Creating comparative advantage: identifying information and technology constraints facing SMEs in supplying large firms

Across a number of developing countries, governments are looking for innovative ways to promote competitive local production. There is potential for large (exporting/foreign) firms to have significant positive effects on the performance of domestic suppliers by sharing ideas, skills and technology (Javorcik, 2004; Havranek and Irsova, 2011; Alfaro-Urena et al., 2019). There have been a number of studies examining different constraints to SME competitiveness that limit their ability to supply larger firms, including access to finance, lack of capital, limited skills, limited scale of production, and poor quality of products (Bassi et al., 2020; FSDU, 2018; Gereffi and Fernandez-Stark, 2016; Hjort et al., 2020; von Hagen, 2011). Less well-understood is the information frictions that these SMEs face that mean large buyers often resort to using international suppliers at the cost of creating domestic supplier chains. We aim to inform the design of government supplier development programs to address these constraints by exploring the role of four distinct information constraints to supplier linkages in Rwanda: I. Information frictions about the existence of and prices offered by SME suppliers (e.g., buyers might not be aware of the local suppliers due to search costs) II. Information frictions about the product quality of SME suppliers (e.g., buyers might be unsure about the quality of inputs made by local suppliers due to lack of credible certification); III. Information frictions about the reliability and management quality of SME suppliers (e.g., buyers might be unsure of whether they can trust local suppliers to deliver on time) IV. Information frictions on the part of suppliers about the exact requirements of larger buyers (e.g., particular quality standards that need to be met) We aim to answer these questions through a two-phased approach: first, we will conduct a diagnostic phase, where the research team will use rich administrative tax data, firms’ surveys and product quality testing to understand which of the above constraints are most pressing in Rwanda and to design a policy relevant intervention to alleviate these constraints. In the second phase, we will evaluate this intervention using a large-scale RCT. The intervention will involve the creation of a matching platform where large buyers can access information on local suppliers and vice versa. Information would be provided on not only buyer demands and the existence and contact details ofsuppliers, but also on the quality of supplier products and reliability in delivery (with these components randomized to separately identify each constraint.