This article is premised on the argument that participation in international trade can be one of the sources of gaining competitive advantage to Small and Medium Enterprises (SMEs) in developing countries. This is supported by a number of theories such as the Resource-Based View (RBV) and the Uppsala Model of Internationalization Process. Competitiveness is possible by gaining the knowledge that a firm accumulates through international activities (Johanson & Vahlne, 1977, 2009). Resource Based View (RBV) approach puts prominence on firm’s resources as one of the critical factors for achieving competitive advantage and those resources must be valuable, rare, imperfect imitability and non-substitutability (Barney, 1991). Barney (1991) introduced three types of resources which are physical capital resources (physical, technological, plant and equipment), human capital resources (training, experience, insights), and organizational capital resources. All these resources have been instrumental in shaping the firms’ internationalization process.

On the other hand, the Uppsala model of internationalization process was pioneered by Johanson and Vahlne (1977). To date it has been revised several times (Johanson & Vahlne, 1992, 2002, 2006, 2009). The earlier postulation of the model were that firms in their internationalization processes incrementally increases their commitment on a foreign market by increasing their presence as time passes and knowledge of the market grows. Moreover, it argued that firms entered new markets with a low level of commitment and as their knowledge of the market increases, more resources would be invested. However, this perspective seems to be contradicting with the changing internationalization process (Johanson & Vahlne, 1977, 2009). Unlike the previous Uppsala Model which was centered on market commitment and market knowledge, the revised version of the Uppsala Model (2009) argues that internationalization process takes place within the firm’s network position and where there is knowledge about the foreign market which is critical to recognize opportunities (Figure 1).

The model separates state and change variables each is divided into two aspects. The state variable considers aspects that are temporarily fixed by its nature. With regard to the Change-side, in the original model, the change variables were commitment decisions and current decisions (Johanson & Vahlne, 1977). In the new model, the word relationship has been added to commitment decision in order to clarify that it regards the firms’ decisions of further commitment to relationships within a specific country (Johanson & Vahlne, 2009). The new model further shows firm’s learning, creating and trust-building as important variables in network formation.

The Network Theory that the new Uppsala Model of internationalization process advocates is a response to the rise of globalization and digital economy (Johanson & Vahlne, 2009). Network formation is important for increasing the participation of SMEs from African countries in global trading system. This is because global production and distribution systems bring together diverse economic actors with complex regime of global corporate governance raising challenges to African SMEs to participate in these systems. As a result, Global Value Chains (GVCs) and global production networks (GPNs) have been particularly useful to understand SMEs’ global market engagements (Neilson et al., 2014).

GVC encompasses value adding activities and fragmentation of stages involved in producing a product or service to meet the needs of consumers with at least two stages being located in different countries (World Bank, 2020). Businesses aim to achieve efficiency in their production processes, as a result, they tend to disperse some of their value chain activities across countries. Greater engagement in GVCs is seen as a central feature in the process of structural transformation particularly in developing countries. In African context, GVC is of particular relevance in order to foster industrialization, technology upgrading, export diversification and inclusive growth. Firms or businesses from Africa can be part of GVCs by performing one or both of the activities along the global value chain, the activities might be related to farming, extraction of resources, product design, management, marketing, distribution, post-sale services, product research and development, processing etc. According to UNCTAD (2013) promoting participation in GVCs is increasingly embraced by Governments and policy makers in African countries as one of the channels towards the path of structural transformation and economic development. GVCs facilitate the movement of resources across sectors and in different countries in a rational way (World Bank, 2020). As a result, in the process GVCs contribute towards industrial upgrading, exportation, employment and income generation, GDP growth and exploitation of other opportunities along the value chain. However, the participation in GVCs is not risk free or free from challenges, this is because income generation and other opportunities may as well be hindered by low productive capacities, inadequate technology and lack of the needed skills set (UNCTAD, 2013). Therefore, it is the role of policy makers to identify and implement policies that foster rather than discourage the participation of African businesses into GVCs.

The realization of the importance of GVCs in Africa can be seen in various initiatives which are implemented so as to facilitate the integration of African firms or businesses into GVCs at continental level. For example, regional bodies such as the East African Community (EAC) and Southern Africa Development Community (SADC) are pushing for the development and upgrading of Regional Value Chains (RVCs) which are important for enhancing production capacities and increasing competitiveness of SMEs at regional levels and serve as a stepping stone into global value chains. Effective participation in GVC, however, for African countries is dependent upon factors such as available resources, market size, infrastructures and the quality of institutions. Hence, the World Bank (2020) and Zeidy (2020) have listed critical drivers for Africa’s participation in GVC which include the following:

In this perspective, the role of policies is critical to nurture SMEs’ participation in GVCs. Zeidy (2020) argues that the right package of policies can stimulate the Africa’s participation in GVC. However, Africa’s share in GVCs is 3% of global trade in intermediate goods (Zeidy, 2020). Nonetheless, Africa has recorded some success stories; currently Africa’s high shares in GVCs are inputs for other countries’ exports, particularly in agriculture and natural resources of African exports (Table 1). According to Zeidy (2020) GVC participation in some of the Sub-Saharan African countries (Ethiopia, Kenya, South Africa, and Tanzania) grew by 10 percentage points or more, approaching what Poland or Vietnam now success stories.

SME is perceived and defined differently across countries by taking into account the policies, programmes and role of the SME sector in the economy (Oladimeji et al., 2017). In Tanzania, SME is defined using the yardsticks like the number of employees, the capital invested in form of machinery, as well as turnover as indicated in Table 2.

The SMEs sector in Tanzania is one of the major sources of employment opportunities after agriculture. Its contribution to employment is between (20-30%) of the total country population and in terms of the SMEs contribution to GDP is estimated to be between (35-40%) of the GDP (Finseth, 1998). As a result, promoting SMEs competitiveness is essential if Tanzania is to raise the contribution of SMEs particularly in job creation, innovation, income generation and economic development. However, since in general most of the SMEs are less productive compared with large firms, ITC (2018) identify four areas that have the potential for increasing African SMEs competitiveness in trade. These are:

In view of these factors, the support of government, SMEs owners and managers are paramount in nurturing SMEs competitiveness. The government must provide direct support to SMEs and as well as improve the investment climate by formulating friendly policies and strategies for SMEs development. Another important role of the government is addressing the supply side constraints by putting in place quality infrastructure, trade facilitation measures, human capital development programmes, access to finance modalities etc. Participation in international trade is another avenue through which SMEs can enhance their competitiveness. According to ITC (2015; 2018), SMEs that are engaging in world international trade become more competitive and the evidence suggests that SME exporters grow 4 % faster than non-exporters. As such, since 2008 Tanzania initiated a strategy for improving trade competitiveness (Tanzania Trade and Competitiveness Strategy – TTIS). The strategy set three priorities, including expansion of existing exports to new and dynamic markets, integration of Tanzania into global production network, and lowering of the cost of doing business. Moreover in 2018 the Government launched a blue print for regulatory reforms to help improve the business environment in Tanzania. A blue print puts in place a framework for addressing business challenges and constraints. However, the export share of Tanzania in global exports for the past 10 years show mixed trend (Figure 2). The instability in export share suggests the need for more SMEs to penetrate in global markets and into GVCs (Mkenda & Rand, 2020).

With regard to the regional integration, Tanzania is a member of East African Community (EAC) and Southern Africa Development Community (SADC) regions. EAC and SADC recognize the importance of regional value chains in accelerating trade among member states. However, to foster increased participation in regional value chains, lowering of trade costs, improving customs management and increasing transparency in rules of origin as products cross borders are critical issues (EAC, 2018). Tanzania’s major exports were gold, coffee, tobacco, cashew nuts, pigeon peas, fish and horticultural products in 2018 and the major trading partners were China, India, South Africa, Kenya and UAE. Tanzania intra-EAC trade increased US$ 707.7 million in 2017 to US$ 811.3 million in 2018. Studies have indicated that countries that are more open to the rest of the world are better placed to absorb the rapid technological advances of leading nations. If the costs of technological imitation are lower than the costs of internally developed innovations, then a poorer country will grow faster than a more developed one. This faster rate of growth will continue so long as that country remains open to capturing new ideas until an equilibrium point, where the rate of growth becomes low. Moreover, the argument that poorer economies grow faster than the rich economies is in line with the convergence theory. Trade openness measured in either way, trade policies (tariff and non-tariff barriers) or as an outcome (the ratio of imports and exports over GDP) facilitates convergence through specializations and promotion of competition and technology transfer. However, liberalization alone does not automatically produce export dynamism or fast growth of incomes. But complementary policies and regulations are essential; this entails macroeconomic policies, property rights, governance (investment climate), infrastructure, education and training together with effective safety nets for those who disproportionately bear the costs of adjustment (Dollar & Kraay, 2002). This suggests that a national trade policy should ensure harmony, coherence and complementarities with other sector policies. In fact, all other sector specific policies including the National Trade Policy should be drawn from a broad national development policy.

SMEs in Tanzania face several constraints and challenges which impede their participation in international trade. Various studies have supported that poor infrastructures, supply capacity constraints, inadequate government support, lack of access to finance, unfriendly investment climate, inadequate skills and knowledge of the foreign market, inadequate business training and skills (entrepreneurial skills), intensive global competition and lack of knowledge on international marketing regulations and standards are among the challenges which hinder the participation and lower the competitiveness of Tanzanian SMEs in international trade (Table 3).

According to the literature review in Table 3, the challenges which impede SMEs’ participation in international trade can be grouped into the following themes:

Descriptive analysis was conducted to determine the frequency of the reviewed literature in Table 4 and Table 5.

The results in Table 5 suggest that internationalization of SMEs in Tanzania is mostly affected by international marketing related constraints and global competition (69%), supply side constraints (56%), unfriendly investment climate (50%) and financial constraints (37.5%).