Apart from the perennial issue of access to finance, access to market is another critical issue that SMEs struggle with, and this is a major inhibitor to both sustainability and long-term development. It can be argued that even if funding opportunities were readily available, this would not automatically translate into increased revenue or business success. This is evident in many markets where special funding initiatives are created; however, this does not result in flourishing and sustainable SMEs nor a positive economic value-add from this sector. Increased market opportunities can then be viewed as one of the other main contributors to the viability and growth of SMEs. Government responses targeted at business development activities have been a mechanism by which to address this issue and have become prevalent in many countries. Some of the pertinent issues that impede business opportunities are highlighted in the table below.
Table 1: The challenges and hindrances that have constricted business opportunities
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Key Challenges |
Further Elaboration |
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Lacking third-party verification of the business and its capabilities. |
In instances where SMEs can properly articulate their capabilities, there are often challenges with regard to the authenticity of the data/claims put forward. This then creates doubt in the end users of these business profiles, which might affect the prospects of doing business. In these instances, contracting parties would be more comfortable if a third party independently verified the business and provided an in-depth evaluation of the business prospects and capabilities going forward. |
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Difficulty in getting large corporate clients to incorporate SMEs into their supply chains and procurement practices.
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One of the key contributors to SMEs remaining within the “SME trap” is their inability to tap into the supply chain networks of larger clients. A major contributor to this is the information asymmetry and poor understanding of SMEs. This stems from the costs and time involved in properly verifying an SME, which becomes difficult when there is limited information on these entities. Larger corporates might find it easier to do business with larger, more established entities with lower due diligence requirements. However, many of these larger corporations would do business with SMEs if there was easily accessible due diligence reporting from a reputable source. |
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Finding it difficult to secure export orders with both regional, continental, and international clients. |
Another contributor to remaining within the “SME trap” is the inability of SMEs to secure export orders and expand their client base. The inability to diversify into additional client bases and tap into extra revenue sources can be viewed as a major inhibitor to an SME’s long-term development and sustainability. Third-party verification has proven to be effective in assisting SMEs in securing these export orders; however, a lack of such verification creates doubt among potential clients of these businesses. This is a common issue in most countries as SMEs make up a fraction of overall exports, apart from exceptions such as China, whereby SMEs make up in excess of 60% of exports. |
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Limited business development and marketing skills. |
SMEs are generally quite specialized in developing their goods and services but are sometimes lacking in other key business areas such as marketing and business development. The typical human capital constituent of micro and small enterprises (which makes up the majority of firms within the SME category) generally does not include a separate business development and marketing team. This function is handled by the business owner, who might not have the requisite skill set to conduct such activities. These SMEs then struggle to create structured and credible business profiles that clearly outline their firms’ technical, financial, operational, and strategic capabilities. Potential clients who might want to extend large contracts to SMEs would need such information to determine if these businesses can undertake such orders. |
The factors explored in the table above apply to SMEs in both developed and developing countries and are a major stumbling block that inhibits SMEs from doing business with other SMEs and larger firms. However, some of the issues prohibiting access to market might be linked to deeper structural issues such as a lack of skills, educational systems with little emphasis on entrepreneurship, creativity, and infrastructure deficiencies. These structural issues cannot be addressed by the solutions put forward within this book; however, they should be noted as they are significant and a major inhibiting factor.
“SMEs often do not have a problem with access to funding but rather have an issue with access to business opportunities, an issue that our grading concept aims to resolve.”
Access to market, exports, and global competitiveness:
Regarding regional and international markets, SMEs typically participate via direct exports, indirect exports, non-equity contractual agreements, foreign direct investment, and fast-developing technological platforms. We focus on exports within this section due to its direct link to SME credit ratings, which creates a necessary foundation for the chapters ahead. Exports (both direct and indirect) are the most effective way in which SMEs can participate globally and, in doing so, provide significant knock-on benefits to these firms. For example, exporting has been shown to boost profitability by up to 26%; productivity and innovation would also naturally improve to cater for increased competition from other markets, and there would be an increase in employment within exporting firms. With regard to contributions to global value chains, SMEs can contribute to this via direct exports or indirectly via their value chain contributions to other exporting firms. The percentage of overall exports of final goods and services that stem from the SME sector varies between countries, regions, and levels of development. On an aggregate basis, SMEs are responsible for 33% of exports from selected developed countries and 18% from selected developing countries. However, there are outliers within the above figures, such as China, in which SMEs contribute a sizeable 68% of exports. These figures are low and showcase the major opportunity for SMEs to diversify their existing revenue streams and boost the overall economic output of their respective countries.
Although SMEs play a significant role in overall economic activity and are actively involved at different stages of the supply chain process, their limited activity with direct exports is often linked to their competitiveness, particularly at a global level. This is owing to many factors and has major economic implications for most emerging market economies. Countries with limited levels of global competitiveness typically struggle with a shortage of dollar reserves and experience external vulnerabilities that have major implications, such as increases in foreign currency debt, currency weakness, and fiscal deterioration. It can, however, be argued that some of the shortcomings related to global competitiveness are not entirely structural in nature but are rather owing to other factors ranging from limited awareness of the goods and services from these smaller firms, a lack of due diligence on these SMEs, to lack of confidence from prospective international clients that want to do business with these entities. The Facebook-OECD-World Bank Future of Business survey highlighted some of these challenges; this study aimed to identify trade barriers, and survey participants with a digital presence highlighted the following challenges.
- 63% had an issue with finding business partners,
- 41% cited market limitation challenges,
- 38% found different regulations to be a challenge,
- 35% pointed to customs regulations,
- 33% indicated that cultural and language barriers were a challenge,
- 31% had issues securing export finance,
- 29% stated poor online payment alternatives to sell online,
- 26% indicated that the large geographical distance from their home country was an issue,
- 18% had an issue with a poor internet connection to sell online.
As per the study quoted above, finding business partners was cited as a major challenge by the majority of respondents. One of the contributing factors to this is likely owing to the fact that businesses are reluctant to do business with foreign entities that they know little about and which have not been independently verified. This is to the detriment of SMEs who might have an equally compelling value proposition, but these entities are either unknown or, if they are, there is no third-party verification on their businesses. Apart from the abovementioned issues, access to finance is also seen as a major contributing factor to constricted competitive advantages and limited export activity. This stems from the fact that global competitiveness at its very core is linked to technological innovations and related relative advantages. Obtaining these technological advantages is heavily linked to capex expenditure, which is often not permissible when access to finance remains a major challenge. Solving the issue of access to finance could then be seen as one of the enabling steps that would address the issue of limited exports, and within the later chapters of this book, we introduce the concept of SME ratings, which addresses both of these issues.
