SMEs are increasingly relying on larger firms for their access to markets, and larger firms find it convenient and profitable to outsource and fragment their activities into many functions carried out by many different actors and in different locations. Networks of firms, clusters and value chains have emerged and dominate international and often also domestic transactions. However, although many possible advantages offered by the different forms of inter-firm linkages are widely acknowledged, less is known on whether they indeed increase the availability of SME financing.
This project explores the phenomenon of increased availability of private finance for SMEs with linkages to larger firms in both international and domestic value chains. Dr Lizbeth Navas-Alemán focused her research and carried out case studies in the Latin American (LAC) region in three industries:
1. Traditional manufacturing (furniture making) Brazil
The furniture making industry has become more competitive as several LAC economies are experiencing GDP per capita increases. This phenomenon could be as a result of a greater investment in infrastructure and construction, which are closely linked to the demand for furniture. Another explanation is the trend for growing countries, not experiencing an increase in inequality, to exhibit participation of domestic demand from lower income consumers.
2. Processing of agricultural produce (dairy production) Argentina
Agroindustry has flourished in LAC over the last decade, spurred by the increase in demand for food both locally and globally. In particular, the dairy sector in the region has experienced large financial investments by foreign multinationals and large domestic companies. These investments may have benefitted the SMEs linked to them in the complex networks from production to the development of innovatiove products for niche markets in LAC and in export markets.
3. Knowledge intensive products and services (IT industry) Costa Rica
Several LAC countries have made important inroads into developing their own software industries (Uruguay, Brazil, Costa Rica), Linkages between SMEs and large firms in LAC’s knowledge intensive sectors present different characteristics and challenges from those in the traditional manufacturing or agricultural sectors.
Smaller companies, highly-educated and socially mobile entrepreneurs comprise the bulk of the SME sector in the knowledge industries and as such are usually less likely to receive governmental support or credit. This sector’s reliance on private sources of funding from traditional banks and larger customers has been found to be key to their development.
Dr Navas-Alemán led the research design and writing of the outputs with the support of IADB officials and local consultants in the three chosen countries. The resulting report will be published by the IADB as a working paper. This working paper addresses the issue of inter-firm linkages and their possible role in SME’s demand and access to finance, with focus on the mentioned sectors as well as a literature review of international experiences.
Key contacts
