The integration of SMEs in international trade : Internal and external Barriers

Mahmoud Sami NabiUniversity of Carthage (LEGI-EPT & FSEGN)

Tunis Business School Model World Trade OrganizationApril, 10th 2017

2

Why SMEs are important ?

• The definition of SMEs varies across countries as well as internationalorganizations.

• The World Bank’s Enterprise Survey definition: Small enterprises arefirms with 5 to 19 employees; Medium enterprises are firms with 20-99employees and; Large enterprises are firms with 100 employees ormore (Duval , D. and C. Utoktham, 2014)

• In Tunisia, is considered SME a firm with a number of employeesvarying between 6 and 199.

3

• IFC : “SMEs account for about 90% of businesses and more than 50%of employment worldwide. They are key engines of job creation andeconomic growth in developing countries, particularly following theglobal financial crisis.”

• World Bank (2015) : 600 million jobs are needed in the next 15 yearsto absorb a growing global workforce. Most formal jobs in emergingmarkets are with small and medium enterprises (SMEs), which alsocreate 4 out of 5 new positions.

• In Tunisia : SMEs contribute to approximately 2/3 of the economicactivity and 65% of the employment.

4

Duval , D. and C. Utoktham (2014) Trade and Investment Working Paper Series, ENABLING PARTICIPATION OF SMEs IN INTERNATIONAL

TRADE AND PRODUCTION NETWORKS: TRADE FACILITATION, TRADE FINANCE AND COMMUNICATION TECHNOLOGY, June 2014,

United Nation Economic and Social Commission for Asia and Pacific:

5

What are the type of constraints impeding the participation of SMEs in international trade?

6

Study Guide for the Model WTO 2017 : The integration of SMEs ininternational trade : Internal and external Barriers

The Team of the Model WTO at TBS : Youssef Ben Hadj Ahmed;Chayma Hachani and Yasser Omar Baalouch; Aymen Karoui andKhaoula Guebsi

Internal and specific

impediment

Financial constraints and

other exogenous factors

Trade Barrriers

Shortage in HR

Lack of Managerial skills

Credit rationing

Higher interest rates

Stringent requirement of

callateral

Short maturities

NTBs

Specific constraints to SMEs

Source : “Projet de Développement de la Compétitivité et des Exportations DOCUMENT D’INFORMATION DU PROJET (PID)PHASE D’ÉVALUATION , » Rapport N° 78503

Les exportateurs existants et potentiels en Tunisie, généralement des PME dans

les secteurs à fort potentiel, doivent relever les défis suivants:

--> (i) identifier le bon marché cible, le segment de produit, et le canal de vente

(ii) apprendre à adapter leurs produits pour ces marchés

(iii) comprendre leurs concurrents

(iv) lancer des campagnes marketing et de vente

(v) former et embaucher de nouveaux travailleurs pour être prêt à répondre à la

demande,

(vi) livrer le produit à temps et percevoir le produit des ventes.

7

>> Internal impediments

8

•In April 2010, I conducted a study in cooperation with CJD Sousse on“SMEs and Export” (8 years old companies, 60% are using less than 60%of their production capacity, 100% would like to develop their exportsactivities, 40% have more than 5 year-experience in export

• 50% are not exporting due to problems and constraints related totransport, bureaucracy , finance and insurance, competition.

•75% identified an export opportunity to Europe

• 50% % identified an export opportunity to an Arab country

• Only 30% know the technical requirements by the identified exportmarkets and 80% would like to know it.

• 80% are exposed to financial problems constraining their effort toexplore export opportunities.

• Only 35% benefited from trainings proposed by the CEPEX whereasalmost 60% benefited from FAMEX and/or FOPRODEX.

>> A sample of SMEs in the region of Sousse (2010)

9

• 65% of the SMEs consider that the technical regulations are becoming more complex in recent years

• 85% of the SMEs are willing to cooperate with other SMEs to improve their export performance.

• 75% need to train their staff on the export techniques.

• 60% are interested in cooperating with HEC Sousse to develop a business-oriented academic program in international trade.

10

Benoît Coeuré, Executive Board Member of the European Central Bank(ECB): “the ECB regards small and medium-sized enterprises (SMEs) as acrucial component of the euro area economy ... Moreover, these SMEs arehighly dependent on bank loans which are supplied at a higher cost andwith a higher rejection rate than for larger firms, due to asymmetricinformation”

Ferrando, Annalisa & Mulier, Klaas, (2013), "Firms’ financing constraints: do perceptions match the actual

situation?", Working Paper Series 1577, European Central Bank.

>> Financial constraints

11

Source: Karen Gordon Mills (2015) "State of Small Business Lending : US and UK"

12

Yann Duval and Chorthip Utoktham, Trade and Investment Working Paper Series, ENABLINGPARTICIPATION OF SMEs IN INTERNATIONAL TRADE AND PRODUCTION NETWORKS: TRADEFACILITATION, TRADE FINANCE AND COMMUNICATION TECHNOLOGY, June 2014, United NationEconomic and Social Commission for Asia and Pacific:

•Total unmet demand for formal SME financing is estimated by IFC-AFME-Oliver Wyman (2014) to be 1.5 trillion USD (2/3 in emergingmarkets and developing countries).

• A 2016 survey by the ADB covering 337 responding banks from 114countries : Estimated global trade finance gap is $1.6 trillion. $692billion of the gap is in developing Asia (including India and thePeople’s Republic of China). Source : "2016 Trade Finance Gaps, Growth, and Jobs

Survey," ADB briefs No 64 - August 2016.

• Access to credit is one of the main factors in explaining SMEs’ exportperformance (Source: Jinjarak, Y. et al (2014) "Does Finance Really Matter for the

Participation of SMEs in International Trade? Evidence from 8,080 East Asian Firms," ADBIWorking Paper Series).

13

>> A huge trade finance gap !

• Ata et al (2013) : “Asia’s economic miracle is often associated with large,multi-national companies. While these organizations are importantdrivers of the region’s growth, SMEs have played a key role. However,unlike larger companies SMEs struggle with finance as a limiting factorrather than a lever for value generation”

• A 2016 survey by the ADB covering 337 responding banks from 114countries : 56% of SME trade finance proposals are rejected, whilelarge corporates face rejection rates of 34% and multinationalcorporations are rejected only 10% of the time.

• Firms report that 25% more trade finance would enable them to hire20% more people. Source : "2016 Trade Finance Gaps, Growth, and Jobs Survey," ADB

briefs No 64 - August 2016.

14

Proposition of Credit Facilitating Platform(Source: Ata et al (2013), "Financing SME Supply Chains,” Malaysia Institute for Supply Chain

Innovation)

15

Source : “Projet de Développement de la Compétitivité et des Exportations DOCUMENT D’INFORMATION DU PROJET (PID)PHASE D’ÉVALUATION , » Rapport N° 78503

Le financement des exportations demeure un problème, surtout pourles petites PME et les nouveaux exportateurs :

Environ 40% des entreprises considèrent l’accès et le coût dufinancement bancaire comme leur plus grande contrainte (Enquête de2012)

--> Sur le plan de l’exportation, les PME ont été particulièrementtouchées par la crise financière mondiale, ce qui a compliqué ladiversification des exportations.

17

>> Trade Barriers (not specific to SMEs, but more pronounced…)

> Transaction costs

• The trade transaction costs are higher in developing countries and constitute the most important obstacle to benefit from the opportunities available at the international level (Ex: Wilson, Mann and Otsuki, 2003).

•The transaction costs include : the inefficiency of the administrative processes in general and at the borders in particular ( Single Windows), regulations, tariffs and non-tariff barriers, the quality of the transit services.

•Exemple: In average, 3 times more days, 2 times more documents and 6 times more signatures to trade with African countries relatively to high income countries (World Bank’s Doing Business report).

• Countries where firms should support higher costs than their competitors for energy, financial services, telecommunications, customs, transport, logistics, administrative procedure, will not be competitive on the international markets.

• For some key Tunisian sectors in manufacturing and services, the logistic costs represent 20% to 73% of the gross markup (2010).

Sources: Wilson,John S. & Mann, Catherine L. & Otsuki, Tsunehiro, 2003. "Trade facilitation and economic

development : measuring the impact,“ Policy Research Working Paper Series 2988, The World Bank.

“Projet de Développement de la Compétitivité et des Exportations DOCUMENT D’INFORMATION DU PROJET

(PID)PHASE D’ÉVALUATION , » Rapport N° 78503

18

A concerted effort to reduce trade costs could yield huge benefits. Reducing trade costs to 50% of those incurred by mostefficient countries could increase world GDP six times more than if all remaining import tariffs were removed ("Enabling TradeValuing Growth Opportunities" (World Economic Forum, Bain & Company and World Bank, 2013).

1

9

Source : The Global Enabling Trade Report 2012

>> The most problematic factor for exporting

2

0

23

Results of a questionnaire submitted to participants to the "OIC High Level Forum on Trade Facilitation“ ? – Morocco, February, 2013. (Nabi, M.S. and Chachi, A. mimeo, IRTI-IDB, 2013)

17 countries 22 respondents

>> Constraints on intra- OIC trade

24

Source: Nabi, M.S. and Chachi, A. mimeo, IRTI-IDB, 2013.

«…transport constraints and inefficiencies in customs clearance processes, are important in explaining the MENA region’s underperformance in trade. »

Source : « Constraints on Trade i n the MENA Region, » R.Bhattacharya et H. Wolde, IMF WP/10/31, 2010 25

26

Les procédures de contrôle d’importation et d’exportation et les délais nécessairespour dédouaner les conteneurs dans le port de Radès nécessitent davantaged'amélioration qui exige 6 jours en moyenne. Source : “Projet de Développement de la

Compétitivité et des Exportations DOCUMENT D’INFORMATION DU PROJET (PID)PHASE D’ÉVALUATION , »Rapport N° 78503

>> High levels of NTBs

2

7

28

28

2

9

Technical regulation:

“Regulation that provides technical requirements (either directly or by referringto - or incorporating - the content of a standard), technical specification or code ofpractice.” (WTO)

Standard:

“Document, established by consensus and approved by a recognised body, thatprovides, for common and repeated use, rules, guidelines or characteristics foractivities or their results, aimed at achievement of the optimum degree of order ina given context.” (WTO)

3

0

In some tunisian sectors, recent technical requirements in the export markets (likeimproving the tracability of the products (namely in the agrifood industry) createadditional constraints in the domestic supply chain.

Source : “Projet de Développement de la Compétitivité et des Exportations DOCUMENTD’INFORMATION DU PROJET (PID)PHASE D’ÉVALUATION , » Rapport N° 78503

Source : Spencer Henson (2010) “THE TECHNICAL REGULATIONS AND STANDARDS LANDSCAPE” WBI Course on

Food and Agricultural Trade for MENA

3

1

Standards and Sanitary and Phytosanitary Measures in Arab Regional TradeAgreements…The interviews revealed that :

-- Abuse of standards and SPS measures continue to be a major problem for specificgoods in a number of countries.

-- In some cases, conformity assessment procedures in terms of expensive testing seemto be the major standards and SPS related problem. …

Ghoneim, Ahmed Farouk (2010) "NTBs, Standards and SPS Facing Agricultural and Processed Food: A Regional

Perspective for Intra-Arab Exports"(WBI, JVI 6-9 April, 2010)

33

Ghoneim, Ahmed Farouk (2010) "NTBs, Standards and SPS Facing Agricultural and

Processed Food: A Regional Perspective for Intra-Arab Exports"(WBI, JVI 6-9 April,

2010)

34

Ghoneim, Ahmed Farouk (2010) "NTBs, Standards and SPS Facing Agricultural and

Processed Food: A Regional Perspective for Intra-Arab Exports"(WBI, JVI 6-9 April,

2010)

35

New tendencies and emerging Solutions

• Meeting on the role of the private sector to improve the implementation of the « Road Map for enhancing intra-OIC trade », (Jeddah, June 2011) recommended multiple actions. Trade finance.

• Develop and introduce new mechanisms/tools aimed at increasing financing for SMEs (Enable SMEs to access financing better and more easily) (Financing of imports, pre-exports, pre-shipment and the domestic purchase of commodities and goods…)

•The 5th OIC Consultative Group Meeting on enhancing intra-OIC trade (February 2013, Casablanca, Morocco) recommended the establishment of Trade Finance Support Schemes, as one of the driving factors, to accelerate the dynamic of the intra-OIC trade.

36

>> International institutions are supporting trade finance programs

37

Trade finance: Access to trade credit is an important determinant of the ability of firms to engage in trade. IFC is proposing to increase its short-term finance products, especially trade finance, with its focus on frontier countries and on MSMEs.

38

39

• Most of the countries are stabilizing the macroeconomic environmentand creating an incentivizing microeconomic framework catalyze theproductivity gains and enhance competitiveness at the international level.

Example: supporting firms in the process of certification andcompliance with the international standards and technicalrequirements.

• Reducing the coordination problems (market inefficiency,bureaucracy,…), improving the access to goods (inputs) and serviceswith comparable quality, prices relatively to the competitors.

>> Facilitating the connection to the global value chain and eliminatingthe barriers between the on-shore and off-shore sectors within aneconomy : enabling domestic firms to supply goods and services toforeign firms hosted by the national economy.

>> Governmental support

• « We find evidence that services grease the wheels of internationalcommerce: A greater availability of services across regions, industriesand time increases a firm’s foreign sourcing of materials relative tosales. »

« We provide systematic evidence that intermediaries play animportant role in facilitating trade using a firm-level of China'sexports. Intermediaries account for around 20% of China's exports in2005. This implies that many firms engage in trade without directlyexporting products.Source: Ahn et al. (2011), "The role of intermediaries in facilitating trade," Journal of InternationalEconomics, Elsevier, vol. 84(1), pages 73-85, May.

Peter Debaere & Holger Gorg & Horst Raff, 2010. "Greasing the Wheels of International Commerce: HowServices Facilitate Firms' International Sourcing," Kiel Working Papers 1591, Kiel Institute for the WorldEconomy.

42

• Supply chain production offers SMEs new trade opportunities, which allows them tospecialize.

• Foreign direct investment (FDI) will become less dominated by developed countries.Large firms from emerging economies will invest in low-income countries and provideopportunities for local SMEs to become suppliers.

opportunities for SMEs to feed into regional production networks that serveinternational demand.

A precondition is that regional integration efforts succeed in eliminating barriersto trade and investment flows, both intra-regionally and globally.

Source : International Trade Centre (ITC) (2014) "50 Years of Unlocking SME Competitiveness: Lessons for the Future."

• The increase of the intra-regional is associated with a growinginterconnectedness of production processes across the countries :specialization in particular stages of a good’s production

“international production networks”/ “global value chains”

>> Connecting SMEs to global supply chains

43

Ganeshan Wignaraja (2013) "Do SMEs matter in Asian production networks?" in "The Future of the World Trading System: Asian Perspectives," Edited by Richard Baldwin, Masahiro Kawai and Ganeshan Wignaraja, CEPR and ADB Institute.

SMEs do matter to some extent in Asian global production networks, particularly inmore industrially developed ASEAN economies (like Malaysia and Thailand), therebysuggesting a large potential role for SMEs in global production networks.

Nonetheless, it also seems that SMEs in several ASEAN economies are at adisadvantage for participation in production networks compared with large firms.SMEs face, to a greater extent than large firms, resource constraints (in terms offinance, information, management capacity, and technological capability). Moreover,SMEs suffer disproportionately from external barriers like market imperfections andregulations.

44

• Declining costs and the increasing power of information technology products and services will allow SMEs to connect to buyers and suppliers more directly. This will enable them to tap into much larger international markets and to source inputs from a broader range of suppliers.

• Information technologies, the Internet and social media platforms allow small businesses to enter global markets, sometimes bypassing local markets. The increasing availability of digital technologies will generate new opportunities for SMEs to sell services.

Source : International Trade Centre (ITC) (2014) "50 Years of Unlocking SME Competitiveness: Lessons for the Future."

>> Fostering the connection of SMEs to global supply chains throughtechnology

45

Tunisia is well positioned to become a regional champion ininnovation and entrepreneurship if it recognizes the potential ofyoung aspiring businesswomen and businessmen.

46

Source: World Bank (2015) "Crowdfunding's Potential for the Developing World"

>> « Crowdfunding»

47

L’émergence du crowdfunding a eu lieu à la suite de la crise financièrede 2008 en raison des difficultés des entreprises en phase d’amorçageà lever des fonds (BM, 2015)

Source: Karen Gordon Mills (2015) "State of Small Business Lending : US and UK"

48

La contribution attendu du crowdfunding dans les pays endéveloppement :

- Améliorer l’accès au financement pour les PME,

- Favoriser l’émergence d’une nouvelle génération d’entrepreneurs

innovants,

- Soutenir l’accès aux marchés extérieus (exportations)

- Catalyser l’entraide entre les différentes couches sociales

-- Financer la R&D dans des secteurs telles que l’énergie renouvelable

49Source: Baromètre du Crowdfunding - 2015 - Financement Participatif France

MarketAnalysis Tools

Source : http://www.itc-learning.org/course/view.php?id=38

Thank you