional, web, social) will

enhance public awareness of the region.

VIII. Revitalize or obtain U.S. Foreign Trade Zone (FTZ) designation A. Inform companies moving goods at Sault Ste. Marie that they might benefit from efficient U.S.

Customs Port of Entry service and duties exemptions (See Appendix 3 for details and benefits of FTZs).

B. Increase awareness of underused FTZ in Sault Ste. Marie. 1. Include FTZ access and benefits in CEDS emphasizing attraction of potential exporters. 2. FTZ access could be factor in SMEs choosing a new location.

IX. Create a strong foreign direct investment (FDI) strategy to attract innovative firms that fill gaps in key manufacturing clusters12

FDI is investing in a businesses located in the region by foreign citizens or businesses; this often involves equity ownership (owning shares of stock) of a business in the region. Manufacturing sector attracts more FDI than any other sector. Michigan’s share of FDI supported employment in the manufacturing sector is 10th in the U.S. in terms of number of jobs from foreign-owned companies.

A. Identify and enhance clusters and develop a talent pool through higher education collaboration. B. Identify FDI support offered by federal programs and regional economic development entities

(SelectUSA). 1. SelectUSA: searchable guide of federal programs and services available to businesses

operating in the United States—including grants, loans, loan guarantees, and tax incentives

X. Build and maintain strong bi-national collaborative relationships with border and near-border regions A. Create multi-nation collaboration boards in border regions. B. Accelerate collaboration in Sault Ste. Marie region

1. Host annual bi-national regional discussions to identify trade and economic development opportunities, challenges, and solutions.

2. Create a shared web page for the bi-national Sault Ste. Marie region

12 The Brookings Institution. “Michigan’s Urban and Metropolitan Strategy”. 2012.

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Appendix 1: Assessment of Company Export and Product Readiness

Based on “Total Global Strategy”, Dr. Tomas Hult Best Practices in Determining Export Readiness, Finn Holm-Olsen

I. Determining Export Readiness

1. Willingness to export does not equate with readiness to do so. A. Organizational Readiness

1. Management commitment 2. Domestic competitiveness 3. Administrative procedures & current supply chain 4. Availability of internal resources

a. Does the company have sufficient production capacity? b. Does the company have the resources to expand if need be?

5. Basic understanding of export complexities and processes a. Does the company have any experience with exporting? b. Does the company have a separate or line-item budget for exporting? c. Does the company have a plan or vision for exporting? d. Does the company have the existing contact person or team dedicated to exporting? e. Does the company have relevant international market certifications to meet

regulations? f. Are personnel trained in the logistics of exporting?

6. Health of Company a. Number of employees b. Number of years in business c. Sales

7. Financial Capacity a. Does the company have the finances available to develop new markets? b. Can the company cover the initial costs of advertising and market visits?

8. Efficient Transport a. Can the producer transport the product to the market in a timely manner?

B. Product Readiness 1. Usability & serviceability

a. Does the product have a comparative advantage in the foreign market? i. Does the company produce a unique product or service? ii. Does the company possess the ability to modify the product to meet market

requirements or demand? b. Does the product have a competitive advantage in the foreign market?

2. Packaging & labeling 3. Positioning based on needs 4. Understanding market potential and competition.

C. Company Overall Readiness to Export (CORE) available at globalEDGE.msu.edu

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Appendix 2: Strategic Freight Planning Process for Multimodal Transport Chain Performance (From Multimodal Freight Transportation in the Great Lakes-St Lawrence Basin, February, 2012)

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Appendix 3: U.S. Foreign Trade Zones

Foreign Trade Zones are secure areas under supervision of the U.S. Customs and Border Protection (CBP) that are considered outside the customs territory of the U.S. for the purposes of duty payment. FTZs are located in or near customs ports of entry. Zones are sponsored by qualified public or public-type corporations, which may operate the facilities or contract for their operations with public or private firms. Authority for establishing FTZs is granted by the U.S. Foreign Trade Zone Board. The U.S. Foreign Trade Zone Board is housed in the U.S. Import Administration, U.S. Department of Commerce. The program was created by Congress in 1934.

Firms that operate within a Foreign Trade Zone are eligible for the following benefits:

• Duty Exemption o When goods are imported and subsequently re-exported without leaving the FTZ.

• Duty Deferral o Duty on imported goods are not due until leaving the FTZ

• Relief from Inverted Tariffs o Inverted tariffs occur in situations when a finished good has a lower duty rate than its

components. o Goods assembled in FTZs are subject to duties on the condition in which they leave the FTZ;

duties are not paid on inputs. • Logistical Benefits

o Streamlined customs procedures • Related benefits such as state or local tax exemption

The two types of Foreign Trade Zones include:

• General Purpose Zones o Local within or near industrial parks, ports, or inland ports. o Open to multiple users

• Subzones o “Special purpose zones” usually related to manufacturing o Approved for use by one company for a specific activity

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