Economic Research Forum (ERF)

Harnessing technology for export growth by small businesses

332
What policy actions can help small and medium-sized enterprises (SMEs) to enhance their integration into the global market for goods, services and ideas? This column outlines recommendations in a new book on the opportunities and challenges facing SMEs in developing countries, focusing in particular on the role of digital technology in supporting SMEs in Arab economies to export and grow.

In a nutshell

New tools of digital technology can facilitate cross-border e-commerce and participation in global markets for smaller and new entrants.

Technology-enabled firms are much more likely to export, to export to more destinations and to survive in the marketplace.

Policy in MENA countries needs to respond to these developments: by providing regulatory clarity, investing in digital literacy and entrepreneurship skills, identifying digital economy opportunities in export markets and improving payment systems.

Small and medium-sized enterprises (SMEs) are the backbone of Arab economies, accounting for 10-40% of their employment. But these figures are likely to be significantly under-reported in official records given that the typical country in the Middle East and North Africa (MENA) region employs 67% of its labour force informally.

MENA has 22 SMEs per 1,000 inhabitants, the highest density of any developing region. Yet in most countries in the region, SMEs are responsible for only a tiny share of the value of gross exports.

Participating in global value chains, which have become the dominant feature of world trade, provides opportunities for SMEs to enhance their integration into global markets for goods, services and investment. Such involvement can lower barriers to exporting by accommodating specialisation in narrow business functions, thereby obviating the need for a firm to develop a complex production process in-house and lessening its dependence on the degree of industrial development of the home country.

These aspects are especially important for SMEs, for which the best metaphor would not be a chain but a ladder. The disaggregation of production into separate stages allows SMEs not only to find their place on the ladder, but also to move up the rungs as their capabilities improve. Global value chains encourage that upward movement by rewarding skills, learning and innovation.

The relatively low weight of SMEs in exports at the total economy level partly reflects compositional effects and associated economies of scale. Exporting SMEs are significantly under-represented in (tangible) capital-intensive sectors, such as transport equipment. But they compare favourably in the services sector and in heterogeneous sectors where specialisation and branding can drive export penetration.

Firm size also affects the capacity to enter more distant and possibly more protected markets. In 2011, for example, SMEs in the European Union (EU) accounted for 37% of intra-EU exports but only 28% of extra-EU exports. Indeed, in most countries, SMEs typically export disproportionately more to neighbouring countries than do larger firms.

Our research points to signs that some SMEs are managing to internationalise by taking advantage of better access to digital technology, including the internet and mobile telecoms (Cusolito et al, 2016). The internet dramatically reduces the cost of finding buyers for SMEs, both domestically and globally.

Our research finds that technology-enabled firms are much more likely to export, to export to more destinations and to survive in the marketplace. Similarly, SMEs and new firms are likely to have a larger role in the export mix for technology-enabled trade than for traditional trade. Figure 1 makes this comparison for Jordan.

There is some evidence of the emergence of ‘micro-multinationals’ – small and young firms that are global from their inception. New digital tools can facilitate cross-border e-commerce and participation in global markets for smaller and new entrants – for example, Skype for communications, Google and Dropbox for file sharing, LinkedIn for finding talent, PayPal for transactions and eBay and Amazon for sales.

Evidence shows that an increasing number of producers in developing countries are selling using the internet, either through their own websites or through web portals such as eBay and Alibaba. Business-to-consumer e-commerce reached $1.5 trillion globally in 2014 and is growing at 25% per year, and even more rapidly in the MENA region (see Table 1). Business-to-business e-commerce may be even larger.

Much of this trade is export trade. By 2020, global online sales will amount to $10 trillion, with annual growth of 20% for business-to-consumer and 7.7% for business-to-business transactions. Much of that growth will originate in emerging markets, where the adoption of digital technology continues to rise rapidly.

Enhancing access to digital networks and enabling SMEs to engage in e-commerce can be an effective way for small MENA firms to go global and even grow across borders where they can become competitors in niche markets. But many potential gains could be lost without changes in the basic framework conditions facing MENA SMEs.

One important component concerns the regulatory burden. The administrative burden generated by governments for starting and running companies can be significant, but online government portals for information on business creation and registration can help lower the burden.

There are also barriers that limit competition that need to be addressed for economies to benefit fully from the internet. Regulatory and trade barriers persistently inhibit entrepreneurs from accessing domestic and foreign markets.

There are significant impediments to the ability of MENA SMEs to exploit the internet fully for exporting. While many have internet access, they either do not have websites through which they can do business, or they have limited understanding of how to leverage the internet as part of their business plan.

According to studies of Egypt, entrepreneurs also face systemic and cultural barriers to digital trade, which is an important enabler of participation in global value chains, particularly in the services sector. These barriers include:

  • inadequate or costly telecoms infrastructure, including internet access;
  • lack of digital literacy and skills, resulting in an unqualified labour force and uninformed consumers;
  • unclear legal and regulatory systems and standards;
  • difficulties with accessing electronic payment systems;
  • complex and unreliable logistics and distribution networks;
  • and lack of ‘one-stop-shop’ facilities to ease digital trade.

Access to larger markets and the possibility of specialising in tasks or stages of production (rather than building entire vertical supply chains) offers huge opportunities for smaller businesses and start-ups in MENA. Technology, notably the internet, is offering further opportunities for dynamic SMEs.

Policy needs to respond to these developments. But reducing existing barriers to digital trade and improving access to global markets will require a holistic approach to provide regulatory clarity, to invest in digital literacy and entrepreneurship skills, to identify digital economy opportunities in export markets and to improve payment systems.

Further reading

Cusolito, Ana Paula, Raed Safadi and Daria Taglioni (2016) Inclusive Global Value Chains: Policy Options for Small and Medium Enterprises and Low-Income Countries,  Directions in Development: Trade, World Bank/OECD.

Figure 1: Jordan: performance of technology-enabled versus traditional exporters

 

Source: eBay 2014, 33.

Table 1: Global business-to-consumer e-commerce marketplace by region, 2012-17

(US$, billions; average annual growth, %)

Region 2012 2013 2014 2015 2016 2017 CAGR (%)
Asia-Pacific 301.2 383.9 525.2 681.2 855.7 1052.9 50
North America 379.5 461.0 482.6 538.3 597.9 660.4 15
Western Europe 277.5 312.0 347.4 382.7 414.2 445.0 12
Central and Eastern Europe 41.5 49.5 58.0 64.4 68.9 73.1 15
Latin America 37.6 48.1 57.7 64.9 70.6 74.6 20
Middle East and Africa 20.6 27.0 33.8 69.5 45.5 51.4 30
Worldwide 1,058 1,215 1,505 1,771 2,053 2,357 25

Source: eMarketer, cited in Suominen, 2014.

Note: CAGR = compound annual growth rate.

Most read

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Arab countries are caught in an inequality trap

Conventional wisdom, based mainly on surveyed household income distribution statistics, suggests that inequality is generally low in Arab countries. At the same time, little attention has been devoted to social inequalities, whether in terms of outcomes or opportunities. This column introduces a forthcoming report, which offers a different narrative: based on the largest research project on the subject to date and covering 12 Arab countries, the authors argue that the region is caught in an inequality trap.

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

The Egyptian economy is still not creating good jobs

Growth in Egypt has recovered substantially since the downturn following the global financial crisis and the political instability following the 2011 revolution – but what has happened to jobs? This column reports the results on employment conditions from just released data in the 2018 wave of the Egypt Labor Market Panel Survey.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

How Egyptian households cope with shocks: new evidence

Managing risks and reducing vulnerability to economic, social, environmental and health shocks enhances the wellbeing of households and encourages investment in human capital. This column explores the nature of shocks experienced by Egyptian households as well as the coping mechanisms that they use. It also examines the relationship between such risks and job formality and health status.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Egypt’s labour market: facts and prospects

An ERF policy conference on the Egyptian labour market in late October 2019 focused on gender and economic vulnerability. This column summarises the key takeaways from the event.

An appeal for Sudan’s future

Sudan today is on a knife-edge: it can evolve toward peace and democracy – or spiral into instability and violence. As this Project Syndicate column argues, vital and timely international assistance can make the difference between success and failure for the new government.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.