Globalization and The Financing of Small and Medium Sized Enterprises Joseph E. Stiglitz Bologna May 7th, 2003

2 Globalization offers both opportunities and challenges  Both the opportunities, and the challenges, are especially important for small and medium sized enterprises and countries

3 Small companies and countries can  Take advantage of global marketplace  Get global access to resources  Get global access to technology, markets

4 But there are potential problems  If there are large economies of scale, global firms will have cost advantage over small and medium sized local firms  International firms have resources to gamble on entering market earlier, especially ‘first mover’ advantage and dominating market  If the rules of the game are stacked in favor of large international firms and most advanced industrial countries, small and medium sized firms and less developed countries will be put at a disadvantage  These interests dominate international trade negotiations  Globalization of finance can hurt small and medium sized enterprises

5 Returns to scale  Importance exaggerated  Evident in R&D  Small and medium sized firms have some distinct advantages  Local knowledge  Especially important in service sector  Key Question: How to combine advantages of two?  Role of cooperative organizations  Role of public infrastructure

6 Rules of game (I)  Example 1: Large companies have advantage in dealing with complex international organizations  Example 2: Large companies have advantage in getting large government contracts  Example 3: Large companies have advantage in dealing with anti-dumping actions

7 Rules of game (II)  Example 4: In international trade negotiations large companies may try to undermine actions by governments to level playing field  Important to maintain right to have small business preferences in government procurement  Important to have special regulatory regimes for small and medium sized business (one stop regulation)  Important to get rid of dumping laws  Part of remedy: Small countries, and countries in which small and medium size enterprises play a more predominant role, need to recognize their common interests, and bargain in a united way  Bargaining strategy of US is to take on each small country one at a time (Chile), extracting best bargain from each

8 Globalization can worsen problems of asymmetric information  International lenders may be less informed about domestic small and medium sized firms  Trade liberalization measures may given international banks advantage over local banks  Size may provide enhanced security  Or at least the belief in enhanced security  So that international banks can obtain deposits at lower interest rates

9 Asymmetries of information may lead to limited supply of credit to small and medium sized domestic enterprises  Issue was long a concern in the United States  Led to the prohibition against national banks  Only eliminated in 1995  Some evidence that these concerns are legitimate  Argentina  Mexico  Potential remedy  Generalized CRA (Community Reinvestment Act) requirements, to encourage, or force, more lending  Use tax policies to level playing field  Government lending programs  SBA (Small Business Administration) highly successful

10 Conclusions (I)  Globalization offers new opportunities and challenges  Some countries have been able to shape globalization, to make it work for themselves, enhancing growth and reducing poverty  In many countries, record is more mixed  Opportunities and challenges particularly strong for medium and small enterprises, and for small and developing countries

11 Conclusions (II)  Two issues: 1) Can we formulate ‘rules of game’ to ensure a level playing field, one which best serves interests not just of most advanced industrial countries and large multinational corporations? 2) Given the rules, can national governments learn to live with globalization, to shape it in ways which most advance the concerns of their citizens?  I am confident that globalization can be shaped in ways which will promote growth and equality  But doing so will not be an easy task