Fuelling SME competitiveness, targeting trade constraints, through Aid for Trade
Small and medium-sized enterprises (SMEs) are more productive and create more jobs when engaged in trade, but they need a conducive business environment to offset the high failure rates they face, said speakers at a workshop jointly organized by the International Trade Centre (ITC) and the World Trade Organization (WTO).
The discussion on the topic of ‘Aid for Trade and SME competitiveness’, held on 9 October at WTO headquarters in Geneva, Switzerland, focused on targeting SMEs’ main trade constraints and addressing them through Aid for Trade initiatives.
The export failure rate for SMEs in 17 sampled least developed countries is 41%, said Marion Jansen, ITC Chief Economist, who presented an ITC-WTO study that shaped discussions. The Gambia has the highest export failure rate of 67%, and Bangladesh has the lowest, at 29%.
SMEs need practical and policy-based support to increase their competitiveness, the speakers said, and assistance comes in a variety of forms, depending on the nature and needs of different types of SMEs.
‘SMEs are disproportionately important to low-income economies, employment and economic growth,’ Ms. Jansen said. ‘Exporting directly is not the only way for SMEs to reach global markets. SMEs can link up to global markets via other exporters, so indirect exports are an option, especially for small firms.’
The benefits that result from supporting SMEs are significant: those that export to international markets tend to rely more heavily on business in those markets than large corporations do. In other words, SMEs that do engage, engage heavily in those markets, and this is especially true for SMEs in the services sector, said Susan Stone, Senior Trade Policy Analyst, Development Division, Trade and Agriculture Directorate, Organisation for Economic Co-operation and Development.
‘Most SMEs are services and most services are SMEs,’ she added. ‘Once a services SME breaks into a foreign market, the likelihood that it will continue exporting is high.’
This means that policies need to address constraints that prevent SMEs from entering export markets. The ITC-WTO study shows that SMEs strongly depend on the quality of the business environment, access to finance and institutional support to overcome trade-related challenges, as highlighted in Diagnostic Trade Integration Studies (DTIS) done by the Enhanced Integrated Framework (EIF) for least developed countries.
Collaborating to create policies
‘DTIS provides a framework to coordinate and mobilize Aid-for-Trade resources in least developed countries to address supply-side constraints,’ said Hang Tran, EIF Coordinator. ‘Without committing to this framework, Aid for Trade would be fragmented in the countries and would not be coordinated and efficient.’
From 2008-2012, US$ 5.2 billion of the US$ 223 billion spent on Aid-for-Trade initiatives was used for SME development, with least developed countries receiving about one-fourth of the support.
‘The financial crisis spurred renewed focus on SMEs as part of private-sector development strategies,’ said Ms. Jansen. SMEs account for nearly half of employment in the formal sector and up to 35% of gross domestic product in developing countries.
When it comes to creating strategies to assist SMEs, discussions among government, the business community and institutions is key, to ensure that businesses’ needs are met.
‘So often, policies are made in ivory towers,’ said Dick de Man, Deputy Managing Director, Centre for the Promotion of Imports from developing countries (CBI). ‘What we have learned is that before we come out of our chairs, we do a lot of research, we start with the market. Because if you start with the market, that offers the best guarantee for sustainable business.’
The top five measures that SMEs find ‘very useful’, according to research shared by Ms. Stone, are business networking opportunities, particularly in markets that do not have chambers of commerce and other trade organizations; assistance in identifying potential foreign business partners; information on market opportunities; trade missions; and one-on-one meetings with potential business partners.
Assistance in dealing with national technical standards and intellectual property rights, as well as staff training, was found to be less helpful to SMEs.