Realising the potential of services SMEs in developing economies
The development of services sectors in least developed countries (LDCs) and low-income countries (LICs) has the potential to generate economic growth, raise incomes, and reduce poverty rates.
Small and medium-sized enterprises (SMEs) play a key role in this quest given their ability to not only react quickly to rapidly changing market conditions, which have come to characterise much of the global economy, but also to disperse economic gains more widely throughout the domestic economy than their larger counterparts.
This paper examines the critical role which SMEs play in the services sector, investigates the primary supply-side constraints which limit their increased participation in the economies of LDCs and LICs, and proposes a set policy options which could boost SME participation, productivity, and competitiveness in the services sectors of the world’s most vulnerable economies.
The tremendous technological advances that have taken place in recent years have created a new kind of world – one in which production processes are increasingly being split up and outsourced to different countries that have various cost-saving competitive advantages. This is the basis of the regional and global value chain phenomenon. Unfortunately, the least-developed countries (LDCs) and low-income countries (LICs) are poorly integrated into the global economy and make a very small contribution to global production. Instead, they are largely dependent on low-value exports, e.g. raw materials or simple manufactures.
However, global trade in services (such as information and communication technology, financial services, transport, education and healthcare) is showing strong growth, helped by the surge in regional and global value chain activity that relies heavily on services. This could herald a new era for LDCs and LICs, especially as it is often easier to transition to a range of service-related activities than to value-added industrial outputs. Services already make a major contribution to the gross domestic product (GDP) of many poor countries, although the majority of service businesses are still survivalist in nature with limited prospects of growing and creating more employment opportunities. Furthermore, poor countries’ services exports – other than, say, those linked to tourism – are insignificant by global standards.
This scoping paper examines the potential of the services sector to extend an economic lifeline to the LDCs and LICs, which are concentrated in four regions: East and Southern Africa; West, North, and Central Africa; Asia; and the Pacific Islands. The paper focuses specifically on SMEs (small and medium-sized enterprises) whose economic potential tends to be suppressed by insufficient market knowledge, a lack of skills and access to finance, fierce competition from larger businesses, ailing or undeveloped national infrastructure, an unhelpful policy and regulatory environment, and excessive bureaucracy.
If these obstacles could be swept aside or at least minimised, SME service providers’ competitive advantages (which might include being adaptable and eager to learn) would be more likely to be revealed, and they could make a more meaningful contribution to their countries’ economies and to the global quest for sustainable development.
It is at the policy level that much can and should be done to create opportunities for SMEs operating in various service sectors in less-developed countries. While SMEs often feature on LDCs’ and LICs’ policy agendas, such references rarely translate into practical initiatives and concrete outcomes. As a result, most SMEs are relegated to the side lines, forced to watch larger and better equipped service providers dominate the playing field. However, with regional and global value chains creating openings for different types of economic contribution, SME service providers with limited capacity but appealing attributes in other areas, and with the necessary support at policy level, could well find their niche.
This paper was produced under ICTSD’s Programme on Inclusive Economic Transformation as part of a project focused on leveraging services to drive sustainable economic growth. The views expressed in this publication are those of the authors and do not necessarily reflect the views of ICTSD or the funding institutions.