A strategic approach to SME export growth
One of the most viable strategies to achieve national development goals in both developing and developed nations is to promote small- and medium-sized enterprises (SMEs). SMEs increase competition, generate employment and develop entrepreneurship while boosting economic vitality at the community level and creating sustainable livelihoods.
It is for this reason that many governments design dedicated support programmes and policy initiatives aimed at the creation and development of a national SME sector. Such initiatives seek to assist SMEs in realizing their potential and to link them to a nation’s larger developmental vision encompassing export strategy and poverty reduction. To name a few initiatives, SME support policies are in place in countries such as Argentina, Brazil, Chile, Mexico and Uruguay, while the European Union is covered by the Small Business Act, India by the Micro, Small and Medium Enterprises Development Act, Malaysia by a SME Masterplan, Tanzania by the SME Development Policy, Kenya by the Micro and Small Enterprises Bill, and the United States by another Small Business Act. SMEs are the raison d’être of work at ITC. The organization ensures inclusive and sustainable exports and aims to be the development partner for small business export success in developing countries.
While the definition of SMEs differs from nation to nation, three parameters are applied: investment (capital and technology); production volume or turnover (revenue); and number of persons employed. SMEs are owner managed, labour intensive, extremely productive and flexible, and have a tendency to innovate. Generally, SMEs do not export directly, but they form the backbone of larger, competitive export industries. Many studies, including the European Commission’s 2010 report Internationalisation of European SMEs, show a direct correlation between exports and improved performance and competitiveness, yet SMEs rely largely on domestic markets despite new opportunities afforded by a more liberal, open and global economy. Export potential among SMEs remains vastly untapped.
SMEs play an important role in generating innovation. Their capacity to develop and produce innovative products, processes and services varies depending on sector, size, resources and the business environment. They are key to the dynamism of high-technology industries, while in other sectors innovation by SMEs often consists of minor adaptations to existing products, innovation in design, or changes to modes of service delivery, management and marketing practices. In both these scenarios, the ability to differentiate products, segment markets, create brand image, find niche markets and target specific customer groups is key to the success and survival of SMEs.
Furthermore, there is evidence in the European Union that innovative companies are more likely to export, as detailed in the European Commission report Policies in support of high-growth innovative SMEs (2011). Such companies are more productive and internationally more competitive and, in turn, exporting has a positive impact on innovation. Hence, exporting and innovation are complementary strategies that result in higher export shares, suggesting turnover and employment growth at firm level and policies supporting innovation and internationalization should be linked up. Results from the 2011 World Bank study Importing, Exporting, and Innovation in Developing Countries, which surveyed 16,722 firms from 43 developing countries in different regions of the world, show that globally engaged firms are larger, more productive, more capital intensive and pay higher wages than domestic firms. Two-way traders and exporters grow faster and innovate more.
As production and distribution systems in international trade become more internationalized, fragmented and interdependent, high value addition and strategic positioning within regional and global markets and value chains are becoming increasingly important. With innovation at their heart, these systems are evolving rapidly through new and emerging technologies and business models. Jack Dorsey, founder of Twitter and Square, rightly says that technology changes the dynamics and velocity of participation. According to John Chambers, CEO of Cisco Systems: 'Speed of change is on steroids, what used to happen in 10 to 15 years now happens in three to five.' Growth is no longer linear, but exponential as the very technologies that are propelling the future are growing exponentially themselves. Ray Kurzweil, author, technologist and director of engineering at Google, says the exponential growth of technologies and their convergence will transform industries and pose new opportunities and hurdles for businesses and society.
Within this rapidly changing scenario, exporters in developing countries seeking international markets are limited by a number of challenges. These include a lack of appropriate market, product and technology-related information, the need to meet and demonstrate compliance with quality standards, buyers’ requirements, trade regulations, tariffs and non-tariff barriers, and are exacerbated by limited access to finance. Support services provided by national agencies, both public and private, often go unnoticed or remain underutilized. The result is that these exporters often find it difficult to export successfully and consistently. Most adopt a traditional, product-focused approach, receiving an order, fulfilling it and then closing the sale. This approach may work in the short term, but too often leaves the exporter at the mercy of price competition with little room for differentiation. On this basis, even when an exporter succeeds at market entry, it is unable to maintain a long-term presence.
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ITC aids exporters to become more competitive and provides opportunities to participate in global value chains. To be competitive, SME exporters need a coherent, forward-looking business strategy and must improve efficiency, reduce costs and enhance the reputation of their products. This can be done by:
- Practising sound export management principles
- Creating a competitive, market-oriented strategy
- Effectively marketing and branding products
- Building reliable supply networks
- Designing and producing quality products and services adapted to markets
- Embracing information and communication technologies, investing in research and development, and acquiring appropriate technologies.
For many capable firms the decision not to export is based on anticipated complexity and fear of the unknown. Still, by thinking beyond traditional borders, and with adequate preparation and support, SMEs can participate and thrive in international markets. ITC assists SMEs in reducing uncertainties related to exports and in overcoming some of the most common challenges. It supports export preparations, the identification of opportunities through market research and the adoption of a strategically sound, market-driven approach, including export marketing and branding. ITC also reinforces the supply capability of SMEs through improved logistics, and promotes value addition as the driver for exports. It facilitates and activates business links for SMEs, turning opportunities into transactions through matchmaking. Moreover, it aids SMEs in the application of e-business solutions. The ITC approach owes its strength to two important features:
- Inclusive growth: by not only focusing on the quantitative aspects of increasing exports, interventions aim to balance trade flows qualitatively and attempt to optimize revenue streams in favour of the poor and marginalized.
- Value addition and projection: through improved branding and marketing, ITC projects support the improvement and projection of the added value within the export equation. This facilitates the move away from commodity-based, low-value or no-value-added exports.
Assistance to reinforce the response capacity of SMEs is provided by ITC through a mix of activities:
- Capacity building through training of trainers to ensure sustainability, and the realization of a multiplier effect by intermediary organizations replicating interventions;
- Direct assistance given to enterprises and including diagnostics, training, matchmaking and sensitization;
- Provision of information and advice through publications, bulletins, tools and checklists.
The content and delivery of any intervention is adapted to the specific perspective of a country, the intermediary agency, the sector and the needs and operational realities of SMEs. In many instances, ITC works with small producers or microenterprises.
The result is that small enterprises are better prepared to enter international markets and intermediary agencies are able to reinforce the support services they offer to enterprises. Within ITC projects, SMEs:
- Improve their understanding of the export process and international markets;
- Spot suitable market opportunities, potential and trends;
- Design cohesive marketing strategies based on the unique strengths of their products adapted to target markets;
- Brand, promote and prepare for sales of their products;
- Meet with potential buyers and transact business;
- Optimize supply chains and logistics;
- Improve value addition;
- Are aided in fulfilling the requirements for appropriate quality standards and related certifications;
- Decide on suitable packaging solutions;
- Deploy information and communication technology and e-solutions to improve overall performance.