2.1 Introduction

Their employment and growth potential, small and medium-sized enterprises (SMEs) play an outstanding

role in the economy. However, in terms of productivity these enterprises fall behind large corporations and their convergence is substantially hindered by the low level of innovation and corporate R&D, the lack of properly qualified labour force, and the absence of production processes or enterprise organisation experience (Eurostat, 2011).

Foreign market entry and joining international production chains represent important breakout

points for SMEs. In relation to exporting, we tend to think of large corporations, but SMEs also participate in international trade. Numerous studies have highlighted the fact that participation in international trade is accompanied by higher corporate employment, labour productivity and total factor productivity. Exporting and importing enterprises are more competitive, both in the external and domestic markets.

Upon entering the external market, enterprises face higher costs, due to the exploration of new export opportunities or purchasing new inputs (Kraay et al., 2002). Enterprises often enhance their products or organise their production processes more efficiently, which may necessitate additional investments in production lines or software (Castellani et al., 2008). These extra costs can be covered by the enterprises with the highest productivity, and thus it is usually large corporations that participate in international trade, rather than the SME sector.

At the same time, by participating in external trade, firms can grow further and increase their productivity.

This is attributable to several factors. When exporting, enterprises will be present with their products in larger markets and higher levels of output may help them reduce fixed production costs (Van Biesebroeck, 2005). Since enterprises meet different demand in the external markets than in the domestic market, they must enhance their products and may also need to introduce new products. This often leads to an improvement in the quality of goods. Competitors in the external markets may force enterprises to implement additional innovation and introduce new technologies, which may increase the enterprises' labour productivity (Verhoogen, 2008; Bustos, 2011; and Lileeva and Trefler, 2010). In light of the foregoing, exporting can be regarded as a learning process in the lifecycle of enterprises. Although it is less likely that a similarly high ratio of SMEs will export as in the case of large corporations, exporting should be regarded as a growth and development strategy for SMEs.

In the past decades, the improvement in export conditions and transformation of production structures have been also favourable for SMEs’ foreign market

entry. External trade is costly, time-consuming and risky, and it is typically the large corporations that are able to cover the losses arising from this. However, tariffs and non-tariff trade barriers have decreased substantially, and with the development of information technology the large distance between trading partners has become surmountable, thereby making exports cheaper and easing market entry for SMEs. The organisation of production into cross-border chains also supports the more intensive presence of SMEs in the export markets: a large part of global exports is represented by intermediate products, providing SMEs with room for participation, which thus may become suppliers to large corporations even if their product is very specialised (WTO, 2016). With the spread of global production chains, services supporting industrial production – such as logistics, transportation, repair and other business services – have also become increasingly widespread. Since services are less capital intensive, the export of these also favours SMEs. The weight of services in external trade increases dynamically due to the spread of information and communication technology, and SMEs may soon play an important role in services export.

On the whole, it can be stated that there is a close link between foreign market entry and the increase in

enterprise productivity. In the case of enterprises, since exporting can also be regarded as a learning and development process, it is important to understand the position of SMEs in the export market and their subsequent performance, which increases the competitiveness of SMEs in the long run. Later in this section, using aggregate international and Hungarian firm-level data, we examine the position of Hungarian SMEs in external trade, the trends in the productivity of exporting SMEs and other features, also touching upon the difficulties in exports perceived by SMEs.