Despite technologic advancements improving our lives and innovating our industries, there haven’t been any significant improvements to global trade since the invention of the shipping container back in 1950. Several countries have endeavored to break new ground and strengthen their export and import ratios over the last ten years, but sadly these attempts had no notable impact on the trade community.
On the other hand, we have seen growth and internationalization of Small and Medium Enterprises (SMEs) over the last three decades, which has garnered increased academic attention. SMEs are considered to be a unique group of firms, different from more established companies because they possess a set of distinct features. Resource constraints in the forms of capital, information, managerial expertise, and other intangible assets and barriers to entry are critically higher for SMEs, limiting the scale of global activities these firms can undertake (Acs et. al., 1997; Karagozoglu and Lindell, 1998; Hollenstein, 2005; Pradhan and Sahu, 2008).
Technology is the answer to solve this crisis. Specifically, a blockchain-enabled system to strengthen the foundation for SMEs to succeed in the global market. Blockchain technology is the process of sharing information among many in an encrypted, verifiable way that can be updated in real time in a secure information loop. It is an unalterable single source of information no individual party has control over and cannot be hacked or duplicated. However, communication and transparency are not all that blockchain offers. When information is readily available, verified companies will stand out on the world stage, which is why many big-name financial players are already interested in where this technology will go next.
Through blockchain technology, SMEs can create a channel of connectivity and integrate all players of a transaction in one chain. The ideal platform would contain on-demand translators, legal advisors, mediators, video conferences, virtual tradeshows and more, all done with the click of a button.
In terms of greater flexibility, faster decision-making process, and niched business strategy, SMEs are also recognized to have advantages over large firms (UNIDO, 2006; Zucchella and Palamara, 2006). In Stage Theory, SMEs receive a more in-depth global recognition through a successive process one step at a time (Johanson and Vahlne, 1977). This states that smaller firms slowly increase their foreign involvements based on the experience and knowledge they acquire about foreign markets. Small firms who have previously produced and supplied within the domestic market internationalize by undertaking irregular and entrepreneurial exports initially. They then proceed to regular exports via independent agents, followed by established sales subsidiaries for direct exports, and completed by investing in foreign production.
Generally, it is believed that a Gradualist Theory is a better representation for SME's internationalization. Going global through low-risk low-investment modes, such as indirect export, then proceeding to greater-risk and higher-investment modes, like sales subsidiaries, may be expected to be more suitable for SMEs with resource constraint (Jones, 1999). But some SMEs in the technology and service sectors reflect what is termed as born global, or international entrepreneurship phenomenon, which is shaking the foundation of Stage Theory (Westhead et. al., 2001; Coviello and Cox, 2006).
In the resource-based view (RBV), firms can improve their competitiveness and growth if they acquire various resources that are useful, unique, and difficult to imitate and substitute (Wernerfelt, 1984; Barney, 1991, 2001; Newbert, 2007). These resources could be physical capital and intangible capital covering technological assets: human capital, organizational capital, and social capital.
By utilizing blockchain, SMEs could join international commerce with less risk or fear holding them back. These alleviated risks include the high cost associated with the process, different international laws, extended time of a transaction, the risk of loss or not getting compensated, and pre-transaction cost such as high cost of acquiring a customer, finding the market, and understanding or adjusting to the market. Simultaneously, psychological barriers such as fear of losing control, fear of breaking something that works, i.e. disrupting their domestic business and relationships, and fear of political, cultural, and legal barriers would be eased as well.
For centuries, third-parties such as banks and other financial institutions have handled and controlled international shipments and other forms of assets, with an accompanying slew of forms and personnel that had to be managed and tracked. On the other hand, verifiable blockchain information opens up new opportunities because there will no longer be the need for extraneous, time-consuming entities, which means more value can flow directly to the bottom line.
Financial institutions will be able to take positions with shipments or companies because they understand the information available on trusted platforms using blockchain technology is thoroughly vetted. In International Trade, blockchain technology’s impactful benefits include: Verified users receiving real-time status updates of transactions, ability to review transaction details transparently, a decentralized system keeping the supply chain moving, easily tracked and traced proof of business ownership, automated transaction fees through smart contracts eliminating third-party financial institutions, and elimination of double spending on bills of lading.
This brilliant system allows data to be transferred securely between the parties involved, resolving the disconnect with trade finance and the supply chain. Another benefit is the IBI number, which is a digitally encrypted identification card that is verified individually and recognized globally. The card holds business information such as business license, company ownership, company type, and product type and its classification. After receiving the IBI number, businesses can enter the international trade marketplace with similar businesses. These companies can virtually showcase their products and receive orders or PO requests from buyers around the world. Purchases will only be possible if the regulations of both countries, origin, and destination permit the nature of the business/product. If the transaction is not possible, a warning will be displayed. Eliminating returned transactions at customs clearance and no longer proving your business identity to multiple agencies.
Imagine that once an order is confirmed via a smart contract, the buyer and seller enter into an agreement most favorable to them without an input of a lawyer, because the contracts have been pre-generated at the time of the order. If a custom agreement exists, it is shared within a ledger all parties involved can view, and its information stamped in the history of the transaction. Simultaneously, a custom request for shipping the order with a complete packing list is sent to certified freight forwarders for an open bid. When the agreeable logistics bid is accepted, the freight forwarder is added to the network of the responsible parties and shared in the network ledger. All documents will be visible to all participants, accessed in real time and unable to be changed or forged. This process also streamlines paperwork and should not necessitate additional employees.
When it comes to payments, it will be required from the buyer within an established deadline from the moment the purchase is confirmed. The full payment will be secured from the buyer, deposited into an escrow account, and distributed as necessary. It will then be posted into an escrow account with the confirmation sent to all. Now, the products can be shipped and transported to the freight forwarders warehouse ready for international departure. The freight forwarder verifies the packing list and forwards the timestamped information. Tracking of the freight is then possible, eliminating any guesswork of arrival times or manufacturing downtime.
At the time of customs clearance, all message documents will be distributed via ledgers prompting for an immediate action when needed. After a successful origin custom clearance, transportation will commence over sea, air, or ground. The product can be tracked anytime, anywhere. At the destination, the product will be stored at the destination warehouse. Content will be verified and reported. When customs have cleared, taxes due must be paid and the product is ready for delivery.
As you can see, Blockchain technology will make the complex international trade transaction smoother by reducing processing time, minimizing the costs associated with international trade, and giving peace of mind to buyers and sellers by allowing them to monitor every step, while also knowing they are working with other verified IBI holders.
SMEs around the world are slowly realizing their hidden exporting potential, each one’s success paving the way for others to participate in global trade. Blockchain-enabled platforms can and will propel small businesses to compete with larger enterprises, leveling the playing field between SMEs and larger, established companies. Blockchain is the ideal platform that encourages SMEs to take on new opportunities without the fear of barriers or financial loss.