Effective strategies for growth in international markets

How can SMEs flourish in a highly competitive environment?

Thomas Mirow, President of the European Bank for Reconstruction and Development, Conference de Montreal, 6 June, 2011

Ladies and gentlemen, thank you for inviting me here to speak.

This is the time for entrepreneurs to take risks. That may sound like a strange statement to make in the aftermath of one of the great global economic downturns but there is plenty of evidence to show that, for small and medium sized enterprises, the right strategy can still bring big rewards. The qualities required are no different now than they have been for decades: an entrepreneur must have a good idea and plenty of courage. They could do worse than take to heart the words of the former Alpine ski champion, Jean Claude Killy. He saw the challenges that he faced in simple terms, `to win, you have to risk loss’. However, for entrepreneurs to thrive in a highly competitive environment, they also need the proper support.

I will address this topic by speaking from the experience of the institution I have the privilege to lead, the European Bank for Reconstruction and Development – so forgive me if I use the occasion to present some facts about the EBRD. For two decades the EBRD has been helping small and medium sized enterprises – part of the task that we were given to help change the economies of the former communist bloc, after the fall of the Berlin Wall in 1989. We do so because we understand that these firms are the drivers of future growth, they are a surer provider of employment than the vast state owned companies which once dominated these and other economies.

These are easy words to say but let me give you one example of a successful initiative. It is seventeen years since we set up our Russian Small Business Fund. The RSBF was established in 1994, with the support of the G7 countries and Switzerland. The aim was to provide financing to micro and small enterprises and to help strengthen the capacity of the Russian banking sector to lend to such firms on a sustainable basis. So far, we have disbursed almost nine billion US dollars. Most of those loans, 90 per cent of them, have been made outside Moscow and St. Petersburg, in regions where the need for job creation and poverty alleviation is greatest. We are recognising that there must be a partnership. Entrepreneurs must put their ideas forward and be prepared to take risks, but for small and medium sized enterprises to flourish, banks and other financial institutions must fulfil their role: the provision of funding to the innovative and the well run.

We have helped entrepreneurs like Alexey Kashkarov. He is one of Russia’s dynamic young business minds. He is 29 years old and runs an online site selling furniture and two furniture stores in Tyumen, a city in Western Siberia. He employs nearly forty people. He couldn’t have done that without the assistance of the Russian Small Business Fund. Before starting his own business, Alexey worked for a big furniture maker, where he gained experience of the trade. In 2008, the financial crisis forced the company to downsize and he lost his job. However, Alexey’s entrepreneurial instinct prompted him to turn this setback into an opportunity – a chance to combine his experience with his management and marketing qualifications to set up a new venture, selling low cost furniture. He rented an empty building in Tyumen and set up his business. Alexey is optimistic about the future and is about to take out another loan to open two additional furniture stores in new areas of what is an expanding city. His is just one of the 587,000 loans that we have made, through that Russian Fund, since 1994.

From our own experience of helping entrepreneurs, like Alexey Kashkarov, we know that the hurdles that he and others like him face are immense, especially in the region where we operate and in similar areas around the world. They need a predictable and transparent business environment, the rule of law, a supportive tax regime and adequate labour regulations. Here, many emerging markets continue to compare badly with the most competitive economies. That means there is a lot of unmet potential: entrepreneurial dynamism waiting to be freed up. The EBRD has a special role to play in this regard. With the heads of government in countries ranging from Mongolia to Russia, we have set up investor councils that identify red tape and other hurdles and follow up on solutions.

Governments must often get out of the way if entrepreneurs are to thrive. But they can go beyond that and create conditions for success. We could do worse than look at how Israel is helping its SMEs. I was impressed by its efforts during a visit to that country, earlier this year. Israel scores highly on a number of innovation indicators. It has the world’s highest research and development intensity – spending more than 4.5 per cent of GDP on it. The key to success is Israel’s innovation framework in which the government has played an important role. It includes promoting strong links between universities and business, as well as encouraging venture capital incubators.  All this is backed up by a strong education system. The share of graduates in science and engineering, at 24.3 per cent, is high by any standard. What Israel does prove is that if a nation makes technological innovation a national priority, and puts all the necessary support structures in place, SMEs can be major beneficiaries.

Money and a supportive business environment may be important, even necessary, but they are not enough. An entrepreneur can have the best idea in the world but the worst idea of how to turn it into reality. One of the pillars of the EBRD’s small and medium enterprise strategy is something that we call TAM/BAS. They are the TurnAround Management and Business Advisory Services programmes. They have been valuable instruments for the promotion of good management in the SME sector, providing consultancy advice, paid for, in large part, by our donor countries. Since its inception, TAM/BAS has carried out over 12,000 projects with individual enterprises across thirty countries.  AzVirt, in Azerbaijan, is one family business that has benefited. It carries out road construction projects. In 2009, it consulted our TurnAround Management Team because it wanted to improve its operational management and expand overseas. We helped AzVirt to define a strategy and to avoid the risks of being dependent on a few large projects. The company is now growing fast and is more diverse.

And here is a lesson that should guide our thinking about SMEs more generally: it is not just the mere existence of small businesses that we should support, but their growth. Small businesses have to become medium-sized businesses if they are to create jobs, and they have to move into global markets if they are to learn, adapt and maintain their competitive edge. Both require management qualities that can be quite different from those of the entrepreneurial innovator, and a policy environment that fosters global integration

These are lessons that we will bear in mind, as we expand the EBRD’s mandate to the nations of North Africa and the Middle East, as the international community has been requesting us to do. In Egypt, one of our priorities would be the development of SMEs in a country with an underdeveloped private sector. Improving access to finance for such firms will be one of the reform challenges for the financial sector. While 75 per cent of SMEs apply for bank loans, 92 per cent of applications are rejected. As a result, loans to SMEs account for only six per cent of all lending. It is an area where we could have an impact, an area where we would consider getting involved, as long as the country continues to make democratic progress. We have the capacity to invest, eventually, up to a billion Euros a year in Egypt, an important shot in the arm for SMEs in a nation which is all too often left out of global supply chains.

I started by saying that this is a good time for entrepreneurs to take risks. I hope that I have shown you, though, that success requires more than good ideas. Only if innovators, government and banks work together can success be more certain. At the EBRD, we are trying to bring these elements together. Only a greater understanding of each others’ needs will bring about stronger growth in an increasingly challenging world.

Last updated 6 June 2011