I. STRENGTHENING THE COMPETITIVENESS OF …agro.gov.vn/images/2007/12/strengthening SME competitiveness.pdf · which is generally defined as the “shrinkage of economic distances

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>).

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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

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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.

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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.


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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


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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.


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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?

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(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

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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.

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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.

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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

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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

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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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Documents

I. STRENGTHENING THE COMPETITIVENESS OF …agro.gov.vn/images/2007/12/strengthening SME competitiveness.pdf · which is generally defined as the “shrinkage of economic distances