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Transcript of SME Development in the GMS Masato Abe, Ph.D. Economic Affairs Officer United Nations ESCAP Bangkok...
SME Development in the GMS
Masato Abe, Ph.D.Economic Affairs OfficerUnited Nations ESCAP
Challenges for SME development
• Scattered targets leading to high transaction costs
• Lack of economies of scale
• Limited public resources
• Limited understanding about the targets, i.e., SMEs
• Limited communication channels
• Limited knowledge and skills
Objectives of SME development
• Increase the number of startups• Increase their survival rate• Encourage incorporation or formalization• Foster SME graduates (to be large enterprises)• Facilitate the smooth exit of failed firms, with
leniency for bankruptcy• Enhance access to markets (e.g., increased
exports and exporting to wider markets)• Sustainable and inclusive enterprise
development (e.g., environment, gender, youth, and minorities)
International SME definitionAsian Development Bank
SME No definition None
European Union Micro
Small
Medium
<10 employees; turnover ≤ €2 million or balance sheet total ≤ €2 million<50 employees; turnover ≤ €10 million or balance sheet total ≤ €10 million<250 employees; turnover ≤ €50 million or balance sheet total ≤ €43 million
Employment and turnover or balance sheet total
United Nations Development Programme (UNDP)
SME ≤200 employees Employment
United States of America
MicroSmallMedium
<20 employees20-99 employees100-499 employees
Employment
World Bank SME ≤300 employees; turnover ≤ US$15 million; assets ≤ US$15 million
Employment, turnover, and asset
Sources: European Union (2003); Gibson and van der Vaart (2008)
GMS SME definition Cambodia Micro
SmallMedium
<1011-5051-100
Employee
China SmallMedium
<300 employees; turnover < 30 million yuan300-2,000 employees; turnover 30-300 million yuan
Employment and turnover
Lao PDR SmallMedium
≤ 19≤ 99
Employee
Myanmar MicroSmallMedium
< 1010-5051-100
Employee
Thailand Small (production and service)Medium (production and service)
≤50 employees or capital ≤50 million baht
51-200 employees or capital 51-200 million baht
Employment and capital
Viet Nam SME ≤300 employees; capital ≤VND 10 billion
Employment and capital
Startups by sector Japan (2009)
SMEs by sector Thailand (2010)
Services 29.3 8.3
Wholesales and retailing 16.5 49.7
Restaurants and hotels 13.9 9.3
Medical services and healthcare 14.8 0.3
Construction 9.5 3.5
Manufacturing 6.2 17.9
Transport and storage 3.6 3.9
Education 1.3 0.1
Others 5.1 7.1
Total 100.0 100.0 Sources: Japan Finance Corporation (2009); Office of SMEs Promotion (2011).
Startups by sector in Japan; SMEs by sector in Thailand (%)
SMEs’ net income in Japan
0.0
0.5
1.0
1.5
2.0
2.5
3.0
01 02 03 04 05 06 (Year)
(%)
Manufacturing
Construction
AverageServices
Retail
Transportation
Wholesales
Source: National Life Finance Corporation (2007).
GDP contribution of the SME and informal sector based on income levels
Source: Ayyagari, Beck, and Demirgüç-Kunt (2003).Note: ‘Residual’ includes large enterprises and public sector.
Simplified SME life cycle
Profit
Years
0
Startup
Pick-up
Maturity
Decline
Exit
Grow to a large firm
Loss
Growth
SME typology
TopicCategory 1 Category 2 Category 3 (if
applicable)
Stage of economic development
Low income$1,005 or less
Middle income$1,006 to $12, 275
High income$12,276 or more
Market orientation Domestic Gradual global Born global
Pace of innovation Incremental Radical
Use of technology Isolated Connected
Corporate life stage Nascent (<2 years) Young (2-5 years) Mature (5+ years)
Another SME typologyby market and technology
Source: Modified from Uchikawa and Keola (2009).
Startup profiles in Japan
• Entrepreneurs• Average age was 41.4 years old• 84.5 per cent were men; 15.5 per cent women• 33.1 per cent held a college degree or higher• Enterprises• 3.9 employees• Startup funds: US$ 100K
– Own capital: 35 per cent– Support of family, relatives and friends: 15 per cent: – Public grants and commercial loans, with collaterals and/or
partially covered by public loan guarantee schemes: 50 per cent• 60 per cent of startups achieved break-even within 15
months. • Source: National Life Finance Corporation (2008)
Characteristics of SMEs
• Born out of individual initiatives, knowledge, and skills
• Greater operational flexibility• Low cost of production• Specialization to niche markets• High propensity to adopt technology• High capacity to innovate• High employment orientation• Utilization of locally available human and
material resources• Reduction of geographical imbalances
Disadvantages of SMEs
• Low bargaining power for both sales and procurement
• Weak market access• Low technology adaptation• Lack of brand development• High debt structure• Weak management with less training• Weak human resource base with low level
of compensation• Inadequate institutional support
Constitutions of enterprises
Source: IFC (2009)
Share of SMEs to SMEs’ contributions, various sources & years
Countries/regionExport share
in GDPSME share in
exportsSME share of total
enterprisesSME share of total
workforce
Developed countries
Japan 13.0 53.8* 99.7 70.2
United States 11.0 22.2 99.9 55.8
European Union n/a 43.4 99.8 67.4
Asia and the Pacific
China 27.0 69.2 99.0 74.5
India 20.0 40.0 n/a n/a
Indonesia 24.0 20.0 99.9 99.6
Malaysia 96.0 14.2 99.2 65.1
Pakistan 13.0 30.0 97.9 78.5
Republic of Korea 50.0 39.0 99.9 87.7
Singapore 221.0 16.0 91.5 51.8
Taiwan Province of China n/a 17.0 97.8 77.2
Thailand 57.5 30.6 99.6 69.0
Viet Nam 68.0 20.0 99.9 77.3
The number of SMEs per 1,000 people, 2001-2006
61.8
29.6
14.9
63.2
27.0
9.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Developed Developing LDC
Global Asia-Pacific
Source: ESCAP (2009b).
Entry and exit rates between Japan and USA
Source: The authors, developed based on data from JSBRI (2011).
National culture and entrepreneurship: Japan & USA
0
10
20
30
40
50
60Perceived opportunity
Perceived capabilities
Fear of failure
Entrepreneurial intentions
Uncertainty avoidance
Long term orinetation
Japan United States of America
Sources: GEM (2011); Hofstede (1991).
Productivity differentials by enterprise size
Source: ADB (2009).
Competitiveness framework for SMEs
- Market access- Access to resources
- Business related regulatory framework- Supporting services
- Contestable market power- Capacity to respond effectively to competitors
- Capacity & flexibility to respond to changing environment- Capacity to create new market niches
SMEs
QCD (Quality, Cost, Delivery)
Market Share, Profitability
Six key areas
1. Business environment, including policy and regulatory framework and infrastructure development
2. Entrepreneurship
3. Financing
4. Business development services
5. Innovation and technology
6. Market access
Business enabling environment
• A transparent, open, fair, and competitive business framework
• Clear, independent rule of law for all firms
• Easy establishment and dissolution of businesses
• Equal and stable legal treatment for national and cross-border transactions
Source: ADB (2009).
Business regulatory compliance costs by firm size, Lao PDR
BusinessEnabling
EnvironmentFor SMEs
FactorEndowment
EntrepreneurshipCulture
Infrastructure
EconomicPolicies
RegulatoryFramework
Technology
BEE components
BEE survey
• Ease of Doing Business
• Economic Freedom of the World Exercise
• Corruption Perception Index
• Sub-national survey
Ease of doing business in Asia and the Pacific
12.6
42.4
85.992.3 95.3
117
0
20
40
60
80
100
120
140
DevelopedEconomies
East andNorth-East
Asia
North andCentral
Asia
Pacific South-EastAsia
South andSouth-West
Asia
Subregion
Ave
rage
ran
k o
ut
of 1
83
Source: World Bank (2012).
Ease of doing business in Asia and the Pacific, 2012
Overall Ease of Doing
Business Rank
Starting a Business
Getting
Electricity
Registering
PropertyGetting Credit
Paying Taxes
Trading Across Borders
Enforcing Contracts
Thailand 17 78 9 28 67 100 17 24
China 91 151 115 40 67 122 60 16
Viet Nam 98 103 135 47 24 151 68 30
Cambodia 138 171 130 110 98 54 120 142
Lao PDR 165 89 138 72 166 123 168 110
Source: World Bank (2012).
Economic freedomEconomy Rank Economy Rank
Hong Kong, China
1 Malaysia 78
Singapore 2 Azerbaijan 84
New Zealand 3 Indonesia
Australia 5 Viet Nam 88
Japan 22 Philippines 89
Taiwan Province of China
26 China 92
Republic of Korea 30 India 94
Mongolia 36 Bangladesh 103
Kazakhstan 56 Sri Lanka 107
Papua New Guinea
61 Pakistan 114
Thailand 65 Nepal 129
Kyrgyzstan 70 Myanmar 140
Fiji 77Source: Gwartney, Hall and Lawson (2011).
Corruption ratings in Asia and the Pacific
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
North andCentral Asia
South andSouth-West
Asia
Pacific South-EastAsia
East andNorth-East
Asia
DevelopedEconomies
DevelopedAsia and the
PacificNations
Source: Transparency International (2011).
Subnational surveys• Most SMEs have relatively limited relationships with
national agencies, interfacing with municipal or provincial bodies and conduct their activities largely or entirely within that sphere
• Provincial competitiveness index in Viet Nam– 64 provinces of Viet Nam– (a) costs of market entry; (b) access to land and security of
tenure; (c) issues relating to the transparency of regulations and their enactment by provincial bodies; (d) the time required to comply with regulations; (e) informal charges imposed; (f) bias towards state-owned enterprises; (g) the pro-activity of provincial authorities to assist firms; (h) the provision of business development services (BDS); (i) the availability of training for employees; and (j) the quality of legal institutions
• Provincial business environment scorecard in Cambodia– 10 most economically active provinces– 10 sub-indices such as tax administration, crime prevention, and
dispute resolution.
Monthly enterprise registration, Cambodia, 2004
Source: Baily (2007).
BEE reformsStage of economy Policy objectives Policy recommendations
Developing Provide basic infrastructureEnsure legal system is fairCreate competitive marketsEncourage female participation
Earmark budgets for roads, etc.Reform regulations to encourage new entrantsRefrain from government intervention.Provide more education to girls and remove roadblocks to female participation in the economy.
Middle Provide financingExpand market access
Ascertain financing needs of SMES and fulfill them (see chapter 5).Educate SMEs about exporting and other forms of participation in the global economy (see chapter 8).
Advanced Adopt technologySpur innovation
Provide incentives for learning about latest technologies and innovations (see chapter 7).
Key success factors of entrepreneurs
Entry barriers to entrepreneurship
• The ‘fear of failure’– Mindset
• Lack of confidence due to inadequate skills and knowledge
• Low aspirations
– socioeconomic and cultural factors:• Negative peer pressures (e.g., parents, relatives,
and friends)• No respectable exit route without economic
punishment• Social stigma
Relationships among culture, policy, and entrepreneurship
Figure 1Institutions and Culture
StagnantLed
(Top down)
Repressed
(Bottom up)Entrepreneurial
UnfavorableU
nfav
orab
leFavorable
Favo
rabl
e
Policy
Culture
A Typology - "Start Point" for Policy Change
Source: Dennis (2005).
SME financing gaps, OECD and non-OECD countries
Source: OECD (2006)
Collateral, interest rate and nonperforming loans
Source: IFC (2009).
Business growth stages and cash flows
The biggest reason of SME failure
Forms of finance for SMEs
Financial sources for Malaysia SMEs, 2004 (%)
Phase of life cycle / financing sources
Startup Established Matured
Self financing 68.0 21.0 25.0
Government schemes 7.8 13.0 9.0
Venture capitals 10.8 8.5 4.5
Short-term loans from banks
20.8 28.6 23.1
Medium-term loans from banks
10.4 32.6 21.8
Long-term loans from banks
7.4 23.7 37.2
Non-bank financial institutions
8.7 7.1 10.9
Source: Rozali et al. (2006)
Financial gap in SME financing
Source: Modified from JFC (2011).
SME financing through public-private partnership in Japan
Types of BDS
• Market access and development
• Supporting infrastructure
• Supplies
• Technical assistance and training
• Technology and product development
Three core segments of BDS
Operational Advisory Advocacy
Services Short-term support services and hand-holding such as accounting, legal and regulatory advice, accessing technical information, labour management, secretarial service
Long-term development services, such as training, strategic management, marketing assistance, and knowledge transfer.
Services to improve business environment through policy advocacy and infrastructure development.
Target clients
Individual firms Individual firms Public sector, business associations
BDS actors and their roles
Source: Modified from AAMO (2007).
Traditional BDS approach
Source: Modified from DCED (2001).
Market-oriented BDS approach
Source: Modified from McVay and Miehlbradt (2001).
An overview of innovation
Market Access: Major challenges
• Intensified competition
• Internationalization
• Trade and investment liberalization
• Management skills
Stages in the process of export product identification
Trade promotion tools for SMEs
• Develop or refine products (and services) for export by communicating with potential customers
• Gain new customers/intermediaries in neighbouring, regional, and global markets
• Strengthen relationship with existing customers and intermediaries
• Increase the amount of exports• Achieve the above objectives effectively and
efficiently
Various trade promotion tools: cost and target
High
Cost
Low
Salesperson
Advertisement(Newspaper,
magazine, journal, directories, TV, radio)
Direct mail(Mail, email, telephone)
Internet(Homepage/portal)
WideTarget customersNarrow
Trade fair/mission
Source: Modified from Japan Finance Corporation (2008)
Special economic zones
Source: FIAS (2008)
Advantages of special economic zones
Static advantages Dynamic advantages
Direct employment creation and income generation
Technology transfer
Export growth and export diversification Skill upgrading
Increase in foreign direct investment Local development
Increase in foreign exchange earnings Empowerment of women
Government revenue Indirect employment creation
Source: FIAS (2008).
How SMEs fit into global supply chains
Source: UNIDO (2001)
AEC 2015
• The ASEAN Economic Community (AEC)
• Regional economic integration by 2015 for ASEAN countries
• Free movement of goods, services, investment, skilled labour and freer flow of capital
AEC: Key objectives
• A single market and production base
• A competitive economic region
• A region of equitable economic development
• A region fully integrated into the global economy.
AEC: Key characteristics
• Fair competition
• Consumer protection
• Intellectual Property Rights
• Infrastructure development
• Product and service standards
AEC: Present status
• Completed 187 measures (67.5%) out of 277 measures by the end of 2011
• Some measures due for implementation have not been fully implemented– Delays in ratification of signed ASEAN-wide
agreements and their alignment into national domestic laws as well as delays in implementation of specific initiatives
• E.g., Measures for the free flow of service, transportation, cooperation in food, agriculture and forestry etc.
CLMV countries in AEC 2015
• Relatively less developed than the ASEAN 6 counties
• Special schedule for CLMV countries– mainly in the elimination of tariffs and non-tariff
barriers)• Completed most of the tasks for AEC 2015 with
some weaker links remained compared to other countries– For example, intellectual property rights, SME
development and taxation• ASEAN Integration (IAI) Work Plan 2 (2009-
2015)– Human capital and institutional strengthening– Slow implementation
The impact of AEC on SMEs
• Challenges– Intensified competition domestic and international players– Access to credit, labour mobility, technology development,
market access and political risk– More measures for promoting SMEs
• A survey conducted by The University of the Thai Chamber of Commerce (2012)– The majority of Thai SMEs did not understand the benefits and
challenges of regional integration• Investment liberalisation, service liberalisation, reduction of non-
tariff barriers, rules of origins and single standards for Asean products
– Lack of readiness on financial support, low development of human resources at both the management level and workers, low development of ICT, high production and labour costs, low support from government agencies, and a low level of logistics development
Case of Myanmar
• Development of Industries with agriculture• Enhancement of production and quality of industrial
products• Increased production of new types of machinery and
equipment• Creation of suitable conditions for industrialized state• Human resource development• Coordination among various agencies in economic and
social activities• Integration of the business community into international
trade and globalized economy