Key message 3 – Reducing the costs of matching domestic firms with foreign buyers or sellers would boost trade.
The barriers small firms must overcome to begin trading internationally are often so high as to be prohibitive. Any firm looking to start exporting must first find foreign buyers to sell to, know how to create a successful trading relationship, and understand what regulations to comply with. Atkin et al. (2017) enabled SMEs to export by matching them directly with buyers.2
The costs of matching buyers and sellers are commonly referred to as “matching frictions”. They constitute up to half of total trade costs (Allen, 2014). For small firms, it could be an even higher share. Therefore, supporting small firms in their efforts to find buyers by reducing such costs is a key goal for governments and export promotion agencies.
There are several reasons why these costs can be high, and why they may particularly affect smaller firms. A number of actions can be taken by policymakers to lower them:
- Facilitate connections between buyers and sellers: SMEs often lack information about where their potential international buyers are, what the buyers want to buy, and how to reach them. Similarly, foreign buyers can find it difficult to find information about domestic producers, limiting the amount of trade that occurs. One solution is to increase the amount of information available by publicising export opportunities to domestic SMEs and providing information about viable SME suppliers to buyers. This could, for example, be achieved by facilitating direct interaction between SMEs and buyers, or through an online platform.
- Increase access to information about regulations and export opportunities: It is often very costly for potential exporters to gather information about regulations and export opportunities in foreign markets. The cost of doing so is often so high that firms are unable to sell beyond a fairly localised market (Jensen and Nolan, 2017). The cost also increases with distance, with trade decreasing as it becomes more expensive to learn about distant markets (Allen, 2014). To make it less costly for SMEs to get information from other
countries, governments can make information available through online marketplaces, organise trade fairs, sponsor trade delegations, or subsidise the cost of travel for SMEs.
- Introduce measures to increase trust and assure quality: It can be difficult for SMEs to get foreign orders even when they have the right information, as foreign deals require a high level of trust on both sides (Startz, 2016). Sellers may be unsure that buyers will fulfil their end of the deal, and buyers can have doubts about whether sellers are as capable as they claim in delivering high quality products. To increase trust, governments can promote reputation mechanisms that reliably rate sellers and buyers. A country may even choose to promote the quality or capabilities of an entire industry abroad, or increase the use of international certifications. Innovative marketing techniques could also increase trust and facilitate contracting (Anderson et al., 2014).
The government body most often involved with implementing the solutions listed above is an export promotion agency. The box below explains the role of these agencies and how they can help
The role of export promotion agencies
An export promotion agency or unit can play an important role in helping firms looking to export and increasing trade. Usually, these organisations are part of a larger government agency or state-controlled and can use a wide array of tools to facilitate trade. The services they usually offer are 1) country image building through advertising,
promotional events, and advocacy, 2) export support services such as exporter training and information on trade finance, logistics, and customs, 3) marketing through trade fairs or exporter and importer missions, and 4) market research and publications. In terms of lowering the costs of matching local firms with foreign buyers, export promotion agencies can work to reduce general frictions across the entire industry or
support individual firms directly.
There has been a large proliferation of national export promotion agencies in the last
two decades. Although many agencies have been criticised for their lack of efficiency,
research suggests that, if run well, they can be very effective in increasing exports (Lederman et al., 2010). The IGC has worked with the export promotion agency in Ethiopia to reform its processes to better target key firms and more efficiently facilitate matching with foreign buyers, with promising results. We have found that it is crucial that the agencies are properly structured and have a clear goal in helping firms in the long term, not just in “putting out fires” (Sutton, 2017). By providing strategic assistance to firms early on and guiding firms looking to export, trade can be greatly increased.