Revolutionizing World Trade by Kati Suominen;

Author:Kati Suominen; [Suominen, Kati]
Language: eng
Format: epub
Publisher: Stanford University Press
Published: 2019-06-15T00:00:00+00:00

11

CREDIT CRUNCH

As the face of world trade changes, so change the constraints to trade. Small businesses are better placed to engage in trade than ever before –but few obstacles are as thorny for small businesses wishing to scale in world markets as lack of finance. Survey after survey shows that capital is the number one challenge to small businesses and a top-three challenge to mid-size companies looking to grow their businesses and export; the challenges are particularly acute in Africa and developing Asia. There are financing gaps for every occasion—for an Italian micro business that urgently needs $100,000 working capital to fulfill an order; for an Indian tech startup that sees a market opportunity for its software and needs $2 million to beef up its sales team and after-sale service to seize it; for an American mid-size company selling clean tech equipment that needs $10 million for its African customer, who will have no credit available in its own country, to buy the equipment.

In Chapter 6, we saw that estimates place the global trade finance gap alone at $1.7 trillion. This mostly measures the availability of instruments that ensure exporters will ultimately get paid by their foreign customer, such as supply chain finance and letters of credit. But there is an even vaster gap of old-fashioned loan products, such as working capital loans, that research shows are essential for businesses to do business and engage in trade. The World Bank has estimated the small business credit gap at $8.9 trillion—twice the size of the Japanese economy.1 As for equity finance, only a quarter of companies seeking angel funding and 2 percent of companies seeking venture capital get funded. In my surveys, access to finance is the number one constraint for SMEs in practically all developing countries to engage in trade and ecommerce, out of forty other major challenges.2

How is it possible that financing gaps keep devouring companies even today, an era of unprecedented financial innovation and a wide array of financing windows—twenty-five thousand banks, tens of thousands of angel investors, over ten thousand annual VC rounds, over five thousand FinTech companies, seminal technologies such as blockchain, and new government funds aimed to invest in innovative firms? Why do these gaps persist? And is that altogether a bad thing for trade and economic growth?

Beautiful Marriage

The best way to see the interplay of credit and trade is to ask, what would happen if there suddenly was no credit?

Sadly, there is a natural experiment to answer that: the global financial crisis of 2007–2009. SME lending during 2007–2009 fell like a sun setting in the ocean. In the United States, small business loans of less than $100,000 dropped from a total of $146 billion in 2007 to $57 billion in 2010, and the number of these small loans fell from 13 million loans to 3.9 million.3 The drying up of credit caused companies to cancel their plans to export; by 2009, the financing dry spell had helped make a 12 percent dent in the

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