Why R&D-intensive SMEs in emerging markets excel in outward FDI

Small and medium enterprises (SMEs) account for approximately 90 per cent of businesses and contribute to more than 50 per cent of employment globally, according to the World Bank.

Recognising their vital role in the economy, it is essential to understand how these enterprises expand internationally.

SMEs in emerging economies are steadily establishing their presence globally through outward foreign direct investment (OFDI). Particularly, those with a strong focus on research and development (R&D) demonstrate a unique prowess in navigating the complexities of international markets.

The latest UNCTAD Investment Policy Monitor reveals that 14 per cent of developing countries now support their firms in overseas investments.

These policies aim to help domestic companies internationalise and access new markets, resources, and technologies.

What do R&D-intensive SMEs need to succeed abroad?

So what are some of the practical techniques and capabilities that these R&D-intensive SMEs leverage to succeed abroad? And what measures can enhance their prospects in foreign investment?

Capabilities SMEs could leverage to foreign markets: SMEs in emerging markets have distinct advantages that enable them to succeed in the competitive arena of global business.

Innovation and technological advancements: The core strength of R&D-intensive SMEs lies in their ability to innovate. Continually developing new products and technologies, these companies create firm-specific advantages that are not easily replicable by competitors. For instance, these SMEs often possess specialized knowledge in cutting-edge technologies like AI, biotechnology, and renewable energy, which are highly valued on the global market.

According to the OECD SME and Entrepreneurship Outlook 2023, SMEs’ use of cloud computing services doubled in less than six years, reflecting their rapid adoption of new technologies to drive innovation.

Adaptability: In addition to innovation, their agility allows them to adapt quickly to new environments and market needs.

Unlike larger corporations, SMEs can make swift decisions and pivot without extensive bureaucratic processes. This flexibility is crucial in responding to the fast-changing demands of international markets and in customising products to meet local tastes and regulatory requirements.

Expertise in niche markets: Many R&D-intensive SMEs develop specialised knowledge in niche markets, which are often overlooked by larger players. This expertise allows them to establish a strong presence in less competitive markets, facilitating significant growth opportunities. The companies’ ability to cater to specific market needs with tailored solutions makes them tough competitors on the global stage.

Measures that support foreign investment by SMEs: To further bolster the OFDI efforts of SMEs, several supportive measures can be implemented by both governments and large enterprises.

Read: Dubai unlocks Dhs500m to fuel SME growth

Measures to support companies

Financial support: Grants, low-interest loans, and tax incentives can alleviate the substantial costs associated with entering foreign markets. Such financial aid is essential for covering upfront expenses like market research, legal fees and the establishment of local operations.

Access to market intelligence: Providing SMEs with access to reliable market intelligence is also crucial. Detailed insights into foreign market dynamics, consumer behavior, and competitive landscapes can guide companies in making informed decisions about where and how to invest.

Reducing administrative burdens: Simplifying the processes for obtaining necessary permits and licenses for overseas operations can significantly ease the path for companies looking to expand abroad. Additionally, international trade agreements that reduce tariffs and streamline regulatory processes can greatly benefit these enterprises.

Capacity building initiatives: Training programmes in international business management and cross-cultural communications can equip SME leaders and their teams with the necessary skills to navigate foreign markets effectively. These programmes not only enhance the operational competencies of these firms but also build resilience against global market volatility.

Networking opportunities: Connecting SMEs with potential overseas partners, customers, and mentors is vital. Strategic alliances and joint ventures fostered through these networks significantly enhance a company’s ability to penetrate new markets swiftly and effectively.

Risk mitigation: Insurance against political risk and exchange rate fluctuations can protect SMEs from some of the inherent uncertainties of operating in an international environment.

These tools enable businesses to plan more confidently and commit resources without fearing sudden financial losses due to unforeseen circumstances. Offering such protections can significantly lower the barrier to international expansion for risk-averse enterprises.

As SMEs continue to expand their global footprint, the role of tailored, strategic support mechanisms will be crucial in ensuring their growth and sustainability in foreign markets.

With the right tools and assistance, such companies can overcome barriers to international business and become formidable players on the world stage, contributing significantly to the global economy.

The writer is the senior executive officer at Ento Capital.