This report examines the degree to which Europe’s small and medium-sized enterprises (SMEs) are operating in emerging markets: which markets they are choosing, why they are going there, and the opportunities and challenges that they are encountering.

Although their bigger rivals get most of the headlines, small and medium-sized enterprises (SMEs) are Europe's main engine for job creation and economic growth. They account for over 99% of registered businesses and employ about two-thirds of all Europeans. Business, however, is hard for them. As this report details, the financial crisis has derailed growth in their home markets, so many are now looking to new horizons. Following in the footsteps of larger multinationals, they are increasingly entering emerging markets to find and exploit niches for their businesses. To examine this trend, the Economist Intelligence Unit undertook a wide-ranging study of European SMEs operating internationally, sponsored by FedEx Express Europe, Middle East, Indian Subcontinent and Africa. It asks how and why small and medium-sized businesses are moving into emerging markets, which ones they are selecting, and what kind of operating environments they are finding. Some of the key findings of this research are as follows.

The rise of emerging markets is not just a big business phenomenon.
Many European SMEs are deeply engaged as well. Although only a minority of Europe's millions of SMEs overall operateoutside their home markets, many of those that do are looking to emerging markets for growth. Almost 90% of the SMEs surveyed for this report, all of which operate outside their domestic markets, are planning to do business in emerging markets in the coming year. Those that do tend to hold specific characteristics, in terms of their size, age, industry and who runs them.

Most SMEs are entering these markets in pursuit of new customers.
While many businesses usedto go to emerging markets in order to lower their production costs, Europe's SMEs are primarily seeking to tap into the rapidly expanding middle classes of emerging markets, either directly or else via the larger multinationals that they supply directly to, such as firms that supply parts to carmakers, for example. Nearly six in ten (58%) say that they are in these markets to sell their goods and services, far ahead of those either manufacturing goods there (11%) or buying services (12%). Indeed, 51% noted the potential for fast revenue growth as the most attractive reason for being in these markets.

The financial crisis acted as a catalyst for expansion abroad.
Europe's weak economic prospects and tight fiscal position is accelerating the process of looking for growth outside the EU. In all, 62% of respondents agree that "tepid growth" in Europe makes it imperative to look to emerging markets for growth. Among slower-growing economies, such as Spain and Italy, the proportion is far higher: just 11% of executives disagree.

The BRICs will attract most attention from European SMEs in the coming year, followed by other near-shore markets.
Growth rates, the degree of risk, ease of access and historical links all guide theprocess of how markets are selected to operate in. The top five markets, in order of preference, are China, Brazil, India, Russia and United Arab Emirates.

Of these markets, Brazil has made the greatest strides in terms of improved perceptions.
Given their greater likelihood for volatility, the relative favourability of emerging markets shifts year by year. In the past 12 months it has been Brazil's chance to shine. Nearly half (48%) of SMEs noted improved perceptions of the country, bolstered by a smooth transition of political power and increased infrastructure spending in the run-up to the FIFA World Cup in 2014 and Olympic Games in 2016. Overall, Brazil and China are viewed most favourably. By contrast, 24% noted less positive views of Russia, while, unsurprisingly, perceptions of the Middle East and North Africa as a whole dimmed, even though individual countries within the region will receive more investment.

Inflation and exchange rates are the primary macroeconomic concerns for SMEs.
Given the political risks of operating in emerging markets, political stability is generally viewed quite positively. However, inflation and exchange rates are seen as key macroeconomic risks: 23% of firms say inflation has become less favourable in their main target market in the past year. Led by a soaring oil price, the costs of both foodstuffs and various raw materials have shot up in the last 12 months. At an operational level, bureaucracy and corruption are, by far, the biggest challenges. Selected equally by 46% of respondents, these issues lie far ahead of other challenges, such as credit risk (20%), difficulties enforcing contracts (18%), language and cultural barriers (16%) or bad infrastructure (14%). While bureaucracy affects firms of all sizes, it imposes larger costs on SMEs, in terms of the additional personnel and resources required to deal with it.