SMEs are more important than you think for EU export performance

Lucian Cernat 18 October 2014

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In 2010, the European Commission launched its Trade, Growth and World Affairs strategy, the political manifesto for the incoming Trade Commissioner at the time. That strategy also benefited from useful ideas generated by a voxEU debate (“The future of EU trade policy”). Four years later, some of the bold objectives set out have already been achieved. One overall objective on which progress has been made was to ensure that EU trade policy provides tangible benefits to EU companies, irrespective of their size. By eliminating protective tariffs abroad or reducing the cost of non-tariff measures, EU trade policy offers better access in foreign markets for small and medium enterprises (SMEs) whenever a new trade agreement (like the Korea-EU FTA) is in place. Apart from general provisions that facilitate trade for all companies, specific provisions for SMEs in FTAs can further ease EU SMEs exports outside the EU.

At the same time, the increasing availability of firm-level data has enabled the rapid growth of academic articles analysing firm-level drivers of export performance. One of the conclusions of this emerging literature is that international trade is a world of ‘happy few’ exporters. Based on a sub-set of EU member state firm-level data, Mayer and Ottaviano (2007) found that a small proportion of firms accounts for a disproportionate share of aggregate exports. While this conclusion is true in relative terms and supported by many other subsequent analyses, this may not be true in absolute terms.

Recent research on export performance of EU SMEs

In a recent paper (Cernat et al. 2014), we contribute to the debate on the export performance of EU SMEs using the Eurostat data on trade by enterprise characteristics (TEC). The Eurostat data cover essentially all EU member states and all its exporting firms. In 2011, the latest year for which comprehensive EU data exist, there were more than 750,000 EU exporting firms outside Europe.

The Eurostat figures point to three simple but very relevant messages for trade policymaking.

  • First, while still a small share of total EU enterprises (exporters and non-exporters), the ‘happy few’ EU exporters are in absolute terms quite numerous – more than 750,000 EU firms are successfully engaged in extra-EU exporting activities.

This makes a fairly large ‘economic constituency’ that stands to benefit from existing and future EU trade policy initiatives. Increased participation by exporting enterprises in giving feedback about what works best in various trade agreements can improve the fine-tuning of EU future trade policy priorities.

  • Second, the value of SME exports is larger than one might think.

The Eurostat data contain a breakdown of exporting firms by size (small, medium, large enterprises based on the number of employees). Out of the total number of exporting firms, more than 80% are SMEs (over 600,000 exporters). With over €500 billion of merchandised exports, SMEs account for over a third of EU exports. These exporting SMEs employ more than 6 million people throughout Europe. Therefore, while the happy few are still accounting for a dominant share of total EU exports, SME exports are too large to be ignored. And so are those firm-level characteristics that lead SMEs to become successful exporters, which bring us to the third conclusion:

  • Export performance of EU SMEs by member states is quite diverse.

When benchmarking SMEs export performance by member states against the EU average, they can be clustered in two dimensions: The proportionate number of exporting SMEs and the value of their exports. Some countries excel in both dimensions, whereas others fall behind in one or in both aspects. Understanding the different SME export performance across countries is important in establishing trade-related domestic policy priorities in various EU countries.

Concluding remarks

So, now that we know a large number of EU exporting firms are SMEs and that they have a non-negligible share in EU exports, what should one do?

The broad conclusions of the existing firm-level trade literature still hold. If SMEs do not face a different vector of trade cost impediments than larger firms, perhaps not much more needs to be done. Surveys of EU exporting SMEs have identified a wide range of potential trade barriers. Many of the barriers affect the exporting firms from small to large. Therefore, the various EU trade policy initiatives, although not specifically aimed for SMEs, offer good exporting opportunities for all EU exporters.

But if SMEs face a different set of trade policy constraints than large firms, it would be important to identify and tackle the most detrimental SME-specific trade impediments (e.g. transparency, trade facilitation, NTBs, etc.) in future EU trade policy initiatives. Certain trade barriers may indeed be SME-specific. In-depth analyses in the way these barriers could be avoided would be useful. More detailed trade statistics with firm-level characteristics, whilst preserving the confidentiality requirements, could create valuable firm-level export performance indicators to feed trade policy debates. These indicators would allow policymakers to have more information on SME export performance and breakdowns by extra-EU market destinations of their exports, notably in the context of current and future trade negotiations. The US is the prime example of this need for more detailed statistical information. An annual SME survey identifying the trade barriers they face in key markets would be in line with current EU policy priorities.

Overall, more detailed firm-level trade information for large, medium, small, and micro exporters will be key to identifying EU trade policy priorities, in line with complex and fast-changing economic realities. In the words of Mayer and Ottaviano (2007): “This simple truth makes it clear that understanding the firm-level facts is essential to good policy making in Europe”.

Editor's note: The views expressed therein are those of the authors and do not necessarily reflect the views of the European Commission.

References

The future of EU trade policy”, a VoxEU.org debate moderated by R Baldwin (Graduate Institute, Geneva; Vox EU Editor-in-Chief; Policy Director, CEPR).

Cernat, L, A Norman-Lopez and A D T-Figueras (2014), “SMEs are more important than you think! Challenges and Opportunities for EU exporting SMEs”, Chief Economist Note no. 3, DG TRADE, Brussels.

Mayer, T and G Ottaviano, G (2007), “The Happy Few: The internationalisation of European firms- new facts based on firm-level evidence”, Bruegel-CEPR EFIM2007 Report, Bruegel Blueprint Series, Volume 3. Brussels: Bruegel Blueprint Series.

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Topics:  Europe's nations and regions International trade

Tags:  EU trade, SMEs exports

Chief Trade Economist of the European Commission

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