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V. Summary of Interviews with U.S. Firms on the Oneration
of the Licensing System
Extensive interviews on the competitive effects of the
licensing system were held with over 20 firms. Based on
these interviews we discerned a basic framework to
characterize how a firm's interaction with the license
system influences their competitive position. Before
describing the framework, we first discuss some overall
generalizations developed from the interview process.
One conclusion that emerged from the interviews is
that some of the aggregate statistics on the operation of
the licensing system can be misleading about its
competitive effects. For example, the reported rate for
denial of licenses tends to obscure the reality of the way
the system influences business behavior. The denial rate
reported by DOC is less than one percent, and the rate
reported by the Questionnaire respondents is just above one
percent. What is not evident in these statistics, but
became clear from the interviews, was that the denial rate
62Extensive interviews were conducted with over 20
U.S.-based companies randomly selected from the
questionnaire respondents who indicated they were willing
to be interviewed about the control system in detail. The
firms selected varied with respect to size of the parent,
size of foreign sales, experience with the U.S. control
system and type of exported products.
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is in some sense artificially low. For example, a number
of companies reported they do not submit certain types of
license applications because they assume the license will
not be approved. In addition, some of the larger companies
that are well versed in dealing with the system stated that
if their application runs into difficulties, they will
often ask for their applications to be RWAd rather than
denied,63 or the firm will modify the scope of the
application to take into account various objections raised
by the licensing officials. Another reason why the denial
rate does not indicate the true restrictiveness of the
system is what can be called a de facto denial when
applications are approved too late--the sale is lost or the
trade show is over. Firms also reported they had either
given up trying to sell to the U.S.S.R. and Bloc countries
or had substantially reduced their level of effort.64 For
all of these reasons, the reported denial rate is not a
very good indicator to gauge effectiveness or effects of
the license system.
63This lowers the denial rate by 25 percent. See
Chapter IV.
64This result was also evident in the NAS
Questionnaire response to the question "Did your firm, by
choice, not sell to Warsaw Pact countries?" with 45 percent
reporting yes. Overall, only 30 percent of the firms had
sales to Bloc countries, but 70 percent of the large firms
reported trade with Bloc countries.
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Another often-cited indicator of competitive effects
is lost sales, where the principal cause of the lost sale
was some aspect of the U.S. export controls. The firms
which were interviewed indicated several problems
associated with trying to develop a real measure of lost
sales. First, it was difficult to identify what sales were
lost solely or principally due to the license system. Even
the lost sales figures that are reported due to the U.S.
export control system are suspect because most of the large
companies interviewed indicated they do not keep track of
such information and said that often the foreign customer
will not cite the U.S. control system as a contributing
factor to the lost sale. Therefore, systematically
tracking the extent of lost sales from company data is
difficult.65 Reports of lost sales also understate any
long-run effects of the system on U.S. firms'
competitiveness by focusing on only the short-run cost of
the loss of a particular transaction. A significant number
of companies stated that when a sale was lost due to a
delayed license or some other aspect of the licensing
process interfering with a transaction, the customer was
65The NAS Questionnaire was designed with this problem
in mind. Appendix B presents an analysis of analytic
instruments trade which directly links changes in trade to
changes in the license rules. This approach bypasses the
problems associated with measuring lost sales.
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very often permanently lost. And, as indicated above, some
companies stated they chose not to export to certain
markets due to the control system and therefore lose
potential sales.
The discussion on the denial rate and lost sales
demonstrate both the complex nature of the effects of the
U.S. export control system and the difficulty in measuring
its competitive effects. The remainder of this chapter
pulls together the interview results in a framework
designed to focus on the way the licensing system
influences f i ~-m behavior.
What appears to be happening regarding the competitive
effects of the system is that the U.S. export control
system acts as a barrier to entry for U.S. companies that
want to enter international markets. Simply stated, the
system increases the cost of doing business abroad. A
portion of the barrier to entry cost relates to economies
of scale created by the way the licensing process operates.
Interviewed firms indicate economies of scale also play an
important role in determining to what extent a firm can
operate in different foreign markets. Different foreign
markets in the context of the licensing system means COCOM,
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non-COCOM West, Bloc, and PRC. Scale effects, therefore,
partly explain the firm-size effects discussed in earlier
chapters.
There also is a different perspective between larger
firms and smaller firms about how they began to comply with
the export license regulations. A number of small firms
interviewed stated they had for many years been exporting
unaware they may have needed to receive a validated license
for their type of export. A surprising number indicated
their first awareness came only after their goods were
seized as part of the Custom Agency's Operation Exodus.
These firms then had to make the choice of investing in
basic compliance procedures or foregoing foreign sales.
Larger firms, while in some instances also incurring
penalties due to being stopped by Operation Exodus
indicated no such discrete decision to comply or withdraw.
Returning to the issue of how the export license
system creates entry costs, the up-front cost of compliance
for a firm comes in the form of training employees,
learning the regulations, developing channels of
communication with the DOC, changing marketing procedures,
collecting proper documentation and even educating
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customers. All companies must make these basic investments
if they are to comply with the export control system. Some
companies/ typically smaller firms, buy the necessary
knowledge and experience by hiring an outside contractor.
Still, this front-end cost can be fairly high and can deter
firms from even beginning the process at all.
The more resources a company can afford to spend on
learning the system, the better their understanding of how
the process works and the more facile they become in
dealing with it. An illustration of this point drawn from
the interviews is that those companies that can afford to
have direct, constant contact with a DOC licensing officer
tended to have an advantage in terms of gaining a better
understanding of license criteria or the status of pending
applications over those companies whose only contact is by
mail or phone. The reasons are straightforward--firms
report that the phone lines at the Export Administration
are often clogged and the use of the mail slows
communication. The advantage of the larger firms that can
afford the investment needed to closely monitor their
license applications manifests itself most obviously in
shorter processing times for license applications. (See
the data on average processing time in the NAS
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Questionnaire results and also Chapter III.) Interviewed
firms consistently supported the view that the large firm
advantage relative to smaller firms is a direct result of
being able to commit more resources to working the
licensing system.
At some point, company management must decide what
level of long-term resource commitment they are willing to
make towards the export control system beyond the
installation of a basic compliance system. There are four
general levels of commitment to exports that can be
identified for a firm. Companies typically trade at one of
these levels based on the compliance cost they are able to
accept.66 In turn, the level Dictates which markets are
available, marketing procedures, delivery schedules and so
forth. The resultant company approach toward exporting
influences the different potential competitive effects
created by the export control system.
At the lowest level are firms that export low-level
technology goods only to COCOM-member countries.
Typically, these firms are small and relatively new to
66Compliance cost here means not only direct
administrative costs but also the overall ability of the
firm to operate the licensing system.
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exporting or are trying for the first time to establish a
foreign sales base. By limiting its trade to this
category, a company will incur a relatively low cost of
compliance but, in turn , its markets and products are
restricted. The maj or front-end investment these companies
must make is that of learning the regulations and learning
how to fill out the application form properly--including
proper class) f ication 0 f the product and accompanying
documentation. The interviewed firms that were new to the
system indicated even these basic tasks were difficult
because the regulations are extraordinarily difficult to
understand without outside assistance. The on-going
resource commitment at this basic level is relatively low
because processing time for licenses is fairly predictable
and therefore does not require extensive follow up once the
firm successfully understands the basic way the system
operates.
If a firm wants to trade at a higher level of
technology and/or with non-COCOM free-worId destinations,
then the interviewed fibrous indicated that a significantly
greater resource commitment to compliance is required. In
other words, the initial entry cost and on-going resource
commitments are higher and economies of scale become more
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important. The companies explained that economies of scale
become a factor because firms need to support the cost
associated with learning more about the system with more
trade and the more the company knows, the easier it is to
work an increased trade volume through the license system.
One of the most often identified costs of engaging in non-
COCOM free-world trade is the unpredictability associated
with license applications that require interagency review.
According to the interviewed firms, the higher costs result
from the difficulty in getting reliable information on the
status of their license applications and inability to
accurately predict how long processing will take.
Most of the companies interviewed stated they received
very little information on the status of a license once it
entered the interagency review stage. One exporter
described the interagency review process as a "black hole."
Companies said that information on the status of a license
was important since they needed to coordinate a complex set
of activities related to production, shipment, and
distribution as well as maintain communication with their
customers if a license application is delayed. Beyond
wanting to know what stage of processing an application is
in as part of their efforts to schedule around the
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approval, they also said that ~ owing the status is
necessary in order to respond to application problems and
avert potential delay or rejection. The difficulty of
obtaining information results in an increase in the
administrative cost of tracking a license application
through the processing system. It is here that a
Washington presence or direct channels of communication
with licensing officials become important. The firms told
us that status inquiries by phone are rarely successful in
obtaining the information needed to adequately track and
monitor the status of a license.
Not only are status checks difficult to get, but
processing time can vary significantly for different
applications with nearly identical characteristics. As the
processing time increases beyond standard times, all
companies increase their resource commitment towards a
given application. This form of the cost associated with
non-COCOM trade is closely related to the information cost
discussed above. Companies begin to send their
representatives to visit agencies or start making almost
daily inquiries to learn of the application status. If the
processing continues to be delayed, frequently senior
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company executives may become involved, or a Congressman,
or, in the case of foreign firms, their embassy officials.
The unpredictability of processing time is an inherent
element in the U.S. export licensing system in this
category of trade. The result is that the U.S. licensing
system may not be the deciding factor in a transaction
decision, but it can be the pacing factor. Companies
reported that the U.S. reputation as reliable suppliers is
damaged by long processing times. The firms explained that
a reliable supplier is a company that will deliver on time,
without unexpected delays. Foreign customers want supply
schedules they can plan around and to that end some
interviewed companies report their customers are beginning
to put contingency statements for license approvals into
contracts. The benefits associated with engaging in trade
at this level depend to a significant degree on a firms'
potential volume of foreign business. Economies of scale
allowed the larger firms interviewed to participate at this
level to a greater extent than smaller firms. The larger
firms can afford the resource commitment required because
of their volume of export.
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The largest exporters interviewed indicated a third
level of resource commitment. At this level, companies
cover the policy side of the system in addition to the
administrative side. The educational emphasis switches
from the company learning the system to the company
educating the Export Administration or other agencies about
particular products and problems. The companies are
willing to incur the costs of trying to modify the system.
They have representatives on the Commerce Department
Technical Advisory Committees, or work for special
legislation or participate in other policy level
activities.
The final level is for those firms that engage in Bloc
trade. As noted in Chapter IV, many U.S. companies have
essentially written off trade with the Bloc because the
cost of working with the licensing system is too high.
Companies consistently report that East-West trade is very
different from West-West trade. When asked about
processing times, experiences with the license system or
customer relations, they specify that their response
depends on whether the question applies to East-West or
West-West trade. According to the NAS Survey, processing
time for Bloc applications is three times longer than for
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free-worId applications and only a third of the respondents
export to the Bloc.
These responses confirm information
obtained from the interviews that the potential volume of
trade to the East Bloc is too small for many firms to
support the cost of engaging the control system at this
level.
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Representative terms from entire chapter:
competitive effects
