CARIBBEAN CONNECT A HIGH LEVEL SYMPOSIUM ON THE CARIBBEAN SINGLE MARKET AND ECONOMY JUNE 2006 Promotion of SME Cross-Border Activities G.M. Pemberton

June 28, 2006 Promotion of SME cross-border activity 2 SME cross-border activity is not new but is taking too long to grow In the seventies and eighties some firms collaborated across borders even though import duties and licensing regimes created barriers. Collaboration took place within industries, within family-owned entities and under the umbrella of Caribbean conglomerates based in Trinidad and Tobago, Barbados and Jamaica. In recent years, SME cross-border activity has sprung up spontaneously among firms in Trinidad and Tobago, Surinam and Barbados in furniture and food processing. Barbadian SMEs have created links with the services sector in Trinidad and Tobago.

June 28, 2006 Promotion of SME cross-border activity 3 What are the realities driving SME cross-border activity? Small markets within national boundaries limit profitability and growth Money is mobile and can be moved freely within regulated markets Competing in wider markets is more profitable than competing in narrow, protected markets Size is neither an advantage or a disadvantage - nor is distance Globalisation is creating new opportunities for SME - worldwide

June 28, 2006 Promotion of SME cross-border activity 4 How is globalisation creating new opportunities for SME? Generating opportunities from existing businesses and products New businesses and products and new markets Paradigm shifts – new thinking

June 28, 2006 Promotion of SME cross-border activity 5 Generating opportunities from existing businesses and products Production networks based on productivity and cultural adaptation out-sourcing clusters horizontal specialization Niche marketing Electronic business transactions

June 28, 2006 Promotion of SME cross-border activity 6 New businesses and products and new markets Life-style preferences influence the residency status of creative minds Indigenous culture is part of world culture and has hard currency value Huge geo-economic shifts can work in favour of the Caribbean because of existing connections with Brazil, China and India

June 28, 2006 Promotion of SME cross-border activity 7 Paradigm shifts - new thinking driving new actions Socio-political powers in developing countries (and IDB, EIB and CDB) now seem to favour SME more than big business Governments now seem to understand that innovation, productivity and access to markets and technology precede the need for access to finance Special-purpose regional business organisations are developing rapidly while national business organisations are increasingly focused on developing business beyond national borders

June 28, 2006 Promotion of SME cross-border activity 8 Paradigm shifts - new thinking driving development Increasing recognition that entrepreneurs (micro, small and large) make up only a small percentage of any countrys population means that customers are more important than producers – this will encourage development i.e. new economic activity through: Innovation Competitiveness Cross-border activity

June 28, 2006 Promotion of SME cross-border activity 9 Why should we promote SME cross- border activity in the face of regional inequalities? SME cross-border activity is not new among the larger CARICOM countries – what is best for SME in the OECS? Partnerships within the OECS or regional partnerships? Choice, Common-sense and Consensus will allow SMEs to decide among them as long as there is a framework that allows cross-border activity – the issue is what will Governments encourage or discourage? A critical issue is Fair Competition - what will be the rules and the redress when SME business combinations fully exploit commercial synergies across borders? The interests of consumers should prevail over local producers – is this the CSME vision?

June 28, 2006 Promotion of SME cross-border activity 10 How can we promote SME cross- border activity? Co-ordination of technical assistance Dissemination of information on standards and industry benchmarks Wider availability of services Equity Investing is the critical gap

June 28, 2006 Promotion of SME cross-border activity 11 Co-ordination of technical assistance Organisations such as CDE/Proinvest and the CDB already co-ordinate technical assistance on a regional basis – other organisations should be encouraged to do the same Caribbean SME Development Network Ltd and its associates will source and supply technical assistance to SME in the Southern and Eastern Caribbean working with agencies such as IICA and CARIRI

June 28, 2006 Promotion of SME cross-border activity 12 Dissemination of information on standards and industry benchmarks The Caribbean tourism industry is setting a fine example on standards and industry benchmarks - the region can easily do the same in agro- industry, furniture manufacturing, food service businesses, printing and packaging The difficult but unavoidable challenge is measuring productivity at the SME level – at least the region can start with the larger regional industries such as airlines, banking, cement, distribution and educational facilities.

June 28, 2006 Promotion of SME cross-border activity 13 Wider availability of services Regionalisation of advertising agencies, legal services Implementation of the financial services agreement especially active co-operation among financial regulatory authorities Encourage specialised regional financing organisations in Small Enterprise Lending – provided these can obtain an international credit rating and issue financial instruments with a regional rating

June 28, 2006 Promotion of SME cross-border activity 14 Equity Investing is the critical gap More enlightened views on equity investment Legislation to protect minority shareholders interests Corporate Governance Accounting standards Auditing standards Incorporating new companies

June 28, 2006 Promotion of SME cross-border activity 15 SME need more enlightened views on equity investment Entrepreneurs contribute to development only through innovation that creates new business activity – that is the purpose of venture capital – it is about smart partnerships Many SMEs in developed countries remain closely-held businesses for decades by avoiding highly leveraged debt especially at vulnerable stages of the enterprise - growth and stability are the critical objectives, not ownership – that is the purpose of private equity

June 28, 2006 Promotion of SME cross-border activity 16 SME need more enlightened views on equity investment partnerships SME need strategic investors who build the business by bringing value not just money – cross- border SME activity will widen the pool of strategic investors Equity Investment Funds in the Caribbean cannot be successful without successful, fast-growth SME operating across borders –that requires partnerships among SME in the region

June 28, 2006 Promotion of SME cross-border activity 17 Legislation to protect minority shareholders interests is the most serious deficiency in SME development in the Caribbean First, we must avoid the trivial issues - board representation cannot help all minority shareholders - the issue is how can minority shareholders in an un-listed SME determine when and how they should realise full market value? This is a technical issue that requires careful study. The new International Financial Reporting Standard IFRS 7 will provide minority shareholders with a great deal of information and analysis - this will surface questions that company law should oblige directors to answer in the presence of the auditors at the General Meeting.

June 28, 2006 Promotion of SME cross-border activity 18 Legislation to protect minority shareholders interests is the most serious deficiency in SME development in the Caribbean Return on capital to only one set of shareholders must not be disguised as payment for services - majority shareholders in SME control the Board but must be accountable for declaring income in cash and in kind that is above what they could otherwise earn in similar employment Majority shareholders who control the Board and Management in un-listed SME should be accountable to shareholders for un-paid statutory debt such as PAYE, national insurance and hotel accommodation tax.

June 28, 2006 Promotion of SME cross-border activity 19 Corporate Governance must be seen a crucial enabling factor Agreement on basic principles and best practices suitable to the Caribbean is an essential requirement for cross-border equity investment in SME - the major private sector organizations must take the lead responsibility – then codes can be written into regulations by Central banks and Stock Exchanges The Caribbean Association of Audit Committee members must be widely representative of enterprises in the Caribbean private sector to ensure respect for its independence – effective audit committees make good Boards even stronger

June 28, 2006 Promotion of SME cross-border activity 20 Accounting and Auditing standards are public issues not private concerns Accounting standards - we must genuinely adopt International Financial Reporting Standards and make use of the approved exemptions for SME – not create our own compromises – we must comply in our own self interests Auditing standards – auditors should be free to operate in any country without un-necessary restrictions imposed by the industry or by governments Standards begin with incorporating new companies – common requirements and procedures for incorporating a new company and removal of disincentives including removal of stamp duty on equity issues by SME

June 28, 2006 Promotion of SME cross-border activity 21 DFL Caribbean Group – SME corporate finance specialists Development Finance Ltd SME Finance Caribbean Small Enterprise Lending Caribbean Development Capital Ltd (DEVCAP) - Venture capital and Private Equity CDN Management Services Ltd