GLOBAL DIGITAL TRADE FINANCING AND CAPACITY UTILIZATION RATIO OF SMEs IN ECOWAS

Abstract This study examined the shock impact of global digital trade financing on the capacity utilization ratio of Small and Medium Enterprises (SMEs) in the Economic Community of West African States (ECOWAS) region over the period 2021 to 2024. Employing a dynamic panel data approach using the System Generalized Method of Moments (System GMM) estimator, the study analyzed the relationship between digital trade finance instruments and SME capacity utilization, controlling for firm characteristics, macroeconomic conditions, infrastructure, and institutional quality. The empirical analysis, covering 15 ECOWAS member countries with 58 observations in the differenced equation and 101 unbalanced system observations revealed that, the System GMM estimator is appropriate for this dynamic panel analysis, with the J-statistic of 0.072623 confirming the validity of the instrument set. The most robust finding is the statistically significant positive effect of changes in digital standby letters of credit on changes in SME capacity utilization with a coefficient of 0.395921 (p = 0.0000), indicating that, a one unit increase in digital standby letter of credit adoption is associated with approximately 0.396 units increase in SME capacity utilization. The analysis also revealed significant dynamic adjustment processes, with the coefficient on the lagged differenced dependent variable of -0.272646 (p < 0.01) confirming that, approximately 27.26% of any deviation in the rate of change is corrected within one year. However, the level equation results indicated that, most digital trade finance variables do not exhibit statistically significant long-run equilibrium effects. The study concluded that, while digital trade finance holds significant theoretical potential to enhance SME capacity utilization, its effects in the ECOWAS region are instrument-specific and primarily realized through short-run dynamic adjustments rather than long-run equilibrium relationships. Based on the findings, it was recommended amongst others that, financial technology companies and commercial banks should expand the availability and accessibility of dynamic discounting platforms, while addressing the operational challenges that may reduce capacity utilization. Keywords: Capacity utilization, Digital trade, ECOWAS, Financing, SMEs, System GMM.