SME Cross Border Activities

CARIBBEAN

CONNECT

A HIGH LEVEL SYMPOSIUM ON THE CARIBBEAN SINGLE MARKET AND ECONOMY - 28-30 JUNE 2006

Promotion of SME Cross-Border Activities

G.M. Pemberton

SME cross-border activity is not new but is taking too long to grow

In the seventies and eighties some firms collaborated across borders even though import duties and licensing regimes created barriers.

Collaboration took place within industries, within family-owned entities and under the umbrella of Caribbean conglomerates based in Trinidad and Tobago, Barbados and Jamaica.

In recent years, SME cross-border activity has sprung up spontaneously among firms in Trinidad and Tobago, Surinam and Barbados in furniture and food processing. Barbadian SMEs have created links with the services sector in Trinidad and Tobago.

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What are the realities driving SME cross-border activity?

Small markets within national boundaries limit profitability and growth

Money is mobile and can be moved freely within regulated markets

Competing in wider markets is more profitable than competing in narrow, protected markets

Size is neither an advantage or a disadvantage - nor is distance

Globalisation is creating new opportunities for SME worldwide

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How is globalisation creating new opportunities for SME?

Generating opportunities from existing businesses and products

New businesses and products and new markets

Paradigm shifts – new thinking

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Generating opportunities from existing businesses and products

Production networks based on productivity and cultural adaptation “out-sourcing” “clusters” “horizontal specialization”

Niche marketing

Electronic business transactions

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New businesses and products and new markets

Life-style preferences influence the residency status of creative minds

Indigenous culture is part of world culture and has hard currency value

Huge geo-economic shifts can work in favour of the Caribbean because of existing connections with Brazil, China and India

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Paradigm shifts - new thinking driving new actions

Socio-political powers in developing countries (and IDB, EIB and CDB) now seem to favour SME more than “big business�

Governments now seem to understand that innovation, productivity and access to markets and technology precede the need for access to finance

Special-purpose regional business organisations are developing rapidly while national business organisations are increasingly focused on developing business beyond national borders

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Paradigm shifts - new thinking driving development

Increasing recognition that entrepreneurs (micro, small and large) make up only a small percentage of any country’s population means that customers are more important than producers – this will encourage development i.e. new economic activity through:

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Innovation Competitiveness Cross-border activity

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Why should we promote SME crossborder activity in the face of regional inequalities?

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SME cross-border activity is not new among the larger CARICOM countries – what is best for SME in the OECS? Partnerships within the OECS or regional partnerships?

Choice, Common-sense and Consensus will allow SMEs to decide among them as long as there is a framework that allows cross-border activity – the issue is what will Governments encourage or discourage?

A critical issue is “Fair Competition” - what will be the rules and the redress when SME business combinations fully exploit commercial synergies across borders? The interests of consumers should prevail over local producers – is this the CSME vision?

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How can we promote SME crossborder activity?

Co-ordination of technical assistance

Dissemination of information on standards and industry benchmarks

Wider availability of services

Equity Investing is the critical gap

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Co-ordination of technical assistance

Organisations such as CDE/Proinvest and the CDB already co-ordinate technical assistance on a regional basis – other organisations should be encouraged to do the same

Caribbean SME Development Network Ltd and its associates will source and supply technical assistance to SME in the Southern and Eastern Caribbean working with agencies such as IICA and CARIRI

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Dissemination of information on standards and industry benchmarks

The Caribbean tourism industry is setting a fine example on standards and industry benchmarks the region can easily do the same in agroindustry, furniture manufacturing, food service businesses, printing and packaging

The difficult but unavoidable challenge is measuring productivity at the SME level – at least the region can start with the larger regional industries such as airlines, banking, cement, distribution and educational facilities.

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Wider availability of services

Regionalisation of advertising agencies, legal services

Implementation of the financial services agreement especially active co-operation among financial regulatory authorities

Encourage specialised regional financing organisations in Small Enterprise Lending – provided these can obtain an international credit rating and issue financial instruments with a regional rating

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Equity Investing is the critical gap

More enlightened views on equity investment

Legislation to protect minority shareholders’ interests

Corporate Governance

Accounting standards

Auditing standards

Incorporating new companies

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SME need more enlightened views on equity investment

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Entrepreneurs contribute to development only through innovation that creates new business activity – that is the purpose of venture capital – it is about “smart partnerships”

Many SMEs in developed countries remain closely-held businesses for decades by avoiding highly leveraged debt especially at vulnerable stages of the enterprise - growth and stability are the critical objectives, not ownership – that is the purpose of private equity

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SME need more enlightened views on equity investment partnerships

SME need strategic investors who build the business by bringing value not just money – cross- border SME activity will widen the pool of strategic investors

Equity Investment Funds in the Caribbean cannot be successful without successful, fast-growth SME operating across borders –that requires partnerships among SME in the region

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Legislation to protect minority shareholders’ interests is the most serious deficiency in SME development in the Caribbean

First, we must avoid the trivial issues - board representation cannot help all minority shareholders - the issue is how can minority shareholders in an un-listed SME determine when and how they should realise full market value? This is a technical issue that requires careful study.

The new International Financial Reporting Standard IFRS 7 will provide minority shareholders with a great deal of information and analysis - this will surface questions that company law should oblige directors to answer in the presence of the auditors at the General Meeting.

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Legislation to protect minority shareholders’ interests is the most serious deficiency in SME development in the Caribbean

Return on capital to only one set of shareholders must not be disguised as payment for services majority shareholders in SME control the Board but must be accountable for declaring income in cash and in kind that is above what they could otherwise earn in similar employment

Majority shareholders who control the Board and Management in un-listed SME should be accountable to shareholders for un-paid statutory debt such as PAYE, national insurance and hotel accommodation tax.

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Corporate Governance must be seen a crucial enabling factor

Agreement on basic principles and best practices suitable to the Caribbean is an essential requirement for cross-border equity investment in SME - the major private sector organizations must take the lead responsibility – then codes can be written into regulations by Central banks and Stock Exchanges

The Caribbean Association of Audit Committee members must be widely representative of enterprises in the Caribbean private sector to ensure respect for its independence – effective audit committees make good Boards even stronger

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Accounting and Auditing standards are public issues not private concerns

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Accounting standards - we must genuinely adopt International Financial Reporting Standards and make use of the approved exemptions for SME – not create our own compromises – we must comply in our own self interests

Auditing standards – auditors should be free to operate in any country without un-necessary restrictions imposed by the industry or by governments

Standards begin with incorporating new companies – common requirements and procedures for incorporating a new company and removal of disincentives including removal of stamp duty on equity issues by SME

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DFL Caribbean Group – SME corporate finance specialists

Development Finance Ltd

SME Finance Caribbean Small Enterprise Lending

Caribbean Development Capital Ltd (DEVCAP) - Venture capital and Private Equity

CDN Management Services Ltd

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