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Europe’s small and medium-sized companies look to emerging markets for growth

Following in the footsteps of larger multinationals, Europe’s small and medium-sized enterprises (SMEs) are increasingly entering emerging markets to find and exploit niches for their businesses, according to new research from the Economist Intelligence Unit. The report, New horizons: Europe’s small and medium-sized businesses look to emerging markets for growth, also finds that the so-called BRIC countries (Brazil, Russia, India and China) lead the field as emerging market destinations for European SMEs.

The report, written by the Economist Intelligence Unit and commissioned by FedEx Express, the US air freight giant, examines the degree to which Europe’s SMEs are operating in emerging markets: which markets they are choosing, why they are going there, and the opportunities and challenges that they are encountering.

The analysis is based on the findings of a survey of more than 600 executives from SMEs in Europe, as well as the conduct of more than 15 in-depth interviews. “Europe’s small businesses are increasingly looking for opportunities outside their home markets, which have been hit hard by the recession and aftermath,” says Jason Sumner, senior editor with the Economist Intelligence Unit and project director. “Emerging markets still present risks for these businesses but our research shows that the potential to find new customers is causing many to take the plunge.”

While many businesses used to go to emerging markets in order to lower their production costs, Europe’s SMEs are primarily seeking to tap into the rapidly expanding middle classes of emerging markets, either directly or else via the larger multinationals that they supply directly to, such as firms that supply parts to carmakers, for example. Nearly six in ten (58%) say that they are in these markets to sell their goods and services, far ahead of those either manufacturing goods there (11%) or buying services (12%).

Indeed, 51% noted the potential for fast revenue growth as the most attractive reason for being in these markets.

Following are the key findings of the report:

• The rise of emerging markets is not just a big business phenomenon. Many European SMEs are deeply engaged as well. Although only a minority of Europe’s millions of SMEs overall operate outside their home markets, many of those that do are looking to emerging markets for growth. Almost 90% of the SMEs surveyed for this report, all of which operate outside their domestic markets, are planning to do business in emerging markets in the coming year.

• Most SMEs are pursuing new customers rather than lower cost inputs. While many businesses used to go to emerging markets in order to lower their production costs, Europe’s SMEs are primarily seeking to tap into the rapidly expanding middle classes of emerging markets, either directly or else via the larger multinationals that they supply.

• The financial crisis acted as a catalyst for expansion abroad. Europe’s weak economic prospects and tight fiscal position is accelerating the process of looking for growth outside the EU. In all, 62% of respondents agree that “tepid growth” in Europe makes it imperative to look to emerging markets for growth.

• The BRICs will attract most attention from European SMEs in the coming year, followed by other near-shore markets. Growth rates, the degree of risk, ease of access and historical links all guide the process of how markets are selected to operate in. The top-10 emerging markets that Europe’s SMEs plan to do business with in the coming year are, in order of preference: China, Brazil, India, Russia, United Arab Emirates, Poland, Czech Republic, Morocco, Romania and Turkey.

• Of these markets, Brazil has made the greatest strides in terms of improved perceptions. Given their greater likelihood for volatility, the relative favourability of emerging markets shifts year by year. In the past 12 months it has been Brazil’s chance to shine. Nearly half (48%) of SMEs noted improved perceptions of the country, bolstered by a smooth transition of political power and increased infrastructure spending in the run-up to the FIFA World Cup in 2014 and Olympic Games in 2016.

• Inflation and exchange rates are the primary macroeconomic concerns for SMEs. Given the political risks of operating in emerging markets, political stability is generally viewed quite positively. However, inflation and exchange rates are seen as key macroeconomic risks: 23% of firms say inflation has become less favourable in their main target market in the past year.

• At an operational level, bureaucracy and corruption are, by far, the biggest challenges. Selected equally by 46% of respondents, these issues lie far ahead of other challenges, such as credit risk (20%), difficulties enforcing contracts (18%), language and cultural barriers (16%) or bad infrastructure (14%).