When a firm is too local to go international

SMEs are disadvantaged more when it comes to global value chain participation. [File, Standard]

How local a firm is or its size determines whether the business will go global, a study by a policy think tank has shown.

The study shows that small and medium-sized enterprises (SMEs) are disadvantaged more when it comes to global value chain participation.

It also shows that the composition of a firm’s ownership, its production capacity and size play a role in its participation in the global value chain.

Consequently, if a firm can tweak any of these factors, they can then increase their chances.

The other factors that can also contribute include internationally recognised certification, finances, and research and development. The study is published by the Kenya Institute for Public Policy Research and Analysis (Kippra), a State-backed think tank.

The study titled Firm-Level Analysis of Global Value Chain Participation in Kenya notes that research and development play a pivotal role in global value chain participation.

“This means that firms that spend on research and development have a 9.59 per cent chance of contributing to global value chain compared to those that do not,” the study reads in part.

It argues that research and development does contribute to higher product quality and better marketing strategies.

But firms with an internationally recognised certification, the study says, have a 22.21 per cent likelihood of participating in the global value chain.

“Similarly, firms that possess these kinds of certifications have a 61.96 per cent likelihood to participate in forward trade,” it adds.

It notes that while investment in research and development has a positive impact on a firm’s exports resulting in higher participation in the global value chain, certification is important in attracting new clients and competing for bids.

“It enables a firm to improve the efficiency of their processes and quality of their products or services,” the study states.

The study documents that larger firms have important networks and are largely known. It is therefore much easier for larger firms to gain access to international markets as opposed to smaller firms.

“As a result, smaller and medium-sized businesses must work extra hard to show their worth on the global stage,” it says. “One way around this is to obtain an internationally acknowledged accreditation, which helps them create confidence with clients.”

The study continues stating how finances also do have a say in global value chain participation saying it plays an integral role in the success of any organisation. This is because it enables processes to run, hires better staff and provides capital to produce quality products or services.

Severe financials

It indicates that firms with severe financials are less likely to participate in backward linkages. This means they are less likely to invest more into their processes such as getting more raw materials, to increase their output.

“Financial obstacles have a larger effect size among small and medium-sized companies compared to larger firms,” the study concludes.

The study notes that productivity has effects on both backward and forward linkages, the latter being towards consumers and other businesses in cases of B2B enterprises.

“Regarding global value chain participation index, however, a one per cent increase in productivity level is only likely to cause a 4.05 increase in global value chain participation index,” the study reads.

Corporate ownership is also a factor which the study found that foreign composition in the leadership structure increases the chances of a firm participating in the global value chain.

“Firms that have a higher percentage of foreign ownership have a positive and significant coefficient for the global value chain index and backward linkage,” it states. “This means that foreign-owned enterprises have a higher likelihood of involvement in the global value chain compared to private domestically owned firms.”

The study references another one by Feenstra et al (2014) that says foreign-owned firms are more likely to be supported by their financial institution. This then improves the liquidity of the firm and increases its chances of participating in the global value chain.

“Domestic financiers prefer to fund state-owned enterprises over privately held enterprises. They discover that foreign-owned businesses are better financed than domestic businesses,” the study outlines.

International certifications

The study authored by Kevin Wanjala and Muhamed Abdulahi obtained firm-level data from the World Enterprise Survey 2018 which covers 1,001 enterprises across seven sectors. These are other manufacturing, retail, other services, food, tourism, chemical, pharmaceutical and plastic, textile and garments.  

The study concludes that Kenya’s global value chain participation index at firm level was estimated at 18.65 per cent. This implies that only two in every 10 Kenyan firms integrated value chains in production processes.

It states that firm size is a critical factor.

“Specifically, large firms have a higher participation score compared to smaller and medium firms. This is partly the case since most of the larger firms can meet the sunk costs involved in participating in global networks,” it says.

Additionally, it says, there is a need to conduct awareness to firms on the importance of international certifications on business and sensitisation in participating in the global value chain.

“Internationally recognized quality certification has a positive effect on global value chain index and forward linkage. This is critical for foreign marketing and ultimately foreign sales,” it states.

It also adds that there is a need to increase investments in research and development. This can be done through innovation centres and business hubs which will improve firms’ capability when participating in the global value chain.

“Increasing productivity of firms is important, and this can be done through investment in human capital development, including on-job training programmes, and investment in efficient technology,” it adds.