Participation in regional and global value chains

GVCs is associated with growing productivity, exporting more sophisticated products and a less concentrated export basket.152 MSMEs are more apt to export intermediate goods through GVCs either directly or indirectly through sales to larger domestic or multinational firms producing and exporting the final product. Policies seeking to integrate MSMEs into GVCs could address importing constraints through continued unilateral or regional liberalization or sustained trade facilitation and connectivity support. At the same time, programmes aimed at promoting domestic and international production linkages should allow MSMEs to identify new opportunities better and exploit their comparative advantage in the production of intermediate goods and services and integrate, directly or indirectly, into regional and GVCs.

Countries need to leverage policies to ensure that they can enter and remain competitive in the value chain. Trade and investment openness and a comprehensive package of policies that include a greater focus on behind-the-border and at-the-border issues (such as trade facilitation, infrastructure and institutional quality) are necessary.153  Thus, policies aimed at reducing the costs of accessing foreign inputs and technologies correlate with MSME internationalization and reductions in tariffs. This further liberalises and promotes FDI by streamlining trade facilitation, which helps MSMEs benefit from broader exporting activities.154 MSMEs can also leverage foreign inputs and technologies to increase their productivity and, therefore, their domestic sales. Evidence suggests that firms need to have access to competitively priced and high-quality intermediates to stay competitive.155 Importing is increasingly a necessary condition for maintaining and enhancing competitiveness, even in the domestic economy. Programmes that help overcome informational asymmetries and facilitate connections between MSMEs and businesses abroad could help identify emerging opportunities for MSMEs to exploit their revealed comparative advantage in producing intermediate goods and services.

Since MSMEs might struggle to produce finished products, greater specialization in supplying intermediates through GVCs may provide new opportunities for developing the economic activity of MSMEs. For policymakers, this suggests that MSME policies might also consider focusing on supporting MSMEs in forming partnerships with firms abroad in addition to overcoming the traditional costs associated with exporting.

MSME policies should consider advancing ways to sell intermediate goods and services as a stepping stone to greater participation in value chaines. This can reduce the costs of both exporting and importing.156 In ASEAN, for example, and in particular sectors, MSMEs rely on larger firms to tap into export markets indirectly. With high fixed costs associated with exporting, MSMEs may seek to attenuate the burden of these costs by selling intermediate goods and services to larger exporting firms in the domestic economy.157 Domestic policies, including those aimed at reducing regulatory barriers faced by MSMEs, and better infrastructure, soft and hard, should help nurture domestic connections. Their promotion should benefit both large and small firms. While research has identified that MSMEs rely on domestic linkages for their internationalization, the determinants of these linkages require further study, including the role of FDI.158

Resources

152 Kowalski, P., J. L. Gonzalez, A. Ragoussis, and C. Ugarte (2015), “Participation of Developing Countries in Global Value Chains: Implications for Trade and Trade-Related Policies”, OECD Trade Policy Paper 179, OECD Publishing, Paris.

153 Kowalski, P., J. L. Gonzalez, A. Ragoussis, and C. Ugarte (2015), “Participation of Developing Countries in Global Value Chains: Implications for Trade and Trade-Related Policies”, OECD Trade Policy Paper 179, OECD Publishing, Paris.

154 Ibid.

155 Vogel A and Wagner J (2010) Exports and Profitability – First Evidence for German Business Services Enterprises, Applied Economics Quarterly, 56(1), 7-30. 

156 UNESCAP: https://readiness.digitalizetrade.org.

157OECD (2019), Integrating Southeast Asian SMEs in Global Value Chains: Trade, Investment and Regulatory Policy Synthesis Note, Paris.

158 UNCTAD, World 2020 Investment Report, Production beyond the Pandemic