UNCTAD sets out a new framework, aimed at tackling existing policy gaps to facilitate overseas investment by smaller firms – the very backbone of economies worldwide.
© Shutterstock/Gorodenkoff | An engineer develops software for drone control. The IT sector accounted for nearly 40% of overseas investment by smaller corporations worldwide between 2015 and 2022.
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Smaller enterprises make up 90% of firms worldwide, and are crucial to global trade
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But their investments abroad are declining, risking untapped development potential
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This calls for policy actions that better support them to invest and thrive in global markets
Foreign direct investment by small- and medium-sized businesses (SMEs) has been falling in recent years.
Between 2015 and 2022, the number of overseas greenfield investment projects by SMEs dipped by about 75%, according to a new UNCTAD report published on 6 February.
“SME investment can be most beneficial for development,” says Amelia Santos-Paulino, head of investment issues and analysis at UNCTAD.
“Because these businesses are more agile, relying more on local suppliers and partners, and less likely to crowd out local firms.”
SMEs can become a real game changer, especially when globally, there’s increasing competition for a shrinking pool of large-scale projects, and an accelerating trend towards regional economic integration.
But in practice, SME investors commonly grapple with financial and information constraints, and difficulties navigating complex regulations.
Adding to the challenge is an international context where policy efforts to facilitate and promote investments are often geared towards attracting large multinational enterprises (MNEs).
Addressing this imbalance will be key to easing SMEs’ efforts to invest abroad, and unlocking the employment and productivity gains they can bring to the wider economy.
Investing internationally: Difference between big and small companies
The report underscores the need for more policy attention to small businesses, as their approach to cross-border investment differs vastly from that of larger ones.
It finds that in Latin America, SMEs tend to export less than MNEs.
Take Brazil for example, only 19% of SMEs export goods, whereas some two thirds of MNEs sell products abroad. A similar contrast is also observed in Peru (25% for SMEs, and 66% for MNEs).
The difference partly has to do with the sectoral distribution of SMEs.
Globally, over half of their foreign investment projects concentrate in knowledge-intensive industries such as business services, software and information technology services, which don’t require high set-up or fixed costs.
In addition, SMEs tend to invest more in high-tech manufacturing such as electronics and electrical equipment, pharmaceuticals and medical devices, but far less in sectors such as textiles and automobiles, where economies of scale are vital to making profits.
SMEs powering regional economic integration
SMEs can both drive and benefit from regionalization, given proximity – geographical, cultural and ideological – is generally a main consideration when they invest overseas.
For instance, more than half of South Korean SMEs invest in neighbouring East Asian economies with lower production costs – in contrast to MNEs which focused more on developed markets.
Similarly, South African companies invest mostly in African countries. Turkish SMEs, representing a significant share of investors from developing Asia, invest almost exclusively in Europe, due to geographical closeness.
In the cases of Brazil, Colombia and Peru, SME foreign affiliates nearly follow the typical driving forces in trade, emphasizing market size, short distance, language commonality, and lower tariffs.
Policy recommendations
Introducing a new framework, the report recommends a range of actions to maximize the impact of SME foreign investments. These include:
- Adjusting investment promotion and facilitation services to address SMEs’ needs and challenges, ensuring that company size doesn’t hinder access to financial incentives and facilitation mechanisms.
- Facilitating SMEs’ access to capital through improved digital services and infrastructure.
- Simplifying regulatory and administrative frameworks, while leveraging digitalization for better access to information.
- Establishing comprehensive support networks and matchmaking programmes to help SMEs foster sustained partnerships.
- Promoting SMEs’ participation in trade to enhance their international exposure and knowledge of foreign markets.