Integrating SMEs into value chains can boost development
Small business comes in many different forms but for millions of people around the world it is a route out of poverty and a chance at a better life.
Small and Medium Enterprises (SMEs) contribute significantly to global income and job creation.
In developing countries, they provide 60-70% of formal employment. In sub-Saharan Africa alone, that figure rises to 80%.
The scale and diversity of small business in the global economy makes it a potentially powerful force in development efforts.
To harness this potential, it is important to strengthen the competitiveness of SMEs and enhance their contribution to the 2030 Agenda for Sustainable Development, the 15-year global roadmap adopted by the international community in 2015.
The Addis Ababa Action Agenda on financing for development lays out financing priorities for the 17 Sustainable Development Goals (SDGs) that form the core of the 2030 Agenda. The SDGs call for multiple interventions to build strong SMEs, notably in the areas of access to finance and skills; knowledge and technology transfer; and by creating linkages with regional and global value chains.
Integrating SMEs into global or regional value chains can be a potent way to strengthen small business operators through their participation in the global economy. Global value chains make up 84% of the international production networks of multinational enterprises (MNEs), meaning they have become the engine room of the global economy.
UNCTAD data shows that some 90,000 MNEs together have US$27 trillion in foreign direct investment stock invested in nearly 1 million foreign affiliates worldwide. Together, MNEs account for over a quarter of global GDP and 30% of private sector value-added. Their production networks form the backbone of trade, now accounting for 80% of all cross-border sales.
In contrast with the international reach inferred by their name, most global value chains have a distinctly regional character. Therefore, strategies to tap the potential of value chains for economic development would do well to heed a regional approach.
There is a large potential for business linkages in both manufacturing and services industries. This can include connecting local firms to value chains by linking them to leading firms and affiliates operating in their countries. These links could potentially achieve the benefits for small enterprises that the Addis Ababa Action Agenda calls for. Such connections help to create stable offset points for the goods and services produced by small suppliers, offer contact with technological innovation, and smooth access to new skills and alternative sources of capital.
However, value chain participation can hold risks. Economic dependence and power imbalance sometimes characterize these networks, and SMEs linked to value chains are not spared the demand fluctuations associated with certain sectors. Value chain participation is not a panacea for all small operators. Smaller domestic firms naturally have fewer opportunities to become part of production networks because of limited resources and bargaining power, as well as information asymmetries.
Country strategies to integrate into value chains are intricate and cut across different policy areas. A value chain participation plan for SMEs must form part of a broader national strategy. Many of the factors that underpin links with cross-border production networks are overarching, affecting firms regardless of their size.
A fundamental requirement for effective value chain integration is adequate infrastructure. Another is policies geared towards creating a sound overall business environment. These include coherent trade, investment, tax and competition policies, labour market regulation, intellectual property rights, access to land, among others. Moreover, trade and investment facilitation efforts are also needed to help make a sound business environment a reality.
Beyond these basic requirements, a focus on the following areas can help SMEs embark on the global and regional value chain development path:
Science and technology support and an effective intellectual property rights (IPR) framework
Business development services
Access to finance for SMEs
The integration of SMEs into regional and global value chains can be a powerful driver of structural transformation and finance for developing countries. But this integration won’t happen automatically, or in a vacuum.
Policy makers and the international community therefore need to work closely with small business to help SMEs reach their potential as engines of the global economy.