• home
  •  

    Export Strategies for Small Firms

     

     
     
    New Challenges for Trade Promotion
    © International Trade Centre, International Trade Forum - Issue 1/1999

    Good strategies can help SMEs reach export markets.

    Today's export promotion strategies must reflect the changing nature of the international trade environment, if they are to have an impact.

    Change in the past several years has taken many forms. Broad changes are affecting international trade, such as the Uruguay Round Agreement and the establishment of the World Trade Organization (WTO). In addition, three major issues have recently emerged that influence export promotion: growing interest in the environment and sustainable development, the importance of small and medium-sized enterprises (SMEs) as exporters, and the scope for increasing trade in services, especially those supplying information technology services and clean technology.

    This article takes a closer look at one of those issues, trade promotion for SMEs.

    The export potential of small and medium-sized firms has been a growing subject of interest. Why should today's export promotion strategies focus on SMEs, rather than on large or micro enterprises?

    • Strong growth potential. Only a small percentage of SMEs in developing countries are now engaged in export trade, yet they account for approximately 40% of export earnings. The current trend points strongly towards a sustained growth in this share, supported by expanding output and employment. Recognizing their growth potential, most governments in developing countries are giving priority to SMEs through policy support and other incentives.

    • New legal framework. The WTO Agreement has created a framework for a more open global trading system, which has implications for smaller firms. An appropriate export strategy could provide the corresponding internal framework to enable smaller businesses to engage more successfully in external trade and meet international competition. By reducing tariff and non-tariff barriers and ensuring non-discriminatory treatment in foreign markets, the smaller exporters have been offered the same market access that was previously available to larger companies with resources to set up local operations to beat the tariff walls.

    • Lower transport and communications costs. Technological developments in communications and reduced international transport costs make it easier for smaller firms to enter international markets. An export promotion strategy could facilitate market entry by assisting smaller firms to acquire technical know-how and familiarize themselves with new cost-saving innovations. SMEs, who have no in-house servicing facility, benefit significantly in terms of lower overall trade service cost and higher competitiveness.

    • Shifting comparative advantage. Globalization of trade, investment and production has substantially altered comparative advantages between large and small firms. The smaller enterprises that have responded flexibly and adapted to the new environment-often linking with new partners and forming new alliances-are positioned for strong growth. These types of smaller firms generally enjoy advantages over large enterprises: they are usually able to preserve better labour relationships, bring a personal touch to their operations, cater to specialized market segments and have smaller capital investment requirements. The constant market pressure to stay competitive also spurs them to be inventive, innovative and flexible in their business operations. This makes it much easier for them to adjust quickly to changing economic conditions and market requirements.

    In other words, small enterprises may be better positioned to adapt to changes in the 1990s than larger enterprises. In the United Republic of Tanzania, successful new product lines have emerged due to trade liberalization, including oil presses and expellers, water pumps, storage tanks and drill presses. Similarly, small textile producers in Sri Lanka have become more export-oriented in response to trade liberalization measures initiated in 1997, through the planned development of skills and institutions, which has improved product quality.

    • Relative impact. Large enterprises are more likely to have the means to promote their own activities; most have resources to establish marketing channels, trade information systems and trade representation offices. A trade support institution will probably make only a marginal contribution. Furthermore, some large companies regard government-supported promotional activities as interference with their business decisions and may therefore be unwilling to cooperate.

    SMEs, on the other hand, are almost entirely dependent on outside trade service providers. The impact of easily accessible and efficient services at affordable cost is correspondingly greater for them. This is crucial at the stage of initial market development efforts when SMEs need to commit scarce financial resources in advance without any guarantee of returns.

    Forging a Strategy

    An export promotion strategy needs to define how best to help smaller firms exploit these opportunities and to overcome some of their constraints. Among the most formidable challenges to those seeking to develop new export promotion measures are the need to improve infrastructure, access to finance, and marketing. A review of the past trading performance of small firms has shown that these deficiencies are major obstacles to export success.

    • Developing export infrastructure. Setting up infrastructure like export industrial estates, export processing zones, and bonded production centres can provide a real boost to export development. In the least developed countries (LDCs) the problems are at a more basic level such as electrical power, water, roads, ports, shipping and telecomunication.

    • Improving financing conditions. Restricted access to finance for small firms which lack collateral and are considered high-risk borrowers puts a cap on production expansion. A recent ITC survey revealed that SMEs think of financing as their most critical problem.

    • Strengthening marketing channels. Many small enterprises are unable to market their goods effectively in existing markets. Small firms continue to lack knowledge of marketing channels and fail to establish marketing networks, or have not entered into strong market relationships with existing customers.

    Several options are worth exploring to improve SME marketing channels. Some trading houses have been effective channels between small producers and the market in areas such as packaging, shipping, financing, insurance, quality management, publicity and delivery, as can be seen in the box above. (See also Forum 2/98, "Using an Export Development Company".) Joint marketing consortia have also been successful in certain cases.

    Another option to stimulate SME export development is provided by subcontracting from large enterprises to small enterprises, as can be seen from the box below.

    The primary responsibility for SME competitiveness, of course, is with the firm's management. There is ample need, however, for trade promotion support. Some private sector and SME associations, which played mainly an advocacy role in the past, have gradually introduced market information and training services that complement public sector efforts. They can and should do more, as businesses are receptive to their generally market-driven approach. Many governments have set up technical support institutions for management training, product design, quality control, packaging, loan guarantees and trade promotion. Their success is often contingent upon the degree of their commercial orientation, to well-trained staff, equipment and financial resources. Public authorities need also to bear in mind that delays, poor services and high costs for infrastructure will cut the competitive edge of their SMEs.

    The general weakness of trade promotion and export development of SMEs in many countries in all developing regions is a pervasive concern that demands sustained attention. Institutions that design export promotion strategies face a critical choice: whether to adopt an all-embracing approach or, given resource limitations, to focus on particular sectors. With few exceptions, national trade promotion organizations have chosen to adopt a broad approach in the past. With their resources spread too thinly, this approach has reduced the effectiveness of many export promotion programmes. The changing trade environment demands a second look at the prevailing trade promotion strategies for SMEs.

    This article has been excerpted and adapted from an ITC technical paper on Trade Promotion Strategies in Developing Countries. The study was directed by Monwarul Islam, ITC's Chief of Functional Advisory Services. Paul Cook of the Institute for Development Policy and Management, University of Manchester, United Kingdom, was a major contributor to this portion which served as a basis for this article, along with several ITC staff.

    Challenges of a Global Market

    SMEs are becoming increasingly aware of the growing competition at home and abroad. They especially require information on markets, buyers, suppliers, prices, trade regulations and business procedures in the target market.

    • Trade information and commercial intelligence gathering require market research and information analysis skills as well as experience with modern information technology. For most SMEs this turns out to be a tall order.

    • In an attempt to differentiate a product, create a brand image or meet the latest consumer preferences, SMEs need to undertake product development, re-design or adaptation. This calls for expertise that is in short supply everywhere, especially in developing countries.

    • SMEs must consider how to upgrade product quality and packaging to internationally acceptable standards.

    Most SMEs do not possess quality control laboratories nor have quality control specialists. Target market regulations or overseas buyers may demand higher quality or technical specifications. Packaging should be seen as a powerful marketing tool. New packaging regulations are being introduced to protect the environment.

    • Market competition is strongly driven by price. Improving productivity and reducing cost is thus an important preoccupation. SMEs in developing countries could use advice for competitive costing and pricing techniques.

    • Cost saving can be achieved by careful sourcing and inventory planning-as much as 15-20%. Few SMEs in developing countries, however, have developed the skills to achieve this level of economy. Many are content with traditional suppliers and large inventory that keep import costs unnecessarily high.

    • Outdated technology may lower quality and raise cost, making the product uncompetitive. Many old technologies are also highly polluting. Sooner or later these SMEs will face exclusion from the market.

    • Knowledge, skills and experience soon become obsolete unless continuously upgraded. While opportunities for academic qualifications proliferate, SMEs in developing countries have little access to practical training they really need.

    Source: Speech extract, "Meeting the Challenges of the Global Market", delivered at the First Asian Pacific Conference on SMEs, Ghangzhou, China, Oct. 1998, by M. Islam, ITC.

    Option

    Subcontracting

    Programmes that link SMEs to larger firms as subcontractors have been introduced in the Republic of Korea, Taiwan Province of China and Singapore. The most successful ones help increase the response capacity of small enterprises to make them more attractive to large firms as suppliers for exports. Part of the secret of success is that all three countries have strong coordinating agencies to provide support: the Investment Development Bureau in Taiwan Province of China, the Ministry of International Trade and Industries in the Republic of Korea and the Economic Development Board in Singapore.

    Intra-country measures to attract subcontracting links and direct foreign investment have proved beneficial in creating a wider network of inter-firm linkages in Japan and the Republic of Korea. It permitted firms in the latter country to penetrate international markets. These arrangements were supported by government screening of the technology transfer process from foreign investment, ensuring that local small firms benefited.

    Working with Trading Companies

    Some larger companies have developed models that benefit SME development. The creation of associated trading companies and trading houses by large enterprises has facilitated export marketing for SMEs. Several large company groups in Brazil, India and Turkey have created their own trading companies to act as their exporting and importing arms. While their priority is to manage trade for products of the companies within the group, they may also act as the marketing channel for a large number of SMEs. Similarly, trading houses have been established in Japan. These trading houses are not involved in production, but often act as intermediaries between small enterprises and world markets. Governments have encouraged links with SMEs, by setting up publicly funded financial incentives (tax breaks, concessionary finance) for trading companies that measurably demonstrate SME export promotion.

    NEEDSME

    ITC is field-testing a diagnostic tool for consultants that work with SMEs in developing countries. Called NEEDSME, this on-line needs and demand assessment system helps consultants rapidly assess a firm's problems in various business management areas.

    NEEDSME can combine the evaluations of several enterprises to generate group profiles by sector, country or other categories. It determines enterprise-level needs for management assistance by assessing a firm's existing achievements in marketing, production and finance.

    Field testing is nearly complete in the United Republic of Tanzania and Southern Africa for debugging and improvements. NEEDSME is now available from ITC in the Beta version (computer diskettes). The final format will be available in CD-Rom. For more information, contact O. A. Ataç, ITC Senior Adviser, Human Resource Development Section, at atac@intracen.org

    ITC Seeks Your Views

    How do you assess needs for SMEs?

    ITC would like to know how you assess needs for SMEs, and what your research conclusions are. ITC is developing an SME Needs Assessment Survey to identify export practices, expectations, and needs of exporters in developing countries. If you have developed a similar assessment tool or would like further information, contact Kai Bethke, Expert, Institutional Capacity Development for SMEs, at bethke@intracen.org