Statistical Insights: Inclusive Globalisation, does firm size matter?
The rapid increase in global value chains (GVCs) in the last two decades, in response to falling communication costs and reductions in trade barriers, has in large part been fuelled by large and multinational enterprises. But across the OECD, 99.8% of enterprises are classified as SMEs, very few of which engage in international trade. Yet collectively, SMEs are responsible for two-thirds of employment and over half of economic activity in the OECD. This has raised policy concerns about the inclusive nature of globalisation and more specifically whether SMEs, and their employees, are less able to benefit from GVCs. While it is clear that SMEs face particular and more significant challenges to exporting compared to larger firms (see for example the OECD Statistical Insights Who’s Who in International Trade) it is also true that direct export channels are not the only mechanism available to SMEs for integration into GVCs. A new report by the OECD, Nordic Countries in Global Value Chains, developed in collaboration with national statistical offices in the Nordic countries, shows that SMEs play an important role in GVCs as suppliers of larger exporting enterprises. In particular, it highlights that in the Nordics, more than half of the domestic value added of exports originates in SMEs.
In the Nordic countries, indirect exports through GVCs by Independent SMEs are around twice as important as their direct exports…
A significant share of total value-added (and hence employment) generated by SMEs is dependent on foreign markets, with the contribution of exports provided via indirect channels rising the smaller the firm. For example, while only 5% of value added generated by independent micro SMEs (SMEs with less than 10 employees) in Sweden is exported directly, an additional 24% of their value added is generated through value chains of downstream exporters, highlighting the significant dependencies of these firms on foreign markets. Figure 1 further illustrates this by separating dependent SMEs (firms with fewer than 250 employees which are part of a larger enterprise group) from independent SMEs (similar firms that do not have such ties). It shows that for the latter category, indirect exports are more than twice as important as direct exports.
Figure 1. Share of domestically produced value added that is exported
….reflecting the important channels provided by larger firms and MNEs…
Larger enterprises provide important channels for SMEs to access foreign markets and benefit from international growth, in particular in emerging economies where barriers to direct exports may be onerous for SMEs. Figure 2 illustrates that 28% of all SME’s exports are channelled through larger firms, with a significant share reflecting MNEs (both foreign and domestically owned).
Figure 2. Channels through which SMEs link to foreign markets
….which generate significant spillovers for jobs and income…
In turn, a quarter of every dollar of GDP created by exports of large firms reflects the value of goods and services provided by upstream SMEs (Figure 3), thus highlighting the important role larger firms can play in generating upstream spillovers in the form of income and employment. Indeed, in the Nordic countries, on average, each unit of value added by large exporting firms generates an additional 0.66 units of value-added in upstream (large and small) suppliers. This partly reflects the stronger focus of large firms on their core business functions. In this respect, it is also useful to mention that larger firms also typically include a larger share of imports in their exports: in other words, a higher import content of exports can go hand in hand with strong domestic supply chains.
Figure 3. Upstream contribution to exports of large enterprises: per cent of total domestic value added
..…particularly for SMEs in the services sector.
Upstream spillovers generated by larger firms are especially important for SME services providers. As Figure 4 illustrates, around 20% of the domestic value added exported by large manufacturing firms consists of services provided by upstream SMEs. Overall, services account for over 4o% of the gross exports of the main manufacturing industries. This shows the importance of e.g. efficient logistic services providers, and specialised business services such as accounting and legal services, for manufacturing exports.
Figure 4. SME services providers’ contribution to exports of large manufacturers
The findings in the report Nordic Countries in Global Value Chains summarised above highlight the importance of policy measures (e.g. improved access to finance, skills and technology transfers that recognise the upstream role of SMEs in driving competitiveness of downstream exporters, as well as their ability to disperse the benefits of trade more widely), as complements to more ‘traditional’ measures that focus on direct exporters, such as removing red tape, special (export) financing schemes, and facilitating match-making with business partners abroad.
The measure explained
The indicators on the role of SMEs in GVCs have been developed via a unique and innovative collaboration between the OECD and the Statistical Offices in Denmark, Finland, Norway and Sweden. This cooperation allowed for the linking and integration of detailed and harmonised micro data into the Inter-Country Input-Output (ICIO) table that underpins the OECD-WTO Trade in Value Added (TiVA) indicators. Building upon standardised national linked micro datasets in all four countries, a shared SAS program ensured that identical calculations were performed in all countries without the microdata having to leave National Statistical Offices. The full report includes a detailed methodological annex that describes how data were combined and indicators derived.
The domestic value added in exports reflects the value of exports that is domestically produced (i.e. not imported), either by the exporting firm itself, or by its upstream suppliers (i.e. value that is indirectly exported).
This Statistics Insights accompanies the report “Nordic Countries in Global Value Chains”, which examines the role of SMEs, MNEs and trading enterprises Nordic Global Value Chains. The report can be downloaded here.
More information on Trade in Value Added (TiVA), the indicators and the ICIO table can be found at http://oe.cd/tiva.