smes, trade, and development in africa - itc · smes, trade, and development in africa by ......
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SMEs, Trade, and Development in Africa
By Herbert Wamalwa and Dorothy McCormick
Institute for Development Studies, University of Nairobi
Paper presented at an academic workshop organised by the International Trade Centre, Geneva, 26-27 March 2015
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Outline
1. Background
2. Internationalisation
3. Clustering and Internationalisation of SMEs
4. Value Chains and Internationalisation of SMEs
5. Clustering and Value Chain Synergies
6. Conclusions
Wamalwa & McCormick - March 2015 - ITC Presentation 2
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Background
Part 1
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Enterprise Structure
• Employment: Micro: <5 Small: 5-19 Medium: 20-99 Large: 100+ Very large (see McCormick et al 2007): >999
• Contribution to GDP – over 50% (UNIDO 1999) • Manufacturing, trade, services • Ownership: Mainly sole proprietorships,
partnerships and PLCs • SMEs are not just ‘smaller companies’; they are
often qualitatively different from large and very large firms.
Wamalwa & McCormick - March 2015 - ITC Presentation 4
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: Selected Firm Characteristics: Africa and All Countries
Item SSA All Countries
Firm Age
Age of Establishment (years) 14.0 15.9
Ownership
Proportion of private domestic ownership (%) 80.4 88.6
Proportion of foreign ownership 14.5 9.1
Formality/informality
Competing against unregistered informal firms 68.5 54.4
Formally registered at start of operations in country
81.3 88.0
Source World Bank, Regional Enterprise Development Data
Wamalwa & McCormick - March 2015 - ITC Presentation 5
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Support Institutions
Government
Ministries
Specific support bodies
Regional Bodies
Associations
General business
Sectoral
Specific
Private –sector players
Financial
Banks
Venture capitalists
Business services
ICT
Accounting & finance
Consultants
Trade facilitation
Wamalwa & McCormick - March 2015 - ITC Presentation 6
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Internationalisation
Part 2
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Faces of Internationalisation
Four faces of internationalisation 1. Exports
How and to what extent do African SMEs access export markets?
2. Imports What imported goods do African SMEs use and how do they get
them?
3. FDI How and to what extent do African SMEs invest in foreign countries?
4. Linkages How do African SMEs link with foreign individuals, firms and
institutional actors?
Wamalwa & McCormick - March 2015 - ITC Presentation 8
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SMEs and Exports
Export Markets Regional markets Markets in other African countries/ trading blocs Global markets
Nature of SME Exports Manufactured goods Semi-processed goods Services
Exporting Process Manufactures: Active, passive, and contracted Semi-processed goods and services: similar or ??
Wamalwa & McCormick - March 2015 - ITC Presentation 9
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SMEs and Imports
• Nature of SME Imports Trade sector:
Consumer goods Durables, e.g. Second hand vehicles
Manufacturing sector: Raw materials and intermediate goods for local manufacturing Machinery and Equipment
Other – construction, mining, services
• Sources of SME Imports Depends on Sector and Type of goods
Manufactures: China, India, Dubai, ... Commodities: other African countries
• Importing process Self, SME importers, brokers, clearing and forwarding, transporters, ...
Wamalwa & McCormick - March 2015 - ITC Presentation 10
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SMEs and FDI
1. Inward FDI
From neighbouring countries
From foreign residents
From other sources – China, India, ...
2. Outward FDI
To neighbouring countries
To other countries
Wamalwa & McCormick - March 2015 - ITC Presentation 11
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Clustering and Internationalisation of SMEs
Part 3
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Internationalisation of SMEs Through Clustering
1. Cluster: sectoral and spatial concentration of firms 2. Potential benefits of clustering
‘Classic’ collective efficiency:
External economies and joint action greater efficiency and competitive pricing
Market access:
Domestic, regional, global
Linkage formation
Between clustered enterprises
With knowledge institutions
Improved products and processes new markets and greater competitiveness
Wamalwa & McCormick - March 2015 - ITC Presentation 13
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Internationalisation of SMEs Through Clustering
Challenges associated with clustering
Collective efficiency can be elusive
Market access often confined to local markets or passive exports
Linkages with other enterprises often weak:
Nature of markets
Cultural or other institutional factors
Linkages with knowledge institutions also weak
Wamalwa & McCormick - March 2015 - ITC Presentation 14
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Clustering and Internationalisation
No automatic link between clustering and internationalisation
Clusters need support to internationalise
from government, business associations, knowledge institutions
Problem: Lack of detailed knowledge of SME internationalisation processes
Wamalwa & McCormick - March 2015 - ITC Presentation 15
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Value Chains and Internationalisation of SMEs
Part 4
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Internationalisation of SMEs Through GVCs and RVCs
Benefits of participating in GVCs and/or RVCs
GVCs - Facilitate access to cheaper or higher quality intermediate inputs
GVCs - Facilitate access to technology and new knowledge
GVCs - Allow firms to specialise in a part of the chain of activities
RVCs and GVCs - Serve as a path to international markets
RVCs’ markets similar to domestic market
Wamalwa & McCormick - March 2015 - ITC Presentation 17
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Internationalisation of SMEs Through GVCs and RVCs
Challenges of participating in GVCs and/or RVCs
Emphasis on competitiveness can lead to ‘race to the bottom’
Chain upgrading to taking on additional functions may be blocked by lead firm or others in chain
Chain upgrading to higher value products or improved processes can be difficult to achieve
Institutional weaknesses in developing countries may limit benefits
Wamalwa & McCormick - March 2015 - ITC Presentation 18
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Clustering and Value Chain Synergies
Part 5
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Clustering and Value Chain Synergies
Both models facilitate identification of trouble spots
• Clusters: Barriers to collective efficiency, market access, intra-cluster firm linkages; infrastructure constraints
• Value chains: Low value addition nodes leading to financial constraints, problems with standards, regulatory and institutional constraints, can be adapted for special purposes, e.g., ‘Homeworkers’ manual
Both models require firm-level data that is often lacking in African countries
Neither deals directly with policy constraints
Wamalwa & McCormick - March 2015 - ITC Presentation 20
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Clustering and Value Chain Synergies
More questions than answers:
- Main theoretical and practical links between the cluster and value chain models?
- How can these links be explored empirically?
- Concrete examples of helpful public policies?
- i.e., those that have succeeded in creating positive incentives for SMEs’ participation in clusters, GVCs, and/or RVCs?
- How appropriate are such policies for African countries?
Wamalwa & McCormick - March 2015 - ITC Presentation 21
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Conclusions
Part 6
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Conclusions
Both cluster value chain models are useful analytical tools for understanding productive processes in African countries. They provide different but complementary insights into how
firms internationalise.
Varied and complex: One size does not fit all!
Issue of contribution of internationalising SMEs to sustainable development handled only indirectly
Issue of effects on labour of ‘race to the bottom’
Issue of building sustained trading relationships
Issue of minor role for exporting in most SMEs
Wamalwa & McCormick - March 2015 - ITC Presentation 23
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Conclusions
Policies and programmes (National and regional) needed to help African SMEs to internationalise in ways that foster sustainable development
Need to protect and enhance livelihoods of small business owners and their workers.
Need for regular data collection and specific research projects to support evidence-based policies
Wamalwa & McCormick - March 2015 - ITC Presentation 24
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THANK YOU! Comments please.
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