Leaving International Markets: Small and Medium-Sized Enterprises (SMEs) in Germany Pull Back
Smaller businesses increasingly opting out of international trade
The social media buzz is swirling with news that small and medium-sized enterprises (SMEs) across Germany are increasingly stepping away from their international business ventures. A recent study by the state-owned KfW bank shows that while around 880,000 of the approximately 3.8 million SMEs were active overseas in 2022, this number dropped significantly to 763,000 the following year, representing an 11.6% decrease [1]. Consequently, the percentage of SMEs engaged in cross-border trade fell from around 23% to 20%, falling below the pre-pandemic long-term average.
"The landscape for foreign trade has taken a significant nosedive," says KfW's chief economist, Dirk Schumacher [2]. He attributes this downturn to several factors: persistent geopolitical tension in Ukraine and the Middle East, growing competition from China in key industries, and protectionist trade policies from the United States [2]. These issues are collectively impeding the export capabilities of companies, making it tough for them to thrive in the global marketplace.
An additional survey by KfW in January 2025 sheds light on the sustained decline of international business. The data shows that 21% of all SMEs active overseas reported growing foreign sales in 2024, while 25% reported declining sales [2]. Looking ahead, the future is uncertain, with a mixed outlook for the upcoming years.
Insights
German SMEs are grappling with various challenges that are deterring them from pursuing international business. These can be categorized into economic challenges, structural challenges, competitive pressures, and internal market dynamics [3].
Economic Challenges- Global Uncertainty: Rising global uncertainty and economic instability have made it challenging for SMEs to predict and adapt to market conditions abroad.- Weak External Demand: A dwindling external demand, in part due to economic downturn and global trade tensions, has diminished the incentives for SMEs to grow internationally.
Structural Challenges- Shortage of Skilled Labor: Germany is confronted with a shortage of skilled labor, which restricts the capacity of SMEs to manage intricate international operations.- Excessive Bureaucracy: High regulative obstacles and bureaucratic hurdles can discourage SMEs from expanding internationally.- Energy Costs: Soaring energy prices can raise operational costs for SMEs, making it less financially viable to maintain international operations.
Competitive Pressures- Imports of Low-Priced Products: An influx of low-priced products from other countries can serve as substitutes for German-made goods, lowering demand for SMEs' products domestically and internationally.- Trade Regulations: Changes in international trade regulations, such as new European Regulations on International Trade in Goods Statistics, can impose additional compliance costs and complexities for SMEs.
Internal Market Dynamics- Focus on Domestic Markets: As domestic consumption and government spending rise, SMEs tend to focus more on stable domestic markets rather than venturing into uncertain international markets.
These factors collectively contribute to the reduced participation of German SMEs in international markets.
Sources:- [1] ntv.de- [2] dpa- [3] Analysis by enrichment data for context and additional insights.
"In response to these economic challenges, structural obstacles, competitive pressures, and internal market dynamics causing a decline in international business for German SMEs, community policy discussions are increasingly focusing on devising strategies to facilitate the growth of domestic markets, while adjusting and improving employment policies to better equip companies for global competition and adapt to market fluctuations in finance and business."
"In an effort to counteract the persistent decrease in overseas sales and participation in international markets, SMEs may need to reassess their finance strategies, collaborate with domestic industry associations, and advocates for favorable business policies that support export capabilities, reducing the impact of protectionist trade policies, excess bureaucracy, and soaring energy costs."
