Rajesh Aggarwal, Acting Director in the Division of Business and Institutional Support at the International Trade Centre (ITC) provides insight into the role of SMEs in integrating successful international markets.
SMEs play an important role in every economy, more so in developing and the least developed countries, in terms of employment and income generation. Across the OECD countries, they account for 99% of enterprises and two-thirds of employment. In developing countries various studies estimate SMEs’ share of employment to be even higher. Furthermore, it is the new high growth enterprises – distinguished by their export orientation and innovative capabilities – that play a disproportionately large role in job creation.
A number of factors impede on SMEs’ ability to integrate successfully and sustainably into international markets. “Limited resources and international contacts as well as lack of requisite managerial knowledge about internationalisation have remained critical constraints to SME internationalisation.” 1 Market opportunities and structures are increasingly dominated by global value chains (GVCs) dominated by large firms, which bring in their wake a set of new challenges for SMEs to become sustainable suppliers to these chains. Over a period of time, with evolution of international markets, related market access barriers now typically constitute a mix of NTMs, tariffs, private standards and trade facilitation (border) issues. Increasing the power of ICT products and services on the other hand, have also provided opportunities to SMEs to connect to buyers and suppliers much more directly and effectively.
Enterprise competitiveness is a result of 3 sets of factors: (i) enterprise internal factors including total factor productivity and ability to constantly innovate products, the production process and organisational set-up; (ii) efficiency of the business environment in which it operates; and (iii) linkage capabilities of an enterprise to markets and related buyers (e.g. lead firms in GVCs), to finance including FDI, and to relevant new knowledge, skills and technologies. SMEs need to address this complexity of factors impacting upon enterprise competitiveness, for which they often need support of institutions like the International Trade Centre (ITC).
Integration of SMEs into value chains is greatly facilitated if developing countries have the ability to attract the big firms to invest in production facilities. Low-income developing countries face many challenges in ‘efficiency seeking’ foreign investments. National governments, therefore, need to put in place investment and trade policies as well as accompanying regulations which are conducive to attract ‘efficiency-seeking’ investments.
Trade facilitation has emerged as a major area for reform as it contributes tremendously to enhancing business competitiveness, more so of the small and medium enterprises. The new WTO Trade Facilitation Agreement (TFA) has given a fillip to policy and regulatory reform in this area by establishing binding obligations to improve customs procedures, transparency and efficiency as well as cooperation amongst border regulatory agencies and private sector.
SMEs often need direct assistance to connect to value chains of large firms. ITC as a neutral joint WTO-UN agency is well poised to play an intermediary role in connecting big corporations with small enterprises and encourage transnational corporations to balance their interests and that of developing countries’ SMEs by fostering sustainable partnerships. For example, micro-producers in marginalised communities in several countries in Africa were connected to international fashion companies and distributors through mentorship of these companies to create high-end products that could find a place on the shelves of fashion stores in Europe. This ‘shared value’ paradigm of large companies, to ensure that SMEs become reliable suppliers and integrate into the value chains of bigger firms is likely to gain significance in future.
SMEs’ quest for internationalisation may not necessarily be tied up with its linkage with domestic presence of large transnational companies due to the emergence of ICT and related advances, such as, digital trade platforms and associated mobile payment systems. These developments have opened up new opportunities for SMEs to connect directly to international suppliers and buyers.
Rationalising business decisions of SMEs
SME managers must have the skills to take rational business decisions, such as, what and how they source, produce and sell with a view to promoting enterprise competitiveness. Skills development programmes which enables business managers to conduct value chain analysis to map their operations to identify opportunities for value addition and efficiencies across the entire value-chain play an important role in transferring such skills to SME managers. Providers of technical assistance target trade support institutions, established by the governments exclusively or in partnership with the private sector, to provide skill building and other relevant export promotion services to SMEs.
They are also ITC’s main national counterparts for capacity building services, which provide two-fold support to these institutions. Namely, organisational strengthening, using good business practices of similar organisations, and technical services strengthening aimed at enhancing the capacity of trade support institutions to provide technical services to its clients, such as market intelligence, quality management (including sanitary and phyto-sanitary measures), and packaging.
1 OECD (2009), “Top Barriers and Drivers to SME Internationalisation”, Report by the OECD Working Party on SMEs and Entrepreneurship, OECD.
Acting Director – Division of Business and
ITC – International Trade Centre