Senior Officer, Industrial Services Unit
ASEAN Secretariat
Jakarta, Indonesia
(October 2002)

for Bulletin on Asia-Pacific Perspectives 2002/03, pp. 57-67


*  The views expressed in this paper are those of the author and do not necessarily reflect those of the ASEAN Secretariat.  Mention of any firm or license process does not imply endorsement from the ASEAN Secretariat.  I am thankful to Mr. Noordin Azhari, Director, Bureau of Economic Co-operation, ASEAN Secretariat; for his encouragement in research, and to Dr. N. V. Lam, Senior Economist, ESCAP and Adviser, Foundation for International Human Resource Development, Bangkok, for extensive discussions and many useful comments on an earlier draft.  The usual disclaimer applies.  The author can be contacted through <thitapha@aseansec.org“>thitapha@aseansec.org>
 


PROMOTING SME DEVELOPMENT: SOME ISSUES AND SUGGESTIONS FOR POLICY CONSIDERATION

On several social and economic grounds, small and medium-sized enterprises (SMEs) are of overwhelming importance in most Asian countries, those in the Association of Southeast Asia Nations (ASEAN) included. 1   Typically, the SME sector accounts for upwards of 90 per cent of all firms outside the agricultural sector of East and South-East Asia, and of Japan as well.  It is also the biggest source of employment – providing livelihood for over three-quarters of the region’s workforce, especially women and the young.  The relative share of SMEs in total output and exports are generally much smaller, ranging from one-third or less. 2   As such, the SME sector will remain the backbone of virtually every economy in this region and, for that matter, of the world in the foreseeable future. 

A concerted push in support of SME growth and competitiveness, moreover, is no longer an option.  In fact, the financial and economic crisis of 1997/98 has induced a return to “the fundamentals” among the “miracle economies” in East and South-East Asia, including a renewed focus on SMEs.  This policy shift has been complemented with higher budget allocations and external aid for the SME sector, including sizable resources made available by Japan under the so-called New Mizayawa Initiative.  Such a reorientation is not just to underpin the on-going socio-economic recovery which was somewhat derailed again due to the 2001/02 global economic slowdown.  It is also necessary to accommodate an expanding pool of millions of job seekers (especially the young and female workers) and, at the same time, to widen the available opportunities for the current as well as potential SME entrepreneurs themselves.


1.       A Working Group of ASEAN SME Agencies has been functioning since 1995.  The grouping of Asia Pacific Economic Co-operation (APEC) was established in 1989; currently it has 21 developing- and developed-economy members.  The first APEC SME Ministerial meeting was held in Osaka, Japan, in 1994.  The APEC Ad Hoc Policy Level Group was first convened in Adelaide, Australia, in the following year and this Group was then converted into a permanent Working Group in 2000.  However, SME issues are also considered by other APEC Working Groups as they are of a cross-cutting nature, especially in terms of their multi-sectoral implications and interdependence.

2.       The acute shortage of comparable and up-to-date data on SMEs gives a spotty picture as regards, among many other parameters, their output composition, and direct and indirect export production.  This chronic shortage is a structural weakness in statistical service common to virtually all developing economies (Hall 2002: 12-17, Regnier: 2000: 35-37, and ILO 1977: 36-37).  For a more recent and detailed discussion of the important social and economic characteristics of SMEs as well as the impact of the 1997/98 on them, see Alphonso and Co (2001), Regnier (2000), Tambunan (2000), Urata (2000), and van Dierman et al. (1997).


A.  A New Development Context

SMEs and, by extension, all business firms have to manage growth and change in an environment where the pace, patterns and organization of production have evolved fundamentally since the late 1980s.  Trade liberalization at the global and regional levels, and the new information and communication technologies (ICTs) have entwined to create rich opportunities as well as formidable challenges to all interdependent countries and enterprises.  The following notes on some of the opportunities and challenges most pertinent to SME development serve as a backdrop for a discussion on related of policy issues and suggestions in the promotion of SME growth and competitiveness in the coming decade.

1. Vast opportunities

A larger proportion of global output is now exported.  The ratio of world exports to production was just under one-fifth in the late 1990s, compared to only 12 per cent in the early 1980s (ESCAP 2000: 8-9).  Even during the global economic slowdown of 2001, the value of world trade (exports) reached $ 12.7 ($ 6.2) trillion.  Regionally, intra-ASEAN trade has also expanded faster than the group’s total trade while the proportion of goods destined for trade within ASEAN is much higher than before the progressive and accelerated tariff reduction arrangements, starting in 1993, under the ASEAN Free Trade Area (AFTA). 3   In addition, most wealth-creating assets such as finance and technologies can now be packaged, located and relocated with relative ease within and across economies and regions.

Furthermore, there are now greater scope and more opportunities for inter-firm linkages for enhanced collective efficiency, technological and innovation capabilities, and hence competitiveness.  In particular, the proliferation of complex networks of international production and cross-border supply chains has widened and deepened the potential and avenues for SME involvement.  Besides, subcontracting and outsourcing relationships now cover processing and manufacturing activities and services of high value-addition and technological sophistication – ranging from original equipment manufacturing, complete-package production, product design and engineering, research and development (R&D), to various other high-end support services.4 

Another development trend pushed and pulled by the ICT revolution is the significant uplift in productivity, resilience, and flexibility of economic activities and services in consequence of the widespread diffusion of ICTs.5   In particular, these new technologies are behind the tremendous upsurge in e-commerce.  Currently, this market is largely confined to the developed region which, for example, accounted for 85 per cent of business-to-business transactions (estimated at some $ 450 billion) in 2000).  E-trade is expected to grow at an exponential rate to reach the trillion-dollar mark well within this decade.6   Trade via the internet has now become an intrinsic part of an increasingly large number of SMEs in the developed countries.  Respectively about one-half and one-third of the medium- and small-sized enterprises in Europe maintain an e-mail contact address or a presence on the world wide web; there are no comparable data in the case of SMEs in ASEAN or Asia.

2. Daunting challenges

But the almost unlimited opportunities for gainful growth through trade on the demand side are countered balanced by highly formidable challenges on the supply side.  Firstly, competition has become increasingly fiercer among the global and regional economies and enterprises, SMEs included.  There are also many more producers competing for both existing and new markets and market segments for goods, services, finance, and other wealth-creating technologies and knowledge.  The competitive strength of China is notable in the above regard, even before the country became a WTO member in December 2001.  Indeed, market penetration and displacing pressures from China have been keenly felt by producers across Asia, particularly those suppliers (especially SMEs) at lower stages of technology sophistication and relying on a high import content.7  

Secondly, consumer preferences and market standards have become more sophisticated and exacting.  Competitive advantage is now determined by several non-price parameters such as quality, health and safety, social equity in employment and production, and ecological compatibility of products and processes.  Furthermore, market demand is also constantly changing — a trend facilitated not least by the rapid advances in ICTs, bio-engineering, and new materials sciences.  In consequence, there are more frequent introduction of new products and processes, faster and more innovative design changes, shorter product cycles and smaller output batches, higher quality and greater mass customization, just-in-time sourcing and more punctuality in delivery.


#3.      The value for ASEAN trade (exports) were $ 0.7 ($ 0.4) trillion during 2001.  Annual growth in intra-ASEAN trade averaged almost 12 per cent during 1993-2000; intra-regional export was equivalent to 23 per cent of the total export value in 2000, a much higher proportion than that of a decade ago.

4.       The process has contributed to a paradigm shift in industrial organization from large-scale vertical integration of hierarchies (of the Fordish and Taylorish varieties) to flatter horizontal production arrangements.  These involve a collective participation of smaller enterprises which are, nevertheless, interlinked on-line and in real-time within and across border.  SME participation in the circuit of subcontracting and outsourcing is thus an attractive and feasible bridgehead to durable competitiveness—especially in R&D-intensive sectors, activities and services. See Porter, Sachs and Mcarthur (2001); Altenburg (1999); Gereffi (1999); and Humphrey (1998).  A detailed discussion on the issues, implications and ancillary requirements relating to SMEs as subcontractors on both the supply and demand sides can be found in Wattanapruttipaisan (2002a: 70-84).

5.       Largely as a result, the rate of economic growth of many countries have been boosted higher and their competitive edge, become increasingly sharper. The United States economy, in particular, displayed an astounding performance in the 1990s with an extended period of expansion which became the longest on record in April 2000.  Equally striking is that yearly output went up by some 4 per cent in America during 1997-1999, and by as much as 5 per cent for the first half of 2000.  For an examination of some of the major economic benefits of ICTs, see APEC (2001: 23-36) and UNCTAD (2001: 25-38).  

6.       It should be noted that there are presently very large variations in estimates of the size of e-commerce ranging, for example, from US$ 200 billion to over US$ 600 billion in 2000 alone.  Such large discrepancies are due to definitional problems coupled with a critical lack of data and information.  See APEC (2001) and UNCTAD (2001) for a comprehensive survey and useful analysis of issues relating respectively to the new economy and e-commerce; the latter with special reference to selected service sectors.

7.         In particular, China has managed with notable success to gain a larger share in the G-7 market — namely Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.  Its share in clothing doubled in the 1990s to around 20 per cent, a gain made largely at the expense of exporters from East Asia with the market share of ASEAN-4 (Indonesia, Malaysia, Philippines and Thailand) remaining largely stagnant at around 8 per cent.  The G-7 market for footwear is now dominated by China whose relative share was less than 10 per cent in the late 1980s but went as high as 38 per cent in the late 1990s.  Again, this has taken place at the expense of both the East Asian suppliers and ASEAN-4.  Similar trends in market penetration by China can also be observed in sectors such as telecommunications equipment, office and automatic data processing machinery, and electrical appliances.  Meanwhile, China has been and will remain the dominant supplier of textiles and clothing to Japan, with a relative share rising from 44 to 62 per cent between 1993 and 1999.  For further details, see OECD (2002: 138-142).  Wattanapruttipaisan (2002b) discusses at some length the gains, issues and implications associated with the proposed ASEAN-China Free Trade Area; this proposal was made at the summit of leaders in Singapore in November 2000. 


B.  Policy Implications and Options

The new development context is likely to require a change in both perception and practices — in other words, a new or different mindset  — in the promotion of SME development.  As is apparent from the preceding discussion, competitiveness is increasingly human-made; furthermore, it can be leveraged by factors other than location and natural resource endowments.  One lever is through the maintenance of an on-going access to the available store of global information and knowledge — including market standards, marketing opportunities and technologies.  Another is embodied in the large gains in collective efficiency and flexibility through participation (whether or not at arm’s length) in clusters of firms, or in networks of inter-linkages backward with suppliers, laterally with other producers and providers, and forward with users and consumers.  Yet another leverage relates to the capability for on-going learning and improvement in efficiency and flexibility; indeed, business enterprises (both large and small) must become and remain a learning organization in the new development context.

A note of cautious optimism is warranted at this juncture.  There is much evidence on the emergence of competitive industries and on the revitalization of domestic regions pushed and driven largely by networks and clusters of SMEs.  The process has taken place in both developed regions, notably Western Europe in the late 1980s, and developing economies.8   Within Asia itself, many large domestic firms as well as transnational business conglomerates, commanding widespread “brand” or “name” recognition, are born and bred locally.  However, the very large majority of them had a more humble origin mostly as small-scale enterprises, often operating in smaller township, at the initial stages of their start-up around half a decade or so ago.9  


8.        See, for example, Liedholm and Mead (1998); UNCTAD and Gate (1993); and Sengenberger, Loveman and Piore (1990) plus the extensive bibliographies cited in these publications.

9.          Yoshihara (1988: 153-263) provides an interesting and extensive account of the stellar rise of many of the present conglomerates which were formerly small and family-controlled enterprises in South-East Asia.  In a related context, two of the world’s most famous corporations, Sony and Honda, started out as small manufacturing companies in small-town Japan.


1. Monitoring and benchmarking competitiveness

In general, SMEs will have to be assisted and facilitated to grow, multiply and replicate into a sufficient (critical) mass across industries and sectors.  In the process, the level of competitiveness and dynamism of domestic enterprises and, by implication, of the economy as a whole will be greatly enhanced.10   However, focus and targeting are unavoidable in the context of SME support activities and services.  On the one hand, government has become “leaner and meaner” with functional divestment through policy liberalization, asset privatization and administrative deregulation.  In fact, no countries will likely have the necessary resources for the concurrent and open-ended support of the massive number of their SMEs; these range from several hundred thousands to a few millions in the larger, more populous and/or SME-intensive economies (e.g., China, Indonesia, Republic of Korea, Taiwan Province of China etc.) 

On the other hand, there are huge differences in the capabilities and competitiveness of SMEs.  As is the case of sectors and industries regarded by government as of priority importance,11  business enterprises deserve closer attention and concerted support if they are more efficient, innovative, growth-oriented, outward looking, learning capable and linkage ready.  Firstly, such firms are likely to be very much fewer in number.  Policy intervention would have a better chance of success as it would be more focused and manageable, both administratively and financially.  Secondly, they will be more receptive to an efficiency-oriented and time-bound approach in policy support and facilitation.  This approach is similar to the provision of fishing rods and related fishing skills to SMEs; it is thus different from the distribution of the fish itself to the target beneficiaries as often has been the case.12   Thirdly, they are also better placed for self-diagnosis and self-improvement after the initial provision of assistance and facilitation measures.  Meanwhile, partial cost recovery in cash and in kind, plus resource pooling are comparatively more feasible among these target firms.


10.         Efficient firms, for example, allow other enterprises to purchase inputs more cheaply.  Dynamic and innovative firms induce others to keep up with the latest technologies in production, management and organization.  Flexible enterprises speed up the capabilities to respond quickly in other firms which have forward or backward linkages to them.  Indeed, the recent attention on national competitiveness and competitiveness studies reflects a growing appreciation that competitive advantage is systemic in nature.  There is a large amount of literature on the concept of, and policy implications from, “systemic competitiveness”.  See, for example, Porter, Sachs and Mcarthur (2001: 17-23); Esser et al. (1999: 62-85) and Altenburg et al. (1998) and the references cited by them. 
11.        Generally, these priority sectors and industries are likely to exhibit high levels of employment, value added and/or technological sophistication; extensive inter-firm linkages (backward, lateral and forward within and/or across border); a heavy export orientation; and prospective economies of scale and scope.  Typically among those with a large SME presence are a wide range of agro-processing activities (e.g., food, wood, fisheries etc.), manufactures (certain automotive and electronics parts and components, textiles and garments, some capital goods etc.), pharmaceutical products, information technologies, construction, and hotel and tourism services.
 

12.          A welfare-based policy approach has its own deserved place within the overall policy and institutional framework.  It is necessary to safeguard social equity, and to act as a social safety net in times of crisis or transitional adjustment.  But this has to be explicitly stated in terms of objectives and expected outcomes for the needed transparency and accountability, as well as for accurate and measurable performance evaluation.


Competitiveness has a foundation at the micro-level, whether or not it is measured and benchmarked at the industry, sectoral or national level (Porter, Sachs and Mcarthur 2001: 21; and Meyer-Stamer 1995: 143-146).  Regrettably, however, there is currently little, if any at all, data and information needed to monitor and compare the evolving capabilities and potential of the top layers of SMEs in priority sectors and industries over time.  Such an exercise is indispensable for a more accurate identification of core competencies of the SMEs under consideration as well as of their shared areas of weakness for follow-up capacity building.  Indeed, learning what a country and its enterprises are, or can be, good at producing is a key challenge of economic development (Rodrick 2002: 7a).  But the same exercise is also essential for better SME performance management and policy impact assessment.  In particular, useful benchmarks can be obtained as regards the on-going changes (whether progressive or regressive) in the capabilities and competitiveness of direct SME exporters and first-rank SME suppliers to large domestic enterprises or cross-border production networks.  These benchmarks constitute a solid input for the consideration of policy framers as well as for emulation by those SMEs presently in the lower ranks or tiers of suppliers. 
To be credible, the data and information for monitoring and benchmarking purposes have to be obtained in an objective, systematic, periodic and (statistically) robust manner.  The persisting shortage of such sample survey results in this regard is another structural statistical weakness in most developing countries, despite the intrinsic socio-economic importance of SMEs and the renewed policy focus on them.  In this connection, a framework for such a remedial exercise is discussed at length, and a pilot project for testing purposes is proposed, in Wattanapruttipaisan (2002a: 70-78 and 84-85).13  

2. Subcontracting compact

As noted previously, the promotion of inter-firm networking as a ready bridgehead to domestic and external competitiveness has been given high policy priority in the developing world, including ASEAN.  The sustainability of such inter-firm arrangements naturally is conditional on a durable compliance to exacting requirements for outsourcing and subcontracting (Altenburg 1999, Gereffi 1999, and Humphrey 1998).  However, a major drawback in business matching events and trade fairs is the lack of solid information as regards the evolving capabilities of the producers concerned.  A product or service may appear competitive on display but there is no guarantee that the needed volume or variety of supplies can be increased by the pertinent enterprises cost effectively, and with their quality and reliability remaining uniform or assured.  In addition, sustained competitiveness depends on learning-based and innovation-driven improvements in product design, quality and delivery.  For a variety of reasons, however, the improvement process may not be realized in an efficient, continuous and flexible manner by the suppliers concerned.

Indeed, the compliance process itself requires mindset changes because a large number of subcontracting prerequisites are traditionally not practiced or expected by most SMEs, among other firms.  To begin with, there is little room for compromise on quality, and compliance to quality management systems recognized worldwide is through certification under the International Organization for Standardization (ISO) 9000 series of standards, ISO 9001 and 9002 especially.14   Such certification is no longer an option.  But changes are also required in several other business practices which include certain conditions as regards employment and workers’ amenities in the workplace, regular audits of factory layouts and work flows, the offer of unconditional product warranties and after sales service, and the extension of credit on delivered products.  There is, moreover, the imposition of penalties for under-performance, for example, in terms of quality consistency, defect and rework ratios and liabilities, timeliness in delivery etc. (Momoya 2000: 160-161, and Altenburg 1999: 32-34). 


13.          Briefly speaking, SME capabilities and competitiveness are conceptually grouped under 7 categories, each with its own set of parameters and guidelines.  The overall environment in which SMEs operate is categorized as “Nature and readiness of firms”.  “Entrepreneurial characteristics” are the driving force of firms, whether they are large businesses or SMEs.  The two categories on “Capabilities” and “Competitiveness” are indicative, by and large, of the initial conditions and circumstances of the SMEs concerned.  Matters included in “Production organization” serve as a proxy of the potential for productivity upgrading and competitive growth of the pertinent SMEs – a process which is innovation-led, learning-based and investment-driven.  In a way, the above category mirrors the (new) Growth Competitiveness Index which was (recently) introduced in 2000 by World Economic Forum (WEF).  Meanwhile, the groupings on “Capabilities” and “Competitiveness” are an approximation of the WEF Current Competitiveness Index.  The last two categories are “Finance” and “Human resource development”. 
14.          The two are identical except for the exclusion of the design element from ISO 9002.  ISO 9001, for example, covers 20 separate system elements relating to design, development, production, installation and servicing.  Moreover, certain system elements relating to environmental safety and control have recently been incorporated as part of the revised version of ISO 9001.  This is because the ISO 14000 series of standards are not directly concerned with the manufacturing processes.


All these require, in turn, a compilation of the typical preconditions for inter-firm networking, including through subcontracting.  The listed specifications can be regarded as general guidelines or “best practices” for emulation expected of SMEs from the demand side.  Likewise, from a supply-side perspective, they can form the basis of a SME subcontracting compact or “code of conduct”.  A demonstrated adherence to such a compact or code would qualify the SMEs concerned as possible subcontractors or supply partners, just like an ISO certification does for quality control, assurance and management.

3. ICTs and e-commerce

The issue in this context is not whether to assist SMEs to invest in ICT-based facilities and services.  Rather, it is how best to encourage SMEs to make the most cost-effective use of the new technologies in production, marketing and networking.  A word of caution is necessary, however.  Firstly, the tremendous expansion of digital connectivity and e-commerce has been highly concentrated in North America and Western Europe, as pointed out earlier.  Secondly, many regional SMEs, those on the top layers in priority industries and sectors especially, will surely have “to go with the flow” of electronic interactivity (or be crushed by it).  As surely, however, there is an extensive agenda to be accomplished before large segments of the regional SMEs can be transformed into the so-call “virtual” enterprises and entrepreneurs. 
Within the middle- and low-income countries in Asia, for example, the constraints on e-commerce among SMEs are simply wide ranging.15   Significant efforts have to be made by both the public- and private sectors to create, regulate, stabilize and legitimize the domestic markets for e-business.  The process has to take place in conjunction with measures to build up the ICT and e-commerce capabilities and potential of the targeted SMEs.  An over-arching issue in these connections is the quality, relevance and accessibility of domestic institutions for education, training and extension services to underpin a more effective diffusion and adaptation of ICTs economy-wide. 

4. Policy consistency

An enabling policy and institutional environment matters even more in another context.  Because of their limited scale of operations, the costs of participation and capacity building are relatively more disproportionate on SMEs, compared to those shouldered by the large firms.  At the same time, by default or accident, changes and adjustments in the policy, regulatory and institutional framework have not always empowered SMEs.  The sector and its entrepreneurs are often constrained by opaque discretion, over-bearing regulations and expensive delays.  A compounding factor operates at the same time — namely the well-known “perverse incentive syndrome” facing most SMEs.16


15.   There is the (Catch-22) issue of low and limited usage of e-business by both customers and suppliers at present.  This reflects, in part, the lack of trust and confidence which itself is due to an inadequate supply of soft infrastructure (as regards, for example, the security of transactions, appropriate support payment and distribution systems, e-contract enforcement, and other legal and liability issues both within and across border).  There are also limited knowledge, awareness and skills on the part of SMEs concerning the promise and requirements of ICTs as well as e-business.  Moreover, significant barriers exist in the form of insufficient access of SMEs to ICT infrastructure, hardware plus software of suitable quality and at affordable cost in time and money.  PricewaterhouseCoopers (1999) contains a useful survey of the main issues and options relating to e-commerce and SMEs in the APEC region.  Debroy (2001: 37-43) provides a sober view on “www” in the Indian context – namely where will the ICT diffusion happen (urban and/or rural areas?); who will facilitate it (private initiatives or government?); and there is the why for the education system itself.  A detailed consideration of e-commerce in the context of low-income countries and economies in transition, specifically China, can be found in UNCTAD (2001: 189-250).

16.   This originates from the minimum requirements in production scale, local contents, capital investment and/or export levels as a pre-condition for government incentives and assistance.  There are valid economic, financial and technological reasons for granting benefits and privileges in exchange for certain minimum or baseline conditions or stipulations (e.g., prospective economies of scale and scope, greater employment volume and market penetration, easier transfer and dissemination of new technologies, better intellectual property and environmental protection etc.).  Nevertheless, efforts must still be made to crowd in, and not to crowd out, SMEs in such arrangements — including through the provision of inducements and assistance in the formation, widening and deepening of both backwards and forwards linkages with smaller scale suppliers and providers of goods and services.


A one-stop agency for the promotion of SME development would prove helpful, just like its counterpart in the promotion of foreign direct investment.  There has been some centralization of responsibilities in a number of countries, including Malaysia and Thailand, where the main concern is to ensure better coordination and greater coherence and consistency of policies and regulation impinging on SMEs.  However, other important functions include advocacy, outreach (especially in capacity building and information dissemination), and policy performance and impact evaluation.  Again, an effective discharge of these functions would depend significantly on the systematic and sustained collection of data and information for the monitoring and benchmarking of SME capabilities, competitiveness and adherence to certain subcontracting benchmarks or code of conduct, as discussed earlier.

References

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