Burdensome regulations add costs, stifle small firms’ ability to export
2016 SME Competitiveness Outlook finds that a 10% increase in regulatory burden decreases the value of small-firm exports by 3.2%
(Geneva) – Small firms are hit twice as hard as larger enterprises by difficulties in complying with standards and regulations required to do business internationally. According to the International Trade Centre’s (ITC) new 2016 SME Competitiveness Outlook: meeting the standard for trade, a 10% increase in regulatory burden decreases the value of large-firm exports by 1.6% – but cuts small-firm exports by 3.2%. However, when policymakers, standard-setters, and business managers work to reduce compliance costs, it helps improve the competitiveness of small and medium-sized enterprises (SMEs), which can open up new market opportunities for businesses in developing countries.
Released today, the 2016 SME Competitiveness Outlook focuses on standards and regulations. Often described by trade practitioners as non-tariff measures, they are crucial for consumer protection, social and environmental sustainability, as well as for companies’ ability to access markets. Standards matter for running a business and for accessing markets, and are closely linked to the quality and inclusiveness of trade.
Whereas three-quarters of voluntary sustainability standards – those created by business and non-governmental organizations – still originate in countries belonging to the Organisation for Economic Cooperation and Development, the SME Competitiveness Outlook finds that 36% of new voluntary standards are based in developing countries, up from 8% in 1990.
The Outlook reveals that there is a close relationship between public and voluntary sustainability standards. In fact, 58% of the close to 200 voluntary standards listed on ITC’s Standards Map website reference to the ILO Declaration of Fundamental Principles and Rights at Work. Some 69 voluntary standards reference other ILO conventions. Norms set by the World Health Organization and the UN Universal Declaration on Human Rights are referenced in 44 and 42 standards respectively.
‘Trade in the 21st century is increasingly consumer-centric,’ said ITC Executive Director Arancha González. ‘Standards are an important means to respond to consumer demands for “good trade”, one that is environmentally sustainable, socially responsible and protective of consumers. But standards can also represent an impossible burden, in particular for SMEs.’
Offering insights for policymakers, business managers and standard setters, the Outlook argues that businesses and countries complying with standards associated with international value chains are more likely to enjoy tangible economic benefits from increased exports.
The way a standard operates has major implications for whom bear the burden of compliance costs. When standards are defined by companies, the Outlook suggests, producers and consumers are more likely to share costs related to implementation and certification of standards. The likelihood of lead firms – often multinationals – taking on more of those costs increases when they have been included in setting a standard. Joining international value chains can therefore be beneficial for SMEs, as it reduces their costs of meeting international standards. However, SMEs need to reach a certain level of competitiveness before becoming players within international value chains.
Even when gender-neutral on paper, regulations can have disproportionate effects on women-owned enterprises as compared to those owned by men, according to the SME Competitiveness Outlook. Based on ITC business surveys, the report finds that a higher share of procedural obstacles resulting from non-tariff measures are due to ‘information and transparency issues’, ‘informal or high payments’ and ‘discriminatory behaviour’. It further suggests that an unintended consequence of such procedural obstacles is lower participation of women entrepreneurs in international value chains.Exploiting SME export potential when standards matter
In addition to 35 country profiles detailing strengths and weaknesses in SME competitiveness performance, this year’s SME Competitiveness Outlook includes regional snapshots highlighting product lines with unexploited export and diversification opportunities.
The Outlook finds that most regions could tap into significant unexploited export potential by directing regulatory efforts to boost SME competitiveness.
For example, the report suggests that in the Middle East and North Africa (MENA) region, there is a huge, untapped export potential in the fresh and processed food sectors, of which 43% would be among the region’s countries themselves. Yet MENA countries subject such imports to four times more technical regulations than other regions do. Regional efforts to reduce these burdens could yield substantial commercial benefits.
Meanwhile, the Asia-Pacific region still has unrealized export potential in IT and consumer electronics, but the chemicals sector appears to offer the highest potential for diversification. 21% of the top 200 products with diversification potential can be found in that sector. While standards in electronics and IT value chains tend to be more about ensuring compatibility – that nuts and bolts fit together – those in the chemicals sector are more about guaranteeing safety, for example, ensuring that toy paint is safe for children, or that a particular mixture will not explode. Complicating the necessary change in orientation is an additional challenge: a wide discrepancy in adoption rates of international management and quality standards: these tend to be high in the region’s larger economies, but low in small and poor economies
In Latin America and the Caribbean, the fresh foods and transport equipment sectors account for about 50% of the region’s untapped export potential, in addition to processed food and chemicals. Reducing the time that businesses spend dealing with regulations by streamlining processes and improving the institutional support environment for them would be beneficial in exploiting this potential.
In sub-Saharan Africa, the fresh food sector accounts for over 30% of the region’s unexploited export potential; metal and basic manufacturing for another 20%. The main diversification opportunities lie within the latter sector. A factor undermining the region’s diversification potential is the relatively weak adoption of international management standards, as these standards imply transferable managerial expertise.
In Eastern Europe and Central Asia, metal and basic manufacturing represent 28.4% of the regions unexploited export potential. Chemicals are another promising sector for product diversification. The time managers spend on regulations and the extent to which firms adopt international management standards may warrant improvement, if the region aims to take advantage of diversification opportunities.
‘The SME Competitiveness Outlook provides a compass for governments to understand where the challenges for SMEs are, and what areas they should exploit. It also sets out a five-point plan for policymakers and business leaders on how to comply with standards and regulations, which can help their SMEs to become more competitive,’ González said. ‘If you are serious about inclusive trade, the SME Outlook will help you understand how better planning and better regulation will help your SMEs and your women in business.’
Notes to Editors -A digital copy of the 2016 SME Competitiveness Outlook: meeting the standard for trade can be downloaded here.
Further information about SME Competitiveness Outlook can be found here.
A recording of the press conference held on 6 October SME Outlook can be watched on webtv.un.org
The following countries are profiled in the competitiveness index: Bangladesh; Barbados; Burkina Faso; Cambodia; China; Colombia; Costa Rica; Côte d’Ivoire; Ecuador, Egypt; Guinea; India; Indonesia; Jamaica; Jordan; Kazakhstan; Kenya; Lebanon; Madagascar; Malawi; Mauritius; Morocco; Namibia; Nepal; Paraguay; Peru; Rwanda; Senegal; Sri Lanka; Thailand; Trinidad and Tobago; Tunisia; Turkey; United Republic of Tanzania; and Uruguay.
About the International Trade Centre - ITC is the joint agency of the World Trade Organization and the United Nations. ITC assists small and medium-sized enterprises in developing and transition economies to become more competitive in global markets, thereby contributing to sustainable economic development within the frameworks of the Aid-for-Trade agenda and the Global Goals for Sustainable Development.
For more information, visit www.intracen.org. Follow ITC on Twitter: @ITCnews
For further information
Mr. Jarle Hetland
P: +41 22 730 0145
M: +41 789 277 406
E: hetland [at] intracen.org