Abstract
This paper integrates a sunk-cost model of foreign trade with a discussion on the capital structure of small and medium-sized enterprises (SMEs) in developing countries. A model of foreign trade where firms have to incur irrecoverable market entry costs in international markets is presented. As a result of the market entry costs the foreign trade structure is non-linear. This non-linearity complicates the relationship between foreign trade flows and exchange rates, compared to the predictions of conventional foreign trade theory. Both the entry and the operating decision are affected, as the non-linearity puts pressure on the capital structure of firms. In most developing countries the link between SMEs and professional risk allocating institutions is weak, as SMEs often rely on informal sources of capital in domestic markets. The size of entry costs that SMEs from developing countries face in international markets, and the extent of exchange rate volatility they have to handle, makes their traditional sources of capital insufficient for operating here. As the ability to handle the non-linearity is weak, SMEs in developing countries are unable to adapt optimally to international markets and to take advantage of the potential gains from internationalization. The policy implication of such a situation is a big push, where export-led growth strategies are accompanied by strategies to develop national capital markets, help SMEs adapt optimally to international markets, and acquire the gains of internationalization.
Recommended Citation
Borgersen, Trond-Arne
(2004)
"SMEs in Developing Countries and the Problem of Exporting: Market Entry Costs, Exchange Rate Shocks and the Capital Structure of Firms,"
Journal of African Policy Studies: Vol. 10:
No.
1, Article 2.
Available at:
https://ecommons.udayton.edu/joaps/vol10/iss1/2