SMEs are the backbone of any economy, providing a skeleton for thriving entrepreneurship and curbing poverty. They constitute a major part of business operations and are considered to be the accelerators of economic growth. They help in ensuring the long-term sustainability of markets – emerging and existing. In Africa alone, It has been suggested that SMEs contribute about 50% of GDP and about 60% of total employment. Globally, they represent about 90% of businesses and more than 50% of employment worldwide. Similarly, subSaharan Africa has the highest number of people engaged in embryonic entrepreneurship (14.1%) or early-stage entrepreneurial activity (26%) in the world.
Entering the foreign markets is the next obvious step for any SME doing well and intending to grow and expand. While this fact is crucial, the firms need to strike a fine balance between a desire to internationalize their business and serving the needs of the existing markets. The last decade witnessed a significant rise in the number of African SMEs initiating international and intercontinental operations. The spurt in the number of innovative and creative SMEs and their ability to sustain themselves against the international competition can be said to be the main reason for this development.
Some examples of African SMEs that successfully expanded their operations globally include Telkom operating in 38 countries, MTN in 24 countries, and Standard Bank in 20 countries. Others that show similar growth trends are Togo-based Ecobank (40 countries); Nigeria’s UBA (20 counties) and Dangote (15 countries). These increases in intra-African cross border activities are accounted for by the rising entrepreneurial spirit across many African countries.
Why is going global the only way out?
“For the small to survive, the small has to go global”
~ Pawan Gupta, Founder and CEO of Connect2India
SMEs trapeze their way through insufficient funds, narrowed the market scope, and financial and knowledge gap. Non-price competition has become extremely important all thanks to globalisation. SMEs are competent to respond better to such kinds of competition. Collaborative partnerships, interfirm industrial networking, and the integration of SME clusters into global value chains have proved to be crucial for any SME community across nations. It is in the interest of SMEs to go global:
- Diversification of business into other markets leads to mitigation of overall risks and provide an escape from saturated domestic markets
- Foray into global markets automatically open up infinite growth potential and profitability
- Greater production capacity and expansion of operations lead to economies of scale thus lowering costs
- The firm is required to meet global standards and hence, is able to better deal with domestic competition.
- The customer faith is boosted given the firm’s status of that of a global brand.
- The global firm now comes at par with the MNCs and shares its advantages.
- Internationalization helps SMEs to overcome government barriers.
- SMEs are able to engage themselves better to make export activities easier via a better information network.
What are the challenges to the globalisation of SMEs?
Africa has a population of over 1.3 billion people steadily growing at an annual rate of 2% in most regions. Many countries have about 50% of their population below the age of 25 years, pointing to the growing need for jobs and economic growth. The local SMEs can deliver the necessary spectrum of opportunities to their populace, but they suffer from their own set of challenges:
Financial access: Consider the formal African SME sector, which has an annual financing gap of over US $136 billion (the number is in the $5 trillion on for global SMEs). Access to finance is the biggest hindrance that SMEs face in most developing countries. For SMEs, The sources of institutional finance are skewed towards big players and MNCs
Inadequate infrastructure: The inherent risks of high-cost microfinance required by SMEs are high and lack trust in part of international as well as local investors. As per a World Bank report, a firm’s productivity is slowed by approximately 40% due to the weak infrastructure in African countries. Lack of government support and levying of heavy duties hurt the export efficiency of firms.
Lack of knowledge and understanding: Imprecise foreign market information and lack of international marketing skills pose a serious threat to any new business trying to get a global grasp for their business. Also, high dependence on a foreign executive for a longer period of time can have the business treading in dangerous waters.
Other factors: The businesses have a high-cost base and a limited range of products. They usually do not benefit from economies of scale. In particular, African SMEs suffer from some specific disadvantages such as:
- Cultural and regional differences
- Volatile input and output markets
- Inefficient legal and regulatory framework
- High tariffs and
- Poor technology
What strategies can the SMEs adopt?
Appointing a local executive: No sooner does the feasibility of internationalization is ascertained, an SME should appoint a seasoned executive well aware of the local market and aligned with the firm’s vision and strategy.
Experience and understanding: Having sound knowledge and understanding of international markets is paramount to expanding business operations beyond the national boundaries. Such useful insights help in planning and strategizing global trading. The second thing that comes in handy is experience with prevalent practices in global markets such as those related to quality and payment. Positioning oneself as a global brand can build the trust of the domestic and global audiences simultaneously.
Technology: Relevant technology lends access to valuable knowledge resources and integrated trade platforms that help the SMEs to go global. Innovative practices and advanced technologies like data sciences taper the challenges faced by SMEs. For instance, the ‘Proudly Made in Africa’ campaign became quite popular across the African continent helping SMEs to earn the trust of consumers.
Cultural Intelligence: The leaders or entrepreneurs must possess high cultural intelligence and be flexible enough to adapt to new global markets quickly. The spirit of multiculturalism and global values should be incorporated into the company culture itself. SMEs should focus on building trust and show their willingness to build long term relationships to build their reputation in the foreign markets.
Access to Finance: A 2010 IFC report based on a study of SMEs’ access to finance in 177 countries cited the solutions to this challenge lies in the creation of financial intermediaries. Access to institutional financing via a country-specific financing model would go a long way in strengthening the necessary facilities available to SMEs to globalize their operations.
It is predicted that Africa is to become one of the forerunners in the global economic arena owing to its mineral wealth and natural resources. The rapidly increasing population in the African continent means a huge potential market in the future that can only be tapped through financing the SME sector. At Salt, we’re on a mission to simplify banking for everyone – both individuals, businesses. With easy and instant financial management solutions, in an all-digital way. Join our waitlist to see what we’re all about!