Financial services and private sector: The future of export diversification in Africa

As observed in previous chapters, firms, in particular new entrants and small-scale exporting companies, need to secure external financing to cover the large costs of entering export markets. The fixed costs to be paid up front by an exporting firm when entering a new market, also known as sunk entry costs, mainly include information costs, compliance costs and other costs related to trade barriers. Information costs are necessary to gain a better understanding of the required regulations and standards of a potential foreign market. Compliance costs stem from the need to redesign products for export that meet demand standards for a specific market and establish new processes or procedures to comply with foreign market regulations and standards. Other costs related to trade barriers include customs procedures, logistics, lead time and tariffs. The substantial information and compliance costs can affect a firm’s decision to enter a new market, decreasing the probability of export by 9 to 16 percentage points and 16 to 18 percentage points, respectively (Wei et al., 2019). For manufacturing firms, additional costs related to investments in plants, machinery or equipment required to export can also be challenging to secure. As for firms in service activities, adapting to foreign demand characteristics or tailoring exports to the tastes and standards of local consumers in new markets may require additional investments in skills and technologies. This chapter examines the potential of SMEs to facilitate export diversification in Africa, especially through the services sector, when supported by sound financial services or provided with access to affordable financing.

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