How to Grow from a Small to a Big Player
Although not sufficiently recognized by the general public, sectors that have achieved dynamic exports are clearly emerging in the Serbian economy, precisely thanks to a strong core of small and medium-sized enterprises (SMEs) that have managed to capture market share from competitors in their breakthrough into foreign markets. However, this potential is not sufficiently utilized, as only 11.6 percent of the total number of SMEs export their products, and only 3.3 percent export their products continuously.
Written by: Danijela Bobić*
The largest part of the Serbian economy – as much as 99.8 percent – consists of small and medium-sized enterprises, which generate 70 percent of the added value, 56 percent of employment, and account for 46 percent of total exports. Although this sector has generally shown export capacity in the previous period, certain economic branches stand out due to the number of healthy and dynamic SMEs that are continuously growing, developing, and have managed to capture market share from competitors in their breakthrough into foreign markets. On the other hand, although SMEs increasingly contribute to total exports, only one in ten small and medium-sized enterprises participates in it.
Unlike the EU average, where small enterprises constitute 6.4 percent and medium-sized ones one percent of the total economy, in Serbia, the share of small firms is 3.2 percent and medium-sized ones only 0.7 percent, while as much as 96 percent of enterprises are micro-sized. Such enterprises, even when capable of producing a quality product, rarely have the capacity to achieve growth. Therefore, the key question is how to ensure conditions for a larger number of successful and prosperous SMEs and their growth from small to medium and large companies?
The inclusion of SMEs in global trade flows, as well as in the supply chains of large companies, represents a channel that can empower them and accelerate their growth.. The significance of such inclusion is multifaceted: entering new markets, adopting new knowledge and technologies, focusing on innovation, but also greater business security and continuity due to secure sales and receivables collection.
Sectors with the Most Dynamic SMEs
The proof of this is that the most dynamic growth and development have been achieved precisely by those companies that have managed to integrate more significantly into international flows. The growth in activity of an average exporting SME in the post-crisis period was 4.1 percent, while an average non-exporting SME experienced a performance decline of -14.5 percent. Similarly, the share of successful SMEs among exporters is 41.2 percent, while only 22.2 percent of non-exporters are successful. However, not all SMEs are ready to compete in the global market, where competition is significantly more demanding and conditions are harsher. Therefore, it is important to identify precisely those sectors that have produced the largest number of successful and dynamic SMEs and use them as a starting point for creating support.
Although not sufficiently recognized by the general public, sectors that have achieved dynamic exports are clearly emerging in the Serbian economy, precisely thanks to a strong core of small and medium-sized enterprises that operate healthily and continuously succeed in improving their international activities. These are primarily sectors with medium added value, located at the center of value chains, acting as a „supporting link“ that provides inputs to sectors of the highest level of complexity.
These are sectors from the following economic branches: 1) machinery and electronics (machinery for the food and beverage industry; special-purpose machinery and general-purpose machinery); 2) metal (production of tools and blades; general-purpose metal products); 3) chemicals (production of plastic packaging; other plastic products; other rubber products); 4) wood industry (wooden packaging and wood products; wood processing and sawing, and furniture); 5) textiles (clothing; footwear and textile products); and 6) agribusiness (fruits; milling and starch products; and animal feed). These sectors demonstrate that very dynamic small and medium-sized enterprises already exist, which need to be supported to realize their full potential.
Wood furniture production is a good example of a sector where SMEs have succeeded in continuously improving their market share in most foreign destinations, reaching a share of 72 percent in the sector's total exports. Companies in this activity, despite facing challenges with low productivity and financing for new technologies and growth, successfully market their products abroad primarily due to competitive prices, tradition, and expertise in this production segment. Serbia's advantage also lies in its good wood raw material base. However, it is not fully utilized, and an even greater drawback is that most of the utilized raw material is used for household heating or for the export of unprocessed and semi-processed products, instead of for production that creates the highest added value. An example of such an industry is certainly wood furniture production, for which international demand is growing, and therefore, this sector represents an opportunity for the development of existing and the entry of new SMEs.
Support for Continuous Exports
However, although the number of successful non-concentrated sectors is relatively large, their share in total exports is not high (26.3 percent of goods exports), which indicates the need to utilize the export potential of a larger number of small and medium-sized enterprises. Namely, as much as 84 percent of Serbia's total exports are generated by only the top five percent of exporters, primarily large companies operating in concentrated sectors and most often linked to foreign direct investments. Only a few sectors – motor vehicle production, underwear and sock production, household appliance production, as well as the production of electronic conductors and optical cables – account for one-fifth of total goods exports, with export growth at an annual rate of 52.1 percent. These indicators undoubtedly point to their significance for Serbia's trade activity, but also raise the question of how to improve the foreign trade activity of a larger number of companies and reduce the obstacles faced by small and medium-sized enterprises?
The strongest barriers to improving the export performance of SMEs relate precisely to export inclusivity and sustainability – Serbian SMEs, in addition to problems with entering foreign markets, equally face difficulties in surviving in them. Out of the total number of small and medium-sized enterprises, only 11.6 percent export their products, and only 3.3 percent export their products continuously. If we exclude established exporters, who place their products on foreign markets year after year, there remains a large group of companies that either do not export or export irregularly. On the other hand, when companies enter a foreign market, on average only 41.2 percent of them manage to export to that market the following year, and only 18.7 percent do so for three consecutive years. Therefore, it is important to identify mechanisms that will enable a larger number of companies to more easily find foreign buyers and export continuously.
Decision-makers should, through their horizontal and vertical policies, provide support, primarily to those small and medium-sized enterprises that have already shown dynamic growth and have the potential to become new „big players“ in the medium term, ranking among the drivers of economic growth. The starting point for creating „tailor-made“ policies for such companies can be non-concentrated sectors in which the greatest development potential has been identified. The next step is to stimulate the export capacities of „potential SME stars“ by facilitating their access to foreign markets and assisting with export financing. Given their limited resources, even relatively solid SMEs most often lack the capacity to independently find opportunities and buyers in foreign markets, analyze specific requirements and applicable regulations in those markets, and the costs of growth are often almost insurmountable. Therefore, it is necessary for decision-makers to create a platform that will focus on solving the critical obstacles faced by these companies, thereby enabling them continuous export.
*The author is the Program Director of the Center for Advanced Economic Studies
The direct link to the article published in the magazine “Biznis i finansije” is available at the following address: http://bif.rs/2016/01/medunarodna-konkurentnost-malih-i-srednjih-preduzeca-kako-od-malog-postati-veliki-igrac/
