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No Data, No Technology: Removing Obstacles from MSMEs' Path to Growth

The growing effort of multinational companies to improve the resilience of their supply chains in the current context has large corporations seeking to outsource from places closer to home, a phenomenon known as “nearshoring.” Before this becomes commonplace, there are obstacles that must be overcome.
DIEGO FLAIBAN
ROMARIO ALVES
NOVEMBER 09 2020

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The growing effort of multinational companies to improve the resilience of their supply chains in the current context has large corporations seeking to outsource from places closer to home, a phenomenon known as “nearshoring.” Before this becomes commonplace, there are obstacles that must be overcome.

Nearshoring operations represent a unique opportunity for the growth of micro, small, and medium-sized enterprises (MSMEs) in Latin America and the Caribbean (LAC), and have become a strategic priority for the IDB Group to promote economic growth. If we look for the reasons why this has so far only been possible on a limited scale, a key problem is a lack of information.

In a world in which “big data” is an everyday expression, the reality is that LAC is far from being a a land of plentiful digital data. Multinationals usually have neither the information necessary to evaluate potential MSME clients and providers in the region, nor mechanisms to easily capture that data, often due to the lack of formal records; they are thus unlikely to trust a provider they do not know.

Without digital tools to secure and transfer information about your business, a small Chilean or Mexican farmer cannot become part of the production chain of a large supermarket and sell what she grows. A Colombian e-commerce company is going to have a hard time growing if it has no way to collect data on the creditworthiness of its customers. A Brazilian company that needs to transport intermediate goods to be assembled in another country will not be able to rely on an unknown carrier that offers the most competitive cost.

LAC is taking steps in the right direction. For example, the deep-water port of Posorja increased the competitiveness of Ecuador's sea-trade, a key to join regional trade networks, by reducing transit times and increasing its service levels in the loading and unloading of containers, while ensuring the timely application of the proper security protocols.

However, if regional trade in LAC is to approach the levels of, for example, Asia-Pacific – where nearshoring has a long history – it is essential that all the agents involved become aware of the need to facilitate the exchange of information and a jump to the digital world.

Gráfico

Large companies, financial institutions and governments must make sufficient technological resources (apps, platforms, etc.) available so that MSMEs are able to capture their information, and promote educational and awareness-raising work in this regard. MSMEs, for their part, must innovate and adapt to new payment mechanisms in order to take full advantage of the digital revolution.

You have to look at the specific obstacles to joining the Fourth Industrial Revolution: a recent study in Argentina shows that almost half of manufacturing firms, mostly SMEs, are technologically lagging behind; in contrast, in Brazil and Uruguay the outlook is more promising, with companies taking effective steps, such as working with banks that offer digital loans and improving their digital infrastructure.

IDB Invest has various financial and non-financial products to support MSMEs and mitigate the traditional barriers that affect their growth and competitiveness, mainly regarding access to financing and information.

Specifically in the field of trade and value chains, IDB Invest's reverse factoring programs offer MSMEs a competitive, efficient and immediate alternative to other types of financing. Through this instrument, IDB Invest seeks the expansion, acceleration and democratization of access to credit for MSMEs that form the backbone of large companies' value chains.

Similarly, IDB Invest has approved an increase in the limit of its program to support foreign trade through banks, the Trade Finance Facilitation Program (TFFP), which this year celebrates its 15th anniversary, from $1.5 billion to $3 billion this year. Under the TFFP, IDB Invest has disbursed several loans specifically geared to financing the import/export activity of MSMEs, through banks in the region.

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