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Export-led SME Development &

Entrepreneurshipin the GMS

Export-led SME Development &

Entrepreneurshipin the GMS

ASEAN SME Regional Gateway Forum

Mekong Institute

Khon Kaen, 6 September 2010

Masato AbeTrade & Investment Division

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About ESCAPAbout ESCAP

• United Nations Economic and Social Commission for Asia and the Pacific

• Asia & Pacific– 58 regional members & associated

members

• Policy advocacy, analytical work & technical assistance for regional development

• Headquarters in Bangkok– Nine branches

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Development Strategies in the GMSDevelopment Strategies in the GMS

• Export & FDI driven development• Agro industry development • Gradual industrialization toward products

with high value added• Infrastructure development• Technology transfer & adaptation• Subregional cooperation (ASEAN, GMS;

BIMST-EC)• SME development• Eco-industry

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SMEs’ RoleSMEs’ Role

• Consisting of more than 95% of total enterprises– 99% for China; 98% for Thailand (2003); 99%

for Viet Nam (2002)

• Creating about 60% of private sector jobs– 75% for China; 65% for Thailand (2003); 77%

for Viet Nam (2002)

• Contributing about 20-30% of GDP– 65% of industrial output (China); 47% of GDP

& 55% of exports (Thailand); 20% of exports (Viet Nam) (2003)

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SMEs’ Role (cont.)SMEs’ Role (cont.)

• Innovation & dynamism

• Graduating to large enterprises (& multinationals)

• Many in the informal sector

• Critical part of the social safety net

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SME TypologySME Typology

Export

Domestic/LocalMarket

HighTech

LowTech

CottageEnterprises

SupportingEnterprises

DomesticMarket-oriented

Enterprises

Export-orientedEnterprises

(Uchikawa & Keola 2009)

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Definition of SMEsDefinition of SMEs• In Asia-Pacific (& GMS), typically less than

100-300 employees for manufacturing sectorCountry Number of Employees

Cambodia Micro

Small

Medium

< 10

11- 50

51- 100

China MSME < 100

Lao PDR Small

Medium

≤ 19

≤ 99

Myanmar Micro

Small

Medium

< 10

10-50

51-100

Thailand

(4 people per firm)

Small

Medium

< 50

≤ 200

Vietnam SME ≤ 300

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SMEs per 1,000 peopleSMEs per 1,000 people

Source: ESCAP (2009), developed based on data from World Bank (2000-2006)

61.8

29.6

14.9

63.2

27.0

9.06.3

13.7

1.10

10

20

30

40

50

60

70

DevelopedCountries

Developingcountries

LeastDevelopedCountries

China(2000)

Thailand(2002)

Viet Nam(2004)

Global Asia-Pacific

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SME Life ModelSME Life Model

Profit

Years0

Start-up

Growth

Maturity

Decline

Discontinuation?

Grow to a large firm

Different supports needed at the different stagesLoss

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Start-ups in JapanStart-ups in Japan

• 41.4 years old (Entrepreneurs)• 3.9 employees• 100K US$ of start-up funds

– 35%: Own capital– 15%: Support of family, relatives and friends– 50%: Public grants & commercial loans, including

public loan guarantees

• Man: 84.5%; Women: 15.5%• College degree or above: 33.1%• 60% of start-ups achieve break-even within 15

months Data: National Life Finance Corporation (2007)

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Start-up: Difficult TimeStart-up: Difficult Time

• 2/3 discontinued within 5 years (USA)

• 40% discontinued within 2 years (UK)

• Approx. 40% in red after 1 year (Japan)

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Sector CompositionSector Composition

Services 26% 22%

Wholesale/retailer 20% 33%

Restaurants/hotels 17% N/A

Medical/health care 16% N/A

Construction 8% 14%

Manufacturing 5% 11%

Others 8% 20%

Total 100% 100%

Japan(2006)

Thailand(2005)

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SMEs’ Net Income in JapanSMEs’ 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

Income before Tax / Total Sales

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Policy ObjectivesPolicy Objectives

• Increase the number of start-ups• Facilitate their growth• Increase their survival rate• Foster SME graduates (to be large

enterprises)• Facilitate the smooth exist of losers,

providing second (& more) chance• Encourage to be incorporated• Foster SME exporters & supporters

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ChallengesChallenges

• Scattered targets (high transaction costs)

• Lack of the economies of scale• Limited public resources• Limited understanding about the

targets, i.e. SMEs• Limited communication channels• Limited knowledge & skills• Limited information on global &

regional markets

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Six Areas for InterventionsSix Areas for Interventions

• Pro-business legal & regulatory framework

• Supporting infrastructure (e.g. ind. zones)

• Enhanced access to finance

• Entrepreneurship development

• Technology transfer & adaptation (plus R&D and product standards)

• Business development services

Entrepreneur centred development strategy

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SME Development ApproachesSME Development Approaches

ADB(2000)

APO(2007)

DFID(2008)

GTZ(2010)

ILO(2009)

JICA(2006)

OECD(2005)

SDC(2010)

UNCTAD(2010)

UNDP(2007)

UNIDO(2010)

USAID(2010)

World Bank(2002)

Policy and regulatory framework

Infrastructure

Access to finance

Entrepreneurship / human resource development

Technology transfer and adaptation

Business development services

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Entrepreneur Centred DevelopmentEntrepreneur Centred Development

Export-mindedEntrepreneurs

Access toFinance

BusinessDevelopment

ServicesTechnology

Infrastructures

BusinessEnvironment

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SME Business NetworkSME Business Network

Export-mindedEntrepreneurs

Launching of New Export Businesses

LinkagePolicy dialogInformationConsultingTraining

TechnologyStandardsCertificates

Training

TrainingInformation

InformationIncubationConsultingTraining

FinanceInformation

Success Case Replication

BusinessAssociations

SMEDevelopment

Agencies

SMETraining

Institutions

FinancialInstitutions

TechnicalCenters

Export-mindedEntrepreneurs

Export-mindedEntrepreneurs

Export-mindedEntrepreneurs

Export-mindedEntrepreneurs

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Global Value ChainsGlobal Value Chains

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In the era of globalization…

Can SMEs compete in the international market?

Will SMEs benefit from the globalization? Can SMEs survive in the

global competition?

Can SMEs learn to be competitive?

What can we do to bring the benefit of the globalization to the poor?

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Selling products directly to the international consumers with “Brand Presence” & “Pricing Power”- Have information related to - Have information related to market/process/product market/process/product

- Have capabilities over the full Value Chain: - Have capabilities over the full Value Chain: design, design,

production, marketing, distribution, etc.production, marketing, distribution, etc.

- Respond effectively to the changing market - Respond effectively to the changing market conditionsconditions

Very difficult for SMEs in developing countries

Alternate option: Reaching global market through global value chains

The ideal is…

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Global Value Chain (GVC)?

Full range of value-added activities involved in conception, design, procurement, production, marketing, distribution, after service, etc.

Firm can focus on one or more activities in a VC.

When activities are geographically dispersed across borders to multiple countries the value chain becomes global or regional

Garment/Apparel Value Chain

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Characteristics of GVCs

A lead firm (a larger enterprise/a multinational) regulates a GVC with specific competences, making a higher profit Brands, resources, technology, expertise and/or goodwill Customer vs. Production vs. Natural Endowment driven value chains

Inviting outside experts on specific functions to manage complicated tasks to maximize the efficiency and effectives of the entire GVC

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Characteristics of GVCs (cont.)Characteristics of GVCs (cont.)

• Contracting with a selected number of capable SMEs typically as subordinate partners for specific tasks or functional support

• Integration of business process, coordinated behaviours and information sharing among independent firms

• Mutual investment into business process and long-term relationship

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Emergence of GVCs: Drivers

Multilateral and regional free trade agreements

Policy Liberalization Trade, investment, capital & finance, HR

Compliance with local content requirements

Technological innovation Transportation and ICT

Increasing competition (pressures for lower cost, higher efficiency/ quality etc.)

New management strategies JIT, e-commerce, ERP, supply chain management

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Shift in the GVC governance during the past three decades

TNCs controlling all production

Ownership of overseas subsidiaries/ franchises

Outsourcing to suppliers (no legal ownership)TNCs focus on core

values

Opportunity for SMEs in developing countries: Specialize in a limited set of activities or Specialize in a limited set of activities or

components in the GVCcomponents in the GVC

Source: UNIDO, Integrating SMEs in Global Value Chains

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Levis Case

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Smaller number of dominant lead firms Emergence of large/strong suppliers Intensified competition toward high-value added

activities Competition on continuous skill development

and knowledge enhancement Economic disparities at the region, country, community and firm levels

Emergence of GVCs: Consequences

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Lead Firm’s Objectives with SME Suppliers

Cost down / quality up; QDC (Quality, Delivery and Cost) improvement

Strategic focus and outsourcing non-core functions

Speed, effectiveness and flexibility

Access to expertise / technology

Long-term security

Control over supply chain networks

Local content requirements and local supplier development

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Opportunities for SMEs in developing countries

Access to international markets

Support from TNC (training/investment in business process/information sharing etc.)

Technology and knowledge transfer

Long term buyer-supplier relationship; secured orders

Reputation and brand development

Opportunity to up-grade and move up to the next tier

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Challenges for SMEs in developing countries

Lack of awareness, capacity and resources

Infrastructure Capital Skilled labour Managerial expertise Knowledge and technology Contacts / networks

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Challenges for SMEs in developing countries (cont.)

High entry barriers -- International Standards

Have to deliver specified product, required quantity and right quality at competitive price and agreed leadtime

Competition is not solely based on cost but also based on product and process related standards, such as quality, safety, environmental preservation and respect for labour

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Challenges for SMEs in developing countries (cont.)

Unfavorable national business environment

Rules and regulations

Red tape/corruption

Political instability

Insufficient business development services

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Regional average of ease of doing business rank

Regional average of ease of doing business rank

0 20 40 60 80 100 120

Developed ESCAP economies

East and North-East Asia

North and Central Asia

South-East Asia

Pacific island economies

South and South-West Asia

Average Rank

Source: ESCAP (2009), calculated by ESCAP based on Doing Business 2009, World Bank (2008)

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Increasing amount of FDI in the region

- Growth of south-south investment- Increasing investment in China can stimulate greater

FDI throughout the region (FDI is not a zero sum game)

- TNCs from developed companies (Intel: Vietnam, GM: Thailand- spill over effect possible in neighboring countries)

The GMS

Centre of 3 rapidly growing subregions

Export & FDI driven development strategy

NortheastAsia

South Asia GMS

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Population by SubregionPopulation by Subregion

260

310

1,350

1,500

Northeast

ASEAN - GMSSouth

GMS

(Million)

China (90%)

India (75%)

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Purchasing Power ParityPurchasing Power Parity

670

1,300

3,300

11,000

Northeast

ASEAN - GMS

South

GMS

(US$ Billion)

China (55%)Japan(33%)

India (80%)

USA10,000

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GMS Markets (GNP, US$ Billion)GMS Markets (GNP, US$ Billion)

$50

$140

$20

$204

3$20

Myanmar

Thailand

Yunnan& Guangxi

Lao PDR

Cambodia

Viet Nam

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Thailand: various GVCs in auto, electronics, high-tech, agri-business, consumer-goods sectors.

Yunnan: VCs mainly serves other provincial markets

Viet Nam: GVCs under development in garment, consumer goods, auto and electronics sectors

Cambodia, Lao PDR and Myanmar: Agro-business and garments; need promotion to attract GVCs although some FDI have been observed advanced manufacturing sectors recently (underdeveloped domestic markets)

GVCs in GMS

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Example: Thailand Automotive Part industry

Thailand invested in cluster development, particularly in Rayong and Samutprakan, south of Bangkok

Cost competitiveness is based less on productivity, and more on low factor input costs, which are now rising (e.g. costs of labour and land)

Key challenge to Thai auto parts suppliers is to improve productivity and lower costs or move up to the next tier within the GVC

Subregional coordinated strategy could provide opportunities for neighboring lower cost countries such as Cambodia (which also has rubber) to become lower tier suppliers of selected components to the Thai auto parts cluster

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Opportunities for SMEs Opportunities for SMEs • Geographical advantage

– Centre of 3 rapidly growing subregions

• Export & FDI driven development strategy• More donor assistance expected

– The combined resources of donors, governments, the private sector currently provides 20% of needs

• Underdeveloped intra-regional trade & investment– Potential home markets– Yunnan & Guangxi’s integration

• Flexibility & specialization

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SMEs’ Corporate Strategies

Improve quality and develop brand

Reach the global market through existing GVCs that are most likely dominated by lead firms

Enter into lower tiers with a low-value role in GVCs

Move up GVCs to high-value added activities over time

Find adequate financing for the investments and accessing quality workforce

Collaborate with other SME players vertically and horizontally in a GVC

Establish joint ventures with foreign investors

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SME actions needed

Improvement of quality Performance Reliability Durability Serviceability Perceived quality

Aggressive marketing (networking and branding)

Catalogues Trade journals & directories Sales representatives Trade missions / fairs / exhibitions Internet

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SME actions needed (cont.)

R&D and technology adaptation in cooperation with public/private research/technological institutions

Seek finance and credit opportunity with governments and banks

Seek services from business associations Develop and involve in producers’

associations Seek aggressively investment opportunity

in cooperation with both domestic and foreign investors

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Change of FDI strategy: Attract GVCs fit for the country.

Develop GVCs by participating in neighbouring countries’ GVCs.

Classic SME export promotion Marketing research, export promotion,

product development, export financing, trade fairs and missions

Create enabling business environment Laws and regulations and their enforcement,

ICT and logistic infrastructure and software

Enhanced access to SME finance

Government actions needed

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Capacity and HR development for SMEs and related government agencies

Fostering capacity and quality of business associations

Training on working relationship in a multicultural environment

Focus on agri-business value chains

Foster stronger backward linkages with SMEs through intra-regional South-South investment

Government actions needed (cont.)

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Facilitate SMEs’ adoption of world standards and credible certifications

Productivity improvement through infrastructure development and logistical improvement

Improving the cross-border flow of goods

Sector based value chain studies

Foster national lead firms – Graduates from the SME sector with quality and brand

Government actions needed (cont.)

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Government Strategies (cont.)

Supply side capacity building

Training/ counseling and advice/ micro financing/ market intelligence etc.

Develop opportunities through cooperation (i.e. SME clusters)

Economies of scale/ joint action/ information sharing/ enhancing attractiveness to global buyers by reducing transaction costs etc.

Promote the GVC mindset

Additional GVC strategies:

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GMS Subregional Cooperation

Develop ‘GVC mindset’ in cross-border cooperation among GMS countries

Strengthen cross-border (GMS/subregional) logistics systems

Focus trade facilitation cooperation (e.g. in GMS Programme) on particular GVCs

Facilitate GMS supplier development, including development of SME clusters across borders (and share information/ best practices etc.)

Facilitate cross-border linkages of domestic business institutions (e.g. GMS-BF)

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Two in-depth studies on SME development in Asia & the Pacific are available at ESCAP website (www.unescap.org)

Further reading

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For further inquiry, contact:

Masato Abe, Ph.D.Economic Affairs OfficerPrivate Sector and Development SectionTrade and Investment DivisionUnited Nations ESCAPBangkok, Thailandabem@un.orgwww.unescap.org