SMEs’ Finance and Participation in Global Markets

1. SMEs’ Finance and Participation in Global Markets 20.06.2012 Koji ITO Centre for Entrepreneurship, SMEs and Local Development (CFE) Organisation for Economic Co-operation and Development (OECD) Koji.ito@oecd.org

2. 1 Researches of SMEs’ international activity by OECD “Fostering Small and Medium-sized Enterprises’ (SMEs) Participation in Global Markets” (2011-12) • Highlight the trends of SME and entrepreneur internationalisation in growth markets; • Explore the drivers of competitiveness and determinants of growth for SMEs and entrepreneurs in these markets; • Identify and suggest ways to overcome the barriers to SMEs and entrepreneurs’ participation in global markets; • Identify innovative practices and policies, and offer policy recommendations, that support and encourage SME entry and competitiveness in global markets.

3. 2 Finance as a barrier for SME’ internationalisation • In the 2000s, a significant body of trade literature on firms’ internationalisation using firm-level data of trade and/or FDI indicates some stylized facts: a. Exporting firms are rare and highly skewed. Only a few firms dominate the share of export. b. Exporting firms have higher value added, employ more, and are more capital-intensive and productive than non exporting firms. c. Firms conducting FDI have higher premia than exporting firms. d. Export propensity is proportional to firm size.

4. 2 Finance as a barrier for SME’ internationalisation • Regarding the causality of firms’ productivity and exporting behavior, “self- selection” hypothesis (firms with high productivity start exporting) holds in many developed countries. The opposite causality, “learning by exporting” hypothesis, is also confirmed in some countries. • Hypothesis on SME finance and internationalisation 1 • “If the self-selection” holds, financial situations of SMEs have no significant effect on export decision.” (It is generally recognized that firms with high productivity can access external finance easily and/or have affluent internal reserve.)

5. 3 Stochastic test of SMEfinance and exporting status (1) Methodology • Firm-level data analysis using Bureau van Dijk “ORBIS” database. • Due to data availability, we focus on French SMEs (firms with less or equal to 250 employees). • Time period: 2005-2009 • Industry: Manufacturing, Construction, Trade(Wholesale and Retail) and Service • Firms are classified by their international activity; exporting firms (with positive exporting turnover) FDI firms (with foreign affiliates) domestic firms (without exporting and foreign affiliates).

6. 3 Stochastic test of SMEfinance and exporting status Premiums of employees and productivity (Employees) (Productivity) Note: Premium = (mean of international firms) / (mean of domestic firms) Productivity = Value added / Employees • In fact, international firms are larger and more productive than domestic firms.

7. 3 Stochastic test of SMEfinance and exporting status • We estimate the empirical relationship between SMEs’ status of international activity (exporting or FDI) and their financial indicators (cash flow, liquidity or leverage). • The results shows: a. Every financial indicator has no significant coefficient in every industry. b. The lag variable of the explained variable has a strong positive effect. c. Firm size (employees), productivity added/employee) and firm age also have a significant positive effect.

8. 3 Stochastic test of SMEfinance and exporting status • Hypothesis on SME finance and internationalisation 2 “ Financial indicators may have an effect when SMEs enter markets with high entrance barriers.” • We specify counties in which SMEs’ foreign affiliates locate, calculate country-specific FDI dummies (FDI Brazil, FDI China, etc.) and • Again, the empirical test shows that no financial indicator has a significant coefficient in every industry.

9. 4 Policy Implication • The empirical tests implies that there is no direct effect of financial situations on export and FDI decision of SMEs. • However, it should be noted that reducing financial constraints of SMEs encourages their international activity indirectly. a. In many countries, a production function, namely positive relationship of productivity and capital-labour ratio, can be confirmed based on firm-level data. b. It is also broadly confirmed that firms’ investment is affected by their financial constraints. c. Hence reducing financial constraints of SMEs increases their productivity through investment and the probability of exporting and FDI.

10. 4 Policy Implication • Regarding the existing financial supports for SMEs’ internationalisation, focusing the target may improve the efficiency of the supports. Distribution of productivity (Domestic Firms) (International Firms) Top priority is to raise productivity. Main target of financial support Firm with high productivity (No need of financial support ?)

11. 4 Policy Implication • Generally, domestic firms with high productivity are able to enter foreign markets without special financial supports. • For domestic firms with low productivity, top priority is to raise their productivity, not starting exporting or having foreign affiliates. • Firms with middle-level productivity are recognized as a main target of the financial supports.

12. 4 Policy Implication • In order to focus the target, screening (finding the proper supports for firms with intention to enter global markets among varying supports) is required. • For an effective screening, the following issues should be reviewed. a. Cooperation between different organizations in public sector b. Cooperation between the private and public sector c. Securing human resources to evaluate firms’ potential of internationalisation and decide the proper supports for them

13. Thank you for your attention. Questions and comments: Koji.ito@oecd.org