MNC-SME Linkages: Insights from Latin America

MNC-SME Linkages: Insights from Latin America

Issue NO. 25

By Jerry Haar*

Multinational corporations (MNCs) and small and medium-sized enterprises (SMEs) play distinct roles in the global economy. The past three decades have seen an acceleration of globalization, as measured by international capital, trade, and human capital flows. International collaboration and trade deals have also significantly benefited Asian and Latin American and Caribbean (LATAM) economies. MNC business models were ideal for spreading innovation globally, tapping into diverse sources of human capital, taking advantage of lower production costs, and accessing various sources of finance.

In the case of SMEs competing in the 21st century’s globalized world, smallness can be a virtue. To begin with, smallness along with technology are the great “equalizers”. It is increasingly accessible and affordable to firms of all sizes and across a spectrum of industries. Technology-based systems and sources are now within the reach of firms for market intelligence, production, management information systems, control, financial management, and customer service, thereby helping to level the playing field for SMEs as they compete with MNCs. Furthermore, smallness permits SMEs greater flexibility, latitude and speed in responding to threats or opportunities. Additionally, whether the SMEs are from industrialized nations or emerging markets, market liberalizing and reform measures by governments (e.g., tax, investment, monetary, and regulatory policies) may enable SMEs to be more productive, efficient and profitable, while also attracting greater investment.
As the LATAM business environment becomes increasingly competitive, MNCs and SMEs are faced with both challenges and opportunities to boost profitability, profit growth, market share, and equity value of their firms. Among the key strategies to meet their goals, MNCs and SMEs have come to realize that linkages can produce the desired results.

Jerry Haar and Carlos Parra, business professors at Florida International University, conducted research under the auspices of the Council of the Americas, to examine MNC-SME linkages in the Latin American region, impediments facing firms seeking linkages and MNC tactics that could be implemented in order to overcome them. The table below summarizes their research findings:

Factors that Impede Linkages and Associated MNC Tactics to Overcome Them
(as well as factors that encourage linkages leveraged by each MNC tactic)

Preventing Factors MNC Tactic Enabling Factors Leveraged
Fit/Size — lack of SME capabilities to adequately partner with MNCs Establish supplier interactionlinkages, with SME capacity building efforts Partnerships focused on formalizing SMEs and helping improve their capabilities and competitiveness
Financing for SMEs

-Establish regulatory and institutional evolution linkages

-Establish investment opportunity linkages

-Public policies – Government efforts favorable to SMEs

-Equity positions with future upsides and improved access to capital markets

Informational Asymmetries Establish customer engagement and societal development linkages Technology platforms and market places that facilitate interactions and engagement with SMEs
Vetting Establish talent development linkages Networks of aggregators that help augment SME capabilities

Customer engagement and talent development are the two critically important arenas in which MNCs and SMEs can work individually and in partnership to strengthen company performance and competitiveness. In the first instance, multinationals can engage SME clients and potential partners by helping them to help themselves. Bundling, be it software or logistical or financial solutions, is an excellent starting point. Assisting small firms with supplier finance solutions improves the likelihood that a commercial relationship will be established in the long term. The SME turns to the MNC for a host of services, while availing themselves of those services to attract and retain SMEs’ customers who highly value the broader and improved range of services.
With respect to talent development, both MNCs and SMEs in technology place a high premium on developing and retaining a cadre of technically proficient professionals. Case examples from CISCO, SAP, and Microsoft validate this point. MNCs support talent development as well by financing the continuing professional education of their employees as well as broad-based scholarships for college students in scientific and technical fields, with graduates of those awards joining not only MNCs but smaller firms as well.

In general, MNCs can do much more to support SME development by partnering with them to improve their capabilities and competitiveness, achieving mutual benefits from their efforts. In the financial realm, SMEs are often constrained by a lack of access to both investment capital and working capital to sustain and grow their businesses. MNCs can help by providing their SME customers and partners with short-term financing as well as investment capital (an equity position) and also encouraging host country governments to develop public policies that institute financing mechanisms and other support for local SMEs. Finally, MNCs can strengthen MNC-SME linkages by providing technology platforms for SMEs and supporting networks of aggregators to help increase SME capabilities. Sharing these “open source” formats and tools can produce significant goodwill and provide concrete benefits for SMEs who ordinarily would not be able to pay for such facilitating mechanisms.
*Jerry Haar is Clinical Professor and Director of Executive & Professional Education at Florida International University College of Business


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