In recent years, there has been a concerning decline in foreign direct investment (FDI) by small- and medium-sized enterprises (SMEs).
A recent report by the United Nations Conference on Trade and Development (UNCTAD), published on February 6, highlights this trend, revealing a substantial 75% decrease in overseas greenfield investment projects by SMEs between 2015 and 2022.
Amelia Santos-Paulino, head of investment issues and analysis at UNCTAD, emphasises the significance of SME investment for development, noting that these enterprises possess unique advantages. SMEs are known for their agility, relying more on local suppliers and partners and less likely to overshadow local firms.
SMEs represent a crucial component of the global economic landscape, particularly as competition intensifies for large-scale projects and regional economic integration gains momentum. However, SME investors often face challenges such as financial constraints, limited access to information, and navigating complex regulatory environments.
Compounding these obstacles is an international policy environment that primarily caters to attracting large multinational enterprises (MNEs), leaving SMEs at a disadvantage. Rectifying this imbalance is essential to facilitate SMEs’ international investment efforts and unlock the employment and productivity benefits they can bring to the broader economy.
Distinguishing Between Large and Small Company International Investment
The UNCTAD report underscores the need for greater policy attention to small businesses, as their approach to cross-border investment significantly differs from that of larger corporations. A notable finding is that SMEs in Latin America tend to engage in less export activity compared to MNEs.
For instance, in Brazil, only 19% of SMEs export goods, whereas approximately two-thirds of MNEs engage in exporting. Similar disparities exist in other countries such as Peru. These differences can be attributed, in part, to the sectoral distribution of SMEs.
Globally, over half of SMEs’ foreign investment projects are concentrated in knowledge-intensive industries, such as business services and information technology, which typically involve lower setup costs. Conversely, SMEs invest less in sectors like textiles and automobiles, where economies of scale are crucial for profitability.
SMEs Driving Regional Economic Integration
SMEs play a pivotal role in both propelling and benefiting from regional economic integration. Geographical, cultural, and ideological proximity often guide SMEs’ overseas investment decisions. For example, a significant portion of South Korean SMEs invests in neighboring East Asian economies due to lower production costs.
Similarly, South African companies predominantly invest in African countries, while Turkish SMEs focus on Europe. In Brazil, Colombia, and Peru, SME foreign affiliates tend to prioritize factors such as market size, proximity, language commonality, and reduced tariffs, aligning with typical trade driving forces.
Policy Recommendations
In light of these findings, the report proposes a new framework outlining actions to maximize the impact of SME foreign investments:
- Tailoring investment promotion and facilitation services to address SMEs’ specific needs and challenges, ensuring equitable access to financial incentives and facilitation mechanisms regardless of company size.
- Enhancing SMEs’ access to capital through improved digital infrastructure and services.
- Streamlining regulatory frameworks and administrative processes while leveraging digitalization to enhance information accessibility.
- Establishing comprehensive support networks and matchmaking programs to facilitate sustained partnerships for SMEs.
- Promoting SMEs’ participation in trade to enhance their international exposure and understanding of foreign markets.
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