SMEs Can Benefit from Globalization through Indirect Exports

Mr. Naoyuki Haraoka's picture

Many anti-globalization activists doubt small and medium enterprises (SMEs) can profit from economic globalization given their competitive disadvantages versus multinational enterprises (MNEs). The good news for SMEs is that MNEs building global supply chains for products such as home electronics or electric appliances will need parts and components from SMEs to achieve competitiveness since many key components are made by SMEs.

Even so, whether a SME can take advantage of these opportunities will depend in part on whether it can be productive enough to pay the fixed costs of exporting which include, among other things, the cost of collecting information about the business environment for their exports and developing sales channels. Given these challenges, SMEs will not always be able to exploit extant export opportunities. Nevertheless, MNEs’ needs for SMEs products are growing so SMEs will have multiple exporting channels. Specifically, they can engage in indirect exporting through intermediaries such as wholesalers or trading companies. In the case of Japan, nearly 40 percent of Japanese companies are indirect exporters with more likely to engage in indirect exporting over time. Another way for SMEs to export is (borderless) e-commerce, which enables them to access overseas customers much more easily, though they will face risks relating to payment and distribution systems. As a result, indirect exports likely will be the principal way most SMEs join the exporting game. To succeed, SMEs choosing indirect exports must have a good sense of their overseas clients’ needs and also make good connections with an intermediary company with full sales capacity. According to a Japan Ministry of Economy, Trade, and Industry questionnaire 50-60 percent of SMEs in Japan believe indirect exports can contribute to increasing their profits. If SMEs can leverage indirect export opportunities, SMEs’ participation in economic globalization means win-win situation for MNEs and them.