WT/COMTD/AFT/W/53  
 
6 October 2014  
(14-5620)  Page: 1/41  
Committee on Trade and Development 
Aid for Trade   
 
   
BACKGROUND NOTE ON AID FOR TRADE AND SME COMPETITIVENESS: CONNECTING 
DEVELOPING COUNTRY SMES TO GLOBAL VALUE CHAINS 
JOINT COMMUNICATION FROM THE INTERN ATIONAL TRADE CENTRE AND THE WTO 
SECRETARIAT1 
Table of contents 
 
 
1   EXECUTIVE SUMMARY ................................................................................................. 4  
2   INTROD UCTION  .......................................................................................................... 5  
3   SMES, TRADE AND DEVELOPMENT ............................................................................... 6  
3.1   What is  an SME? ....................................................................................................... 6  
3.2   SME's contribution to development ............................................................................... 8  
3.3   The internationa lization of  SMEs ................................................................................. 11 
4   BOTTLENECKS TO THE INTERN ATIONALIZATION OF SMES ....................................... 15  
4.1   Access to finance ...................................................................................................... 15 
4.2   Difficulties en tering new markets ................................................................................ 18 
4.3   Difficulties defe nding their intere sts ............................................................................ 19 
4.4   Access to technology and scope for innovation .............................................................. 19 
4.5   Availability of skills .................................................................................................. . 19 
4.6   Trade costs .............................................................................................................. 20 
4.7   Business environment ............................................................................................... 21 
5   BOTTLENECKS TO SMES  INTERNATIONALIZATION IN LDCS: COUNTRY LEVEL 
EVIDENCE ......................................................................................................................  22 
5.1   References to "SMEs" in the DTISs .............................................................................. 22 
5.2   SME constraints highlighted in DTISs ........................................................................... 23 
5.3   Constraints faced by SMEs pe r region .......................................................................... 24 
5.3.1   Asia .................................................................................................................. ... 25 
5.3.2   Oceania ................................................................................................................ 25 
5.3.3   Southe rn Africa ..................................................................................................... 26 
5.3.4   East ern Africa........................................................................................................ 26 
5.3.5   Cent ral Africa ........................................................................................................  26 
                                               
1 This document has been prepared under the responsibility of the ITC, and the WTO Secretariat, and is 
without prejudice to the positions of Members and to their rights and obligations under the ITC or WTO. The document is also being issued by the ITC as a joint ITC-WTO technical paper. 
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  5.3.6   Western Africa ....................................................................................................... 27 
5.4   EIF support to alleviate SMEs' bottlenecks .................................................................... 27 
6   SMES, DEVELOPMENT FINA NCE AND AID FO R TRADE ............................................... 28  
6.1   Development finance and SMEs .................................................................................. 28 
6.2   Aid for Trade and SMEs ............................................................................................. 31 
6.3   Strengthening the delivery of SME support programmes ................................................. 34 
7   CONCLUSIONS ........................................................................................................... 36  
REFERENCES .................................................................................................................. 3 8 
 
Tables 
 
Table 3.1 Criterion used by listed institutions for de fining "SME" .............................................. 7  
Table 3.2 SME contribution to employment  shares by region (median values) ............................ 9  
Table 3.3 The importance of SMEs fo r trade and econom ic activity ........................................... 9  
Table 4.1 Information barriers faced by SMEs  by region......................................................... 18 
Table 6.1 Indicative list of Development Finance Institutions active in SME development 
through their private sector development programmes .......................................................... 30 
Table 6.2 Assistance reported to the OE CD for SME developmen t (US$ millions) ....................... 32 
Table 6.3 Examples of Aid-for-Trade pr ojects providing for SME development ........................... 33 
Table 6.4 SME development projects  by value 2008- 2012 (in US$) ......................................... 34 
Table 6.5 Overview of messages from recent evaluations ....................................................... 35 
 
Figures 
 Figure 3.1 Number of formal and informal SMEs (in millions)  in developing  countri es. ................. 8
 
Figure 3.2 Breakdown of fo rmal SMEs by  region. ................................................................... 8  
Figure 3.3 Job creation shares by size (only countries with net job creation are included) ........... 10 
Figure 3.4 Total Entrepreneurial Activity (TEA) for female adul ts in 67 economies ..................... 11 
Figure 3.5 TEA by industry sector for females and males by region. ......................................... 11 
Figure 3.6 Company size  by export  status ........................................................................... 13 
Figure 3.7 Sector breakdown of small-, medium- and large-sized companies from the 
African, Caribbean and Pacifi c (ACP) group of  countries ......................................................... 14 
Figure 3.8 Barriers to internationalization ranked by SMEs using the ‘top ten’ ranking 
method ........................................................................................................................ .. 14 
Figure 4.1 Percentage of firms viewing access to finance as a major obstacle by firm size 
and country income group ................................................................................................. 16 
Figure 4.2 SME finance coverage by fi rm size and by type of financing ..................................... 17 
Figure 4.3 Share of firms by income group identifying an inadequately educated workforce 
as a major constraint to their op erations ............................................................................. 20 
Figure 5.1 Number of text refe rences to SMEs in the DTISs. ................................................... 23 
Figure 5.2 Importance of different SME- specific bottlenecks in DTIS studies ............................. 24 
Figure 5.3 Relative importance SME-specific constraints in DTIS studies, by region .................... 25 
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Boxes 
  
Box 4.1: Accessing affordable trade financ e  - an on-going ch allenge for SMEs ......................... 17
 
Box 5.1: Examples of EIF support  to address SM E constr aints ................................................ 28 
Box 6.1: Mind the gap: empowering Keny a’s SMEs through al ternative lending ......................... 29 
Box 6.2: Plugging the SME funding gap - examples from ar ound the world ............................... 29 
Box 6.3: Trade finance support: facilitating US$30 billion in trade in 2013 ................................ 31 
Box 6.4: Involving multinational enterprises in trade-related technical assistance ...................... 33 
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1  EXECUTIVE SUMMARY 
1.1.  This joint ITC-WTO study discusses the constraints that small- and medium-sized 
enterprises (SMEs) face in engaging in international trade, notably those highlighted by SMEs 
in Least-Developed Countries (LDCs), and reviews how Aid for Trade is addressing these 
obstacles.  It builds on the analysis conducted for the 4th Global Review of Aid for Trade: 
"Connecting to Value Chains", and is submitted as a contribution to the Aid-for-Trade Work 
Programme for 2014-15 in preparation of the 5th Global Review of  Aid for Trade. 
1.2.  Some 95% of enterprises across the world are SMEs, accounting for 60-70% of private 
sector employment. In developing economies, SMEs are strongly linked to employment, poverty reduction, women's economic empowerment, and income distribution.   
1.3.  SMEs are integral to private sector development, particularly in LDCs, and an essential 
component of inclusive, sustainable development.  Fragmentation of trade into value chains has increased the trade exposure of SMEs – as importers and exporters of goods and services 
themselves, and as suppliers of other exporters and importers – opening new opportunities 
and offering fresh challenges. 
1.4.  SMEs with greater "internationalization"  tend to report higher turnover and growth; 
these SMEs are more productive than their counterparts.  But in low-income countries, seven 
out of every 10 new export relationships fail within two years.  Only a minority of SMEs manage to sustain adequate growth patterns for a significant period of time. The SME sector is characterized by a high level of "churn": of exit and re-entry.  
1.5.  And yet, SMEs are disproportionately important to low-income economies, employment, 
and economic growth. The challenge to policymakers is two-fold. First, how does one encourage a higher fraction of SMEs to su rvive by avoiding that they are unduly and 
disproportionally affected by market failures and fixed costs, and second, how might one 
support these high growth SMEs and ensure that these firms are able to successfully transition from one state of development to another (e.g. from small to medium to large, or 
national to international)? 
1.6.  SMEs face a number of inherent challenges due to their size. These include: access to 
finance, notably trade finance; lack of institutional support; insufficient skilled personnel; disproportionately high trade costs; lack of access to technology; and an unfavourable 
business environment.  Challenges are amplified in a trade context where SMEs must navigate 
a set of further constraints – constraints that, in part, explain the low survival rates observed for SME exporters. 
1.7.  From analysis of the obstacles faced by SMEs in LDCs, drawn from a sample of 23 
Diagnostic Trade Integration Studies (DTISs) undertaken by the Enhanced Integrated Framework (EIF) for LDCs, three key bottlenecks emerge:  
 quality of the business environment;  
 access to finance; and  
 lack of institutional support to overcome trade related challenges.  
 
1.8.  Improving the business environment emerge s as a priority action area for all LDCs, 
alongside strong institutional structures that actively promote investment and address market failures, such as lack of information on potential trading partners. Other bottlenecks vary by 
region. For example, in Oceania, lack of institutional support ranked highly, while in Central 
Africa, lack of a skilled workforce was a more pressing concern. 
1.9.  The global economic crisis has brought new energy to initiatives to bridge the financing 
gap faced by SMEs and to help SMEs to realize their economic growth and development 
potential.  The G20 has taken up this challenge in the context of its work on financial inclusion. This focus has renewed interest in the on-going work of a broad range of development finance institutions (DFIs) and their related investment vehicles. DFIs have for 
many years been working on SME financing, often with innovative solutions and approaches WT/COMTD/AFT/W/53 
 
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  that mix training and advisory services with commercial financing products.  South-South 
partners are also adding their own stamp to this area through new institutions, approaches and products – and, in so doing, connecting SMEs to a dynamic segment of global trade.   
1.10.  This joint background note aims to discuss how Aid for Trade is seeking to address the 
challenge of SME competitiveness.  An importan t issue discussed in this context is that of 
"additionality".  DFIs, and Aid for Trade, cannot alone bridge the SME funding gap or address all of the trade-related constraints of SME training. There must be close collaboration with 
partner country governments, and with the private sector both in implementation and in 
finding long-term solutions to market failures.   
1.11.  This study highlights some of the action s being taken by companies to integrate SMEs 
into their supply chains, and how DFIs are seeking to utilize new techniques and insights 
(such as base of the pyramid approaches) to catalyse and leverage the private sector to 
address market failures. 
1.12.  The study concludes with an analysis of evaluations of recent private sector 
programmes with significant SME components.  A clear message that emerges is that while 
the trade elements of SME programmes are growing, more work is still needed to arrive at a coherent trade perspective, not just in project design, but also in monitoring, evaluation and 
results.  The study concludes with two open questions for the trade and development 
community where further work is suggested: 
  How to scale up trade support to SMEs without institutions and instruments becoming too 
diffuse, losing both focus and impact?; and 
 How to mainstream trade, at a conceptual and implementation level, into SME project 
design, implementation and reporting?   
 
2  INTRODUCTION 
2.1.  The study builds on the results of the 4
th Global Review of Aid for Trade: Connecting to 
Value Chains, and is being submitted as a cont ribution to the Aid-for-Trade Work Programme 
for 2014-2015.   
2.2.  It comes at a time when G20 discussions have increased their focus on small- and 
medium-sized enterprises (SMEs), when SMEs  are being discussed in the context of the 
United Nations’ (UN) post-2015 Development Agenda and when the UN is reviewing the 
implementation of the General Assembly Re solution A/67/202 "Entrepreneurship for 
Development".2 While the G20 discussions and the UN resolution deal with SME 
entrepreneurship in general, the present study provides a specific focus on SMEs in an 
international trade context. The report has therefore been prepared jointly by the ITC and 
WTO, in recognition of the fact that much of IT C’s activities over the past five decades focused 
on the international competitiveness of SMEs (ITC, 2014).  
2.3.  In most countries, SMEs represent the ov erwhelming majority of enterprises; they are 
an important source of private sector employment creation and contribute significantly to Gross Domestic Product (GDP). SMEs are often among the most dynamic players in any economy, notably because small size facilitates flexibility and creativity.  SMEs also have an 
important social policy dimension, notably in the areas of poverty alleviation and the 
empowering of otherwise disadvantaged groups, including women.  
2.4.  SMEs face inherent challenges linked to their size. Failure rates among SMEs are high, 
both in developed and developing countries.  At the same time, SMEs are operating in an ever 
more globalized and complex trading system in which value chains are the predominant form of industrial organization. SMEs are internat ionalizing, both by design and by default. 
Internationalization may take different forms including: the import of inputs, the supply of 
inputs to an exporting (often multinational) firm, or the direct involvement in exports.  
                                               
2 See the Communiqué to the B20 leaders and G20 Finance Deputies and Sherpas at the occasion of the 
Conference "The G20 Agenda for Growth: O pportunities for SMEs" on 20 June 2014. WT/COMTD/AFT/W/53 
 
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  2.5.  The study starts with a description of the typical characteristics of SMEs, their role for 
development, and their role in international trad e. It then continues with an overview of the 
challenges SMEs face in general and when wanting to get involved in international trade. These challenges are further examined in the context of Least-Developed Countries (LDCs) 
through an overview of SME-specific challenges that have been identified in recent Diagnostic 
Trade Integration Studies (DTISs) conducted by the Enhanced Integrated Framework (EIF). 
2.6.  The study then examines how Aid for Trade is seeking to address relevant constraints 
and discusses how Aid-for-Trade initiatives fi t within the wider context of development 
finance. Results achieved so far and the challe nges inherent to SME-specific Aid-for-Trade 
programming are also examined.    
3  SMES, TRADE AND DEVELOPMENT  
3.1.  The importance of small- and medium-siz ed enterprises (SMEs) to the performance of 
national economies is a subject of increasing interest among policymakers in national governments and international institutions, in both developed and developing countries. This 
is unsurprising given that, in most countries SMEs constitute the overwhelming majority of 
firms, are a major source of employment, and contribute significantly to Gross Domestic 
Product (GDP).  
3.2.  Studies indicate that "formal-sector" SMEs  contribute up to 45% of employment and up 
to 33% of GDP in developing economies; th ese numbers are significantly higher if the 
contributions from the "informal sector" are taken into account (International Finance Corporation (IFC), 2010). As an example, in Morocco 93% of industrial firms are SMEs, 
accounting for 38% of production, 33% of invest ment and 30% of exports (Edinburgh Group, 
2013). In Ghana, SMEs represent about 92% of Ghanaian businesses and contribute about 70% of Ghana's GDP (Abor and Quartey, 2010). Further studies find that the contribution to employment by SMEs is 51% in low-income countries, 44% in lower-middle income countries 
and 38% in upper-middle income countries (Ayyagari et al., 2011). The picture is similar in 
Least-Developed Countries (LDCs). For instance, in Lao PDR, SMEs account for 98% of firms 
and generate more than 81% of employment. A dd to this the positive correlation observed 
between the relative size of the SME sector an d economic growth (see Beck et al., 2005) and 
the importance of SMEs becomes clear. 
3.3.  The SME sector is characterized by a high level of "churn". In other words, many SMEs 
will fail within a few years and be replaced by new ones. The World Bank, looking at data from 
OECD countries and Latin America, finds that after the seventh year since starting up, 60% of firms have exited and 35% remain micro or stagnating enterprises (Tewari et al., 2013). Only around 5% of the initial cohort are characterized by strong and sustained growth (Tewari et 
al., 2013). It is this group which contributes disproportionately to the economy and which is a 
driver of innovation, employment, and growth for the economy as a whole. Moreover, it is this group which is best positioned to join national and international value chains through 
relationships with larger companies. Therefor e, the challenge presented to policymakers is 
two-fold. First, how does one encourage a higher fraction of SMEs to survive by avoiding that they are unduly and disproportionally affected by market failures and fixed costs, and second, 
how might one support these high growth SMEs and ensure that these firms are able to 
successfully transition from one state of development to another (e.g. from small to medium, or national to international)? 
3.4.  To overcome these challenges, it is essential for policymakers to understand the many 
factors that encourage and discourage SME creati on and development. This section provides 
an overview of some of the unique characteristics that SMEs possess and seeks to explain why the health of this segment is a pre-requisite for any vibrant and productive economy. 
3.1  What is an SME? 
3.5.  The term "SME" encompasses a broad sp ectrum of definitions which vary between 
country and region. Even within countries, definitions may vary or indeed be non-existent. 
International organizations and financial institutions use their own guidelines for defining an WT/COMTD/AFT/W/53 
 
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  SME. However, almost all definitions are ba sed on some combination of the number of 
employees, turnover and assets (see Table 3.1).  
Table 3.1 Criterion used by listed institutions for defining "SME" 
Institutions Maximum No. 
of Employees Maximum Revenue or 
turnover (US$) Maximum 
Assets (US$) 
World Bank 300 15,000,000 15,000,000 
Inter-American 
Development Bank 100 3,000,000 None 
African Development Bank 50 None None 
Asian Development Bank 50 None None 
UNDP 200 None None 
Source: ITC and WTO research 
 
3.6.  As is clear from Table 3.1, not only does the definition for an SME vary considerably, but 
the criteria are often broad and therefore encompass a wide variety of firms with very 
different properties. The traditional view of the differences within the SME category in 
developing countries is as follows. Micro firms (i.e. businesses which employ 10 or less 
individuals) often exclusively serve the local economy, use basic technologies in the 
production of their goods and services, and have little in the way of fixed assets. Small businesses may employ up to 50 individuals, an d also serve the local economy. However, the 
additional scale increases the likelihood that they are also active at the national level. 
Turnover and assets are expected to be of the order of US$100,000. Medium-sized companies 
may employ up to 300 people, and are likely to  be focused on serving the national economy. 
Turnover and assets are expected to be in the region of millions of dollars. These companies 
will likely use competitive production methods, and be equipped to join existing global value 
chains
3 (GVCs) either by direct exports or by serving large/foreign firms in the domestic 
market.  Moreover, integration into GVCs need not be production based; services based GVCs 
have been shown to enhance trade and economic  growth, as the recent experience of Costa 
Rica demonstrates (Marín-Odio, 2014). 
3.7.  Although the above view is in line with recent economic modelling of trade (e.g. Melitz, 
2003), it is important to note that many companies will not fit into this characterization of 
micro-, small- and medium-sized enterprises. This is partly due to the "levelling effect" of new technologies, and the unique strengths and weaknesses an economy may possess. For instance, online platforms like e-Bay have made it possible for firms administered by less than 
10 people (ostensibly a micro-SME) to run a global enterprise with an international client 
base. It is also the case that the existence of GVCs makes it easier for relatively small firms to internationalize, although this does not necessarily imply exporting directly.  
3.8.  Adding to the complexity is the distinction between "formal" and "informal" SMEs. 
Formal SMEs are usually defined by whether they have been officially registered by tax authorities. While being registered has the "disadvantage" of being subject to taxation, it 
improves access to finance and access to other services. Nevertheless, the overwhelming 
majority of firms in the developing worl d are in fact informal (see Figure 3.1). 
3.9.  Figure 3.2 shows the prevalence of form al micro-, small- and medium-sized businesses 
by region. What is striking is the level of variation from region to region. For example, in 
South Asia 82-100% of formal SMEs are estimated to be very small (i.e. micro), while this is 
only true for 22-27% of SMEs in sub-Saharan Africa.  
3.10.  The differences between SMEs serve as an added complication to the design of SME 
policies. Nevertheless, it is still useful to categorize companies by their size as it can give 
insights into the structure of an economy. It is the variety exhibited by SMEs which makes the sector both vibrant and productive. 
                                               
3 In this study, GVCs refers to global and region al value chains. WT/COMTD/AFT/W/53 
 
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  Figure 3.1 Number of formal and informal SMEs (in millions) in developing countries. 
 
Source: IFC (2013) 
 
Figure 3.2 Breakdown of formal SMEs by region. 
 
 
Source: IFC (2013) 
 
3.2  SME's contribution to development 
3.11.  SMEs, as a group, account for a signific ant share of economic activity and employment. 
However, there is considerable variation by geographical region, and indeed by SME size. 
Table 3.2 provides statistical information of th e contribution SMEs make to employment and 
highlights differences between regions. For instan ce, in the Middle East and North Africa only 
32% of total employment is due to SMEs with 100 or less employees, compared to 55% for 
sub-Saharan Africa. In the SME500 category, it  can be inferred that the North American 
economy is dominated by large firms to a much greater extent than any other region, as the employment contribution by SME500s is rela tively low. Understanding the fraction of 
employment due to SMEs can yield valuable in formation on the employment structure of any 
given economy. WT/COMTD/AFT/W/53 
 
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  Table 3.2 SME contribution to employme nt shares by region (median values) 
Region SME100  SME150  SME200  SME250  SME300 SME500  
Sub-Saharan Africa 54.8 63.8 68.2 76.9 80.6 85.1 
East Asia and Pacific 56.8 61.6 67.4 65.7 71.3 71.3 
Europe and Central Asia 44.7 53.1 59.5 66.3 67.5 75.5 
Latin America 53.7 56.7 64.4 67.8 71.0 78.3 
Middle East and North 
Africa 32.2 48.1 36.6 57.3 58.6 62.3 
North America 41.7 39.3 42.0 - 59.3 56.6 
South Asia 56.6 65.3 73.6 78.0 80.3 88.5 
Note: Estimates are subject to an error margin of several percentage points. 
Source: Ayyagari et al., (2011) 
 
3.12.  While employment figures are certainly inst ructive, they do not tell us the "quality" of 
employment or the productivity of the work do ne. The literature suggests that SMEs tend to 
be less productive than large companies, partly because SMEs tend to be engaged in more 
labour-intensive sectors and do not benefit from economies of scale (Wymenga et al., 2011). This is especially true in developing countries, where advanced manufacturing techniques may 
not be used due to insufficient financing, a poor regulatory environment, or other market 
failures. Lower productivity is born out in th e statistics presented in Table 3.3, where the 
share of employment and the contribution to GDP are shown for a select number of countries. 
In most cases, the share of employment is higher than the share of GDP, implying the 
average productivity of an employee working fo r an SME is lower than that found for large 
firms. An exception is the United States where employees working for SMEs appear to be as productive as those working for large firms. 
Table 3.3 The importance of SMEs for trade and economic activity 
Country Share of 
firms (%) Share of 
employment (%)  GDP Value 
Added (%) Share of SMEs 
Exporting (%) 
Brazil 99.9 77 61 11 (S) 
Canada 99.7 60 - - 
Chile 98.9 80 25 15 
China 99.0 73 60 40-60 (M) 
Columbia 96.4 84 - 20 
EU 99.8 70 61 - 
India 95.0 80 40 32 (M) 
Japan 99.0 72 52 14 (M) 
Mexico 99.8 74 52 - 
New Zealand 99.8 75 - - 
Sweden 96.3 60 57 24 (M) 
Taiwan 96.3 80 - 56 (M) 
US 99.9 50 50 31 (M) 
Note: SME share of firms, employment  and GDP. Fraction of SMEs engage d in export activities. (M) and (S) 
denote data for manufacturing and services data only. Source: OECD (2014) 
 
3.13.  SMEs are drivers of job creation. Over the last 30 years, the SME share of employment 
in OECD countries has been rising. This implies that SMEs have been creating jobs at a faster pace than large firms. Indeed, the European Commission estimates that 85% of new EU jobs 
created between 2002 and 2010 were created by SMEs. The data covering developing 
countries tells much the same story. In a survey of 104 developing countries, Ayyagari et al. (2011) find that small firms have the largest sh ares of job creation, a trend which is strongest WT/COMTD/AFT/W/53 
 
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  for low-income countries (Figure 3.3). Even in countries with net job losses, small firms are 
found to be creating jobs. 
Figure 3.3 Job creation shares by size (only countries with net job creation are included) 
 
 
Source: Ayyagari et al., 2011 
 
3.14.  SMEs play a particularly powerful role  in employing and empowering women in LDCs 
and developing countries. According to the World Development Report 2012, women have made enormous strides in nurturing SMEs, spurring local development and generating 
employment opportunities. In many developing  countries women entrepreneurs are helping 
their respective governments to establish and develop strong SMEs that contribute to economic growth and poverty reduction. SME development and promotion helps to encourage 
autonomy and at the same time strengthens pluralistic and social emancipation processes 
(Singh et al. 2007). Women entrepreneurs seem to be motivated to start a business to be their own boss, to have job satisfaction, to have economic independence, or to have an opportunity to be engaged in more creative work (Kandasaami and Tibbits, 1993), although 
financial pressures are often an important factor.  
3.15.  The Global Entrepreneurship Monitor (GEM) measures entrepreneurship via Total 
Entrepreneurial Activity (TEA). TEA summarizes various entrepreneurial indicators such as the 
fraction of individuals who have started a business and attitudes towards entrepreneurial 
activity. Figure 3.4 shows the TEA score for women by region. It is clear that women score highly in sub-Saharan African countries; this is partly due to positive attitudes towards women 
entrepreneurship, low fear of business failure, and connections with other entrepreneurs. 
However, the high number of women seeking se lf-employment may also reflect a lack of 
employment options for women, and a need for income possibilities.  WT/COMTD/AFT/W/53 
 
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  Figure 3.4 Total Entrepreneur ial Activity (TEA) for female adults in 67 economies 
 
Source: GEM, 2012 
 
3.16.  It is also instructive to see the kinds of SMEs women tend to create. Figure 3.5 divides 
business into four categories: extractive, transforming, business services, and consumer services. The information shows that women tend to establish a higher proportion of service-
oriented businesses than men, although significant variation exists across regions. Policies 
aimed at closing the gender gap by encouraging women participation in SME creation can leverage this information to design targeted interventions. 
Figure 3.5 TEA by industry sector  for females and males by region. 
 
Source: GEM, 2012 
 
3.3  The internationalization of SMEs 
3.17.  The internationalization of different kinds of firms has been a topic of great interest 
since the 1970s when researchers first tried to define the process. The most traditional way of 
describing the internationalization process involves four key stages: (i) direct exports to a 
foreign country; (ii) exporting with the help of independent foreign agents; (iii) the use of subsidiaries to carry out this function; and (iv) the establishment of production facilities in the WT/COMTD/AFT/W/53 
 
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  said export market.4 One of the points often stressed is th at the lack of knowledge of external 
markets and operations is the major obstacle to internationalization. It is generally accepted that these shortcomings may, in part, be overcome through the strengthening of experiences accumulated by operations executed abroad. However, there are gaps and problems 
associated with this view of internationalization. Among these are: being too deterministic; 
not including acquisitions; not including the role of imports; not emphasising the impact of social and business networks; and not accounting for so called "born-globals" (i.e. firms which 
operate internationally from or near their founding; Knight and Cavusgil, 2004). 
3.18.  A second view of internationalization, seen  more as an evolution of the first view rather 
than a radical departure from it, stresses the importance of "networks". Here, "network" is defined as the set of relationships a business has with its suppliers and customers. In this 
instance, there are two types of networks an d two types of firms, both of which are 
distinguished by their level of internationalization. For example, a firm may exist within a highly internationalized network, but may itself serve a purely national production role. 
Alternatively, a firm may exist within a predominantly national network but also engage in 
substantial foreign trade. This highlights that  the challenges and opportunities presented to 
firms in these various categories are different, and that distinct support programmes are 
required to help further "internationalization". 
3.19.  Economists also point out that importing as well as exporting, need to be taken into 
account when referring to internationalization, as a firm’s experience of importing goods may help it to enter export operations (Welch and Luostarinen, 1988). This fits well with our 
current understanding of the importance  for SMEs to integrate into GVCs. 
3.20.  Data shows that SMEs are major contributors to total exports. For instance, in India 
SMEs accounted for 38-40% of exports in the 10-year period from 1998-2008 (Tambunan, 
2009). In China SMEs contributed 60% to the country’s exports; in Vietnam 20%; and in 
Thailand 46% (Tambunan 2009). However, it shou ld be noted that in developed countries, 
exports tend to be dominated by large firm s. The above statistics do not include the 
significant contribution made by indirect export ers (i.e. firms which provide goods or services 
to direct exporters). Figure 3.6 provides firm-level statistics on the African, Caribbean and Pacific (ACP) group of countries’ exporters. We find that indirect exporters usually make up 
around 20% of total SME exporters, but that in some instances this increases to 50%. The 
initial step of SME internationalization therefore does not necessarily have to involve direct 
exporting.  
                                               
4 The stages described here are the essential features of the Uppsala model (U-model; Johanson and 
Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). WT/COMTD/AFT/W/53 
 
- 13 - 
 
  Figure 3.6 Company size by export status 
 
Source: ITC calculations based on the World Bank’s Enterprise Surveys data collected between 2006 and 2013 
 
3.21.  Understanding in which sectors SME exporters are concentrated may provide insights into the types of activities in which SMEs engage. Data on the ACP group of countries’ companies reveal that sectors such as wholesale and retail trade, auxiliary transport activities, 
hotels and restaurants, and other services, comprise a large proportion of small and medium 
enterprises, while the manufacture of textiles, food products and beverages, and chemical and 
chemical products, relies more on large companies (Figure 3.7). Thus, there appears to be a 
tendency for SMEs to gravitate towards the delivery of services.  
3.22.  SMEs with greater internationalization tend to report higher turnover and growth 
(BIS (2010)). Internationally-active SMEs also demonstrate higher employment growth; 7% 
growth for exporters, and 3% for non-exporters – with a larger difference between importers 
and non-importers (8% and 2%, respectively) (Edinburgh Group, 2013). In short, SMEs engaged in foreign trade tend to be more productive than non-trading firms. WT/COMTD/AFT/W/53 
 
- 14 - 
 
  Figure 3.7 Sector breakdown of small-, me dium- and large-sized companies from the 
African, Caribbean and Pacifi c (ACP) group of countries 
 
Source: ITC, 2014 
 
3.23.  Recent changes in the nature of global business – such as the increased role of GVCs 
and rise of e-commerce - have arguably made it easier for SMEs to internationalize. Yet, SMEs 
continue to find it more difficult to internationalize, i.e. expand beyond their domestic 
markets, than larger firms. There is a large body of qualitative case-study work identifying 
bottlenecks which lower economic activity. Among the issues identified are: access to finance and technology; lack of investment in foreign market research; lack of adequately trained personnel; and lack of managerial time to deal with internationalization. Research carried out 
by the OECD ranks some of these barriers (s ee Figure 3.8). These issues are discussed in 
more detail in the next section. A sustained effort by policymakers to address these issues will boost SME internationalization and, by extension, an economy's development prospects. 
Figure 3.8 Barriers to internationalization ra nked by SMEs using the ‘top ten’ ranking 
method 
 
Source: OECD, 2009 WT/COMTD/AFT/W/53 
 
- 15 - 
 
   
4  BOTTLENECKS TO THE INTE RNATIONALIZATION OF SMES 
4.1.  Small- and medium-sized enterprises (SMEs) face a number of challenges due to their 
size (see for instance Dinh et al., 2010; ILO, 2013). Some of these challenges are amplified 
when set in a global context, and, as a result, contribute to the low survival rates observed for 
SME exporters. The export failure rate has, for instance, been found to average 41% in a sample of 17 LDCs, with a high of 67% in The Gambia and a low of 29% in Bangladesh (ITC, 
2014). In addition, most enterprises in Least-Developed Countries (LDCs) export for just one 
year, implying that SMEs tend to export as a response to opportunistic circumstances rather than because of long-standing relationships wi th customers (ITC, 2014). This, in combination 
with the difficulties SMEs face in building long standing relationships, is a problem, as survival 
rates for intermittent SME exporters are considerably lower than for continuous exporters 
(WB, 2009).  
4.2.  Firms learn by doing, and the knowledge ga ined from continuous exporting can be put to 
use to export the same product to new markets, or new products to established markets (ITC, 
2014). It is important to note that SMEs in developing countries are as entrepreneurial as those in richer countries when it comes to exploring new markets, but as alluded to earlier, 
they are less successful in sustaining trading relationships. Furthermore, globalization may 
also bring challenges for SMEs mainly active in domestic markets as they become exposed to competition from foreign firms. This competition often leads to losses in market share. 
4.3.  The challenges SMEs face may be related to both internal factors (e.g. lack of trained 
personnel, and administrative processes) and external factors (e.g. access to finance, 
regulatory burden, and infrastructure). A bette r understanding of the challenges SMEs face 
when trying to internationalize will help policymakers, notably those active in the area of Aid 
for Trade, to design appropriate policies.  
4.1  Access to finance 
4.4.  Across the globe, banks perceive SMEs as a large, diverse and complex segment with a 
broad risk spectrum (Beck and Demiurgic-Kunt, 2003). SMEs notably tend to find it hard to 
acquire the initial loan which enables the creation of a credit history. Access to finance is perceived as a major obstacle to growth and development for SMEs in low- and middle-income countries. In addition, when banks and other financial institutions start lending to 
SMEs, they usually provide smaller loans with short tenures as a way of mitigating risk until 
there is sufficient credit history to warrant larger volumes of lending (IFC, 2010). WT/COMTD/AFT/W/53 
 
- 16 - 
 
  Figure 4.1 Percentage of firms viewing access to  finance as a major obstacle by firm size 
and country income group 
 
Source: IFC, 2010 
 
4.5.  Figure 4.1, which shows the percentage  of firms by size and income group viewing 
access to finance as a major obstacle to growth, illustrates that this is a much greater problem for SMEs located in developing countries. For instance, the data reveals that in low-income countries, on average, 38% of businesses with 20 to 99 employees rate access to 
finance as a major constraint to current operations. On the contrary, in high-income 
countries, only 14% of businesses of the same size rate access to finance as a constraint. The WTO’s World Trade Report 2012 (WTO, 2012) observes that top banks serving SMEs in non-
OECD countries reach only 20% of formal micro enterprises and SMEs. In sub-Saharan Africa 
this number is even lower, at 5%. 
4.6.  It is clear that SMEs face a number of challenges when it comes to financing their 
business activities. One of the central problems is providing SMEs with the right level of 
financing given their size. Figure 4.2 illustrates how SME finance needs change depending on firm size, and the longevity of the loan they requ ire. Ensuring that all forms of funding are in 
place, and that the transition from one type of financing to the next is streamlined, is crucial 
to the growth of the SME sector.  WT/COMTD/AFT/W/53 
 
- 17 - 
 
  Figure 4.2 SME finance coverage by fi rm size and by type of financing 
 
Source: IFC, 2010 
 
4.7.  A subset of access to finance, which affe cts exporters, is access to trade finance. Trade 
finance usually involves the seller, the buyer, and some intermediary (usually a bank) to 
agree to a contract which enables the flow of goods across borders. Because the involvement of a bank is usually required, it is often difficul t for SMEs to leverage the existing trade finance 
infrastructure to lower risk. Notably, SME managers often lack basic understanding of relevant 
trade finance instruments or financial business planning. The result is that the participation of small firms in global chains is often diminished by the fact that these firms find it difficult to 
finance their production cycle, since after goods are delivered most buyers demand 30 to 90 
days for payment.   
4.8.  Specific financial tools (for instance "factoring" and "reverse factoring") have been 
created to provide financing of working capital to small suppliers, and have gone some way to 
alleviating the problem (OECD, 2007).  
Box 4.1:
 Accessing affordable trade finance  - an on-going challenge for SMEs 
Experts have reported on the increasing difficulties fa ced by low-income countries to access trade finance on 
affordable terms. Part of these diffi culties existed prior to the financial crisis. "Structural" constraints range 
from the lack of know-how in local banks to mistrust, resulting in traders having to set aside large collateral 
requirements for a loan in addition to high fees. Th ese problems in accessing affordable trade finance may 
have worsened somewhat since the 2009 financial crisis. Th e downsizing of some key global financial industry 
players since 2009 has certainly contributed to this situation. Capital for lending in low-income countries has 
become scarcer and the selectivity of risks greater, so  negative expectations regarding the cost of doing 
business in poorly- (or non-) rated countr ies translated into higher costs for traders locally, or simply in less 
finance being available. Several global banks have been  reducing their network of "correspondent banks" in 
these countries, thereby limiting the scope of local ba nks to find suitable counterparties internationally.5 
Emerging countries' banks, while generally gaining market shares, have not filled the gap, because of the 
"start-up" cost of doing business.  
Source: WTO Secretariat (2014) 
 
                                               
5 According to BIS (2014), global banks play a very important role in the market for trade finance. They 
"appear to account for a quarter to a third of the global  supply of bank-intermediated trade finance, with local 
and regional banks providing the remainder" . In 2011, such banks provided US$2 trillion of the estimated 
US$6.5-8 trillion of bank-intermediated , short-term trade finance recorded. WT/COMTD/AFT/W/53 
 
- 18 - 
 
  4.9.  However, difficulties remain in accessing affordable trade finance, as Box 4.1 above 
highlights.  A 2013 survey by the Centre for Pr omotion of Imports from Developing Countries 
(CBI, 2013) reveals that the majority of SME exporters in Africa consider that trade finance costs have increased over the last three years.  Furthermore, in most developing economies, 
the legal and institutional framework to support financial and non-financial schemes is still 
weak and evolving. There is broad agreement that access to finance, including trade finance, is the major bottleneck to SME growth in developing countries. 
4.2  Difficulties entering new markets 
4.10.  Entering new markets typically requires substantial investment in information 
gathering. It is necessary to acquire relevant market information (e.g. on foreign prices, consumer preferences, standards and testing requirements) and information regarding the 
establishment of appropriate distribution channels abroad, to lower downside risks when 
exporting. A CPCCAF
6 survey (Table 4.1) on information constraints shows that in all regions, 
information on " trade contacts and business opportunities " is ranked as the top concern. This 
is followed by information on "relevant regulations" and on "export support measures". 
Table 4.1 Information barriers faced by SMEs by region 
When exporting, which are the main types of information you need? (2014, 2 possible 
answers, CPCCAF) 
Information type Northern 
Africa (%) Central 
Africa (%) Indian 
Ocean 
(%) Western 
Africa (%) Average  
Information on trade 
contacts and business 
opportunities 69 70 70 66 69 
Information on relevant 
regulations 51 37 28 47 41 
Information on export 
support measures 46 34 43 41 41 
Information on target 
markets 29 43 37 28 34 
Other 1 3 0 2 2 
Source: ITC calculations ba sed on CPCCAF survey data 
 
4.11.  Cash-strapped SMEs find it harder to make the investments needed to plug these 
information gaps. In addition there may be certain disincentives to be the first mover in these 
areas, as the information gathered on foreign demand and foreign distribution channels may benefit competing firms (Lattimore et al., 1998).
7 Firms based in countries facing a reputation 
barrier (because they are unknown to, or have a bad image among, foreign consumers) may 
also need to make additional investments in branding and marketing that would benefit competing firms. Individual SMEs may therefore be reluctant to make the investments 
necessary to enter into new markets (Lattimore et al., 1998; Box IV.6 in Bacchetta and 
Jansen, 2003).  
4.12.  Institutions that centralize the collection and dissemination of relevant information can 
play an important role in helping enterprises, and in particular SMEs, to overcome entry 
barriers related to market intelligence, distribu tion, and reputation building (Copeland, 2007). 
Such institutions can take the form of trade support institutions, producer organizations (including Chambers of Commerce) or diplomatic representations. Recent economic literature 
has shown that the impact on trade of these inst itutions can be significant. Rose (2007) finds 
that adding a diplomatic representation can incr ease exports by 6 to 10 %. Lederman et al. 
(2006) find that for each US dollar of export promotion, exports increase by US$40 for the 
median export promotion agency. Volpe Martincus et al. (2009) find that in Latin America, 
diplomatic missions and other export promotion offices are more successful in promoting new 
                                               
6 Conférence Permanente des Chambres Co nsulaires Africaines et Francophones. 
7 In other words, entering into new markets is an acti vity characterized by exte rnalities in the form of 
knowledge spillovers. The result will be underinvestment in market entry.   WT/COMTD/AFT/W/53 
 
- 19 - 
 
  products for export rather than simply increasing sales of existing ones. This is crucial for 
export diversification. From these findings, it is clear that trade support institutions, both national and international, have a central role to play in addressing market failures.   
4.3  Difficulties defending their interests 
4.13.  Due to their small size SMEs find it hard  to defend their interests. This situation may 
occur in different contexts including, bargaini ng with suppliers, bargaining with buyers, and 
lobbying in favour of policies or regulations that are in the interest of SMEs. 
4.14.  Concentration of market power is a phenomenon that can be observed in a number of 
global markets. It can affect the functioning an d governance of global value chains (GVCs) as 
different players within the chain will have different bargaining power. This is, for instance, one of the reasons behind the observation that providers at the bottom of an assembly line or 
of raw inputs in a food chain sometimes only retain a relatively small share of the final retail 
price.
8  
4.15.  SMEs can also face difficulties defending their interests in the policy arena. Cheong et 
al. (2013), for instance, report anecdotal evidence on the difficulties smallholders in 
agriculture face exerting influence on trad e policymakers. One way to strengthen the 
bargaining position of small and medium suppliers within GVCs or at the policy level is to 
create producer organizations (World Bank, 2008). Such organizations can take different 
forms such as sector organizations, Chambers of Commerce or other trade support institutions. Examples also exist of situations where SMEs partner with trade unions in order to strengthen their bargaining position on issues of common interest.
9  
4.4  Access to technology and scope for innovation 
4.16.  SMEs tend to find it harder than large firms to keep up with technological change, 
notably because they employ fewer technical specialists and because of the financial 
resources needed to continually purchase new technology. In LDCs, simple information and 
communications technology (ICT) solutions, such as access to the internet or the creation of a business website, often represent a significant challenge for SMEs. Cluster policies like the 
creation of special economic zones or innovation hubs try to address such challenges by 
providing access to relevant business services to those locating in the cluster (McCormick and Maalu, 2011; Chatterji et al., 2013). Geographical vicinity itself can facilitate spillovers of 
innovation across SMEs, thus representi ng another advantage of clustering. 
4.17.  When SMEs are incubators of new technology, they often face new challenges such as 
protecting their intellectual property. Zhang and Xia (2014), for instance, argues that SMEs face difficulties making use of national intellectual property (IP) systems; systems tend to 
favour access by larger and financially stronger enterprises with the resources to navigate 
their way through "cumbersome" processes.  To address this challenge, the World Intellectual Property Organization (WIPO) created a division focusing on SMEs in 2000 with a view to 
increasing awareness among SMEs on IPR related issues, and to strengthen the capacity of 
relevant public and private institutions to provide IP-related services.  
4.5  Availability of skills 
4.18.  Global production is increasingly characterized by rapid changes in technology and by 
the need to adjust to changes in consumer demand. Access to a skilled workforce is crucial in 
such an environment, as skilled workers find it easier to adapt to changes in the working environment. As a consequence, work-force skills are an important asset for both defensive 
and expansive enterprise strategies in global markets (Jansen and Lanz, 2013).  
4.19.  In an environment of constant change it is difficult for employers to hire workers with 
the right skills or to regularly adjust skills through in-house training. These challenges are 
                                               
8 See, for instance, Nina Pavcnik (2014) on price tr ansmission mechanisms in developing countries.  
9 In Brazil, for instance, CONTAG represents both agricultural wage earners and self-employed farmers 
(ILO, 2008).  WT/COMTD/AFT/W/53 
 
- 20 - 
 
  particularly daunting for SMEs that may not have the financial resources to re-train their 
workforce (see Okada, 2004). SMEs also often lack the resources or the capacity to assess future skills needs, causing them to lose competitiveness over time (Cedefop, 2012). 
4.20.  Figure 4.3 shows the share of firms by  income group identifying an inadequately 
educated workforce as a major constraint to their operations. Around 20% of small- and 
medium-sized firms in LDCs identify an inadequately educated workforce as a major constraint. This is low when compared to the other categories shown. This may be explained 
by the fact that enterprises tend to engage in ac tivities that are not skill intensive. Joining and 
moving up GVCs often requires a skilled workforce, and it is clear from Figure 4.3 that, as a firm grows, skills shortages becomes a greate r problem. Therefore, many SMEs may not 
consider skills shortages to be an immediate concern. Yet they are a constraint which will 
need addressing if the SME sector is to grow and thrive. 
Figure 4.3 Share of firms by income grou p identifying an inadequately educated 
workforce as a major constraint to their operations  
 
 
Source: Jansen and Lanz, 2013 
 
4.21.  In addition, the 2013 OECD-WTO Aid-for-Tr ade monitoring survey confirmed that skills 
are a major supply side constraint for SMEs, notably in the ICT sector which is characterized by rapid technological change, and in the touris m sector which is characterized by frequent 
employee-client contact. In high-tech sectors like ICT, industry clusters sometimes play a role 
in allowing labour market pooling, thus facilitating access to skilled labour (e.g. McCormick, 
1999).  
4.6  Trade costs 
4.22.  In the early 1980s and 1990s many economies undertook trade policy reforms that 
realised the removal of quantitative restrictions  on imports and exports, and the reduction of 
tariffs. Other barriers to trade, however, continue to exist. They often take the form of non-
tariff measures (NTMs) like standards or regulations. They can also take the form of lengthy 
port-handling or custom procedures.  
4.23.  SMEs tend to be disproportionally affected  by such trade costs. Unlike large companies, 
most SMEs do not possess in-house trade or international departments with experts who 
know how to efficiently overcome relevant trad e costs. SMEs tend to have limited resources 
and a lower threshold to absorbing risks, especially when operating in intensely competitive WT/COMTD/AFT/W/53 
 
- 21 - 
 
  markets (OECD, 2006). In addition, the fact that SMEs tend to trade smaller quantities implies 
that fixed trade costs often make up a larger share of the unit cost of their goods when compared to rivals exporting larger volumes.
10   
4.7  Business environment 
4.24.  Much has been written about the importan ce of the quality of the business environment 
for international trade (e.g. WEF 2013, Global Competitiveness Index). The quality of the business environment is particularly important for SMEs, because SMEs tend to have less 
resources (notably in terms of staff) to handle regulatory matters. As a consequence, 
regulatory matters tend to have a stronger impact on the performance of SMEs than on large firms. Lattimore et al. (1998) cite evidence from Australia indicating that, in 1994-95, SMEs bore around 85% of the regulatory complianc e burden, while their share in GDP was only 
around 30%. 
4.25.  Proportionate compliance costs can be anywhere from 10 to 30 times greater for SMEs 
than for larger firms.
11 This highlights the difficulties  S M E s  f a c e  w h e n  d e a l i n g  w i t h  
government regulations, and in particular, illustrates the disadvantages they must overcome 
in order to be compeitive. The OECD calculates that reducing these costs by 25% would increase growth by 1% – half the G20 target. This may be achieved by removing superfluous 
Acts and Regulations, implementing digita l reporting and information systems, and 
rationalizing conflicting regulations.  
4.26.  There are many indices which measure different aspects of a country’s business 
environment. The World Bank’s Logistics Performance Index (LPI, 2014) assesses the 
transportation infrastructure a country possesses – which is evidently important for trade, 
while the World Bank’s Doing Business series (DB, 2014) looks at a wide variety of indicators in order to provide both quantitative and qu alitative assessments of a country’s business 
environment. Other well-known indices and sources of data which contribute to the wide 
literature on business environment include: the ITC’s market access and trade maps, the WEF’s Executive Opinion Survey, the International Telecommunications Database, and the 
UN’s e-government survey. However, many of these indices are unable to differentiate 
between the wider business environment and the business environment faced by SMEs, and in 
particular, SME exporters.  
4.27.  When referring to international trade, firms which offer services to trading companies 
begin to become important to the business environment, even if these firms do not trade 
themselves. Such firms tend to offer transport, telecommunication, financial, and business services. Total logistics costs (packaging, storag e, transport, inventories, administration and 
management) are estimated on average at 20% of total production costs in OECD countries 
(WTO, 2004). Integrated transport and communica tion links are therefore indispensable for 
cost-efficient transportation networks.  
4.28.  Logistics services providers can often help trading firms increase transportation 
efficiency. For example, they can assist clients in  finding the best transportation price for their 
goods alongside an appropriate travel schedule. Efficient logistics may also decrease costs of 
production, since inefficient production leads to larger inventory stores at each stage of the 
production chain (i.e. bigger warehouses to stor e larger inventories). It has been estimated 
that developing countries could reduce the unit cost of production by as much as 20% by reducing inventory holdings by half (Gaush and Kogan, 2001). 
4.29.  Telecommunication services consist of wire-based (e.g. fixed-line telephony), wireless 
(e.g. mobile and satellite services), resale-based (i.e. over leased transport capacity) and a myriad of combinations thereof (WTO, 2004) . Since telecommunications is primarily a 
"network industry", the value and entry level to  the industry increases with each additional 
customer. For these reasons, the industry was considered a natural monopoly in the past, but 
                                               
10 This is the mechanism behind the Melitz (2003) find ing that only companies of a certain size will be 
able to export.  
11 Dr Sergio Arzeni, Director of th e OECD Centre for Entr epreneurship, SMEs and Local Development, in 
a keynote address to "The G20 Agenda for Growth: Opportunities for SMEs Co nference", Melbourne, 
20 June 2014; as quoted in the Conference Report of Proceedings. WT/COMTD/AFT/W/53 
 
- 22 - 
 
  recent technological developments have reduced the importance of economies of scale, and 
promoted vertical disintegration and competition. 
4.30.  Trade supporting financial services companies also have a pivotal role in the efficient 
allocation of resources across time and space. The importance of such firms is discussed in 
sub-section 3.1 "What is an SME". "Business se rvices" consist of a broad range of services, 
including computing and data processing, professional services, marketing services, technical services, leasing and renting, labour recruitment, and operational services (WTO, 2004).  
4.31.  The business services sector has both a dire ct and indirect effect on international trade. 
The direct impact is the international trade between business services firms. The indirect impact is from business services providers increasing the operational efficiency of currently trading companies. For example, marketing services can help to match producers in one 
country with customers in another, while technical and management services help producers 
in countries with shortages of skills to improve productivity and become more competitive (WTO, 2004). Thus, supporting trade growth is  inextricably linked to encouraging the 
development of firms which offer services to currently trading companies. 
5  BOTTLENECKS TO SMES INTERNATIO NALIZATION IN LDCS: COUNTRY LEVEL 
EVIDENCE 
5.1.  The constraints outlined in Section 2 fall heavily on small- and medium-sized enterprise 
(SMEs) in Least-Developed countries (LDCs). In addition, the contexts in which these constraints are described often depend on purely national factors. Thus, the issues raised in Section 2 may not correlate well with the constraints internationalizing SMEs in LDCs might be 
facing.  
5.2.  The Diagnostic Integrated Trade Study (DTIS) represents a unique source of information 
regarding the constraints SMEs in LDCs may face when trying to internationalize. DTISs 
identify internal and external constraints of a country’s integration into the global economy, 
and recommend priority areas where technical assistance and policy actions can help the country overcome these barriers.  
5.3.  The DTIS is conducted under the Enhanced Integrated Framework (EIF) – a multi-donor 
programme designed to support LDCs' better integration into the global trading system. Each DTIS is conducted by a specialist team which analyses specific sectors of the economy as well as cross-cutting institutional issues. Towards the end of the process, an "Action Matrix" is 
created to facilitate discussions with the government, donors, civil society and private sector 
partners in order to encourage implementation. 
5.4.  In this section, a study of SME-related issues highlighted in the DTISs is presented. The 
analysis attempts to identify the number of instances SMEs are mentioned, and in what 
context. This is followed by an attempt to dr aw conclusions, at a regional level, about the 
most important issues facing internationalising SMEs. It is important to note, however, that 
DTISs were not designed for such SME-specific analysis. The findings presented here should 
therefore be interpreted with caution. 
5.1  References to "SMEs" in the DTISs 
5.5.  SMEs are referred to in all the LDC DTISs that were surveyed for the purpose of this 
study.
12  Figure 5.1 reveals that in the Central African, Asian and West African DTISs, SMEs 
                                               
12 T h e  r e g i o n a l  d i s t r i b u t i o n  o f  t h e  2 3  D T I S  i s  a s  f o l l o w s :  5  c o u n t r i e s  i n  A s i a  ( A f g h a n i s t a n ,  B h u t a n ,  
Cambodia, Lao PDR, the Maldives), 4 in Oceania (Kiribati, Samoa, Solomon Islands, Tuvalu), 2 in Southern 
Africa (Lesotho, Malawi), 4 in Eastern Africa (Burundi , Rwanda, Tanzania and Uganda), 2 in Central Africa 
(Chad, Democratic Republic of Congo) , and 6 in Western Africa (Republic of Cabo Verde, Guinea Bissau, The 
Gambia, Liberia, Senegal, Sierra Leone, and Togo). WT/COMTD/AFT/W/53 
 
- 23 - 
 
  are referred to, on average, more than 20 times. This compares to Southern and Eastern 
Africa, where SMEs are mentioned, on average, less than 10 times.13  
5.6.  The DTIS for Chad is responsible for the high number of references observed for Central 
Africa, while in Western Africa, the DTIS of The Gambia and of the Republic of Cabo Verde are 
responsible for the high number of references observed with dedicated chapters to SMEs. The 
DTIS for Lao PDR and Cambodia also contribute a significant number for Asia. Both Southern 
African countries have limited references to SM Es. Lesotho's DTIS has a strong focus on the 
textiles and garments, and tourism sectors, while Malawi's DTIS focuses on trade costs. 
Section 4.3 further discusses SME challenges identified in the DTIS by region. 
Figure 5.1 Number of text refere nces to SMEs in the DTISs.  
 
Source: ITC -W TO analysis 
 
5.2  SME constraints highlighted in DTISs 
5.7.  In addition to simply counting the num ber of instances SMEs were referred to in the 
DTISs, the context of the reference was also recorded. Each time SMEs were mentioned, the 
reference was assigned to one of six categories: access to finance, availability of institutional 
support, access to technology and innovation, avai lability of skills, trade costs, and business 
environment. These categories correspond to th e types of bottlenecks discussed in Section 3, 
with the exception that the category "availability of institutional support" bundles references 
t o  s u p p o r t  i n  o v e r c o m i n g  d i f f i c u l t i e s  t o  e n t e r new markets and difficulties to defend SME 
interests. The results of this categorization process are shown in Figure 5.2. 
 
                                               
13 Figure 5.1 has been established on  the basis of a simple word count.  This was done by measuring the 
number of times "SME", or a variation thereof, was ment ioned, taking care not to include repetitions (e.g. 
instances where SMEs are referred to twice in the same sentence). WT/COMTD/AFT/W/53 
 
- 24 - 
 
  Figure 5.2 Importance of different SME- specific bottlenecks in DTIS studies 
 
Source: ITC-WTO analysis 
 
5.8.  The quality of the business environmen t is ranked highest among the SME-related 
challenges discussed in the DTIS observed. This is unsurprising, given that business environment has a very wide definition, and contains within it all other issues not explicitly 
defined by our remaining categories. Therefore, while accepting that business environment is 
an important factor to SME development, the focus in the following analysis is on the relative importance of the remaining categories. 
5.9.  Access to finance (including trade finance) is ranked as the second biggest constraint to 
SME development. This is in line with the LDC private sector responses surveyed for the 4
th 
Global Review on Aid for Trade: Connecting to Value Chains. Developing country suppliers 
from agri-food, textiles and apparel, tourism, ICT, and transport and logistics ranked lack of 
access to finance as their main obstacle preventing them from entering, establishing or moving up value chains, followed by the bu siness environment, trade facilitation and 
infrastructure (WTO/OECD, 2013). This is confir med when examining relevant information in 
the World Bank’s Enterprise Surveys, which reveals that in low-income countries, on average 
43% of businesses with 20 to 99 employees, rate access to finance or cost of finance as a major constraint to current operations.   
5.10.  References to the availability of instit utional support is the third largest category of 
references in the DTISs, and highlights the important role institutions are expected to play in supporting SME development. Some DTISs refer to the importance of building the capacity of 
ministries and their international partner agencies to support SMEs and increase engagement. 
Lesotho, for example, plans to establish a new SME department to oversee and coordinate SME policy matters. 
5.11.  References to trade costs did not factor prominently in DTIS analysis of SME 
constraints, mainly because most of the DTIS studies examined dealt with trade facilitation 
issues, which were examined at an economy-wide level, rather than specifically in relation to SMEs. As such, most DTIS include a dedicate d chapter on trade facilitation, border and 
customs procedural issues.  
5.3  Constraints faced by SMEs per region 
5.12.  Figure 5.3 shows the relative importance of SME constraints by region. It is clear that 
the quality of the business environment is most  widely cited, and is therefore the most 
binding constraint faced by SMEs across all regi ons, albeit to differing degrees. As discussed 
in the previous subsection, this is not particularly surprising. In 3 out of 5 regions, the next biggest constraint is access to finance; however, of the remaining two regions, availability of 
institutional support is ranked second. WT/COMTD/AFT/W/53 
 
- 25 - 
 
  Figure 5.3 Relative importance SME-specific  constraints in DTIS studies, by region 
 
Source: ITC-WTO analysis 
 
5.3.1  Asia 
5.13.  The quality of the business environment is identified as the biggest constraint to SMEs 
in the DTISs of the five Asian LDCs examined (Afghanistan, Bhutan, Cambodia, Lao PDR, and the Maldives). Bhutan identifies SMEs as an engine for green growth, job creation and poverty 
eradication.  Bhutan's DTIS discusses how to improve regulations to support non-polluting, 
non-harmful industries. Cambodia's DTIS examines how to integrate SMEs into the garment industry and food processing.  The DTIS discusses how to assist SMEs in diversification, 
expansion and sharing of dividends of export-l ed development. Lao PDR's DTIS discusses how 
to simplify the taxation regime for SMEs by estab lishing an SME Tax Unit at the district level.  
5.14.  Amongst the other categories, availability of institutional support ranked top. In 
particular, Asian countries are looking to set up business development services and to 
enhance stakeholder engagements as in the case of Bhutan, Lao PDR, and the Maldives.  
5.15.  The DTIS of the Maldives identifies inadequate credit finance for SMEs as inhibiting 
growth; the existing weak credit regime creates uncertainty for financial institutions.  This is a 
problem cited across the five DTISs examined, and steps have been taken to provide more 
access to financial services for SMEs, but further actions are recommended. Suggestions made include setting up specialized risk sharing facilities or credit facility for SMEs in Lao PDR 
or providing lower, more competitive rates in the Maldives.  
5.3.2  Oceania 
5.16.  The quality of the business environment is cited as the major constraint in the Pacific 
region – a region characterized by relatively lo w SME density.  The importance for SMEs of an 
improved business and investment climate has been stressed in the DTIS of Kiribati. 
Institutional support is considered the second largest constraint. There is a general finding that ministries of trade are not well prepared  to support SMEs. The DTIS for Solomon Islands 
highlights the thriving non-governmental business services sector for SMEs, and calls for a 
strengthening of the capacity of the Ministry  of Commerce, Industry and Employment to 
support SMEs.  WT/COMTD/AFT/W/53 
 
- 26 - 
 
  5.17.  Access to start up and development financing for SMEs due to difficulties in preparing 
business plans is highlighted in the DTIS for Tuva lu.  Lack of access to finance was the subject 
of a joint IFC-McKinsey 2010 study, which mapped the finance gap experienced by SMEs.  That study reports that access to financial services in the SME sector remains low across the 
pacific region. In addition, a substantial portion of SMEs who have access to basic financial 
services still remain underserved given the gaps in the product range offered to SMEs in the formal sector.
14   
5.18.  The DTIS of Kiribati, Samoa, Solomon Is lands, and Tuvalu highlight the tourism sector 
as generating significant income and employment opportunities. The sector is currently dominated by a small number of resort-style hotels.  SMEs are identified by the DTIS as offering the potential to grow the community-based and eco-tourism segment of the tourism 
market, whilst also safeguarding local culture and environmental preservation.  
5.3.3  Southern Africa 
5.19.  Trade costs are identified as a particularly serious constraint to SME internationalization 
in the DTIS of Malawi and Lesotho – both landlocked LDCs.  Both DTISs recommend 
streamlining customs documentation and rules of origin to bring SMEs more into foreign trade.  Lesotho's trade facilitation environment is  identified as a key constraint for its SMEs 
and simplifying these processes is key to diversifying the country's exports. 
5.20.  Quality of the business environment and access to finance are also identified as 
constraints. Lesotho’s DTIS states that SMEs face a lack of physical facilities to ensure quality 
and hygiene, internet facilitates for logistics services and linkages with supermarket chains. In 
Malawi, formalizing the informal SMEs is considered crucial. 
5.3.4  Eastern Africa 
5.21.  The quality of the business environment is considered the main constraint for SMEs in 
four East African DTISs (Burundi, Rwanda, Tanzania, and Uganda), together with access to 
finance and access to technology/innovation. The DTISs also recognize steps being taken to create an enabling environment for SMEs. Fo r example, Tanzania's Small and Medium 
Enterprise policy which is aimed at fostering job creation and improving the performance and 
participation of existing small enterprises – a policy which the DTIS recommends mainstreaming into the Tanzanian National Development Plan.  
5.22.  In Rwanda, awareness campaigns and pr ogrammes on financial support to provide 
exporters credit and raising awareness to SM Es on existing trade financing schemes, are 
being rolled out. Rwanda’s DTIS also recommends setting up a special financing scheme for SMEs. For Uganda, the Ugandan Revenue Authority is recommended to provide training on 
trade facilitation measures to small economic operators.  A Directorate of Small and Medium 
Enterprises is now in place under the Uganda In vestment Authority as a One-Stop Centre to 
oversee coordination and implementation of SME support through the SME National Policy and 
Strategy. 
5.23.  The DTIS for Burundi notes that efforts need to be made to engage SMEs and informal 
traders in regional integration processes. Rwanda's DTIS suggests the development of quantifiable indicators on SMEs so as to move towards an inclusive export strategy. 
5.3.5  Central Africa 
5.24.  SME challenges identified in the DTISs for Chad and for the Democratic Republic of 
Congo focus on access to finance, access to technology, and the quality of the business 
environment. Chadian SMEs are struggling to formalise due to absence of an enabling 
infrastructure (especially in the ICT sector) which facilitates economic activity. The government is addressing SME challenges through a number of policy and institutional 
reforms; with a strong focus on increasing ICT penetration to SMEs as a tool to foster 
                                               
14 The informal sector is estimated to  be three times the size of the fo rmal registered businesses in the 
Pacific region according to the same study.  WT/COMTD/AFT/W/53 
 
- 27 - 
 
  economic activity. These include the elimination of all taxes on all ICT import products and 
creating awareness and improving incentives for SMEs to invest in ICT.  
5.25.  In the Democratic Republic of Congo, power cuts and access to finance are identified as 
key constraints to SMEs. The DTIS recommends o ffering a loan fund to SMEs. The price and 
availability of power for example, is highly dependent on a business's size and negotiating 
power; SMEs are therefore at a disadvantage.  
5.26.  Chad's DTIS also makes specific refere nce to strengthening the institutional framework 
to support the development of SMEs and improv ing their technical, financial and economic 
performance. Furthermore, access to market information is considered crucial in enhancing SME competitiveness.  
5.3.6  Western Africa 
5.27.  The quality of the business environment and access to finance emerges as the largest 
constraints to SMEs in the seven Western Afri can DTIS (Republic of Cabo Verde, Guinea 
Bissau, The Gambia, Liberia, Senegal, Sierra Leone, and Togo).  
5.28.  Regarding the business environment, many  of the DTISs highlight that a majority of 
S M E s  r e m a i n  i n  t h e  i n f o r m a l  s e c t o r .  F o r m a l i z i n g  S M E s  s o  a s  t o  e x p a n d  t h e  t a x  b a s e  i s  therefore a priority measure. Togo has adopted a tax framework to promote SMEs and 
formalize micro-enterprises. The DTIS for The Gambia is dedicated to fostering SME 
development and has prioritized the stream lining of business registration and the 
establishment of a help desk for SMEs. The Gambia Investment and Export Promotion Agency has been mandated to support SMEs and micro-businesses in their export promotion 
initiatives.  
5.29.  Senegal’s DTIS claims that 65% of SME start-ups currently fail in less than a year 
mainly due to the high cost of credit and lack  of access to capital markets. Senegal adopted a 
Charter of SMEs which plans to facilitate access to finance by implementing agencies or line 
venture capital, with new products of the Regional Stock Exchange. Financing SME activities have also recently been put through sovereign wealth funds. The Liberian Central Bank has 
also launched a Credit Stimulus Initiative for Liberian-owned SMEs.  
5.30.  A number of analysed DTISs in this region acknowledge the importance of and made 
recommendations regarding institutional support. The Republic of Cabo Verde's DTIS recommended support to the Agency for Business Development and Innovation to increase its 
ability to support a pipeline of strong SMEs with export potential. Liberia's suggests that the 
Ministry of Commerce and Industry shall continue institutional support to SMEs through the Bureau of Small Business Services.  
5.4  EIF support to alleviate SMEs' bottlenecks  
5.31.  Building on in-country partnership, outreach and advocacy, the EIF focuses on 
mainstreaming trade into national development plans, strengthening trade institutions and 
building capacity needed to roll out coordina ted trade and development assistance. The EIF 
works to support catalyst projects to overcome supply-side constraints to trade and help develop a sustainable basis for export growth.  Tier 2 projects fund Action Matrix priority projects to build up trade-related and supply-side capacities.  This phase is supported by the 
EIF Trust Fund for priority small-scale projects to build up trade-related and supply-side 
capacities.   
5.32.  The EIF Trust Fund portfolio of US$251 million is being used across 50 poorest 
countries to fund catalytic initiatives addressing trade-related challenges inclusive of SMEs 
constraints facing the LDCs and three graduated countries. The EIF Trust Fund resources are also used to coordinate and further leverage additional resources from domestic and external 
partners to address national priorities identified  in the DTIS and the DTIS Update including on 
SMEs. Box 5.1 below provides some examples of the EIF's support for SMEs.  
 WT/COMTD/AFT/W/53 
 
- 28 - 
 
   
 Box 5.1:  Examples of EIF support to  address SME constraints
 
 
 In Cambodia the EIF is supporting a project to strengthen and diversif y export supply capacity in milled 
rice focusing on SMEs. 
 In Nepal, the EIF medicinal herbs and aromatic plan ts project is working to develop value chains and 
helping products through marketing for stronger expo rts. It will help SMEs build a competitive edge, 
supporting people across the country whose livelih oods depend on agriculture (currently 77% of the 
total). 
 In Burundi, the EIF is supporting the Ministry of Trade, Industry, Posts and Tourism to take public-
private sector partnerships forwar d, with the Federal Chamber of Co mmerce and Industry linking up 
SMEs across regions and offering micro-finance. 
 In The Gambia, the EIF support is going to 14 sub- grants to improve produc tivity for fisheries, 
horticulture, ports, cashew  and the SMEs Association 
 In the Republic of Cabo Verde, the EIF has supported training to 39 SMEs to strengthen their capacities 
and knowledge in labour laws, food safety and hygiene. 
 In Uganda, 25 districts nationwide are being networked as part of the EIF Tier 2 project on providing 
decentralized business services to rural clients, including farmers, producers, businessmen, cooperatives, local tourism agencies and SMEs. The Eu ropean Union is supportin g additional districts, 
while the Government is supporting an additional 15 districts and plans to increase its annual support to new districts in order to provide market inform ation at grassroots level, linking the farmers to 
producers and the producers to the market. 
Source: EIF Secretariat 
 
6  SMES, DEVELOPMENT FINANCE AND AID FOR TRADE 
6.1.  Assistance to small- and medium-sized  enterprises (SMEs) has a long tradition in 
national policymaking and international development assistance.  The impact of the economic 
crisis, greater understanding of the role of valu e chains in trade and a desire on the part of 
the development community to promote inclusive, sustainable models of development, have stirred renewed interest in SMEs and how to support their internationalization.   
6.2.  Classic capacity building approaches are being mixed with innovative financing vehicles 
and new commercial thinking.  Innovative approaches are being complemented with new 
actors, notably South-South partners, with their own ideas and instruments.   Companies are also taking up the challenge, recognizing both  the possibilities in underserved markets, and 
the possibilities for innovation and expansion offered by integrating new supplier into value 
chains.   
6.3.  Emerging practice tells us much about how private sector development is seeking to 
leverage other financial resources and work with the private sector, notably as regards issues 
of financial inclusion and broad-based inclusive economic growth.  
6.4.  This section begins with an analysis of approaches used in development finance to 
address the financing gap faced by SMEs.  It pr esents SME-specific Aid-for-Trade activities 
and in this context discusses how established appr oaches to capacity building are being allied 
to financing mechanisms.  The section ends with an examination of lessons from recent evaluations and poses the question of how to achieve scale in SME development without loss 
of focus and spreading programmes too thinly, together with the on-going challenge of how to 
mainstream the trade dimension into programming and reporting – a dimension currently neglected in evaluation approaches. 
6.1  Development finance and SMEs 
6.5.  While commercial financing is substantial and growing, work by the International Finance 
Corporation (IFC) suggests that SMEs still face a significant financing gap.  Some 55–68% of formal SMEs (14–18.6 million enterprises) in developing economies are either un-served or WT/COMTD/AFT/W/53 
 
- 29 - 
 
  under-served in terms of their access to financing (IFC, 2011).  The gap widens considerably 
further when the financing needs of informal enterprises are considered.   
6.6.  Lack of collateral and insufficient banking history can make formal sector SMEs a "credit 
risk" for poorly-capitalized and thinly-spread banking sectors.  Electronic payment systems 
and mobile banking services are offering new approaches to meet the un-served banking 
needs of SMEs (see Box 6.1).  These new approaches, combined with development financing vehicles such as micro-credit and venture capital funds, offer opportunities to advance 
financial inclusion – if the appropriate regulatory regimes can be put in place.   
Box 6.1: Mind the gap: empowering Ke nya’s SMEs through alternative lending 
 
A series of companies, including Kopo Kopo, PayPal, and Sq uare are seeking to fill the financing gap of SMEs in 
Kenya.  Through electronic payment platforms, these companies can track electronic receivables and use these as the basis to offer financing produc ts.  This payment platform transforms a customer’s transaction history 
into a form of credit history. To repay loans or other financing, the company automatically deducts a mutually-agreed percentage of the customer’s daily sales over  an assigned period.  For Kopo Kopo, customers on 
average borrow as little as US$2,400 and repay their advances within 2-3 months. Of those that have completely repaid, nearly 70% have taken another (and often larger) cash advance, indicating a continuous 
need to smooth the ebbs and flows of daily business.
15 
 
6.7.  Development financing is intended as catalytic; it cannot close the funding gap for SMEs 
by itself. This funding seeks to expand the st ock of private investment and private sector 
activity in developing countries. Development fi nance support for SMEs aims at "additionality" 
– addressing market failures (i.e. such as insufficient bank credit lines or the regulatory environment) or a development objective (eco nomic, environmental or social).  Box 6.2 
provides some examples of development finance institution (DFI) projects that aim to address 
the funding gap faced by SMEs. 
Box 6.2:
 Plugging the SME funding gap - examples from around the world  
 
Deutsche Investitions-und Entwicklungsgesellschaft mbH (D EG - a subsidiary of KFW) has partnered with the 
International Finance Corporation and the Dutch development finance institution (FMO) to make a US$80 million investment to improve the range of financial services available to SMEs in Papua New Guinea offered by Bank South Pacific (BSP).  BSP is the leading bank in Papua New Guinea with more than 50% market share.  
The joint investment expands BSP's credit line, thereby allowing it to extending its SME business.  (Source: DEG website)
16 
 The Central American Small Enterprise Investment Fund (CASEIF) is a privat e equity fund totaling 
US$35 million for SMEs in the Central American region. It  provides long-term capital needs, provides technical 
services, and aims to improve transpar ency and governance within its investees.  CASEIF is a joint venture of 
the Multilateral Investment Fund of the Inter-American  Development Bank, the Norwegian Investment Fund for 
Developing Countries, the Swiss Investment Fund fo r Emerging Markets (SIFEM), the Finnish Fund for 
Industrial Cooperation (Finnfund), the Andean Investme nt Corporation (CAF), and Latin American Financial 
Services (LAFISE).  (Source: CASEIF)
17   
 Fanisi Venture Capital Fund is a joint initiative of IFC, NORFUND and Amani Capital that makes privately negotiated equity and quasi-equity investments in start-ups, early stage and growth orientated small- and 
medium-sized enterprises primarily in the East African region. The Fund (US$55 million in total) will target 
investments of between US$0.5 and US$3 million in the Agri-business, Retail, ICT/Technology, Financial Services, Manufacturing, Media, Transportation, Logist ics/Distribution, Tourism an d Housing sectors. FANISI 
also offers a Business Advisory Services Fa cility funded by grants from Norfund.   
(Source: IFC website)
18 
 
6 . 8 .   A n  i m p o r t a n t  c h a r a c t e r i s t i c  o f  m u c h  o f  t h e  w o r k  o f  D F I s  e n g a g e d  i n  t h i s  a r e a  i s  t h a t  
these projects seek to catalyze financing from a range of other sources, including private 
                                               
15 Adapted from Mind the gap: empowering Kenya's SMEs through alternative lending Benjamin Lyon, 
Director of Special Projects at Kopo Kopo   Source: http://smefinanceforum.org/post/mind-the-gap-
empowering-kenya%E2%80%99s-smes- through-alternative-lending . 
16 See: https://www.deginvest.de/I nternational-financing/D EG/Die-DEG/Was-wir-tun/ . 
17 See: http://www.lafiseinvestment.c om/lafise-lim/default_e.aspx . 
18 See: http://ifcext.ifc.org/ifcext/spiwebsite1.nsf/ProjectDisplay/SPI_DP27776 . WT/COMTD/AFT/W/53 
 
- 30 - 
 
  investors, other DFIs, governments, non-go vernment organizations (NGOs) and private 
companies.  Most international DFIs limit their participation in project investment to well under 50% of the total project value.  As such, the intention is to expand the volume of financing offered, and not to crowd out commercial financing.  
6.9.  Another important feature of investments is that there is a high degree of collaboration 
and cooperation between different DFIs in projects and programming.   
6.10.  CGAP research suggests that some 300 SME investment vehicles are currently being 
run by DFI-investment vehicles that committed at least US$20 billion to developing countries 
in 2010. Table 6.1 below provides an indicative list of the DFIs active in this area.   
Table 6.1 Indicative list of Development Fina nce Institutions active in SME development 
through their private sector development programmes 
Multilateral Development Banks or 
Finance Institutions with Private Sector 
Operations Examples of Bilateral Private Sector 
Development Finance Institutions 
 
African Development Bank (AfDB) Belgian Corporation for International Investment 
(SBI-BMI) 
Asian Development Bank (AsDB) Belgian Investment Company for Developing 
Countries (BIO) 
Black Sea Trade and Development Bank 
(BSTDB) CDC Group (British Development Finance 
Institution) 
Development Bank of Latin America (CAF) COFIDES (Spanish Development Finance 
Institution) 
European Bank for Reconstruction and Development (EBRD) Danish Industrialization Fund for Developing 
Countries (IFU) 
European Investment Bank (EIB) DEG (German Development Finance Institution) 
Inter-American Development Bank (IaDB)  Development Bank of Austria (OeEB) 
Inter-American Investment Corporation (IIC) Entrepreneurial Development Bank of the 
Netherlands (FMO) 
International Finance Corporation (IFC) Finnish Fund for Industrial Cooperation (Finnfund) 
Islamic Corporation for Development of the 
Private Sector (ICD) French Investment and Promotions Company for 
Economic Cooperation (Proparco) 
Multilateral Investment Fund (MIF) Japan Bank for International Cooperation (JBIC) 
Multilateral Investment Guarantee Agency 
(MIGA) Norwegian Investment Fund for Developing 
Countries (Norfund) 
Nordic Investment Bank (NIB) Overseas Private Investment Corporation (OPIC, 
US) 
OPEC Fund for International Development 
(OFID) SIMEST (Italian Development Finance Institution) 
 SOFID (Portuguese Development Finance 
Institution) 
 Swedfund 
 Swiss Investment Fund for Emerging Markets 
(Sifem) 
Source: International Finance Institutions and De velopment through the Private Sector (IFC, 2013) 
 
6.11.  Work in the G20 in the aftermath of the financial crisis has sought to scale up 
successful models of SME support, notably thro ugh an SME Finance Challenge.  At the G20 
Seoul Summit, 14 winners were announced and an SME Finance Innovation Trust Fund was created, with funding of US$28 million, contributed by Canada, Korea, the Netherlands, the 
United Kingdom, and the United States.  Concurrently, the G20 SME Finance Framework 
channelled US$119.7 million in additional funding from DFIs and bilateral donors directly to individual challenge winners.
19  
                                               
19 Saint Petersburg Accountability Report  on G20 Development Commitments.  
https://www.g20.org/sites/default/files/g20_resources/l ibrary/Saint%20Petersburg%20Accountability%20Repo
rt%20on%20G20%20Development%20Commitments_0.pdf. WT/COMTD/AFT/W/53 
 
- 31 - 
 
  6.12.  Another area of finance taken up through the G20 and other bodies has been that of 
trade finance.  The WTO, together with the International Chamber of Commerce, the World Bank Group, and other international financial institutions have sought to promote action on trade finance through such initiatives as the Global Trade Liquidity Programme, the IaDB 
Trade Finance Reactivation Programme, and other programmes offered by regional 
development banks which have sought to resolve issues of access to trade finance, notably for SMEs (see Box 6.3). Since 2007, the Director-General of the WTO has convened regular 
meetings of an Expert Group on Trade Fina nce to report on market developments and 
possible steps to address market gaps and failures. 
Box 6.3: Trade finance support: facilitating US$30 billion in trade in 2013 
 
The Asian Development Bank (AsDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IaDB), the Islamic Development Bank Group (ITFC), and the International 
Finance Corporation (IFC) are all operating similar trade finance programmes.  In early 2013, the African 
Development Bank (AfDB) opened a permanent programm e and has already financed close to US$1 billion in 
trade transactions in Africa and expects to support more than US$10 billion over the next four years.  Trade finance facilitation programmes from multilateral institutions  helped facilitate around US$30 billion in trade in 
2013. Almost a third of IFC's total operations took place in sub-Saharan Africa and the AsDB's risk-mitigation support mainly caters for the poorest regions in Asia, inter-alia, Pakistan, Bangladesh, Viet Nam, Sri Lanka, 
Nepal, and Uzbekistan.   
(WTO, 2014)
 
 
6.2  Aid for Trade and SMEs 
6.13.  Development financing for SMEs passes through three main channels: 
 Official development assistance (ODA) provid ed by national aid agencies that provide 
concessional funding support (mostly in the form of grants); 
 
 Multilateral development banks’ public sector arms that provide concessional financing (with 
a combination of grants and loans, both concessional and non-concessional); 
 
 Bilateral development finance institutions and the private sector arms of multilateral 
development banks, which provide financial products and related advisory services to the 
private sector (mostly on non-concessional or commercial terms).    
 
6.14.  Monitoring of Aid-for-Trade flows capt ures assistance provided in ODA-form by 
development agencies (bilateral and multilateral ).  Although small in financial terms, as 
compared to the work of DFIs, the Aid-for- Trade activities captured by OECD and WTO 
monitoring nevertheless play an important role.  Projects addressing a variety of different 
SME constraints (e.g. access to electricity, business support services, development of the 
banking sector, information and communication technology, trade policy, industrial development), are reported to the OECD's Creditor Reporting System (CRS).   
6.15.  Given the range of support that benefits SMEs, it is not possible to quantify Aid-for-
Trade support to SMEs.  Many projects benefi t SMEs (e.g. business environment reforms or 
infrastructure development – as suppliers and final users) either directly or indirectly even if 
they may not be the main target of an intervention.  Assistance, though, is significant.  For 
example, an Independent Evaluation Group st udy estimated World Bank Group support at 
around US$3 billion per annum in commitments, expenditures, and gross exposure for SMEs over the period 2006–2012.
20		Many of the activities undertaken by the World Bank Group, 
such as investment climate reform, may be best considered as a form of public good – 
establishing conducive conditions for others, notably DFIs, to operate.  
                                               
20 The Big Business of Small Enterprises, Evaluation of  the World Bank Group Experience with Targeted 
Support to SMEs, 2006–12, Independent Evaluation Group, 2014.  
 WT/COMTD/AFT/W/53 
 
- 32 - 
 
  6.16.  Table 6.2, provides an overview of the funding reported to the CRS with the specific 
aim of supporting SME development.   
 
Table 6.2 Assistance reported to the OECD for SME development (US$ millions) 
Year 2008 2009 2010 2011 2012 
All Donors, Total 1099 1008 1051 1477 569 
All 
Donors, 
Total DAC Countries, Total 751 685 637 1252 306 
DAC 
Countries, Total Australia 
11.3 13.2 2.5 1.7 5.3 
Austria 3.6 3.4 9.8 .. 0.9 
Belgium 25.8 41.5 10.7 9.0 0.9 
Canada 13.6 20 39.0 39.7 29.7 
Czech Republic .. .. .. 0.01 .. 
Denmark 31.4 37.2 132.1 56.7 21.5 
Finland 1.45 3.08 9.27 2.42 0.31 
France .. 122.7 75.7 9.33 22.3 
Germany 17.8 74 19.3 57 32.8 
Greece 0.08 0.2 .. .. .. 
Iceland .. .. .. .. 0.18 
Ireland 0.07 1.8 0.01 .. 0.02 
Italy 126 6.1 44 0.9 1.0 
Japan 292 186 57 479 31 
Korea 4.1 0.5 0.49 0.72 4.5 
Luxembourg 0.4 .. 0.5 0.4 0.18 
Netherlands 18.3 1.9 0.5 12 63 
New Zealand 4.1 0.3 2.4 1.3 1.6 
Norway 12.8 6.8 14.6 8.4 4.1 
Spain 13.5 6.8 19.9 458.5 4.68 
Sweden 7.2 0.8 11.9 9.3 18.1 
Switzerland 22.8 20 24.7 18.9 13.2 
UK 32 42 37 20 6 
USA 112 95 124 65.2 43 
Multilateral, Total 347 323 414 224 263 
Multilateral 
Total AsDB Special Funds  .. 83 40 .. 5.01 
BADEA .. .. .. 0.1 .. 
EU Institutions 116 169 167 104 227 
GEF  .. .. .. .. 0.99 
IDA 221 27 151 58 12 
IDB Sp.Fund .. 4.6 25.7 11.4 11 
IFAD 9.7 11.8 27.4 48.7 6.7 
OFID .. 25 .. .. .. 
UNDP  0.2 1.4 1.1 0.7 .. 
UNPBF .. .. .. .. 0.0 
Source: OECD Creditor  Reporting System 
 
6.17.  A total of 34 donors reported over 3, 400 projects worth US$5.2 billion to the OECD 
CRS in activities supporting SME development over the period 2008-2012.  LDCs received on average 22% of this support over this period – assistance provided in the form of grants and 
concessional loans.   WT/COMTD/AFT/W/53 
 
- 33 - 
 
  6.18.  Table 6.3 below provides indicative ex amples of the type of activities funded.  
Examples given include multi-donor programmes, projects with a specific thematic focus (e.g. gender empowerment), and initiatives with a sectoral focus (e.g. agricultural or tourist sector development).  A diverse range of donors are en gaged in this area. Examples also exist of 
SME-targeted projects trying to engage multinational private sector players as illustrated in 
Box 6.4. 
Box 6.4: Involving multinational enterpri ses in trade-related technical assistance
 
The ILO-IFC’s Better Work Program and the International Trade Centre's Ethical Fashion initiative are two 
initiatives that combine capacity building of developing country producers with a direct involvement of global private sector players. The set-up of the programmes has been influenced by the on-going debate on the 
functioning of global value chains (GVCs) that highlights the important role intermediaries can play in linking 
local SME producers to global players. Technical assistan ce projects can play such a role, whereby the ultimate 
objective should be to make the programmes self-sustainable, in the sense that developing country producers run sustainably profitable businesses with the implemen ting agency’s role being reduced in the long run to 
certifying quality standards.
  
 
6.19.  South-South partnerships are also playing an increasingly important role in this area.  
Accelerating India-Africa cooperation in suppo rt of SME development was one of the topics 
discussed at the 2014 Confederation of Indian In dustry-Exim Bank Conclave on India Africa 
Project Partnership.  China is also active in SME development support.  For example, the 
China Development Bank has signed an Agreement on Development Financing Cooperation with the Development Bank of Southern Africa , and an agreement to loan €60 million to the 
West African Development Bank for the development of SMEs in countries belonging to the 
West African Economic and Monetary Union.  The Export-Import Bank of China and the Agricultural Bank of China have both signed cooperation framework agreements with the 
African Development Bank to cooperate on infrastructure project financing and the 
development of SMEs.  Developing countries are also taking their own actions at regional level to support SMEs.  A good example here is the ASEAN Strategic Action Plan for SMEs for the period 2010-2015.   
Table 6.3 Examples of Aid-for-Trade pr ojects providing for SME development 
Area of thematic focus Examples of projects and programmes 
Business environment for SMEs   Competitiveness and Private Sector Development – 
Mozambique (World Bank IDA) 
 SME revitalizations and Governance – Côte d'Ivoire  (World 
Bank IDA) 
 Investment Climate Advisory Services – IFC  
 Central Asia Invest – European Union 
 Trade Mainstreaming in LDCs – Enhanced Integrated 
Framework (through Tier 1) 
SME training: market research, business plans, vocational training, business education 
and mentoring, trade meetings  ITC online tools – Trade Map, Market Access Map, 
Investment Map, Trade Competitiveness Map and Standards Map – that enable companies and trade 
support institutions to identify export/import 
opportunities and compare market-access requirements.  
 Business-to-Business IT training centre, Nicaragua – 
Denmark 
 "One Village-One Product", Japan International Corporation 
Agency  
 Micro Enterprise Development Programme in Nepal – multi-
donor programme including Australia, Belgium, UNDP) 
 SMEs newsletter, SME guides and manuals, training and 
free legal advice for SMEs – World Intellectual Property 
Organization 
 Empretec and Business Linkages Programme – UNCTAD   
ITC’s Enterprise Competitiveness Diagnostic Model to WT/COMTD/AFT/W/53 
 
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  evaluate SMEs vis-à-vis all internal factors driving 
operational excellence and long term competitiveness. 
 SME development programmes – IFAD 
Jordan SME training programme – France 
Regional training 
centres/strategies for SMEs  SME innovation centre – APEC and KOICA 
 CARICOM Education for Employment – Canada and 
CARICOM 
 Compete Caribbean – Inter-American Development Bank, 
Caribbean Development Bank, Canada, UK 
Exporter/importer pairing, 
promotion of joint ventures, 
development of business to 
business services   ITC's Certified Trade Advisers Programme (CTAP) is a 
certification programme that builds the capacities of 
Trade Support Institutions for designing and delivering 
export management development and direct assistance programmes to SMEs 
 Trade Americas & Connect Americas Expo, Inter-American 
Development Bank 
Sustainability, fair trade, certification, quality standards   Portfolio of 164 debt and equity projects with focus on 
sustainable development – Belgian Investment Company for Developing Countries (BIO) 
 Capital Access for Renewable Energy Enterprises, East 
Africa – SIDA  
Funding for business start-up 
and working capital   Microenterprise programs – USAID  
 Global SME finance facility – IFC  
 Small and Medium Enterprises  Program – African 
Development Bank 
Impact Fund (Africa and South Asia), UK  
Promoting women-owned SMEs   Women in trade – ITC  
 Training for women micro entrepreneurs in Peru – Spain  
 Rural SME support services, Bolivia – Switzerland 
Women in tourism empowerment programme – UNWTO 
Source: OECD Creditor  Reporting System 
 
6.3  Strengthening the delivery of SME support programmes 
6.20.  Ever greater attention is being paid to the "results agenda" in aid programming.  
Development financing for SMEs and targeted Aid-for-Trade assistance to SMEs is no exception.  An oft-repeated conclusion of ev aluations is the need for more robust results 
measurement frameworks, the use of impact assessments, and greater attention to baselines 
and indicators. For example, an evaluation by  the Independent Evaluation Group (IEG) of 
World Bank Group support to SME concluded that the Bank's support "needs to be firmly rooted in a clear, evidence-based understanding  of how the proposed support will sustainably 
remove the problems that constrain SMEs’ ability to contribute to employment, growth and 
economic opportunity".
21   
6.21.  One difficulty faced by project designers in Aid-for-Trade programming is the small size 
of many project interventions.  Table 6.4 exam ines project size using data reported to the 
OECD CRS.  From the table it is clear that 2,100 (or 60%) of the 3,400 activities reported were under US$200,000 in value.  From the da ta, a median project size of US$110,800 can 
be estimated.  Given the small size of projects, evaluations have tended to focus on the 
performance of the delivery institutions or programme reviews. 
Table 6.4 SME development projects by value 2008-2012 (in US$) 
Less than 
50,000 50,000-
100,000  100,000-
200,000  200,000-
500,000  0.5 million 
to 1 
million1-2 
million More than 
2 million  
1,181  415  505  491 336 172  293
 
                                               
21 The Big Business of Small Enterprises, Evaluation of the World Bank Group Experience with Targeted 
Support to SMEs, 2006–12, IEG, 2014.  WT/COMTD/AFT/W/53 
 
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  6.22.  One challenge facing private sector development institutions is how to achieve 
operational scale when providing support to SMEs in developing countries, which by their nature are small, diffuse and numerous.  Supporting SMEs carries with it the inherent risk of itself becoming too diffuse as highlighted in a number of recent evaluations of development 
assistance to SMEs as illustrated in Table 6.5. One way through which institutions seek to 
increase the scale of impact of trade-related SME support is to focus on strengthening intermediary organizations – such as trade support institutions, as highlighted in a recent 
evaluation (ITC, 2013).  
Table 6.5 Overview of message s from recent evaluations 
Programme Key messages 
DANIDA - 
Business 
Development Services 
(2009)  Business sector interventions need to take account of the enabling 
environment as well as provide scope for interventions at firm level. 
Interventions at multiple levels are interdependent and support each other and create scope for more re levant and effective programmes. 
While it would be naïve to say that donor agencies’ business sector 
programmes triggered growth, one could point to a measure of 
contribution – both in terms of creating an enabling environment for the 
business sector as well as for more direct forms of support, and some evaluations actually claim that interventions had such an effect 
The supplies of investment capital through the multilateral financial institutions and bilateral donor programmes, and the technology transfer through various projects fit into an overall picture of 
competitive business sector performance. 
EU – Private 
Sector 
Development  
(2004-2010) 
(2013)  The contribution made by the EU to the development of the private 
sector showed particular strengths in middle-income countries as 
compared to low-income countries, across a range of different criteria. 
Notable strengths were observed regarding policy dialogue, alignment 
and the clarity of the EU’s role in private sector development. 
The EU has generally aligned its support with the beneficiary countries’ 
priorities but has also, on good grounds, reserved for itself the right not 
to so align when confronted with specific drawbacks to alignment. 
Ensuring that the expected results are clear and targeted, baselines 
defined, and evaluations conducted, including for cross-cutting issues. 
Enhancing the inclusiveness of the Private Sector Development (PSD) 
enabling environment support.  
AsDB – Private 
Sector 
Development (2013) Improving business registration : ADB support was effective in 
increasing the number of business registrations.  
AsDB actively promoted secured transactions legislation and the 
establishment of collateral registries . Insufficient collateral is seen by 
SMEs as being among the top reasons for their difficulty in accessing 
finance. 
Investment support needs to be carefully sequenced with enabling environment support, particularly for SME development and public-private partnerships. 
UK- Private 
Sector 
Development 
(2013) DFID should clearly define where it can add most value in PSD relative 
to other stakeholders.  
Micro-level interventions are achieving pro-poor impact and mid-level 
and Markets for Poor approaches show signs of impact and 
sustainability 
DFID needs to appreciate the barriers and business imperatives faced 
by the private sector in participating in development.  
Impact evaluations should be applied to all pilot programs to decide 
whether to scale-up or not. 
ITC-SAANA (2014) Impressed by the "special relevance, quality and thoughtful delivery" of 
its expertise, in an environment crowded by larger, better funded 
organizations. 
Thinly spread, only intermittently present in countries, and with deserving requests being unmet. 
3IE- To understand results, focus should go beyond outcomes and examine WT/COMTD/AFT/W/53 
 
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  Business 
Development 
Services 
(2013) impact.  
Participation levels during trainings, and the extent of formal training 
and cognitive skills affected outcomes. 
Clarify approaches to target support to SMEs.  
World Bank - 
Independent 
Evaluation 
Group (2014) Enhance relevance and additionality of SME support. 
Institute a tailored research agenda.  
Strengthen guidance and quality control.  
Source: WTO Secretariat analysis 
 
6.23.  Trade metrics are also largely absent from the diagnostics and results measurements 
being used in SME support.  The IEG report 2014  evaluation of World Bank Group support to 
SMEs includes only limited textual references to trade – and no substantive analysis of trade 
effects.  Other evaluations have similar shortcomings. Given the increased and increasing exposure of SMEs to global markets, both thro ugh exports and imports, there appears to be a 
need to integrate trade metrics and indicators more systematically into the design of projects.  
6.24.  The need to bolster monitoring of tr ade effects is not however to suggest that 
programmes do not have positive trade effects.  The 3
rd Global Review of Aid for Trade 
collected a wealth of information on projec t and programme outcomes and impacts, with 
direct impacts on exports, employment and povert y reduction.  More than 20 of the 275 case 
stories submitted cited examples of SME export  development programmes and their impacts.   
6.25.  Action is being taken by the aid comm unity to integrate the results agenda into 
programming and reporting. A number of trends are emerging from the ongoing discussions 
as reflected in initiatives like the OECD's (2013) "Management Framework for Aid for Trade and Development Results", the Donor Committee for Enterprise Development common 
standard for results measurement, and the ITC’s new approach to impact assessment. 
6.26.  Although targeted SME projects are often relatively small on the funding side, many of 
them involve significant numbers of beneficiarie s. As a consequence, the use of quantitative 
impact assessments is in theory possible and is increasingly applied in targeted SME projects.  
6.27.  Quantitative, research-based impact a ssessments – such as those based on random 
control trials or quasi-experimental approaches – need to be integrated into projects from the design phase. In order to be applicable, baselines need to be established and expected results 
need to be defined clearly and from the start of the project. 
6.28.  The cost factor of such impact assess ments is significant (Cadot and de Melo, 2014) 
and effective application of such assessments requires support from donors, implementing 
agencies and beneficiaries. If well-implemented such assessments could provide very valuable 
insights into the effectiveness of different aid projects, which may explain the increased use of these approaches in targeted SME assistance.  
7  CONCLUSIONS 
7.1.  Small-and medium-sized enterprises (SMEs), though small in size, are large in number 
and represent the overwhelming majority of ente rprises in most economies.  This report has 
sought to synthesize key issues facing SMEs in developing countries, and in particular Least-
Developed Countries (LDCs).  In tandem, the report has attempted to survey the support 
being offered by a broad array of development actors.   
7.2.  This report does not claim to be exhaustive, and rather aims at stimulating dialogue on 
SME competitiveness constraints and how best to address them.  In this respect, the report is 
timely.  A message that emanates clearly from the report is that SME development is integral to the vision of inclusive, sustainable growth th at is being debated in New York in the context 
of the post-2015 Development Agenda. 
7.3.  The evidence surveyed in this report po ints to the central role that SMEs play in 
economic growth, job creation, and women's economic empowerment.  The expansion of WT/COMTD/AFT/W/53 
 
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  global and regional value chains, together with  the expansion of electronic commerce, offers 
new opportunities for SMEs in developing countries and LDCs to internationalize and to increase their contribution to sustainable development.   
7.4.  Experience suggests that SMEs offer an important route for economic diversification, the 
gravitation of SMEs towards the services sector being an important trend in this regard – not 
least in the context of what has been termed th e "servicification" of global and regional value 
chains
.  Evidence suggests that SMEs engaged in trade enjoy higher productivity, but only if 
they are able to survive and thrive.  Herein lies the challenge: failure and exit rates for SMEs 
in trade operations are high.   
7.5.  The range of constraints that burden SMEs (poor business environment, limited access 
to finance (including trade finance), poor labour skills, lack of bargaining power, restricted access to market data, high trade costs and difficulty accessing technology) are sometimes 
amplified when SMEs try to internationalize. This may particularly be the case in developing 
countries, notably because many SMEs operate in  the informal sector there and because of 
the often higher incidence of fixed costs and market failures relevant for trade.  
7.6.  In 23 LDCs surveyed for the purpose of this report, the quality of the business 
environment ranked as the most pressing concern for SMEs, with access to finance close 
behind. Availability of institutional support – notably to enter new markets or to defend SME interests – also ranks highly among the SME-specific challenges.  
7.7.  The economic crisis has prompted a resurg ence of interest in private sector development 
support aimed at the SME sector – both in developed and developing economies.  Bridging the financing gap faced by SMEs has attracted a high level of attention, notably in the context of 
the G20's work on financial inclusion.  It has also stirred renewed interest in the work of a 
broad array of development finance institutions and their work.   
7.8.  Important to note here is that the work of  development partners aims not at trying to fill 
the financing gaps faced by SMEs themselves, but instead at seeking to address the market 
failures that give rise to this situation. Public-private partnerships are an integral part of many 
of the approaches taken.  Furthermore, commercial financial institutions are looking at new business approaches (such as base of the pyramid models, and electronic payment systems) 
that can seek to un-tap economic value. South-South partners are also entering this area with 
their own approaches and institutions. 
7.9.  Support to SME development and internationalization is a dynamic area, but it is also an 
area characterized by a number of inherent pitfalls for development agencies. Support to SME 
development by definition involves working with a relatively large number of small beneficiaries.  The danger for agencies is that their programmes become too diffuse to have appreciable, measurable impact.  A second phenom enon highlighted in this report is that the 
trade dimension to SME development programmes is often not adequately captured, at a 
programming, implementation or evaluation stag e.  The prevalence of value chains and the 
trade exposure of SMEs is growing; in this context, better perhaps that internationalization 
happens by design, not default.  
7.10.  Lastly, the study highlights that the constraints of SMEs, particularly related to 
internationalization, remain a pressing concern.  The potential which SMEs offer in the context 
of inclusive, sustainable growth underlines that support for private sector development, with a 
specific focus on SMEs in LDCs, needs to continue.  Furthermore, evaluations conducted to date of SME development suggest that these programmes have measurable and beneficial impacts for SMEs in developing countries.   WT/COMTD/AFT/W/53 
 
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