Promoting SME Internationalization in Latin America and the Caribbean: Nextrade Group Book
Nations around the world have identified exports as a key growth lever. For Latin American and Caribbean, this priority is no different. Regional policymakers are particularly acutely aware of the potential of regional small and mid-size companies for export-led growth, increased productivity, economic diversification, and job-creation: so far, only 13 percent of LAC SMEs export.
This Nextrade flagship report prepared for the Inter-American Development Bank analyzes the state and challenges of SME internationalization in the LAC region, and offers practical recommendations for policymakers, companies, and practitioners to accelerate regional SME internationalization.
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As the global economy emerges from the Great Recession, nations around the world have identified exports as a key growth lever. For Latin American and Caribbean, this priority is no different. After all, trade is the lifeblood for practically all LAC economies, and it has expanded dramatically in the past two decades on the back of structural reforms, extensive trade liberalization, and the formation of free trade agreements with leading economies.
However, the region’s trade expansion has largely been driven by large companies and multinationals. Large Latin American companies, or multilatinas, are also highly internationalized, often deriving the bulk of their sales from overseas. While a backbone of the regional economies and a source of employment for millions, small and medium-sized enterprises (SMEs) are notably under-represented in the region’s external sector. SMEs constitute over 95 percent of companies in the region, but only 13 percent of LAC SMEs export. In addition, the regional SMEs that do export tend to export only a few products to a very small number of markets. These patterns not only stifle the potential for growth among regional SMEs, attainable through gains from trade; they also render SMEs more vulnerable to domestic business cycles.
Latin America and the Caribbean countries stand to score significant growth gains by fostering SME internationalization, particularly when focusing on SMEs that have a strong potential to grow in international markets. These LAC SMEs are a vast reservoir of latent potential that has yet to be fully tapped for export-led growth, greater productivity, economic diversification, and job-creation. Empirically, SME that enter export markets and continue exporting successfully enable LAC countries to significantly expand and diversify their exports. Emerging research around the world also shows that internationalization enables SMEs to grow more productive, innovative, and competitive – and thus offers an opportunity for LAC firms to grow into large companies that generate employment for thousands. Yet many LAC economies trail comparable emerging markets in SME export participation, diversification, and export sales.
Constraints to LAC SME Internationalization
SME internationalization is, in short, a major growth opportunity for Latin America and the Caribbean. Yet LAC SMEs fail to perform on all three critical legs of the internationalization stool: export entry, export survival, and export diversification. There are three types of critical constraints that impede LAC SMEs seeking to enter and thrive in the global marketplace on a sustained basis:
External bottlenecks – factors outside the firm. In Latin America, these include high up-front costs required for a firm to first enter a particular export arena that tend to disproportionately affect SMEs; high trade costs that stem from wanting transportation infrastructure, long customs clearance times, and high freight costs, and complexities of trade compliance.
Firm’s internal export capabilities. Two companies with similar external constraints can perform radically differently in export markets. The difference: firm-specific assets and capabilities. Each successful exporter has key assets, such as management with relevant international background, and a suite of hard-to-build capabilities, including specific methodologies to plan for risk and uncertainty, drive high-trust high-touch relationships with key channels and buyers, and create adaptive process and product innovations by improving on existing technologies and codifiable knowledge.
Access to finance, the critical yet often sorely lacking fuel for SME growth and internationalization. Collateral requirements and net interest margins facing the regional SMEs are among world’s highest, and LAC SMEs also pay significantly higher interest premia than do larger firms. In addition, alternative financing sources such as equity, supplier credit, and supply chain finance, require further development in the LAC region so as to benefit a far larger pool of LAC SMEs.
How to Make a Difference?
LAC SMEs face several constraints to internationalization, yet many companies seem to beat the challenging odds. Public policy can play a leading role to alleviate the frictions and market failures that constrain LAC SMEs’ internationalization, and thus expand the number of SMEs that export, and the overall SME exports.
There are many ways to structure and sequence interventions. There are several innovative international support mechanisms in export promotion and export finance that can be applied in the LAC region. Select generic features of such interventions include:
Shared knowledge and experience. By now, there is ample empirical evidence that exporters can inspire and concretely help other firms to export, by transmitting knowledge about the export process and markets. Yet such externalities do not come about fully on their own. Rather, policy interventions can make them systematic, scalable, and impactful. Some examples might include such as virtual sectoral clusters and “mobility initiatives” to internationalize the workforce. The public sector does not only provide the venue for such knowledge transfer; it can plays an important role in mitigating the sense of free-riding by non-exporters on exporters by offering incentives for the exporters to share their knowledge.
Pooled regional knowledge. There are enormous opportunities to pool national and regional resources to build high accessible and user-friendly information portals to guide SME exporters and export aspirants. Enormously useful would be a one-stop-shop information repository that brings together, in business-friendly language, the many standards and rules involved in trade, foreign export markets, and export finance, and that were purposefully and forcefully marketed to LAC SMEs. The IDB’s ConnectAmericas is an important step in this direction.
Scaled, customized capacity-building. Each exporter is different, and faced with different circumstances. As such, “one-size-fits-all”-advice has its limits. And while tailor-made case management can work, particularly when delivered across the full chain of support, it is notoriously difficult to scale. Even more, the specific capabilities at the heart of successful SME internationalization are inherently learning-based, incremental and require continual improvement. All this points to a new opportunity to move beyond one-time training. This approach would leverage technology and provide SME managers with access to a full range of essential assessments, decision-making tools and learning activities, empowering them to engage in continuous learning throughout the export trajectory.
Coordinated government and stakeholder action. All too often resources and efforts to help SMEs internationalize are spread thin across several government agencies and stakeholder groups. That SME internationalization requires holistic and integrated solutions to be successful should be reflected in the design, organization and implementation of support, such as in tight coordination among the many agencies that solve different facets of the challenges facing globalizing SMEs – export promotion, innovation policy, and economic development, to name a few. Similarly, there are opportunities to build synergies among the various entities that provide credit enhancements to SMEs, such as export credit and SME finance and development agencies.
There are also a set of immediately actionable strategies that are especially suitable for LAC region to catalyze SME internationalization, and that would help maximize results from what are inherently limited support resources. This set of strategies relies on the region’s comparative advantages, and covers the following three areas:
Accelerating LAC SMEs’ quality participation in global value chains. With a substantial presence of multinational firms in their region, LAC SMEs have an opportunity to supply global value chains, one of the best first steps for companies to internationalize.
Leveraging the U.S. Hispanic Diaspora to drive LAC SME exports. LAC SME are exceptionally well-placed to win more business in one of the largest and fastest-growing markets worldwide – the U.S. Hispanic market.
Helping SMEs leverage cross-border e-commerce. One of the most powerful ways for LAC SMEs to reach global markets is through e-commerce: selling online essentially reduces the physical, informational, and cultural distances that limit trade across borders. The regional supply side has promise: Compared with much of the developing world, Latin American SMEs are rather well-connected to the web.
Successful and sustainable SME internationalization requires a paradigm shift, one away from a granular focus on isolated support mechanisms that may or may not place SME priorities at the forefront, and towards a holistic and coordinated set of national economic and trade policies along with requisite managerial and operational practices within SMEs and targeted institutional innovations.
Much has already been accomplished in the region. At a time of stiffening global competition for export market share and for foreign direct investment, these efforts will now have to be stepped up. The payoff is well worth the work.