EXPORT POTENTIAL OF SME IN DEVELOPING Countries. II:At the national level

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SME Management (MGT-601)

Lesson 38

EXPORT POTENTIAL OF SME IN DEVELOPING

Countries. II

Relationship between SMEs and Export Development

While in certain circumstances SMEs enjoys some advantages of flexibility, in general they suffer from

structural handicaps in their operations arising from small size, particularly where exports are concerned.

Even SMEs that are highly successful domestically, for a variety of reasons, do not find it easy to upgrade

production to production for exports.

Problems faced by SMEs in developing countries typically include:

· Scarcity of capital.

· Limited and unequal access to institutional credit markets.

· Irregular access to domestic and imported inputs coupled with higher cost.

· Inadequate infrastructure facilities.

· Weak managerial and technical skills.

A large number of SMEs have successfully overcome these formidable difficulties, established a sound base

in the domestic market, and may be potentially capable of breaking into export markets. However they may

be hampered by a variety of circumstances:

· Lack of information on possible export market.

· Absence of guidance on export regulations and procedures.

· Inability to identify sources of assistance for product development and product upgrading for export.

· Lack of information on export credit and insurance facilities as well as for export requirements.

· Lack of information on operation of indirect marketing channels like merchant export houses.

· Absence of guidance on basic management issues relevant exporting firms.

· Absence of sound steps that need to be taken to enter in export field.

SMEs are often uninterested and unprepared to enter export field owing to lack of market information,

Lack of incentives, Lack of credit, Lack of staff and organization and Difficulties in obtaining export

licenses, export guarantees and foreign exchange. Thus, while in many developing countries SMEs are now

receiving greater attention and aid from both the public and the private sector in many developing

countries, little attention has so far been focused on the specific help needed to increase exports from

SMEs.

Developing the export capabilities of SMEs is difficult because of their special problems. Yet it is often

assumed that the needs of SMEs are adequately net by `traditional sources' of assistance, which are usually

geared to the needs of larger firms. While most developing countries have well-established SME support

programs with agencies. Yet it can be argued that many of the techniques used to stimulate and support

small business growth in general can be extended activity of SMEs.

This argument is based on the fact that the development of export capability in small firms is just one more

aspect of their business development. In the essence, exporting means moving to improve basic

organizational capabilities such as management control, financing, costing and pricing, design and marketing

management. General support structure for SME development has to be linked with export support. This

structure demonstrates the linkage between the general support infrastructure for SMEs and the specific

export support infrastructure and their different goals.

The former has as its objective the development of capability of SMEs for survival and growth, the latter

the development of specific capability for export.

Whereas in the context of the firm the development of general organizational capability and that of specific

organizational capability for export are obviously closely linked, casual observation indicates that there is

often no close linkage between the general support infrastructure for SMEs and the export support

infrastructure.

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SME Management (MGT-601)

SMEs assistance institutions can be considered in terms of a number of characteristics including: Whether

they are public, private or mixed. Whether they are local, regional or national. And their degree of coverage.

Whether they provide integrated forms of assistance, meeting a variety of different kinds of needs; whether

they are general or concentrated upon particular industry sectors or sectors of the population; whether they

are strong in terms of resources and capability; and finally whether they are long established traditional

sources of small business support with a good track record.

Strategy for Development of Exports from SMEs

Today, export promotion in general by most of the developing countries and particularly by SMEs is not

easy. This is true for a variety of reasons. Some of which are listed below.

First, the products available in most developing countries are generally known in international markets and

discovery new product capabilities is not likely to be as regular and frequent as before.

Second, international marketing techniques are well disseminated in most

developing countries, though they are not equally well known in the interior of the

Countries.

Third, as more developing countries penetrate in world markets, path to other developing countries will be

that much harder and competition correspondingly greater.

Finally, international markets are tending to become less open to manufactured products from developing

countries.

Common Difficulties at Various Levels

A summary of some of these problems is given below.

At the national level.

· It is often observed that a well-planned strategy to develop exports from SMEs does not exist. The

objectives are frequently not well defined and the available policy instruments for industry and trade are

frequently not aimed at developing the SME sector and its exports.

· Where support for SMEs is a stated objective, there is often inadequate follow-up in terms of specific

measures and mechanisms. In many instances, the institutional infrastructure is sub-optimal with a lack of

coordination among trade service institutions.

· The environment is often not conducive to the creation and growth of marketing channels for SME

exports such as merchant export houses, export development companies, joint marketing arrangements,

export consortia, etc.

At the level of trade organization (TPOs) and industry export institutions

· There is often an inadequate focus on issues of concern and relevance to SMEs and a lack of appreciation

of the special features and difficulties of SMEs in their export efforts.

· Many service institutions do not have well-defined programs with clear objectives for assisting SMEs in

export development.

· The channels of communication between service institutions and SMEs are frequently inadequate.

At the level of Enterprise

· In many situations, special difficulties are encountered, leading to inadequate and more costly access to

factor markets.

· Individual SMEs are often not in a position to identify sources of assistance for product development and

product upgrading for export.

· SMEs generally have difficulty in obtaining information and guidance on export markets and are unable to

undertake direct export marketing.

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SME Management (MGT-601)

· Absence of indirect export marketing channels like merchant export houses, export development

companies, etc. in many situations inhibit export market access for SMEs.

· Training facilities in export management are often not readily available.

Involving SME Development agencies

The trade organizations and export service agencies in many developing countries interface only with

exporting SMEs, though the majority of the SMEs are usually linked with national level with SME

development agencies and institution. Many governments have established a network of SME institutions

which are in close touch with SMEs.

There is a need to deliver an export orientation programme to a new target audience, that is, established

SMEs in the region who are currently not participating in exports.

It is important to create awareness in SME development institutions and through them among the

enterprises themselves of export potential for export. To achieve this, it will be necessary to strengthen

SME development institutions capacities to provide export development services.

GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)

Pakistan has participated in GATS negotiations, but did not undertake extensive commitments. Pakistan

signed the second protocol to the GATS that pertains to financial services, which apply to insurance,

banking and other financial services. Pakistan also provided offers in the negotiations on Basic

Telecommunication which were completed on February 15, 1997.

Pakistan's schedule of specific commitments consists of both;

Sector-specific commitments

Horizontal commitments.

Sector- Specific Commitments

The Sector- Specific Commitments cover 47 activities within the business, communications,

construction/engineering, health, financial and tourism/travel services.

The GATS agreement recognizes 12 main sectors for the purpose of classification of services are as

follows.

Communication.

Financial.

Construction/Engineering.

Health.

Tourism/travel.

Distribution.

Education.

Environment.

Recreation/culture.

10.

Sporting.

11.

Transport.

12.

Others.

Pakistan has so far made commitments in only first six of above mentioned twelve sectors which are

business services, financial services, communication services, health and related services, construction and

related engineering services and tourism and travel related services.

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SME Management (MGT-601)

Pakistan also submitted two lists of MFN Exemptions, One relating to telecommunications on April 11,

1997 and the Second relating to banking and other financial services on February 26 1998.Under Article II

of GATS, Pakistan maintains MFN exemptions for four financial services/activities with a view to

presenting reciprocal requirements, for four financial services/activities with a view to presenting reciprocal

requirements. Islamic financing transactions and join ventures among ECO countries.

Pakistan also maintains exemptions in two identical communication services in favours of

countries/operators signatories of bilateral agreements on rtes with the PTCL. It may be mentioned that the

maintenance of Article II exemption is not unusual: 79 member countries have maintained 390 MFN

exemptions. However, such exemptions should not exceed a period of ten years (beginning from1995). In

any event, they shall be subject to negotiation in subsequent trade liberalization.

The activity or Industry-Specific Commitments have been made under;

Article XVI (Market Access).

Article XVII (National Treatment).

Of the GATS, MFN exemptions on the other hand originate from Article II of the GATS.

Horizontal Commitments of Pakistan

The Horizontal Commitments of Pakistan, that is, commitments that apply to all sectors, relate to

"commercial presence" or "presence of natural person". Pakistan's commitments regarding "commercial

presence" are subject to incorporation in Pakistan with maximum foreign equity of 51% unless different

percentage is inscribed against a particular sector or sub-sector. All expenses of representative offices have

to meet by foreign remittances. A Foreign undertaking is allowed to hire up to 50% of its total executive

and specialist from abroad.

Acquisition of real estate by non-Pakistani entities and/or persons is subject to authorization on a case by

case basis taking into consideration the purposes and location of the undertaking.

A study on Trade in Services commissioned by Ministry of Commerce, Government of Pakistan (March

2003) brought forth following important points;

Pakistan like a large majority of countries was rather cautious in its approach to GATS

commitments. This was only natural. But what was unique to Pakistan was that while it had

paid a great deal of attention to inward flow of foreign investment and technology it did

not view the GATS as a mean of expanding export of its services. The central lesson of

this Study is that Pakistan should increase the range of its objectives from inward

investment and importation of foreign technology to the expansion of its exports. In

future its objective should be attraction of foreign investment, increase in importation of

modern technology, and promotion of exports of services.

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