Small and medium enterprises (SMEs) are often important parts of developing country economies, but many programs designed to spur their growth have been unsuccessful. In Egypt, researchers offered small-scale rug manufacturers the opportunity to export to high-income countries. They found that SMEs offered export opportunities increased both their profits and product quality relative to firms in a comparison group.
In developing countries, small and medium enterprises (SMEs) often employ a substantial portion of the population 1 and many of these firms participate in government-sponsored trade-facilitation programs2. These initiatives are based on the assumption that increased export opportunities will spur SME growth and productivity. Currently, however, there is a lack of rigorous evidence evaluating if and how access to export markets impacts SMEs. Answers to these questions could assist governments and donor organizations in tailoring specific policies and programs to improve local economies.
Profits and productivity: Among SMEs offered the opportunity to export, operating profits increased 15 to 26 percent relative to comparison group firms. The higher-quality rugs demanded by foreign retailers were more expensive and time-intensive to make, but the resulting increased purchase price was more than enough to offset costlier production. This increase in profits, thus, came in tandem with increases in quality, as well as declines in output per hour.
Learning by exporting: Evidence from this evaluation suggests that the quality upgrades may have been a result of “learning by exporting.” When the first orders arrived, productivity declined, but then rose steadily as production continued. In the researchers’ “quality lab,” the rug quality produced by treatment group SMEs was higher across every dimension measured. Additionally, communication logbooks confirmed that most improvements took place along dimensions discussed between buyers and sellers, suggesting that feedback was an important improvement channel.
The profit, quality, and productivity increases in this study are generally much larger than corresponding results from microcredit access or business training programs. This suggests that increasing market access may be relatively more important to SME growth in developing countries.