Trade Forum Features

The changing role of trade promotion

23 December 2014
ITC News

Running a successful business is the dream of every entrepreneur. While global empires are for the few, finding and receiving proper support, however, can make success a more realistic prospect for many more. In recent decades trade promotion organizations (TPOs) have emerged across the world and are playing a crucial role for small and medium-sized enterprises (SMEs). In particular TPOs play an invaluable part for SMEs that want to expand their operations across borders and to integrate into global value chains. TPOs are the main instrument to implement national export strategies for many governments while at the same time acting as advocates for the interests of the export sector and providing advice on appropriate policies to foster trade. For other trade support institutions (TSIs), often smaller and focused on particular sectors, national TPOs can play a vital coordinating and leadership role. In addition, TPOs can serve as a good entry point for foreign businesses and investors interested in developing relationships with local suppliers and exporters in a particular country.

Support by TPOs to SMEs aiming to export goods and services often comes in different stages and levels depending on the existing capacities of a given enterprise. Take for example a domestic supplier that has the potential to become export-ready or a firm that is actively seeking export opportunities. In such cases TPOs would normally provide services such as awareness-building, information and training in exporting. Many would also have a toolbox from which they would apply a range of remedies such as capacity building, training, advice on how to export and how to prepare the firm to compete in the international marketplace. As the SME advances in its maturity, it becomes ready to export or to expand its export presence. TPOs would then continue to provide advice and support to ensure that market entry is achieved or exports are successfully scaled up.

For SMEs, rapid adaptation to new conditions is crucial if they are to compete in foreign markets. In today’s rapidly evolving international trade environment, the scramble to keep up with change is adding further pressure not only for businesses, but also for TPOs which have to be ready to provide new types of support to serve their clients. Today’s modern, globalized value chains have led to production processes of products or services that are often accomplished in various independent stages in different nations and on different continents. Apple Inc.’s iPhone, for example, goes through a production process including 30 countries. While this is not true for all goods, the iPhone shows how the line between exporters and importers is disappearing.

For firms with smaller networks and production capacities looking to set up operations in foreign markets, TPOs are often called upon for assistance. TPOs can then support SMEs by finding adequate market entry channels and local partners. As a result of slower growth in developed economies relative to emerging and developing markets, TPOs have encouraged developing-country SMEs to diversify, moving their focus away from traditional markets to faster-growing areas. This outreach to new alternative markets has led to an increased demand for TPOs to provide new services, especially as these companies are now facing new barriers to their exports. This became evident during the recent financial crisis: while tariff barriers did not increase during the crisis, there was a surge in countries applying non-tariff measures (NTMs), thereby making exports more complex. This was especially problematic for SMEs with fewer resources. In response, TPOs are now required to step up their information-gathering abilities to be able to provide advice on NTMs and other regulatory provisions. The emerging and growing importance of trade in services, where many SMEs from developing countries are active, has also generated an increasing demand on TPOs to provide tailored advice to meet the needs of services exporters, ranging from information services to protection of intellectual property. Fiscal constraints experienced by most governments have generated an increasing need from public sector organizations, including TPOs, to demonstrate that they can offer value for money. Often this translates to cutting costs while increasing performance with the same or fewer resources. For TPOs this has resulted in a need to better measure results, demonstrate impact and initiate performance improvement programmes.

Stronger impact Given appropriate conditions and adequate financial support, it is clear that TPOs can have a significant impact on the trade performance of their countries. For example, Daniel Lederman, Marcelo Olarreaga and Lucy Payton (Export Promotion Agencies: Do they work? Journal of Development Economics 91 [2011]), measured the impact of an increase in export promotion budgets using data from more than 80 export promotion agencies in developed and emerging economies. The study showed that a 1% average increase in the budgets of export promotion agencies led to a 0.05% increase in national exports. This suggests that investment trade promotion can yield a return of more than US$ 40 for each dollar invested in a TPO. This conclusion is further backed by findings in developed countries which have also registered strong returns for clients. UK Trade and Investment (UKTI), which has one of the most advanced results-measurement systems in the TPO community, has estimated that in the year to March 2014 the organization provided support to more than 30,000 firms, generating additional aggregate profits of more than US$ 8.6 billion, or an average of approximately US$ 285,000 per firm. Overall this suggests that there is a need to step up efforts to internationalize SMEs. TPOs are increasingly called upon to play a more prominent role in providing support to existing or prospective exporters to expand their operations and investments into new markets. This is true not only for companies as such, but for new product lines and new services as well. The evidence is clear that, overall, TPOs produce good returns on the investments that are made in them.