Why services SMEs should engage in international trade

Firms that engage in international trade are on average larger, more productive and more often foreign owned than firms that service the local economy only. Nevertheless, there are vast opportunities for services SMEs to engage in international trade.

It takes substantial scale to service international markets. But in the digital economy the additional cost of adding a new customer can be tiny and even start-up services firms can enter international markets – being born global. Music, films, computer software, computer games and the like are often produced for the global market by young SMEs. Most services markets rely on the physical world in addition to the digital economy, however. For these, services start-ups can leverage their reach through participation in international value chains.

An alternative way for services SMEs to participate in international trade is by franchises with multinational, often manufacturing firms. The franchisors provide a trade mark, know-how, and sometimes credit. SMEs may also engage in international trade by using foreign Internet platforms to connect with local customers to whom they deliver the service offline.

Although the opportunities are many, and it has been argued that the 21st century belongs to the micro multinational, the challenges and obstacles are also numerous. First, it is always more difficult for SMEs to absorb burdensome regulations and red-tape than larger firms. Second, staying power requires keeping abreast with rapidly changing technology and consumer tastes, which require significant human and financial resources.

Firms are born small, and a few are also born global. The vast majority of services firms that manage to survive in international markets grow rapidly to reach a sustainable scale. Some grow organically, some integrate into international networks and many are acquired by larger firms.

Policy should first and foremost remove unnecessary obstacles to entrepreneurship, and barriers to enter foreign markets. Reforms related to domestic regulation that would particularly benefit start-ups and SMEs are minimizing the burden of licensing requirements, and harmonizing with trading partners where possible; refrain from stigmatising going bankrupt; ensure competitive and well-functioning telecommunications and financial markets, including for venture capital; refrain from protecting incumbents against start-ups that use disruptive technologies; and protect intellectual property rights.

The most important trade policy measures would be to ease the flow of natural persons providing services across borders, remove barriers to establishing branches and representative offices; allow data to flow freely across borders; allow cross-border crowd funding; and make copyright and related rights suitable for the digital economy.

Government support for SMEs’ services exports through explicit or implicit subsidies are not recommended. There is no evidence that such policies would improve welfare, stimulate employment generation or productivity, while there is some evidence that such policies would waste resources and become an obstacle to scaling up.

This article is published in collaboration with ICTSD. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Hildegunn Kyvik Nordås is a Senior Trade Policy Analyst at OECD.

Image: A container ship departs Burrard Inlet in Vancouver, British Columbia March 6, 2009. REUTERS/Andy Clark.