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O'CONNELL ASSOCIATES

1330 Antelope Avenue, Suite 24

DAVIS, CALIFORNIA 95616-5597

TELEPHONE: 916.758.7180

E-MAIL: oconnell@inreach.com

September 1997

TO: Colleagues

FR: Jock O'Connell

RE: An Invitation to an E-Mail Forum on Reforming California's International Trade Programs

The purpose of this memo is to initiate an electronic conversation about the State of California's international trade programs.

As arguably the most persistent and contentious critic of the state's efforts to promote exports and attract foreign investment, I hardly presume that everyone concurs with all or even most of the reservations I have expressed about the stats's trade programs and how they have been run.

To be sure, these programs have their fans and supporters. What seems much more impressive, however, is that a disturbing number of those individuals who formerly administered these same programs have voiced some exceedingly negative views of the state's international trade bureaucracy.

The time is ripe for a thorough re-examination of the state's role in advancing the interests of California businesses in international commerce. Next year Californians will be asked to select a new Governor, and one issue that may emerge in some guise during the gubernatorial campaign is the role of state government in promoting (or at least safeguarding) the state's economic vitality in an age of galloping globalization. At the same time, several newer members of the Legislation have expressed an interest in taking a fresh look at the activities of the Trade & Commerce Agency.

Such a re-appraisal of policies and programs is what I would like to accomplish by means of an informal electronic forum. To set things in motion, I have drafted a brief paper which I hope will stimulate comment and discussion. (Those of you who have been regular readers of the Sacramento Bee, the San Francisco Chronicle, or the San Jose Mercury- News over the past few years may already be familiar with many of the specific reservations I have voiced with the state's efforts in international trade. The following pages will necessarily revisit some old points but will also set forth some new observations and recommendations.)

I invite each of you to respond with your comments and suggestions, preferably via e-mail. To facilitate a full airing of diverse views, I propose to forward your responses to everyone else participating in this forum. Those who wish to remain anonymous but who still want their thoughts circulated will only be identified by a code name of their choice. (Please let me know who you are, though.) Those who do not wish to have their views made public should so indicate when sending their responses to me. If the level of participation merits it, we could move this discussion to its own website.

One last word — this is not an invitation to reach for slings and arrows. What I think we should aim for is a series of constructive suggestions arrived at through an open but essentially civil discussion of options.

Thanks for your cooperation. I look forward to an interesting and enlightening exchange of ideas.

Jock


The Golden State and the Global Economy

by

Jock O'Connell

The issues to be addressed in this memo are not necessarily new. Indeed, some of us older hands have been wrestling with them since at least 1982, when legislation was enacted to close the long-moribund California Office of International Trade in favor of a new California State World Trade Commission. Over the ensuing decade and a half, new trade programs have been established, several commercial outposts have been established abroad, and, more recently, the entire organization of California's trade programs has undergone a substantial metamorphosis with the creation of the Trade & Commerce Agency.

The overall aims of these international programs are laudable. By boosting the state's export trade and attracting more foreign direct investment to California, a host of noble ends are gained -- from new job creation to increased tax revenue. Yet there is always the potential for existing resources to be used more effectively in support of private enterprise.

What, then, can be done to improve the state's services to exporters and foreign investors?

SUPPRESSING HUBRIS

Most of the problems besetting the State's international trade bureaucracy appear to stem from two sources: a confusion between political and commercial objectives and an unhealthy dose of hubris on the part of state officials — both elected and appointed.

From a macroeconomic perspective, the state's trade promotion programs are of literally immeasurable significance to California's $100 billion a year merchandise export trade. Even if we accept the most extravagant claims of the programs' proponents, we are talking about activities which at best affect slivers of fractions of one percent of what goes on in the real world. Yet to hear many state officials talk, these programs (especially the overseas trade offices) are indispensable to California industry's ability to penetrate foreign markets.

Such notions are both self-serving and fatuous. Private industry in California is quite capable of fending for itself. For example, even before the Wilson Administration determined it was necessary to open a state trade office in Taiwan, California already exported more to that island nation than did New York, New Jersey, Michigan, Illinois, Washington and Texas combined!

State officials, though, are understandably loathe to concede they may have no vital role to play in international trade. And, so long as there may be some assistance to specific firms available from state government, private industry is understandably loathe to discourage the delusions of state officials. But it's more than just a convenient trade-off of interests. The state's international trade programs (and again most notably, the overseas trade offices) represent a means to certain political ends which have no real bearing on California's commercial needs.*

Sponsoring the creation of yet another overseas trade office is perhaps the easiest way for a California politician to demonstrate his or her pro-business and internationalist credentials to business constituents in particular and to the public at large. It is also a means for appeasing specific constituencies at home whose true agendas may or may not be commercial.

But to the extent that state officials support trade promotion activities for largely political reasons, there has been very little pressure to periodically reappraise these programs' actual relevance to the private sector's true needs. Admittedly, there are much bigger fish to fry in state government. But that does not excuse the persistent reluctance to seriously explore ways in which the state can be considerably more helpful in helping California companies pursue new business abroad.

In any event, a useful first step would entail an admission by state officials: that the programs of state government are not essential to California's private sector's pursuit of foreign market opportunities. Now I hasten to add that this does not mean that the state cannot be helpful to the private sector. There are obviously many individual firms which have benefitted from the state's international trade programs. The point is that, by substantially redefining the role of state government in international trade, the state can play a more decisive role.

EMERGING INDUSTRIES FOR EMERGING MARKETS

The state has long recognized that large companies in mature industries are far less likely to benefit from any state intervention than are smaller firms, especially those in emerging industries. Unfortunately, the traditional emphasis on aiding small and medium-sized businesses does little to limit the potential clientele state trade officials are obliged to serve. As a result, the state is hardly in an optimal position for targeting its relatively sparse resources on those industries or individual companies which have the brightest prospects in foreign trade. Not surprisingly, the state's export programs have been haphazardly targeted. Indeed, there seems to have been a tacit acknowledgment of such on the Trade & Commerce Agency's website where the heading on the section summarizing the agency's achievements in promoting trade, "Success Stories: Who knows? You could be the next California win [sic]," is an obvious knock-off of the state lottery's principal advertising pitch. But at least the lottery admits the odds of being a winner are astronomical.

Much of the reason for this lack of focus stems from a philosophical or ideological disinclination to cast government in the role of trying to "pick winners." The argument against public agencies trying to pick winners is largely disingenuous, though. After all, the administrators of the state's two huge pension funds -- CalPERS and STRS — are under immense pressure to pick winners while resisting political interference. More to the point, state government, having decided that it will furnish services to California exporters, is under an obligation to insure that those programs make a real difference. Otherwise, the programs are just so much political wallpaper. Yet, with very limited resources, decisions about how best to utilize those resources are unavoidable. Sound management practice demands that every effort be made to direct scarce resources to where they will have the greatest impact. In other words, a state trade agency that refuses to pick winners is wasting valuable resources. Where I have grave reservations is with the prospect that state officials are obliged to pick individual companies to aid.

For some while now I have been arguing that the state's services to exporters should be shifted from a retail to a wholesale basis. At the moment, virtually any small or medium-sized firm can demand assistance from state trade officials. This creates a gross overload on the services the state can provide. I submit that the state would be far better off providing assistance on a wholesale basis to those industries which have formed and funded regional or statewide industry small business export councils. These councils would be the vehicle through which the state determined what specific services it could usefully provide to the private sector and through which those services would be delivered. The councils, rather than individual firms, would be the state's clients. In other words, the state would seek to pick winning industries instead of stand-out firms.

An even more intriguing (not to say appealingly symmetrical) strategy would involve the state working primarily with those export councils representing emerging industries in penetrating emerging markets. Federal trade promotion strategy is now heavily focused helping American firms export more to the so- called Big Emerging Markets. At the very least, state trade programs which also focused on these markets could leverage a substantial amount of help from federal agencies.

INFORMATION, PLEASE

Although the state's trade programs may not be absolutely essential to both current and prospective exporters, current, accurate and well-packaged information most certainly is. And it is in this regard that the state can employ its resources much more effectively on behalf of the private sector. I suggest the Trade & Commerce Agency stop providing most of the services it currently renders to exporters. Other than the Export Finance Program, which seeks to address a real deficiency in the financial market, every service Trade & Commerce offers can be readily obtained in the private marketplace. What Trade & Commerce can usefully do is transform itself — at least for trade and investment promotion purposes — into a collector, analyzer and disseminator of valuable and timely commercial intelligence.

This role would involve closer collaboration with other public institutions such as the UC, CSU and community college systems. It would also require a dramatic change in the qualifications of the personnel recruited to serve in the International Trade and Investment Division of the Trade & Commerce Agency and especially in the state's several overseas trade offices. Skilled market analysts and economists would replace those officials whose strengths lie in sales and marketing.

RE-TASK THE OVERSEAS OFFICES

I initially supported the move to establish state trade offices back in the early and mid-1980's. In the intervening years, however, I have grown increasingly skeptical about their value to California business because of the almost limitless breadth of their mandate, because of the remarkably unfocused way in which they continue to be operated, and because, from a personnel point of view, way too much has been expected of way too few. It is simply preposterous to think that an office staffed in most cases by no more than one or two professionals can cope with the incredibly diverse range of industries which comprise the world's eighth largest economic unit. No private business would dispatch salespeople who were not proficient in describing every aspect of the goods or services they presumed to provide. But somehow the state assumes that its overseas office personnel can easily shift from aiding an agricultural exporter to helping a software company gain entry into new markets. Denizens of the political world tends to admire those who are regarded as "quick studies" for their ability to cope with the multiplicity of issues that overwhelm elected officials. By contrast, technical proficiency and detailed knowledge of specific market segments are considered much more appealing traits in private enterprise.

Since the first overseas office was established in Tokyo in 1987, these facilities have been run on the same basic premise as a retail store which provided a vast array of goods for its customers -- so long as the customers were not too discriminating or demanding.

Perhaps if a specific office's mandate were much more restricted — such as to help California's wheat growers export more to the European Union — a small representational office in Brussels could make a major difference in the state's wheat exports. But the problem with this approach is that, as the operational focus of an overseas office becomes narrower to accommodate the very limited capabilities of the small staffs, the question arises: Why doesn't the industry which benefits underwrite the cost of the operation or at least open its own office? The fundamental dilemma is that, from a management point of view, the rationale for the state maintaining overseas trade offices diminishes as the offices' ability to make a measurable impact on our export trade increases.

Admittedly, overseas trade offices are politically popular. The flying of the state flag over some foreign commercial capital lends evidence to the state's commitment to helping private industry compete successfully for overseas. That these offices may do very little to justify their existence is an issue which is irrelevant to their real purpose -- which is political theater.

Do these offices help California companies? Sure, and so do Boy Scouts helping elderly people across the street. But neither represent the most effective or efficient way of accomplishing meritorious objectives. Can better use be made of them? Most definitely. But their functions would have to be drastically altered.

Rather than close the existing overseas trade offices (which is politically out of the question), I recommend they cease to operate as retail service establishments liable for helping just about any California exporter who calls, faxes, or wanders in off the street.

Instead, as part of a more comprehensive change in the focus of the state's international trade bureaucracy, the overseas offices should become our eyes and ears on foreign markets. The London office, for example, might be restricted to acting as the state's liaison with the huge international financial center in the City of London. Quite apart from serving the information needs of California industry in an era of global finance, such an office could provide vital informational and liaison services to the State Treasurer, the State Controller, the Franchise Tax Board as well as the two major state pension funds, CalPERS and State Teachers' Retirement System.

The role of other overseas offices should be similarly restricted to gathering the sort of market intelligence required to compete successfully in world trade. Thus, the office in Sub-Saharan Africa could be re-tasked to look not for new export markets for California companies but for opportunities for California firms to invest in and perhaps share management expertise with African-owned companies. Likewise, the Frankfurt office could be restricted to promoting joint ventures between small and medium-sized European and California firms in the environmental technology or biosciences sectors. The Hong Kong office could be moved to Manila where its primary function would be liaison with the Asia Development Bank in pinpointing emerging market opportunities for California companies.

LEVERAGE OTHER ASSETS BETTER

State trade officials should work more closely and cooperatively with private sector organizations. For example, industry associations should be urged to assign a knowledgeable representative to work out of a specific state office overseas.

At the same time, universities and colleges throughout California are actively seeking to "go international." Students attending law schools and business schools within the UC and CSU systems can benefit from international business or international law internships sponsored by the state to assist with its research needs. MBA students, for example, could cut their teeth on overseas market research studies conducted on behalf of the Trade & Commerce Agency. Similarly, law students planning a career in international law would likely to eager to participate in internships or study groups tasked to examine the commercials codes and regulatory climates in selected national markets.

University extensions should be encouraged to harness the intramural resources of each campus to support industries with close university ties. For example, University Extension at UC Davis is already exploring ways of tapping the expertise of Davis faculty in supporting biotechnology firms in their efforts to find new markets overseas. At the same time, it is also devising a curriculum for providing local economic development directors with a more cogent understanding of the global marketplace so that these officials can better serve their local business constituencies.

REVAMP THE EXPORT FINANCE PROGRAM

The Legislature might wish to reconsider whether the California Export Finance Program should be backed by the full faith and credit of the State of California. There is a strong likelihood that considerably more loan money could be leveraged to enable smaller California firms to export more. Indeed, such a step would likely prompt creation of export finance companies that would identify export opportunities, identify prospective exporters, assist in preparing their applications for loan guarantees, provide the actual loans, and handle collections.

RESTORE THE WORLD TRADE COMMISSION

The promise of the California State World Trade Commission was that, by bringing knowledgeable and experienced figures from international business together with the highest state government officials, state government policies would be informed by the actual needs of the private sector rather than by the assumptions of government officials with only limited knowledge of the realities of international commerce.

Unfortunately, the Commission has been institutionally ‘disappeared' in recent years. (It is a wonder that we don't have the mothers of the Trade Commissioners demanding that the Secretary of the Trade & Commerce Agency reveal why their sons and daughters are being held incommunicado.)

To restore the vital link between the private sector and state government, the Commission should be restored to its former prominence. Moreover, the Commission (or subcommittees) should meet much more frequently throughout the state to hear directly from business executives and trade association officials about what kinds of state assistance would be most beneficial to the private sector.

CONCLUSION

I hope this is more of a beginning than a conclusion. The ideas I have sketched above are hopefully coherent enough to prompt a serious discussion about how we can better direct California's trade and foreign investment promotion programs. I look forward to hearing your own thoughts and comments both on what I have had to say and on what I have overlooked.



Jock O'Connell