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06 Jun 2013

SMEs: passport for growth

Raman Rai

by Raman Rai

Global Head of Business Banking, HSBC

SMEs passport for growth

Many manufacturers are rethinking the focus of their businesses

Small and medium enterprises have to decide whether to continue to build their businesses in the home markets they know and trust or take on the logistical, financial and cultural challenges of international trade.

In China, India and Brazil GDP growth rates are outstripping those of the US and Europe. As economic malaise leads to reduced spending in the developed world, many manufacturers are rethinking the focus of their businesses, which previously catered for demand from Western consumers.

In the future we expect companies in developed and developing economies to focus on emerging markets

In the future we expect companies in developed and developing economies to focus on emerging markets. This is already happening. The Asia-Pacific region accounted for 7 per cent of Apple’s net sales in 2009, for example, but in 2012 this share rose to 21 per cent.

Between 2000 and 2012 almost 17 million Brazilians started using private healthcare. That’s the equivalent to adding the population of the Netherlands to the world’s private healthcare and pharmaceuticals market.

By 2050, HSBC Global Research forecasts that the collective size of the economies we today call “emerging” will have increased five-fold to eclipse those we call “developed”. This means real wage increases and an expanding middle class with rising consumer power in the emerging world. For small and medium enterprises (SMEs), it will offer a host of new challenges and opportunities.

A report by the European Commission’s Enterprise and Industry division found that being active across borders correlates with higher turnover growth. Between 2007 and 2009, more than half of European SMEs that invested or took on subcontracting work abroad reported increased turnover, compared to 35 per cent for all SMEs. Those that are internationally active also reported higher employment growth, while the study found a close link between internationalisation and innovation.

Fear of the unknown

An SME thinking about venturing overseas for the first time may be concerned about differences in legal systems, trade documentation, foreign exchange volatility and even whether it will get paid. Such concerns often intensify with distance.

A US exporter trading with Canada may face some modest challenges around law and logistics, but in the Middle East it may be obliged to find a local partner that will hold majority ownership of the venture. For a company without the internal resources of a multinational it can be a daunting task to research new markets, assess counterparty risk and source affordable advice on legal and tax matters.

Emerging world suppliers can face similar challenges. Lack of cross-border trading experience can be a barrier, even in countries such as China where the majority of SMEs – representing about 60 per cent of GDP – have been in business for less than a decade.

Many SMEs across the developing world are striving to innovate, boost efficiency and learn how to thrive in new markets. The United Nations Conference on Trade and Development (UNCTAD) is studying the processes of clustering and networking that emerging SMEs attempt to compete in today’s globalised world. UNCTAD says that some grow while others fall away. The winning formula is still being worked out.

As the biggest trade finance bank in the world, HSBC is aware of the challenges. But no company can ignore the structural shift that is underway in world trade as “South-South” trade corridors grow in importance.

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