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Investment Promotion andEnterprise Development Bulletin

for Asia and the Pacific

No. 1

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

UNITED NATIONS

UNITED NATIONSNew York, 2003

Investment Promotion andEnterprise Development Bulletin

for Asia and the Pacific

No. 1

ESCAP works towards reducing povertyand managing globalization

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

The Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific is publishedannually by the Economic and Social Commission for Asia and the Pacific.

Any uncredited article or information in this Bulletin may be copied, summarized or translated into anylanguage provided that acknowledgement of its use is made and a copy of the publication in which it appears issent to the Editor. However, permission must be received from the original author before use may be made of anyarticle, picture, drawing, cartoon or other account for which credit is specifically given.

The designations employed and the presentation of the material in this publication do not imply theexpression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legalstatus of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers orboundaries.

On 1 July 1997, Hong Kong became Hong Kong, China. Mention of “Hong Kong” in the text refers to adate prior to 1 July 1997.

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Short articles and viewpoints on industrial development issues from readers are welcome. The editorreserves the right to edit and publish manuscripts in accordance with the editorial requirements of this publication.

All correspondence should be addressed to:

ChiefTrade and Investment DivisionEconomic and Social Commission for Asia and the Pacific (ESCAP)United Nations Building, Rajdamnern Nok AvenueBangkok 10200, Thailand

ST/ESCAP/2259

UNITED NATIONS PUBLICATION

Sales No. E.03.II.F.36

Copyright © United Nations 2003

ISBN: 92-1-120176-4 ISSN: 0252-4481

ii

iii

CONTENTS

Page

Abbreviations ....................................................................................................................................... vi

Explanatory notes .............................................................................................................................. viii

I. STRENGTHENING THE COMPETITIVENESS OF SMALL ANDMEDIUM ENTERPRISES IN THE GLOBALIZATION PROCESS:PROSPECTS AND CHALLENGES .................................................................................... 1

– Bhavani P. Dhungana

A. Globalization: challenges and prospects for small and medium enterprisesin Asia and the Pacific ............................................................................................................ 1

B. Industrial dynamism, economic prosperity and economic crisis: liberalization,globalization and private sector-led industrial growth ........................................................... 4

C. Role of SMEs in the development process: some country experiences ................................. 11

D. Promoting the competitiveness of SMEs within the ongoing processof globalization ........................................................................................................................ 16

E. Conclusions and recommendations ......................................................................................... 22

II. PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEsIN ASIA AND THE PACIFIC ............................................................................................... 33

– Tarun Das

A. Introduction ............................................................................................................................. 33

B. Resource-based and agro-based industries: sector’s main characteristics .............................. 33

C. Rationale for development and contribution of agro-based and resource-basedindustries to poverty alleviation .............................................................................................. 39

D. Economic policies and strategies for development of agro-based andresource-based industries ........................................................................................................ 49

E. Role of the World Trade Organization for the development of agro-based andresource-based industries ........................................................................................................ 60

F. Conclusions and recommendations ......................................................................................... 63

iv

CONTENTS (continued)

Page

III. ISSUES AND STRATEGIES FOR THE TRANSFER AND ADOPTION OFPROSPECTIVE TECHNOLOGIES BY SMEs AND SMALL GROWERSFOR PROCESSING OF HORTICULTURAL PRODUCE INDEVELOPING ASIAN COUNTRIES ................................................................................. 77

– K. Lakshminarayanan

A. Introduction ............................................................................................................................. 77

B. Technology gaps ...................................................................................................................... 82

C. Problems and prospects in technology transfer ...................................................................... 85

D. Technology management issues .............................................................................................. 87

E. Conclusions ............................................................................................................................. 90

IV. REPORT OF THE EXPERT GROUP MEETING ON PROMOTINGRESOURCE-BASED EXPORT-ORIENTED SMEs FOR POVERTYALLEVIATION IN ASIA AND THE PACIFIC ............................................................... 93

– ESCAP secretariat

A. Regional overview of the status of the resource-based export-oriented SMEsand their impacts on poverty alleviation in Asia and the Pacific .......................................... 93

B. Evolving model of programmes for enhancing the competitiveness of SMEs,and issues and strategies for the transfer and adoption of prospective technologiesfor processing horticultural produce ....................................................................................... 95

C. Country experiences ................................................................................................................ 95

D. Recommendations ................................................................................................................... 97

V. FOREIGN DIRECT INVESTMENT: DETERMINANTS, TRENDSIN FLOWS AND PROMOTION POLICIES .................................................................... 99

– Joong-Wan Cho

A. Globalization and foreign direct investment ........................................................................... 99

B. Foreign direct investment flows: determinants and recent trends .......................................... 100

C. Host country FDI promotion policy trends ............................................................................. 104

D. FDI by small and medium enterprises .................................................................................... 108

E. Conclusions and implications for regional action and cooperation ....................................... 110

v

LIST OF TABLES

Page

I.1. Real GDP of selected Asian and Pacific economies ...................................................................... 5

I.2. Selected economies of the ESCAP region: rates of economic growth and inflation,2000-2004 ........................................................................................................................................ 6

II.1. Growth rate and share of MVA in selected Asian countries, 1980-2000 ...................................... 34

II.2. Employment by economic activity in selected Asian economies ................................................... 35

II.3. Share of females in total employment by branches in selected Asian countries ........................... 36

II.4. Value added per employee in selected Asian countries .................................................................. 37

II.5. Average annual growth of manufacturing in selected Asian economies, 1990-1999 .................... 41

II.6. Distribution of employment and value added among the manufacturing sectors .......................... 43

II.7. Tax policies in selected Asian economies in 1990 and 2000 ........................................................ 53

II.8. Science and technology development in selected Asian economies .............................................. 56

V.1. Host country determinants of FDI .................................................................................................. 100

V.2. FDI inflows by region, 1997-2001 .................................................................................................. 102

V.3. FDI inflows to the Asian and Pacific region, 1997-2001 ............................................................... 103

LIST OF BOXES

II.1. WTO and market access ................................................................................................................. 61

II.2. Uruguay Round: principal commitment on agriculture .................................................................. 62

II.3. Agreement on Textiles and Clothing (ATC) ................................................................................... 63

vi

ABBREVIATIONS

ADB Asian Development Bank

AFTA ASEAN Free Trade Area

APCAEM Asian and Pacific Centre for Agricultural Engineering and Machinery

APCTT Asian and Pacific Centre for Transfer of Technology

APEC Asia Pacific Economic Cooperation (currently comprises 21 countries/areas includingAustralia; Brunei Darussalam; Canada; Chile; China; Hong Kong, China; Indonesia;Japan; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; the Philippines; theRepublic of Korea; the Russian Federation; Singapore; Taiwan Province of China;Thailand; and the United States of America).

ASEAN Association of Southeast Asian Nations (comprises Brunei Darussalam, Indonesia,Malaysia, the Philippines, Singapore, Thailand, Viet Nam, the Lao People’s DemocraticRepublic, Myanmar and Cambodia).

ASEAN-4 Comprises Indonesia, Malaysia, the Philippines and Thailand

ATC Agreement on Textiles and Clothing

BITs bilateral investment treaties

CGPRT Regional Coordination Centre for Research and Development of Coarse Grains, Pulses,Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific

DLC letter of credit

ECDC economic cooperation among developing countries

ESCAP Economic and Social Commission for Asia and the Pacific

ESTs environmentally sound technologies

EU European Union

FAO Food and Agriculture Organization of the United Nations

FDI foreign direct investment

FIAS Foreign Investment Advisory Service

FTZ free trade zone

GATT General Agreement on Tariffs and Trade

ICT information and communication technology

IPR intellectual property rights

ISO International Organization for Standardization

ISO 9000 international standards for quality management systems

ISO 14000 international standards for environmental management systems

vii

ABBREVIATIONS (continued)

IT information technology

LDCs least developed countries

M&As mergers and acquisitions

MFA Multifibre Arrangement

MFIs microfinance institutions

MFN most-favoured nation

MNCs multinational corporations

MNEs multinational enterprises

MVA manufacturing value added

n.e.c. not elsewhere classified

NGOs non-governmental organizations

NIEs newly industrializing economies

NIPAs national investment promotion agencies

NTEs new technology enterprises

NTMs non-tariff measures

OECD Organisation for Economic Cooperation and Development (comprises Australia, Austria,Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece,Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, NewZealand, Norway, Poland, Portugal, the Republic of Korea, Spain, Sweden, Switzerland,Turkey, the United Kingdom of Great Britain and Northern Ireland, and the UnitedStates of America).

ODA official development assistance

QRs quantitative restrictions

R&D research and development

S&T science and technology

SAARC South Asian Association for Regional Cooperation (comprises Bangladesh, Bhutan,India, Maldives, Nepal, Pakistan and Sri Lanka)

SBA Small Business Administration

SCMs subsidies and countervailing measures

SIDBI Small Industries Development Bank of India

SMBA Small and Medium Business Administration

SMEs small and medium-sized enterprises

viii

ABBREVIATIONS (continued)

SMIPC Small and Medium Industry Promotion Corporation

SSI small-scale industry

SSTC State Science and Technology Commission

T&C textiles and clothing

TBT technical barriers to trade

TCDC technical cooperation among developing countries

TNCs transnational corporations

TRIMs trade-related investment measures

TRIPs trade-related intellectual property rights

UNCTAD United Nations Conference on Trade and Development

UNIDO United Nations Industrial Development Organization

USSR Union of Soviet Socialist Republics (also known as the Soviet Union for short, consistedof Russia and surrounding countries that today make up Armenia, Azerbaijan, Belarus,Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, the Republic of Moldova,the Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan)

VERs voluntary export restraints

WTO World Trade Organization

EXPLANATORY NOTES

M$ = ringgitRs = Indian rupeeUS$ = United States dollars

A. Globalization: challengesand prospects for small and mediumenterprises in Asia and the Pacific

The Asian and Pacific region – a fast-growing, dynamic part of the developing world –has sustained its vibrancy and impressive growth,despite the unexpected setbacks during the latterhalf of the 1990s. The dynamism and vibrancy ofthe economies and the economic crisis of 1997-1998 are both cited as the results of the fast paceof liberalization and the globalization process.Opinions are divided and experts have differentviews on these issues. However, globalization,which is generally defined as the “shrinkage ofeconomic distances (i.e., the costs of doing busi-ness) between nations”, when one analyses thetrends in production and trade or finance andcapital flows among countries in the region as wellas global terms,1 has ushered in new opportunitiesand challenges especially for small and medium-sized enterprises (SMEs). Globalization has alsoresulted in the integration of economies and hasprompted a rapid increase in the movement ofproducts, capital and labour across borders. It isincreasingly realized that globalization offers clearadvantages as it contributes to the maximizationof economic efficiencies, including the efficientutilization and allocation of resources, such asnatural resources, labour and capital on a globalscale, resulting in a sharp increase in global outputand growth.

It is becoming increasingly clear that theglobalization of production and trade has led to arising trade-GDP (gross domestic product) ratioand has also resulted in the fragmentation of theproduction process into its subcomponent parts,which in turn are distributed across countries onthe basis of comparative and competitive advan-tages. Developing countries have also benefitedsignificantly from increased flows of capital andother forms of finance. However, globalizationalso has disadvantages, particularly as nationalGovernments in many countries display a lackof political will and/or competence to adjustaccordingly to the process of globalization. It isalso observed by some people that globalizationis a process mainly pushed by the developed worldto unsustainable levels, and has placed manydeveloping countries in rather unstable situations,disregarding the nature and appropriateness ofdeveloping countries’ national policy frameworksand other limitations. This is the subject of furtheranalysis requiring concerted efforts by nationalGovernments to seek new policy options. Never-theless, the international community has aresponsibility to institute mechanisms to manageglobalization2 well to the advantage of all coun-tries while as mentioned earlier national Govern-ments would have a responsibility to formulate andimplement policies to adjust their economiessmoothly and efficiently to benefit from the

* Chief, Investment and Enterprise Development Section,Trade and Investment Division, Economic and SocialCommission for Asia and the Pacific.

1 Ramkishen S. Rajan, “Economic globalization and Asia:trade, finance and taxation”, ASEAN Economic Bulletin,vol. 18, No. 1 (January 2001), pp. 1-11.

2 In view of the needs and priorities expressed by theGovernments of Asia and the Pacific, the United NationsEconomic and Social Commission for Asia and thePacific adopted a new programme structure with“Managing globalization” as one of the main themes at itsfifty-eighth session, held in May 2002. The Commissionhas also established a Subcommittee on InternationalTrade and Investment to focus on globalization issues.

I. STRENGTHENING THE COMPETITIVENESS OF SMALL ANDMEDIUM ENTERPRISES IN THE GLOBALIZATION PROCESS:

PROSPECTS AND CHALLENGES

Bhavani P. Dhungana*

1

Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

globalization process, especially if SMEs are tobe promoted and sustained in this new economicenvironment.

As pointed out earlier, it is becoming obvi-ous that globalization is driven by a variety offactors, such as the accelerated growth of interna-tional trade and foreign direct investment (FDI),and rapid development in information technology,further facilitated by the global flow of informationas a result of the rapid spread of Internet use,which have far-reaching implications for SMEs.In particular, the advances in information andcommunication technology have driven down thecosts of international transactions and exchangesand enabled the creation of the global financialsystem. In turn, these interdependent and mutuallyreinforcing global flows of products, technology,information and capital are pushing globalizationfurther, making the whole process evolve at anaccelerated pace. However, with the advent ofglobalization, growth has become somewhat vola-tile, as recently demonstrated in Asian countries,imposing additional costs in terms of reconcilinggrowth and social development on the onehand and sustainability of development on theother.3 This aspect is to be especially noted whenexamining the implications of globalization forSMEs.

Nevertheless, globalization will lead to amore liberalized and market-oriented economicprocess. As past experience has demonstrated,it will expedite growth and spread technologymore rapidly, especially information technology.

A recent study by the World Bank has alsoanalysed the critical effect of globalization oninequality and poverty. The study identified agroup of developing countries that are participatingeffectively in the globalization process and found apositive relationship between globalization andpoverty reduction. For example, China, India andseveral other large countries are part of this groupand well over half of the population of the deve-loping world lives in these globalizing economies.The post-1980 globalizers have seen largeincreases in trade with significant declines intariffs over the past 20 years. Their growth rateshave accelerated from the 1970s to the 1980s andfurther accelerated in the 1990s. The post-1980globalizers are catching up with the rich countries,while the rest of the developing world, whichhas not been part of the globalization process, isfalling farther behind. The study also analyseshow general these patterns are and finds a strongpositive effect of trade on growth after controllingfor changes in other policies and addressingendogeneity with internal instruments. Finally, thestudy examines the effects of trade on the poor.Since there is little systematic evidence of arelationship between changes in trade volumes (orany other globalization measure considered) andchanges in the income share of the poorest, theincrease in growth rates that accompaniesexpanded trade leads to proportionate increasesin the incomes of the poor. The evidence fromindividual cases and from cross-country analysissupports the view that globalization leads to fastergrowth and poverty reduction in poor countries.4As mentioned earlier, the globalization process willalso bring various volatilities in the economy withgreater risks in the areas of capital and financialflows as well as in currency exchange arrange-ments. It is therefore urgent that certain concretemeasures be taken to safeguard SMEs and makethem sustainable. Furthermore, it should be noted

3 Several international organizations have focused theiractivities on assisting countries in dealing with variousissues of globalization processes. See World Bank, WorldDevelopment Report 2001/2002; ESCAP, Economic andSocial Survey of Asia and the Pacific 2002: EconomicProspects: Preparing for Recovery (ST/ESCAP/2144);and Asian Development Bank, Asian DevelopmentOutlook 2002. Also refer Byron G. Auguste, “What’s sonew about globalization?”, New Perspectives Quarterly,1 January 1998; to illustrate the decline in costs of inter-national transactions, he notes that since 1945 averageocean freight charges have fallen by 50 per cent, airtransport costs by 90 per cent and trans-atlantic telephonecharges by 99 per cent. See also International MonetaryFund, World Economic Outlook, May 1997.

4 For further details see, David Dollar and Aart Kraay,“Trade growth and poverty”, World Bank Policy ResearchWorking Paper 2615. See also United Kingdom of GreatBritain and Northern Ireland, “Eliminating world poverty:making globalisation work for the poor”, White Paperon International Development (available at <http://www.globalisation.gov.uk>).

2

that smaller firms have traditionally focused ondomestic markets and many will continue to relyheavily on local assets and markets. At the sametime, SMEs will be increasingly globalized. About25 per cent of manufacturing SMEs are nowinternationally competitive but this share shouldincrease rapidly. At present, SMEs contributebetween 25 and 35 per cent of world manufacturedexports and account for a smaller but growingshare of FDI. They are becoming more involvedin international strategic alliances and jointventures both among themselves and together withthe larger multinationals. More generally, network-ing allows SMEs to combine the advantages ofsmall scale, e.g., flexibility, and the economies ofscale and scope provided by firm groups.5 It isalso essential that some new and innovativemeasures be taken to improve their competitive-ness in the globally integrated and highly competi-tive economy. Furthermore, since SMEs accountfor the majority of the firms in a country and havethe largest share in employment and since the 2billion urban population throughout the world willincrease in the next decade, it is therefore essentialthat urban SMEs be promoted as major providersof employment. SMEs are also important to growout of a stage-dominated economy characterizedby government subsidy and control and, becauseof their independence and sheer numbers, SMEsrepresent a constituency of good policy andgovernance in many developing countries of theAsian and Pacific region.

In a recent United Nations Industrial Deve-lopment Organization (UNIDO) forum on “Fight-ing marginalization through sustainable industrialdevelopment: challenges and opportunities in aglobalizing world”, the experts, while addressingthe role of investment, technology and trade inpromoting industrial and economic development ina globalizing world, emphasized that technologyand liberalization were the prime forces drivingglobalization. Technological innovation ratherthan capital accumulation was seen as the mainsource of long-term sustainable growth and it was

urged that in order to overcome the threat ofmarginalization, developing countries be enabledto mobilize the key ingredients of productivity-based growth, namely, information, knowledge,skills and technology, by drawing on internationaltrade, capital/investment and technology flows. Onthe subject of global norms and standards inthe context of development, it was agreed thatdeveloping countries were to be provided with thecapacity to participate more fully in internationaltrade agreements and environmental conventions.The forum had also highlighted the critical role ofdevelopment agencies in guiding productivity-based growth in the developing world and promot-ing “workable” globalization. These necessitiesare even more forcefully reinforced when one triesto strengthen the role of SMEs in developing coun-tries to enable them to be the forceful agents inpromoting the integration of industrial activities atthe regional and global levels.

Therefore, this paper has tried to analyseand suggest measures as to what strategies canbe adopted to enhance the development of SMEsin the context of the ongoing process of globali-zation. There are many ways to approach thedevelopment of SMEs, but the paper has focusedon the various ways and means to enhance theexport capabilities of SMEs, in promoting coopera-tion and networking of SMEs to play importantroles in regional/global markets, in improvingvarious measures for the provision of businessservices for SME competitiveness and in promot-ing good management and efficient overall govern-ance, including the provision of a legal frameworkto manage globalization for the benefit andefficiency of SMEs. At the end, a set of urgentmeasures to promote the competitiveness of SMEsis presented.

Before the analysis actually focuses on thespecific issues of SMEs and competitiveness, it isrelevant to present some analysis of the recenteconomic and industrial trends and situation ofAsian and Pacific developing countries, followedby a section on the role of SMEs in selectedcountries of the region, so that coherent andconsistent policy issues for SME development andways to improve their competitiveness can beanalysed.

5 Organisation for Economic Cooperation and Develop-ment, OECD Small and Medium Enterprise Outlook(Paris, OECD, 2000).

I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges

3


B. Industrial dynamism,economic prosperity and economic

crisis: liberalization, globalization andprivate sector-led industrial growth

1. Recent economic growth

The Asian and Pacific developing regionhas frequently been termed one of the mostdynamic parts of the global economy. However,these economies again registered a decline inGDP growth in 2001 to 3.1 per cent as comparedwith 7.0 per cent in 2000.6 Several economiesregistered a decline in their growth rate (see tablesI.1 and I.2). There was also a slowdown in theglobal GDP growth rate. The slowdown wasparticularly evident in the information and commu-nication technology sector and in economies witha preponderance of ICT-related manufacturingactivities and with high trade-to-GDP ratios, as inEast and South-East Asia, were most affected bythe slowdown. While some economies andsubregions remained relatively immune initially,the dramatic suddenness of the global slowdownand its intensity slowed GDP growth in theseeconomies and subregions as well. The events of11 September 2001 aggravated the slowdownthrough a loss of business and consumer confi-dence.

It should be noted that since March 2002,signs of a global and regional upturn were beingseen. On balance, evidence of a gentle recoveryin both the global and regional economies wasbecoming discernible. The majority of the ESCAPeconomies were expected to exceed their 2001GDP growth rates in 2002 (see table I.2). Abenign inflationary environment and comfortableexternal positions indicated that most economies inthe region had considerable leeway to compensatefor the loss of external demand through domesticstimulus measures.7

Thus, the Asia-Pacific region is quite resil-ient and is able to cope with economic problemsmuch more quickly. In general, it managed totrigger a process of unprecedented economicgrowth led by industry (in particular manufactur-ing) among a selected few developing countriesowing to a combination of appropriate policies anda conducive international economic environmentduring the last three decades despite catching upwith the crisis in 1997. The aggregate GDPgrowth of the Asia-Pacific region (excludingChina) grew by an annual average of 7 per centduring the period 1980-1996 but contracted byover 4 per cent in 1998 after growing 5.6 per centin 1997. Conducive national policies aimed atsuccessful integration of national economies intothe world economy certainly played a fundamentalrole in explaining East Asia’s success stories.Only during the last three years of the 1990s, hadit become obvious that major adjustments at boththe national and international levels were necessaryto manage the globalization process to the benefitof all.

In the coming years, the Asian and Pacificregion in general is expected to continue achievinghigher growth rates, depending on the degree ofdevelopment in the United States and Japaneseeconomies. Thus, a regional economic recoveryin 2003 is essentially predicated on a significantimprovement in the external environment, sup-ported by appropriate domestic policy measures.However, the pace of economic performance ingeneral and industrial growth in particular in somedeveloping economies of the region could remainunsatisfactory. The least developed countries andthe economies in transition could achieve onlymarginal growth. Many such poorer economiescould stagnate and remain poor, unless majoreconomic and industrial transformations arebrought about at the regional and global levels,promoting the integration of those economies. It istherefore essential that the production system atthe regional and global levels be diversified, anddispersed and the production process fragmented,so that not only efficiencies and cost-effectivenessare achieved, but also the disadvantaged group ofcountries could somehow find niches in regionaland global production and create jobs and incomesin their respective economies. It should be notedthat as production becomes more and more

6 Asian Development Bank, Asian Development Outlook2002 (New York, Oxford University Press, 2002), p. 4.

7 “Summary of the economic and social survey of Asia andthe Pacific, 2002” (E/2002/18), 15 April 2002, p. 1.

4

Table I.1. Real GDP of selected Asian and Pacific economies

(Annual percentage change)

10-yearaverage

1982-1991 1992 1993 1994 1995 1996 1997 1998 1999

Asiaa

Bangladesh 4.8 4.3 4.5 4.8 5.0 5.3 5.0 5.2 3.89Bhutan 4.4 5.0 5.1 6.9 6.0 5.7 4.6 6.5 5.26Cambodia 4.8 7.5 7.0 7.7 7.0 1.0 1.0 4.97 4.0China 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0Fiji 4.8 3.5 4.2 2.4 3.3 3.6 4.0 4.5 4.95Hong Kong, China 6.3 6.1 5.4 3.9 4.5 5.0 --5.1 3.06 10.05India 4.2 5.0 6.7 7.6 7.1 4.7 6.3 6.55 6.37Indonesia 7.2 7.3 7.5 8.2 8.0 4.5 --13.0 0.85 4.77Kiribati --1.6 0.8 7.2 6.5 2.6 3.3 6.1 2.5 2.0Lao People’s Democratic Republic 7.0 5.9 8.1 7.1 6.9 6.5 5.0 5.0 5.7Malaysia 8.9 9.9 9.2 9.8 10.0 7.3 --7.4 5.81 8.54Maldives 6.3 6.2 6.6 7.2 6.5 6.2 6.0 8.55 7.58Marshall Islands 0.1 5.4 2.7 --1.9 --13.1 --5.3 --4.3 --1.8 –Micronesia, Federated States of --1.2 5.7 --0.9 1.3 --0.5 --3.8 --2.8 --2.0 –Myanmar 9.7 5.9 6.8 7.2 7.0 7.0 7.0 10.92 5.46Nepal 4.1 3.8 8.2 3.5 5.3 5.0 3.0 3.94 5.99Pakistan 7.8 1.9 3.9 4.1 4.9 1.0 2.6 4.33 5.09Papua New Guinea 11.8 16.6 1.9 --2.6 2.9 --2.4 1.4 3.15 --1.21Philippines 0.3 2.1 4.4 4.8 5.8 5.2 --0.6 3.32 3.95Republic of Korea 5.4 5.5 8.3 8.9 6.8 5.0 --6.7 10.89 8.81Samoa 4.1 1.7 --0.1 6.8 6.1 1.6 1.2 2.5 3.5Singapore 6.5 12.7 11.4 8.0 7.5 8.4 0.4 5.86 9.89Solomon Islands 9.5 2.0 5.4 10.5 3.5 --2.3 0.5 --0.5 --1.0Sri Lanka 4.3 6.9 5.6 5.5 3.8 6.4 4.7 4.3 6.0Taiwan Province of China 6.8 6.3 6.5 6.0 5.7 6.8 4.7 5.42 5.98Thailand 8.1 8.4 9.0 8.9 5.9 --1.7 --10.2 4.22 4.31Tonga 0.3 3.7 5.0 4.8 --1.4 --4.4 --1.5 – 1.5Vanuatu --0.7 4.5 1.3 2.3 0.4 0.6 6.0 --2.5 3.97Viet Nam 8.6 8.1 8.8 9.5 9.3 8.2 3.5 4.2 5.5

Central Asia

Armenia --52.6 --14.1 5.4 6.9 5.9 3.3 7.2 3.3 6.0Azerbaijan --22.7 --23.1 --19.7 --11.8 1.3 5.8 10.0 7.4 10.27Georgia --44.9 --29.3 --10.4 2.6 10.5 10.7 2.9 2.9 1.5Kazakhstan --5.3 --9.2 --12.6 --8.2 0.5 1.7 --1.9 2.8 9.44Kyrgyzstan --13.9 --15.5 --19.8 --5.8 7.1 9.9 2.1 3.6 5.04Mongolia --9.5 --3.0 2.3 6.3 2.4 4.0 3.5 3.2 2.98Russian Federation --19.4 --10.4 --11.6 --4.2 --3.4 0.9 --4.9 3.2 7.5Tajikistan --28.9 --11.1 --21.4 --12.5 --4.4 1.7 5.3 3.7 8.3Turkmenistan --5.3 --10.0 --17.3 --7.2 --6.7 --11.3 5.0 16.0 17.6Uzbekistan --11.1 --2.3 --4.2 --0.9 1.6 2.5 4.3 4.4 4.0

Source: IMF, World Economic Outlook 2000, Statistical Appendix. Available at <www.imf.org/external/pubs/ft/weo/2001/01/data/growth_a.csv>.a Excluding Central Asian economies.


5


Table I.2. Selected economies of the ESCAP region: rates of economicgrowth and inflation, 2000-2004

(Percentage)

Real GDP Inflationa

2000 2001b 2002c 2003c 2004c 2000 2001b 2002c 2003c 2004c

Developing economies of theESCAP regiond 7.0 3.1 4.2 5.4 5.9 2.1 3.1 3.0 3.4 3.6

South and South-West Asiac 4.5 4.6 5.5 6.0 6.6 6.1 6.9 7.3 6.7 6.3

Bangladesh 5.9 6.0 4.3 .. .. 3.4 1.6 4.0 .. ..India 4.0 5.4 6.0 6.3 7.0 3.7 4.2 5.0 5.0 4.5Islamic Republic of Iran 5.9 5.5 6.5 6.5 6.0 12.6 12.0 14.0 14.0 11.5Nepal 6.4 5.9 5.0 6.0 6.5 3.5 2.4 4.5 5.0 5.0Pakistan 3.9 2.6 4.0 4.7 5.2 3.6 4.7 5.0 5.0 5.0Sri Lanka 6.0 0.9 3.3 5.5 5.9 6.2 13.0 9.0 7.5 6.6Turkey 7.1 --8.4 2.0 4.4 4.1 54.9 65.0 51.2 43.0 34.9

South-East Asia 6.5 1.8 3.2 4.4 4.6 2.3 5.0 4.3 3.9 3.9

Cambodia 5.4 5.3 4.5 6.3 6.0 --0.8 --0.6 3.0 5.0 5.0Indonesia 4.8 3.3 3.8 4.9 4.6 3.7 11.1 9.8 6.3 5.3Lao People’s Democratic

Republic 5.7 6.4 5.0 .. .. 25.1 9.0 12.0 15.0 ..Malaysia 8.3 0.4 3.2 5.1 6.1 1.6 1.5 1.6 3.4 4.0Myanmar 13.6 5.0 5.1 5.9 .. --0.1 9.6 .. .. ..Philippines 4.3 3.4 4.0 3.4 4.0 4.4 6.3 5.7 5.3 5.0Singapore 9.9 --2.0 2.0 5.8 5.7 1.4 1.0 0.8 1.5 1.7Thailand 4.4 1.5 2.5 2.5 3.5 1.6 1.6 1.8 2.5 3.1Viet Nam 6.8 6.8 6.1 6.8 7.3 --1.7 --0.1 2.0 3.8 7.6

East and North-East Asia 8.0 3.2 4.3 5.7 6.2 0.8 1.1 1.2 2.1 2.7

China 8.0 7.3 7.0 7.5 7.6 0.4 0.7 1.1 2.2 2.5Hong Kong, China 10.5 --2.0 1.0 6.0 6.3 --3.8 --1.6 --1.0 2.5 4.0Mongolia 1.1 1.4 4.0 5.0 6.0 11.8 8.8 6.0 5.0 5.0Republic of Korea 8.8 3.0 3.9 4.6 5.0 2.3 3.2 2.8 2.6 3.4Taiwan Province of China 5.9 --2.2 1.7 4.0 5.4 1.3 0.0 0.0 1.0 1.5Pacific island economies --1.0 --1.2 2.7 2.7 2.5 7.1 7.2 8.2 7.1 5.9Cook Islands 3.2 3.2 3.3 .. .. 2.0 1.0 1.0 .. ..Fiji --2.8 1.5 5.0 4.0 3.0 3.0 2.3 2.5 3.0 3.0Papua New Guinea --0.8 --3.3 1.2 1.8 2.1 10.0 10.3 12.0 10.0 8.0Samoa 7.3 6.5 4.8 4.3 4.1 1.0 1.5 2.0 2.0 2.0Solomon Islands --14.5 --7.0 5.5 3.0 2.0 6.0 8.0 10.0 6.0 5.0Tonga 6.1 3.0 2.5 2.9 3.0 7.0 8.0 3.0 3.0 3.0Vanuatu 4.0 2.0 3.0 3.5 3.5 4.1 3.0 2.0 2.5 2.5

(Continued)

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Table I.2 (continued)

(Percentage)

Real GDP Inflationa

2000 2001b 2002c 2003c 2004c 2000 2001b 2002c 2003c 2004c

Developed economies of theESCAP region 2.5 --0.2 --0.9 1.6 1.5 --0.4 --0.4 --0.7 --0.3 0.2

Australia 3.8 4.1 3.0 4.1 3.6 4.5 4.2 2.3 2.4 2.9Japan 2.4 --0.5 --1.2 1.4 1.4 --0.7 --0.7 --0.9 --0.5 0.0New Zealand 3.8 2.6 1.9 3.3 2.0 2.6 2.7 2.1 1.8 1.8

Memo:

Kazakhstan 9.6 13.0 6.3 6.8 7.2 13.5 8.4 6.9 6.7 7.0Russian Federation 8.3 5.7 3.5 4.0 4.3 20.8 18.6 15.5 13.0 11.0Uzbekistan 4.0 4.0 2.5 3.0 .. 24.9 25.6 25.5 23.1 ..

Sources: ESCAP, based on International Monetary Fund, International Financial Statistics, vol. LV, No. 1 (January 2002); AsianDevelopment Bank, Key Indicators of Developing Asian and Pacific Countries 2001 (New York, Oxford UniversityPress, 2001) and Asian Development Outlook 2001 (New York, Oxford University Press, 2001); Economist IntelligenceUnit, Country Reports and Country Forecasts (London, 2001 and 2002), various issues; and national sources.

Notes: This table is based on data and information available up to 15 March 2002.

The estimates and forecasts for countries relate to fiscal years defined as follows: fiscal year 2001/02 = 2001 for Indiaand the Islamic Republic of Iran; and fiscal year 2000/01 = 2001 for Bangladesh, Nepal and Pakistan.a Changes in the consumer price index.b Estimate.c Forecast/target.d Based on data for 28 developing economies representing about 95 per cent of the population of the region (excluding

the Central Asian republics); GDPs at market prices in US dollars in 1995 have been used as weights to calculate theregional and subregional growth rates.

globalized and as transport and communicationcosts are reduced, the intensity of competitionincreases, and it becomes desirable to search fornew economical sites to produce differentproducts, parts and components to serve differentmarketplaces.

For all developing countries including theleast developed ones and the economies in transi-tions, some form of industrialization and industrialgrowth must be recognized as the principal meansto provide stability and economic growth. Abun-dant natural resources, low labour rates and evenlarge markets are no longer indispensable factorsfor development, nor sufficient attractions forinvestors. Essential infrastructure, enhanced skills,technological capability and improved management

practices constitute the key elements of competi-tiveness in the emerging pattern of global competi-tion and industrialization. Industrial developmentcontinues to be the main channel for value added,together with certain related service sectors. Whileindustry remains the principal engine for economicgrowth and overall prosperity, at the same time,because of the liberalized process, the increasedglobalization of industry and the extraordinaryand rapid pace of technological innovations andadaptation, new challenges and prospects forindustrialization are being created. It is thereforeessential not only to reiterate the key role of theindustrialization of developing countries in the newcontext, but it is also necessary to assess thecurrent industrial development trend and prospectsfor new international relationships at the enterprise


7


and institutional levels. As a result, industrialgrowth in developing countries is likely to becomeincreasingly complex and difficult during thecoming years. Furthermore, in developing coun-tries of the region, major institutional changes andnew strategies and mechanisms will be required forthe successful integration of developing countriesinto the mainstream of international trade, invest-ment and technological flows. Industrial policyreforms and the role of government will needmajor changes and adjustments to ensure thatmarket shortcomings are adequately adjusted andcorrected through appropriate policy interventionsto improve long-term economic performanceand ensure that economies can be truly part ofthe mainstream of global trade and investment.Countries must increasingly assume a leading rolein enhancing both domestic and international com-petitiveness and the increased export orientation oflocal enterprises. At the same time, the growingcomplexity of industrialization in the light ofglobal economic developments highlights the needfor specialized institutional support at the interna-tional level to provide a range of technical servicesfor accelerated industrialization and technologicalprocess in developing countries.8

2. Liberalization and globalizationprocess and SMEs

Thus, it has to be underscored that theprocess of globalization and liberalization hasassisted individual firms in operating acrossnational boundaries in Asian and Pacific countries,affecting thereby the whole process of industrialdevelopment in different economies. Increasinglyit is being realized that the opening of globalmarkets through trade liberalization is not onlymaking it easier for firms to extend their opera-tions beyond national boundaries but also provid-ing greater potential for expansion and growth.But all countries are not benefiting, as this will

require competitive capacity and additional re-sources for investment, in addition to technologicaland marketing linkages to promote rapidly chang-ing and high-quality products and services. This iswhere the importance of international and globalproduction networks lies. It is very essential thatall countries and economies be somehow linkedand integrated into such production networks sothat sustainable regional and global productionstructures could be created for everyone to playmutually beneficial economic roles.

Furthermore, as a result of globalizationfactors, the world has witnessed unprecedentedgrowth in output and trade over recent decades.World output grew by an annual average of 2.7 percent during 1981-1990 and 3.5 per cent in 1996and 1997, before the crisis reduced growth to 1.9per cent in 1998. However, it increased to 3.8 percent in 2000, but fell to 1.3 per cent in 2001.9World trade has grown at about twice the rate, at4.5 per cent on average during 1981-1990 andabout 7.0 per cent during 1991-1997 with a growthrate of 10.5 per cent in 1994 largely owing tosustained trade liberalization. World trade volumegrew by 12.4 per cent in 2000, but declined to -0.2per cent in 2001.10 In 2002 the world tradevolume is expected to increase by 2.5 per cent.Average tariffs in industrial countries fell from 40per cent in 1946 to about 5 per cent in 1990. Bythe early 1990s, world exports (adjusted forinflation) were nearly 10 times higher than 40years earlier.11 Even in 1998, world trade grew attwice the rate of growth in world output.12 In2003 world trade is expected to grow by 6.6 percent in comparison with the world output growthof 4.0 per cent in that year.13 Global FDI flowsrose from US$ 24 billion in 1990 to US$ 120billion in 1999. For many developing countries,private capital flows have largely replaced official

8 Bhavani P. Dhungana, “Economic integration and indus-trial production networking: Asia’s prospects andchallenges in 21st century”, paper presented at the Work-shop on the Emerging Economic Map of Asia: RegionalProduction Restructuring, Asian Integration and Sustain-able Development, Bangkok, 1-2 August 2001, p. 5.

9 UNCTAD, Trade and Development Report 2002, p. 5.

10 World Bank, Global Economic Prospects and the Deve-loping Countries 2002, p. 3.

11 International Herald Tribune, 4 January 2000.

12 United Nations, World Economic and Social Survey 1999.

13 International Monetary Fund, World Economic Outlook,April 2002, p. 6.

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capital flows. In 1990, official capital providedhalf the loans and credits to 29 major developingcountries (including India, China and the Republicof Korea in Asia). By 1999 private flows totalledabout US$ 136 billion to these countries comparedwith only US$ 22 billion in government capitalflows.14

As indicated above, the Asian and Pacificregion also witnessed rapid economic growthduring the 1980s and 1990s as a result of globali-zation factors in combination with conducivenational policies. To a large extent, this economicgrowth was triggered by the impressive growth ofthe industrial sector, in particular manufacturing,especially after the switch from import substitutionto export promotion as the main developmentstrategy adopted by most East Asian economies.This policy has proved tremendously successful asjudged by the rapid export growth of selectedAsian countries.

A rise in the share of manufactured exportsand imports as a share of total merchandise tradewould be consistent with rapid growth in manu-facturing value added. Manufactured exports haveindeed shown a steadily increasing share of totalmerchandise exports with very large increases ineach ASEAN country and increases amongSAARC countries as well.15

Indonesia had a spectacular rise in manu-factured exports as a share of total merchandiseexports from just 2 per cent in 1980 to over 50 percent in 1995 and 1996. Manufactured exports hadbecome dominant in the exports of Malaysia (76per cent), Singapore (84 per cent), Thailand (73per cent), India (74 per cent), Nepal (99 per cent)and Pakistan (84 per cent) by the mid-1990s.Shares of manufactured imports had also risen

perceptibly in every case in ASEAN, but manu-factured goods shares in imports fluctuated inSouth Asia. Imports of manufactured goods inmuch of South Asia were subjected to high tariffsand several types of controls.

However, in general there has been adramatic shift in the pattern of developing countrytrade, with a shift away from dependence oncommodity exports to much greater reliance onmanufactures and services and the greatly in-creased importance of exports to other developingcountries. While national-level policy initiativesremain the principal focus of trade policy reforms,developing countries have become increasinglyinvolved in regional and multilateral trade negotia-tions. The multilateral system has made substan-tial adjustments to the increased importance ofdeveloping countries, but reforms in governanceand a sharper distinction between positive andnegative approaches to integration seem likely tobe needed. Furthermore, between 1980 and 1985manufactured exports and imports grew slowly inASEAN (with the exception of Indonesia, wheremanufactured exports rose rapidly from a verysmall base between 1980 and 1985). The slowgrowth during the first half of the 1980s reflectsthe period of economic recession in the region.Import growth was sharply negative in thecrisis-ridden Philippines in 1980-1985. Notably,there was a dramatic recovery of growth of manu-factured imports and exports in the Philippinesonce the economic and political situation had beenstabilized after 1986. In South Asia manufacturedimports grew very slowly in Bangladesh, Pakistanand Sri Lanka during 1980-1985, but have shownhigher growth since then. In Nepal, manufacturedimports decelerated after 1985 and growth becamenegative between 1990 and 1995. Growth inimports of manufactured goods fluctuated in India.The performance of manufactured exports ofIndia after 1990 was quite good compared with1980-1985. Nepal steadily increased its exportsof manufactured goods. The performance ofPakistan’s manufactured exports fluctuated. SriLanka had fairly strong growth in manufacturedexports during the 1980s.

Indeed, it is now widely recognized that themaintenance of an open liberalized domesticeconomy was decisive in explaining the growth of

14 Institute of International Finance, as quoted in Inter-national Herald Tribune, 4 January 2000. Private capitalflows comprise bank loans, bond financing, equityinvestments in local stock markets and foreign directinvestment.

15 Export Competitiveness and Sustained EconomicRecovery, Studies in Trade and Investment No. 46,(ST/ESCAP/2150), pp. 38-39.


9


East Asia and other successful developing coun-tries. It not only allowed for large inflows of FDIbut also for the rapid export growth generated to alarge extent by foreign-invested companies. Eastand South-East Asia have been the leading destina-tion among developing countries for global FDIflows. FDI inflows have been particularly high inthose countries, which also witnessed large exportgrowth. It is evident that those countries whichfailed to open their economies and adopt an exportpromotion strategy also failed to reap the benefitsof the globalization process. Globalization, inter-preted as constituting growing opportunities forworld trade and investment, after all enabled coun-tries with an export promotion strategy to actuallyincrease their exports. Without globalization, indi-vidual countries, including developed countries,would have continued their protectionist policies,so common in the direct aftermath of theglobal depression of the 1930s, and would haveprevented East Asian and other developing coun-tries from increasing their exports at such highrates.

The latest success story in Asia with respectto export growth has been China since the countrystarted to liberalize its economy in the early 1980s.China is a very large economy in terms of absolutesize of production and trade. China has provedattractive to foreign investors as a result of itsrapid economic growth, large size, abundance oflow-cost labour and increasing trade orientation.Recent studies have found that Chinese manu-facturing industries and firms have proven to beformidable competitors with ASEAN counterpartsin both the United States and Japan. The exportshares of China in labour-intensive manufacturesrose sharply in the 1990s in both the United Statesand Japan and had an undeniable impact on themarket share of ASEAN. China devalued the yuantwice in 1990 and 1994 and strengthened itscompetitiveness vis-à-vis the ASEAN countries asthey by and large pegged their currencies to UnitedStates dollar, which appreciated strongly againstthe yen and most other major currencies in 1995and 1996. The sharp currency realignments in1997 and 1998, coupled with China’s pledge toavoid competitive devaluation, had eroded thiscompetitive advantage, however. It is also note-worthy that China, like most of South-East Asia

(the Philippines being the exception), experiencedan export slowdown in 1996. Thus, China is notable to avoid cyclical swings in export markets anymore than other Asian economies. South Asianindustries and firms may also have experiencedsome competitive pressure from China, particularlyin markets for labour-intensive manufactures suchas textiles, apparel, footwear and leather goods,toys and other miscellaneous manufactures. None-theless, trade with China also appears to havebeen expanding rapidly in the case of Indiabetween 1991 and 1997, with exports and importsboth expanding impressively. China maintains amerchandise trade surplus with the SAARC region.Both SAARC and ASEAN members have aninterest in the terms and conditions of China’saccession to the World Trade Organization (WTO)and may wish to consider commercial benefits andcosts in that context.

The growing trend of intraregional trade andinvestment is in fact a reflection at the regionallevel of global trends, which are pushed byglobalization. However, as globalization is likelyto continue at an accelerated pace, the implicationsfor industrial development and restructuring inline with the requirements of globalization arewide-ranging and include both opportunities andchallenges. That having been said, it should benoted, especially in the context of promotingSMEs, that a critical long-term policy challengewhich the ESCAP region will face is how tomanage globalization, extend the duration of thecurrent recovery and broaden its reach so thatthe poor can benefit from economic growth. Muchwill depend on creating new sources of growthby increasing the region’s export competitiveness,especially of exports by SMEs, while maintainingfinancial stability in increasingly open and inter-dependent economies.

This is the critical issue on which thecompetitiveness of SMEs will depend and attemptswill be made to seek answers to the followingquestions:

(a) What are the policy reforms that willensure that the region can sustain the internationalcompetitiveness of SMEs in a globalizing worldeconomy?

10

(b) How can the productivity andefficiency of SMEs be boosted? What institutionaland infrastructural factors are necessary forimproving the efficiency of SMEs?

(c) What are the implications of thecurrency exchange rate crisis for the long-termstability and export competitiveness of SMEs?

(d) What are the implications of regiona-lism and multilateralism for the survival and com-petitiveness of SMEs?

(e) What economy-wide integrated policyissues are important for the promotion of SMEsand their competitiveness at the internationalmarket?

C. Role of SMEs in the developmentprocess: some country experiences

1. General observations

SMEs all over the world have played afundamental role in promoting economic and in-dustrial production. In particular, SMEs providethe necessary foundations for sustained growth andrising incomes in the less developed and transi-tional economies. Sustained and healthy growth ofthe SME sector in weaker economies is obviouslynecessary, as it is difficult to imagine raisingoverall living standards and social peace in thoseeconomies without SME development. In general,SMEs provide the bulk of the entrepreneurs andemployment in those economies and they aremostly in the private sector. The development ofthe SMEs and their linkages with larger enterpriseshave also played a significant role in the highlysuccessful business practices of the verticallyintegrated Japanese “keiretsu” financial-industrialgroups during most of the post-war period. Simi-lar linkages appear to have been important inrecent successes of “township and village enter-prises” (TVE) in China. Another quite differentsynergistic relationship, based on both horizontaland vertical linkages, is represented by the kindof local cooperative/competitive development com-mon for a long time in Europe and North America,but only recently dignified with the titles of

“industrial district” and “cluster”.16 However, theSME sector in many developing countries hasusually been neglected and discriminated against interms of access to government attention, access tofinance, management and marketing expertise andtechnology, as compared with large enterprises.This has been particularly so in the economies intransition, where the large-scale State sector hadassumed the major role in economic and industrialdevelopment. Private sector development in theeconomies in transition and in the least developedcountries should, therefore, start by strengtheningand promoting SMEs as to allow these enterprisesto grow into medium- to large-scale enterprisesand enable them to take over the functions of thepreviously State-owned enterprises.

Although there are variations in theproliferation of SMEs and their contributions tothe economy, in recent decades there have beensome efforts to improve the conditions for SMEpromotion in the Asian and Pacific region.Policies have been adopted and attempts made toimprove the institutional facilities for their func-tioning. However, it also has to be noted that inthe Asian and Pacific region SMEs comprise awide range of plant sizes and technologies, bothacross and within countries, covering three broadtiers of activities. At the top, there is the modernSME sector, often closely linked with large enter-prises as subcontractors and producing modernconsumer and manufacturing products such asmetal goods, paints, processed foods, plastic goodsand wood products. These types of enterprisesgenerally use more modern technology andare located nearer to cities and ports with well-developed infrastructure facilities. In addition,urbanization and localization tend to facilitate thegrowth of the modern SME sector. At the otherextreme can be found the traditional SME sector,consisting of artisans, workshops, household unitsand craft industries and other industries, which arenormally found in rural areas. Enterprises operat-ing in this segment of the SME spectrum usually

16 Robert McIntyre, The Role of Small and MediumEnterprises in Transition: Growth and Entrepreneurship,Research for Action No. 49 (United Nations University,World Institute for Development Economics Research[WIDER], December 2001), p. 5.

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employ rudimentary implements and rely on localmarkets for the supply of raw materials and thesale of the final products. Here, the agrariannature of the economy and fragmented markets,low technology and weak infrastructure favourlabour-intensive manufacturing at the householdlevel. Between these two sets of SMEs arethe agro-based industries, most often found insemi-urban areas, which utilize agricultural rawmaterials as major production inputs but maydepend on distant markets to sell their products.These types of SMEs, clustering around townshipsand population centres, have a great potential inmeeting some of the urgent needs of developingcountries, especially those with weaker economies.

In most less developed economies andeconomies in transition in the Asian and Pacificregion, the bulk of the industrial labour force isengaged in small- and medium-scale enterprises.Small-scale and cottage industries in LDCs usuallyemploy around 80 per cent of the entire industrialworkforce of the country. This sector also makes avaluable contribution to the industrial value addedof the economy. However, most of the valueadded, varying from around 40 to 70 per cent,routinely originates from only a few industries,usually food and beverages, jewellery and gems,leather and leather products, jute and jute products,textiles, furniture, wood products and handicrafts,indicating the narrow base of the SMEs in theeconomy. In the more advanced economies, SMEsare found in a wide array of industries.

2. Selected country experiences

SMEs in Bangladesh have contributedsignificantly to manufacturing growth and employ-ment creation. There are around 27,000 medium-sized enterprises and around 150,000 small-scaleenterprises in the country. At present, 80 per centof manufacturing establishments are SMEs,accounting for 80 per cent of the labour force and50 per cent of the output of the sector and 5 percent of GDP. SMEs provide vital linkages tolarger enterprises, particularly in the high-growthexport sector, and also form part of the corebusiness activities in both rural and urban areas.The garments industry contributed to SME deve-lopment through orders for accessories, packaging

materials, etc., while the footwear industry in-creased subcontracts to SMEs. In addition, agro-processing and poultry have recently emerged asimportant activities for the development of SMEs.Over the past decades, SMEs have contributedsignificantly to fostering labour-intensive growthand reducing poverty. Their production processesare often marked by outdated technologies. SMEsin general cannot offer the requisite collateral andmeet the transaction costs for obtaining access toinstitutional credit. SMEs also find it relativelymore difficult to access key infrastructure, includ-ing electricity and gas. The policy environment isnot conducive to the growth of SMEs. They aresubject to the same procedural rigours of registra-tion, taxation, credit disbursement, export andimport as large enterprises, thus adding high coststo their operations.

In India, small-scale industries (SSIs)account for 95 per cent of the country’s industrialunits, 40 per cent of industrial output, 80 per centof employment in the industrial sector, 35 per centof value added by the manufacturing sector, 40 percent of total exports and 7 per cent of net domesticproduct.

In Pakistan, the SME sector employs about80 per cent of the industrial labour force andmakes up about 60 per cent of the manufacturingsector. However, the contribution of SMEs toGDP is only 15 per cent.

In Indonesia, before the 1997 economiccrisis, almost two thirds of small business were inthe agricultural sector, over 17 per cent in trading(including restaurants and hotels), over 7 per centin processing industries, 5 per cent in the servicesector, 2.5 per cent in consultancy and 4 per centin other sectors. Thus, although SMEs account formore than 90 per cent of the total number ofcompanies in Indonesia, their share in the Indone-sian economy is very insignificant, as 80 per centof GDP is produced by large corporations.

SMEs constitute a large portion ofThailand’s national economy as they account for70 per cent of employment in the industrial sectorand 4.7 per cent of total manufacturing valueadded. About 98 per cent of establishments in the

12

manufacturing sector in Thailand are SMEs,17

which are scattered in both the Bangkok Metro-politan area and regional areas. The main indus-tries which are dominated by SMEs in Thailandinclude metal and steel, plastic products, rubberand garments. The competitiveness of SMEs isthus a crucial component of the national competi-tiveness agenda. The SME Promotion Act wasenacted in February 2000. The SME PromotionCommittee, chaired by the Prime Minister, and theOffice of Small and Medium Sized EnterprisePromotion, have been established to promotethe development of SMEs. The SME PromotionFund has also been established with seed moneyfrom the Government and other private sources.The Fund can be used for lending to SMEsor groups of SMEs and for funding projectsof government departments, other governmentagencies, State enterprises and private sector or-ganizations as approved under the SME PromotionAction Plan.

Concerted efforts are being made to supportSMEs through: (a) strengthening of technologicaland management capabilities; (b) developing skillsand knowledge; (c) enhancing market accessibility;(d) strengthening of the financial support system;(e) establishing a conducive business environment;(f) commercialization and incubation programmes;and (g) developing networks and clusters.18

Additional work is needed on SMEs, given theirpotential for job creation.

SMEs in Malaysia, defined as companieshaving paid-up capital of less than M$ 25 millionwith not more than 150 full-time employees, areprimarily involved in the manufacturing, engineer-ing and printing areas. SMEs contributed almost30 per cent of total output, 17.6 per cent of value

added and 17.5 per cent of employment in themanufacturing sector in 1995. Figures for thatyear show that only 20 per cent of SMEs areinvolved in exports. Currently more than 80 percent of total manufacturing firms in Malaysia areSMEs. Malaysian Industrial Development FinanceBerhad, which covers the manufacturing sector,provides 60 per cent of its coverage to SMEs.

In the Philippines, SMEs accounted for99 per cent of all enterprises, 45 per cent ofemployment and 28 per cent of value added in themanufacturing sector in the mid-1990s.

Singapore has no statistics for SMEs, but itis estimated that SMEs account for over 40 percent of manufacturing production and over 25 percent of value added in manufacturing.

In the Republic of Korea, SMEs accountedfor 70 per cent of employment, 46 per cent ofgross output and 47 per cent of value added in1997. Since the mid-1990s, SME policies in theRepublic of Korea have focused on fosteringcompetitive SMEs, accelerating the shift towards amore sophisticated and value-added industrialstructure through automation- and information-based processes and providing assistance for tech-nology development and quality improvement.SMEs have been encouraged to form cooperativeties with large companies and enhance their marketcompetitiveness at home and abroad. Short-termpolicies have focused on ensuring stability forSMEs in, for example, access to financing, particu-larly in the wake of the financial crisis. In addi-tion, sanctions against unfair transaction practicesbetween large companies and SMEs have beenstrengthened, and support for SME technologydevelopment projects has been increased. SMEpolicies also place emphasis on promoting exports.The Small and Medium Business Administration(SMBA) was established in 1996 as the centralsupport organization to assist SMEs. SMBA has11 regional offices throughout the country, workingin cooperation with related organizations suchas the Small and Medium Industry PromotionCorporation (SMIPC), Korea Federation of SmallBusiness (KFSB), Korea Credit Guarantee Fund(KCGF) and Korea Technology Credit GuaranteeFund (KOTEC).

17 Korea Trade-Investment Promotion Agency (KOTRA),A Strategy for Internationalization of SMEs in the Asia-Pacific Region: Lessons from the Empirical Study onKorean and Other APEC Member Countries (October1999), pp. 116-117.

18 Research Institute for Development and Finance, JapanBank for International Cooperation (JBIC), Issues ofSustainable Development in Asian Countries: Focusedon SMIs in Thailand, JBIC Research Paper No. 8-1(January 2001), pp. 9-12.

13



In China, the Government has not adopteda comprehensive SME policy yet. However, theState Economic and Trade Commission has deve-loped policies to support SMEs’ managementcontrol, financing and technology developmentsince it established its Small and Medium Enter-prises Department in 1998. In March 1999, theNational People’s Congress recommended morereforms and restructuring of SMEs and recentlygovernment circles have started to use the termSME more frequently. It is known that measuresto support SMEs, especially in financing andpreferential tax policies, have been implementedactively. The large State-owned corporations’difficult management situation has prompted theChinese Government to implement a promotionpolicy for SMEs. Currently there are no accuratestatistics on SME exports; however, it is roughlyestimated that 60 per cent of total exports fromChina come from the SME sector. The main areathat the Chinese Government is focusing on topromote SMEs is financial support, which includesrelieving SME debt through policy adjustmentsand providing credit and preferential tax treatmentto SMEs. Especially to provide credit loans toSMEs, the Government encouraged banks toexpand loans to SMEs by establishing a depart-ment that deals with SME credit loans exclusively.

3. SMEs and export promotion

In developing economies of the ESCAPregion, SMEs are now exporting a wide variety ofproducts and continue to play a crucial role ingenerating and diversifying exports. Although thedeveloping countries’ exports are mostly labour-intensive, as economies of the region are undergo-ing industrial restructuring of varying kinds withemphasis on the private sector as the engine ofgrowth, the importance of SMEs in exports hastaken on a new dimension. In particular, SMEsplay a significant role in the first or early phaseof an export-oriented industrialization strategy bysupplying low-cost labour-intensive products suchas textiles and garments, leather goods and otherconsumer products. Again, as SMEs begin tomodernize, they have been active in producinglight engineering goods such as forgings, castings,diesel engines, simple machinery, machine tools,domestic appliances and construction hardware.

Electronics is in a different category, beingknowledge-intensive but requiring little capital andinfrastructure; it provides a valuable opportunityfor a new breed of young entrepreneurs, techni-cally and professionally qualified, to make theirmark. In countries such as the Republic of Korea,China, India, the Philippines, Thailand and Indone-sia, this sector is proving to be highly productiveespecially for exports from the SME sector. At themargin, imports of SMEs also tend to be lesscapital-intensive than those of large enterprises.This pattern of exports and imports not onlygenerates additional employment, but also has apositive impact on the trade balance. In all thenewly industrialized economies (NIEs), the export-oriented development strategy made a significantcontribution and in that context SMEs had amajor role to play. Even after Japan and AsianNIEs reached an advanced stage of development,SMEs in their economies continued to play acritical role in the export of manufacturedproducts, especially in those that are technology-and skill-intensive such as computers and software,and specialized parts and components for themachinery, transport and aircraft industries. Whilepromoting the ESCAP region’s export competitive-ness of SMEs entails creating new sources ofproductivity growth in the SME sector withstability and further trade liberalization and greaterflow of information, the contribution of SMEs todirect exports is considerable in most economies ofthe region. This contribution is even higher ifindirect exports are included. Statistics are usuallyonly available to limited extents for direct exportsand once again, the picture varies across countriesin the region. In India, SMEs account for about 35per cent of total exports. Since SMEs in Indonesiado not play a very significant role, only less than 5per cent of SMEs are involved in exports but thisfigure is much higher when indirect exports areincluded in terms of export items, textiles, fabrics,garments and agro-based products. In recent yearsexports of jewellery products from SMEs haveincreased rapidly in Indonesia. In Malaysia, SMEexports make up about 20 per cent of total exports.In Pakistan, SMEs exports account for about 80per cent of total exports of manufactured products.In the Philippines, some 90 per cent of exportersfall into the category of SMEs and their contribu-tion to exports is estimated at around 20 per cent.

14

In the Republic of Korea, SMEs accounted for41.8 per cent of exports in 1996. Main exportitems include electric and electronic products,machinery, other household goods and plasticitems. In China, textiles and light industry haveemerged as SME-dominated export sectors. Thesetwo sectors now account for over one third each ofthe total exports of China. In Japan, althoughSMEs occupy a very important place, in terms ofexports, they are not significant. SMEs play a veryimportant role in the exports of Taiwan Province ofChina. In Singapore, as companies are focusingon direct or indirect export of goods through multi-national corporations, the ratio of exports fromSMEs is not high.

Other developing countries trying to repeatthe success of the NIEs face vastly differentexternal market conditions. In particular, theproduct structure of SMEs would have to changein line with changes in external demand. Sinceexternal demand is shifting to human capital andinformation-intensive products, the SMEs of theAsian NIEs are better placed than SMEs in othercountries of the region to respond to this change.The newcomers, particularly countries eager torepeat the success of the NIEs, may find that theirSMEs are less favourably placed. They are likelyto encounter increased competition from otherSMEs from outside the region. In addition, thehigh cost of some capital goods and exchange ratevolatility add to their difficulties.

SMEs make a valuable contribution assubcontractors to large enterprises, which oftentend to be transnational corporations (TNCs).They produce parts and components for largeenterprises on a contractual basis, using localresources and skills. In terms of economic fluctua-tions, they act as “shock absorbers” for the largeenterprises, adjusting their own employment andproduction levels to reflect changes in demandand supply conditions. In these ways, they add tothe flexibility and viability not only of the largeenterprise sector but also of the entire economy.While the importance of such linkages is recog-nized, the actual existence and utilization of thevast potential to forge and strengthen such linkageshave remained limited and therefore requireincreased government attention.

4. SMEs and foreign direct investment

Although information on FDI by SMEs isdifficult to obtain, in some cases it is obvious thatSMEs are playing an increasingly important role inFDI, especially from the more advanced develop-ing countries. However, not all countries collectcomprehensive data on SME-related FDI. Excep-tions in this regard are Japan and the Republic ofKorea. However, there is no survey to identifyinward or outward FDI by SMEs. Nevertheless, inthe Republic of Korea, investment abroad by smallbusinesses amounted to 65.7 per cent of totaloutward investment in 1996 or US$ 3,968 million.In 1996 small and medium-sized TNCs accountedfor 55 per cent of new foreign affiliates byJapanese firms.19 In Thailand, 46 per cent of theapproximately 2,500 Japanese firms operatingin the country are SMEs.20 In 1997 the UnitedNations Conference on Trade and Development(UNCTAD) undertook a questionnaire survey andanalysed the problems and obstacles facing invest-ment by SMEs. This is the only comprehensiveanalysis on the subject.21

On the basis of the above analysis, itappears that SMEs are quite important in theircontribution to overall development in countries ofAsia and the Pacific. They have also increasinglybecome involved in the globalization process,which has clearly created opportunities. Interna-tionalization of SMEs has opened up new opportu-nities for growth within the domestic economythrough employment promotion, entrepreneurshipdevelopment and exports. However, globalizationalso has its costs and has affected SMEs somewhatnegatively, in particular when one looks at it withreference to the recent Asian crisis. Some suchimplications of the globalization process for SMEsare presented in the following section of this study.

19 UNCTAD, World Investment Report 1999: ForeignDirect Investment and the Challenge to Development(United Nations publication, Sales No. E.99.II.D.3).UNCTAD defines SMEs as firms with 300-500 workers.

20 According to the Board of Investment in Thailand,Bangkok Post, 3 March 2000.

21 UNCTAD, Handbook on Foreign Direct Investment bySmall and Medium-sized Enterprises: Lessons from Asia(United Nations publication, Sales No. E.97.II.D.4).


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D. Promoting the competitivenessof SMEs within the ongoing process

of globalization

The analysis and information provided inthe earlier sections of this study have pointed outthat globalization and its various aspects haveimpacted in different ways on the SMEs, whichhas not been positive all the time. Furthermore, inmost of the developed countries, SMEs enjoyedthe support of the Government in terms ofappropriate legislation for the provision of credit,technical support and other incentive measures andbuilt-up their capacity to deal with the adverseimpacts of globalization. However, in developingcountries, SMEs enjoy only limited support fromgovernment for the same types of facilities. Inaddition to the problems that the SMEs have toface in developing countries, new challenges haveunfolded as a result of the globalization process.SMEs of developing countries, particularly smallmanufacturing firms, are facing serious challengesdue to new developments at the regional andglobal levels, leading to severe competition indomestic as well as international markets. Someof these challenges are presented below.

1. Trade liberalization and multilateralagreements

While SMEs in Asia and the Pacific willmainly benefit in the long run from trade liberali-zation within the region, the various provisions ofregional and multilateral agreements including theUruguay Round agreements have led to substantialtariff cuts in developed countries, changing thestructure of export markets, especially for productswhich are important to SMEs. For instance,above-average cuts involve seven product groups,which together account for over 70 per cent ofindustrialized countries’ imports: metals; mineralproducts and precious stones; electrical machinery;wood, pulp, paper and furniture; non-electricalmachinery, chemicals and photographic supplies;and other manufactured articles, all of which aresectors in which SMEs are direct producers orsuppliers. However, not only SMEs in Asia andthe Pacific will benefit, but SMEs from other

regions will as well, which will intensify the levelof competition among SMEs globally for exportsto developed countries. Moreover, high tariffs aremaintained in developed countries on productswhich are also important to SMEs, such as textilesand garments, rubber, leather, footwear and travelgoods. It is also to be noted that regionaleconomic groupings are gaining power and arechanging the patterns of international trade.

For those countries with a less developedeconomy and industrial sector, including the LDCsin South and South-East Asia, their commitmentsunder the regional and multilateral agreementswill provide both opportunities and challenges, inparticular for SMEs. While opportunities liemainly in the necessity to upgrade national capa-bilities and the performance of both public andprivate enterprises forced by international competi-tion, challenges include mobilizing the necessaryfinancing, political commitment and skills to do so.While trade liberalization provides major opportu-nities for SMEs to increase their exports, a majorchallenge will be to improve their competitivenessnot only for exports but also at home as SMEshave to compete with imports and larger inflows ofFDI, including foreign investment from otherSMEs.

One of the most significant outcomes of theUruguay Round was the decision to incorporateworld trade in textiles and apparel into the GeneralAgreement on Tariffs and Trade (GATT)/WTO andto phase out the multifibre arrangement (MFA)over a period of 10 years ending in 2004. Theimplications of this measure for SMEs areconsiderable as they play an important role in theproduction of textiles and garments and relatedareas. The Governments of South and South-EastAsia should monitor the implementation of theagreement. In the meantime, it will be essentialto promote competitiveness in the region’s textileindustry. For SMEs, the important thing is toseek out niche markets for lower-quality low-pricegarments and textiles. To the extent that they aredirect exporters, competition is expected to befierce. To the extent that they are suppliers toTNCs, they will also face challenges as it willbecome easier for TNCs to shop around the worldfor the most suitable supplier. Increasingly, there

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will be a shift away from low-price low-qualitygoods to higher quality in conformity with ISO9000 (international standards for quality manage-ment systems) and ISO 14000 (internationalstandards for environmental management systems).However, niche markets for low-priced goods willcontinue to exist, in particular in the region. As aresult, SMEs need to concentrate on competing athome and in the region rather than at the globallevel.

Technical standards are a vexing problemin expanding trade in machinery, particularly elec-trical machinery, telecommunications equipment,motor vehicles and transport equipment. They alsoare very important in food, pharmaceuticals andother consumer products, sectors where SMEs playan important role to various extents, mainly assubcontractors. As such, they are indirectlyaffected by technical standards. The diversity oftechnical standards and capabilities in the regionand globally presents a formidable barrier to thefree flow of trade as was recognized in theUruguay Round Agreement on Technical Barriersto Trade (TBT). Countries are able to restrictimports through rather onerous and costly con-formance requirements. Imported products maybe subject to laboratory testing and other pro-cedures that are non-transparent and addsubstantially to the item’s cost. This has given riseto greater efforts by Governments, firms andindustry associations to meet standards set atthe international level and gain certification bythe International Organization for Standardization(ISO).

Trade-related investment measures (TRIMs)have been included in the Uruguay Round agree-ments, although LDCs are exempted from imple-mentation for a period of 10 years (up to the endof 2004). The use of performance requirementsis unnecessary when outward-looking policiesare already in place. However, in cases wheretariff and non-tariff protection provides higherprofits to domestic sales, TRIMs may be atemporary necessary evil. Regulations restrictingforeign ownership are likely to be redundant unlessa very high percentage of production is exported,as surveys of TNCs reveal a positive and signifi-cant correlation between foreign ownership share

and export propensities in countries without exportperformance requirements.22 The importancefor SMEs is that investment liberalization willexpose them to more intense competition fromTNCs in the home market and for their exportmarkets.

An important development is the adoptionof the Agreement on Trade-related Aspects ofIntellectual Property Rights (TRIPs). The TRIPsAgreement has incorporated all the essentialprovisions of the international conventions govern-ing intellectual property protection administeredby the World Intellectual Property Organization(WIPO) and made them universally applicableon a most-favoured nation (MFN) basis.23 So far,many developing countries in the Asian andPacific region have continued to violate intellectualproperty rights and incurred sanctions from deve-loped countries, notably the United States. Asmany SMEs are in businesses where intellectualproperty rights have been violated, the implementa-tion of TRIPs will directly affect them. It mayalso lead to increased investment inflows, whichcould crowd them out. However, opportunities arecreated to improve their competitiveness and theirown rate of innovation. SMEs are known for theirflexibility and innovativeness and TRIPs may givethem an extra stimulus to undertake their ownresearch and development (R&D). In addition,technology transfer will be facilitated as TNCs willnow have better guarantees that the technologytransferred will not be abused with detrimentaleffects to their own operations. The absence ofintellectual property rights protection has beenseen as a major impediment to technology transferto developing countries.

Subsidies, safeguards and countervailingduties have been traditionally used and abused as ahidden form of trade protection. In developingcountries, SMEs are major recipients of subsidies.The Uruguay Round Agreement on Subsidies and

22 Eric D. Ramstetter, “Comparisons of foreign multi-nationals and local firms in Asian manufacturing overtime”, ICSEAD Working Paper No. 98-18.

23 WIPO, “Intellectual property for business” <http://www.wipo.int/sme/en/ip_business/index.htm>.

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Countervailing Measures has limited the use ofthese instruments but not altogether eliminatedthem. Major subsidy programmes in developedcountries are exempted from the prohibitiveprovisions while countervailing duties are per-mitted in exceptional cases where “material injury”to domestic producers is indicated. What consti-tutes “material injury” will be difficult to judgeand is therefore subject to different nationalinterpretations. Developing countries should bewary of developed countries’ practice of levyingcountervailing duties while their own practicewith regard to subsidies would have to be severelyrestricted in order to conform to the Agreementand strengthen competitiveness in the domesticmarkets. A similar argument can be made withrespect to safeguards. However, it will give deve-loping countries the same tools to protect theirdomestic industries, including the SMEs.

In the end, trade liberalization within theregion is probably of more significance than at theglobal level. The implementation of the ASEANFree Trade Area (AFTA) will directly open upavenues for SMEs in the ASEAN region toincrease their exports and foreign investment whilealso exposing them to increased FDI and importsat home from countries at similar or slightly higherdevelopment levels. Competition at this level willbe the fiercest. However, less developed countriessuch as Cambodia, the Lao People’s DemocraticRepublic and Viet Nam are likely to benefit fromFDI from developing countries in the region at ahigher development level, which may provide moreappropriate competition and advantages to theirindigenous business sector than similar investmentand imports from the industrialized countries,with which the indigenous sector obviously cannotcompete. Realizing the importance of SMEs,initiatives within ASEAN and Asia Pacific Eco-nomic Cooperation (APEC) have now been takento improve the competitiveness of SMEs of theirmember States, ranging from financial support(such as venture capital) to the establishment ofdata banks and information centres and technologysupport as well as modalities for skills develop-ment and human resources development in theSME sector. In particular, SMEs will benefit frominitiatives within APEC to improve the businessenvironment through the harmonization of regula-

tions and other measures through the BusinessAdvisory Council. In addition, the APEC Centerfor Technology Exchange and Training forSmall and Medium Enterprises (ACTETSME) isintended to support the sustainable developmentand growth of SMEs in the Asian and Pacificregion and at the same time make them globallycompetitive. The Center is envisaged to performthe role of an information clearing house andreferral facility.

While it is generally recognized that SMEscan greatly benefit from global and regional tradeand investment liberalization, the actual impact onSMEs has been mixed but on the whole not verypositive. For instance, it is reported that in manycountries in the region liberalized imports offinished products has led to dumping at below-costprices against which small-scale units could notcompete while it shifted demand away fromdomestic goods to imported goods. In general, itis pointed out that SMEs have not benefited fromthe economic boom in various countries of theregion: while they have gained better access toland and lower prices for machinery and equip-ment, and finance through incentives and govern-ment assistance, the cost of services has generallyspeaking gone up while increased competitionhas driven many SMEs out of business. In addi-tion, any import benefits may not accrue in thosecountries, such as in South Asia, where SMEshave to go through middlemen for their imports.In those cases where import tariffs were loweredon both consumer goods (areas of activity ofSMEs) and inputs such as machinery and equip-ment, the SMEs have suffered. In cases wheretariff cuts on consumer goods were sequenced (orare scheduled) after import liberalization on inputgoods (such as India), SMEs have been able tosurvive in better shape.24

24 Rizwanul Islam, ed., Small and Micro Enterprises ina Period of Economic Liberalization: Opportunitiesand Challenges (New Delhi, ILO/SAAT, 1996). Thispublication also notes that the sequencing of tradeliberalization with respect to cutting tariff and non-tariff barriers has also shifted incentive structures forSMEs to the advantage of large enterprises in variouscountries.

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2. Information technology and SMEs

Creativity and innovations through majorbreakthroughs in technology, particularly in infor-mation technology, has created many opportunitiesand challenges for the SMEs, bringing with themnew changes in production management andcommercial practice. It should be noted that inorder to succeed in the emerging global economy,managers of small and large businesses alike needto redefine how they interact with their customers,suppliers and competitors. To that end, organi-zational strategies and interaction with otherstakeholders must be continuously reviewed andrepositioned with a view to the enhancement ofcorporate functioning and the speedy flow ofinformation and decision-making. Informationtechnology (IT) offers a wide variety of supportsand alternatives which are of crucial importanceto dynamic firm management. In that context,small enterprises have to move effectively intomore integrated management methodologies usingIT applications. In this process, with the advanceof enterprise-wide client-server computing comesa new challenge: how to control all major busi-ness processes with a single software architecturein real time. The integrated solution, known asenterprise resource planning (ERP), promisesbenefits ranging from increased efficiency toimproved quality, productivity and profitability.25

A negative implication of this process is thereplacement of labour by labour-saving techno-logies adopted by the larger enterprises, raisingtheir productivity to much higher levels thanthe competing SMEs. SMEs can ill afford thehigh costs involved in adopting similar techno-logies and run the risk of being driven out ofbusiness. However, in the area of informationtechnology, the Internet and the possibility ofelectronic commerce have opened up myriadopportunities for SMEs to start, operate andexpand their businesses at low cost. In particular,electronic commerce will enable SMEs to streng-then customer relationships, reach new markets,optimize business processes, reduce costs, improve

business knowledge, attract investments and createnew products and services. In addition, e-com-merce would enable them to compete againstlarger, more established firms and in new andpreviously untapped markets. While SMEs donot have the brand recognition of the largeenterprises, with e-commerce they can create apresence and compete in markets that were tradi-tionally dominated by the large enterprises.Internet use in general would also greatly facilitatecommunications, which would lower their operat-ing costs.

The main challenge for SMEs is therefore toupgrade their technological capabilities with regardto Internet use and conduct e-commerce effec-tively. A major constraint is the lack of telecom-munication infrastructure or the restrictive regimespresent in various Asian economies. For instance,while computer density is 21.6 in Singapore, it isonly 0.3 in Viet Nam and China. Telephone mainline density ranges from 51.3 in Singapore to 1.1in Papua New Guinea in the APEC region. Of theless developed countries in the Asian and Pacificregion, Malaysia stands out with a telephone mainline density of 18.3, compared with 2.1 for Indone-sia, 7.0 for Thailand and 2.5 for the Philippines.26

Government policy to provide an enabling environ-ment is therefore crucial for SMEs to utilize thefull potential of the Internet and computerization oftheir operations. It should be noted that in thisperiod of knowledge-based development processes,SMEs must transform themselves as learningorganizations and become increasingly knowledge-based organizations.

3. Investment flows and integration ofcapital markets affecting SMEs

The rapid increase of FDI flows, includingintraregional inflows has major implications forthe SME sector in two respects. The first respect,as indicated earlier, refers to the role of SMEsin domestic markets as suppliers of parts andcomponents or basic services, largely on a subcon-tracting basis, to foreign investors. The second is

25 ESCWA, Potential of Manufacturing Small and MediumEnterprises for Innovation in Selected ESCWA Countries(2001), p. 21.

26 World Bank, World Development Report 1998/1999(Washington, 1999).

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the internationalization and transnationalization ofSMEs themselves as SMEs increasingly investabroad. With regard to the first respect, it hasbeen mentioned that SMEs have been integratedin complicated global production and investmentnetworks set up by TNCs as part of their globalstrategic management policies. The Asian andPacific region in particular has witnessed27 astrong rise in the number and extent of suchnetworks characterized by the importance ofstrengthened linkages of various kinds betweenSMEs and TNCs, which in turn have contributedto the emergence of national competitive advan-tages of selected less developed countries in theregion in particular areas and industrial subsectors.Thus, semiconductors have become a major andleading export industry in Singapore and laterMalaysia, auto parts and components in Thailand,computer peripherals in Taiwan Province of China,software design in India and textiles and garmentproduction at various stages in many countries inthe region ranging from the more advancedASEAN economies to South and Central Asianand even Pacific island economies such as Fiji.In all these cases, indigenous SMEs have beenincreasingly and substantively involved as suppli-ers to TNCs either within the domestic marketor for export to other subsidiaries in the TNC-operated regional and global production networksfor further processing. More important, it can bedemonstrated that those countries that have beenmost successful in forging such linkages betweentheir SMEs and TNCs have done relatively betterin the overall economic and industrial developmentprocess and have been able to optimize thebenefits of foreign investment as such linkagesideally translate into the transfer of much-neededtechnology, capital and expertise and provideindigenous companies with better access tointernational markets. While these linkages refermainly to backward linkages, forward linkagesinvolving retail and service operations under-taken by SMEs have also become increasingly

important and still have enormous potential, furtherwidening and broadening global productionnetworks.

With regard to the second respect, aspointed out earlier it can be observed that SMEsworldwide, but particularly in Asia, have increas-ingly become foreign investors themselves orrecipients of foreign investment usually in theform of joint ventures. Interest in the role ofSMEs in FDI flows derives from the potentialspecial contribution which these companies canmake to developing countries. Their relativelyrecent arrival as investors provides a new sourceof foreign capital for these countries. Theirassumed specific characteristics, i.e., their greaterflexibility, relatively labour-intensive technologies,greater adaptability to local economic conditionsand capacity to serve small communities, couldmake them more suited to the conditions of mostdeveloping countries than their large TNC counter-parts. Therefore, for policy makers in developingcountries the FDI flows that SMEs can providemay constitute a valuable supplement to flowsof more conventional types of TNCs, which, asindicated above, have been reducing their involve-ment in certain regions of developing countries inrecent years.

In many developing economies, SMEs havenow firmly begun to enter the international market.In most cases, SMEs invest abroad for the samereasons as large firms. As with large firms, theyneed to be close to the markets they are serving.Local production is necessary when tariff barriersexist that obstruct their imports. Also, those SMEswhich supply components and other parts to largeenterprises follow their clients abroad as theythemselves internationalize their activities. ManyTNCs now have, through the system of “partner-ship sourcing”, rather close relations with theirsuppliers. Instead of using many small suppliers,they tend to choose a few and contract withthem to supply goods produced to the higherstandards of design and production and deliveredto strict schedules. By using these closer relations,supplier firms can follow their clients abroad,knowing that their products will have a ready-mademarket.

27 See “SME FDI in Asia: extent, pattern and trends”, inUNCTAD, Handbook on Foreign Direct Investment bySmall and Medium-sized Enterprises: Lessons from Asia(United Nations publication, Sales No. E.97.II.D.4), pp.27-34.

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While investments from SMEs clearly haveadvantages for host countries, they may be a mixedblessing as on the one hand overseas SMEsstrengthen national competitive advantages throughtheir contribution to quality and exports but on theother hand they risk crowding out indigenousSMEs. A more preferable investment pattern froma domestic point of view is the establishment ofjoint ventures between larger enterprises fromcountries at relatively higher development levelson the one hand and SMEs from other countriesat relatively lower development levels. TheUNCTAD World Investment Report 1999 explainsthat “in today’s globalizing world economy, theincreasing competitive pressures faced by firms ofall sizes impel more and more of them to establishan international portfolio of locational assets toremain competitive. However small parent firmsand their foreign affiliates may be, they are partof an increasing network of production linkagesacross borders”. As a result, the region haswitnessed significant growth in the level of intra-regional investment flows in the form of jointventures involving SMEs. This process has been aparticular feature of the development processin countries and areas like Taiwan Province ofChina and Singapore but recently also countrieslike China and countries in Indo-China havebenefited from joint ventures with enterprises fromneighbouring countries, often involving SMEs.Subregional economic cooperation frameworkssuch as ASEAN have facilitated and promotedsuch joint ventures through a variety of industrialcomplementarities and cooperation schemes.However, with respect to overall inflows of FDI,the share of FDI coming from SMEs is as yetrelatively small owing to numerous problemsSMEs face, not only in their investment butin their general operations. Lacking governmentattention and support, despite paying lip service totheir cause, has prevented SMEs in many countriesfrom growing and making up an essential “middleclass” of enterprise which would facilitate theirlinkages with larger enterprises, including TNCs,and would ensure a much healthier private enter-prise sector than is currently the case.

While it is generally understood and recog-nized that the promotion and attraction of FDI

has great potential to favourably contribute to thenational economic development process, it ismost definitely not a sufficient policy in itself.The development of national entrepreneurial acti-vity and capabilities resulting in the formation ofhealthy domestic enterprises which are able tocompete internationally is probably even moreimportant. Only with a strong indigenous enter-prise sector is FDI likely to make a positive impactwith less potential to crowd out domestic invest-ment but more potential to transfer technology,capital and expertise either separately or as aconvenient package. At the same time, the chancethat mutually beneficial linkages between theindigenous business sector, which consists mostlyof SMEs, and TNCs can be successfully forgedis much higher. Governments and private sectorinstitutions alike have a role in formulating andimplementing policies and strategies to attractand promote FDI and promote their domestic SMEsector with the objective of establishing a healthybusiness sector at the national level which includesan environment that ensures fair competitionbetween foreign and domestic companies andfacilitates and promotes linkages between the twosectors to the extent that such linkages are indeeduseful. As far as the Government is concerned,support for SMEs does not necessarily haveto come in the form of direct financial and techni-cal support but rather in providing a conducivemacroeconomic and legal framework which doesnot discriminate unfairly against SMEs but, asindicated above, creates a level playing field forlarge and small companies and domestic andforeign companies alike. SMEs should be assistedin such a way that they can help themselves.Assistance should mainly consist of clearingunnecessary hurdles and obstacles, which aremostly of a legal and financial nature, rather thansubsidies and other forms of handouts. Supportingpolicies should also ensure a free flow of informa-tion and strengthen countries’ institutional capabili-ties in both the government and private sectors.Chambers of commerce and other private sectorinstitutions could set up extensive data andinformation networks which SMEs can tap at littlecost on such issues as market access and tech-nology availability among others. At the sametime, Governments need to develop comprehensive

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national policies for the development of SMEs,which involves focusing on specific subsectors andcluster formation in line with a country’s nationalcompetitive advantages. In this context, the esta-blishment of specific industrial parks for SMEs inparticular industrial subsectors which have accessto adequate infrastructural facilities and which arein close touch with R&D institutions and centresof excellence and higher learning as well as withforeign companies could be considered. As part ofsuch policies, the consolidation of SMEs andthe forging of horizontal linkages among SMEsshould be encouraged in line with the globalmerger and acquisition trend among TNCs. WithTNCs getting bigger and bigger, SMEs cannotafford to stay behind. Lastly, active measures toimprove the quality of SME products and servicesneed to be taken which would make them moreresponsive to consumer needs both at home andabroad but would also make them more attractivepartners for TNCs.

The integration of capital markets for SMEshas opened new avenues for financing. Tradi-tionally constrained by adequate access to financialresources, the liberalization of financial marketshas enabled the larger SMEs to tap internationalcapital markets. In fact, the larger presence offoreign banks in domestic economies facilitatedforeign investment of SMEs following their largercounterpart abroad. As such, FDI by large enter-prises is followed by FDI by banks and SMEsconveniently replicating similar business networksexisting at home. However, for the majority ofindigenous SMEs, access to finance remains aproblem as most are not aware of the financ-ing options available or are simply too small totap either domestic or foreign capital markets,although the establishment of over-the-counter(OTC) markets in selected countries, particularlyfor high-tech SMEs, has improved the situationconsiderably. These SMEs also benefit fromincreasing capital available from global venturecapital funds which are roaming the world forinvestment. The formation of joint venturesbetween SMEs has also provided new ways forfinancing SME activity through capital brought inby the foreign partner.

E. Conclusions and recommendations

1. Conclusions

It is obvious that globalization and its mani-festations have already had clear impacts on SMEsof Asia and the Pacific, which have not altogetherbeen positive, despite the great potential for SMEs.In recent years, while it is easier to point to marketforces as the ultimate saviour of development andgrowth including the development of SMEs, thereis a general consensus that rapid and not well-thought-out means of liberalization of trade andinvestment, including too rapid and inappropriatesequencing of reform measures, will do more harmthan good, especially for SMEs. While marketforces would squeeze out inefficient SMEs andwould, at least in theory, improve economicefficiency at the national level, the social conse-quences of overreliance on the market anduncontrolled liberalization measures should be themajor consideration to continue active governmentsupport for SMEs in developing countries, toallow them at least time to adapt to changingglobal and regional economic realities. One of themajor challenges for Governments in developingcountries is the evaluation of various economicpolicies affecting SMEs. In many cases, policiesdo not effectively address the key problemsconfronting small firms, and measures taken indifferent areas are inconsistent. Assessing the realimpact of each policy measure is not easy and hasbeen attempted in a rather haphazard manner inseveral countries. Nonetheless, all Governments indeveloping countries of Asia and the Pacific canbenefit from sharing their experiences on bothsuccessful and unsuccessful practices, with insightsof the private sector to inspire more mutuallybeneficial policy frameworks for globalizing smallfirms. Effective benchmarking is one way tohighlight weaknesses and help to build momentumfor shaping policies that can allow for greaterbenefits from cross-border business networking. Itcan also help Governments to address the costsand challenges which arise from global industrialrestructuring affecting SMEs. In so doing,Governments need to realize that SMEs havealready changed themselves to some extent alongthree major lines:

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1. There is a growing “professionalism”in SME management as well as more dependenceon formal financial institutions;

2. SMEs are increasingly diversifying theirproducts into knowledge- and skills-based sectorssuch as electronics, informatics, precision compo-nents and parts;

3. SMEs are increasingly diversifying theirmarkets away from domestic markets to overseasmarkets.

However, the share of SMEs actuallyinvolved in more sophisticated and higher value-added activities remains as yet small in mostcountries of the region. There is therefore a needfor a comprehensive and well-integrated packageof measures and incentives, both on the supplyside and on the demand side, to foster thegrowth of a vibrant SME sector and improve thecompetitiveness of SMEs in both domestic andinternational markets. In developing such a com-prehensive and well-integrated support package,careful consideration should be given to severalaspects. First, the ever-present temptation tocreate new organizational structures would haveto be resisted, and existing institutions, suitablyreorganized, reformed and strengthened, should beutilized to extend support services and input to theSMEs. In that regard, decentralized organizationalstructures should be used to reach out to theSMEs. Second, support measures should beextended only to deserving SMEs and not to thosewhich are likely to waste resources. Perpetualsupport and subsidies should not be granted toinefficient SMEs. Third, promotional measuresshould be development-oriented rather thanprotective or restrictive. In a development-orientedapproach, market structures that increase competi-tiveness, innovation and resilience are emphasizedso that SMEs can become self-reliant and an effec-tive source of competition for the large enterprises.Fourth, incentive measures should be direct anduse prices and markets as far as possible. Fifth,there may be instances where the Governmentfinds it difficult to reach the SMEs, especiallythose that are located in rural and remote areas.In such instances, government agencies shouldactively seek to involve non-governmental organi-

zations (NGOs) in developing programmes anddelivering support services to the SMEs. In low-income countries such as Bangladesh and Nepal,some NGOs have proved to be highly effectivein delivering credit and providing other kinds ofsupport to rural-based small and craft industries.Overall, the ability of SMEs to compete in theglobal marketplace depends on their access tocertain critical resources, the most important ofwhich are finance, technology and managerialskills. TNCs have been an important means forSMEs to gain access to new technologies andmanagement know-how. The shift in corporateproduction strategies from simple integration tomore complex integration has widened the oppor-tunities for SMEs while at the same time raisingthe requirements for entering TNC networks. Thecurrent challenge for developing countries isfirst to adopt policies to deepen the developmentaleffects of FDI by attracting TNCs willing to forgesuch linkages and then to undertake measures topromote such linkages between TNCs andSMEs.28 Specifically, the support measures forthe improvement of competitiveness of SMEs canbe categorized as follows:

(a) Organizational and policy supportmeasures

All countries of the region have evolvedinstitutions to support SMEs. In particular, in thedeveloping economies of the region, organizationalsupport has assumed two distinct roles, which canbe classified as (a) regulatory and (b) promotional.The regulatory role is concerned with aspectssuch as a framework of laws and regulations forregistration and licensing, maintenance of statisti-cal records, regulation of foreign investments,prevention of misuse of concessions and concen-tration of economic power, and reducing locational

28 UNCTAD, “Enhancing the competitiveness of SMEsthrough linkages” (TD/B/COM.3/EM.11/2), paper pre-sented to the Trade and Development Board Commissionon Enterprise, Business Facilitation and DevelopmentExpert Meeting on the Relationship between SMEs andTNCs to Ensure the Competitiveness of SMEs, Geneva,27-29 November 2000.

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constraints. The promotional role is the positiverole with respect to inputs such as infrastructure,financial support, training, technology and market-ing. The regulatory and promotional aspectsare applicable to both new entrants and existingunits.

In almost all countries there is either aseparate policy statement for SMEs (or for cottageand small industries) or a general industrial policystatement with some portions of it relating to thissector. There is a ministry or a department inoverall charge of industry and a host of institutionsdealing with or extending support to SMEs. Veryfew Governments have, however, enacted speciallegislation to back up SMEs.

There is a perceived need for individualeconomies to set up focal points for SMEs at thenational level which are linked to other similarfocal points in neighbouring countries and othercountries in the region and even outside the region.Such linkages provide for quick and efficientinformation exchange on trade and investmentopportunities for SMEs. In this context, extensiveuse could be made of the Internet. Such focalpoints could also provide training and informationon sources of technology and finance and act asinstigator for setting up and strengthening linkagesamong SMEs under cooperative marketing andjoint manufacturing arrangements and linkages ofvarious kinds between SMEs and large enterprises,both domestic and foreign. Subsidiaries of such afocal point could be set up in various areas of acountry. Thus, the Governments in developingcountries should adopt a comprehensive set ofselective support measures for linkages betweenSMEs and large firms as well as TNCs. Businessassociations should also play an important role infacilitating such linkages, as well as networking ofSMEs.

The globalization process has called for adrastic reorientation in terms of domestic economicpolicy issues calling for a change in the Govern-ment’s role towards SMEs. One of the principalmeasures in support of the SMEs would have toinvolve the attenuation of macroeconomic andsectoral policy biases against them which haveaccumulated over the years in many developing

countries of the region. The elements of thesepolicies and their consequences are fairly wellknown. Trade and exchange rate policies insupport of rapid industrialization efforts often giverise to overvalued exchange rates, which make theexports of SMEs non-competitive in internationalmarkets. Tariffs and taxation are importantelements of policy in all countries. However ithas been found that in most cases they benefitlarge industry and not necessarily SMEs. It hasbeen established that import regimes (includingtariff rates) are inherently biased in favour oflarge industry. As far as tax concessions areconcerned, only in a few countries like India doesexemption from central excise tax seems to bedirected to SMEs. In most other countries, taxconcessions seem to be given on the basis ofconsiderations other than size. Investment incen-tives are generally scale-based, favouring largeprojects and enterprises and capital-intensiveproduction techniques over small-scale and labour-intensive technologies. Macro policies also tend toprotect large enterprises against competition fromSMEs.

It is therefore necessary to define new keyelements in policies and in the role of the Govern-ment in adopting measures to remove the barriersthat prevent SMEs from prospering. The elementsrelate to self-reliant policy (helping SMEs to helpthemselves); stronger private sector empowerment(membership organizations, self-regulation, policy-making); private and non-governmental businessdevelopment services (with government fundingbut without direct government intervention);information technology-driven assistance (use theinformation superhighway); greater linkage be-tween SMEs and large enterprises (creating themissing middle); and industry clusters for criticalmass.29 Such measures should lead to a reductionin biases in terms of access to economic inputssuch as credit, training and technology. Reformstowards low and uniform tariffs and quotas,realistic interest rates and relaxing physicalcontrols on size and output go a long way towards

29 UNIDO, Proceedings of the Asia-Pacific RegionalForum on Industry, Bangkok, 23-24 September 1999,p. 23.

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harmonizing macro and sectoral policies withmeasures designed to benefit SMEs. On the de-mand side, macro and sectoral policy measuresshould aim at fostering agricultural and ruraldevelopment, especially in raising rural incomesand encouraging exports so as to harness thepotential of external demand to the maximum.In low-income economies, macro and sectoralpolicies favouring agricultural development haveparticular relevance, for such policies can increaserural income, thereby creating demand for income-elastic SME products. In addition, economic liber-alization and deregulation measures should takeinto account the situation of SMEs and proceed inan appropriate way of sequencing which would notunduly harm the SME sector.

(b) Entrepreneurial and managerial skills

SMEs which are trying to enter globalmarkets require good entrepreneurial and manage-ment skills. Thus, any support, includinginfrastructural support, would have to be combinedwith sound institutions in developing an efficientSME sector through measures designed to supportthe development of SME entrepreneurs andmanagers who have great potential in generatingbenefits not only for the SMEs but also forother enterprises. In general, entrepreneurs inthe SME sector are often “home-grown”, acquiringtheir skills and leadership qualities in their ownworkplace and business environment. Beyond acertain point, this “learning by doing” approachbecomes less and less useful in assisting smallenterprises in graduating into modern small enter-prises, equipped with newer forms of technologyand marketing skills. Furthermore, SME manage-ment needs to be experienced and able tocommunicate both inside the enterprise and withoutside parties. Therefore, training and supportprogrammes may be needed to improve the qualityand skills of both employees and management.Moreover, SMEs would need practical assistancein legal and consulting services to negotiate forbetter terms in international business transactions.In designing these support services, careful atten-tion would have to be paid to ensure proper opera-tional linkages between service providers andSMEs. Failure to develop such links frequently

led to rigid application of rules and regulations,institutional inertia and an inability to respond tochanging requirements through innovation andforesight. The prime objective of forging suchlinks should be to make the entire effort a two-wayprocess in which the supporting institutions andSME entrepreneurs find themselves in a continu-ous dialogue. This is especially true for rural andremotely-based SMEs whose needs are too oftenneglected.

One of the most critical areas in whichstrong support needs to be extended to the SMEentrepreneur is in access to information. Access tostrategic information, e.g., on potential foreignbusiness partners, regulations and business envi-ronment issues in foreign markets, is anotherchallenge for SMEs. These barriers need to beaddressed as they can prevent SMEs from partici-pating in international alliances and other globalbusiness linkages. In fact, the intensity of strategicpartnering tends to rise with the size of companies,indicating that larger firms actively seek and findexternal opportunities through strategic linkages.Government Internet home pages for SMEs andother private services (e.g., market research) canimprove small-firm access to business-relatedinformation in foreign markets.30 Thus, SMEsoften fail to prosper because they have limitedaccess to information. This may be because infor-mation is controlled or available but not accessiblebecause of ignorance or relative isolation frominformation centres and sources. Computerizationand the introduction of the Internet would go along way towards providing SMEs with properaccess to information, although in many countriesInternet use is still controlled while SMEs may nothave the necessary skills and other resources (e.g.,capital) to acquire this technology and effectivelyutilize it. Governments and private sector institu-tions such as chambers of commerce could assistin setting up data and information banks onmarkets, technology and other areas of concern toSMEs. Regional centres in rural areas for informa-tion dissemination should also be set up.

30 Kentaro Sakai, “Global industrial restructuring: implica-tions for small firms”, STI Working Papers 2002/4(OECD, Paris, February 2002), p. 33.

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(c) Provision of finance

The most pressing problem faced bySMEs in improving their competitiveness is thelack of adequate financing facilities. All countriesof the region recognize the importance of thisvital input and have created a network of financialinstitutions and banks, and many of them havecreated specialized institutions to meet the specificneeds of SMEs. However, the traditional small-scale enterprises relied little on external finance.In recent times there has been an increasingtendency on the part of SMEs in developingcountries to seek finance from banks and otherfinancial institutions. In virtually all countries,however, there are numerous complaints aboutthe paucity of loan funds available to SMEs andthe onerous terms imposed for accessing formalfinance, thereby restricting the possibilities ofimproving the competitiveness of SMEs. Addi-tionally, despite increasing awareness of the needfor a seed capital scheme and venture capital,the institutional framework for these cannot beconsidered well developed. In some countries,supervised credit in its commonly applied form ofsupply of machinery on a hire-purchase basis hasbeen introduced. Supervised credit also sometimestakes the form of assistance in the purchase of rawmaterials and intermediate inputs.

Some countries have adopted fiscal policiesor provided tax relief directed explicitly at SMEsor at firms contributing in some special way to thedevelopment effort, regardless of size. In India,for example, small-scale industries are exemptedfrom the payment of excise duties on productionup to a certain limit. Tax holidays are given inMalaysia and other countries.

There are several issues in the area ofproviding development financial assistance toSMEs which require careful consideration. Re-gardless of the stage of development of theeconomy, a number of factors determine theaccessibility of organized finance for SMEs,including the structure of financial institutions, theterms and conditions of credit and the diversity ofthe financial instruments offered. Generally, theseare geared to serve the financial needs of largeenterprises and better-established public sector

enterprises with which the SMEs lack both themanagerial resources and informational advantageto compete effectively.

While it is widely recognized that SMEsmay indeed qualify for institutional finance, theinterest rate policy generally works against them.Most countries of the region offer finance at subsi-dized rates to their industry. One consequence of asubsidized interest rate policy is the creation ofexcess demand over supply. Faced with such anexcess demand, financial institutions are forced toration out the credit at their disposal. One crite-rion used in the choice of clients in a rationingscheme such as this is enterprise size, where thelarge-scale sector has an advantage. At times, theirsize is taken by financial lenders as an indicator oftheir profitability and hence the lenders considerthe risk of loans advanced to them to be lower. Inthe process, SMEs progressively get squeezed outof the organized sector and many of them findthemselves dependent on the informal sector forexternal finance, especially those that are locatedin townships and rural areas.

This raises an important question relatingto mobilization of financial resources for SMEs.The mobilization of financial resources for SMEscan be an uphill task given the intense competitionfor domestic resources in all the developingcountries of the region. While the majority ofsmall enterprises depend on retained profit andinformal sources of credit for expansion, theneed for external finance increases rapidly withthe growth in size, first as working capital andthen as fixed capital. The latter requirement forexternal finance is found mostly in the modernand better-established segment of the SMEs. Theresponse of the developing countries has beenthe establishment of a variety of institutions andagencies, as indicated above, with varying degreesof success.

In recent years, following the successfulexample of Japan in mobilizing savings, manycountries in the region have introduced savingsschemes and experimented with a wide array ofnew financial instruments and innovations. Alongwith efforts to boost savings mobilization,measures have been adopted to increase the

26

accessibility of SMEs to organized finance. Onesuch measure has involved the growing use ofguarantees for loans advanced to SMEs.

Many countries have also tried to restrictthe activities of informal credit intermediaries.However, given the inability of the formal sectorto meet the credit requirements of SMEs, it maybe more useful to increase the complementa-rity between formal and informal credit markets.In that regard, the banks could lend to theinformal credit intermediaries for on-lending tosmall enterprises, thereby reducing the administra-tive and other costs of the formal sector’s directlending.

(d) Technology capacity-building forSME competitiveness

One of the most important factors incapacity-building for improved competitiveness ofSMEs is through technological upgrading. Theneed to apply modern efficient and relevanttechnology in order to survive in an increasinglycompetitive environment has never been so urgent.It is often stated that globalization and liberaliza-tion have opened new opportunities for firms indeveloping countries to acquire technology fromabroad and that increased competitiveness intechnology markets has made technologies cheaperand more accessible. This may indeed occur insome industries and sectors, while in others tech-nology remains costly and access is still difficultfor SMEs in the developing world. Acquiringtechnologies and the technological capacitiesneeded to master technologies involves time,effort, cost and risk and complex interactionsbetween firms as well as between firms andinstitutions. Very often the transfer of technologyto solve the problems of industries is available.However, transfer agents are needed to make itaccessible to these industries, which also have tobe assisted by dissemination of information onchoice of technology, source of equipment, know-how and “show-how”. It should also be notedthat every effort should be made to promote thewider applications of information technology inthe SME sector. However, lack of finance andskills has constrained this. Although information

and communication technology (ICT), includingthe Internet, has great potential for allowing SMEsto expand their customer base, enter new productmarkets, rationalize their businesses and searchglobally for potential business partners, many smallfirms have not fully exploited these opportunitiesowing to a lack of awareness and skills and thenecessary resources to make initial investments.Costs of installation, access and use of ITC, whichvary widely across countries, present barriers forsmall firms. Governments have to make specialefforts to enhance small-firm awareness and skillsfor the use of ICT and electronic commerce. Inthis context, there is an equally urgent need onthe part of multilateral and other internationalagencies, to assist countries in promoting theapplication of ICT for SME use.

Available evidence indicates that technicalinformation and technology for SME use obtainedfrom countries at similar stages of development aremore useful and relevant. However, some of themajor impediments in this respect include lack oflocal capacity and the skills required to select,acquire, adapt and assimilate technologies, finan-cial constraints and lack of awareness of, as wellas relevant information on, available technologies.Few SMEs have the networking and monitoringcapabilities that would enable them to access andevaluate technological information. SMEs, be theyin developing or developed countries, generallytend to be risk-adverse, particularly when it comesto the introduction of innovations based on newtechnologies. Despite these limitations, new formsof inter-firm technology cooperation are beginningto emerge that involve longer-term mutual benefitsand go beyond short-term financial gain. Thecommon feature of these new forms of coopera-tion is the sharing of capabilities to developnew products, technologies and processes, or toproduce and market new products. It is in consi-deration of these factors that increasing emphasishas to be placed on technical cooperation amongdeveloping countries (TCDC) and economiccooperation among developing countries (ECDC)with the active cooperation and assistance of thedeveloped countries and multilateral and bilateralaid agencies in implementing TCDC and ECDCprojects.

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The need for technological upgrading hasbecome more urgent in a globalizing world. SMEscan ill afford to be left behind in the processof technological upgrading and the informationtechnology revolution, which has led to an ever-increasing use of the Internet for companies’communication and information needs. Sustainedprogrammes with specific focus on SMEs needto be adopted by Governments to allow theintroduction of computers and other informationtechnology in the private sector while adopting thenecessary legislation to that effect.

(e) Regional cooperation measures forSME competitiveness

The potential of intraregional trade andinvestment flows, as a means to spur the growthof a modern, export-oriented SME sector isawaiting full utilization. Regional cooperation inSME development is based on the premise thatit will enable them to take advantage of econo-mies of scale. At the national level, cooperativeshave historically been viewed as conduits toassist SMEs in reaping economies of scale inmarketing and purchasing. Regional cooperationcan extend this process, enabling national SMEsto take advantage of scale economies moreeffectively. Additionally, regional cooperation inSME development can improve the prospectsof developing countries to create the necessaryconditions for the growth of a viable and modernSME sector. This in turn can stimulate thedevelopment of a vibrant industrial sector.Subcontracting systems at a regional level canalso be utilized, thus promoting closer interfaceand interdependence between large enterprisesand SMEs. However, it is essential to identifypriority industries in devising regional cooperationmeasures.

There are three broad possibilities herewhich could be pursued on a regional basis. First,specific SMEs with export potential could beidentified, in such areas as textiles, leather goodsand electronics. Once such an identification isdone, each industry could be closely evaluated tosee where and how it needs assistance in productdevelopment, standardization, technology upgrad-

ing and skills development. Second, once theseindustries are identified for assistance, regionalinitiatives could be launched to develop arrange-ments through which market-sharing schemes canbe designed. In this way, much wasteful competi-tion for foreign markets can be replaced bycooperation for access to these markets on anequitable basis. Third, in the area of forginglinkages between large industries and SMEs,specific industries from Japan, China and theRepublic of Korea can be studied to see how suchlinkages were developed, what risks did they faceand how they succeeded. Lessons thus gatheredcan then be disseminated to other developingcountries. Technology flow, technical and finan-cial assistance, improved supply and marketingarrangements, promotion of industrial activitiesand training of personnel are a few areas wheresuch schemes may be formulated to foster suchcooperation.

Regional cooperation measures would haveto be supplemented by measures at the nationallevel, particularly by removing those barriers thathinder the growth of SMEs. These measureswould include removal of obstacles in obtainingaccess to inputs such as technology, credit andtraining, reforming tariff structures and removingquotas, introducing realistic interest rates anddismantling physical controls on size and output.Four specific areas where regional cooperation canbe enhanced are:

1. New and emerging technologies forSME-development;

2. Support to SME entrepreneurs andmanagers for enterprise development;

3. Skills development for SME growth;

4. Mobilization of financial resources asboth fixed and working capital.

The role of national focal points andsubregional and regional networks of such focalpoints for SMEs was discussed before. As faras finance is concerned, the establishment ofsubregional development banks or even a regionaldevelopment bank for SMEs in Asia and the

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Pacific, with financial and technical support fromand under the auspices of the Asian DevelopmentBank or International Finance Corporation of theWorld Bank for instance, could be considered.Technology information and supply centres arecurrently managed by regional organizations suchas ASEAN and APEC while at the regional levelat large the Asian and Pacific Centre for Transferof Technology (APCTT) plays a fundamental role.In the long run, as such subregional cooperationwidens to a larger level, such centres could beintegrated and consolidated into truly regionalcentres which are electronically linked to globalcentres and data banks.

2. Recommendations

The previous sections presented the currentsituation of SMEs in Asia and the Pacific andprospects and challenges facing them in a globaliz-ing world. At the moment it seems that SMEsare negatively affected by globalization as thepolicy environment in which they have to operateat the national level is often not conducive. WhileGovernments pay lip service to their cause, theruling elites in many countries often have stakesin the large enterprises and as a result the SMEsfind themselves on the losing end. Even potentiallinkages with TNCs are not entirely the result ofthe efficiencies of the market subject to politicalwill and commitment. While globalization isforcing Governments to take more integratedaction to help SMEs – the recent Asian crisismade their importance painfully clear – there is arisk that the big money attached to TNCs andlarge-scale operations will divert Governments,banks and major business concerns (with oftenoverlapping interests) once again away fromattention to the SME sector. There are clearlyexceptions. In economies like Malaysia, Singa-pore and Taiwan Province of China, SMEs havebeen a fundamental cornerstone of developmentsuccess. The relative neglect of the SMEs in acountry like the Republic of Korea was certainlypart of the process that set the crisis in motion.In fact, various studies have indicated that SMEs,in particular the smaller ones, were more affectedby national and local conditions than by globali-zation per se.

While Governments play an importantrole in supporting SMEs, the SMEs themselvescannot sit idle and wait until they get somesupport which may never come. In fact, the mostsuccessful SMEs are those that are activelyseeking partners and support themselves andrealign their competitive strategies to the realitiesof the global marketplace. It is important forSMEs to adopt modern financial managementtechniques and actively look for suitable tech-nology that is affordable and would improvetheir productivity. They need to be ready totake risks as risk-taking is the main characteristicof the successful entrepreneur, in exploringoverseas markets for exports or even for directinvestment. In this context, the proper selectionof partners for joint cooperation schemes infinancing, management or technology, both atthe national level and across borders, is veryimportant. However, it is imperative for SMEentrepreneurs to overcome their pride andreluctance to give up management autonomy intheir own, often family-owned businesses. Afterall, TNCs will not enter into joint ventures andmergers unless there are clear advantages to doingso. Given the surge of mergers and acquisitionsbetween large TNCs at the global and regionallevels, SMEs cannot afford to lag behind ashuge TNCs will not be able to do business withtiny enterprises. Even the SMEs that cater fordomestic demand will find themselves ultimatelylinked in a larger enterprise network whichcomprises other SMEs and large enterprises,including TNCs, in an economic environmentwhich can be truly termed global.

Thus, there is an urgent need to improvethe competitiveness of SMEs in this globalizingworld. This aspect has to be dealt in a com-prehensive and coherent manner encompassingpolicies, institutions and other support measures.Specifically, the following urgent actions arerequired:

1. National Governments have played acrucial role in the growth of SMEs through avariety of support programmes such as creditand reservation policies as well as mandatoryprocurement programmes and technology support.

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In order that SMEs continue to operate effectively,Governments in Asia and the Pacific need toprovide a conducive economic environment witha minimum of restrictions on production, tradeand investment. They also need to implement theright macroeconomic policies to maintain price,exchange rate and interest rate stability, appro-priately liberalize trade and investment regimesand provide a proper financial, legal and institu-tional framework. In this task, Governmentsmay decentralize decision-making mechanisms tobe as close to the SMEs as possible and involveindustry associations and NGOs to a greaterextent;

2. For the above-mentioned purpose,Governments may review the policy framefollowed in their countries relating to the SMEs(specially in respect of export-oriented units) soas to take into account the many changes thatinevitably take place in the next few years as aresult of the multilateral agreements including theUruguay Round and the new round of agreements.Governments may also make the SMEs in theircountries fully aware of the implications of thoseagreements (through workshops and seminars) andprepare them adequately to meet the challengesof increased competition both at home andabroad. Such a comprehensive and critical reviewshould also take note of the need to harmonizethese challenges with the social and economiccompulsions in those countries;

3. The SMEs in the ESCAP region havedemonstrated a proven capability to exporta wide range of products particularly in textiles(and ready-made garments), leather and leatherproducts, light engineering (including electricalappliances), agro-based products and electronicitems (including computer software). Theycontribute in many countries as much as 50per cent of industrial production, 60 per cent ofemployment and 40 per cent of direct exports;

4. Policies may be reoriented to streng-then the export sector through effective marketinginformation networks, assisting SME delegationsin going abroad to study at first hand opportunitiesfor export and also organize joint marketing

through collective action and launch awarenesscampaigns on the need to maintain quality andenvironmental standards by conforming to widelyaccepted standards such as the ISO 9000/14000series;

5. Governments have a critical role toplay in providing the necessary infrastructure –both physical and social – to enable SMEs tooperate efficiently and provide them with askilled workforce that can function with highproductivity. Private sector assistance could beenlisted in this task through carefully designedfiscal policies and tax incentives. Vocationaltraining programmes for workers and improvedentrepreneurial and management skills for super-visory personnel have to be organized in closecooperation with industry associations and traininginstitutions;

6. It is now widely recognized thatlow wages, by themselves, cannot sustain forlong a viable growth process, which can onlybe done by continued technology upgrading andexposure to improved management and organiza-tional techniques. Governments have to set up(if not already existing) suitable national R&Dcentres for each relevant subsector where relevantinnovation practices could be developed anddiffused widely throughout the industry and thesector as a whole, as has been done effectivelyunder the Sparks Programme in China. It isnecessary, however, to ensure that such tech-nologies are eco-friendly and attempts shouldbe made to acquire them for disseminationthroughout the country. In this connection,APCTT may function as a focal point in pro-viding information to member countries onthe availability and suitability of such techno-logies;

7. One method that has proved effective inseveral developed countries as well as in somecountries of the ESCAP region is to enhance thecollective efficiency of SMEs through operationin clusters specializing in a specific product. Suchclusters can consist of both large and smallenterprises and other units to provide specializedservices. Each cluster can have a resource centre

30

to coordinate the activities of the cluster, collectand disseminate information and generally functionas the brain of the cluster. While such clustersneed to arise on their own, Governments canprovide support services to enable them tooperate efficiently preferably by cluster industryassociations. Current international economic reali-ties demand a holistic view of trade, technology,investment and capital flows, not only for largeindustries but for SMEs as well;

8. It is noted that a number of regionalarrangements such as APEC, AFTA and SAPTA(South Asian Preferential Trading Arrangement)could provide greater opportunities for SMEs inthe region to come together. In addition,subregional groupings (in the shape of growthtriangles or quadrangles) could be proposed whereSMEs may find it easier to work in closecooperation. In such groupings, an inventory ofthe SMEs with the capability to participate inregional networking arrangements for productionand exports can be made and publicized widely.Within this context, local authorities may considernetworking themselves to make this idea moreeffective;

9. Any such regional networking would,however, require some concrete steps to betaken such as: (a) uniformity in standards andtesting procedures; (b) compatible managementand operational styles; (c) liberal tax laws (includ-ing avoidance of double taxation); (d) clearlydefined pricing policies and arbitration procedures;(e) supportive R&D as well as entrepreneurshipdevelopment programmes and vocational skillsdevelopment programmes; (f) clear agreement onthe terms of technology transfer (such as royalties,know-how fees, etc.); (g) inculcation of an entre-preneurial spirit that blends cooperation and com-petition; and (h) a nodal agency in each countrywhich can help to coordinate efforts;

10. It is noted that easy access to credit onreasonable terms continues to be a major problemfor SMEs in most countries. In that context,governments may advise the financial institutionsin their countries to provide deserving SMEs withlong-term as well as short-term credit so as to beable to operate to their full capacity;

11. The heartening feature of the SMEscene in many countries in recent years is theinvolvement and participation of women both onthe shop floor and entrepreneurs managing smallbusinesses. It is felt that the presence of womenin the industrial field will have a beneficial effecton the economic and social life of society as awhole and Governments may therefore providespecial support to such women entrepreneursthrough various incentives and exemptions.Efforts should be made to organize women’sentrepreneurship programmes at the national andregional levels and facilitate training programmesand other supporting activities as extensively aspossible. Regional organizations such as ESCAPand the Asian Development Bank (ADB) shouldassist countries in such activities;

12. Ultimately, it is the entrepreneurs whowill have to adopt the right strategies to competesuccessfully in a changing economic environment.To this end, they need to focus on specializationstrategies, be responsive to market needs, seek outmarket niches, adopt superior and relevant tech-nologies, develop higher skills levels and generallycultivate an attitude which would combine a com-petitive spirit with a willingness to cooperate withother units in joint collaborative arrangements;

13. It should be noted that regionalcooperation programmes could be initiated underthe auspices of various regional organizations andregional arrangements, aimed at strengtheningnational capacities in promoting SMEs in generaland export-oriented ones in particular. In thisrespect, regional bodies such as ESCAP and ADBand regional and subregional bodies such asAPEC, ASEAN and SAARC should also initiateand strengthen their activities aimed at assistingGovernments in undertaking reviews of theirpolicy directions, organize training in specificareas such as financial and marketing managementand technology transfer, strengthen selected institu-tions for the SMEs and help to foster subcon-tracting through a network of clusters. ESCAPmay consider promoting networking of SMEassociations through appropriate projects. Particu-lar attention should be paid to the needs of theLDCs, Pacific island economies and economies intransition so that the growth process is acceleratedto keep pace with the rest of the region;

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31 Ibid., p. 30.

14. The most important aspect in en-hancing the global competitiveness of SMEs isto make them attractive business partners forforeign firms. SMEs do not necessarily haveto establish foreign facilities for production tobecome more international. Small firms can ex-port their products and services through exploitinginternational distribution networks. Governmentscan help small firms to compete globally by

ensuring easy access to strategic business informa-tion.31 Therefore, Governments need to play aproactive role in supporting SMEs by helpingthem to improve their competitiveness in a globali-zation process.

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A. Introduction

This paper deals with the prospectsand challenges for promoting resource-based andagro-based SMEs for employment generation andexport promotion, thereby helping countries topromote integration at the regional and globallevels. The paper identifies areas for policyorientations, institutional capacity-building andprivate sector-led rural enterprise development witha view to improving employment in rural areas andproductivity improvement for poverty alleviation.

As the study is concerned with the role ofagro-based and resource-based SMEs for employ-ment generation and poverty alleviation, the timeframe of the study is confined mainly to the 1990s.For analytical purposes, Asian economies consi-dered in the study have been grouped into thefollowing regions:

• South Asia, comprising Bangladesh,Bhutan, India, Maldives, Nepal, Pakistanand Sri Lanka;

• The NIEs, comprising Hong Kong,China; the Republic of Korea; Singapore;and Taiwan Province of China;

• Developing economies in South-EastAsia, comprising Cambodia, Indonesia,the Lao People’s Democratic Republic,Malaysia, Myanmar, the Philippines,Thailand and Viet Nam. These countriesalong with Brunei Darussalam andSingapore constitute ASEAN and AFTA.

Three other economies in East Asia, i.e.,Japan, Mongolia and China, are also included inthe study.

II. PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEsIN ASIA AND THE PACIFIC

Tarun Das*

B. Resource-based and agro-basedindustries: the sector’s main

characteristics

1. Economic significance

(a) Contribution to GDP

The growth rate of manufacturing valueadded (MVA) and the share of MVA in GDP inselected Asian countries are given in table II.1.It is observed from the table that the share of MVAin GDP in 2000 was highest in South and EastAsia at 30.4 per cent. China had the highest shareat 42.8 per cent followed by the Republic of Korea(35 per cent), Malaysia (32.4 per cent), Thailand(31.7 per cent) and Mongolia (30.1 per cent).

(b) Contribution to employment

Table II.2 presents male and female employ-ment by economic activity in selected Asianeconomies in 1990 and 2000. It is observed fromthe table that in the NIEs, the service sector hasthe predominant share of both male and femaleemployment followed by industry and agriculturein that order, whereas in most of the countriesin South Asia and South-East Asia, agricultureand allied sectors have the predominant share ofboth male and female employment. Over time,consistent with the change in sectoral shares inGDP, both the male and the female labour forcehave shifted from agriculture to industry and ser-vices in the NIEs and South- East Asian countries.

Table II.3 provides information on the shareof females in total employment by differentbranches of manufacturing in selected Asian coun-tries (Macao, China; Taiwan Province of China;India; Indonesia; Japan; Malaysia; Myanmar;Nepal; Philippines; Republic of Korea; and SriLanka) in the most recent period for which

* Economic Adviser, Department of Economic Affairs,Ministry of Finance, New Delhi.

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Table II.1. Growth rate and share of MVA in selected Asian countries, 1980-2000

Total MVA Per capita MVA Share of MVACountry or area Growth rate (%) Growth rate (%) Value (US$) in GDP

1980-1990 1990-2000 1980-1990 1990-2000 2000 1985 1990 2000

Newly industrialized economies(NIEs)

Hong Kong, China 4.7 --1.8 3.5 --3.6 1 499 20.9 16.3 8.9Republic of Korea 12.1 7.5 10.8 6.6 3 434 25.6 28.9 35.0Singapore 6.6 6.7 4.3 3.6 5 049 22.2 27.2 25.4Taiwan Province of China 8.4 5.1 7.0 4.2 3 920 35.7 32.7 29.3

China and MongoliaChina 10.7 13.2 9.1 12.1 347 31.6 33.1 42.8Mongolia 5.8 1.1 2.7 --0.2 210 26.5 29.0 30.1

South-East AsiaCambodia 8.0 8.7 3.8 5.4 13 4.1 5.2 7.7Indonesia 12.6 6.6 10.5 5.0 201 17.2 20.7 24.8Lao People’s Democratic Republic 6.8 12.1 4.1 9.4 53 7.6 10.0 17.9Malaysia 8.9 9.3 6.1 7.0 1 258 19.9 26.5 32.4Myanmar --0.1 6.6 --2.0 4.9 70 8.5 7.8 8.2Philippines 0.2 3.0 --2.2 0.8 187 24.6 24.8 24.1Thailand 9.5 5.8 7.6 4.4 650 22.0 27.2 31.7Viet Nam 7.1 11.1 4.7 9.3 28 14.0 12.3 16.4

South AsiaBangladesh 3.0 7.3 0.4 4.9 53 13.4 12.7 16.0Bhutan 12.7 10.5 9.9 8.3 30 5.7 8.1 12.1India 7.4 7.2 5.2 5.3 92 17.1 18.7 20.0Maldives 12.0 8.8 8.6 5.6 63 5.3 5.4 6.1Nepal 6.6 8.5 4.3 5.9 21 5.9 6.0 8.8Pakistan 7.7 3.6 4.5 1.0 65 16.3 17.4 17.0Sri Lanka 6.3 8.1 4.6 6.9 122 12.6 14.8 19.0

East AsiaJapan 4.8 0.6 4.2 0.3 6 865 25.8 25.8 23.9

WorldIndustrialized countries 2.8 1.9 2.0 1.4 2 669 22.9 22.4 21.5Developing countries 5.1 6.4 3.0 4.6 314 21.4 22.2 25.5Least developed countries 2.2 4.3 --0.6 1.7 37 10.2 9.7 10.0Low-income 5.9 5.9 3.4 3.8 88 15.3 16.8 18.3Middle-income 2.4 3.2 0.2 1.4 556 22.2 21.9 21.7High-income 8.5 5.8 6.3 4.3 2 685 21.2 22.7 25.3Africa 3.9 2.9 1.0 0.4 78 12.6 12.3 12.3Latin America 1.4 2.9 --0.6 1.2 643 25.0 24.1 22.8South and East Asia 9.0 8.9 6.9 7.3 300 22.8 25.1 30.4ASEAN 7.5 6.5 5.3 4.7 292 18.9 23.0 25.9West Asia and Europe 4.0 2.7 1.3 0.5 580 16.8 16.2 16.8

World 3.1 2.8 1.4 1.3 1 037 22.7 22.4 22.3

Source: World Bank, World Development Report 2002.

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Table II.2. Employment by economic activity in selected Asian economies

Agriculture Industry Services

Male Female Male Female Male Female

Country or area % of male % of female % of male % of female % of male % of femalelabour force labour force labour force labour force labour force labour force

1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998-1982 2000 1982 2000 1982 2000 1982 2000 1982 2000 1982 2000

Newly industrialized economies(NIEs)

Hong Kong, China 2 0 1 0 47 28 56 12 52 71 43 88Republic of Korea 31 10 39 13 32 34 24 19 37 56 37 68Singapore 2 0 1 0 33 33 40 23 65 67 59 77Taiwan Province of China .. .. .. .. .. .. .. .. .. .. .. ..

China and MongoliaChina .. .. .. .. .. .. .. .. .. .. .. ..Mongolia .. .. .. .. .. .. .. .. .. .. .. ..

South-East AsiaCambodia .. .. .. .. .. .. .. .. .. .. .. ..Indonesia 57 .. 54 .. 13 .. 13 .. 29 .. 33 ..Lao People’s Democratic Republic 77 .. 82 .. 7 .. 4 .. 16 .. 13 ..Malaysia 34 21 44 13 26 33 20 29 40 46 36 58Myanmar .. .. .. .. .. .. .. .. .. .. .. ..Philippines 60 47 37 27 16 18 15 13 25 36 48 61Thailand 68 50 74 47 13 20 8 17 20 31 18 36Viet Nam .. .. .. .. .. .. .. .. .. .. .. ..

South AsiaBangladesh .. .. .. .. .. .. .. .. .. .. .. ..Bhutan .. .. .. .. .. .. .. .. .. .. .. ..India .. .. .. .. .. .. .. .. .. .. .. ..Maldives .. .. .. .. .. .. .. .. .. .. .. ..Nepal .. .. .. .. .. .. .. .. .. .. .. ..Pakistan .. .. .. .. .. .. .. .. .. .. .. ..Sri Lanka 44 38 51 49 19 23 18 22 30 37 28 27

East AsiaJapan 9 5 13 6 40 38 28 22 51 57 58 73

WorldLow- and middle-income .. .. .. .. .. .. .. .. .. .. .. ..East Asia and Pacific .. .. .. .. .. .. .. .. .. .. .. ..Europe and Central Asia .. 22 .. 21 .. 31 .. 16 .. 48 .. 64Latin America and Caribbean .. 20 .. 11 .. 28 .. 14 .. 52 .. 75Middle East and North Africa .. .. .. .. .. .. .. .. .. .. .. ..South Asia .. .. .. .. .. .. .. .. .. .. .. ..Sub-Saharan Africa .. .. .. .. .. .. .. .. .. .. .. ..High-income 7 4 6 2 42 36 22 15 51 60 72 82

World .. .. .. .. .. .. .. .. .. .. .. ..

Sources: World Bank, World Development Indicators 2002 and World Development Report 2002.Note: Two dots (..) indicate that data are not available.

II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

35


Table II.3. Share of females in total employment by branches in selected Asian countries

(Percentage)

TaiwanProvince Republic

Branch (ISIC) Macao, of India Indonesia Japan Malaysia Myanmar Nepal Philippines of SriChina China Korea Lanka

1997 1997 1997 1999 1999 1997 1999 1996 1995 1999 1998

Food products (311-312) 48 45 15 41 59 38 .. 8 33 50 34Beverages (313) 24 34 6 35 31 38 .. 9 9 24 12Tobacco (314) 39 93 35 82 34 16 47 7 45 19 71Textiles (321) 70 53 9 52 60 49 .. 37 52 47 62Wearing apparel,

except footwear (322) 81 79 55 78 84 73 .. 18 80 74 86Leather and fur products

(323) 58 34 16 55 50 71 53 8 67 42 69Footwear (324) 78 65 38 73 54 55 73 16 58 49 57Wood and cork products

(331) 10 41 9 36 29 35 .. 3 17 23 35Furniture, fixtures,

except metallic (332) 6 38 1 32 28 28 21 5 29 23 4Paper (341) 20 32 4 23 32 34 .. 19 23 20 20Printing and publishing

(342) 29 37 3 .. 30 38 45 7 31 31 12Industrial chemicals (351) .. 24 1 17 11 18 .. .. 20 11 19Other chemicals (352) 50 45 19 47 34 40 46 10 33 30 41Petroleum refineries (353) .. 10 0.3 .. 9 11 13 5 13 .. ..Petroleum, oil, lubricant

and coal products (354) .. 11 5 .. 15 13 .. .. 23 .. ..Rubber products (355) 40 41 4 23 29 45 35 12 41 20 30Plastic products (356) 30 45 5 49 40 43 47 7 27 26 40Pottery, earthenware (361) .. 39 7 .. 42 55 50 .. 44 51 48Glass (362) 17 38 2 .. 24 28 36 6 9 17 17Other non-metallic

mineral products (369) 16 23 7 .. 19 16 .. 15 14 14 28Iron and steel (371) .. 15 1 4 10 13 .. 0.1 8 7 6Non-ferrous metals (372) .. 23 1 14 17 22 20 .. 18 12 3Metal products (381) 11 33 2 25 25 25 27 2 19 20 7Non-electrical machinery

(382) 17 35 2 17 24 42 .. 1 48 19 ..Electrical machinery (383) 69 52 8 62 37 67 .. 5 70 41 45Transport equipment (384) 4 24 1 11 17 21 .. .. 12 10 10Professional and scientific

equipment (385) 57 57 12 63 36 91 .. .. 80 36 30Other manufactures (390) 68 52 16 .. 42 71 38 21 65 43 74

Total manufacturing (3) 72 42 11 .. 35 47 .. 22 46 31 58

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Notes: ISIC = International Standard Industrial Classification.Two dots (..) indicate that data are not available.

36

data are available. It is observed from the tablethat in many countries, the share of femaleemployment in total sectoral employment ishigher than that of male employment in tobacco,textiles, wearing apparel, footwear, leather and furproducts, chinaware and potteries.

(c) Contribution to productivity

Table II.4 presents value added per em-ployee in different branches of manufacturing inselected Asian countries (Japan; Bangladesh; HongKong, China; Macao, China; Taiwan Province ofChina; India; Indonesia; Malaysia; Republic ofKorea; Singapore; and Sri Lanka) in the latest yearfor which data are available and may provide someindication about differences in labour productivityin different segments. For almost all the countries,iron and steel has the highest labour productivity,while the sector with the lowest value added per

employee is not uniform across the countries.However, the productivity of the majority of agro-based and resource-based industries such as foodproducts and beverages, textiles and clothing,apparel, leather products and footwear was rela-tively high in most of the countries.

2. Issues at stake

(a) Prospects of agro-based andresource-based SMEs

Up to mid-1997, the economies of South-East Asian countries experienced robust economicgrowth due to:

• Political, social and economic stability

• Endowment of natural and humanresources

Table II.4. Value added per employee in selected Asian countries

(Hundreds of US$)

Hong Taiwan RepublicJapan Bangladesh Kong, Macao, Province India Indonesia Malaysia of Singapore Sri

Products (ISIC) China China of China Korea Lanka

1999 1997 1999 1997 1990 1998 1999 1997 1999 1999 1998

Food products (311-312) 738 37 356 108 276 26 46 208 639 463 60Textiles (321) 535 11 327 128 161 20 42 197 427 335 28Wearing apparel (322) 339 9 276 113 203 26 25 74 238 180 25Leather and fur

products (323) 635 39 213 74 124 20 28 78 421 342 40Footwear (324) 505 33 142 83 123 21 27 80 267 187 51Wood and cork products

(331) 621 17 277 67 109 13 38 101 423 291 22Furniture and fixtures

(332) 427 15 261 142 226 25 20 101 363 235 8Paper (341) 1 030 24 351 99 231 28 81 173 715 498 50Rubber products (355) 1 013 11 336 .. 141 47 46 167 570 409 46Plastic products (356) 853 38 294 119 160 28 36 168 484 303 33Pottery, earthenware

(361) 615 13 .. .. 116 20 72 102 260 .. 28Iron and steel (371) 1 440 82 460 .. 442 67 149 741 1 175 750 80Non-ferrous metals (372) 1 096 .. 462 .. 347 68 198 337 773 343 35Metal products (381) 869 23 326 129 132 34 56 172 409 354 30

Source: UNIDO, International Yearbook of Industrial Statistics 2002.Note: Two dots (..) indicate that data are not available.


37


• Efficient legal and institutional frame-work

• Pro-business and pro-foreign directinvestment policies

• Sound macroeconomic policies

• Emphasis on the market, private enter-prise, outward-looking industrializationand relatively open economies

Despite this growth, Asian SMEs sufferedfrom age-old problems:

• Low level of productivity, lower averagevalue added and output levels peremployee

• Inadequate access to financial institu-tions and high credit cost

• Higher costs of raw materials becauseof small quantities ordered

• Inadequate level of technology andmanagerial skills due to lack or inad-equacy of R&D and difficulty of accessto technological information

• Difficulties in marketing and distribu-tion due to lack of direct overseasmarket exposure and penetration

Although many government programmesfocused on developing the SME sector, thesesupport programmes suffered from the followingdeficiencies:

• Involvement of too many governmentagencies with minimal coordination

• Short-run and unfocused approach forthe development of SMEs

• Absence of continuity or frequentrevisions to many programmes

• More benefits accrued to large andmedium industries compared with smallindustries

• Involvement of many non-governmentalorganizations for private groups (localchambers, federations and associations)necessitating need for greater coordi-nation

Economic liberalization affected small andmedium industries in many ways with somepositive as well as negative effects:

• Decrease in number of microenterprises

• Better access to and low prices formachinery, equipment and tools

• Greater competition in consumer goodssectors

• Improved access to the system of newand universalized government incentives

• Increased access to financial resources

• High costs of support services includinginfrastructure

• More opportunities for subcontractingand networking from foreign investment

• Greater competition from foreign invest-ments in modern market and labourforce

The East Asian economic crisis diminishedthe positive effects, at times even negating themand magnifying the negative effects. The crisisexposed weaknesses in the competitive abilityof the traditional manufacturing and had dispro-portionate effects on small and medium-size enter-prises. Although East Asian firms, includingthose in crisis countries, were adept at adoptingnew manufacturing techniques, they faced con-tinual challenges from low-wage developingcountries and from China and Japan. As in thecase of the Mexican crisis, the East Asian crisisled to a sharp fall in production and investment innon-tradable sectors. This is expected becausecurrency depreciation, which favours traded goods,reduces the incentive to invest in non-tradablesectors.

(b) Major issues for consideration

The above analysis indicates that majorissues at stake for the development of agro-based and resource-based SMEs include thefollowing:

• Integration of agriculture and agro-based industries

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• Availability of raw materials and credits

• Location of industry, transport costs andaccess to markets

• Economies of scale and size of markets

• Availability of skilled labour andcapacity-building

• Lack of modern technology

• International barriers to trade

• Role of multinationals and foreigninvestment

• Environment and sustainability

In many developing countries there is lackof coordination for the development of agricultureand agro-based industries due to several restric-tions imposed on both internal and external tradein agricultural commodities. Owing to lack ofbasic infrastructure such as electricity andtransport, agro-based food processing industriesare generally established close to the cities andtowns, which are the major consumption anddemand centres for these goods. As a result, trans-port costs for raw materials become high andimpose a burden on the cost of production. Inorder to reap several fiscal and monetary benefits,agro-based and resource-based industries generallylack vertical expansion and therefore suffer fromthe low economies of scale.

C. Rationale for developmentand contribution of agro-based and

resource-based industries topoverty alleviation

1. Rationale for developmentof agro- and resource-based SMEs

The rationale for promoting agro- andresource-based SMEs lies in their valuable contri-butions to employment generation and povertyalleviation. These enterprises contribute signifi-cantly to poverty alleviation and promote economicand social justice by employing a significantportion of the poor and low-skill workforce, which

may otherwise remain unemployed or underem-ployed. Higher employment in rural areas helpsin the reduction of inequalities, development ofbackward areas and balanced regional growth anddevelopment.

Poor persons cannot participate in thegrowth process for reasons of extreme deprivationor vulnerability combined with poverty or facecontinuing exposure to risks of ill health andmalnutrition, which may jeopardize their ability toparticipate in the opportunities offered by growth.Employment generated by SMEs provides effectivesafety nets that ensure the rural poor against theincome fluctuations.

Development of agro-based and resource-based industries provides opportunities for thegrowth of economic activities in the informalsector and microenterprises in both rural and urbanareas. The informal sector remains an importantsource of income and employment for the poor andself-employed in developing countries. This sectoris very diverse and covers multiple economicactivities ranging from petty trading and personaland domestic services to manufacturing, transportand construction. The social groups includeartisans and craftsmen, hawkers, fruit and vegeta-ble vendors, women and daily labourers forconstruction and other services. Employment orownership of microenterprises provides the poorwith a source of empowerment and incomesecurity and enables them to participate actively inrural and overall economic development.

Agro-based industries open up new channelsof distribution and marketing for agriculturalcommodities produced by the small and marginalfarmers and raise their incomes. Development ofresource-based industries, particularly SMEs, inrural areas leads to valorization of agriculturalland, agricultural commodities and other resources.

The location of agro-based and resource-based industries in rural areas helps to distributethe benefits of economic growth broadly amongthe rural poor. It also improves value addition andthe productivity of rural industries through widerdistribution networks and greater access to bothinternal and external markets.


39


A dynamic small and medium industriessector serves not only to create employment butalso to earn foreign exchange through exports,upgrade the quality of the labour force and diffusetechnological know-how throughout the economy.These industries help to mobilize domestic re-sources by utilizing the savings, labour andagricultural raw materials that otherwise remainidle. They serve the low-income consumermarkets and produce a wide variety of goods thatalso includes sophisticated products for export.

The location of small and medium industriesin rural areas creates livelihood opportunities thathelp to stop migration to urban centres. Theyprovide a training ground for small-scale entre-preneurs and business management personnel, whomay later join larger undertakings.

The role of financial markets as an instru-ment to promote SMEs and alleviate poverty isgenerally focused on supplying credit facilities.However, credit is only one of the financialservices that the poor need. Access to bankaccounts or savings facilities in the rural areas isequally important. For example, people whoderive their income primarily from agriculturemust build up financial assets following harvests tosustain themselves for the rest of the year. Eventhe poorest households are eager to save if theycan obtain positive real interest rates and there areconveniently located deposit collecting facilities.This point has been confirmed by the experience inBangladesh and Indonesia.

Integration of SMEs into global marketoffers the potential for more rapid growth andpoverty reduction. Increased market access foragricultural products would work to directlyaddress poverty reduction in developing countries.While the rapid expansion of demand for unskilledlabour in manufacturing and urban services inmany developing countries has sharply reducedrural poverty, about three quarters of the world’spoor still live in rural areas, where agriculture isoften the dominant economic activity. Agricultureaccounts for about 27 per cent of GDP in develop-ing countries, a similar share of exports and 50 per

cent of employment. This dependency on agricul-ture is even higher in LDCs. But agriculturalmarkets are among the most heavily distorted andattract tariffs several times higher than those facingmanufactured imports.

Historically, textiles and clothing haveplayed a unique role in economic development andpoverty reduction. Their contribution to the indus-trial revolution in Western Europe and NorthAmerica in the eighteenth and nineteenth centuriesis well known, and they continued to spearheadindustrialization in many developing countries inthe twentieth century. Since textile and clothingproduction often requires only simple technologyand is intensive in unskilled labour, many develop-ing countries have a strong comparative advantagein these sectors. In the mid-1960s, developingcountries accounted for 15 per cent of world textileexports and less than 25 per cent of world clothingexports. By 1998, these shares had reached 50 percent and 70 per cent, respectively. However, thesector has also long been a prime target for protec-tionism.

Despite these positive aspects, SMEs arecriticized for their inability to realize economies ofscale in procurement and production and havehigher costs of production. In many countries,SMEs exist on the strength of costly governmentsupport programmes in terms of several fiscal,monetary and other concessions.

2. Growth and poverty alleviation

In many Asian developing countries, agro-based and resource-based small and mediumindustries have succeeded in achieving theintended objectives of absorbing surplus labour,alleviating poverty and bringing about morebalanced regional growth. In many cases, SMEshave succeeded in raising their share in terms ofnumber of establishments, employment and outputvis-à-vis large-scale industries. This is clearlyillustrated in the Philippines in the case ofprofessional and scientific equipment, electricalmachinery and non-metallic products, pottery, glassproducts and electrical equipment.

40

Table II.5. Average annual growth of manufacturing in selected Asian economies, 1990-1999

(Percentage)

Products by ISIC India Indonesia Republic Singapore Sri Lanka Hong Kong,of Korea China

15. Food and beverages 4.7 100.0 2.6 0.4 1.6 0.016. Tobacco products 2.6 .. 0.8 .. .. ..17. Textiles 8.3 4.3 --3.1 --5.6 7.0 --2.118. Wearing apparel, fur products --4.4 26.6 --5.0 --5.4 .. --1.219. Leather, leather products, footwear 1.7 .. --7.6 --1.5 .. ..20. Wood and wood products

(except furniture) 0.5 --3.5 --3.1 --3.6 14.5 ..21. Paper and paper products 10.9 28.2 5.4 --1.4 10.0 2.422. Printing and publishing .. --3.6 0.6 4.4 .. ..23. Coke, refined petroleum products,

nuclear fuel 4.0 10.7 19.0 1.8 .. ..24. Chemical and chemical products 8.3 .. 13.6 17.1 1.1 --4.725. Rubber and plastic products 3.0 .. 3.7 1.5 .. --7.126. Non-metallic mineral products 18.3 4.6 2.6 1.5 0.2 ..27. Basic metals 9.3 12.6 7.3 --0.6 0.1 --4.928. Fabricated metal products 2.3 0.3 1.4 2.5 5.7 ..29. Machinery and equipment n.e.c. 8.0 --9.7 4.1 3.9 .. --5.530. Office, accounting and computing

machinery 3.4 .. 73.9 .. .. ..31. Electrical equipment and apparatus 5.3 2.8 6.2 5.8 .. 0.232. Radio, television and communication

equipment 10.6 .. 55.7 .. .. ..33. Medical, precision and optical instruments 2.7 --6.5 3.7 .. .. ..34. Motor vehicles, trailers, semi-trailers 13.4 --4.8 14.3 2.6 .. ..35. Other transport equipment 7.5 .. 25.7 .. .. ..36. Furniture manufacturing n.e.c. .. .. --2.1 --5.3 .. --3.737. Recycling .. .. .. .. .. ..

Total manufacturing 7.1 3.9 9.9 8.1 3.1 --1.9

Source: UNIDO, International Yearbook of Industrial Statistics 2002.Notes: ISIC = International Standard Industrial Classification.

n.e.c. = not elsewhere classified.

Table II.5 presents the average annualgrowth rates by broad branches of manufacturingin selected Asian economies (India; Indonesia;Republic of Korea; Singapore; Sri Lanka; andHong Kong, China) during the 1990s. Althoughgrowth rates of agro-based and resource-basedindustries were adversely affected in the EastAsian countries due to economic crisis at the endof 1990s, India and Sri Lanka achieved significantgrowth rates in the value added of these industriesin the 1990s.

During the 1990s, sectors achieving averageannual growth rates exceeding 8 per cent (i.e.,the average growth rate of MVA recorded byEast Asian countries in the 1990s) include thefollowing:

• Non-metallic mineral products, motorvehicles and trailers, paper and paperproducts, radio and TV sets, textiles,chemical products, basic metals, andmachinery and equipment in India


41


• Food and beverages, wearing appareland fur products, paper products, cokeand petroleum, and basic metals inIndonesia

• Coke and petroleum products, chemicalproducts, basic metals, computers andoffice machinery, radio and TV sets,motor vehicles and other transportequipment in the Republic of Korea

• Chemical products in Singapore

• Wood and paper products in Sri Lanka

• None in Hong Kong, China, whichrecorded negative growth for most ofthe subgroups

Of all the crisis economies, the Republicof Korea’s industrial production recovered thefastest, rising above the pre-crisis levels within twoyears, whereas the levels of industrial productionin Malaysia, Thailand and Indonesia remainedbelow the pre-crisis level even after two years(World Bank, 2000). The more rapid recovery inthe Republic of Korea partly reflects its greaterstrengths in sectors such as electronics, computersand telecommunications. The Korean firms alsoperformed well in transport equipment, whereasMalaysian and Thai firms suffered in these sectors.The Republic of Korea had poor performancein traditional and resource-based sectors suchas food, chemicals, base metals, paper and pulpproducts.

Traditional manufacturing sectors wereexpected to lead the way to recovery in the crisiscountries having lower wages. In Thailand thetextiles sector grew rapidly following thedepreciation of baht, but output fell back topre-crisis levels as the currency appreciated andThai products faced steep competition in exportmarkets. Traditional manufacturing in theRepublic of Korea rebounded only slightly afterthe crisis, reinforcing a secular decline.

Small and medium-sized firms wereadversely affected in all crisis countries. Whileaggregate Korean industrial output started toincrease in late 1998, production by SMEs conti-nued to fall in absolute terms until July 1999,

resulting in a decline by one third from pre-crisis production levels. In other countries,where SMEs had a larger proportion in industrialproduction, poor performance by SMEs intensifiedthe overall industrial setback. For example, morethan 50,000 small firms and 400,000 householdsthroughout Thailand accounted for about 50per cent of non-performing loans in 1999. Theinability to restructure these debts effectivelycontributes to financial sector problems, whichfeed back into the continued financial difficultiesof SMEs.

Despite these adverse effects of theeconomic crisis, countries continued with theircommitment to liberalization and globalizationwhile strengthening international regulation forfinancial markets and capital flows. Countriescontinued to review the rigid and outdated laws,rules and regulations, particularly in services,finance, labour, technology and all production in-puts. As SMEs account for almost 80 per cent ofindustrial establishments in Asia, and these SMEsfaced a serious shortage of capital, marketsand professional management, all the countriescontinued to have special programmes for thedevelopment and technology upgrading of a SMEs.They also emphasized the development of bothphysical and social infrastructure, especially publicutilities, research and development and technical-oriented infrastructure, which are particularlyneeded by the small and medium enterprises.

The countries continued to move fromresource-based and labour-intensive types of indus-tries to skill- and knowledge-based and medium-and high-technology industries. They also furtherliberalized foreign investment policies to attractmore of the widely accepted foreign direct invest-ment and portfolio investment.

Table II.6A to II.6C presents sectoral sharesin manufacturing employment and value added inselected countries (India; Indonesia; Philippines;Republic of Korea; Singapore; China; Hong Kong,China; Sri Lanka; and Thailand) in the most recentyear for which data are available. These tablesindicate that agro-based and resource-based manu-facturing units account for major shares in valueadded in all these countries.

42

• In India, chemical products had thehighest share in MVA (15.7 per cent)followed by textiles (12.4 per cent),food and beverages (12.2 per cent),basic metals (9.1 per cent) and electricalmachinery (8.5 per cent). Sectorshaving a significant share in employ-ment include food and beverages,tobacco, textiles, chemical products,basic metals, machinery and equipment,and automobiles.

• Dominant sectors for MVA in Indonesiainclude food and beverages (having ashare of 13.6 per cent in MVA), textiles(12.6 per cent), tobacco products (8.9per cent) and wood products (7.5

per cent). Sectors having a significantshare in employment include food andbeverages, textiles, chemical products,non-metallic mineral products, basicmetals, machinery and equipment, elec-trical machinery and automobiles.

• Dominant sectors for MVA inPhilippines include food and beverages(29.8 per cent) and chemical products(12 per cent). Sectors having a signifi-cant share in employment include foodand beverages, textiles, wearing appareland fur products, chemical products,non-metallic mineral products, electricalmachinery, radio and TV sets andfurniture.

Table II.6A. Distribution of employment and value added among the manufacturing sectors

(Percentage)

Products by ISICIndia Indonesia Philippines

Labour MVA Labour MVA Labour MVA

15. Food and beverages 16.1 12.2 13.9 13.6 16.8 29.816. Tobacco products 5.3 2.0 6.0 8.9 0.7 4.117. Textiles 17.1 12.4 15.7 12.6 4.8 2.118. Wearing apparel, fur products 3.3 1.0 10.7 5.0 14.2 5.219. Leather, leather products, footwear 1.5 0.5 7.0 3.7 3.8 1.020. Wood and wood products (except furniture) 0.9 2.5 10.2 7.5 2.1 0.921. Paper and paper products 2.0 2.0 2.4 3.8 2.1 2.222. Printing and publishing 1.3 1.3 1.3 2.9 2.7 2.023. Coke, refined petroleum products, nuclear fuel 0.8 2.0 0.1 0.2 0.2 9.724. Chemical and chemical products 9.6 15.7 4.7 7.2 5.0 12.025. Rubber and plastic products 3.4 3.7 6.9 5.3 3.8 2.526. Non-metallic mineral products 5.2 5.3 0.1 0.0 4.3 4.827. Basic metals 7.3 9.1 1.4 4.5 3.5 3.928. Fabricated metal products 3.2 4.0 2.7 2.9 3.6 1.829. Machinery and equipment n.e.c. 8.8 5.8 1.2 0.8 3.3 1.730. Office, accounting and computing machinery 0.2 0.5 0.0 0.0 2.1 3.231. Electrical equipment and apparatus 3.1 8.5 1.7 3.1 4.3 3.432. Radio, television and communication equipment 1.7 2.4 3.7 4.9 11.3 2.833. Medical, precision and optical instruments 1.0 1.5 0.5 0.6 3.3 1.234. Motor vehicles, trailers, semi-trailers 3.3 4.7 1.0 2.6 1.8 2.035. Other transport equipment 3.4 4.3 1.6 6.9 1.0 1.836. Furniture manufacturing n.e.c. 1.3 1.5 6.9 2.8 5.0 1.937. Recycling 0.0 0.1 0.1 0.0 0.1 0.0

Total manufacturing 100.0 100.0 100.0 100.0 100.0 100.0

Source: UNIDO, International Yearbook of Industrial Statistics 2002.Note: n.e.c. = not elsewhere classified.


43


Table II.6B. Distribution of employment and value added among the manufacturing sectors

(Percentage)

Products by ISICRepublic of Korea Singapore China





• Dominant sectors in MVA in theRepublic of Korea include radio and TVsets (16.2 per cent), chemical products(9.5 per cent) and food and beverages(7.8 per cent). Sectors having a signifi-cant share in employment include foodand beverages, textiles, wearing appareland fur products, chemical products,rubber and plastic products, fabricatedmetal products, machinery and equip-ment, radio and TV sets, electricalmachinery, and automobiles.

• Dominant sectors in MVA in Singaporeinclude computers and office machinery(22.5 per cent), radio and TV sets(19.4 per cent) and chemical products

(18.5 per cent). Sectors with highemployment potential include foodand beverages, chemical products,fabricated metal products, machineryand equipment, computers and officeequipment, radio and TV sets, andautomobiles.

• China had a significant share ofMVA in food and beverages, chemicalproducts, basic metals, radio and TVsets and automobiles. Sectors having asignificant share in employment includefood and beverages, textiles, chemicalproducts, non-metallic mineral products,basic metals, computers and officeequipment, and automobiles.

44

Table II.6C. Distribution of employment and value added among the manufacturing sectors

(Percentage)

Products by ISICHong Kong, China Sri Lanka Thailand





• Dominant sectors in MVA in HongKong, China, include food andbeverages, textiles, wearing apparel,printing and publishing, and radio andTV sets. Sectors having a significantshare in employment include food andbeverages, textiles, wearing apparel andfur products, printing and publishing,radio and TV sets, furniture and auto-mobiles.

• Sri Lanka had dominant shares ofMVA in food and beverages, tobaccoproducts, wearing apparel, chemicalsand rubber and plastic products.

Sectors with high employment includefood and beverages, tobacco products,textiles, wearing apparel, rubber andplastic products, non-metallic mineralproducts, and furniture.

• Thailand had dominant shares in foodand beverages, motor vehicles, non-metallic mineral products, textiles andrubber and plastic products. Sectorswith high employment include food andbeverages, textiles, wearing apparel,rubber and plastic products, non-metallic mineral products, radio and TVsets and furniture.


45


The significance of SMEs in the deve-lopment process may be beyond the recordedshares in MVA and employment that are directlyattributed to them. They are often the vehicleswhich facilitate the birth and expansion of large-scale industries in the structural transformationthat occurs with growth in income. For example,in the Republic of Korea, much of the increase inemployment of factories with 100 or more workerssince the 1960s came from small firms that grewlarger and larger over time. In India, Indonesiaand the Philippines, most of the enterprises now inexistence began as household firms, subsequentlygrowing into SMEs and larger enterprises in anumber of cases.

In order to achieve faster growth andalleviation of poverty, industrialization in manydeveloping countries has focused on developmentof textile and clothing industries. As a labour-intensive sector, clothing provides significant jobopportunities in labour-abundant economies havinga comparative advantage due to lower wages.Moreover, for over two decades the quota regula-tions of the Multifibre Arrangement enabled late-comers to access markets for clothing and textilesonce other countries filled their MFA quotas.

More recently, improvements in productionand communication technologies and decliningtransport costs have enabled geographical separa-tion of the labour-intensive segments from theskills- and capital-intensive segments of the manu-facturing process in textiles and clothing. Forexample, while growing automation has increasedthe capital intensity of the pre-assembly stagesof the production process, the assembly stageshave remained relatively labour-intensive. As aresult, it has become both technically feasible andeconomically profitable for high-wage countrymanufacturers to relocate their assembly stages ofproduction to low-wage countries and reimport theend products for domestic sale or for export tothird markets. The NIEs in East Asia were thefirst to establish production facilities underoutsourcing agreements with large United Statesretailers and brand-name merchandisers.

It is generally held that prices of manufac-tures are much less flexible than prices of primarycommodities in world trade, because markets for

manufactures are much less competitive. Mostmarkets for manufactures have high barriers toentry; many are oligopolistic, controlled by a smallnumber of producers who often compete on thebasis of quality, design, marketing, branding andproduct differentiation rather than prices.

In most major industrial countries, wagesin firms are not flexible owing to a number oflabour market regulations, including minimumwage legislation, collective bargaining and restric-tions on hiring and firing. The absence of suchconditions in the labour markets of most deve-loping countries, together with large amounts ofsurplus labour, often implies that wages in deve-loping countries are much more flexible than inindustrial countries. This increases the ability offirms to lower wages when there are price declinesso those profit margins are maintained. It thusallows them to compete on the basis of prices inmarkets for labour-intensive manufactures.

Furthermore, the East Asian experienceshows that mobility of low-skilled labour is greateramong developing countries than between deve-loping and industrial countries. All these factorscombined not only introduce greater priceflexibility in the markets for developing countries’labour-intensive manufactures vis-à-vis thoseexported by industrial countries, but also exertdownward pressure on their prices and terms oftrade.

The share of developing countries in worldexports grew considerably during the period 1980-1998 for both clothing and selected products fromthe electronics industry, which are labour-intensive.However, the increase was concentrated in a smallnumber of economies. The NIEs accounted fortwo thirds of all clothing exports from developingeconomies during the first half of the 1980s, buttheir share declined thereafter to about one fifth bythe mid-1990s, as they upgraded their exports andbegan to exit from the clothing markets. Theirmarket shares were taken up by other developingcountries in Asia, notably those in South Asia,the ASEAN-4 (comprises Indonesia, Malaysia, thePhilippines and Thailand), China, Turkey andMexico.

In the markets for the selected productsfrom the electronics sector, NIEs accounted formost of the spectacular increase in the share of

46

developing countries in world exports in 1980-1995. During this period, the share of theseeconomies increased from two thirds to threefourths of all developing country exports of theseproducts. Other developing countries, such as theASEAN-4, China and Mexico, have succeeded inincreasing their market shares in the past fewyears. It is interesting to note that the ASEAN-4and China have gained market share in the elec-tronics sector much more rapidly than in clothing.

3. Employment generation

Small and medium industries have predo-minant shares in output, exports and employmentin agro-based and resource-based industries inmany Asian countries such as Bangladesh, India,Pakistan, China, the Republic of Korea, Indonesia,Thailand and the Philippines. They played a sig-nificant role in economic development even in theUnited States, Germany, Japan and Singapore.They are mainly in textiles, garments, wood prod-ucts, food processing, leather products, fabricatedmetals, machinery and equipment, rubber and plas-tic products, pottery, and printing and publishing.

International experience indicates that evenunder the most competitive conditions, unorgan-ized and small business enterprises not onlyprovide major employment opportunities but alsosurvive alongside the highly organized sector. Forexample, there are about 23 million small businessenterprises in the United States that constitute theprincipal source of new jobs in the economy. Allfirms under the United States Small Business Act:

• Employ 53 per cent of the privateworkforce

• Represent 99 per cent of all employers

• Account for more than 50 per cent ofGDP

• Account for 28 per cent of jobs in thehigh-technology sectors

• Provide 55 per cent of all innovations

• Provide virtually all new jobs in theeconomy

• Account for 47 per cent of all sales inthe country

• Account for 35 per cent of federalcontract deals

• Account for 51 per cent of privatesector output

• Represent 96 per cent of all UnitedStates exporters.

Nearly 60 per cent of United States smallbusinesses have 4 employees or less, 18 per centhave 5 to 9 employees, 11 per cent have 10 to 19,9 per cent have 20 to 99 and only 1.4 per centhave 100 to 499, the traditional high-end demar-cation in qualifying in the small business segment.

As regards Asian countries, in 1990 smalland medium enterprises accounted for 95 per centof establishments in Bangladesh, 98 per cent inThailand, 93 per cent in Malaysia, 70 per cent inIndonesia and 80 per cent in the Philippines.

The SSI sector in India produces over 7,500products ranging from consumer goods to sophi-sticated machinery and computer peripherals andcovers a wide spectrum of industries. Small-scaleindustries basically fall under the unorganizedsector, which accounts for 93 per cent of employ-ment. In addition, the SSI sector contributes over40 per cent of the gross turnover in manufacturingoutput, 45 per cent of manufactured exports and 40per cent of total exports.

In Japan, of the total of 54,160,000 peopleengaged nationwide (excluding those in primaryindustries), 42,270,000, i.e., 78 per cent of employ-ment, are in small and medium enterprises. Theirshare of employment in various manufacturingsubsectors ranged from 41 per cent in transportmachinery to 100 per cent in silverware. SMEsaccounted for 99 per cent of all business establish-ments, 52 per cent of both manufacturing valueadded and exports, 64 per cent of wholesalebusiness and 78 per cent of retail sales.

Development in the Republic of Korea haslargely been driven by the expansion of conglo-merates, but in the 1980s, the SME sector began togrow rapidly. There are now nearly 96,000 smalland medium manufacturing enterprises, whichemploy 1 to 300 persons each. They account for69 per cent of total employment in this sector.


47


Like the Republic of Korea, Taiwan Pro-vince of China has made rapid strides in expandingits industrial base and enhancing exports. SMEs inTaiwan Province of China account for 90 per centof enterprises and 65 per cent of exports. The rootof the progress made by both the Republic ofKorea and Taiwan Province of China is thecombined result of sound economic policies anda strong scientific and technological base. Likethe Republic of Korea, Taiwan Province of Chinabenefited tremendously from the Asian exportboom to the United States. The main exportshave been textiles, clothing, footwear, furniture,chemicals, electric appliances and consumer andcomputer electronics.

In China, the highest priority is given toemployment generation, environmental and eco-logical protection, poverty eradication and raisingthe living standards of people in rural areas byincreasing agricultural productivity. In China,SMEs provide nearly 75 per cent of urban jobopportunities and the number of units hasexceeded 8 million, being 99 per cent of totalenterprises in China. A large number of theseenterprises employ around four persons per unitunder the SME sectors. SMEs account for 78per cent of employees, 64 per cent of industrialturnover, 52 per cent of corporate profits and 52per cent of fixed assets held by industry.

In 1985, the Government of China startedthe Spark Programme, a project aimed at establish-ing “big agriculture” in the vast rural areas tofoster the development of industrialized agricul-ture, animal husbandry, forestry and all types ofagro and forest produce processing industries. TheSpark Programme is a scientific and technologicaldevelopment plan implemented by the StateScience and Technology Commission (SSTC) todevelop advanced technologies for townshipenterprises. From 1986 to 1993, more than 50,000projects had been implemented at various levelsunder the Spark Programme, covering more than85 per cent of the total number of towns andtraining 30 million technical and managementpersonnel. Over 400 types of advanced technicalequipment had been developed and more than100 Spark technology-intensive zones had beenestablished. Since 1993, 71 regional pillar indus-

tries, 43 Spark technology-intensive zones and 173industries in provinces have been established allover China. Today, there are over 2,000 techno-logy trade markets all over China employing about1 million people.

In China, rural industries dominate pro-duction in cement, iron and steel, fertilizers,hydropower and agri-machinery and contribute 25per cent of rural employment. The initial focus ofrural industry in China was on primary processingof farm products, handicrafts, manufacture andrepair of simple farm tools, and developing andprocessing local industrial resources. The indus-tries were small and used primitive techniques.Reforms in China have encouraged rural indus-trialization along with the entry of multinationalsin export-oriented sectors.

Subcontracting and ancillarization havehelped the dispersal of industry and the growth ofthe small and medium industries and rural non-farm sector in many countries. The most success-ful example of subcontracting from large urbanareas to small rural entrepreneurs is in Japan. Thedivision of responsibility and resources, in keepingwith its economic propensity, has given Japan anunparalleled global edge. Its success is attributedto expanding demand, limited capital of largecompanies, low basic skills required by small unitsand paternalistic relationships. Big businesshouses share the production process, technologyand innovation with small/medium industries.

Thailand, Malaysia and Indonesia haveadopted the Japanese model with variations to suiteach nation’s cultural and social environment. InThailand large companies are allowed to developancillaries, which can operate within the samefactory premises and yet are entitled to haveindependent recruitment, wage structure andservice conditions.

In Pakistan, subcontracting has beenpractised over a long period in traditional productssuch as carpets, garments and footwear. Subcon-tracting is also strong in the labour-intensiveactivities of rattan in Indonesia and for garments inPhilippines. The “Bapakangkat” (parent unit) and“Anakangkat” (related units) of Indonesia are good

48

examples of networking. Under the scheme, inaddition to contractual networking, the Bapa-kangkat provides technical and financial assistance,leases plant and equipment and trains people,leading to higher employment and lowering thecost of production.

These facts suggest that although thedefinition of SSEs may not be uniform acrosscountries, they contribute significantly to employ-ment generation. As unemployment is the rootcause of poverty, the SMEs through employmentgeneration help in poverty reduction. However,all available studies show that the growth andquality of employment in the SMEs have been verymuch affected by the absence of timely low-costcredit, improved technology, good infrastructure,quality consciousness, modern marketing, properorganization and a synergy with large, organizedindustries.

All measures should be taken to improvetechnology, quality and productivity by vocationaland other training, skills development, organiza-tional changes like cluster development, etc.Indeed barely 5.3 per cent of Indian youth in thelabour force in the age group 19-24 in 1999-2000are trained in vocational skills through formaltraining as against nearly 30 per cent in selectedleast developed countries (LDCs) and above 70 percent in developed countries.

SMEs have high employment elasticity.Their employment intensive-character should beprotected by selecting proper labour-intensivetechnology drawn from all sources, including thegrass-roots indigenous level. Proper rules andregulations should be laid down so that benefitsof higher growth are translated in the form ofincreased earnings for the workers.

As the major portion of the poor exist inthe unorganized sector, faster growth and produc-tivity in this sector will also reduce poverty. In theattempt to increase labour productivity, it isnecessary to improve job quality and security bymajor changes in legislation regarding basic socialsecurity, working conditions, minimum wages andprotection of labour interests.

D. Economic policies and strategiesfor development of agro-based and

resource-based industries

1. Industry development formulation

The development of the agro-based andresource-based industries provides the poor withopportunities to generate income and assets. Butthese industries face many barriers to developmentand cannot fulfil their potential to generate incomeor improve wealth distribution to the poor and tocontribute to poverty alleviation. In rural areas,the business environment may not be favourable tothriving agro-based industries. This reflects notonly low skills development but also low accessto capital, information and technology. Theseconstraints are discussed in detail in the followingsections.

Even after the establishment of WTO, thereare still several barriers in multilateral tradingarrangements for market access in agro-basedmanufactures. Although there have been someinitiatives in this area such as preferential marketaccess provided by the European Union (EU) andthe United States, the improved access they offer isrestricted to the poorest countries. Given thatthose countries generally are not large exportersof labour-intensive manufactures, the initiatives dolittle to improve market access for such exports.In Canada and the United States, tariff peaks areconcentrated in textiles and clothing; in the EUand Japan, in agriculture, food products andfootwear.

The majority of developing countries withthe capacity to expand exports of agro-basedproducts continue to face significant barriers.Trade in textiles and clothing continues to begoverned by quota regulations, and developingcountries’ manufactured exports encounter hightariffs and increased contingent forms of protec-tion, such as anti-dumping action and labour andenvironmental standards.

The roadblock towards technologicalupgrading and transfer of technology to SSIs isalso due to complex modalities of technology


49


transfer, lack of knowledge about the new globaltrade system which is being engineered by WTOthrough GATT, the General Agreement on Trade inServices (GATS), TRIMS and TRIPS, and varioustechnical and non-tariff barriers for exports ofproducts of SSIs imposed by advanced countrieson the grounds of the environment, health andlabour among other factors. Another importantconstraint pertains to inadequate availability offinance for the acquisition or patenting of anyindigenously developed technology or product.Technology quality management by adhering toISO standards has been found lacking in manySSIs.

After the establishment of WTO, theroles of intellectual property rights (IPRs) andpatenting have become dominant in the flowof technologies and international trade. IPRsinclude copyrights, patents, trademarks and de-signs. All these have far-reaching implicationsfor SSIs since reverse engineering, an importantsource of technology for SSIs, is difficult underthe stricter IPR regime. The issues of IPRsand patenting have serious implications forspecific segments like agro and food processing,biotechnology and chemicals including pharma-ceuticals.

In order to learn from international bestpractices and formulate appropriate policies forthe development of agro-based and resource-based industries, the following measures aresuggested:

(a) A task force at the regional levelmay help to come up with an action plan toformulate strategies to support the development ofagro-based and resource-based industries;

(b) A regional capacity-building pro-gramme could help regional governments ordevelopment agencies to work with the privatesector to stimulate growth and opportunity;

(c) Identification of some pilot pro-grammes in progressive regions can provide agood demonstration or benchmark for otherregions to replicate.

2. Business environment

(a) Licences and regulatory system

All countries have a specialized, organizedand very elaborate system of rules and regulations,licences and control for the development of SMEs.Fiscal and other incentives are also given in someform or other to SMEs and export-oriented units inalmost all countries, including developed countries.Some of these policies are directed explicitly atthese industries, while others are generally aimedat firms in certain priority sectors on account oftheir special role in development.

The nodal agency for SSI promotion anddevelopment in the United States is the SmallBusiness Administration (SBA). Established in1953, SBA provides financial, technical andmanagement assistance to enable Americans tostart, run and grow their business enterprises.SBA has a portfolio of US$ 45 billion in businessloans and is the United States single-largestpromoter of small business. It provides loans, loanguarantees and what are called “disaster loans”. In1998, SBA offered management and technicalassistance to more than 1 million business entre-preneurs.

Japan has enacted the Small and MediumEnterprise Basic Law, which stipulates that theGovernment must implement necessary measuresin a comprehensive manner in the following areasfor the SME sectors:

(a) Modernization of equipment;

(b) Improvement of technology;

(c) Stimulation of demand;

(d) Rationalization of management;

(e) Structural upgrading of small andmedium enterprises;

(f) Prevention of excessive competitionand establishment of proper subcontracting.

The Spark Programme on rural industrializa-tion approved by the Chinese Government in 1986aims at modernizing the rural economy throughscience and technology. The Programme works at

50

three levels – county, province and central Govern-ment. In general, units under Spark include (a)village and township enterprises having R&D unitsin cooperation, (b) R&D units which have villageor township units for cooperation and (c) ascientific and production consortium. Spark hasadopted a mechanism of setting up a technologydevelopment and extension network that interlinkslocal sectors and central departments and institu-tions for continuous flow of technology.

In addition, China has set up non-profitableproductivity centres promoted by SSTC thatprovide comprehensive service to medium andsmall-sized enterprises. These productivity centresare equipped with computers, fax machines andtraining equipment and systems used in the UnitedStates; Japan; Hong Kong, China; Italy; Australia;the EU; and Singapore. China’s experience inproviding 100 million jobs in rural enterprisesunder the non-farm sector during 1986-1993reveals that its rural non-agricultural enterprisesowe their success to a market-orientation, availabi-lity of infrastructure, stress on higher technology,incentive-linked wages, competitiveness, diversityin products and community cooperation.

Small and medium-sized enterprises play animportant role in the Republic of Korea’s economythat is supported both by the Government anda well-developed institutional mechanism andinfrastructure. The development of SSIs has thesupport of the Republic of Korea’s Constitution,which states that “promotion of SSIs is the duty ofthe nation”, while the country has also developedcomprehensive SME legislation.

In India, the primary responsibility fordeveloping village and small industries restswith the state governments. However, the centralGovernment provides various fiscal and monetaryincentives and support services for the promotionof SSIs and also for the development of allindustries in industrially backward areas toreduce regional imbalances. The Governmentprescribes minimum credits (currently 40 per centof total credits) that government-owned commer-cial banks must lend to the priority sectors, whichinclude agriculture, SSI and retail trade and trans-port operators. In addition, it has establishedspecialized institutions that extend long-term

finance for fixed-asset purchases. Some creditsand equity funds also come from State industrialdevelopment corporations. Government providesvarious other fiscal, monetary and non-monetaryincentives to promote SMEs and export-orientedunits.

India has a unique policy of reservingproducts for exclusive manufacture in the SSIsector as a promotional and protective measure forSSI, which was initiated in 1967 with 47 items andreached a peak of 873 items in October 1984. Thepolicy is applicable only to manufacturing unitsand not for servicing or repair activities. Thispolicy has statutory backing from the Industries(Development and Regulation) Act, 1951. As at30 June 2001 there were 799 items on the reservedlist. One item, ready-made garments, was de-reserved in January 2001; a further 12 items werede-reserved in June 2001 and another 14 items in2002.

(b) Fiscal and investment incentives

Tax incentives accorded to firms are in theform of exemptions from sales taxes, customsduties and income taxes. Such exemptions aregranted for a variety of purposes and haveselective effects from the standpoint of firm size.In India, for example, small firms are given acentral excise duties exemption which declineswith firm size until it disappears for large indus-tries. However, many countries generally grant taxconcessions on the basis of considerations otherthan size. Tax holidays are granted for the estab-lishment or expansion of industries, which areclassified as new or necessary or particularly desir-able, such as infrastructure and core industries.

Investment incentive packages are alsoprovided for diversifying exports and for regionaldispersion of growth and employment opportuni-ties. India, which perhaps has the biggest pro-gramme and network for small industries, has anelaborate organization to promote investments indifferent small industries and ancillaries. Theseprovide for industrial estate facilities, tax holidays,export incentives and other direct subsidies suchas transport subsidies, concessional credit andpurchase and price preference.


51


In Indonesia and the Philippines, newinvestment promotion facilities such as import dutyconcessions on capital goods and raw materialimports are available to firms, including small andmedium industries, in priority sectors.

The general nature of the investmentincentive system, except in India, however, placesthe SMEs in a disadvantageous situation for thefollowing reasons:

• The proliferation of licences, permits,taxes and duties and control overagricultural price policies impose majorcosts on agro-based and resource-basedSMEs.

• Administrative procedures, documenta-tion and follow-up activities for incen-tives involve fixed costs, and the netvalue of the implicit subsidy is muchlower for SMEs.

• SMEs have less capability in financialmanagement and project evaluation,making it more difficult to meetdocumentation and project feasibilityprerequisites for a loan.

• Investment boards are generally locatedin the capital, and the travel time andexpense can be a significant burden onSMEs, which are generally located inthe rural areas.

• Many types of tax concessions, e.g.,exemption from duties on importedmachinery, are more valuable to largefirms than to small labour-intensivefirms.

• General tax rates on corporate andindividual incomes are very high inmany countries in Asia (see table II.7).

(c) Export promotion schemes

Of all the policies pursued in East Asia,“export promotion” is the most often talked about.This policy starts from a basic principle in inter-national economics, that any tax on imports is atax on exports, either through raising the cost ofexport production or through making the domestic

market more attractive. In East Asia, one majorfactor for economic success has been the main-tenance and encouragement of export competitive-ness, while retaining some degree of domesticprotection.

East and South-East Asia, in addition tomaintaining realistic exchange rates and reducingthe average level of tariffs, pursued policiesdirectly in support of exports by granting free tradestatus for all export activities. This is achievedthrough: (a) fenced private or public free tradezones (FTZs); (b) non-fenced FTZs; (c) bondedmanufacturing warehouses (BMWs); (d) dutyexemptions; and (e) duty drawbacks/rebates. Thefirst three were specialized schemes, which hadbeen widely and effectively used in countries atthe early stages of development. Duty exemptionsand drawbacks are economy-wide schemes thatwere desirable complementary systems, used atthe advanced stage of development. However,development experience suggests that in manylow-income countries, the implementation ofeconomy-wide schemes has been flawed, owingto inadequate development of the necessaryinstruments, institutions and mechanisms (WorldBank, 1996).

The fundamental features of the Republic ofKorea’s pioneering export promotion drive werethe duty drawback scheme, implemented throughthe domestic letter of credit and the export financesystem. The instruments selected for the Republicof Korea’s export drive were comprehensiveand far-reaching. They included the provision ofincome tax deductions, import duty exemptionsand drawbacks, liberal access to pre- and post-shipment and investment finance at preferentialrates, export finance guarantees and creditinsurance, preferential rates for electricity and railtransport, and supportive infrastructure investment,such as the provision of free trade zones.

Taiwan Province of China also effectivelyused the system of duty drawbacks for exportpromotion, but the scheme was significantlydifferent. In Taiwan Province of China, unlike inthe Republic of Korea, duty rebates are claimed onthe basis of customs documents of exports andimports. Export credit (through banks) is muchless significant as a proportion of export value than

52

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in the Republic of Korea. More of the creditcomes through suppliers’ credit (in the form ofpost-dated cheques), or buyers’ credit (mainly fromJapanese trading companies, which account for anestimated 30 to 50 per cent of Taiwan Province ofChina’s exports). Indirect exports cannot get ex-port credit on the basis of documentary proof oftheir production for export. Finally, the Republicof Korea’s system differs from that of TaiwanProvince of China’s in the area of input coeffi-cients. For many products they have been set moregenerously in the Republic of Korea, so as to givemore of a subsidy to exports through an extrarebate.

Indonesia, Malaysia and Thailand alsoapplied export support instruments including taxincentives, duty drawbacks and exemptions, andexport and investment finance. But the intensiveefforts were initiated only in the early 1980s andthe system of exemptions and drawbacks wasunsatisfactory because of limited access (especiallyby small and indirect exporters) and slow andcumbersome procedures. Compared with theRepublic of Korea, the South-East Asian systemshave not been as comprehensive in coverage or asautomatic in access.

There are four main methods of financingtrade: (a) company credit; (b) bank credit; (c) bankloans; and (d) self-financing. In most developingcountries, exporters cannot meet financing needsthrough company credit or bank credit becausethey lack modern banks and trading companies thatcan internalize the risk-taking. Therefore, theimmediate objective of ensuring access to tradefinancing must be met through bank loans.

The three instruments for the bank loan-based trade financing system are: (a) transaction-based, self-liquidating mechanisms for tradefinancing (including rediscount mechanisms of thecentral bank); (b) institutions to deal with export-ers’ non-performance risk, i.e., pre-shipment exportfinance guarantees (PEFG); and (c) institutions todeal with overseas buyers’ non-payment risk, i.e.,export credit insurance and guarantees (ECI/G).The Bank of Korea’s trade financing mechanismsare particularly good examples of successful bankloan-based trade financing and consisted of allthese instruments.

3. Development of skills and technology

Despite attractions such as political stability,the rapid pace of deregulation, moderate inflation,availability of relatively cheap labour, large domes-tic market and plentiful natural resources, most ofthe Asian developing countries face obstacles totechnology transfer. These difficulties vary indegree across all Asian countries especially inagro-based industries given their different levels oftechnological development and absorptive capacity.They fall broadly into the following categories:

(a) Poor infrastructure and utilities;

(b) Strict laws and regulations on foreignfirms, and inefficiencies in the implementation ofderegulation policies;

(c) Shortage of trained technical andmanagerial workforce;

(d) Weak local supporting industry in theproduction of parts and components;

(e) Low rate of diffusion of technology tothe rest of the economy except for FDI;

(f) High cost of technology agreements;

(g) Transfer of technology which is notenvironment friendly.

An important condition for successful tech-nology transfer is the ability of the host countriesto attract foreign investment and provide an envi-ronment that enhances the willingness of foreigninvestors to take a long-term view and transferknow-how to local partners and workers.

Lack of transparency and excessive bureauc-racy in the implementation of foreign investmentlaws often cause a big gap between approval andactual realization rates, which may be as low as 30to 35 per cent in the case of several countries inthe Asian and Pacific region. Furthermore, the gapbetween approval and actual investment is as longas two to three years.

Most of the SAARC countries share com-mon strengths and problems. The problems relateto the low level of technology, environmental

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degradation and a limited export base concentratedon natural resources and semi-finished products.For a long time, these countries were dependent onthe West for their technological needs and paidlittle attention to building their own technologicalcapabilities.

By and large, SAARC countries encouragedtransplantation of turnkey projects operating at asuboptimal level of efficiency and capacity utiliza-tion and were unable to absorb, adapt and developtechnologies needed for their economic develop-ment. Whatever science and technology (S&T)infrastructure was developed, it remained weak inestablishing linkages with the productive sectors.Furthermore, much of the aid acquired in the pastwas spent on public sector projects that wereinefficient. There is also a lack of sufficientlinkages and networking among academia andenterprises.

The Chinese case is an example that has metwith considerable success in technological upgrad-ing of its small-scale sector through transfer oftechnology by creating sufficient institutionalmechanisms. In this direction, the Spark Pro-gramme was initiated in 1986 for village and town-ship enterprises (VTEs) in rural areas and theTorch Programme (for high- technology areas) wasinitiated in 1988 to cater for industries mostly in120 high-technology development zones (HTDZs)in urban areas. To facilitate transfer of technologyand reduce the barriers between research institu-tions and enterprises, some 55,000 new technologyenterprises (NTEs) have been set up. The Govern-ment provides soft bank loans, preferential taxationpolicies and development of infrastructure facilitiesand risk capital for start-up for NTEs through agovernment-financing agency known as theVenture Investment Corporation.

With the onset of economic liberalization inIndia in 1991, the Government of India liberalizedthe import of technologies by domestic manufac-turers. Some salient features relating to the tech-nology import policy are:

• There is a commitment to developmentand utilization of indigenous capabilitiesin technology and manufacturing, andtheir upgrading to world standards.

• Foreign investment and technologycollaboration are welcome to obtainhigher technology to increase exportsand expand the production base.

• The relationship between domestic andforeign industry is much more dynamicin terms of technology and investment.

• Indian companies are free to negotiateterms of technology acquisition withtheir foreign counterparts according tocommercial judgment.

• Procedures for foreign investment,foreign technology agreements andservices of foreign technicians havebeen made easier and more liberal.

• Imports of capital goods have beencompletely liberalized with a significantreduction in import duties.

India has acquired imported technologies,either by outright purchase, direct foreign invest-ment and joint ventures or on the basis of royaltypayments. For the acquisition of foreign technolo-gies, Indian companies have also received supportand assistance from international organizations likeAPCTT, the United Nations, UNIDO and the Inter-national Development Research Centre (IDRC) ofCanada.

The main sources of imported technologieshave been the United States, the United Kingdom,the former Union of Soviet Socialist Republics,Germany, France and Japan. Many financial andnon-financial support systems built over a periodof time helped in the acquisition, adaptation andassimilation of imported and indigenous technolo-gies. India was also able to provide technical andconsultancy services not only to African and Asiandeveloping countries but also to some developedcountries. However, India still lags far behind inits R&D activities when compared with advancedcountries, since the expenditure on R&D is verylow (see table II.8).

The R&D expenditure at 0.6 per cent ofGNP in India, 0.4 per cent in Malaysia, 0.2 percent in the Philippines, 0.1 per cent in Thailand,


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Table II.8. Science and technology development in selected Asian economies

Scientists Technicians Science and Science Expenditures High-technologyand engineers in R&D engineering and for exports

in R&D students technical R&DCountry or area journal % of

% of total articles Billions manu-per million per million tertiary level % of of factured

people people students GNP US$ exports

1990-2000 1990-2000 1987-1997 1997 1989-2000 2000 2000

Newly industrializedeconomies (NIEs)Hong Kong, China 93 100 36 2 080 .. 5.2 23Republic of Korea 2 139 574 32 4 619 2.70 54.0 35Singapore 2 182 283 .. 1 164 1.13 73.6 63Taiwan Province of China .. .. .. .. .. .. ..

China and MongoliaChina 459 187 43 9 081 0.06 40.8 19Mongolia 468 92 24 13 0.07 5.7 16

South-East AsiaCambodia .. .. 13 3 .. .. ..Indonesia .. .. 39 123 0.07 5.7 16Lao People’s

Democratic Republic .. .. 20 2 .. .. ..Malaysia 154 44 27 304 0.42 40.0 59Myanmar .. .. 56 3 .. .. ..Philippines 156 22 14 159 0.21 8.5 59Thailand 102 75 18 356 0.10 13.9 32Viet Nam 274 .. .. 106 .. .. ..

South AsiaBangladesh 51 32 47 130 .. 0 0Bhutan .. .. .. .. .. .. ..India 158 115 25 8 439 0.62 1 245 4Maldives .. .. .. .. .. .. ..Nepal .. .. 13 35 .. 0 0Pakistan 78 14 32 232 .. 0 0Sri Lanka 188 45 34 61 .. 0.1 3

East AsiaJapan 4 960 663 21 43 891 2.80 127 368 28

WorldLow- and middle-income .. .. 35 75 298 .. 156.8 16East Asia and the Pacific 496 193 43 14 817 0.88 100.5 25Europe and Central Asia 2 212 478 44 34 905 0.83 15.6 10Latin America and Caribbean 287 .. 30 10 075 0.58 40.5 16Middle East and North Africa .. .. 29 3 106 .. .. 1South Asia 158 114 24 8 896 0.62 .. 3Sub-Saharan Africa .. .. 29 3 499 .. .. 8High-income 3344 .. 25 437 339 2.30 847.0 22

World .. .. 35 512 637 2.12 1 003.8 20

Sources: World Bank, World Development Indicators 2002 and World Development Report 2002.

Note: Two dots (..) indicate that data are not available.

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0.07 per cent in Indonesia and 0.06 per centin China in 1989-2000 was considerably lowerthan in the United States (2.6 per cent), Japan(2.8 per cent), Germany (2.3 per cent), theRepublic of Korea (2.7 per cent) and Singapore(1.1 per cent). In the United States, Japan,Germany and the Republic of Korea, the majorportion of the funds was contributed by the privatesector. In contrast, R&D expenditures are mostlyfunded by the public sector in Thailand, Indonesia,China and India.

India has built a wide array of institutionsto support the development and diffusion of indus-trial technologies since the inception of planning in1951. It has virtually all basic, applied, hardwareand software and R&D institutions, some of whichmeet world-class standards. But these institutionshave failed to commercialize R&D activities asthese are virtually financed and controlled bythe public sector without any linkage with theprivate sector. Since 1993 the Government hasencouraged private sector funding of researchinstitutions by providing tax relief on R&Dexpenditure.

4. Access to capital

(a) Lending by commercial banks

In the Republic of Korea, the United States,Japan, China and India, the credit guarantee pro-grammes help small enterprises to have access tobank loans without collateral support. Like India,the Republic of Korea has set up a special techno-logy development fund and other programmes tosupport venture capital. On the marketing side, theCentral Government, local autonomous authoritiesand State-run corporations in the Republic ofKorea are encouraged to extend procurements fromSMEs and provide special incentives to increaseexports.

Among the numerous government supportorganizations for SSIs, the Korean TechnologyBanking Corporation and Korea Technology CreditGuarantee Fund provide finance for technologydevelopment projects and venture capital finance,in addition to extending credit guarantees for SSIs.Research cooperatives promoted by industry are

encouraged to undertake R&D. The Korean Tech-nology Banking Corporation (a private institution)and the Korean Development Investment Corpora-tion (a subsidiary of the Korean DevelopmentBank) provide substantial financial support.

The Small and Medium Industry PromotionCorporation (SMIPC), a non-profit autonomousorganization established by the Republic of Koreain 1979, provides financial assistance for industrialextension services concerning management andtechnology. Mention may also be made of theKorean Institute of Industries and TechnologyInformation, a non-profit organization, and theMinistry of Commerce, Industry and Energy, whichhelps in nationwide dissemination of informationto support industrial and technological develop-ment in the Republic of Korea.

In Germany, special privileges and specialincentives are provided for small and medium-sized firms. For example, in the “equity supportprogramme” earmarked for small and mediumindustries, special support is given to young entre-preneurs and new enterprises. This programmeincludes, among others, no interest for two years, acomparatively low interest rate, 10-year graceperiod and 20-year repayment period.

India has a very organized system underwhich public sector commercial banks and finan-cial institutes provide various types of financialassistance to SSI units. The Small Industries De-velopment Bank of India (SIDBI) is a good exam-ple of a specialized bank which provides financialand other services exclusively to SMEs. SIDBIwas set up under an Act of Parliament as the all-India financial institution for the promotion,financing and development of SSI and commencedoperations on 2 April 1990. Apart from extendingfinancial assistance, SIDBI coordinates the func-tions of institutions engaged in similar activities.As an apex institution for SSIs, SIDBI’s lendingoperations are supplemented by promotional anddevelopmental activities. SIDBI focuses on meet-ing the credit requirements of the SSI sector ingeneral and in emerging areas like technologyupgrading, venture capital financing, informationtechnology, microenterprises and export promo-tion.


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China has a pilot project to introduce creditguarantee schemes for SMEs covering 30 pro-vinces. As per estimates, a corpus of around 7.6billion yuan has been raised. Like India, Chinahas the National Technological Innovation Fund tosupplement technology upgrading among SMEs.

In Bangladesh, the Government directsfunds to SMEs through scheduled banks, whichare obliged to lend prescribed share of their totalresources to these industries as working capital.Some nationalized banks have also helped tofinance subcontracting arrangements of smallindustries to large ones, but these constitute asmall portion of the banks’ loan portfolio, and aswith the other loans, the recovery rate is low. InIndonesia the most important among the priorityschemes has been the provision of working capitaland small investment credit for fixed-assetacquisition, but lending has been below target asthe lending agencies involved have exercisedextreme caution in the disbursement of such loans.

The Philippines also has specializedprogrammes for SMEs.

Despite all these measures, in virtually all ofthe countries, small and medium industries com-plain about the paucity of funds available to themand the onerous terms associated with loans theyreceive. Interest rates on government loans arelower than market rates but the funds available arelimited and high collaterals are required by bothprivate and government banks. Interest ratespreads are very high in many countries.

(b) Specialized financial institutions

In industrialized countries, in addition tocommercial banks which undertake generallending, there are large numbers of specializedfinancial institutions including those in rural areasthat focus on lending of particular types, such as:

• Factoring companies, which lendagainst trade receivables and whichfrequently undertake the task of debtcollection for companies using theirservices. The receivables themselvesprovide the security for the loan.

• Leasing companies, which lend for thepurchase of capital equipment, allowingthe lessee to take delivery of equipment,which effectively serves as the collateralfor the leasing contract.

• Trade credit suppliers, which financepurchases of raw materials and use rawmaterial inventories as collateral.

• Mortgage finance companies, whichspecialize in financing mortgages.

The specialized financial institutions play avital role in allowing businesses to grow, includingagro-business. In most developing countries thereare very few leasing or trade credit entities as thefinancial and judicial systems necessary for theireffective operations do not exist.

(c) Role of microfinance institutions

Since the late 1980s, the number ofmicrofinance institutions (MFIs) has grown rapidlyin many developing countries. MFIs can be de-fined as formal, semi-formal or informal providersof financial services to low-income clients, includ-ing the self-employed. Financial services generallyare restricted to lending although some MFIs alsoprovide savings, insurance and payments services.

There are a number of reasons why MFIsare likely to bring benefits to the poor. MFIs enjoybetter local knowledge and proximity, which is animportant advantage because the majority of poorhouseholds live in vast rural areas that are unde-served by the commercial banks. Furthermore, thesemi-formal and informal MFIs complement theformal financial system by providing financialservices to those who have limited access to theformal financial system.

However, the importance of microfinanceas an instrument of poverty alleviation should betreated with caution. The quality of the loanportfolio of MFIs is often poor because of inad-equate management. A large number of theseinstitutions are not efficient and survive on subsi-dies from their donors. Lending rates charged byMFIs are usually very high. The linkages betweenMFIs and commercial banks are often weak.

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Replication of successful MFI models is oftenimpossible owing to differences in demographicor cultural contexts. Finally, there are still nocountries with a comprehensive network ofmicrofinance institutions.

The above analysis indicates that access tocapital is a critical factor for the development ofagro-based industries, particularly SMEs. Fundingis critical to these industries in their early stages ofdevelopment. Commercial banks should offermore appropriate instruments to SMEs and developmicrocredit schemes with the support of govern-ment.

There is also a need to develop specializedbanks for the supply of venture capital, tradecredits, mortgage finance, factoring and leasingservices to SMEs.

Commercial banks in the East and South-East Asian countries are suffering lendingconstraints in the aftermath of the Asian crisis.Governments and multilateral lending institutions(like ADB) should consider establishing specialfunds dedicated to helping to fund SMEs in theagro-based and resource-based sectors.

5. Infrastructure and informationtechnology

Development of a proper legal and institu-tional set-up and efficient infrastructure (transportand telecommunications) is essential for the deve-lopment of SMEs. In open economies, such asSingapore; Hong Kong, China; or Mauritius, onlyminimal investment laws and regulations exist andadministrative costs are negligible. Most develop-ing countries like India are faced with a transitionperiod. The experience of countries such as Indo-nesia, Malaysia, Taiwan Province of China andThailand suggests that the transition can be man-aged well. The faster an economy is reformed, theeasier the management of private investment in-cluding foreign investment. Regulations can besimple and their administration can be made effi-cient and transparent.

As regards infrastructure, some of the meas-ures to improve the production and marketing ofSMEs are suggested below:

(a) Cluster development

A “cluster” refers to a geographicallybounded concentration of similar, related or com-plementary businesses, with active channels forbusiness transactions and communications thatshare specialized infrastructure, labour, marketsand services. The cluster approach assists SMEsin introducing innovative marketing. UNIDO hashelped to develop clusters for exports of textiles,rubber and pharmaceuticals in India to improvetheir international competitiveness.

(b) Trading houses

The Japanese experience in this area isworth noting. Japan is the pioneer in setting uplarge trading houses known as “Sogo Sosha”.These companies assisted in the marketing ofproducts of Japanese SMEs. In order to encourageexports of products of SMEs, the Government ofIndia encouraged the setting up of export housesand trading houses and also extended variousfacilities and incentives to export houses andtrading houses.

(c) E-commerce and development ofinformation technology

E-commerce has revolutionized internationaltrade owing to:

• Reduction in transaction costs globally

• Direct contractual relations betweenbuyers and sellers

• More transparency in dealings

The three major directions of commercialactivity, i.e. (a) business to business (B2B), (b)business to consumer (B2C) and (c) business togovernment (B2G), have been very much capturedthrough e-commerce and can help SMEs to expandtheir market and obtain information on bothdemand and supply and behaviour of customers.Hong Kong, China and Singapore are aggressivelyexpanding their ICT infrastructure to improvetheir ability to take advantage of the Internet andglobalization.


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All developed and developing countries arenow attaching special importance to the develop-ment of IT infrastructure through the formulationof national policies on IT and related sectors. TheGovernment of India has adopted a convergencebill to cover telecommunications, IT and broadcast-ing under the same Act. Under the framework ofWTO, there is a special international arrangementon IT under which all participating countries haveagreed to duty-free entry for all IT products andcomponents.

(d) Networking

Networking can play a dominant role insupporting SMEs in marketing their products.Networking is of many types. However, vertical(aimed at finding complementary activities in thedevelopment of a new product) and knowledgenetworks (associations geared to solving a commontechnology or market information) are morerelevant in the context of the market.

E. Role of the World TradeOrganization for the developmentof agro-based and resource-based

industries

1. Role of the World TradeOrganization

The prevailing world trade order came intoexistence in 1995, with the culmination of theUruguay Round of trade talks. The institutionali-zation of this order is represented by WTO, whichmonitors the compliance of member countrieswith a number of agreements on trade relationshipsbetween countries and also acts as a dispute reso-lution mechanism.

The current order is fundamentally differentfrom the previous regime, manifested primarily inGATT and focusing mainly on commodities andmanufactured goods. In addition to commodities,a number of other factors have become extremelyimportant in cross-border transactions. Thesecan be broadly classified in three categories:services, knowledge and capital. The agreements

administered by WTO now cover the first twocategories, while a collective agreement on capitalflows is also on the agenda for future talks. Thus,the new order is far wider in scope than the one itreplaced.

Quantification of all these various impacts isobviously very difficult. Most of them are outsidethe purview of this study. However, the mostsignificant impact on the developing countries islikely to be that of the elimination of quantitativerestrictions (QRs) under GATT.

While the Uruguay Round agreementsachieved a sizeable reduction in the use of non-tariff measures (NTMs), the phasing-out periodfor the existing NTMs differed significantly fordifferent products. NTMs in agriculture, affectingtemperate zone food products (particularly grainsand dairy products) exported mainly by developedcountries, were to be phased out almost immedi-ately, but those on textiles and clothing were givena transition period of 10 years and voluntary exportrestraints (VERs) four years. These imbalancesare reinforced by the unequal incidence ofVERs across exporting countries and products.For example, as at 1992, of the 79 VERs outsideagriculture and textiles and clothing, 69 involvedJapan and the Republic of Korea as exporters,and they applied mainly to motor vehicles andconsumer electronics.

Regarding broad product categories, avail-able evidence suggests that trade liberalization hasbeen limited and slow in agriculture, textiles andclothing, compared with other sectors. Access tomarkets for these products continues to be muchmore restricted. Agricultural subsidies, particularlyin the EU, have been largely responsible forrestricting the growth of exports of a number ofagricultural commodities from developing coun-tries.

In manufacturing, except in textiles andclothing, differences in the evolution of marketaccess conditions are not large enough to explainthe differences in the pace of expansion of trade inthese products. Among other factors, the growingimportance of international production networksappears to have played a greater role.

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2. WTO and market access

Market access covers a broad range ofissues, which are briefly outlined in box II.1.The scope of this report is limited to analysingprotection in agro- and resource-based exports withspecial attention to trade in agriculture and textilesand clothing (T&C), two sectors that are of greatexport interest of developing countries. In thecontext of the Doha Development Agenda, WTOmembers are committed to negotiations aimedat substantially improving market access foragricultural and industrial products, in particularfor developing countries.

(a) Import tariffs

Successive rounds of multilateral negotia-tions have lowered average levels of protection.Industrial countries have generally set applied tariffrates close to their tariff binding, enhancing thepredictability and transparency of market accessregimes. In contrast, most developing countries

bind their tariffs at levels well above their appliedrates so that they could in principle substantiallyincrease their applied tariffs without infringingtheir WTO commitments. Among broad countrygroups, it is notable that the average tariffs ofLDCs (17.9 per cent) are higher than those ofother developing countries (14.0 per cent) and wellabove those of industrial countries (5.2 per cent).

However, averages of MFN applied tariffsby importing country or region provide anincomplete picture of protection for the followingreasons:

(a) A number of barriers are not coveredby the standard MFN databases, including specifictariffs (i.e., absolute monetary value per unit ofimports), tariff rate quotas, prohibitions, contingentprotection, the costs of rules of origin and environ-mental and technical standards;

(b) The averages do not capture the impactof tariff dispersion, in particular tariff peaks andescalation;

Market access refers to the ability of providers of foreign goods and services to sell in a given country.For the purpose of market access negotiations, WTO subdivides tradable items into four groups, i.e., agriculturalgoods, textiles and clothing, industrial goods, and services. A different set of multilaterally agreed rules appliesto each group.

Main market access barriers include:

• Import tariffs and other price-based border measures: government policies usually targeted atrestricting market access in a particular commodity and raising budget revenue. These measuresinclude import duties tariff, quotas and other border duties, levies and charges.

• Non-tariff border measures: government policies that may restrict market access through non-priceinstruments. Such measures include quantitative restrictions (import quotas, direct prohibitions,domestic content requirements, licensing); contingency measures (anti-dumping, countervailing andsafeguard measures); TBT (regulations, standards, testing and certification procedures); and sanitaryand phytosanitary measures (SPS) (food, animal and plant health and safety).

• Domestic policy measures: government policies, which may restrict market access if not applieduniformly to domestic and imported goods and services. These are tax, competition, credit andinvestment policies; price controls; and fiscal incentives, in particular, trade-distorting export subsi-dies and domestic support.

Negotiations on market access. The Doha Development Agenda envisages negotiations on market accessin all of the above areas.

Box II.1. WTO and market access


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(c) Because of preference schemes anddiffering export structures, the barriers facedby exporters to the same market can varywidely;

(d) Uncertainty over market access relatedto contingent protection, interpretation of normsand procedures and the discretionary nature ofmany preference schemes may represent a furtherdisincentive to exporters.

Developing countries generally face higherbarriers to their exports than industrial countries.Adoption by all industrial countries of schemesthat provide unrestricted market access for LDCscould have significant benefits without imposingundue costs on other suppliers, given the verysmall share of LDCs in world trade (around 0.5per cent). Trade preferences also have duty draw-backs. Apart from the economic inefficiencies,they create vested interests and should therefore beset firmly within a context of rapid multilateralliberalization.

Improved market access for LDC exportswill not be sufficient to ensure sustained growth inexports as constraints in key infrastructure sectorslike telecommunications, transport and financialservices often add more to export costs thanforeign trade barriers (World Bank 2002b).

(b) Agreement on agriculture

Agriculture has traditionally been heavilyprotected from import competition. It was notuntil the conclusion of the Uruguay Round in 1994that the sector was brought under effective GATTdiscipline. The Uruguay Round marked the begin-ning of a gradual liberalization process in agricul-ture, initially over 6 years for industrial countriesand 10 years for developing countries. WTOmembers also made a commitment to engage innegotiations to continue the reform process inthe final year of the 6-year implementation period,part of the so-called “built-in agenda”. The keycommitments entailed a move away from quanti-tative restrictions, a binding of maximum tariffrates and the reduction of domestic support andexport subsidies (see box II.2).

Tariffication and binds: Non-tariff measures to be converted to bound tariff at the start of the imple-mentation period with average tariff cuts by industrial countries of 36 per cent over six years from a 1986-1988base, and a minimum cut of 15 per cent on any tariff line.

Minimum import access: Tariff rate quotas were introduced to guarantee minimum market access by theend of the implementation period.

Domestic support, as measured by the total aggregate measurement of support (AMS), to be reduced by20 per cent from a 1986-1988 base over the implementation period. Exempt are domestic supports of less than 5per cent, “green box” subsidies allowed for purposes such as development and technical progress and “blue box”subsidies linked to output reduction schemes.

Export subsidies to be reduced by 36 per cent in value and subsidized exports by 21 per cent in volumefor each product over the implementation period from a 1986-1990 base.

Special safeguard provisions, triggered by volume increases or price reductions, permit the imposition ofadditional duties up to specified limits.

• Greater flexibility was given to developing countries in their commitment to market access reductionsin domestic and export subsidies (generally two thirds of developed country commitments and alonger implementation period of 10 years).

• For subsidies excluded from the reduction commitments, the measures will be considerednon-actionable in terms of countervailing duties and legal challenges at WTO until the end of 2003.

Box II.2. Uruguay Round: principal commitment on agriculture

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Under the Agreement on Textiles and Cloth-ing (ATC), quota restrictions are being graduallyabolished (as products are “integrated”) over the

• Under the Uruguay Round ATC, MFA quotas are to be phased out progressively over a 10-year period.In the first stage, which began on 1 January 1995, WTO members were required to integrate productsrepresenting not less than 16 per cent in volume terms of their 1990 imports of T&C. In stage 2, startingJanuary 1998, not less than a further 17 per cent was to be integrated; and in stage 3, from January 2002, afurther 18 per cent. Finally, on 1 January 2005, all remaining products (amounting to a maximum 49 percent) are to be automatically integrated.

• Products not yet integrated are subject to a special transitional safeguard mechanism, whereby an importingcountry can apply quantitative restrictions for up to three years on imports from a particular source of supplywhich causes or threatens to cause serious injury to the domestic industry. After integration, regular GATTsafeguards apply.

• In addition to this integration process, ATC accelerated the growth rates for the remaining quotas.The annual growth rates of quota volumes were increased by a factor of 16 per cent for the first stage of theAgreement, by a further 25 per cent for the second stage and another 27 per cent for the last stage. LDCsenjoy one-stage advancement in the acceleration of quota growth.

• In additional to the MFA quotas, T&C imports are subject to exceptionally high tariffs in both developed anddeveloping countries. Trade-weighted average (applied) tariffs for non-OECD countries are 16 per cent.This average conceals large variations among individual countries. The largest developing country exporterstend to have higher tariffs. ASEAN, China and South Asia all have tariffs in the range of 20-33 per cent ontextiles and of 30-35 per cent on clothing.

Box II.3. Agreement on Textiles and Clothing (ATC)

period 1995-2005 and quotas that have not beenremoved are subject to a progressive increase intheir growth rates (see box II.3).

F. Conclusions and recommendations

1. Role of agro-basedand resource-based industries

In many developing countries, agro-basedand resource-based SMEs contribute significantly toGDP growth, employment generation and povertyalleviation. In general, SMEs have higher labourelasticity and have grown at a higher rate than theoverall industrial sector. This proves their ability tocompete globally. But these industries face anumber of problems and constraints, which includethe following:

(a) Lower productivity and outdated tech-nology;

(b) Lack of skilled labour and managerialskill;

(c) Constraints on infrastructure;

(d) Low economies of scale;

(e) Lack of modern marketing;

(f) Increased capital intensity;

(g) High cost of domestic credit and lackof foreign investment;

(h) Increased competition due to removalof QRs and reduction of customs duties.

A wide range of opportunities can beseized by small-scale and labour-intensive indus-tries. This is particularly so in the Asian region,where the horizontal division of labour throughtrade and joint venture projects is increasingsharply.


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The following measures need to be givenpriority to strengthen the SMI sector:

• It is necessary to facilitate the transferof technology to SMEs by suitablearrangements such as regional infor-mation networks and the provision oftimely and adequate finance to SMEs.

• Adequate backward and forwardlinkages need to be established betweensmall and large units in terms ofsubcontracting, production sharing andmanufacture of parts.

• Suitable measures should be taken toenhance the access of the SMI sectorto information particularly relating toexternal markets and foreign invest-ment.

• Vertical expansion of SMEs may belimited owing to reservation of itemsand limits on investment. A review ofthe reservation policy and investmentlimits is necessary to facilitate capacityexpansion, technology upgrading andeconomies of scale.

• Much of the existing growth ofSMEs has taken place in and aroundthe metropolitan areas, but balanced re-gional growth requires that the processof industrialization be extended to thecountryside. In this respect, the expe-rience of China in setting up townshipenterprises on a large scale may beparticularly relevant for other develop-ing countries.

• SMEs are most vulnerable to tradeprotectionism and exchange rate fluc-tuations. Undesirable tariffs and non-tariff restrictions on their products mustbe removed to enhance the exportpotential of SMEs.

2. National-level policies

At the national level, the development ofagro-based and resource-based SMEs calls forvarious policies, including the following:

Marketing – Sectors with a competitiveadvantage need to be identified and sector-specificinnovative marketing support devised. SMEs needto be promoted as ideal destinations for franchisingand outsourcing. A mandatory policy on govern-ment purchases would provide a captive market.The United States Small Business Act provides forthe compulsory purchase of 24 per cent of govern-ment purchases from small business.

Technology – In the pre-liberalization era,technology upgrading was often the last priorityfor SSIs. With limited competition in the market-place, depreciated machinery provided a costadvantage. This has changed with liberalization,which emphasizes better quality. As technologyupgrading becomes a key parameter of competi-tiveness, it is necessary to focus on enhancingtechnology information through a technology bankand facilitating technology transfers through softfinancing and a capital subsidy scheme.

Infrastructure – Power, water, industrialestates, roads, telecommunications and a cleanenvironment are some of the more critical aspectsof infrastructure for doing business. Productionand commerce are heavily dependent on theseinputs. Improvement in infrastructure facilities forSMEs is necessary to enhance their efficiency andproductivity.

Clusters – Clusters have the potential to bespringboards of core competencies. The creationof common facilities, upgrading of infrastructure,demonstration projects, capacity-building, streng-thening of associations, targeted credit delivery andbrand building are activities that it is suggested bebuilt around clusters.

Cluster development has to be accordedpriority for existing ones and potential clusterswould have to be identified and an appropriateaction plan worked out for their integrated deve-lopment. The programme needs support in theform of adequate infrastructure for the clusters andactive involvement of industry associations in themaintenance of their services.

Access to information – The World WideWeb is changing the face of the marketplace.Information is being described as the fifth factor of

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production. Databases on market-related andfinancing-related information need to be identifiedand made accessible in a user-friendly manner.Governments must provide more of their SSI-related services through the Internet.

Innovative financing techniques – There is aneed to develop innovative financing measuressuch as setting up venture capital funds, leasingcompanies, mortgage finance companies, factoringcompanies, trade credit suppliers and microfinance.

Microfinance – The development ofmicrofinance promotes economic growth, therebycontributing to poverty alleviation. Not only doesfinancial development foster economic growth andcreate employment opportunities for the poor, butit also helps to mobilize savings.

3. Development strategy for agro-basedand resource-based industries

While agro- and resource-based small andmedium industries play important roles at differentstages of a country’s economic, social and politicaldevelopment, various studies conclude that manyof the small and medium industries in Asiandeveloping countries are less efficient and lessproductive than their larger counterparts. Theysuffer from high-mortality rates, which inflictheavy costs to the economy. Many of them lackentrepreneurial and technical resources to makethem successful. While various incentives maymake them profitable, the efforts might beeconomically wasteful.

(a) Macroeconomic policies

Macroeconomic stability is one of thenecessary conditions for efficient developmentof the resource base of industries and povertyreduction. Macroeconomic volatility puts a breakon economic growth. High and unpredictableinflation hurts everybody, particularly the poor astheir incomes are not indexed to prices, and thuscontributes directly to higher poverty rates.

However, sound macroeconomic policieshave only limited capacity to alleviate povertydirectly. These policies should be directed at

promoting growth through prudent implementationof macroeconomic goals, developing direct inter-ventions for protecting the interests of the poor andfor target groups of industries with employmentpotential and comparative advantage.

The experiences of India, Bangladesh,Pakistan, China, the Republic of Korea, Indonesia,Thailand, the Philippines, Japan and Singaporesuggest that given appropriate programme andpolicy assistance, small and medium industries canmake substantial contributions not only to outputand employment but also to exports. Rather thangeneral subsidies, selective support should beextended to qualified firms and industries onlywith fixed-term finance for the specific purpose ofassisting them in becoming competitive.

(b) Fiscal incentives

In many countries, tax holidays have beengiven as an investment incentive, but the benefithas been marginal either because they are notavailable to small and medium industries or theyare more accessible to larger industries. Moreover,tax holidays have been less effective in theregional dispersal of industries, as industries tendto be located near the main demand centres orregions with better infrastructure facilities. Insteadof providing tax breaks for industries, it maybe more productive to develop basic infrastructurefacilities in backward areas through increasedallocation of public funds.

A reform of government policies shouldredirect the focus from the microeconomic level ofthe firm to the macroeconomic level of businessand the economic environment. Instead of focus-ing on the different concessions to be provided,greater emphasis should be placed on creating anenvironment conducive to long-term developmentof not only efficient but also viable small andmedium industries. This may entail the disman-tling of costly incentives and subsidies thatencourage inefficiency and waste in firms, increas-ing the availability of essential inputs and bankcredits for small and medium industries andintroducing a wide array of marketing options andpossibilities.


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(c) Technology development

One of the major problems faced by SMEsis technological obsolescence and the use ofoutdated plant, machinery and equipment. Consi-dering the urgent need to attain technologicalcompetitiveness of SSIs in the face of globalcompetition, it is important to stimulate technolo-gical revolution in SSIs.

However, developing countries should notblindly adopt advanced technologies but acquireor develop technologies that are appropriate tolocal needs and ensure a smooth transition fromoutdated traditional technologies to more moderntechnologies conforming to local conditions. It isgenerally agreed that instead of importing andadopting advanced technologies from the West,developing countries should acquire, adapt and usetechnologies that are available from “regionalsources” as these are more compatible with thelocal culture, skills, raw materials and demand.

The technology policies adopted by SSIsshould be an integral part of the overall S&Tpolicies in all countries. The experiences of thedeveloped economies of the United States, Japanand Europe have shown that the average size of afirm increases with the growth in national and percapita incomes. SSIs in the developed countriesare far more productive than even large firmsbecause of the usage of modern technology andmanagement techniques. Economic developmentis invariably accompanied by a reduction in wagedisparities among different sectors, industries andfirms of different sizes.

In order to remain competitive in the era ofglobalization, it is imperative that SMEs upgradetheir technology, which may involve (a) introduc-tion of new tools and equipment, (b) changes inthe manufacturing process, (c) improvement in thequality of products, (d) introduction of new de-signs, (e) use of new raw materials and (f) use ofmodern management and information technology.This requires an integrated approach encompassingidentification, technology transfer, adaptation andabsorption. Governments should provide financialassistance to SMEs for technology upgrading andmodernization. The following are some of therecommendations for such an integrated approach:

Technology information – Setting up atechnology bank at the country and regional levelswhich will have information on technologiesavailable and their sources is recommended. Inaddition, the bank could provide information ontechnology policy, technologies for differentsectors and their applications, institutional infra-structure, sources of finance for acquiring techno-logy within the country and from abroad. To startwith, it will disseminate information on upgradingof technology, process know-how and designalong with institutions and also provide consul-tancy services or any other input required. Acompendium of available technologies from R&Dinstitutions in various countries could be broughtout on a sectoral basis and circulated among thefacilitating institutions and industry associationsfor dissemination of technology related informa-tion.

Financial assistance – Financing may alsobe provided to units entering into collaboration fortechnical know-how and technology upgradingwith a view to enhancing the marketability of theirproducts or entering into buy-back arrangementsfor exports. Concessional customs duties withinthe WTO framework may be provided for theimports of environment friendly plants and machi-nery for technology upgrading of SMEs as isgenerally applicable to export-oriented units.

Industry clusters – As major portions of theexports of SMEs emerge from industrial clusters,a massive programme needs to be launched tomodernize export-oriented industrial clusters.

Quality upgrading – More SMEs should beencouraged to obtain ISO 9000. Encouragementcould be given to small industry associations in theform of financial grants to set up and operatetesting laboratories. Strengthening of existing test-ing facilities in technical institutions would also benecessary. At least one testing facility for eachmajor cluster should be set up to fulfil their needs.

Role of FDI – The diversity of experiencesin Asia with respect to FDI requires differentpolicy approaches on the part of host countries.Those countries that have only recently been opento FDI need to ensure that the “open door policy”is maintained and remains stable. They should

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examine the possibility of a further liberalizationof FDI regimes; the harmonization of FDI andrelated policies on industry, trade and technology;and improving the efficiency of their administrativeset-up for investment approvals. In doing so, allcountries in the region should pay particular atten-tion to firms from neighbouring countries so as tocapitalize on the growing intraregional investment.Special attention needs to be given to small andmedium-sized enterprises whose special needs –dictated by their limited financial and managerialresources and insufficient information – may callfor incentives for joint ventures. The Asian markethas high potential for small and medium-sizedTNCs.

Consortia for SSI marketing – Governmentsmay promote the setting-up of more consortia forSSI marketing and provide them with financialand other support. The participation of SMEs indomestic and international trade fairs should beencouraged and promoted.

(d) Infrastructure and human resourcesdevelopment

Efficient physical infrastructure and skilledlabour are critical factors for enhancing produc-tivity and efficiency. For the more dynamicallytraded goods and services, telecommunications arethe most important facilitator of investment, andtechnological and organizational innovations driveforeign investment into those countries which havetrained and skilled workforces and fairly higheducational standards. This points to the overrid-ing importance for developing countries of invest-ing more in the development of human resources,infrastructure and services. It also highlights therisk of being marginalized in the case of leastdeveloped countries with a lowly of skilled labourforce and infrastructure constraints. The existenceof a dynamic local business sector creates asupportive environment through efficient networksof local suppliers, service firms, consultants,partners or competitors. It is therefore necessaryto concentrate efforts on the development oflocal entrepreneurship. Equally important is theavailability of high-quality telecommunicationsand transport systems, energy supply and otherutilities.

(e) Competent and committed bureaucracy

Another important institutional prerequisiteappears to be the establishment of a competenteconomic bureaucracy. The complexity and diffi-culty of managing targeted industrial policiesplaces high demands on the economic administra-tors, who must be able to balance financial supportfor targeted industries with penalties for non-performance. The economies of Japan, theRepublic of Korea and Taiwan Province of Chinahad economic bureaucracies capable of imposingdiscipline on private industry. In short, themanagement of a set of successful industrial poli-cies requires a stable macroeconomic frameworkand committed economic bureaucracy capable ofrunning complex pricing policies and objectivelyrunning public subsidy schemes.

(f) Legal, institutional and regulatory system

It is also necessary to strengthen theregulatory system and the legal and institutionalset-up for the orderly growth of industries. Asregards the limits and nature of government inter-vention in private sector activities, it is necessaryto devise optimal rules for the regulatory system,which while serving its legitimate purpose will nottranscend its limits to the disadvantage of privatesector development. First, any policy affectingallocation of resources and regulation of theprivate sector needs to be transparent and based ona specified set of procedures. Second, even whenthere is strong presumption in favour of govern-ment intervention, it is imperative to limit it to theminimum necessary scale. Third, from among theavailable alternative regulatory sets, it is necessaryto select the one which provides the least scopefor rent-seeking.

Along with deregulation, more importantmeasures need to be directed towards creating alegal and institutional infrastructure for the smoothfunctioning of the private sector. This is wellillustrated by the Indonesian experience. AlthoughIndonesia’s industrial policy, trade and financialsector reforms were deep and sweeping, they failedto achieve the full benefit as Indonesia lagged inchanging its corporate law and other laws vital totrade and industry. The same applied to issues ofland and property rights.


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An important lesson from the East Asiandevelopment experience is that a holistic approachto deregulation is more productive than partialderegulation in any one sphere, say in industrialpolicy, which is divorced from any reform in otherareas. Domestic deregulation should proceed intandem with liberalization of trade and tariffs inorder to ensure optimal allocation of resourcesbetween traded and non-traded goods.

4. Role of external trade

(a) Trade and techniques of production

A detailed analysis of the relationshipbetween trade and MVA in the UNCTAD Tradeand Development Report 2002 shows that for morethan a decade, world trade has been growing onaverage faster than world income as a result ofrapid integration. Policies governing marketaccess for both goods and FDI had a more decisiveinfluence on the evolution of trade in manyproducts. The increased mobility of capital,together with continued restrictions on the mobilityof labour, has accelerated trade in a number ofsectors where production chains can be split upand located in different countries.

Policies in developing countries have alsocontributed by offering various incentives to FDIand encouraging TNCs to operate in their territo-ries with minimum restrictions. UNCTAD furtherobserved that the aggregate picture concealsconsiderable diversity in the developing world:

• First, countries that have not been ableto move away from primary commo-dities the markets for which are rela-tively stagnant or declining have beenmarginalized in world trade.

• Second, most developing countries thathave been able to shift from primarycommodities to manufactures havedone so by focusing on resource-based, labour-intensive products whichgenerally lack dynamism in worldmarkets.

• Third, a number of developing countrieshave also experienced a rapid rise inskill- and technology-intensive products.However, with some exceptions, the

involvement of developing countries inthe manufacture of such products hasbeen confined to labour-intensive andassembly-type processes with little valueadded.

• Fourth, a few developing economieshave seen sharp increases in their sharesin world manufacturing value added.This group includes some East AsianNIEs that had already achievedconsiderable progress in industrializa-tion before other developing economiesbegan to shift their emphasis to export-oriented production.

• Fifth, with the exception of this lastgroup, exports of developing countriescontinue to be concentrated on resource-based, labour-intensive products.However, market growth is slow formany of these products, which continueto be protected by both tariff and non-tariff barriers in industrial countries.

The above trends lead to the conclusion thata simultaneous drive by a large number of develop-ing countries to expand their existing exports andincrease competition among them for attractingFDI in labour-intensive products could be self-defeating, as this could cause significant terms-of-trade losses and create frictions in the globaltrading system. UNCTAD suggested that theseproblems could be avoided by three sets of factors:

• First, by faster growth of markets forlabour-intensive manufactures in moreadvanced economies (both the indus-trialized countries and the NIEs), whichin turn depends on faster income growthand improved market access.

• Second, the middle-income countriesshould diversify their trade and produc-tion and move out of labour-intensivemanufactures and create space forlower-income countries, both in themarkets of advanced countries and intheir own markets.

• Finally, the developing countries them-selves should expand their domesticmarkets by overcoming their deep-seated problems of unemployment andpoverty.

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A return to rapid and sustained growth andfull employment policies in the industrializedcountries is crucial for averting problems associ-ated with potential frictions within the multilateraltrading system. The growth in trade among deve-loping countries is also crucial for expandingmarkets for labour-intensive products. In particu-lar, industrial upgrading in more advanced deve-loping countries would allow new players totake over labour-intensive activities in line withthe “flying geese paradigm”. This has alreadyhappened to some extent. China and the otherhighly populated low-income countries that haveadopted more export-oriented strategies gainedmuch of the market shares given up by NIEs whenthose economies shifted to more capital- andtechnology-intensive exports.

The industrial upgrading needed in themiddle-income countries depends, to a large extent,on the policies they pursue in such areas as trade,industry and technology. It also depends on theextent to which large economies such as China,India and Indonesia will rely on foreign markets tocreate jobs and incomes for large segments of theirpopulation.

Rapid industrialization in the NIEs, particu-larly at the early stages of their development,depended heavily on expansion of exports. Asthese countries were poor in natural resources, theydepended on expansion of labour-intensive manu-facturing to earn foreign exchange to import capi-tal goods and some essential primary commoditiessuch as oil. They had also small domestic marketsand their industries needed foreign markets toachieve the necessary economies of scale inproduction. But large countries such as China andIndia can rely less on foreign markets for theirindustrialization. The skills mix and resourceendowments in China and India are sufficientlywell developed to allow rapid upgrading in anumber of technology-intensive sectors to enablethem to earn the foreign exchange needed forsustained economic growth and development ofagro-based and resource-based industries.

(b) Role of export promotion policies

Export promotion schemes have been a criti-cal part of East Asia’s economic success and meritspecial consideration. These schemes consisted

mainly of duty exemption and drawback systems.But such schemes had limited success in otherAsian developing countries owing to cumbersomerules and procedures, and the costs from delaysand paperwork outweigh the reductions in duty.A review of experience in East Asia and Africasuggests that simple exemption schemes focusingon the direct exporter are more sustainable andattractive to the private sector than drawbackmechanisms

One of the key requirements of a modern-ized duty exemption or drawback should be thedevelopment of a system of pre-tabulated andpublished input-output coefficients. The work ofpre-tabulating the quantity or value coefficientsshould be carried out by technical persons, sepa-rated from the customs, while the customs officeshould focus on the implementation of exemptionsand drawbacks based on the pre-tabulated andpublished coefficients. This is based on the expe-rience of (a) the Republic of Korea and TaiwanProvince of China; (b) recent experiences of deve-loping countries such as India and Bangladesh;(c) almost 50 World Bank projects (during 1980-1990) on the implementation of duty-free importadministration reforms most of which failed prima-rily owing to the mishandling of input-outputcoefficient administration; and (d) the new GATTrules on export subsidies, which require thesystematic documentation of input-output coeffi-cients.

The other key measure of export support hasbeen the supply of export credits to exporters,especially for pre-shipment finance. It is necessaryto restructure and strengthen the existing financialsystem with a focus on trade finance, rather thancreating new institutions for supply of export orforeign exchange credits.

It is also necessary to modernize customsadministrations in many countries for quick dis-bursement of duty drawback claims. An inefficientcustoms administration comes in the form of slowor non-existent rebates and negative effectiveprotection. An alternative solution that merits con-sideration would be zero tariffs on imported rawmaterials and intermediates, coupled with increasedreliance for revenue purposes on domestic indirecttaxes, such as value added tax (VAT).


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(c) Free trade zones

Free trade status for export activities can beachieved through (a) fenced private or publicFTZs, (b) non-fenced FTZs or (c) bonded draw-backs/rebates. These specialized schemes havebeen widely and effectively used in countries at theearly stages of development. The fundamentalfeature of the Republic of Korea’s pioneeringexport promotion drive was the duty drawbackscheme implemented through the domestic letter ofcredit (DLC) and the export finance system. In theRepublic of Korea, the Input Coefficient Adminis-tration, which estimates and publishes detailedinput-output coefficients, band and individual com-modity drawback rates and the back-to-back creditsystem offered through domestic DLCs, hasefficiently provided tax-free inputs and readyaccess to working capital finance for direct andindirect exporters. India, Taiwan Province ofChina, Indonesia, Malaysia and Thailand also haveexport support instruments including tax incen-tives, duty drawbacks and exemptions, and exportand investment finance for exporters.

Four broad conclusions can be drawn fromthe Asian experience for the development of exportpromotion zones:

• Where the general economic climateis reasonable, or becoming so, thedevelopment of FTZs can be a usefulinstrument in the development of ex-port-oriented industry, as they can lowerinitial investment costs for investors andencourage economies of agglomeration.

• FTZs should be a component of abroader outward-oriented developmentstrategy, rather than a substitute for sucha strategy, or an excuse to delay much-needed economy-wide trade reforms.

• FTZs should have proper infrastructureand linkages with other parts of thecountry through proper hinterland deve-lopment.

• The benefits from FTZs in terms offoreign exchange earnings, employment,technology transfer and linkages withdomestic markets may be limited unless

accompanied by an appropriate policyframework and human capital develop-ment for sustained export development.

• While accepting that sometimes marketfailure justifies a potential role for thepublic sector in the development of freetrade zones, the pricing of land in suchzones should not be subsidized. Simi-larly, as part of a general programme topromote foreign investment, Govern-ments should be sure to remain open tothe private development of such indus-trial estates, as is being done in China.

5. Participation at the regional level

(a) Regional economic cooperation

A strengthening of regional economic coop-eration could help this process along in East andSouth Asia. The successful use of strategic trade,industrial and macroeconomic policies led to apattern of regional division of labour, described asthe “flying geese” model. As the leading econo-mies in the region successfully shifted fromresource-based and labour-intensive industries tosophisticated manufacturing activities, they pro-vided space for the less developed countries toenter simpler manufacturing stages. Regional tradeand investment flows played a central role inthis process by helping to create markets and bytransferring skills and technology to neighbouringcountries. The challenge now lies in the extensionof this regional dynamics and growth pattern toinclude newly emerging countries such as Chinaand India, as well as other less developed countriesin South and East Asia.

Since regional economic arrangementsimply close interdependence among a group ofeconomies, there is the risk of a contagion effect-ing that the problems in one country may betransmitted to its neighbours. In fact, a number offinancial problems in the regional integration at theend of the 1990s contributed to volatile capitalflows fuelling a boom-bust cycle in East Asianeconomies. Thus, maintenance of stable and rapidregional growth needs not only credible economicpolicies for upgrading of production and exports,

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but also appropriate regional arrangements toensure the stability of financial markets, includinglending facilities and agreement on a sustainablepattern of exchange rates (UNCTAD 2001).

(b) Role of ESCAP

ESCAP and its regional institutions such asAPCTT, the Asian and Pacific Centre for Agricul-tural Engineering and Machinery (APCAEM) andthe Regional Coordination Centre for Research andDevelopment of Coarse Grains, Pulses, Roots andTuber Crops in the Humid Tropics of Asia and thePacific (CGPRT), have carried out many activitiesin the past and could do more in the future topromote the exchange of national experiences,skills training and endogenous capability-building,research on sectoral restructuring, dissemination ofinformation and specific technology and environ-mentally sound technologies (ESTs) through semi-nars, workshops and technology fairs.

(i) FDI and technology transfer

FDI-related technology transfer has played amajor role in the development of many developingmembers of ESCAP, such as the Republic ofKorea and Taiwan Province of China, as well asSouth-East Asia, as is evident from their flexibleand practical approach to FDI. Other ESCAPmembers are advised to take a similar approach.

In particular, ESCAP members that haveabundant, low-cost labour should welcome labour-intensive technology; this should be the case evenin countries that have already built up a high levelof science and technology, for instance, China andIndia. Technology is a means for developing theeconomy and improving the standard of living.Low-level technology is usually appropriate forthose economies seeking to attain full employment,which is the best policy for eradication of poverty.

(ii) FDI and export promotion

FDI can be critical in introducing wide-spread technological change, improving the agilityand competitiveness of firms and providing accessto skills and global markets. This is evident inChina, and to a lesser extent in Bangladesh, India

and Kenya, where FDI is increasingly generatingspillover effects in many sectors. Successful casesshow the importance of having Governmentspromote and welcome FDI, particularly in infra-structure such as communications and energy.They also show the importance of avoiding exces-sive regulation and restrictions on expatriates andfinancial flows and the business activities of firms.

Export promotion through FDI is a keyreason for the Governments’ desire to attract FDI.FDI can help to channel capital into industries thathave the potential to compete internationally, andthe global linkages of TNCs can facilitate theiraccess to foreign markets. The share of foreignaffiliates in total Chinese exports increased from anegligible amount in 1978 to 27.5 per cent in1993, with even higher shares in electronics,machinery, footwear, toys, travel goods and textilesand clothing. Given that the absolute volume ofChina’s total exports has also been increasingsubstantially, this is a remarkable achievement.

(iii) Multilayered bilateral cooperation

FDI and technology are increasingly flowinginto ESCAP member countries from not onlydeveloped countries but also from Asian NIEs andother dynamic Asian economies. Technology fromthe latter may often be more appropriate than thatof Japan in the case of less-developed economies,in the sense that in the former it is more labour-intensive. For this reason, the flow of FDI andtechnology from Asian NIEs and other dynamicAsian economies should be actively encouraged byall organizations including ESCAP.

(iv) Cooperation at the subregional level

In the ESCAP region, ASEAN and SAARCare major subregional associations. The fact thatboth the associations are building up intrasub-regional cooperation for preferential trade withminimal discrimination against other countries is awelcome move. These arrangements will realizeeconomies of scale for their member countries, thesize of which will be measured by manufacturing,including in India and Indonesia. It is hoped thatdiscrimination against non-member countries willnot intensify.


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(v) Role of NGOs

NGOs can serve as technical advisers toimporting agencies by helping them in the choice,appraisal and negotiation of technology transfer,and in the assimilation and dissemination ofimported technologies. They may also be objec-tive observers in monitoring the governmentactivities needed to facilitate the transfer process.Their comments on the activities can serve asbases for the national legislative institutions, suchas parliament, to force the Government to improveservices and cooperation. NGOs may conductlong-term studies on the technology requirementsof a country or enterprise and help in skillstraining and access to information.

(vi) Source book on ESTs

In 1993 APCTT, with support from theMinistry of Environment of India, published a veryuseful book entitled 101 Environmentally FriendlyTechnologies, giving details of technology indifferent sectors, in such areas as the use ofsolar energy, energy conservation, energy fromwastes, building materials, material conservation,new products and equipment, food processing,waste composting, waste treatment and wasterecycling.

It would be appropriate to prepare a similarsource book containing information on ESTs. Thiscould be prepared by ESCAP in cooperation withAPCTT and other technology transfer institutesin the region. Technology sourcebooks from tech-nology-supplying countries of the region would bevery valuable, but it must be ensured that they areupdated periodically.

(vii) Cooperation among countryassociations

There is a need for national Governments,NGOs and international organizations in Asia andthe Pacific to intensify their efforts to facilitatetechnology flows to and from countries of theregion. For this there should be continual inter-action and dialogue among country federations,chambers and associations of industries.

A number of initiatives could be takenby them, either jointly at the regional level orseparately at the national level, to promote strongertechnology transfer and greater economic deve-lopment in the region. The initiatives shouldinclude:

(a) In-depth studies on the status of endog-enous capabilities of developing coun-tries of the ESCAP region in agro-based and resource-based industries,with a view to identifying areas ofcomparative advantage and cooperationon the basis of complementarity;

(b) Research on problems in technologyflows between developed and deve-loping countries, and their role andinfluence in different sectors of theeconomy;

(c) Establishment of a regional schemeof demand-oriented training in skillsinvolved in different aspects of tech-nology transfer. Such a scheme wouldutilize institutional and on-the-jobtraining facilities of more advanceddeveloping countries and could beoperated with the cooperation ofnational technology transfer centers;

(d) Organization of seminars, workshopsand conferences to provide for theexchange of national experiences, in-troduce new investment forms anddisseminate particular technologies;

(e) Strengthening of the existing informa-tion networks on technology transfer sothat they can better satisfy the require-ments of the developing countries;

(f) Formulation of a common strategy forthe prevention and removal of barriersto flows of investment, technology,goods and services;

(g) Establishment of national and thenregional databases on imported tech-nologies and an information-sharingnetwork;

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(h) Provision of a suitable form of linkagebetween research institutions, techno-logy brooking agencies and concernedgovernment departments in the deve-loping countries of the region;

(i) Strengthening the cooperation betweenregional institutions such as APCTT,CGPRT and APCAEM, and the divi-sions of the ESCAP secretariat, andbetween ESCAP and other interna-tional organizations.

6. Multilateral level actions

(a) Role of WTO

Improving market access for developingcountry exports requires a comprehensive approachto liberalization. The Doha Development Agendaof WTO contains important commitments butinitial efforts need to be sustained. Particularissues include:

• The phasing-out by all countries oftariff peaks (tariffs of 15 per cent orhigher) and multiplicity of rates isessential for the development dimensionof the current round of multilateral tradenegotiations.

• Developing countries should receivemore technical assistance in implement-ing product and process standards.

• Schemes that provide unrestrictedmarket access for all least developedcountries should be extended by alllarge trading nations.

• In agriculture, effective liberalizationmust cover border protection andsubsidies in both industrial and deve-loping countries. The Organisation forEconomic Cooperation and Develop-ment (OECD) countries must de-linkagricultural income support fromproduction and coordinate reforms ofsubsidy and tariff regimes.

• In textiles and clothing, the prioritymust be to accelerate the removal ofquotas in order to avoid an adjustment

shock in 2005 as a result of thephasing-out of quotas under theUruguay Round Agreement on Textilesand Clothing (ATC). The simultaneousreduction in import tariffs would help tomitigate adjustment pressures.

• Reform of market access in developingcountries themselves would contributeas much to a development-orientedmultilateral trading system.

• Distribution effects of reforms shouldbe recognized and dealt with properly.Food security issues and the concerns ofpoor consumers, in particular, must beaddressed as part of overall povertyreduction and development strategies bythe multilateral organizations.

(b) Market access for agricultureand T&C exports

Market access barriers in world traderemain significant for products of export interestto developing countries. The liberalization ofimports, especially for agricultural products andtextiles and clothing, can generate large benefitsfor developing countries in terms of incomes,exports and employment. These benefits wouldderive partly from the elimination of access barri-ers to industrial country markets and partly fromreforms of the trade regimes of developing coun-tries themselves. In the aggregate, further openingof external trade is a win-win proposition for bothindustrial and developing countries.

It is desirable to accelerate the removal ofquotas on textiles and clothing imports. Given therisks associated with the backloading of quotaremoval under ATC, the objective should be tolimit the adjustment shock at the end of thetransition period for both importing and exportingcountries.

It is also desirable under the Doha roundnegotiations to substantially lower tariffs on T&Ctrade, in both industrial and developing countries.Tariffs in this sector are exceptionally high andliberalization can be expected to carry largebenefits for developing countries in terms ofexports, employment and income.


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In order to prevent anti-dumping action fromtaking the place of quotas and tariffs once theseare liberalized, trade remedy rules should bereviewed with the aim of limiting the scope fordiscretion and incorporating consumer interest.

7. Technical assistance

For stronger regional integration in SouthAsia as well as East and South-East Asia, manycountries are starting to coordinate and harmonizepolicies for tariffs, taxation, investment and busi-ness regulations. But the most productive impetusto regional integration would come from removingthe restrictions on movements of goods, capital andpeople. Regional integration is also likely to geta boost from strengthening the regional growthcentres in South Asia and South-East Asia. Thesecould produce important pull effects on growththroughout the continent. They would also helpto promote FDI by enlarging markets. Regionalintegration should not be a substitute for globaliza-tion, but should be a means to strengthen it.

Multilateral agencies have helped the deve-loping countries by providing financial and techni-cal support and investment guarantees for the de-velopment of infrastructure and human resources.They have also played a more catalytic role inmobilizing funds from a wide range of privatesources. External assistance should further beincreased and continue to be provided onconcessional terms, given the long-term nature ofinvestment in human capital and its link to povertyalleviation, skills formation and enhancement ofindustrial productivity and efficiency.

Although the technical assistance receivedfrom these institutions has been found to be veryvaluable, there is scope for improvement in thefollowing fields:

• Promotion of regional cooperation inhuman resources development, R&D,S&T development, technology blending,use of IT and computer training andfacilities

• Consultancy and training aimed at tech-nology upgrading and skills improve-ment for the growth and globalizationof SMEs with special attention to entre-preneurs from rural areas, ethnic minor-ity areas, economically backward areas,ethnic and backward classes, andwomen and young entrepreneurs

• Regional technical assistance pro-grammes on harmonization of nationaland regional policies on trade, tariffs,taxation, investment and businessregulations and plans for private sectordevelopment and foreign investment

• Promotion of technology management,evaluation, assessment and enterprisescooperation for the blending of indig-enous technology and imported tech-nology

• Improvement of the institutional ma-chinery and administrative and legalframework with a view to facilitatingprivate investment, including foreigninvestment

• Advisory services for developing coun-tries and LDCs to strengthen capitalmarkets and attract foreign portfolioinvestment

• Technical support for developingcountries and countries in transition toupgrade their institutional capacity toidentify, design, negotiate and imple-ment schemes on BOT/BOO/BOLT forinfrastructure development

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A. Introduction

Horticultural production has emerged as amajor economic activity in developing countries,especially those which were hitherto heavilydependent on agricultural production, often atsubsistence levels, but are now increasingly look-ing for ways to increase both national and familyincomes. Asia alone has around 44 per cent ofthe world’s acreage under fruit, covering a widerange such as apples, bananas, oranges, grapes andmangoes in addition to tropical and sub-tropicalfruits such as pineapples, papayas, guavas, lycheesand passion fruit.

Quite primitive systems of cultivation,harvest and post-harvest handling and treatment ofhorticultural produce as well as poor infrastructurein terms of transport, storage and marketing inmany developing countries contribute to a highproportion of wastage of this perishable com-modity, estimated to range between 20 and 50 percent. Major infrastructure limitations in deve-loping countries also continue to impose severeconstraints on domestic distribution as well asexport of horticultural produce.

Losses are this high in many developingcountries, especially in Asia, because of difficultiesin collecting horticultural produce from numeroussmall farms and lack of efficient transport to

* In-charge, Technology Management, Asian and PacificCentre for Transfer of Technology (APCTT), New Delhi.

domestic or export markets. Lack of adequatesystems and procedures for grading and sortingpermit even greater spoilage during storage andtransport. The situation is further compounded intropical and subtropical countries, whose warm,humid climates accelerate the spoilage of theproduce. Post-harvest losses of vegetables andfruit in most Asian and many other developingcountries are so high and the causes so diverse thata great deal of research, training and upgrading ofsystems and procedures is needed for preventivemeasures to take effect.

Against this background, processing ofhorticultural produce into different products isincreasingly being seen as a major aspect ofendeavours to reduce wastage and boost thecompetitiveness of horticultural produce fromdeveloping countries and particularly tropical fruitsfrom the Asian region. Processing helps to tacklesome of the problems posed by perish-ability andseasonal gluts, especially in the context of poorstorage and transport infrastructures. In addition toextending shelf life, processing also results invalue addition and employment generation, as wellas enabling vertical integration and diversification.Recent technological innovations in processing andpackaging also favour fruit processing. Addition-ally, over the past decade or more there has been asteady increase in demand for processed horticul-tural products both internationally and in domesticmarkets in producing countries although, given thesomewhat weaker growth in domestic demand andthe attractiveness of export markets, the latter haveassumed greater importance in most developingcountries.

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III. ISSUES AND STRATEGIES FOR THE TRANSFERAND ADOPTION OF PROSPECTIVE TECHNOLOGIES

BY SMEs AND SMALL GROWERS FORPROCESSING OF HORTICULTURAL PRODUCE

IN DEVELOPING ASIAN COUNTRIES

K. Lakshminarayanan*


1. Prevalent market scenario

Market demand for fresh horticulturalproduce grew steadily during the 1990s and thatfor processed fruits and nuts grew at about 60 percent per annum. However, only about 15 per centof this trade involves developing countries.Further, exports of fruit from Asia lag behind thosefrom other major fruit-producing regions such asCentral America, which has 33 per cent of globalexports, and South America with 37 per cent forseveral reasons related to domestic conditions aswell as impediments to trade with importingregions of the world.

International trade in processed fruits andvegetables is very large with an ever-increasingnumber of different types being processed andexported. Whereas even a few decades agoprocessing was limited to mostly temperate fruitsand vegetables as were grown and consumed inmostly Western developed countries, the rangehas now broadened to include tropical andsubtropical produce. World trade in processedhorticultural products increased from about US$13 billion in 1991 to about US$ 14.9 billion in1995 and this overall trend has continued since.In general, the world market for fruit juices,the largest group of processed horticulturalproducts, is expected to show further growth andalso a sharper rise in growth rates both because ofthe current low per capita consumption in somegrowing markets and growing health consciousnessin most markets favouring consumption of suchproducts.

The dietary preferences of consumers havenow become considerably more diverse thanearlier. For instance, people in North America andEurope have exhibited a growing fondness fortropical fruit and vegetables, both fresh andprocessed. Also, processing and preservationtechniques have been improved substantially sothat the final product is tasty and nutritious and haslong shelf life. Many developing countries havetaken advantage of this continuing and risingworldwide demand for processed fruits and vegeta-bles and have earned valuable foreign exchangefrom exports of products.

In the case of tropical produce, pineapples,mangoes, papayas and bananas form the backboneof trade in tropical products, while other producesuch as lychees, rambutans, jackfruit and vegetableproducts such as okra also have a good, if smallerdemand. There is also growing demand in severalEuropean markets for tropical fruit salads, two- ormultiple-fruit products, e.g. papaya/mango/guava,frozen tropical fruit products for use in bakery anddairy products and baby foods, and for tropicaljams, syrups and other retail tropical fruit products.Many processed products are produced by manu-facturers in the importing developed countries fromimported raw material or intermediates. Often,trade from developing countries constitutes whatare termed “bright cans” where the branding andmarketing is done by the importer who attaches hisown label to the imported product. Nevertheless,some companies in Thailand and the Philippineshave been successful in exporting labelledproducts, as have some companies from theCaribbean.

Apart from export markets, which areunderstandably emphasized in the case of smallercountries and those countries in which horticultureconstitutes a large proportion of the economy,growing domestic consumption within developingcountries, which is rising further with the risingprosperity at least of the middle class, is anincreasingly important factor influencing the de-mand for both fresh and processed horticultureproduce. Processed products are increasinglyfinding good and growing markets in developingcountries both for local producers and for multina-tional corporations (MNCs) and other internationalcorporations bringing substantial foreign invest-ment into Asia, Africa and Latin America.

Many studies have pointed to “spillover”advantages of horticultural produce into areassuch as balanced diets and nutrition and socialrituals attached to ornamentals and flowers, all ofwhich are perceived as signs of refinementand upward mobility. Horticulture also plays animportant role in providing raw materials forconventional pharmaceuticals and herbal medi-cines, aromatics, cosmetics, organic dyes and avariety of value added products which are gainingincreasing importance in the international market.

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These achievements in horticulture havebeen achieved through active researches intocultivation, preservation, processing and relatedtechnologies, as well as the extension of thesetechnologies downstream through technologytransfer both within countries and between coun-tries and regions. And yet seen in the initialparagraphs of this section, serious problems remainto be tackled, chief among them being the enor-mous differentials that remain between developedand developing countries in respect of technologi-cal capability, access to and degree of participationin international trade and the contribution of horti-culture to both production and consumption indeveloping countries.

2. Current trends in developingcountries

We may now note some of the major trendsin horticulture processing in some developingcountries in Asia and elsewhere, focusing ontechnological and managerial aspects, so as toindicate the major issues that need to be addressedin technology transfer in this sector.

In Bangladesh, the modern organized fruitprocessing industry comprises relatively smallvolumes of canning, freezing and dehydration.However, jams, jellies and pickles are made inlarge quantities, chiefly by small entrepreneurs atthe home or cottage scale, and extruded snacks,puffed rice and potato chips are made and sold inthe domestic market by small and medium enter-prises. Some units, especially larger ones, havemodern facilities operating hygienically in con-formity with the United States good manufacturingpractices (GMP). On the whole, however, mostfacilities are in need of upgrading and personnelrequire considerable training on a wide range ofaspects.

In Thailand, earlier horticultural export-oriented production involved manioc and othertubers but steadily gave way to processed fruitsand vegetables exported to markets in the UnitedStates, the EU and South-East Asia and todayrepresenting about 50 per cent of total horticulturalexports from the country. Processed fruit products

exported from Thailand include canned and juicedpineapple, canned banana, of which over 30 percent goes to the United States, whereas over 90 percent of fresh banana exports are to Hong Kong,China; dried and canned mango exported mostly toUnited States and EU markets while most freshmango exports are to Asian markets. Smallerquantities of fresh and processed longan, rambutan,durian, lychee, ginger and dried tamarind are alsoproduced and exported. Processed vegetables arealso important products of the Thai horticulturalprocessing industry and its exports. Other impor-tant products exported from Thailand are processedor canned asparagus exported to Japan, cannedbaby corn exported to the United States, the EUand Asia, processed or preserved bamboo shootcomprising over 90 per cent of total bamboo shootproduction to the United States, which absorbsover 60 per cent of these exports and frozen okra.Recently, the production and export of fresh cutflowers and orchids has assumed greater impor-tance in Thailand.

As may be imagined, given the requirementsof the markets to which Thailand mainly exports,the processes and facilities in Thailand are ofrelatively high standard so as to ensure competi-tiveness in these demanding market environments.

In India, the world’s second largest producerof fruits and vegetables, the horticultural process-ing industry is quite rapidly changing its profile,especially in the last decade or so after economicliberalization was initiated especially in respect oflicensing and foreign investment policies generallyand also specific to this industry. While mostprocessing activity in India continues to take placein a highly decentralized manner, mostly in small-scale industries or in cottage/home-scale units withrelatively small capacities of up to 250 tons/year,there are several large units contributing abut 15per cent of total production run by MNCs or bigIndian corporations with capacities in excess of 30tons/hour. Many export-oriented units also operatein India. India’s domestic consumption has alsoincreased substantially in recent times with aburgeoning middle class with considerable spend-ing power, a phenomenon which has served toattract substantial foreign direct investment in thissector, amounting to over US$ 250 million up until

III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs andSmall Growers for Processing of Horticultural Produce in Developing Asian Countries

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1997, for manufacture of processed horticultureproducts in both the domestic and internationalmarkets. By the end of the eighth plan period(1992-1997), investment in the organized foodprocessing industry is estimated to have reachedUS$ 5 billion, of which about US$ 1 billion isestimated to be FDI.

While traditional processed products madein and exported from India comprised chiefly fruitpulp or juice, ready-to-serve beverages, cannedfruit and vegetables and a wide range of jams,squashes, pickles and chutneys, the product rangenow increasingly includes frozen pulp and vegeta-bles, frozen or dried fruits, vegetable curries inretortable pouches, canned mushrooms and mush-room products, etc. Exports of cut flowers anddried flowers are also increasing. Yet for all thesechanges, India still accounts only for a measly 1per cent of global trade in this sector and the scopefor technological upgrading of the industry at allits different stages is enormous.

In Africa, 40 per cent of all manufacturingvalue added is created in the food processingsubsector. In Uganda and the United Republic ofTanzania, since supply and market linkages areweak but crucial, only a few entrepreneurs haveventured beyond processing traditional or basicfood products. In Uganda some enterprises havesuccessfully entered into fruit processing, inparticular drying of fruits and juice extraction.Studies have shown that obtaining suitable tech-nologies and attractive packaging materials aresome of the problems that these enterprises face.Given the constraints posed on both raw materialand market fronts, most food processors sell theirproducts in the domestic market, exceptions beingplantation commodities such as coffee, tea andcashew, dried spices especially from Zanzibar,some dried fruits produced mostly on contract withimporting companies in Europe (chiefly the UnitedKingdom) and some other products, for instancehoney, that gain entry into Europe through the fairtrade market segment.

Former Soviet countries in Central Asiasuch as Uzbekistan, for instance, are now attempt-ing to diversify their processed horticultureproducts to cater for the newly accessible markets

in Europe. Products such as syrups, concentratedjuice, pulp, canned fruit and other fruit- andvegetable-based products are being focused onas future exports. The programme to developthis area of the country’s economy providesfor replacement of equipment, reconstruction ofprocessing plants and introduction of new produc-tion lines, attracting foreign credit and establishingjoint ventures based on modern technologies, state-of-the-art equipment and experience. Specialistfarms and agricultural companies with foreigncollaboration are sought to be established in orderto build solid backward linkages for supply ofassured quantities and quality of raw materials tosupply units which make products such as juice,tomato paste, wines, cognac, vodka, tinned fruitand vegetables.

Despite the addition of production capacitiesand consequent increase in processing volumes,it is felt that the full potential has yet to berealized. Some of the constraints felt are the lackof suitable packing materials to meet internationalrequirements, the state of the existing plant andmachinery and the lack of the latest technologies,all of which are to be tackled through suitableforeign partnerships in terms of both technologyand investment.

It must be emphasized that lack of orweaknesses in infrastructure or technology arenot the only constraints as far as the export ofprocessed horticultural products in developingcountries is concerned. Large importing compa-nies based in developed countries are relativelyconservative, and often act as strong lobbiesagainst changes in existing distribution structures,making new entry more difficult than usual, andproblems of marketing of products in developedcountry markets can be quite daunting for mostenterprises from developing countries. Non-tariffbarriers and costs of market entry of brandedgoods are also very high in most developedcountries. Thus, in Europe, for instance, majorsuppliers from outside the EU are Brazil, Israel,South Africa, the United States, Thailand, China,Mexico, the Philippines and Kenya, with Polandbeing the main supplier from Eastern Europe andthe Andean countries from South America alsofeaturing owing to their special duty freeprivileges.

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In general, therefore, several factors makeit difficult for developing countries to competewith exporters from the United States, the EU andIsrael, all of which have substantial horticulturalprocessing industries. Additional competition isalso emerging from Eastern Europe, especially forsome temperate-zone processed products. Givenother financial, physical and human resourcefactors, trade is increasingly being dominated bya few large MNCs or by some well-establishedindividual export companies.

Yet there are several examples of successamong small and medium firms from severaldeveloping countries. Studies have shown thatfactors behind these successes have includedspecific targeting of quality markets and products,large volumes allowing diversification of markets,efficient linkages among processing industries aswell as between them and growers, effectivegovernmental policies and promotion of theindustry as a whole and exports in particular, aswell as good logistical management given mostdeveloping countries’ distance from the mainimporting markets.

3. Developments in horticultureprocessing technology

The number and variety of processed fruitand vegetable products has increased substantiallyin recent years at least partly owing to the in-creased recognition and emphasis by consumers ofthe importance of these products in a healthy diet.

Updated and modernized processing andpreservation technologies such as heating, freezingand drying together with the more recent commer-cial introduction of a variety of processing tech-niques continue to provide the consumer with anincreased choice of products. This has beenachieved, apart from new process protocols andproducts, by new heating and freezing techniquessuch as microwave or ohmic heating or cryogenicfreezing, combined with new packaging materialsand technologies such as aseptic packing andmodified atmosphere packaging.

In overall terms, the trend in new processedfruit and vegetable products is to add value byincreasing taste or flavour, having a greater variety

of fruit and vegetable products with longer andmore stable shelf life, making available processedhorticultural products cutting across seasons andproviding increased convenience to the consumer.

New fruit varieties and advances in dehydra-tion technologies have given a fresh impetus todried fruit. Apart from traditional dried fruit suchas raisins, apricots, peaches, prunes, figs and dates,new fruit such as cherries, apples and a varietyof berries such as cranberries, raspberries andstrawberries have been made available in varyingdegrees of dehydration. Such dried fruits areincreasingly perceived as value added products inthemselves or by adding flavour, colour, textureand diversity to other preparations such as cakes,puddings and other desserts. Dried fruits whichare not only simply dehydrated but also osmoti-cally dehydrated (i.e., dehydrated by infusing theproduct with sugar while natural water is drawnout, both processes taking place through osmosiswhile the produce is immersed in optimized sugarsolutions) are available these days, allowing forgreater variety in recipes using such products.Dried fruit is also more widely available indifferent forms, including whole dried, cut, dicedand powdered. The growing interest in ethniccuisines in developed countries and among moreaffluent sections in developing countries and ashift towards a lifestyle perceived as more healthyhave also contributed to the popularity of driedfruit in markets throughout the world.

Dried herbs and herbal powders are anothervalue added item used for culinary purposes and asintermediates in herbal or other medicines, cosmet-ics and other products. Dehydration processes alsolead on to products such as onion, garlic, gingerand tomato powders as well as a wide range ofherbal and spice powders which are consumer-friendly convenience products as well as inter-mediates used by manufacturers of ketchups, souppowders, biscuits or other baked products, confec-tionaries and condiments and so on. Dehydratedpre-cut and diced vegetables are an extremelyviable and attractive substitute for similarlyprepared frozen vegetables, although such productshave yet to make any significant impact on themarket except for some traditional productssuch as sun-dried tomatoes, dried mushrooms anddesiccated coconut. Dehydrated vegetables do not


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require a cold chain from production throughwholesaler/retailer to consumer and can beprepared, transported, stocked and retained by theconsumer without any level or degree of energy-intensive refrigeration at any stage of theentire marketing chain. Dehydrated horticulturalproducts thus have the potential to open up awhole range of new or otherwise value addedproducts. Dehydration technologies are alsoavailable in a range of scales and degrees ofsophistication, from simple solar drying throughforced-air dryers to freeze or spray drying, lendingthemselves to varying scales of operation andespecially to decentralized production systemsstretching right down to the farm level.

B. Technology gaps

As can be seen from the above, themanufacturing and value added chain from farmto factory to consumer in different developingcountries, as well as in different scenarios withinindividual developing countries, contains numeroustechnology gaps which need to be addressedthrough technology transfer. Obviously, no singleapproach or strategy can be applied across theboard and, indeed, the first step would be toclearly identify these gaps, the technologies whichneed to be introduced or upgraded in order to fillthem, as well as the other issues which need to beaddressed integrally along with technology issuesin order to make the system as a whole workas desired. It would be presumptuous and wellbeyond the scope of this paper to even try toenumerate technology gaps in individual develop-ing countries, but some attempt may be made hereto broadly point to the major areas likely to requireattention in many, if not most, developingcountries.

1. Overall system deficiencies/gaps

Before coming to specific technology issues,it needs to be emphasized that deficiencies or gapsat the overall level need to be recognized andaddressed since, clearly, technologies do notoperate in a vacuum but rather within a system.

In most developing countries, the furthergrowth and development of horticultural process-ing suffers from several constraints, such as:

• Poor quality or limited range of varie-ties, cultivars and planting material

• Poor or obsolescent on-farm practicesduring cultivation, harvest and post-harvest handling

• Weak transport system and relatedinfrastructure impeding effective long-distance transport of fresh andprocessed commodities

• Limited availability, distribution andcontinuous supply of electricity parti-cularly in rural areas

• Inadequacies in maintaining hygieneand sanitary/phyto-sanitary standardsduring preservation and processing

• Weaknesses in grading, standardization,packaging material and systems, allcontributing to losses and poor quality

• Weaknesses in human resourcesespecially in technical and managerialskills, again particularly in the ruralproducing areas

• Shortage of technical and marketinformation

• Low domestic consumer income orother factors limiting domestic demandfor processed foods

• Obsolete or low-level technologiescausing high processing losses andlow-quality products

Many of these issues have already beentouched upon in previous sections and require nodetailed explanation. It will, of course, be evidentthat not all these issues can be addressed throughtechnology transfer and call for much widersystem-level action in specific country contexts.Nevertheless, experience shows that practicalinterventions in technology transfer must take intoaccount of these factors and must, in each specificintervention, address these issues to the extentpossible within the scope of the particular inter-vention itself. Without such a holistic approach,technology transfer endeavours are unlikely tocreate or leave behind working models which

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could act as exemplars with a visible demonstra-tion effect which could catalyse wider replicationor adoption.

We may now take a broad look at someof the specific technology areas but again keepingin mind that these require to be addressed in acountry- and context-specific manner.

2. Processes and equipment/machinery

In many developing countries, processingtechniques and corresponding equipment/machi-nery and facilities are of the Second WorldWar vintage and, in order to enable units thereto compete effectively in international markets,require upgrading if not refurbishing. The follow-ing main elements of plant and machinery likely torequire addressing may be highlighted, it beingstressed that this is only a broadly indicative ratherthan exhaustive listing:

• Pre-treatment of raw material: fumiga-tion chambers, other pre-treatment forconformity with S/PS (sterile/partiallysterile) requirements and UV/X-raychambers for testing and quality controlespecially for fruit fly

• Chilling and freezing: pre-chilling,refrigeration, individual quick freezing(IQF) technology, blast freezers, platefreezers, liquid nitrogen tunnels

• Canning: rotomat as against still retorts

• Evaporation and concentration: evapo-ration under vacuum and concentrationby freezing or by use of membranes

• Dehydration: shelf dryers, vacuumdryers, continuous dryers, freeze dryers,spiral dryers; also these dryers operatedby natural gas or solar energy

• High-value extraction: oleoresin extrac-tion processes for ginger, garlic, cloves,etc.; super-critical fluid (SCF) extrac-tion for extraction of volatile flavoursfrom spices, e.g. cucumin fromturmeric, in addition to tea, coffee, etc.

The equipment and processes areexpensive but give good returns on in-vestment and yield high-value products

• Packaging: aseptic packaging especiallyfor large quantities of pulp/juice/concentrates; retail packaging systemsand packaging materials

Once again, we need not go into detail hereexcept to note that a wide range of technologyoptions are available today and can be adopteddepending on raw material availability and quality,product range, scale of operations, desired productquality as per consumer preference, buyer specifi-cations or trade regulations, shelf life required,destination markets and so on. Decisions regard-ing each of these and other parameters need to bemade carefully for each unit or plant in a context-specific manner. The latest or the biggest is notnecessarily the best. Indeed, the advantage inhorticulture processing is that there is enormousflexibility available and systems can be puttogether to match an extremely wide range ofrequirements. What is necessary is to determinethese carefully based on a clear understanding ofthe market, which must be understood properly inthis highly market-driven industry, and then designa system to match these requirements.

It must also be pointed that there is awidespread lack of appreciation of the possibilitiesof and potential for vertical integration in thehorticultural processing industry. Processing offruits and vegetables allows for different produc-tion operations to be taken up at different levels,each level making products or intermediates asrequired, which can be integrated downstream.Suitable technologies are available and can beselected for multiple, decentralized and semi-processing facilities to prepare, preserve andprotect produce for later centralized processing,packaging and marketing. Such disaggregationand subsequent aggregation can be achieved withinenterprises, which can organize their productionfacilities and operations in tiers, as well as betweenenterprises, which may tie up or collaborate insome other manner to achieve the same effect.Such decentralized systems are particularly suitablefor countries with dispersed cultivation areas andweak transport linkages inhibiting more centralized


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processing. In some developing countries, modelsfor such decentralized networked productionhave been effectively developed and demonstrated,such as in India, where such demonstrationprojects are being pilot tested in the north-easternstates with the support from APCTT and theGovernment of India’s Ministry of Science andTechnology.

3. Backward linkages

While the emphasis in this paper is onprocessing technologies proper, it is evident thatthese cannot be addressed in isolation. Indeed,experience in all countries has clearly shown thatthe processing industry is crucially dependent onbackward linkages to the raw material in terms ofits quality both inherent to the variety as well as inrelation to the effect of harvest, post-harvest andstorage/transport handling.

Often the issues are as much economic astechnology- or quality-related. It is common indeveloping countries in Asia and other regions forsophisticated post-harvest procedures to be usedfor some export commodities by large commercialenterprises, alongside simple, low-cost methodsused by smallholders, who only have access tosmall local markets. There is also an increasinggap between the industrialized and less indus-trialized countries, in terms of the quality of theirstorage and marketing facilities and their foodprocessing technology. For instance, the marketingchain in Japan is longer and more sophisticatedthan in most other countries. Many methods ofpreventing post-harvest losses have been developedso that produce can meet the exacting standards ofJapanese consumers. These include sophisticatedand expensive methods such as vacuum pre-cooling, individual packing of items and packingproduce in plastic trays wrapped in film. Suchmethods inevitably mean high marketing costs andtherefore high prices for the consumer.

Keeping in mind these economic andmanagerial issues, within the horticultural fielditself, produce, and especially fruit, handlingsystems notably in harvest, post-harvest, storageand transport, as well as marketing infrastructureand other arrangements, in most developing

countries require major improvements if qualitativeshifts are to be made away from the present ratherlow level of exports. Apart from infrastructuralissues, most of these can be achieved througheffective training and other human resourcesdevelopment strategies which need to be built in toany technology transfer endeavour. This wouldrequire collaboration between institutions oragencies dealing with processing aspects on theone hand and with horticulture on the other so thatnecessary synergy is brought about.

One of the recommendations often madein respect of backward linkages is to tie upproducers, especially small growers, to processingunits through contract farming systems as a meansof ensuring quality raw material supply. Manylarge corporations, especially MNCs, have adoptedthis procedure in many developing countries, thelinkage with the farmers extending to supplyingthem with quality seeds or planting material oreven sponsoring research into developing newstrains and then disseminating them. A briefdiscussion on the potential and problems asso-ciated with organized contract farming linkedto fruit-processing units is called for since theliterature and available experience in several deve-loping countries have thrown up many issues fordebate.

In general, opinion is divided between thosewho feel that contract farming is a means to trans-fer new technologies to small farmers and raisetheir incomes and those who argue that contractfarming is only another version of the “putting-out” system in manufacturing which makes thefarmer captive to the processing unit through thisnew form of indentured labour. Studies quotedextensively in the literature appear to show that thereality lies somewhere in between, that there aresituations where the grower has benefited whilethere are others in which he has not and, moreparticularly, that there are crops and situationswhich are suitable for small-holder participationwhile others are not.

One must also understand the economicmotivations behind the system and its individualmanifestations, particularly the issue of institu-tional and market failure that drives much of

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contract farming. In the first place it must berecognized that in many developing countries,small growers mostly do not participate in activi-ties linked to value added production for either thedomestic market or for export. Small growers areextremely vulnerable to price fluctuations andother market vagaries and therefore see somebenefit in assured purchases by corporate process-ing units through contracts in addition to obtainingbetter inputs in the form of planting material andentering into a wider market. However, cases ofsmall growers being pressured into accepting lowerprices or being denied inputs and so on are notinfrequent.

Experience seems to suggest that whereascontract farming may suit some MNCs or otherlarge corporations, processing units in general maybenefit more from the kinds of synergistic arrange-ments spoken of earlier between processors’ andgrowers’ associations with the catalytic support ofGovernments. Models and examples of growers’cooperatives themselves running processing enter-prises are also available and increasing, as arenetworked systems involving growers in clustersbeing partners in a common processing enterprise.

It must also be stated that several simpletechnological interventions are available and canbe adopted for post-harvest handling such as forheat dissipation, reduction of physical injury andpest or disease control and all these can have asignificant impact on reducing losses and increas-ing product quality. A variety of treatments andother measures designed to extend shelf life arealso very important and need to be systematicallyintroduced into the mainstream of horticulturalproduction in developing countries. Infestation byfruit flies is a major problem in production andespecially in the export of tropical fruit and theproblem needs to be tackled at different levels,from field-level controls to various types oftreatment to ensure complete freedom from anyinfestation enabling clearing of quarantine restric-tions currently applied in major markets such asthe United States and Japan.

In the longer term, systematically carried outhorticultural research in plant breeding may be auseful approach to loss prevention as studies have

shown that losses differ with different varieties.Biotechnology also has important contributions tomake to sustainable agriculture, for instance intissue culture for multiplication of different varie-ties, gradual replacement of chemical pesticides bybiocontrol and biopesticides, use of biofertilizersthat enhance nitrogen fixation and other aspectsadding value to the produce.

C. Problems and prospects intechnology transfer

We may now turn to some constraintsinhibiting equitable growth in the global horticul-ture processing industry as well as in the transferof technologies within it. We shall also, in thissection, look at the potentialities and possibilitiesof overcoming some of these obstacles and ofpromoting technology transfer.

1. Barriers in international trade

It is well known and widely agreed thatinternational trade in agriculture and horticulturalproducts is characterized by production and marketdisequilibria. As stated earlier, profitable horticul-ture is a visible sign of advanced agriculture insound and growing economies, and it thereforefollows that the policy of most such countries isto protect horticulture because of its role in pro-viding and supporting higher standards of living.In the long run, such policies contrast with theconcepts and workings of free trade. This is oneof the reasons why there is greater consensus inWTO on global liberalization in various othersectors than in agriculture. Fortunately, given itsdependence on climate and seasonality and theperishability of its produce, horticulture to someextent forces a degree of integration of producingzones and a mutuality of interests in trade.However, even with such an offset of inherentdisadvantages, some problems of inequity willremain so long as different countries with quitedifferent levels of economic strength and techno-logical capability produce the same commodities inthe same season at significantly differing costs ashappens today with apples, tomatoes and flowersand other ornamentals.


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Some countries such as Bangladesh in Asiaand several African nations had hoped to gainfrom the Uruguay Round of the WTO agreements,in particular the provisions made with respect todeveloping and least developed countries, but thesehopes have been largely belied.

World Bank studies have shown thatprotectionist trade barriers have affected exports ofprocessed foods in the so-called “Quad” countries,i.e., the United States, Canada, the EU and Japan,with food industry products including fruit juices,canned meat, peanut butter and sugar confec-tionaries having import duty rates exceeding 30 percent in several markets as against average duties of4-8 per cent for other commodities. Higher protec-tion will clearly prevent all but the most efficienthorticultural producers in developing countriesfrom entering developed country markets whileenabling even relatively more inefficient producersin these countries to retain their market share. Thecase of cut flowers from Africa, as also its greatertrade shares in fruits and vegetables facing lowerprotection and subsidies, shows that many of thepoorest countries could expand their exports ifprotection in agriculture is lowered in developedeconomies.

2. R&D and S&T capability

The expectedly high differential betweendeveloped and developing countries as regardsresearch on horticulture and related processing,and S&T institutions and capabilities in thesesectors is another major barrier both to growth ofthis sector in developing countries as well as totechnology transfer, which requires at least someextent of scientific and technical capability in therecipient country.

Whereas developed countries have a longhistory of research in horticulture and relatedareas as well as institutionalized capabilities in theState sector, private sector and university system,developing countries have adopted differentapproaches to achieve the necessary capabilitiesin their own internal contexts and in orderto remain competitive internationally. Different

developing countries have evolved varying modelsinvolving appropriate mixes of public and privatesector research and facilities. The experience ofdifferent developing countries has shown thata collaborative approach, where all elementscomplement each other, works better than systemsin which there is no common ground betweenthe public and private sectors as in some countriesof South America and Asia where the publicsector lacks skilled researchers, funds, facilities,projects, international exchanges and the like.While in most cases this approach may also corre-spond to national horticulture interests and aims,in others it could take the dangerous form ofnatural resource exploitation and the transfer ofresults abroad.

Product or process development in thearea of horticulture processing is mostly carriedout in-house by individual processing units orcorporate entities, while research on more sophis-ticated machinery development and packagingmaterials/processes is carried out mostly by corpo-rate manufacturers as well as research institutionsand the university system.

However, the bulk of the research is beingconducted in horticulture itself, and researchsubjects which have emerged as priority areas andwhich obtain most support are:

• Genetics, including breeding, biodiver-sity, gene banks and plant geneticresources

• Biotechnology

• Integrated and sustainable productionsystems

• Post-harvest handling and storage

• Marketing and consumer education

There are many factors which act asconstraints on regional/international cooperation inR&D. It would be natural to assume that countriesin contiguous regions or similar agro-climaticzones would have common produce and may there-fore have greater chances of success in research

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collaboration. Yet the commodity approach hasbeen successful to date only for major food cropslike soybean, grain, maize, rice, etc. Part of thereason may be the lack of major international fund-ing for similar researches on horticultural producesince, after all, such produce does not representenormous trade volumes internationally and is notconsidered, even by Food and Agriculture Organi-zation of the United Nations (FAO), as commodi-ties relevant to food security. At the same time,crops like coffee, cocoa, bananas and apples dohave global reach and may some day attract inter-nationally collaborative R&D. Some limited suc-cesses in collaborative researches have, however,been achieved in the case of banana and plantainin Africa funded by international agencies, and themostly private sector-funded researches on tomatoin collaboration with researchers’ associations,and there are also umbrella groups for nuts aswell as for medicinal herbs and plants. A kind ofintermediary role between regional and commoditycooperation in research and policy-making is alsoplayed by certain large agencies and organizationslike FAO and the International Plant GeneticResources Institute (IPGRI) for plant geneticresources.

In the area of technology transfer inhorticultural processing, which is the subject ofthis paper, it is not envisaged that R&D of such afundamental nature would be required or under-taken. Rather, the need would be for technologyadaptation and adaptive research to suit localconditions, which would be essential for anytechnology transfer in this sector, where onecan rarely conceive of a direct implantation of aprocess from one region/country to another giventhe variations in produce type/variety, agro-climaticconditions and local factors relating to infra-structure and product range, among others. Forsuch adaptive research, however, there are noready-to-hand mechanisms or institutional struc-tures. It is clear, therefore, that some new effortsneed to be launched, perhaps on a more limitedscope both geographically and in terms ofsubject areas, to undertake the necessary adaptiveresearch required as part of technology transferendeavours.

D. Technology management issues

Perhaps the most important issues relevantto technology transfer are those relating totechnology management, which would be informedby all the different macro-level considerationsdiscussed hitherto. It is necessary to underline thefact that technology transfer does not involvedisembodied processes or equipment; rather, theseneed to be embodied in a particular facility, unitor enterprise which would have to be set up inrelation to specific parameters such as raw mate-rials available, their quality and quantity, marketscenario and target market, product range withquality and other specifications, scale of opera-tions, technology choice, plant and machinery,human resources available and required, backwardlinkages and forward linkages for sales. In manytechnology transfer exercises, there is a faultyassumption that the task is to bring in the latest/best technologies, irrespective of the specificsinvolved, and that this would make it possible totackle the problems initially encountered. Far frombeing a generic exercise, technology transfer hasindeed to be tailor-made for each concrete fieldsituation. At the country level, some degree ofgeneralization is inevitable but it too must becontext-specific rather than take any single orcommon approach.

1. System design

The first major issue to be addressed anddecided upon in the production system to beadopted pertains to the scale of operations.

A system involving large-scale processingrequires substantial capital investment and hightechnical and managerial skills. Because of thehigh demand for processed foods in recent years,many large-scale factories were established indeveloping countries with mixed results but withconspicuous failures in West Africa. Most of thesefailures were apparently related to high labourinputs and relatively high cost, lack of managerialskills, high cost and supply instability of rawmaterials and changing governmental policies.These experiences underlined the necessity ofestablishing better backward linkages for raw


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materials, for better overall planning and especiallyfor more in-depth feasibility studies prior to settingup production facilities.

While large-scale industries can certainlynot be ruled out in developing countries, histori-cally small- and medium-scale processing haveproved to be more successful than large-scaleprocessing in developing countries, especiallysince the marketing is fraught with uncertaintiesexcept for well-established players and largeMNCs. For the technology transfer exercisesenvisaged, it is suggested that the focus clearlyremain on small enterprises since, apart from otherconsiderations, this is the sector requiring thegreatest assistance and where spread effects arelikely to be the maximum in developing econo-mies.

2. Choice of technology

Cumulative experience in many countries aswell as recommendations of FAO and several otheragencies suggest that system design and relatedchoice of processing technologies in developingcountries should be guided by the need to combinelabour, material resources and capital so that notonly the type and quantity of goods and servicesproduced are taken into account, but also thedistribution of their benefits and the prospects ofoverall growth. These criteria should include:

• Increasing incomes of growers andworkers/artisans through maximumutilization of locally available raw mate-rial and maximum possible local pro-curement of equipment/machinery

• Reducing production and transport costsand overheads by optimum utilization ofrenewable energy (e.g., solar energyand biogas) and reducing the moisturecontent of products wherever and tothe maximum extent possible beforetransport

• Engendering better distribution ofincome and greater local value additionby decentralizing processing activitiesand involving growers themselves atleast in some semi-processing activities

• Maximizing national output by reducingroyalty payments and capital costs andminimizing imports of equipment, pack-ing materials, additives, etc.

• Maximizing the availability of high-quality, standard processed productsfor internal and export markets, therebyreducing post-harvest losses, givingadded value to indigenous crops andincreasing the volume and quality ofagricultural output

3. Post-harvest operation

The importance of linking up processingunits and operations with the procurement andquality of the raw produce itself cannot be overem-phasized and must form part of the overall activityundertaken. Leaving aside issues pertaining toimproved varieties and planting materials, and eventaking the currently available raw material asgiven, a great deal can be achieved througheffective backward linkages in terms of theviability and profitability of the unit, improvementin incomes of growers and reduction of producelosses.

Grading and sorting of raw material willhave a considerable effect on product quality byeliminating poor produce and promoting bettermaterial handling. Growers supplying raw materialshould be encouraged to undertake proper gradingand sorting practices not only to facilitate betterproduct quality but also to encourage a process oflearning the true value of their raw material andthe importance of its quality in fetching betterprices. However, it must be recognized thatgrading or sorting never improve quality, butmerely separate produce on the basis of size andquality respectively.

Practices and measures while produce is stillon the tree, at harvest time and during post-harvesthandling are also vital in promoting the quality ofproduce before it enters the production process orthe market. Proper application of pesticides, otherpest-prevention measures, correct timing of theharvest, correct plucking techniques, adequatestorage procedures and other such measures willgo a long way towards reducing losses and

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promoting produce quality. While efficient pre-and post-harvest handling cannot compensate forpoor initial quality of horticultural produce, greatimprovements can be achieved through improvedmanagement. The production system could there-fore have in-built appropriate procurement pricingsystems and managerial practices to further thisprocess.

4. Market considerations

As emphasized earlier, horticulture pro-cessing is a highly market-driven industry, heavilydependent on transient consumer tastes and charac-terized by enormous variability and competition inmarket conditions. Many an enterprise has foldedbecause of erroneous decisions regarding scale,product definition and range, pricing, branding andlabelling, etc., which have not matched the targetedmarket. These are extremely important aspects oftechnology management in this sector.

A huge variety of processed products are inthe market today both domestically in differentcountries and internationally. In designing theproduction system of an enterprise, decisions haveto be taken with respect to the range of products tobe made in relation to the available produce.

In small or medium enterprises, experiencehas shown that all-year production based on thevarious types of produce available locally in thedifferent seasons is a better option than single-produce operations, which are likely to be onlyseasonal, limiting capacity utilization, employmentgeneration and market spread, to guard againstfailures. Similarly, both finished and intermediateproducts can be made and both have their ownadvantages and disadvantages, the former involv-ing the enterprise getting involved with retailmarketing with its attendant risks and additionalcosts of branding, labelling and sales, while thelatter increases the dependence of the enterprise ona few buyers who can cartelize and control prices.Product quality, pricing and other factors such aswhether the product should or should not containchemical preservatives, added flavours and colours,added sugar and so on are all crucial decisionswith a direct bearing on the positioning andmarketability of the products.

Careful and rigorous market analysis isessential to address the above issues beforesetting up the unit and commencing production.Unfortunately, these kinds of exercises are usuallybeyond the means of small or medium enterprises,but recourse can be had to existing market studiesand intelligence and local consultancies. Priordiscussions with trade representatives can alsohelp.

Experience also suggests that, despite theattractiveness of export markets and the importanceto the host nation of export earnings, small andmedium enterprises should give importance toand specifically address local and wider domesticmarkets. The latter are likely to be more familiarand involve less risks, would permit relativelyeasier entry and access and could constitute thefoundation of economic viability with exports asthe icing on the cake. Large corporations andMNCs also tend to deal with fewer products inmuch larger quantities as this matches theirproduction and marketing systems well and lendsitself to more effective market promotion, thusleaving space for SMEs with a wider and moredifferentiated product range with less competition.Locally preferred products and flavours can alsobe more readily built in to the product rangeof such enterprises, creating a market niche forthemselves.

The need for continuous monitoring ofthe market and variations in demand should beexplicitly recognized and built in to the enterprisesand the systems sought to be transferred, so thatthe enterprise is not caught unawares by changesin consumer preferences or entry of rival products,and once again underlining the market-drivennature of this industry.

5. Human resources development

Managerial and technical skills are ex-tremely important in this industry perhaps evenmore so than in most others, especially because theproduct lines are likely to keep undergoing changein tune with market trends and because continuousand rigorous quality control and management areessential.


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Technical personnel should be properlytrained and measures taken to periodically upgradetheir knowledge and skills so that they are intouch with technological improvements, qualityspecifications and sanitary/phyto-sanitary require-ments.

Managerial personnel should be similarlytrained and periodically exposed to new develop-ments and encouraged to keep abreast with markettrends, new processes and equipment and otherdevelopments in the industry.

Together, these personnel should beequipped to undertake periodic updating of equip-ment and processes to guard against obsolescence,maintain product quality and competitiveness.These HRD aspects are critical aspects of techno-logy management in this industry since the successor otherwise of the enterprise ultimately rests onthem.

E. Conclusions

Some recommendations may now be maderegarding programmes and strategies for techno-logy transfer to SMEs in developing countries,keeping in mind the various issues discussedabove.

1. Technology transfer at theenterprise level

We may first list some of the salient aspectswhich should form an integral part of the processof planning and establishing any and each enter-prise or unit in horticulture processing, so thatthese in turn become integral components of theenvisaged technology transfer programme andstrategies:

• Locally felt needs as regards rawmaterial utilization and losses, pricesobtained, marketability, etc., should beproperly studied and ascertained; em-phasis should be given to produce withsmall farmers, who should be networkedfor procurement or partnership

• The overall market situation should becarefully studied and a preliminaryproduct range defined in relation to boththe market and raw material availability;the properties, quality, etc., of thedifferent products may also be initiallylaid down

• In the light of the above, a broad systemdesign laying down proposed scales,mechanisms for the procurement of rawmaterial and other supplies, marketingstrategies and human resources re-quired/available should be worked out

• Technology needs/gaps should beidentified to match the above systemdesign and new/upgraded equipmentand machinery required, preferablyavailable domestically and maximallycapable of local maintenance/repairshould be listed with specifications

• Personnel at technical and manageriallevels should be fully and properlytrained

• Processes and protocols for differentproducts should be standardized, qualitycontrol measures worked out andmechanisms for quality management putin place

• Trial production and trial marketing ona pilot basis should be undertaken toiron out production problems, assessconsumer/buyer response, assess costsand viability and finalize product range

• Full-scale production and marketingwith continuous monitoring of feedback

2. Strategies and programmesfor effective technology transfer

and adoption

With the above requirements in mind, thefollowing major issues and other elements of anenvisaged strategy for the transfer of prospectivetechnologies to promote horticultural processing inAsian developing countries may be considered:

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• Greater priority should be given to thedevelopment of technology assessmentcapabilities for sustainable developmentand institutional linkages for evaluatingrelevant technologies

• Emphasis must be on “technologymanagement”, i.e., integrating entre-preneurship technology, finance andmarketing aspects instead of transfer oftechnology/techniques only

• Agribusiness incubators should be setup to encourage start-up entrepreneurs/enterprises

• The technology package and systemdesign evolved and transferred shouldbe holistic, needs-based and context-specific while being up to date withrespect to international quality andhygiene standards and aiming at long-term market opportunities to ensuresustainability

• Adaptive research towards appropriate,locale-specific and improved techno-logies should be encouraged with theactive participation of NGOs and R&Dagencies

• Introduction of sophisticated processingequipment and packaging materialsmust be based on the specific needs ofdomestic and export markets

• Decentralization of technology transferactivities must be planned to assistsmall farmers and institutional linkagesmust be strengthened

• Training must focus on the promotionof best practices and experiences ofother developing countries

• Backward linkages down to the farmlevel should be built in, includingmeasures relating to the improvement ofproduce quality, on-farm practices andpost-harvest handling

• Advocacy regarding horticultural policyframeworks should also be articulated

• Linkages with complementary sectorsshould be promoted wherever feasibleand promising

• Demonstration projects should beencouraged to pilot test technologytransfer at the national, subregional andregional levels

• “Clearing houses and IT kiosks” shouldbe set up to promote and transfer newand innovative technologies

• Regional and subregional networks/associations should be promoted tofacilitate R&D and enterprises coopera-tion


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REFERENCES

Arthey, David and Philip Ashurst, eds., 2000.Fruit Processing: Nutrition, Products andQuality Management (Aspen Publishers).

Dauthy, Mircea Enachescu, 1995. Fruit andVegetable Processing (FAO AgriculturalServices Bulletin No. 119) (Rome, FAO).

Dietz, H. Martin, Stephen Matee and WilliamSsali, 2000. Assessment of the Small-scaleFood Processing Subsector in Tanzania andUganda: Study Report (ACP-EU).

Food and Fertilizer Technology Center, 1993.“Postharvest losses of fruit and veget-ables in Asia” <http://www.agnet.org/library/abstract/ac1993d.html>.

Giovannucci, Daniele, ed., 2001. “The guide todeveloping agricultural markets and agro-enterprises” <http://wbln0018.worldbank.org/essd/essd.nsf/Agroenterprise/agro_guide>.

Government of Canada, 1996. Focus India: ABusiness Guide for Canadian Food Process-ing Firms (Canada, Department of ForeignAffairs and International Trade, South AsiaDivision).

ILO, various articles available at <http://www.ilo.org/public/english/dialogue/sector/sectors/food.htm>.

Ludwig, J.H.D., 1997. “Processing and marketing:FSD strategies review report” (RETA/V00128) (Hanoi, Social Forestry Develop-ment Project [SFDP] Song Da, Ministry ofAgriculture and Rural Development-GTZ-GFA).

Sahai, Suman, 1999. “Biotechnology capacity ofLDCs in the Asian Pacific Rim”, AgBioForum, vol. 2, No. 3 & 4 <http://www.agbioforum.org/v2n34/v2n34a07-sahai.htm>or <http://www.agbioforum.org/v2n34/v2n34a07-sahai.pdf>.

Sansavini, Silviero, 1998. “Key issues facingresearch in horticulture: an overview, pros-pects and the role of cooperation” <http://www.agrsci.unibo.it/wchr/wc5/sansavin.html>.

UNCTAD, 1977. “Opportunities for vertical diver-sification in the food processing sector indeveloping countries”, paper presented atthe Expert Meeting on Vertical Diversi-fication in the Food Processing Sector inDeveloping Countries, Geneva, 1-3 Sep-tember 1997 (TD/B/COM.1/EM.2/2) <http://www.unctad.org/en/docs//c1em2d2.en.pdf>.

Vandendriessche, Henri. Tropical Fruit ProcessingIndustry: Case Studies of the Industry inDeveloping Countries (Paris, OECD, Deve-lopment Centre).

Verma, L.R. and V.K. Joshi, eds., 2000. Posthar-vest Technology of Fruits and Vegetables:Handling, Processing, Fermentation andWaste Management (New Delhi, Indus).

World Bank, various articles of the World Bank’sAgribusiness and Markets Thematic Group<http://wbln0018.worldbank.org/essd/essd.nsf/Agroenterprise>.

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The Expert Group Meeting on PromotingResource-based Export-oriented SMEs for PovertyAlleviation in Asia and the Pacific was organizedby the United Nations Economic and SocialCommission for Asia and the Pacific (ESCAP), atthe United Nations Conference Centre, Bangkok,from 21 to 23 January 2003.

The overall objective of the Meeting wasto deliberate on the critical issues related to thepromotion of agro- and resource-based SMEswhich could be export-oriented and which couldutilize the resources available, especially in therural areas. The other objective was to explorethe possibilities for enterprise development in ruralareas with a view to alleviating poverty in thoseareas.

A. Regional overview of the statusof the resource-based export-orientedSMEs and their impacts on povertyalleviation in Asia and the Pacific

The Expert Group Meeting pointed out thatSMEs played an important role in the economiesof all the Asian countries, irrespective of theirstage of development. In many countries of theregion, SMEs accounted for 40 to 50 per cent ofthe total output, employing over two thirds of theworkforce. SMEs were generally seen as beingmore employment-oriented and tended to have alarge presence in items like food processing,leather, footwear, furniture, metal fabrication,printing and in recent years producing parts andcomponents in a wide range of the engineeringindustry. Since they used labour-intensive techno-logy, their growth was considered to be beneficial

IV. REPORT OF THE EXPERT GROUP MEETINGON PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs

FOR POVERTY ALLEVIATION IN ASIA AND THE PACIFIC

ESCAP secretariat

to labour-abundant economies for employmentgeneration and poverty alleviation. Capital pro-ductivity was generally high in SMEs with noclearly established evidence on total factor produc-tivity.

SMEs were the continuous breeding groundof entrepreneurs and a source of savings. As manylarge firms had their roots in the SME sector, thesignificance of small firms’ performance wentbeyond their immediate contribution to output andemployment. In achieving the objectives of equita-ble distribution of income and regional dispersal ofeconomic activities, especially in the promotion ofrural industrialization and rural resource utilization,the SME sector could make a valuable contribu-tion. Rural SMEs, by their location, created moredispersed economic activities and even in theurban areas, small-scale enterprises contributed tothe more even spread of work centres and popula-tion. These features exerted a positive influenceon the distribution of income.

The Meeting also pointed out that Govern-ments of the region had adopted a wide range ofinstitutional and promotional measures in the areasof infrastructure, finance, human resources deve-lopment and technology to spur the growth ofthe SME sector. However, these policies andmeasures had produced mixed results. In additionto many gaps, a lack of coordination among thefinancial support schemes and technical assistanceprogrammes was clearly evident in severalcountries, especially the developing ones. Despitemany attempts at redressing the imbalance, manyeconomies still showed policy-induced biasesagainst SMEs. In some instances, financial andfiscal policies tended to operate less in the interestof SMEs and more in the interest of large-scale

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enterprises. The large enterprises had superiormanagerial and financial resources to deal withgovernment agencies, reinforcing their institutionaladvantage over the SMEs.

During the course of deliberations, theexperts were of the opinion that despite the newchallenges caused by the rapid pace of globaliza-tion and global integration of economic activities,SMEs in the developing as well as developedcountries of the region needed to demonstrateand establish a great deal of interdependence withlarge enterprises, thereby generating benefits foreach other. This feature of their coexistence couldbecome a useful source of structural changethrough the development of linkages betweenthem, either vertically or horizontally. As manySMEs faced limited markets and were oftenconstrained by lack of resources to expand, sub-contracting arrangements with large enterprisescould become an important element in the designof a new strategy for the development of SMEs.The rural-based SMEs in weaker economies suchas LDCs and economies in transition were likelyto face increased competition as investments inphysical infrastructure were increased. It waspointed out that that would require significantefforts, especially in the developing economies ofthe region in creating more linkages across sectorsas well as between enterprises of different sizes.New export markets could also be explored torelax the constraints posed by a limited market.

The Meeting was of the opinion that themajor problem faced by SMEs in developingeconomies was the lack of a skilled labour forceand technological upgrading. Those inadequacieshad prevented SMEs from being linked properlyin the economic restructuring process at both thedomestic and regional levels. It was thereforedesirable that in the context of changing techno-logical situations and marketing strategies forSMEs which constituted the backbone of theeconomy in several economies, to receive fairand appropriate treatment in overall planning anddevelopment programmes. In that context, it wasemphasized that special measures targeting tech-nology capacity-building for rural SME promotionshould be initiated. It was pointed out thatGovernments as well as international donor agen-cies could look into the possibilities of setting upagro-based rural technology/business incubators.

It was also emphasized that research and develop-ment activities for innovations in promoting ruralresource-based enterprises should be promotedwith the cooperation of government and academicinstitutions. The experts also pointed out that un-der the existing international agreements andmandates, there were several mandatory require-ments to meet the technical and environmentalstandards. Furthermore, under the new round ofmultilateral agreements, it was likely that newmandates would evolve requiring SMEs from allcountries to abide by those mandates. It was there-fore necessary to apprise the enterprises in ruralareas of these developments and to build upcapacities to meet the requirements. In that con-text, linkages were necessary between researchinstitutes and enterprises.

The Meeting emphasized that access tofinance was one of the critical problems facedby SMEs in both rural and urban areas. Thatproblem was quite critical regardless of whetherthe enterprises were resource-based or otherwise.The experts were of the opinion that subsidizedcredit programmes had failed badly as they didnot actually benefit the targeted SMEs. It waspointed out that the experience of Grameen Bankin Bangladesh was a successful case in ruralenterprise financing and needed review for possi-ble replication. It was also emphasized that thestrengthening of rural banking and other financialfacilities was urgently needed, including thepromotion of venture capital funding. The viewwas also expressed that it was timely to exploreand institute market-oriented financial services inthe rural sector rather than subsidized credit. Itwas further emphasized that there was an urgentneed to promote an efficient rural financial marketwith the institutional capacity to mobilize ruralsavings and leverage such funds through thecommercial markets for the benefit of ruralresource-based SMEs.

The Meeting strongly pointed out that theGovernment’s role was very important in pro-moting resource-based rural SMEs. A cleartransparent national policy framework with a clearinstitutional mechanism for its implementation wasessential. It was also necessary for Governmentsto be involved in the provision of rural infrastruc-tures, rural financial reforms and land and property

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registration systems but more importantly in humanresources development, including the promotionof entrepreneurships. Furthermore, such skill de-velopment should also become a priority area forNGOs and the private sector, as the availability ofskills and entrepreneurship was vital for resource-based enterprise development as well as for theidentification of proper opportunities in the ruralareas. The private sector as an end-user shouldalso be more involved in developing trainingcurricula. As NGOs had proved to be successfulin several countries in identifying and trainingentrepreneurial talent at the grass-roots level, theycould also increase awareness of the governmentalhuman resources development projects. Theprivate sector could play an important role as“mentor” for new entrants.

While Governments had to shoulder heavierresponsibilities in augmenting the supply ofadequately trained manpower, both technically andmanagerially, it was also important for Govern-ments in most of the developing countries toimprove and re-engineer the public institutions toassist SMEs. There was an urgent need to reorientand reform public institutions so that they couldadequately and appropriately respond to the needsof rural private enterprises.

B. Evolving model ofprogrammes for enhancing the

competitiveness of SMEs, and issuesand strategies for the transfer and

adoption of prospective technologies forprocessing horticultural produce

A presentation highlighted the specificprogramme activities initiated by APCTT in pro-moting rural industrialization and enhancing thecompetitiveness of resource-based SMEs inselected sectors such as bamboo, fruits andvegetables, herbal medicine and garment sectors.The emphasis of the programmes was on streng-thening technology management capabilities atboth the institutional and enterprise levels. Theapproach was to evolve model programmes toaddress capacity-building issues relating to SMEsin facing local and global competition in thenew WTO regime and knowledge-based economy.

In view of the high growth potential existingfor SMEs in the fruits and vegetables processingsector, the presentation dealt with the developmen-tal issues involved in small-scale and high-qualityprocessing techniques in the present marketscenario and the strategies and technology transferissues introduced in aspects pertaining to theproduction system, technology choice strengthen-ing backward linkages and capacity-building forhuman resources development and in the techno-logy area, i.e., market development. With this inview, the specific demonstration projects beingundertaken by the Centre in cooperation withESCAP, national and other international agencieswere elaborated. The methodology stressed theneed to evolve new mechanisms to address theproblems of microenterprises and also integratetechnology management dimensions in enhancingthe competitiveness of both the enterprises andintermediary agencies.

The Meeting emphasized the role of inter-national organizations especially in strengtheningentrepreneurship development programmes andin promoting agribusiness incubator capabilitiesamong SMEs in rural areas. It was also pointedout that in order to sustain the long-term competi-tiveness of resource-based SMEs, there was also aneed to promote and further strengthen industrialclusters in selected traditional sectors. The appli-cation of ICT was considered to be an importanttool in strengthening the linkages betweenproducts, markets and technology. This must forman important component in the demonstrationactivities planned in member countries to enhancenetworking at various levels.

C. Country experiences

The various country presentations high-lighted the policy issues and other facilitiesimplemented at the national level with a view topromoting resource-based SMEs.

In Bangladesh, the main thrust in SMEpromotion was in the development of agro-basedprocessing and essential consumer goods products.The important area of investment was in agricul-tural tools and equipment, irrigation pumps, motors

IV. Report of the Expert Group Meeting on Promoting Resource-based Export-oriented SMEsfor Poverty Alleviation in Asia and the Pacific

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and other equipment, fertilizers and insecticides,dyes and chemical, leather and rubber products,rural transport equipment, sports goods, food, fruitand vegetable preservation and processing, fish,poultry and cattle feed, cotton spinning, textiles,handlooms, hosiery and silk products, machinetools, poultry and dairy products. The techno-logical levels of the majority of SMEs in Bangla-desh were low. Many governmental, semi-govern-mental and non-governmental organizations andother institutions at the national level were respon-sible for providing assistance to entrepreneursthrough SMEs in the country. Industrial credit inBangladesh was financed through a multi-agencysystem consisting of: (a) government-sponsoredindustrial banks – Bangladesh Shilpa Bank, Bang-ladesh Shilpa Rin Sangshtha; and (b) commercialbanks and specialized financial institutions likeBangladesh Krishi Bank, the Bank of Small Indus-tries and Commerce and the Bangladesh Small andCottage Industries Corporation (BSCIC).

In Cambodia, the small and mediumindustries constituted 98 per cent of total industrialestablishments and basically consisted of food,beverages and tobacco and wood-based products.In recent years, garments had emerged as animportant export item. The SME sector sufferedfrom low technological levels, lack of formalfinance and inadequacy of trained manpower, bothtechnical and managerial. There was an urgentneed to initiate legal and regulatory measures tosupport and promote SMEs in Cambodia.

In China, during the past few years, with thedeepening of reform measures and opening up,especially after the country’s entry into WTO, theeconomy was increasingly in transition towardsmarket economy. Thus, a more favourable envi-ronment for SME development had been created.Some of the key strategies that China wasimplementing to boost economic development wereexpected to effectively push SME developmentforward. Such policies were:

(a) Establishing special laws to guaranteeSMEs’ healthy development;

(b) China’s western region developmentstrategy to boost SME development;

(c) Lifting restrictions on foreign tradelicences to benefit the development of SMEs’foreign trade business;

(d) Tertiary sector development to enableSMEs to further exert their advantages;

(e) Strengthened guidance to SMEs intheir technical innovations and personnel training;

(f) Consolidating regional economiccooperation and boosting the export of resourceproducts.

Owing to all the factors mentioned above, itwas expected that the Chinese SMEs wouldstrengthen their development environment andwould have a more favourable environment in thefuture. In the years to come, China was expectedto realize comprehensive socio-economic progressby boosting SME development and help to freemore people from the fetters of poverty.

In India, SMEs had occupied an importantplace for a long time. SSI consisted of 3.5 millionunits and employed 19.3 million people. Its sharein industrial production was 39 per cent and inexports, 34 per cent in 2001. The SSI sector hadbeen growing at the rate of 6 per cent andconsisted of 8,000 items. The technologies used inthe SSI sector ranged from simple traditionalvillage types to the most sophisticated ones. Majorproduction items included drugs and pharmaceu-ticals, pesticides, fertilizers, synthetic detergents,textiles, leather and leather products, agriculturalimplements, etc. The SSI sector had always beentreated as an area of employment promotion in thecontext of the Indian economy. Various measuresat both the central and state levels had beenenacted. The major challenge was still to upgradethe technological levels of a large number ofestablishments in the SSI sector.

Malaysia had relied on the productionand export of primary commodities for a certainperiod of time. SMEs, which were defined ascompanies with annual sales turnover not exceed-ing RM 25 million and full-time employees up to150, accounted for 90 per cent of total manu-facturing establishments and contributed 33.3per cent to the total manufacturing value added.

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The Government, with the active support of theprivate sector, had launched several programmesto assist SMEs in such areas as (1) industriallinkages, (2) technology development, (3) techno-logy acquisition, (4) skills development, (5) marketdevelopment, (6) infrastructure development and(7) advisory services. Special programmes forexport-oriented SMEs consisted of (1) tax relief,(2) duties and sales tax exemption, (3) other finan-cial incentives and schemes, etc. However, theSMEs in Malaysia needed technological upgradingand reduction in factor costs if they were tocompete at the global and regional levels byimproving the export competitiveness.

In Nepal, SMEs, which had fixed assets ofless than Rs 100 million (US$ 1 = Rs 78), wereviewed as an important source of employmentgeneration and rural industrialization, helping tocreate backward and forward linkages in theeconomy and thereby increasing the rural income.The Government provided various incentives andfacilities including interest rebates in selectedpriority areas as well as institutional support forthe choice and adaptation of modern technologies.Most of the SMEs suffered from technologicaldifficulties and lack of skilled manpower.

In the Republic of Korea, SMEs accountedfor 84 per cent of total employment and 35 percent of total exports. Various arrangements suchas the Small and Medium Business Administration(SMBA), the Small and Medium Business Centre(SMBC) and other SME-related associations hadbeen set up. In recent years the Government hadbeen putting a great deal of emphasis on SMEdevelopment in the Republic of Korea, instead ofthe earlier emphasis on the “Chaebol” system.

In Thailand, SMEs had always occupied animportant place. In recent years the Governmenthad implemented a new “one village one product”initiative, which was aimed at building self-reliance at the local community level, by utilizinglocal resources and adding higher value. Throughits various offices, especially the Ministries ofAgriculture and Cooperatives, Commerce, andScience and Technology, the Government providedvarious services in the areas of production,management, marketing, standardization, qualitycontrol and product design. Most of the products

consisted of textiles and garments, food and herbs,ceramics and other handicrafts. Although theinitiative had been in operation for only two years,34 per cent of the products under the scheme werealready being exported.

In Viet Nam, SMEs played an important rolein the nation’s economic growth in creatingemployment, in export promotion and in reducingpoverty. However, SMEs in general were facingserious problems in the areas of adequate provisionof capital, low levels of technological capabilitiesand information on markets. The Government hadimplemented several measures to support SMEs,however, the implementation of those measuresneeded to be speeded up.

D. Recommendations

At the national level, the development ofagro-based and resource-based SMEs calls forvarious policies, including the following:

(a) General policies

(i) In general, the private sector shouldbe allowed to take the leading role inthe development of SMEs. However,Governments should create an enabl-ing environment for the sustainedgrowth and development of SMEsby strengthening legal institutional,administrative and financial set-ups andformulating appropriate policies at boththe micro and macro levels.

(ii) Member countries should take appro-priate policy and operational measuresto promote backward and forward link-ages among resource-based small andmedium industries and large industrieswith a view to developing resource-based and export-oriented SMEs.

(b) Fiscal policies

Instead of providing special tax holidays andother fiscal incentives, the focus should be onstrengthening the rural infrastructure and public-private partnerships for the dispersal of SMEs andbalanced regional development.

IV. Report of the Expert Group Meeting on Promoting Resource-based Export-oriented SMEsfor Poverty Alleviation in Asia and the Pacific

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(c) Marketing

Sectors with a competitive advantage needto be identified and sector-specific innovativemarketing support devised. SMEs need to bepromoted as ideal destinations for franchising andoutsourcing. In this context, ICT must be usedas an effective tool for enhancing marketingcapabilities in rural areas. Member countries cansupport the initiatives of ESCAP and other inter-national agencies should support member countryinitiatives to enhance the competitiveness ofSMEs through training programmes, demonstrationprojects, trade fairs and other market promotionactivities.

(d) Finance

Member countries should focus onexpanding the financing base through the micro-credit arrangement in rural areas, where micro-enterprises may develop. In this respect, theexperience of some member countries in intro-ducing credit cards, credit ratings, credit guaranteesystems and village funding schemes for small-scale industries may be particularly relevant forother developing countries.

(e) Entrepreneurship development

Special programmes need to be evolved atthe national level in cooperation with bilateral andinternational organizations for skills upgrading and

entrepreneurship development, including womenentrepreneurs for small-scale enterprises. Themember countries suggested evolving pilot demon-stration projects in selected sectors to enhance thecapabilities of SMEs.

(f) Technology

As technology upgrading and quality controlare critical factors for competitiveness in thecontext of the WTO regime and knowledge-basedeconomy, it is necessary to focus on technologyupgrading issues and evolve new mechanisms suchas industrial clusters and agribusiness incubators.Member countries should focus on improving theircapabilities in technology assessment, IPR andother management through training programmes.

(g) Infrastructure

Improvement in infrastructure facilities forthe SMEs in rural areas is necessary to enhancetheir efficiency and productivity.

(h) Regional cooperation

It is necessary to evolve programmes tostrengthen networking and share experience onbest practices for promoting SMEs. It was stressedthat ESCAP should strengthen its activities tosupport the initiatives of member countries in thatregard.

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A. Globalization and foreigndirect investment

Globalization is an inevitable and irrevers-ible process, and dealing with the imperatives ofglobalization capitalizing on its positive aspectsand mitigating the negative ones is perhaps themost important challenge for the new millennium.Globalization has enhanced the opportunities forsuccess, but it has also posed new risks to deve-loping countries.

Globalization has many faces; however,globalization is first and foremost comprehendedin economic and financial terms. In this sense, itmay be defined as the broadening and deepeninglinkages of national economies into a worldwidemarket for goods, services and especially capital.As a result of a revolution in telecommunicationsand information technologies, the last 15 yearshave witnessed dramatic increases in trade linkagesand cross-border capital flows, as well as radicalchanges in the form, structure and location ofproduction.

Perhaps the most prominent face of globali-zation is the rapid integration of production andfinancial markets over the last decade; that is, tradeand investment are the prime driving forces behindglobalization. Foreign direct investment (FDI)has been one of the core features of globalizationand the world economy over the past two decades.It has grown at an unprecedented pace for morethan a decade, with only a slight interruptionduring the recession of the early 1990s. More

firms in more industries from more countries areexpanding abroad through direct investment thanever before, and virtually all economies now com-pete to attract multinational enterprises (MNEs).As a result, global flows reached a historic highof US$ 340 billion with the global stock of FDIreaching US$ 3,266 billion in 1996.

This trend has been driven by the complexinteraction of technological change, evolvingcorporate strategies towards a more global focusand major policy reform in individual countries.The past two decades have witnessed an unparal-leled opening and modernization of economies inall regions, encompassing deregulation, demono-polization, privatization and private participation inthe provision of infrastructure, and the reductionand simplification of tariffs. An integral part ofthis process has been the liberalization of foreigninvestment regimes. Indeed, the wish to attractFDI has been one of the driving forces behindthe whole reform process. Although the paceand scale of reform have varied depending onthe particular circumstances in each country, thedirection of change has not.

Most developing countries were starting tolook to FDI as a source of capital when flows ofofficial development assistance (ODA) declinedsharply in the 1990s. FDI usually represented along-term commitment to the host country andcontributed significantly to gross fixed capitalformation in developing countries. FDI hadseveral advantages over other types of capitalflows, in particular its greater stability and the factthat it would not create obligations for the hostcountry, as had been observed in the context of theAsian financial crisis of 1997-1998.

Emerging issues in the areas of foreigndirect investment are an essential part of the coreprocess of globalization. Of particular urgency is

* Economic Affairs Officer, Investment and EnterpriseDevelopment Section, Trade and Investment Division,Economic and Social Commission for Asia and thePacific.

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V. FOREIGN DIRECT INVESTMENT: DETERMINANTS,TRENDS IN FLOWS AND PROMOTION POLICIES

Joong-Wan Cho*


the issue of the quality of the policies that need tobe adopted by countries as a result of the growthof FDI and the role it plays in their competitiveposition in global and regional markets. FDI canplay a key role in improving the capacity of thehost country to respond to the opportunities offeredby global economic integration, a goal increasinglyrecognized as one of the key aims of any develop-ment strategy.

B. Foreign direct investment flows:determinants and recent trends

1. Review of host countrydeterminants of FDI

Nowadays, virtually all countries areactively seeking to attract FDI, because of theexpected favourable effect on income generationfrom capital inflows, advanced technology,management skills and market know-how. It

would be useful to review the key determinantsand factors of FDI based on the theories of interna-tional investment.

Table V.1 lists three key determinants andfactors associated with the extent and pattern ofFDI in developing host countries: attractiveness ofthe economic conditions in host countries; thepolicy framework towards the private sector,trade and industry, and FDI and its implementationby host governments; and the investment strategiesof MNEs.

The review of host country determinantsis closely linked with the role of national policiesand especially the liberalization of policies, a keyfactor in globalization, as FDI determinants. Loca-tion-specific determinants have a crucial influenceon a host country’s inflow of FDI. The relativeimportance of different location-specific determi-nants depends on at least three aspects of invest-ment: the motive for investment (e.g., resources,

Table V.1. Host country determinants of FDI

• Markets Size; income levels; urbanization; stability and growth prospects;access to regional markets; distribution and demand patterns.

Economic conditions • Resources Natural resources; location.

• Competitiveness Labour availability, cost, skills, trainability; managerial technicalskills; access to inputs; physical infrastructure; supplier base;technology support.

• Macro policies Management of crucial macro variables; ease of remittance;access to foreign exchange.

• Private sector Promotion of private ownership; clear and stable policies; easy

Host country policies entry/exit policies; efficient financial markets; other support.

• Trade and industry Trade strategy; regional integration and access to markets;ownership controls; competition policies; support for SMEs.

• FDI policies Ease of entry; ownership, incentives; access to inputs; transparentand stable policies.

• Risk perception Perceptions of country risk, based on political factors, macromanagement, labour markets, policy stability.

MNE strategies • Location, sourcing, Company strategies on location, sourcing of products/inputs,integration integration of affiliates, strategic alliances, training, technologytransfer.

Source: Sanjaya Lall, Attracting Foreign Investment: New Trends, Sources and Policies, Economic Paper 31 (CommonwealthSecretariat, 1997).

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market or efficiency-seeking), the type of invest-ment (e.g., services or manufacturing), and the sizeof the investors (small and medium MNEs or largeMNEs) (UNCTAD 1998a).

As a consequence of globalization andeconomic integration, one of the most importanttraditional FDI determinants, the size of nationalmarkets, has decreased in importance. At the sametime, cost differences between locations, thequality of infrastructure, the ease of doing businessand the availability of skills have become moreimportant (UNCTAD 1996). Traditional economicdeterminants, such as natural resources andnational market size for manufacturing productssheltered from international competition by hightariffs or quotas, still play an important role inattracting FDI by a number of developing anddeveloped countries as well as economies intransition (e.g., China, Australia and Kazakhstan).

The economic determinants related to largemarkets, trade barriers and non-tradable servicesare still at work and account for a large shareof worldwide FDI flows. Although FDI remainsstrongly driven by its traditional determinants, therelative importance of different locational determi-nants for competitiveness-enhancing FDI is shift-ing. While low-cost labour remains a locationaladvantage, the increasingly sought-after advantagesare competitive combinations of wages, skills andproductivity (UNCTAD 1998a).

With the creation of regional integrationframeworks (e.g., ASEAN), access to the regionalmarket supersedes access to national markets as animportant FDI determinant. This also depends onhow well the country is integrated into the regionalbloc in terms of policy harmonization as well asphysical accessibility, which gives policy determi-nants an increasing importance.

For foreign investors, the host countrypolicies on the repatriation of profits and capitaland access to foreign exchange for the import ofintermediaries, raw materials and technology areparticularly important. The pattern of recent FDIflows supports the conclusion that liberal policieson technology, which tend to go hand in hand withmore liberal policies in general, serve to attractmore and better foreign investments.

Core FDI policies consist of rules andregulations governing the entry and operations offoreign investors, the standards of treatmentaccorded to them and functioning of the marketswithin which they operate (UNCTAD 1997).Among the supplementary policies used toinfluence locational decisions, trade policy playsthe most prominent role. Asian countries haveused both FDI and trade policies to encourageMNEs to contribute to their export-orienteddevelopment strategies. Other related policies mayinclude privatization policies and policies deter-mined by international agreements, such as bila-teral investment treaties (BITs). BITs augment theinternational dimension to national direct invest-ment policies focused on insurance and protectionand other broader issues. However, as in the caseof BITs, it is precisely the function of the enablingframework to allow other determinants, especiallyeconomic determinants, to assert their influence.

2. Summary of recent trendsin FDI flows

After a decade of steady and strong growth,foreign direct investment flows declined sharplyin 2001 and continued their decline in 2002,decreasing further by 27 per cent. In 2002, thevolume of FDI inflows reached about US$ 534billion, which contrasts with US$ 735 billion in2001, and is equivalent to a third of the US$ 1,492billion peak in 2000 (see table V.2). A majorfactor behind this decline is the slowdown in theworld economy, which has reduced world demandand accentuated and accelerated the global restruc-turing process of major MNEs in sectors character-ized by excess capacity. The decline in FDI in2001 also reflects the aftermath of the 11 Septem-ber 2001 incident.

The decline in 2001 was mainly con-centrated in developed countries as a result of aconsiderable drop in cross-border mergers andacquisitions (M&As). FDI inflows to developedcountries decreased by 59 per cent, compared with14 per cent in developing economies. In 2002,similar trends continued with a major decline indeveloped countries and a smaller decline indeveloping countries. FDI in 2001 was higherthan that in 1998, after which dramatic increases

V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies

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Table V.2. FDI inflows by region, 1997-2001

(Billions of US$)

Host region 1997 1998 1999 2000 2001

World 478.1a 694.5a 1 088.3a 1 491.9a 735.1a

Developed economies 267.9 484.2 837.8 1 227.5 503.1(56.0)b (69.7)b (77.0)b (82.3)b (68.4)b

Developing economies 191.0 187.6 225.1 237.9 204.8(39.9)b (27.0)b (20.7)b (15.9)b (27.9)b

Africa 10.7 9.0 12.8 8.7 17.2(5.6)c (4.8)c (5.7)c (3.7)c (8.4)c

Asia and the Pacific 106.0 96.4 103.0 133.8 102.3(55.5)c (51.4)c (45.8)c (56.2)c (49.9)c

Latin America and the Caribbean 74.3 82.2 109.3 95.4 85.4(38.9)c (43.8)c (48.5)c (40.1)c (41.7)c

Central and Eastern Europe 19.1 22.6 25.4 26.6 27.2(4.0)b (3.3)b (2.3)b (1.8)b (3.7)b

Source: World Investment Report 2002: Transnational Corporations and Export Competitiveness (UNCTAD/WIR/2002).a Including FDI inflow figures of least developed countries and oil exporting countries.b Percentage share of the world total.c Percentage share of the developing economies total.

in cross-border M&As led to record flows in1999 and 2000. This is the third downward cyclein FDI since the late 1980s, which reflects suchshort-term factors as business cycles, portfolioinvestment sentiment and M&As, which work inparallel with longer-term factors (UNCTAD2002).

The economic slowdown has intensifiedcompetitive pressures, forcing companies to searchfor cheaper locations. This may have resultedin increased FDI in activities that benefit fromrelocation to low-wage economies. FDI outflowsmay also have risen from countries in whichdomestic markets have been growing slower thanforeign markets. There are signs that both factorshave contributed to the recent increase of JapaneseFDI in China. In general, there has been a redis-tribution of FDI towards developing countries,where growth has reportedly been higher thanin developed countries. The rise in developingcountries’ shares may also reflect the furtherliberalization of their FDI regimes, which wasreinforced by the growth in the number of bilateralinvestment promotion and protection treaties.

In spite of the substantial liberalizingmeasures of the 1990s, developing countries stillattract less than a third of world FDI flows, andthese flows remain highly concentrated. In 2001,the five largest host countries in the developingworld received 62 per cent of total inflows. Thedecline in FDI flows in 2001 largely reflects a fallin cross-border M&As, the principal vehicle sincethe mid-1990s for FDI in developed countries. Itcould be argued that 2001 saw a return of FDI tonormal levels after the surge of M&A activities inthe period 1999-2000. In developing countries andeconomies in transition, FDI in 2001 in fact provedfairly resilient despite the global downturn and the11 September 2001 incident. This resilience wasmore pronounced in comparison with inflows ofportfolio investment and bank lending. On a netbasis (inflows less outflows), FDI flows were theonly positive component of private capital flows todeveloping countries and economies in transitionduring 2000-2001 (UNCTAD 2002).

It is worthwhile to note that FDI in develop-ing countries has been larger than official inflowssince 1997. It was 10 times larger than bilateral

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FDI flows to China, the largest recipientamong the developing countries for most of the1990s, regained their momentum after three yearsof stagnation, to reach US$ 47 billion in 2001.The upward trend in FDI is likely to be sustainedin the coming years, particularly in the light of thecountry’s accession to WTO in November 2001.In addition to investment by new entrants,reinvested earnings of foreign affiliates in Chinahave become an important source of FDI, account-ing for about one third of the total inflows during2000-2001. FDI continues to play a prominentrole in China’s economy. For example, foreignaffiliates now account for 23 per cent of the totalindustrial value added, 18 per cent of tax revenuesand 48 per cent of total exports (MOFTEC 2001).


ODA in 2000. This contrasts with the latter halfof the 1980s, when the two were about equal. Itneeds to be stressed, however, that for the leastdeveloped countries, ODA remains of paramountimportance.

3. FDI inflows to theAsian and Pacific region

FDI flows to the developing economies ofAsia and the Pacific declined from US$ 134 billionin 2000 to US$ 102 billion in 2001. Much of thedecline was due to an over 60 per cent drop inflows to Hong Kong, China, which had recorded amassive inflow of US$ 62 billion in 2000 (seetable V.3).

Table V.3. FDI inflows to the Asian and Pacific region, 1997-2001

(Millions of US$)

Host subregion/economy 1997 1998 1999 2000 2001

Asia and the Pacific 105 978 96 386 103 008 133 795 102 264

Asia 105 828 96 109 102 779 133 707 102 066

West Asia 5 645 6 705 324 688 4 133Islamic Republic of Iran 53 24 35 39 33Turkey 805 940 783 982 3 266

Central Asia 3 844 3 152 2 466 1 895 3 569Azerbaijan 1 067 1 085 510 130 227Kazakhstan 2 107 1 233 1 468 1 278 2 760

South, East and South-East Asia 96 338 86 252 99 990 131 123 94 365China 44 237 43 751 40 319 40 772 46 846

(41.7) (45.4) (39.1) (30.5) (45.8)Hong Kong, China 11 368 14 770 24 596 61 938 22 834

(10.7) (15.3) (23.9) (46.3) (22.3)India 3 619 2 633 2 168 2 319 3 403Indonesia 4 677 --356 --2 745 --4 550 --3 277Malaysia 6 324 2 714 3 895 3 788 554Philippines 1 249 1 752 578 1 241 1 792Republic of Korea 2 844 5 412 9 333 9 283 3 198Singapore 10 746 6 389 11 803 5 407 8 609Thailand 3 626 5 143 3 561 2 813 3 759

Pacific 150 277 229 88 198Fiji --11 140 --79 --69 --3Papua New Guinea 88 110 296 130 179

Source: World Investment Report 2002: Transnational Corporations and Export Competitiveness (UNCTAD/WIR/2002).

Notes: Figures in parentheses ( ) denote percentage share of the regional total.Negative figures denote disinvestment.

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Turning to North-East Asia, the FDI boomhas subsided with inflows falling from US$ 76billion in 2000 to US$ 30 billion in 2001. FDI inthe Republic of Korea fell by some 67 per cent in2001 to US$ 3 billion as the surge of post-financialcrisis M&As subsided.

Flows to South-East Asia stagnated atUS$ 13 billion; part of the reason was continueddivestment (US$ 3 billion in 2001) in Indonesia,where divestments have exceeded FDI inflowssince late 1998. In Malaysia, FDI remained stag-nant, whereas inflows to the Philippines rose fromUS$ 1.2 billion in 2000 to US$ 1.8 billion in 2001.FDI in Singapore also increased by 59 per cent toUS$ 9 billion, the first time since 1998, but stillbelow the peak of US$ 11 billion reached in 1997.Faced with the erosion of its competitiveness inelectronics vis-à-vis other countries in the region,Singapore has designated the biomedical industryas the next pillar of its growth area, and hasbeen improving infrastructure and targetinghigh-potential companies in that industry throughvarious investment funds, including venturecapital. FDI in Thailand increased by US$ 1billion to US$ 3 billion and the MNEs continuedto consolidate their regional auto-manufacturingbases in Thailand. Viet Nam is entering a new eraas host to FDI strengthened by the bilateral tradeagreement with the United States, and the prospectof its accession to WTO.

Inflows into South Asia reached US$ 4billion, a 32 per cent increase over 2000. Out ofthe subregion’s total FDI, US$ 3.4 billion went toIndia, a 47 per cent increase over the previousyear. India, which is by far the largest recipient inthe region, has been taking steps to liberalize itsFDI regime further. Inflows into other economiesin the subregion stagnated or declined apparentlyowing to perceived instability in the investmentenvironment, particularly after the 11 September2001 incident.

FDI in Central Asia rose by 88 per cent in2001, to US$ 3.6 billion, driven by the doublingof inflows into Kazakhstan (US$ 2.8 billion).Resource-based activities, particularly in copperand zinc as well as in oil and gas extraction, tookup the largest share (77 per cent) of inflows intothe subregion.

The Pacific region remains marginal interms of FDI inflows, with US$ 200 million in2001. Political instability coupled with relativelypoor infrastructure added to the structural con-straints of location and size in the Pacific islandcountries.

Overall, the prospects for FDI in the Asianand Pacific region remain bright. Surveys suggestAsia will continue to be an important locationfor the expansion of the international productionsystem, where China topped the list in Asia,followed by Indonesia and Thailand. Greenfieldinvestment will once again become the preferredoption by far for FDI entry into the region follow-ing the M&A boom during the financial crisis(MIGA 2002).

C. Host country FDI promotionpolicy trends

Recently, the FDI inward policy regimes ofmost countries around the world, both developedand developing, have taken on a liberal framework.The liberalization of core FDI policies consists ofreducing barriers for inward FDI, strengtheningstandards of treatment for foreign investors andensuring the proper functioning of markets anda level playing field for all investors. Ironically,with policy regimes becoming increasingly openand similar, many countries have found that theyneed to make further efforts to attract FDI insuch a competitive climate; FDI is now recognizedas one of the most important sources of much-needed capital and managerial, technical andmarketing know-how not only in the manufactur-ing industry, but also in services and the resource-based industry. Moreover, world-wide liberaliza-tion convergence increases the locational choicefor FDI.

Measures aimed at attracting FDI are notalways sufficient to ensure the greatest possiblebenefits that countries expect from FDI, such astechnology transfer to foreign affiliates and domes-tic firms, more and deeper linkages with localenterprises, higher exports, higher employment andupgraded skills. At the same time, host countriesseek to reduce any negative effects related to

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foreign investment, such as financial volatility,anti-competitive practices, abusive transfer pricing,the crowding-out of domestic firms and excessivedependence on foreign ownership. In brief, forhost countries the central concern is to maximizethe positive effects of FDI and minimize itsnegative effects.

When considering what host countrypolicies could effectively help developing countriesand economies in transition to attract FDI andbenefit from it, a wide range of host country policymeasures were implemented, for example, to:

• Create a sound and stable macro-economic and political environment,including a transparent and predictablebusiness environment

• Develop physical and technical infra-structure, and promote clusters

• Develop human resources

• Develop domestic enterprise capabili-ties, especially SMEs

• Address environmental and socialconcerns

• Adopt competition laws and reducerestrictive business practices

• Influence the behaviour of investorsby offering investment incentives andimposing performance requirements

• Create larger markets through regionaland bilateral cooperation

• Protect investment, including intellec-tual property rights

Countries have implemented active FDIpromotion policies that have evolved over theyears, as the objective has shifted from simplyattracting a desired quantity of FDI to attractingquality FDI with a highly beneficial impact onthe domestic economy. In the first generation ofinvestment promotion policies, many countriesadopt market-friendly policies. They liberalizetheir FDI regimes by reducing barriers to inwardFDI, strengthening standards of treatment offoreign investors and assigning a greater role

to market forces in resource allocation. Somecountries can go a long way in attracting foreigninvestment with these steps, if the basic economicdeterminants for obtaining FDI are right.

On the issue of FDI performance require-ments and effectiveness, almost all countries, bothdeveloped and developing host countries, have hadrecourse to such requirements at some stage intheir development. Specific objectives for the useof performance requirements include:

• Deepening and broadening of theindustrial base

• Generation of employment opportunities

• Linkage promotion

• Export generation and performance

• Trade balancing

• Regional development promotion

• Avoidance of restrictive businesspractices

• Technology transfer

Strong local firms attract FDI; the entry offoreign affiliates, in turn, enhances the competi-tiveness and dynamism of the domestic enterprisesector. The strongest channel for diffusing skills,knowledge and technology from foreign affiliatesis backward linkages with local firms. This cancontribute to the growth of a vibrant domesticenterprise sector, the foundation of economicdevelopment. Foreign affiliates, in turn, canbenefit from backward linkages as they reducecosts and enhance access to local tangible andintangible assets. Hence there is a substantialmutual interest between foreign affiliates anddomestic firms in creating and deepening back-ward linkages. With respect to the technologytransfer requirement, technology and know-how flowing from parent firms to their foreignaffiliates are one of the principal channels forinternational technology transfer. MNEs are therepositories of much of the world’s most advancedtechnologies, and most technology transfertakes place within the MNEs. Intrafirm paymentsof royalties and licence fees account for the


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majority of the total sales of these transactions.More competition in host country marketsincreases the pressure and incentives for MNEsto transfer more and better-quality technology toaffiliates.

In a globalizing economy, however, per-formance requirements are used less frequently,because they are increasingly considered anunnecessary bother, which might discourageforeign investors. In contrast, the use of invest-ment incentives has proliferated. Sometimes coun-tries even engage in direct competition for specificinvestment projects with financial and other incen-tives, and such competition can be very costly.In spite of this competition, there is considerableevidence to suggest that incentives are a relativelyminor factor in the location decisions of MNEsrelative to other locational advantages.

Countries have used various policies andmeasures to attract FDI and increase the benefitsfrom it, from targeted promotion policies toincentives and performance requirements, aswell as measures to support the enterprise sector.Many of these measures, however, have beensubjected to new international rules in the frame-work of multilateral agreements such as theWTO Agreements on TRIMs and on Subsidies andCountervailing Measures (SCMs). For example,local content requirements have been phased outby most countries in line with the requirementof the TRIMs Agreement. At the same time, FDIand trade liberalization, as well as more intensecompetition for FDI, have reduced the reliance onother investment performance requirements.

In the second generation of investmentpromotion policies, Governments actively seek toattract FDI by marketing their countries, whichusually leads to the setting-up of national invest-ment promotion agencies (NIPAs).

The third generation of investment promo-tion policies takes as a starting point the enablingframework for FDI and a proactive approach toattracting FDI. It then proceeds to target foreigninvestors at the level of industries and firms tomeet their specific developmental priorities, forexample, in export promotion or linkage creation.

The key to the success of these new investmentpromotion strategies is that they actually addressone of the basic economic FDI determinants whileunderstanding the changing locational strategiesof MNEs. Regardless of the level at which FDIis promoted, the competitiveness of the domesticenterprise sector and a pool of skilled people arethe keys to the product to be marketed. Anotherimportant element of targeting is a sound analysisof MNEs’ strategies affecting the choice oflocation. In response to the increased geographicaland functional specialization in many industries,countries may find it useful to identify productionniches through which they can link up withinternational production systems.

There are, however, risks involved indeveloping a more targeted and focused strategy.Resources may be focused on attracting invest-ments that do not materialize, or considerableefforts and resources may be devoted to seekingthe wrong types of firms, or firms that would haveinvested in any event. Improving the overallpolicy environment for investment should not besacrificed to a selective focus on attracting a fewfirms. Also, for most developing countries, theinvestors to target will probably not be the largestMNEs in the world, but smaller firms within theappropriate industry or activity. Although adoptingan investor-targeting strategy can clearly beeffective in attracting FDI, it presents considerablechallenges for Governments. Effective targetingrequires business-oriented NIPAs with well-developed links to the private sector as well asother branches of government, to identify andcreate comparative advantages that are sustainable(UNCTAD 1997).

In today’s highly competitive worldeconomy, the ability to attract FDI, especially high-quality FDI, increasingly needs an investmentproduct. One implication of this is that countriesthat want to attract high-quality FDI and benefitfrom it need to develop differentiated and efficientclusters that offer real and identifiable locationaladvantages to international investors and even-tually become brand names recognizable to anynational or international investor seeking thisparticular configuration of advantages. Bangalorein India has such a brand name for the

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development of software, as do Singapore andHong Kong, China, for financial services andregional headquarters. It must be recognized, how-ever, that such a targeted approach, and especiallythe development of a locational brand name, isdifficult, costly and takes time. Moreover, a moretargeted and fine-tuned approach, which in theend seeks to match the specific functional needsof corporate investors with specific locationalproducts, requires fairly sophisticated institutionalcapacities. It is, however, facilitated by theproliferation of sub-national agencies, and alsoeven by municipal investment promotion agenciesthat as a rule, seek to market more specific invest-ment products. But this gives rise to anotherchallenge: the need to coordinate polices acrossvarious administrative levels in a country. Properconsultation and coordination mechanisms betweencentral and provincial or municipal governmentsneed to be strengthened for proper and efficientinvestment attraction (ESCAP 2002).

In sum, the continuous need for countries tomove up the ladder and improve the attractivenessof their locational advantages is a challenging taskfor policy makers in developing countries andcalls for sophisticated and comprehensive policyapproaches. Regardless of the level at which FDIis promoted, and regardless of the precise mix ofthe three basic investment promotion strategiespursued, the competitiveness of the domesticenterprise sector, including a pool of skilledpeople, is the key to the investment product.

Investment facilitation measures

Host Governments have a choice betweenallowing in foreign investment without specificapproval or subjecting proposed investment toscreening and approval against specific criteria.While the trend to creating a more enabling FDIframework continues, many countries still evaluateand screen FDI at the point of entry. The timerequired to obtain the various licences, permits andapprovals needed can sometimes be considerableand can negatively influence the cost-efficiency ofa location; the cost in terms of both money andtime are especially important to export-orientedforeign investors.

Investment and business facilitation mea-sures include promotion efforts, provision ofincentives to foreign investors, reduction of unnec-essary costs of doing business in a host country(e.g., reducing or eliminating corruption andimproving administrative efficiency) and provisionof amenities that contribute to the quality of lifeof foreign investors and expatriates. Investmentfacilitation services are another increasinglyimportant component of promotion activities inboth developed and developing countries. Suchservices consist of counselling, acceleratingthe various stage of the approval process andproviding assistance in obtaining all the permitsneeded.

Under the pressures of competition for FDIin a globalizing economy, investment facilitationmeasures and services have been extended toinclude after-investment services. Sequentialinvestment, the reinvestment of earnings byestablished foreign affiliates, can be a significantsource of FDI; also there is a growing awarenessthat satisfied investors are the best evidenceof a good investment climate in a host countryand that they can therefore help to attract otherinvestors.

Countries compete increasingly for FDInot only by improving their policy and economicdeterminants but also by implementing pro-activeinvestment facilitation measures that go beyondpolicy liberalization. Successful attraction of FDIshould also be followed up by efficient facilitationand implementation of investment projects andby ensuring that local investment regulationand procedures are consistent with the centralgovernment policies, laws and regulations (ESCAP2003).

NIPAs can reduce administrative barriersby fostering the development of industrial andexport processing zones. In addition to goodinfrastructure and tax incentives, such zones canconstitute islands of administrative efficiency andprovide a buffer between export-oriented foreigninvestors and regulatory authorities. NIPAs canalso help to ensure the relevant laws andregulations governing export-oriented FDI areeasily accessible by foreign investors. Increased


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transparency of the administrative system andinvestment procedures makes it easier for foreigninvestors to predict costs for the realizationof investment projects. A range of instrumentscould be applied to improve public governance,including performance assessments, e-governmentand codes of conduct for the officials atNIPAs and other investment-related governmentagencies.

One way for NIPAs to attack regulatoryinefficiencies and red tape is to develop so-called“investor road maps”. These have been developedby the Foreign Investment Advisory Service(FIAS) as a tool for identifying and reducingthe number and scope of procedural steps,regulatory requirements and administrative barriersthat constitute the day-to-day interactions betweengovernment and entrepreneurs (FIAS 2001).

The number of agencies whose supervision,approval or other input is required in the invest-ment process presents a Government with asubstantial risk of coordinating/avoiding duplica-tion for each phase of the promotion strategy,including image-building, generating specificprojects and, most specifically, facilitation servicesrelating to screening, approvals and follow-up.To address this problem, there is a strong need tolaunch an initiative to assist developing economiesin their efforts to promote good governance ininvestment facilitation, which could be measuredby the efficiency and transparency of investment-related procedures and practices. Establishmentof an office of an investment ombudsman at thenational level (for example, in the case of theRepublic of Korea) could be part of a goodgovernance programme in investment promotionand facilitation for other developing economies toconsider and adopt.

D. FDI by small and mediumenterprises

In a liberalizing and globalizing worldeconomy in which all enterprises, whether large orsmall, are increasingly subjected to internationalcompetition, the internationalization of SMEs,through both inward and outward investment,

deserves increasing attention, as these firms playa central role in economic development. SMEsconstitute an important part of the economiesof most Asian countries, contributing substantiallyto employment and production. They can alsomake a major dynamic contribution to growth anddevelopment. Internationalized SMEs, in particu-lar, offer a significant potential source of growthand development for developing countries. Forexample, smaller MNEs are more likely to: (a)transfer appropriate technology to developingcountries; (b) have a favourable impact on thetrade balance; and (c) have more flexible localarrangements and contribute more to the localeconomy by using subcontracting to a greaterextent (UNCTAD 1998b).

SMEs contribute to development in twomain ways:

• Through conventional contributions viathe normal production process, such asinvestment in tangible and intangiblecapital and technological processes.The contribution of SMEs in this way isprobably relatively small, and roughlyin proportion to the role of SMEs inproduction or value added, around 40to 60 per cent in the leading Asianeconomies.

• Through the less conventional “entre-preneurial engine”. In developed coun-tries at least, SMEs’ contribution togrowth is larger than might besuggested by conventional models, andmostly comes from a relatively smallproportion of high-growth SMEs.SMEs engaged in FDI are more likelyto be among this core group of high-growth firms. It is important to takethis fact into account in the design ofpolicies to facilitate FDI for develop-ment. The process of SME interna-tionalization, especially through SMEFDI, can offer significant opportunitiesfor development.

FDI by SMEs has grown remarkably sincethe mid-1980s. Driven, among other factors, bythe need to be present abroad to access markets

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and resources in order to maintain their competi-tiveness in a rapidly liberalizing and globalizingworld economy, small and medium MNEs areincreasingly internationalizing their productionactivities. FDI by SMEs thus complements largeMNEs as a potential avenue for the transfer ofproductive resources and technology that canenhance the growth and competitiveness of deve-loping countries. As a case in point, the first waveof Japanese investment abroad, in the 1960s,was led by small and medium firms seeking lowwage bases overseas. In the 1970s and 1980s, itbecame dominated by large manufacturers, seekingnatural resources, production sites in or near largeexport markets and low-cost assembly sites forlabour-intensive processes in South-East Asia. Thecurrent wave is led by support industries, whichproduce parts and machinery for the big manu-facturers and are finding it increasingly expensiveto supply components from their home base (Fujita1998).

Most SMEs face several handicaps ininvesting in developing countries. They lackinformation on investment opportunities and localconditions, they are particularly sensitive topolitical risk and macroeconomic uncertaintiesand they are unfamiliar with the different legalsystems and regulations involved. Apart fromthe right policy environment, with stable and non-discriminatory policies and good market prospects,the promotion of FDI by SMEs has to addressthe information gaps and risk elements that areinherent in the internationalization of small firms.Many developing host countries are alreadymaking efforts to do this. A number of countriesdo not require formal approval for FDI belowa certain size. Several that had requirementsregarding the minimum size of foreign invest-ments have abolished them: Malaysia, Thailandand Indonesia are good examples. The Republicof Korea has reduced the minimum size require-ments over time. The reduction of clearanceformalities is being achieved by the setting-up ofone-stop agencies for FDI promotion. Policiesused by developing countries to help SMEs ingeneral, such as lower tax rates and credit,infrastructure and other forms of assistance onfavourable terms, can also help SME MNEs iftheir entry is facilitated in other ways.

Entry into overseas markets by SMEsalso has been facilitated by a new array of cost-saving and risk-reducing investment techniques,allowing foreign companies to take effectivecontrol and expand production abroad withoutmajority equity stakes or ownership control in theventure. Such techniques include joint ventures,international subcontracting deals, licensingarrangements, franchising, management contracts,turnkey projects, and production and risk-sharingagreements. These new forms of investmentreduce the start-up and working capital costs ofinvestments, limit MNEs’ exposure to political andcommercial risks and allow them to circumventadministrative barriers to market entry, withoutlosing competitive strength (Oman 1984).

In sum, SMEs that engage in FDI are animportant part of the entrepreneurial engine thatdrives development and growth. In many deve-loping countries, however, the SME sector isinsufficiently developed in terms of the core ofdynamic and fast-growing SMEs that contributesignificantly to development. FDI by SMEs hasthe potential to strengthen the SME sectors ofhome as well as host countries, contributing to thehealth and dynamism of their economies. Thepotential in this regard is high, as more than 95per cent of all firms are small or medium-sized.Increasing the awareness and understanding indeveloping countries of this insufficiently tappedsource of investment can thus usefully contributeto their development, including the development oftheir own SMEs. Carefully designed policies are,however, needed to encourage FDI by and inSMEs. A number of countries have considerableexperience as regards SME development generallyas well policies to attract investment by suchenterprises and to expand and strengthen its role indevelopment. An understanding of this experiencewould be useful in formulating policies and pro-grammes with respect to attracting and benefitingfrom FDI by SMEs, since developing Asia has alarger potential to mobilize FDI by SMEs than anyother developing region. Asian SMEs are likely tobe among the primary sources of future Asiandevelopment. For this to be realized, appropriate,enhanced Asian linkages have to be established atall levels.


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E. Conclusions and implications forregional action and cooperation

FDI inflows could bring important benefitsto the recipient economies in the form of capitalinflows, technology spillovers, human capitalformation, international trade integration, enhance-ment of enterprise development and good govern-ance. However, FDI could have negative effectsin such areas as market structure and balanceof payments and could lead to crowding-outof domestic enterprises, as well as other socialimpacts. Government policies are thereforeneeded to enhance benefits and minimize negativeeffects.

The role of an enabling environment forFDI including political stability as a key factorin attracting and maintaining investors cannotbe overemphasized. Another universally acknow-ledged principle is the need to offer stable,transparent and non-discriminatory regimes forforeign investors. Such an environment wouldconsist, among other things, of a legal frameworkmaximizing a country’s potential for attractingFDI, adequate infrastructure, good governance, aneffective judicial system and respect for the ruleof law.

The policy mix has to be adapted tothe special circumstances prevailing in differentcountries and might have to evolve over time.Factors influencing this mix are level of deve-lopment, market size, domestic capabilities andexisting levels of FDI. Globalization offers betteropportunities for small economies to compete forexport-oriented FDI, but it also implies more com-petition between countries. Hence, it is becomingincreasingly important for countries to considerwhat the best policy approach is for attractingand benefiting from FDI in accordance withtheir development objectives. Even at an earlystage of their development, countries need toattach importance not just to the size of FDI, butalso to its qualitative aspects.

Concerns have arisen that competition toattract FDI will intensify among countries, espe-cially the type of FDI that can bring major benefits

to recipient economies by enhancing their exportcompetitiveness or by providing linkages withdomestic enterprises. Indeed, countries are in-creasingly recognizing the positive contributionthat FDI can make to economic developmentthrough an increase in export capacity, employmentgeneration, transfer of technology, industrialupgrading and training of labour. In this kind ofinternational investment environment, there is agreat need to strengthen the capacity of hostcountries, particularly developing countries, indealing with FDI inflows. This involves devisingFDI policies and enhancing legislative and institu-tional structures in order to attract new investmentand building new skills and capacity by trainingpolicy makers, officials, managers and localentrepreneurs as regards what they can offerforeign investors and how to attract and assist themin FDI realization.

While most multilateral organizationsconcentrate on promotion and attraction of FDI,relatively little has been done in the area of invest-ment facilitation and realization, which is ofparticular concern for the further promotion ofinvestment. There seems to be a strong need to fillthis gap in investment facilitation and realizationwithin an effective framework of FDI promotionpolicies, especially at the SME level, such as:

• Promoting the exchange of experiencesand the transfer of best practices andestablishing regional networks

• Enhancing FDI flows in small andmedium industries (SMIs) by organizinginvestment promotion and facilitationmeetings at certain intervals, keeping inview the needs and priorities of the hostcountries in the region

• Providing regional perspectives onemerging issues related to FDI andSME capacity-building and undertakingstudies in those areas for the harmo-nization of investment policies andstrategies. There is considerable scopefor the harmonization of the lawsand regulations, property rights, equitysharing and other requirements relatedto FDI

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Countries have used various proactivepolicies and measures to attract and increase thebenefits from FDI, ranging from targeted pro-motion policies to incentives and performancerequirements, as well as measures to supportthe enterprise sector. Many of these measures,however, have been subjected to new internationalrules in the framework of multilateral agreementssuch as the WTO Agreements on TRIMs andSCMs and other regional or bilateral agreements.The challenge for policy makers is to deepen theirunderstanding of what policies and policy tools aremost important from a development perspectiveand how international rules in the area of invest-ment would affect them.

Finally, while SME MNEs remain relativelysmall players in the global FDI scene, their impor-tance should not be underestimated in the longterm. They are bound to become more interna-tional as the pace of globalization increases. Theycan offer simple technologies and can diffuse skillsand know-how to local enterprises more readily

than large MNEs. In this context, the followingagenda for regional action and cooperation couldbe envisaged:

• Regional information networking onFDI opportunities in the SME sector ofthe region

• SME-specific measures, such as anSME investors club which will focusattention on SMEs and provide support-ing activities by government agencies,private industry and other SMEs

• Provision of a regional trainingprogramme for members and associatemembers to evolve comprehensiveinvestment promotion and facilitationpolicy measures, especially at the SMElevel

• Design and implementation of goodgovernance programmes in investmentpromotion and facilitation at theregional and/or subregional level


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REFERENCES

ESCAP, 2002. Report of the High-levelSubregional Seminar on Investment Promo-tion and Realization for Indo-China, Hanoi,5 March 2002.

, 2003. Report on the Regional RoundTable on FDI for Central Asia, Dushanbe,3-4 April 2003.

FIAS, 2001. Investor Road Maps (Washington,World Bank Group and InternationalFinance Corporation Foreign InvestmentAdvisory Service).

Fujita, Masataka, 1998. The Transnational Activi-ties of Small and Medium-sized Enterprises(New York and Dorecht, Kluwer AcademicPublishers).

Lall, Sanjaya, 1997. Attracting Foreign Invest-ment: New Trends, Sources and Policies,Economic Paper No. 31 (CommonwealthSecretariat).

McIntyre, Robert, 2001. The Role of Smalland Medium Enterprises in Transition:Growth and Entrepreneurship (Helsinki,United Nations University World Institutefor Development Economics Research).

MIGA, 2002. Foreign Direct Investment Survey(Washington, World Bank Group, Multi-lateral Investment Guarantee Agency).

MOFTEC, 2001. “Achievements in FDI utilizationand the role of FDI in China” (Beijing,Ministry of Foreign Trade and EconomicCooperation).

Oman, C., ed., 1984. New Forms of InternationalInvestment in Developing Countries(Paris, OECD Development Centre).

UNCTAD, 1996. World Investment Report 1996:Investment, Trade and International PolicyArrangements (UNCTAD/WIR/1996).

, 1997. Survey of Best Practices inInvestment Promotion (UNCTAD/ITE/IIP/1).

, 1998a. World Investment Report 1998:Trends and Determinants (UNCTAD/WIR/1998).

, 1998b. Handbook on Foreign DirectInvestment by Small and Medium-SizedEnterprises: Lessons from Asia (UNCTAD/ITE/IIT/6).

, 1999. World Investment Report1999: Foreign Direct Investment and theChallenge of Development (UNCTAD/WIR/1999).

, 2002. World Investment Report 2002:Transnational Corporations and ExportCompetitiveness (UNCTAD/WIR/2002).

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United Nations publicationSales No. E.03.II.F.36Copyright © United Nations 2003ISBN: 92-1-120176-4ISSN: 0252-4481ST/ESCAP/2259

Printed in BangkokJuly 2003 – 650

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