As COVID-19 transitions from a health crisis to an economic crisis, we’re attempting to predict how small businesses throughout the world will weather the storm and where our efforts should be focused.
It’s simply too early to tell how severe the pandemic will be for our SMEs around the world. Small firms are already experiencing or will soon be experiencing a liquidity crisis, which has the potential to wipe out entire portions of the economy. They will face a variety of problems in the next months, which will be largely determined by how politicians respond to the crisis now.
Small enterprises face numerous challenges.
Businesses are likely to go through four stages: shutdown, supply-chain disruption, demand slump, and finally recovery. The severity and degree of disruption caused by each stage of the process will be determined by government policies. We already know the consequences will be severe; the only unknown is how long the crisis will persist.
MSMEs will confront a variety of dangers to their survival as they transition from shutdown to recovery:
- Demand and liquidity access are collapsing. Demand for the businesses and entrepreneurs we help has plummeted, even in commodity-based industries, and some buyers are delaying payments for orders that have already been placed. MSMEs have little cash reserves and, as a result, are the first to go out of business when there is a liquidity crisis.
- Managing inventory and gaining access to inputs. MSMEs routinely import inputs from other countries, which has become more common as supply chains have grown longer and more complicated. As orders have fallen, essential inputs, like as fabrics from China, have also vanished for the garment companies we partner with in North Africa.
- Keeping an eye on the workplace. It’s difficult for manufacturing MSMEs to stay open during a lockdown since industrial floors aren’t constructed for social separation. Workers have vanished as a result of massive outmigration from cities, and it may be difficult to reactivate them. Even while the agricultural calendar continues, many governments have discontinued subsidies to farmers.
- Uncertainty in policy and supply chains. Policies are rapidly changing. MSME executives frequently operate alone and are unable to form crisis teams to track changes. Because passenger air travel has ceased, one of our clients reports that a consignment of fresh vegetables has been grounded at an airport. Disruptions in the supply chain, such as grounded airlines, cause significant liabilities.
- Obtaining emergency assistance: Many of the small firms we assist operate on the outskirts of the formal economy or do business unofficially. They rarely rely on government assistance, and only a small percentage of them participate in government-sponsored support networks. It may be tough to reach these companies and discover methods to aid as governments put together emergency support.
Small and medium-sized firms (SMEs) can engage in the global economy through joining global value chains. Mapping Global Value Chains reveals that their structure and ability to support SMEs in poorer nations can differ. While some governments have developed industrial policies and may favour some economic sectors, they have been less supportive of SMEs, particularly in terms of expanding their worldwide importance. Nonetheless, the importance of SMEs in terms of income, employment, and exports is becoming more widely recognised. Several international organisations have conducted studies and sponsored expert meetings and ministerial conferences to emphasise the contributions of small businesses and how governments may increase their supply abilities.
First, governments should do a better job of encouraging the development of skills. SME’s must be both dynamic and innovative in order to participate in global value chains. This implies they must be able to hire skilled individuals with the necessary abilities, especially highly specialised ones.
Second, governments must make it possible for small businesses to comply with international norms. Governments must promote the harmonisation of numerous and burdensome product and process quality standards, as well as provide financial measures and instruments that will enable SMEs to invest in continual innovation and technology upgrading.
Recommendation for Policy
1. Skills Enhancement
The absence of suitable skills in the workforce of SMEs in GvCs is a major issue that appears in the majority of case studies. The majority of the case studies, however, focus on public training institutions’ slow and ineffective responses to new skill requirements, and in some cases, even fundamental skill requirements. The case studies’ policy implications for skills development are not evident, as they are dependent on the position of the suppliers as well as the industry in which they operate. In this regard, there are four possible GvC scenarios, each of which corresponds to a distinct priority in terms of policy measures to be implemented.
Upgrading skills in four different GVC scenarios
- Assisting underperforming enterprises
- Upgrading low-cost suppliers in older sectors
- Making emerging industries more accessible
- Developing specialised and sophisticated factors
2. Modernization of technology
All of the case studies revealed that in order to enter and remain in a GvC, ongoing technological upgrading is required to fulfil company and international standards. Finally, the foreign buyer or lead business in the GvC, which wants ongoing innovation from suppliers who wish to stay in the GvC, is the primary driver of innovation in SMEs. In addition, the lead firm will specify the general direction of the innovation endeavour, including both process and product innovation. Granting financial incentives to SMEs so that they can invest in relevant technology is the most essential measure a government can take to help them satisfy these standards. SME development can be aided by strengthening national innovation systems at the local, regional, and sectoral levels.
3. Standards and quality
Compliance with international standards is another important concern in the context of GvCs. This is inextricably tied to and dependent on the ability of the small business to upgrade its technology. Product and process quality requirements are both covered by compliance. Product compliance can be validated by testing the product, however process compliance necessitates regular audits of the manufacturing plant and is frequently tied to process certification (e.g. ISO 9001:2015).
There was a time when it was thought that generic standards like ISO 9001 would suffice to ensure consistent quality, but that was not the case. A variety of proprietary process standards or industry-specific standards have also been used by lead firms. For SMEs, the expense of complying with a variety of standards, particularly in terms of certification preparation, can be significant and often exorbitant, posing a barrier to entry into a GvC.
Extensive quality assurance, certification, and accreditation systems have long existed in sophisticated industrialised countries, and the cost of doing so is quite low. Certification is typically handled by technical experts, and the process is rarely viewed as a strategic variable. Calibration of popular measurement instruments, for example, is performed by specialist suppliers that compete in a competitive market with cheap pricing, often less than $100 for an annual calibration. Similarly, various providers compete in the market for certification of quality management systems, with the cost of certification in the case of ISO 9001 being restricted to a few thousand dollars.
The situation in many developing countries is considerably different. Multilayered certification, accreditation, and calibration systems are still in the early stages of development. Monopoly suppliers charge a hefty price for these specialised services. As a result, some emerging countries have begun to work on building national certification, accreditation, and calibration systems.
4. Relationships between large corporations and small businesses
One of the most efficient strategies to integrate domestic suppliers into GvCs is to build long-term partnerships between SMEs and conventional businesses. Specific promotion measures might be targeted at foreign direct investors who would strengthen local supply capacity, as recommended by the So Paolo Consensus, which recognised the importance of developing countries and economies in transition “building stronger supply capabilities responsive to market demands, promoting technology development and transfer, encouraging enterprise networking, and increasing productivity.”
Governments can help businesses connect by strengthening the investment climate and focusing on established enterprises that are known for forming partnerships with local businesses. Simultaneously, the government must support business development services that will help SMEs become more “partnership ready.”
From entirely donor-driven and government-driven programmes to public–private sector partnerships, there are a number of approaches to build links in technical assistance. United Nations Conference on Trade and Development’s business linkage development programme, for example, encourages the formation of long-term and mutually beneficial collaborations between traditional corporation affiliates and big local enterprises on the one hand, and SMEs on the other, in order to improve their productive capacity, efficiency, competitiveness, and sustainability. In partnership with the local investment promotion agency, selected traditional corporations, and donors, the initiative is executed by a Business Development Services Centre as lead facilitator, often United Nations Conference on Trade and Development’s Empretec Centre. There are also programmes that are solely driven by the private sector, such as supplier development programmes run independently by traditional corporations in their own self-interest, and occasionally as part of their corporate social responsibility programmes. Such supplier development programmes benefited SMEs in Egypt and Vietnam. A well-developed entrepreneurship culture aids in the development of high-quality local businesses that can profit from international investment. Linkages are also facilitated by suitable technology and skill development.
5. Territorial development and clusters
National governments, as well as municipal organisations, are progressively pursuing business promotion activities and policies. Local governments and other actors are developing economic initiatives, including cluster promotion, in an increasing number of countries. To promote local suppliers, such entities should consider the form and evolution of GvCs. According to the report, clusters are simpler to locate for global purchasers than individual producers. Clustered businesses can also provide collective efficiencies, making them more appealing to global producers (meyerstamer, 2007). Egypt and Vietnam have established software parks and smart communities, while Nigeria has established film villages.
The establishment of close engagement with enterprises and clusters in emerging industries that are already internationally integrated is a major issue for governments. Such businesses frequently avoid interacting with governments, which they consider as an impediment rather than a facilitator. They have no motivation to urge the government for protection or assistance. Governments must work to establish credibility in the private sector, approach stakeholders in a constructive manner, and develop tangible support options.
The OECD tokyo action statement (OECD, 2007b) included specific proposals for governments to improve sme involvement in GvCs through collective action and cooperation, including:
- assisting in the formation and growth of industrial associations; establishing clusters and networks through establishing relationships between universities, research institutes, laboratories, and small businesses;
- Supporting clusters in specific technologies; and integrating SMEs from developing countries into the global value chain
- Fostering commercial relationships between traditional firms and small businesses, as well as promoting supplier development programmes in which small businesses are trained and mentored in critical areas such as design and production engineering.
6. IPR protection
In the creative industries of cinema and software, where SMEs contribute significantly to value-added, the inability to implement iprs was seen as a key barrier to sme expansion and capacity to benefit from GvCs. Local SMEs in more mature industries did not perceive the issue to be very important. However, there have been some complaints in the automobile parts industry, where local suppliers believe that some OEMs do not have an ethical problem with passing designs of a component made by one supplier to another. Even if intellectual property protection is not a “magic bullet” for all development issues, the fact that a government is beginning to enforce copyright and anti-piracy laws may boost new economic activities, particularly in emerging areas, according to the poll. It also indicates that the majority of SMEs in developing nations lack the knowledge, capability, and financial resources needed to adequately protect and exploit their intellectual property.
The relationship between innovation, intellectual property rights, and capital is critical for SMEs in mature economies. These SMEs are reliant on iprs to attract investment and sell their cutting-edge innovations, as well as to protect them from being duplicated (Jensen, 2005). The Tokyo Action Statement views ipr reforms as critical, and advises that governments increase the value of intellectual assets and intellectual property earned by SMEs via:
- Increasing SMEs’ awareness of intellectual property rights; establishing mechanisms to value and manage intellectual property assets;
- establishing online marketplaces where small businesses can sell their intellectual property; zz making it easier for small businesses to file patents;
- Developing recommendations for traditional corporations on how to treat SMEs’ intellectual property fairly; and zz assisting SMEs in legally acquiring intellectual property assets from universities and research centres.
Final Thoughts
Although it is difficult to identify common tendencies across industries and geographies in the diverse universe of SMEs, the case studies gave new insights into expanding SMEs’ participation and enhancing their performance in GvCs. One finding from the study that jumps out is that successful involvement in GvCs can bring stability: small businesses that are able to stay in value chain(s) despite fierce global competition, or SMEs who succeed in “coming on board,” are more likely to see their business grow. As a result of increased exposure and availability to information, business processes, and technologies, this is more frequently accompanied by technological and human capital upgrades. Cooperation throughout the chain is a critical success factor that provides significant advantages in terms of status, information flow, and learning opportunities.
Finally, developing countries must prioritise the expansion of productive abilities in their programmes. The encouragement of entrepreneurship and the enhancement of firm competitiveness through technology and business linkages are also required for the development of local industry or service networks that can effectively link with international production networks. housewife
When working in GvCs, suppliers must constantly improve and develop in order to stay competitive. Governments that want to boost sme competitiveness should focus on long-term solutions rather than short-term fixes. To achieve, maintain, and improve international competitiveness in more sophisticated products and services, legislative assistance for technological upgrading and boosting domestic value added could be provided.
Re-establishment of commercial ties
Our beneficiaries will expect us to be ready to assist them in reconnecting with buyers, rehiring workers, and resuming production after the crisis has passed. It’s too early to draw conclusions, but here are some suggestions based on early field feedback:
- Make changes in working plans. We should revise our work plans, pay close attention to what MSME management and governments require, and figure out how to get it done.
- Have data on hand. International value chains connect millions of SMEs and account for a significant share of trade. Concentrate on assessing the crisis’s effects and making the findings available to decision-makers and businesses.
- Create (or re-create) an ecosystem. Now, more than ever, MSMEs require the assistance of business support organisations. Governments also require an ecosystem capable of providing much-needed assistance to its SMEs. The institutional strengthening team is bringing together trade promotion groups from around the world to exchange new best practises and resources for small firms, such as market data, so that they can learn from one another in real time.
- Consider value chains and strategic alliances. To re-establish trade, actors from all parts of the value chain must collaborate. For example, we’re aiming to keep the lines of communication open between customers and suppliers.
- Concentrate on finances. Create a strong team to collaborate with trade finance providers, regulators, guarantors, buyers, and suppliers to help MSMEs gain access to inexpensive financing.
It is critical that we begin these processes as quickly as possible, using virtual technology when possible. We’ve developed ways to assist tiny firms from afar, such as virtual mentorship, virtual inception missions, and even offering early grants to keep them moving forward. More importantly, our employees have significantly expanded their roles in data collection, service delivery, and customer relationship management, all of which will be more crucial than ever in our response.
Many of our MSME beneficiaries are succumbing to COVID-19’s early consequences. We must be ready and react swiftly when they are ready to talk about rehabilitation.
