SMEs

SME Competitiveness Outlook 2107 finds that deep regional integration generates more value-chain activity and helps improve SMEs’ competitiveness

Trade agreements with investment provisions encourage greater domestic value added than stand-alone bilateral investment treaties

(Geneva) – Comprehensive trade agreements that provide for deep regional integration are better at connecting small businesses to value chains and ultimately better for building more inclusive growth. According to the International Trade Centre’s SME Competitiveness Outlook 2017 – The Region: A Door to Global Trade, deeper regional integration turns out to be a major success factor in developing multi-country value chains, which in turn raises the competitiveness of small and medium-sized enterprises (SMEs). This finding is particularly interesting given the current debate on the utility of expanding the content and depth of trade agreements.

Released today, the 2017 edition of the SME Competitiveness Outlook combines data analysis, academic insights and case studies to provide guidance for policymakers, business managers and trade and investment support institutions on how best to help SMEs navigate regional trade as a springboard to move up the value chain and increase the chances of going global. The report contains thought leader contributions from Thahirwa Dieudonné, Managing Director, Gashora Farm, Rwanda; Tony O. Elumelu, Founder, the Tony Elemelu Foundation; Mukhisa Kituyi, Secretary-General, United Nations Conference on Trade and Development; Susana Malcorra, Minister Advisor, Government of Argentina; and Ying McGuire, Global Vice-President, Technology Integration Group.

The report finds that trade agreements – especially ‘deep integration’ deals that combine trade provisions with those on foreign investment – are associated with increased domestic value added for exports. The conclusions are drawn on novel econometric analysis of 261 bilateral and multi-country trade agreements involving more than 150 countries and territories. While trade agreements that include investment provisions are associated with a 2% increase of the domestic content in value-chain exports, stand-alone bilateral investment treaties do not have an effect on domestic value added.

Increasing value-chain activity in turn appears to boost the competitiveness of SMEs more than it does that of larger domestic companies. The report finds that for each additional policy area – such as investment, dispute settlement, competition policy, intellectual property or environmental provisions – covered by a country’s trade agreements, there is a 2.5% increase in the country’s integration into value-chain trade.

More significantly, this leads to a 1.25% reduction in the competitiveness gap between small and large firms. This can have substantial impacts given that this reduction represents, for example, the difference between the competitiveness gap in countries like Botswana and Ecuador and that in Eastern European countries that belong to highly competitive regional value chains.

Increased firm-level capacity of SMEs implies being in a better position to be selected by international buyers, to operate successfully within value chains and to upgrade or expand within such chains. Overall it increases SMEs’ bargaining power within the value chain and reduces the risk of being locked into the lower ends of value chains. Being able to negotiate better contracts with their buyers also puts SMEs in a position to offer better terms to their own employees.

Gender is also a feature of the Outlook, with findings showing that there has been an increase in provisions covering gender equality and SMEs in trade agreements. In 1995-1999, 14% of trade agreements had references to gender equality; in 2010-2016, 47% of agreements referred to gender equality. SME provisions were part of only 6% of trade agreements in 1995-1999, whereas in 2010-2016, 25% of trade agreements contained SME provisions.

‘Including provisions on gender equality and SMEs has to be part of modern trade agreements,’ said ITC Executive Director Arancha González. ‘Even when they are not legally binding, they send an important signal that efforts need to be made to create a level playing-field for all. It is all about the need for greater coherence between economic and inclusiveness policies.’

‘The potential of SMEs to connect to foreign markets depends on the extent of value-chain activity nearby,’ González said. ‘As this report shows, most value-chain activity takes place within regional value chains, with suppliers serving lead firms in the regional hub. This means that creating an environment that facilitates regional value chain activity is important for the inclusiveness of trade.’

The report also examines recent regional infrastructure initiatives – such as China’s Belt and Road Initiative – that explicitly recognize the interaction between infrastructure, trade and regional integration.

Regional competitiveness

In line with other research, the report shows that regional value-chain activity is highest in Europe, Asia and North America. ITC’s competitiveness analysis, based on firm-level capacity, strength of the ecosystem and the national environment, makes it possible to assess why this is the case. While trade and investment policies play an important role, they are not the sole determinant.

Among the report’s findings are that traditional ‘headquarter’ economies in Europe (for example, France and Germany) and Asia (for example, Japan and the Republic of Korea) are surrounded by countries with a strong supplier base that facilitates regional value-chain activity. Both regions are also characterized by the emergence of new headquarter economies, notably China in the Asian region.

In contrast, the top competitiveness performers in Latin America and the Caribbean are weaker than their European and Asian counterparts, and are not fully exploiting the potential to become headquarter economies. Africa, meanwhile, remains split in two, with countries north of the Sahara serving value chains headquartered in Europe, while regional value-chain activity remains weak elsewhere on the continent.

The 50 country profiles contained in the report allow readers to develop a deeper understanding of which sectors have the potential to attract foreign investors and how national suppliers are positioned to serve or lead international value chains. In addition, the report contains five detailed stories of successful supplier integration: cocoa in Ghana, the automotive industry in Hungary, horticulture in Kenya, the electronics industry in Indonesia and the aerospace industry in Morocco. Together, they provide useful insights into the components of an effective value chain strategy.

Key findings of the Outlook include:

Deep regional trade integration can help deliver more inclusive economic growth.
Deep integration trade deals spur activity in cross-border value chains for goods and services.
Increasing value-chain activity helps boost the competitiveness of small and medium-sized enterprises.
Narrowing the competitiveness gap between small and large firms helps reduce income inequality.
Bilateral investment treaties do not measurably stimulate domestic value-added in exports through value chains. Integrating investment provisions in trade agreements does.
Investment into regional infrastructure has to be part and parcel of regional trade and investment strategies and cannot only come as an afterthought.
Lack of regional hubs means sub-Saharan Africa and Latin America (excluding Mexico) are less integrated in international value chains than Asia, Europe and North America (including Mexico).
China has the capacity to act as a headquarter economy in Asia and a number of Eastern European countries can move into this position in Europe.
Regional top performers like South Africa in Africa and Chile and Colombia in South America are the most likely candidates to take up positions as ‘headquarter’ economies.

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