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Wednesday, Feb 21, 2024

When FAANGs Bite, Take Your MSME Medicine

I nvestors pay rapt attention to the powerful multinational companies with high market caps – the FAANGs (Facebook, Amazon, Apple, Netflix and Google) and BATs (Baidu, Alibaba Group and Tencent) of America and China, respectively. But we are misallocating our precious attention. These acronym companies are outnumbered by the world’s micro, small and medium-sized enterprises (known as MSMEs).

Within the economies of the Asia-Pacific Economic Cooperation, 97 percent of enterprises are MSMEs. With the current FAANG losses in the stock market, and the headwinds faced by the BATs as well, there is no better time to seize opportunities with the other 97 percent of firms.

When governments seek to enhance trade for MSMEs, especially women-led MSMEs, economies achieve higher economic and social growth rates. MSMEs that engage in cross-border trade are more productive, pay higher wages, and are more innovative, creating positive spillover benefits on home economies.

Unfortunately, as our research confirmed, the current environment for supporting MSMEs in trade, especially cross-border trade, is dismal.

Across APEC, we found that trade costs overwhelm and discourage MSMEs before the border, at the border, and in foreign markets. Patchwork and one-size-fits-all approaches trap MSMEs in vicious cycles of low growth and low productivity. As a result, economies do not capture the benefits of trade.

There is hope, however. Our research identified four critical areas where programs and policies enable MSMEs to enter virtuous cycles, bringing social and economic wealth back to their home economies.

First, build readiness and resiliency of MSMEs. Economies must invest in supportive regulatory and operating environments. Transparency and consistency of law, easy business formation processes, well-built physical infrastructure, functioning logistics providers, universal quality education and business-friendly tax policies must be in place before MSMEs can engage in domestic or international business.

Second, appreciate that 21st century MSMEs and their economies must be digital. Digital technologies and platforms streamline cross-border trade for MSMEs, reduce export costs by up to 82 percent, increase the number of economies reached by 10 times and double growth when compared to nondigital MSMEs. Continued growth of cross-border e-commerce yields further productivity gains of 6 to 15 percent for MSMEs and doubles participation of women-led MSMEs. Without policymaker comprehension of the digital economy’s enablers and barriers, MSMEs cannot survive.

Third, support MSMEs in the services sector and global value chains (GVCs), especially in APEC’s developing economies. MSMEs’ participation in direct and indirect export of services is low, despite clustering of MSMEs in the services sector. For GVCs, more than 80 percent of global trade now occurs within international production networks of multinationals, and more than 50 percent of domestic value added to exports is attributed to SMEs. MSMEs engaged in GVCs are more efficient, productive and competitive compared to MSMEs that engage in direct trade. The steps are clear for inclusive growth for MSMEs in the services sector and in GVCs.

Fourth, women-led MSMEs must be supported. Compared to men-led MSMEs, women-led MSMEs encounter strong barriers to trade in every aspect of the business environment. All APEC economies engender biases. All businesses will benefit from policies and programs that acknowledge the explicit and implicit cultural biases, and work toward inclusive growth. As McKinsey stated in a recent report, global gross domestic product could potentially grow by $12 trillion if gender equality is achieved. 

Economies must understand the processes and moral implications of the digital economy and develop cohesive strategies to support MSMEs. Alongside economic co-operations like APEC, stakeholders must remain champions of trade liberalization and ensure MSMEs are at the negotiating table for free trade agreements. They must also develop standards for interoperability of digital systems to enable flows of goods, services and data.

Previous research has stated the importance of MSMEs. Now, it is clearer than ever that economic and social growth is dependent on MSMEs. It is incumbent upon policymakers and the business community to understand and implement the good practices identified in our research.

Jasmine Hagans is the co-lead of the USC Marshall APEC Business Advisory Council (ABAC) Research Team.

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