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An opportunity to integrate SMEs into GVCs through MNCs
Most SMEs produce intermediate products, which are important in the GVC spectrum.
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Turkish visitors at a BNI MSME partner booth at the Pasar Senggol Festival in Istanbul on June 5. BNI encourages the performance of global MSMEs as a response to the potential Indonesia-Turkey market, with a trading value of US$2.01 billion.
The paradigm of international trade has been shifting from that of the conventional view, where products are entirely produced within one country and dispatched overseas, to the phenomenon of so-called Global Value Chains (GVCs), where the production process often takes circuitous routes, crossing different countries before the finished goods can be sold.
The Organisation for Economic Co-operation and Development (OECD) estimates that 70 percent of current international trade is dominated by GVCs, 80 percent of which are linked to Multinational Corporations (MNCs). Thus, MNCs play a pivotal role in current international trade.
Despite dominating international trade, MNCs have been identified as generating razor-thin margins due to the intensely competitive environment in which they operate. This has forced them to relocate their production facilities to the most cost-efficient countries to maximize their efficiency, resulting in newly industrialized countries (e.g., China, Vietnam and Indonesia) becoming deeply involved in the GVCs.
The fact that GVCs require production processes to be divided into several activities might stimulate local firms to engage in the production process, as MNCs often focus on their production core, thereby subcontracting less essential production activities to their local counterparts.
This provides opportunities for local firms, including Small and Medium Enterprises (SMEs), to collaborate with MNCs, allowing them to reap the benefits of knowledge transfer to improve their innovativeness, an issue that has always been identified as leading to SMEs’ limited presence in GVCs.
MNCs have been regarded as producing innovative products to very high standards. As such, partnering with MNCs offers SMEs a first step onto the technological innovation ladder by receiving comprehensive knowledge, be it technical or managerial, such as production planning, obtaining raw materials, performing quality control, packaging, storage and delivery, all of which are in accordance with MNCs’ standards.
