MGT601 - SME Management - Lecture Handout 38

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EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES – II

Relationship between SMEs and Export Development

While in certain circumstances SMEs enjoys some advantages of flexibility, in general they suffer from structural handicaps in their operations arising from small size, particularly where exports are concerned. Even SMEs that are highly successful domestically, for a variety of reasons, do not find it easy to upgrade production to production for exports.

Problems faced by SMEs in developing countries typically include:

Scarcity of capital.
Limited and unequal access to institutional credit markets.
Irregular access to domestic and imported inputs coupled with higher cost.
Inadequate infrastructure facilities.
Weak managerial and technical skills.

A large number of SMEs have successfully overcome these formidable difficulties, established a sound base in the domestic market, and may be potentially capable of breaking into export markets. However they may be hampered by a variety of circumstances:

Lack of information on possible export market.
Absence of guidance on export regulations and procedures.
Inability to identify sources of assistance for product development and product upgrading for export.
Lack of information on export credit and insurance facilities as well as for export requirements.
Lack of information on operation of indirect marketing channels like merchant export houses.
Absence of guidance on basic management issues relevant exporting firms.
Absence of sound steps that need to be taken to enter in export field.

SMEs are often uninterested and unprepared to enter export field owing to: Lack of market information, Lack of incentives, Lack of credit, Lack of staff and organization and Difficulties in obtaining export licenses, export guarantees and foreign exchange. Thus, while in many developing countries SMEs are now receiving greater attention and aid from both the public and the private sector in many developing countries, little attention has so far been focused on the specific help needed to increase exports from SMEs. Developing the export capabilities of SMEs is difficult because of their special problems. Yet it is often assumed that the needs of SMEs are adequately net by ‘traditional sources’ of assistance, which are usually geared to the needs of larger firms. While most developing countries have well-established SME support programmes with agencies. Yet it can be argued that many of the techniques used to stimulate and support small business growth in general can be extended to support the export activity of SMEs.

This argument is based on the fact that the development of export capability in small firms is just one more aspect of their business development. In the essence exporting means moving to improve basic organizational capabilities: such as management control, financing, costing and pricing, design and marketing management. General support structure for SME development to be linked with export support. This structure demonstrates the linkage between the general support infrastructure for SMEs and the specific export support infrastructure and their different goals.

The former has as its objective the development of capability of SMEs for survival and growth, the latter the development of specific capability for export. Whereas in the context of the firm the development of general organizational capability and that of specific organizational capability for export are obviously closely linked, casual observation indicates that there is often no close linkage between the general support infrastructure for SMEs and the export support infrastructure.

SMEs assistance institutions can be considered in terms of a number of characteristics including: Whether they are public, private or mixed. Whether they are local, regional or national. And their degree of coverage. Whether they provide integrated forms of assistance, meeting a variety of different kinds of needs; whether they are general or concentrated upon particular industry sectors or sectors of the population; whether they are strong in terms of resources and capability; and finally whether they are long established traditional sources of small business support with a good track record.

Strategy for Development of Exports from SMEs

Today, export promotion in general by most of the developing countries and particularly by SMEs is not easy. This is true for a variety of reasons. Some of which are listed below.

First, the products available in most developing countries are generally known in international markets and discovery new product capabilities is not likely to be as regular and frequent as before.
Second, international marketing techniques are well disseminated in most developing countries, though they are not equally well known in the interior of the countries.
Third, as more developing countries penetrate in world markets, path to other developing countries will be that much harder and competition correspondingly greater.
Finally, international markets are tending to become less open to manufactured products from developing countries.

Common Difficulties at Various Levels

A summary of some of these problems is given below.

At the national level

It is often observed that a well-planned strategy to develop exports from SMEs does not exist. The objectives are frequently not well defined and the available policy instruments for industry and trade are frequently not aimed at developing the SME sector and its exports.
Where support for SMEs is a stated objective, there is often inadequate follow-up in terms of specific measures and mechanisms. In many instances, the institutional infrastructure is sub-optimal with a lack of coordination among trade service institutions.
The environment is often not conducive to the creation and growth of marketing channels for SME exports such as merchant export houses, export development companies, joint marketing arrangements, export consortia, etc.

At the level of trade organization (TPOs) and industry export institutions

There is often an inadequate focus on issues of concern and relevance to SMEs and a lack of appreciation of the special features and difficulties of SMEs in their export efforts.
Many service institutions do not have well-defined programmes with clear objectives for assisting SMEs in export development.
The channels of communication between service institutions and SMEs are frequently inadequate.

At the level of Enterprise

In many situations, special difficulties are encountered, leading to inadequate and more costly access to factor markets.
Individual SMEs are often not in a position to identify sources of assistance for product development and product upgrading for export.
SMEs generally have difficulty in obtaining information and guidance on export markets and are unable to undertake direct export marketing.
Absence of indirect export marketing channels like merchant export houses, export development companies, etc. in many situations inhibit export market access for SMEs.
Training facilities in export management are often not readily available.

Involving SME Development agencies

The trade organizations and export service agencies in many developing countries interface only with exporting SMEs, though the majority of the SMEs are usually linked with national level with SME development agencies and institution. Many governments have established a network of SME institutions which are in close touch with SMEs. There is a need to deliver an export orientation programme to a new target audience, that is, established SMEs in the region who are currently not participating in exports. It is important to create awareness in SME development institutions and through them among the enterprises themselves of export potential for export. To achieve this, it will be necessary to strengthen SME development institutions capacities to provide export development services.