Small and medium-sized enterprises (SMEs) provide the majority of jobs in developing countries, yet they have low productivity and exports. International trade can spur the growth of SMEs.
International trade has traditionally been viewed as an economic activity that mainly benefits large companies. However, a growing body of research suggests that exporting may offer substantial gains for smaller firms as well. Exporting allows firms to reach bigger markets and learn new skills that increase their profitability, and raises consumption for firm owners, workers, and their families.
SMEs employ a large proportion of the labour force in developing countries. Compared to large firms, however, few SMEs export – direct exports represent just 3% of total SME manufacturing sales, compared to 14% for large enterprises (World Trade Organisation, 2016).
Recent research has found that exporting provides important gains for small firms. An innovative project in Egypt found that exporting raised rug firms’ profits by 26%, with similarly dramatic rises in productivity (Atkin et al., 2017). By learning new skills from intermediaries and foreign buyers, exporting firms increased the quality of their products as well as their efficiency.
Demonstrating the importance of this process of “learning by exporting” and the resulting increases in profitability makes the case for increases in trade finance and better policies to facilitate trade for SMEs.
Policies to boost SME trade need to address the often high costs and barriers to finding and matching buyers and sellers. Such policies can lower costs by facilitating connections between buyers and sellers, increasing access to information about regulations and export opportunities, and introducing measures to ensure quality of goods and services.
- Exporting benefits small and medium-sized enterprises (SMEs) and their owners by increasing profits.
The profitability of small firms increases by 26% when they are given the opportunity to export to sophisticated foreign buyers. The families of the exporter also benefit as a result of higher household incomes, which is reflected by a 24% increase in household meat consumption.
- Small firms can learn important new skills from exporting.
Knowledge and skills are transferred from buyers and intermediaries to domestic firms when they start exporting. International trade thereby generates lasting productivity gains for SMEs that would otherwise not be realised. This increases the overall gains from trade and justifies increased trade facilitation.
- Reducing the costs of matching domestic firms with foreign buyers or sellers
would boost trade.
The cost and time involved in finding foreign customers and starting an initial trade relationship makes up a substantial proportion of trade costs. Reducing these costs should be a key policy goal for governments and export promotion agencies hoping to increase the growth of SMEs and push SMEs into global value chains.