International Competitiveness of Small and Medium-sized Enterprises
How to grow from a small player into a substantial one
Although it might be unknown to the broader public, there are specific sectors of the Serbian economy prominent for their dynamic exports. This is mainly due to their strong core, composed of small and medium-sized enterprises (SMEs) with the ability to overtake market share from foreign competitors. However, export potentials are not fully exploited, considering that only 11.6% of SMEs export, and just 3.3% do so on a continuous basis.
Written By: Danijela Bobić*
The largest part of the Serbian economy, about 99.8%, consists of small and medium-sized enterprises (SMEs). They create over 70% of value added, generate 56% of employment, and have a contribution of 46% to the overall exports. Although the SME sector has shown export potential in the recent years, there are some industries standing amongst others, due to the number of healthy and dynamic SMEs, which are continually growing and developing. As a result, these SMEs are slowly taking over the market share from their competitors abroad. At the same time, even though SMEs in total continue to contribute more to the overall exports, only one in ten SMEs actually sells its products abroad.
As opposed to the EU, where on average small enterprises represent 6.4% of the economy, while medium-sized companies contribute to 1%, situation is different in Serbia. In the Serbian economy, only 3.2% of total companies are small, 0.7% are medium sized, while over 96% of the economy consists of micro companies. The problem is that micro companies are rarely capable of generating growth, even after creating a product of high quality. Therefore, it is crucial to think about ways to support more SMEs so they can become successful and prosperous, and to strengthen their chances to expand from small into medium and big sized companies.
One way to strengthen SMEs and stimulate their growth is through inclusion into the global trends and large companies’ supply chains. This is beneficial for various reasons – it introduces companies to new markets, helps them acquire new knowledge and technology, become more innovative, and provides them with greater security, as the business is more likely to survive due to better product placements and faster collection of payments.
Sectors with the most dynamic SMEs
The success of including SMEs into global trends is evidenced by those sectors with the most dynamic growth and development – companies in these sectors are very internationally oriented. When it comes to the average SME exporter, its growth rate in the post-crisis period was 4.1%, while non-exporting SMEs saw a 14.5% decrease of performance. Additionally, 41.2% of all the exporters are successful SMEs, while they attribute to only 22.2% of non-exporters. However, not all SMEs are capable of being globally competitive, considering that the global market is more taxing, with strict rules in place. This is why it is so important to identify sectors with the highest number of successful and dynamic SMEs, and use them as a model to design effective programs of support.
Although it might be unknown to the broader public, there are specific sectors of the Serbian economy prominent for their dynamic exports. This is mainly due to their strong core, composed primarily of SMEs with the ability to overtake market share from foreign competitors. These sectors are mostly concentrated in the middle of the value chain, working as a “supporting link” that supplies companies which create the highest value added with needed inputs.
Sectors in mind are parts of the following industries: (1) machines and electronics (machines for the manufacture of food and beverages; machines for specialized purposes, and machines for general purposes); (2) metal industry (manufacturing of tools and blades; metal products for general purposes); (3) chemical industry (production of plastic packaging; other plastic products; other rubber products); (4) wood industry (wood packaging and wood products; processing and cutting of the wood, and wooden furniture); (5) textile industry (clothing; footwear and textile products); and (6) agri-business (fruit; mill and starch products; animal food). After looking into these sectors, it is evident that a strong base of successful SMEs is already present, but they need to be further stimulated in order for their potential to be fully utilized.
A good example of a sector where SMEs are especially vigorous and capable of advancing their market presence abroad is the wooden furniture industry. SMEs in this sector are so strong that they contribute by 72% to the overall exports of the sector. Even though they are affected by low productivity and poor access to finance, these companies are capable of selling their products abroad due to competitive prices, accumulated knowledge and tradition. Another important advantage for this sector is Serbia’s strong wood resource base. However, this brings additional problem to light – this resource base is not fully used. Even more pressing is the fact that wood is usually used as firewood, or exported as a primary or secondary product, without becoming a part of the domestic production, where the largest value added is created. Wooden furniture industry serves as a good example of this, with a growing international demand, making it a sector with great potential for future development of new and existing SMEs.
Support to the continuous exports
Although there is a big number of successful sectors with low concentration, their contributions to overall exports are not very high (only 26.3% of total exports of products). This further shows that we should use the exporting potentials of SMEs more effectively. Actually, 84% of total Serbian exports were generated by the 5% of the biggest exporters, working in highly concentrated sectors, usually tied to foreign investments. Just a handful of sectors (manufacturing of motor vehicles, manufacturing of socks and garments, manufacturing of household appliances, and the manufacturing of optical cables and electronic conductors) amount to 1/5 of the overall exports, with the annual export growth rate of 52.1%. These indicators serve as an argument for the importance of these sectors to the overall trade activity in Serbia. But also, they point to another question – how to stimulate more companies to participate in foreign trade, and bring down the barriers SMEs are facing?
The biggest barriers to advancing export performance of SMEs lie in the areas of inclusiveness and sustainability of exports. Serbian SMEs are not faced with problems only when entering new markets, but they also struggle to maintain their foreign presence. For example, only 11.6% of SMEs export their products, while only 3.3% do so on a continuous basis. Excluding already established exporters, there is a vast number of companies which either do not export at all, or do not do it continuously. On the other hand, following their entry to a new foreign market, only 41.2% of companies are able to export to the same market in the following year, with the number of those capable of exporting for three years in a row falling down to 18.7%. This is precisely why it is of the utmost importance to identify mechanisms in order to help companies find foreign partners and export continuously.
Policy makers should use various vertical and horizontal policies in order to support SMEs with strong growth potential, thus helping them become new big players on the market and drive the economic growth. Identified low concentrated sectors can serve as a starting point for these firm-tailored policies, as they exhibit the biggest development potentials. The next step is to support the potential star SMEs, by giving them easier access to foreign markets and finance. Considering their limited resources, even good SMEs usually do not have the capacity to find opportunities and foreign partners alone, or to analyze legislation and requirements of foreign markets, while dealing with the overwhelming costs of growth. Therefore, policy makers should create a platform through which these obstacles can be alleviated, further generating opportunities for the continuous growth of Serbian SMEs.
* The Author is the Program Director at the Center for Advanced Economic Studies (CEVES)