A Partner In-House

Is your country heading toward free trade? Don’t worry—the government and small businesses can work together to improve competitiveness.

In Costa Rica, there is a word with a history of its own: “associativity.” Cooperatives such as Dos Pinos, the largest dairy company in Central America, exemplify the concept. And now two new projects— Costa Rica Fashion Port and Consorcio Metalmecánico (Metalwork Consortium)— have joined the group. Both are examples of the Costa Rican government’s efforts to prepare small businesses for CAFTA, the free trade agreement among the United States, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and Costa Rica. As this edition of MicroEnterprise Americas went to press, the Costa Rican Congress had not yet ratified CAFTA, but that hasn’t kept government agencies such as the foreign trade promoter Procomer from forging ahead in anticipation of the opening.

Procomer is, in fact, behind Costa Rica Fashion Port and Consorcio Metalmecánico. And the Costa Ricans aren’t the only ones preparing for competition. Chile, the Latin American nation most open to trade, has set the bar for helping micro and small producers prepare for free trade. In both cases, the agencies promoting exports have tried to address the core issue: how the government can get producers into shape for a competition in which there will be winners—but also losers.

These strategies would appear to be exportable; what is needed is to raise awareness and knowledge about how to acquire a competitive edge, take advantage of institutional support and forge associations in order to obtain a critical mass and coordinate competition, a trend called “coopetition.” According to Procomer director Martín Zúñiga, “The signing of a free trade agreement should be accompanied by support policies—complementary or parallel agendas—that provide particular help to micro, small and medium enterprises in raising their levels of competitiveness.”

Linkages

Three years ago, Procomer set out to get small businesses and microenterprises better positioned to deal with CAFTA. To this end, it laid out a series of strategies that ranged from concentrating enterprises around their current creative capabilities to developing consortiums of partners and engaging in market research. The main objective was to make the smaller companies as competitive as if they were in the global market, so they would not be destroyed when a competitor eventually crossed the border.

Procomer managed to get 300 small and medium enterprises (SMEs) to go international as suppliers for export firms. Others, such as the companies that make up Costa Rica Fashion Port, have begun to abandon the constraints of the assembly plant, or “maquila” model, to produce clothing under their own brand names for the domestic market, as a step toward entering the global market.

Costa Rica Fashion Port’s first step was to link together textile firms that were operating individually. Procomer provided training in managing markets and conceptual instruction in the fashion business. It hired Inexmoda, Colombia’s Fashion and Export Institute, to provide training in clothing design. Integration has helped the firms improve in several ways, such as exchanging information on customers and supplies. They’ve also learned to coordinate their production, so when one member faces excess demand, it can channel work to another.

The Consorcio Metalmecánico put 13 SMEs on the path to consolidation by providing them with know-how and experience. When these companies wanted to become suppliers for international companies, they were given guidance on transforming their production lines, adapting their manufacturing methods and incorporating new machinery in order to meet the quality standards and supply times that such buyers demand. “Companies in the domestic market use less-sophisticated processes [than international companies],” says Zúñiga. “But our criteria for internationalization isn’t necessarily to sell abroad; even though they produce for the domestic market, firms should meet quality standards that would be competitive in any part of the world.”

Both consortiums have also helped their member firms gain experience in post-sale services and management of inventories, cash flow, invoicing and accessing financial services. Another equally important factor was improving their supply of raw materials. Individually, those SMEs didn’t have sufficient power to negotiate prices for the small volumes they demanded, so they often wound up purchasing lowquality materials. Once they partnered, though, they gained a better negotiating position vis-à-vis suppliers.

The experiences of the metal and textile workers have been replicated by a plastics manufacturers’ association formed in 2005 under the aegis of Procomer. In the past, when those polymer producers made individual purchases of raw materials, the time and place of delivery were determined by the manufacturer’s schedule. Their partnership has enabled them to cut supply times and persuade manufacturers to deliver materials directly to their plants.

Members of the polymers association are small and medium firms with underutilized machinery, since they don’t have enough contracts to operate two or three shifts per day. When an association member faces excessive demand, the consortium allows the member to shift part of that production to another member’s under-utilized plant. In this way, they are constructing a single, large production line from various factories, so that none of them will miss lucrative opportunities.

When firms are ready to enter the international market, Procomer offers one more instance of support. The agency’s economic research department works with its marketing management to identify niche markets in various countries. The search consists of identifying commercial opportunities and describing the conditions in each of the eight markets where Procomer has offices: the United States, Canada, Puerto Rico, Mexico, El Salvador, the Dominican Republic, Trinidad & Tobago and Chile. That information is then sent directly to the firms. “Market prospecting is quite expensive and knowledge-intensive for SMEs,” notes Zúñiga. “But if they organize, they gain greater access to more and better information.”

Is There Life After Death?

Various analysts agree that the internationalization of small producers, or helping them to meet international quality standards, allows those firms to raise their competitiveness to levels that should allow them to survive in an open market, even when their operations are exclusively domestic. “Along these lines, partnering through associativity is indispensable,” says Zúñiga. “Small firms will neither grow stronger nor exploit advantages on their own, but if they form a partnership, synergies start to happen.”

The panelists discussing free trade agreements

The point is particularly significant in the context of trade liberalization. Free trade agreements (FTAs) are customarily viewed by critics as triggering crises and are blamed for the disappearance of economic players. IDB consultant Laura Rojas, a Venezuelan expert on international trade, thinks this perspective is wrong. “The [domestic] impact doesn’t begin with an FTA per se, but comes from globalization,” she says. “FTAs are instruments that accelerate globalization, broadening markets while bringing to the fore other globalization trends such as product segmentation or differentiation.”

Nevertheless, small producers do face the risk of becoming extinct, which is the way competition works. To confront that risk, as the experiences of partnering in associativity have shown, small players need to identify their strengths and weaknesses and create policies to deal with them. According to Juan José Llisterri, senior specialist for entrepreneurial development in the IDB’s Micro, Small, and Medium Enterprise Division: “Among firms, there are winners and losers, and just as companies should be encouraged to take advantage of opportunities, losers need to straighten things out or adapt to the demands of their sector if they are going to survive.”

In this context, focusing on market niches is an excellent opportunity for SMEs, especially for those that value local products. The cases of Mexican and Costa Rican coffee producers are well known, and new examples are appearing all the time, such as the shared brand name for crafts produced by artisans in the Dominican Republic. “Niches are not simply a cliché,” says Rojas, “As the market expands, a product can become increasingly differentiated, which makes it more feasible to find a point where it can enter the chain.”

Beyond the Traditional

Chile represents a successful case of integrating nontraditional and niche markets into international trade. Salmon production didn’t exist in Chile 30 years ago, but today, the country is among the world’s top three salmon exporters. Nor were there small suppliers in the salmon industry, which provides direct and indirect employment for 45,000 people.

Nontraditional Chilean exports now account for 25% of total sales to Europe, 50% of sales to the United States and 75% of sales to Latin America. SMEs in the country’s farming, fishing, food and metal industries have either directly or indirectly gained entry into the international market. For instance, some 500 growers participate in the fresh fruit export market. Although nontraditional products still represent only a fraction of total exports, they have been growing at rates of more than 35% and form an integral part of the country’s development strategy.

“Our procedure has been to diversify markets, and the participation of SMEs within it has basically been as suppliers of goods and services to the major exporters,” explains Hugo Lavados, director of the export promotion agency ProChile.

But not everything is rosy. ProChile figures show that 60% of the country’s internationalized SMEs are exporting to a single market, a level of dependency that makes them vulnerable. Together with private institutions, and with support from the IDB’s Multilateral Investment Fund, ProChile has launched the Pymexporta program to help SMEs that are already exporting within Latin America to gain entry into more complex markets, such as Europe and the United States.

Apart from the customary snags of financing and technology, ProChile has identified three major problems these companies need to address: upgrading their packaging, containers and labeling; overcoming obstacles such as complicated product safety, food hygiene and customs regulations; and identifying distribution networks, which are generally concentrated among a few buyers.

After assessing firms’ export capabilities and capacities, the program implements a training project to help SMEs make the necessary modifications to the products and services they supply. “One of the strategies is to shift away from the concept of ‘This is what we produce,’ to: ‘We produce what the market demands,’” says Lavados.

Pymexporta, like ProChile, is part of a chain of support for small producers and companies. The Fondo de Solidaridad e Inversión Social (Solidarity and Social Investment Fund) offers financial and technical support to emerging microenterprises, whereas Servicio de Cooperación Técnica (Technical Cooperation Service) provides education and training to industrial SMEs. The Instituto de Desarrollo Agropecuario (Agricultural Development Institute) provides financing to farmers and ranchers, and the Corporación de Fomento (Development Corporation) acts as a second-tier bank and brings together firms to improve their procedures, certifications and technological innovation. “An organization that promotes exports is simply the last link in a chain of support for SMEs,” notes Lavados. “For it to work well, there must be a high level of interaction and synchronization of shared strategies.”