The digital economy, GVCs and SMEs

Although small and medium-sized enterprises (SMEs) represent the vast majority of firms worldwide, their participation in international trade remains limited relative to their share of overall economic activity and employment as compared to large firms. The rise of the digital economy could, however, open a range of new opportunities for small firms to play a more active role in global value chains (GVCs). This chapter reviews evidence of SME participation in international trade and production networks and looks at how the digitalization of our economies is already affecting, or could affect future, SME contributions to GVCs. New research by Lanz et al. (2018) finds evidence that digitally-connected SMEs in developing countries tend to import a higher share of their inputs than non-digitally-connected firms. Additionally, it is shown that this positive digital effect is greater for SMEs than it is for large firms. The chapter reviews the various opportunities that the digital economy opens for SMEs, especially in terms of cost reductions and the emergence of new business models, but also discusses policy measures that could be taken to promote SME participation in GVCs. Indeed, significant challenges remain for SMEs to enter GVCs, some of which are exacerbated by the new digital economy. A holistic approach that combines investment in ICT infrastructure and human capital with trade policy measures and measures to improve the business environment, access to finance and logistics, and promote innovation and R&D is necessary. Improving the availability of data would also help to better understand and integrate SMEs in GVCs. • Although small and medium-sized enterprises (SMEs) represent the vast majority of firms worldwide, their participation in international trade remains limited relative to their share of overall economic activity and employment as compared to large firms. • The rise of the digital economy could, however, open a range of new opportunities for small firms to play a more active role in global value chains (GVCs). • New research finds that when a manufacturing SME has a website, this facilitates its participation in GVCs and trade. In particular, such SMEs are more likely to use foreign inputs for production and export their output. Further, information and communication technology (ICT) connectivity is found to be more important for small firms than for large ones in whether or not a firm participates in trade. • However, SMEs continue to face important challenges when integrating into GVCs. A holistic approach that combines investment in ICT infrastructure and human capital with trade policy measures and with measures to improve the business environment and access to finance and logistics, and promote innovation and R&D, is necessary. • Improving the availability of data would also help to better understand and integrate SMEs in GVCs. 122 • Technological innovation, supply chain trade, and workers in a globalized world