Promoting Agro-Based Export-Oriented SMEs in Asia by Tarun Das

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Investment Promotion and

Enterprise Development Bulletin

for Asia and the Pacific

No. 1

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

UNITED NATIONS





UNITED NATIONS

New York, 2003

Investment Promotion and

Enterprise Development Bulletin

for Asia and the Pacific

No. 1

ESCAP works towards reducing poverty

and managing globalization

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC



The Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific is published

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Chief

Trade and Investment Division

Economic and Social Commission for Asia and the Pacific (ESCAP)

United Nations Building, Rajdamnern Nok AvenueBangkok 10200, Thailand

ST/ESCAP/2259

UNITED NATIONS PUBLICATION

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

Copyright © United Nations 2003

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

ii



iii

CONTENTS

Page

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

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

I. STRENGTHENING THE COMPETITIVENESS OF SMALL AND

MEDIUM ENTERPRISES IN THE GLOBALIZATION PROCESS:

PROSPECTS AND CHALLENGES .................................................................................... 1

– Bhavani P. Dhungana

A. Globalization: challenges and prospects for small and medium enterprises

in Asia and the Pacific ............................................................................................................ 1

B. Industrial dynamism, economic prosperity and economic crisis: liberalization,

globalization and private sector-led industrial growth ........................................................... 4

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

D. Promoting the competitiveness of SMEs within the ongoing process

of globalization........................................................................................................................ 16

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

II. PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs

IN ASIA AND THE PACIFIC ............................................................................................... 33

– Tarun Das

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

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

C. Rationale for development and contribution of agro-based and resource-based

industries to poverty alleviation .............................................................................................. 39

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

resource-based industries ........................................................................................................ 49

E. Role of the World Trade Organization for the development of agro-based and

resource-based industries ........................................................................................................ 60

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



iv

CONTENTS (continued)

Page

III. ISSUES AND STRATEGIES FOR THE TRANSFER AND ADOPTION OF

PROSPECTIVE TECHNOLOGIES BY SMEs AND SMALL GROWERS

FOR PROCESSING OF HORTICULTURAL PRODUCE IN

DEVELOPING ASIAN COUNTRIES ................................................................................. 77

– K. Lakshminarayanan

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

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

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

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

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

IV. REPORT OF THE EXPERT GROUP MEETING ON PROMOTING

RESOURCE-BASED EXPORT-ORIENTED SMEs FOR POVERTY

ALLEVIATION IN ASIA AND THE PACIFIC ............................................................... 93

– ESCAP secretariat

A. Regional overview of the status of the resource-based export-oriented SMEs

and their impacts on poverty alleviation in Asia and the Pacific .......................................... 93

B. Evolving model of programmes for enhancing the competitiveness of SMEs,

and issues and strategies for the transfer and adoption of prospective technologies

for processing horticultural produce ....................................................................................... 95

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

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

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

– Joong-Wan Cho

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

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

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

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

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



v

LIST OF TABLES

Page

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

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

2000-2004 ........................................................................................................................................ 6

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

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

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

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

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

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

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

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

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

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

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

LIST OF BOXES

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

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

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



vi

ABBREVIATIONS

ADB Asian Development Bank

AFTA ASEAN Free Trade Area

APCAEM Asian and Pacific Centre for Agricultural Engineering and Machinery

APCTT Asian and Pacific Centre for Transfer of Technology

APEC Asia Pacific Economic Cooperation (currently comprises 21 countries/areas including

Australia; Brunei Darussalam; Canada; Chile; China; Hong Kong, China; Indonesia;

Japan; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; the Philippines; the

Republic of Korea; the Russian Federation; Singapore; Taiwan Province of China;

Thailand; and the United States of America).

ASEAN Association of Southeast Asian Nations (comprises Brunei Darussalam, Indonesia,

Malaysia, the Philippines, Singapore, Thailand, Viet Nam, the Lao People’s Democratic

Republic, Myanmar and Cambodia).

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

ATC Agreement on Textiles and Clothing

BITs bilateral investment treaties

CGPRT Regional Coordination Centre for Research and Development of Coarse Grains, Pulses,

Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific

DLC letter of credit

ECDC economic cooperation among developing countries

ESCAP Economic and Social Commission for Asia and the Pacific

ESTs environmentally sound technologies

EU European Union

FAO Food and Agriculture Organization of the United Nations

FDI foreign direct investmentFIAS Foreign Investment Advisory Service

FTZ free trade zone

GATT General Agreement on Tariffs and Trade

ICT information and communication technology

IPR intellectual property rights

ISO International Organization for Standardization

ISO 9000 international standards for quality management systems

ISO 14000 international standards for environmental management systems



vii

ABBREVIATIONS (continued)

IT information technology

LDCs least developed countries

M&As mergers and acquisitions

MFA Multifibre Arrangement

MFIs microfinance institutions

MFN most-favoured nation

MNCs multinational corporations

MNEs multinational enterprises

MVA manufacturing value added

n.e.c. not elsewhere classified

NGOs non-governmental organizations

NIEs newly industrializing economies

NIPAs national investment promotion agencies

NTEs new technology enterprises

NTMs non-tariff measures

OECD Organisation for Economic Cooperation and Development (comprises Australia, Austria,

Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece,

Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New

Zealand, Norway, Poland, Portugal, the Republic of Korea, Spain, Sweden, Switzerland,

Turkey, the United Kingdom of Great Britain and Northern Ireland, and the United

States of America).

ODA official development assistance

QRs quantitative restrictions

R&D research and development

S&T science and technology

SAARC South Asian Association for Regional Cooperation (comprises Bangladesh, Bhutan,

India, Maldives, Nepal, Pakistan and Sri Lanka)

SBA Small Business Administration

SCMs subsidies and countervailing measures

SIDBI Small Industries Development Bank of India

SMBA Small and Medium Business Administration

SMEs small and medium-sized enterprises



viii

ABBREVIATIONS (continued)

SMIPC Small and Medium Industry Promotion Corporation

SSI small-scale industry

SSTC State Science and Technology Commission

T&C textiles and clothing

TBT technical barriers to trade

TCDC technical cooperation among developing countries

TNCs transnational corporations

TRIMs trade-related investment measures

TRIPs trade-related intellectual property rights

UNCTAD United Nations Conference on Trade and Development

UNIDO United Nations Industrial Development Organization

USSR Union of Soviet Socialist Republics (also known as the Soviet Union for short, consisted

of Russia and surrounding countries that today make up Armenia, Azerbaijan, Belarus,

Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, the Republic of Moldova,

the Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan)

VERs voluntary export restraints

WTO World Trade Organization

EXPLANATORY NOTES

M$ = ringgit

Rs = Indian rupee

US$ = United States dollars



A. Globalization: challenges

and prospects for small and medium

enterprises 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 latter

half of the 1990s. The dynamism and vibrancy of

the economies and the economic crisis of 1997-

1998 are both cited as the results of the fast pace

of liberalization and the globalization process.

Opinions are divided and experts have different

views on these issues. However, globalization,

which is generally defined as the “shrinkage of

economic distances (i.e., the costs of doing busi-

ness) between nations”, when one analyses the

trends in production and trade or finance and

capital flows among countries in the region as well

as global terms,1 has ushered in new opportunities

and challenges especially for small and medium-

sized enterprises (SMEs). Globalization has also

resulted in the integration of economies and has

prompted a rapid increase in the movement of

products, capital and labour across borders. It is

increasingly realized that globalization offers clear

advantages as it contributes to the maximization

of economic efficiencies, including the efficientutilization and allocation of resources, such as

natural resources, labour and capital on a global

scale, resulting in a sharp increase in global output

and growth.

It is becoming increasingly clear that the

globalization of production and trade has led to a

rising trade-GDP (gross domestic product) ratio

and has also resulted in the fragmentation of the

production process into its subcomponent parts,

which in turn are distributed across countries on

the basis of comparative and competitive advan-

tages. Developing countries have also benefited

significantly from increased flows of capital and

other forms of finance. However, globalization

also has disadvantages, particularly as national

Governments in many countries display a lack

of political will and/or competence to adjust

accordingly to the process of globalization. It is

also observed by some people that globalization

is a process mainly pushed by the developed world

to unsustainable levels, and has placed many

developing countries in rather unstable situations,

disregarding the nature and appropriateness of

developing countries’ national policy frameworks

and other limitations. This is the subject of further

analysis requiring concerted efforts by national

Governments to seek new policy options. Never-

theless, the international community has a

responsibility to institute mechanisms to manage

globalization2 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 economies

smoothly and efficiently to benefit from the

* Chief, Investment and Enterprise Development Section,

Trade and Investment Division, Economic and Social

Commission 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 the

Governments of Asia and the Pacific, the United Nations

Economic and Social Commission for Asia and the

Pacific adopted a new programme structure with

“Managing globalization” as one of the main themes at its

fifty-eighth session, held in May 2002. The Commission

has also established a Subcommittee on InternationalTrade and Investment to focus on globalization issues.

I. STRENGTHENING THE COMPETITIVENESS OF SMALL AND

MEDIUM 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 to

be promoted and sustained in this new economic

environment.

As pointed out earlier, it is becoming obvi-

ous that globalization is driven by a variety of

factors, 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 information

as a result of the rapid spread of Internet use,

which have far-reaching implications for SMEs.

In particular, the advances in information and

communication technology have driven down the

costs of international transactions and exchanges

and enabled the creation of the global financialsystem. In turn, these interdependent and mutually

reinforcing global flows of products, technology,

information and capital are pushing globalization

further, making the whole process evolve at an

accelerated pace. However, with the advent of

globalization, growth has become somewhat vola-

tile, as recently demonstrated in Asian countries,

imposing additional costs in terms of reconciling

growth and social development on the one

hand and sustainability of development on the

other.3 This aspect is to be especially noted whenexamining the implications of globalization for

SMEs.

Nevertheless, globalization will lead to a

more liberalized and market-oriented economic

process. As past experience has demonstrated,

it will expedite growth and spread technology

more rapidly, especially information technology.

A recent study by the World Bank has also

analysed the critical effect of globalization on

inequality and poverty. The study identified a

group of developing countries that are participating

effectively in the globalization process and found a

positive relationship between globalization and

poverty reduction. For example, China, India and

several other large countries are part of this group

and well over half of the population of the deve-

loping world lives in these globalizing economies.

The post-1980 globalizers have seen large

increases in trade with significant declines in

tariffs over the past 20 years. Their growth rates

have accelerated from the 1970s to the 1980s and

further accelerated in the 1990s. The post-1980

globalizers are catching up with the rich countries,while the rest of the developing world, which

has not been part of the globalization process, is

falling farther behind. The study also analyses

how general these patterns are and finds a strong

positive effect of trade on growth after controlling

for changes in other policies and addressing

endogeneity with internal instruments. Finally, the

study examines the effects of trade on the poor.

Since there is little systematic evidence of a

relationship between changes in trade volumes (or

any other globalization measure considered) andchanges in the income share of the poorest, the

increase in growth rates that accompanies

expanded trade leads to proportionate increases

in the incomes of the poor. The evidence from

individual cases and from cross-country analysis

supports the view that globalization leads to faster

growth and poverty reduction in poor countries.4

As mentioned earlier, the globalization process will

also bring various volatilities in the economy with

greater risks in the areas of capital and financial

flows as well as in currency exchange arrange-ments. It is therefore urgent that certain concrete

measures be taken to safeguard SMEs and make

them sustainable. Furthermore, it should be noted

3 Several international organizations have focused their

activities on assisting countries in dealing with various

issues of globalization processes. See World Bank, World

Development Report 2001/2002; ESCAP, Economic and

Social Survey of Asia and the Pacific 2002: Economic

Prospects: Preparing for Recovery (ST/ESCAP/2144);

and Asian Development Bank, Asian Development

Outlook 2002. Also refer Byron G. Auguste, “What’s so

new about globalization?”, New Perspectives Quarterly,

1 January 1998; to illustrate the decline in costs of inter-

national transactions, he notes that since 1945 average

ocean freight charges have fallen by 50 per cent, air

transport costs by 90 per cent and trans-atlantic telephone

charges 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 Research

Working Paper 2615. See also United Kingdom of Great

Britain and Northern Ireland, “Eliminating world poverty:

making globalisation work for the poor”, White Paper

on International Development (available at <http://www.globalisation.gov.uk>).

2



that smaller firms have traditionally focused on

domestic markets and many will continue to rely

heavily on local assets and markets. At the same

time, SMEs will be increasingly globalized. About

25 per cent of manufacturing SMEs are now

internationally competitive but this share should

increase rapidly. At present, SMEs contribute

between 25 and 35 per cent of world manufactured

exports and account for a smaller but growing

share of FDI. They are becoming more involved

in international strategic alliances and joint

ventures both among themselves and together with

the larger multinationals. More generally, network-

ing allows SMEs to combine the advantages of

small scale, e.g., flexibility, and the economies of

scale and scope provided by firm groups.5 It isalso essential that some new and innovative

measures be taken to improve their competitive-

ness in the globally integrated and highly competi-

tive economy. Furthermore, since SMEs account

for the majority of the firms in a country and have

the largest share in employment and since the 2

billion urban population throughout the world will

increase in the next decade, it is therefore essential

that urban SMEs be promoted as major providers

of employment. SMEs are also important to grow

out of a stage-dominated economy characterized by government subsidy and control and, because

of their independence and sheer numbers, SMEs

represent a constituency of good policy and

governance in many developing countries of the

Asian and Pacific region.

In a recent United Nations Industrial Deve-

lopment Organization (UNIDO) forum on “Fight-

ing marginalization through sustainable industrial

development: challenges and opportunities in a

globalizing world”, the experts, while addressingthe role of investment, technology and trade in

promoting industrial and economic development in

a globalizing world, emphasized that technology

and liberalization were the prime forces driving

globalization. Technological innovation rather

than capital accumulation was seen as the main

source of long-term sustainable growth and it was

urged that in order to overcome the threat of

marginalization, developing countries be enabled

to mobilize the key ingredients of productivity-

based growth, namely, information, knowledge,

skills and technology, by drawing on international

trade, capital/investment and technology flows. On

the subject of global norms and standards in

the context of development, it was agreed that

developing countries were to be provided with the

capacity to participate more fully in international

trade agreements and environmental conventions.

The forum had also highlighted the critical role of

development agencies in guiding productivity-

based growth in the developing world and promot-

ing “workable” globalization. These necessities

are even more forcefully reinforced when one triesto strengthen the role of SMEs in developing coun-

tries to enable them to be the forceful agents in

promoting the integration of industrial activities at

the regional and global levels.

Therefore, this paper has tried to analyse

and suggest measures as to what strategies can

be adopted to enhance the development of SMEs

in the context of the ongoing process of globali-

zation. There are many ways to approach the

development of SMEs, but the paper has focusedon the various ways and means to enhance the

export capabilities of SMEs, in promoting coopera-

tion and networking of SMEs to play important

roles in regional/global markets, in improving

various measures for the provision of business

services for SME competitiveness and in promot-

ing good management and efficient overall govern-

ance, including the provision of a legal framework

to manage globalization for the benefit and

efficiency of SMEs. At the end, a set of urgent

measures to promote the competitiveness of SMEsis presented.

Before the analysis actually focuses on the

specific issues of SMEs and competitiveness, it is

relevant to present some analysis of the recent

economic and industrial trends and situation of

Asian and Pacific developing countries, followed

by a section on the role of SMEs in selected

countries of the region, so that coherent and

consistent policy issues for SME development and

ways to improve their competitiveness can beanalysed.

5 Organisation for Economic Cooperation and Develop-

ment, OECD Small and Medium Enterprise Outlook (Paris, OECD, 2000).

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

3




B. Industrial dynamism,

economic prosperity and economic

crisis: liberalization, globalization and

private sector-led industrial growth

1. Recent economic growth

The Asian and Pacific developing region

has frequently been termed one of the most

dynamic parts of the global economy. However,

these economies again registered a decline in

GDP growth in 2001 to 3.1 per cent as compared

with 7.0 per cent in 2000.6 Several economies

registered a decline in their growth rate (see tablesI.1 and I.2). There was also a slowdown in the

global GDP growth rate. The slowdown was

particularly evident in the information and commu-

nication technology sector and in economies with

a preponderance of ICT-related manufacturing

activities and with high trade-to-GDP ratios, as in

East and South-East Asia, were most affected by

the slowdown. While some economies and

subregions remained relatively immune initially,

the dramatic suddenness of the global slowdown

and its intensity slowed GDP growth in these

economies and subregions as well. The events of

11 September 2001 aggravated the slowdown

through a loss of business and consumer confi-

dence.

It should be noted that since March 2002,

signs of a global and regional upturn were being

seen. On balance, evidence of a gentle recovery

in both the global and regional economies was

becoming discernible. The majority of the ESCAP

economies were expected to exceed their 2001

GDP growth rates in 2002 (see table I.2). A

benign inflationary environment and comfortable

external positions indicated that most economies in

the region had considerable leeway to compensate

for the loss of external demand through domestic

stimulus measures.7

Thus, the Asia-Pacific region is quite resil-

ient and is able to cope with economic problems

much more quickly. In general, it managed to

trigger a process of unprecedented economic

growth led by industry (in particular manufactur-ing) among a selected few developing countries

owing to a combination of appropriate policies and

a conducive international economic environment

during the last three decades despite catching up

with the crisis in 1997. The aggregate GDP

growth of the Asia-Pacific region (excluding

China) grew by an annual average of 7 per cent

during the period 1980-1996 but contracted by

over 4 per cent in 1998 after growing 5.6 per cent

in 1997. Conducive national policies aimed at

successful integration of national economies intothe world economy certainly played a fundamental

role in explaining East Asia’s success stories.

Only during the last three years of the 1990s, had

it become obvious that major adjustments at both

the national and international levels were necessary

to manage the globalization process to the benefit

of all.

In the coming years, the Asian and Pacific

region in general is expected to continue achieving

higher growth rates, depending on the degree of

development in the United States and Japanese

economies. Thus, a regional economic recovery

in 2003 is essentially predicated on a significant

improvement in the external environment, sup-

ported by appropriate domestic policy measures.

However, the pace of economic performance in

general and industrial growth in particular in some

developing economies of the region could remain

unsatisfactory. The least developed countries and

the economies in transition could achieve only

marginal growth. Many such poorer economies

could stagnate and remain poor, unless major economic and industrial transformations are

brought about at the regional and global levels,

promoting the integration of those economies. It is

therefore essential that the production system at

the regional and global levels be diversified, and

dispersed and the production process fragmented,

so that not only efficiencies and cost-effectiveness

are achieved, but also the disadvantaged group of

countries could somehow find niches in regional

and global production and create jobs and incomes

in their respective economies. It should be notedthat as production becomes more and more

6 Asian Development Bank, Asian Development Outlook

2002 (New York, Oxford University Press, 2002), p. 4.

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

4



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

(Annual percentage change)

10-yearaverage

1982-1991 1992 1993 1994 1995 1996 1997 1998 1999

Asiaa

Bangladesh 4.8 4.3 4.5 4.8 5.0 5.3 5.0 5.2 3.89

Bhutan 4.4 5.0 5.1 6.9 6.0 5.7 4.6 6.5 5.26

Cambodia 4.8 7.5 7.0 7.7 7.0 1.0 1.0 4.97 4.0

China 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0

Fiji 4.8 3.5 4.2 2.4 3.3 3.6 4.0 4.5 4.95

Hong Kong, China 6.3 6.1 5.4 3.9 4.5 5.0 --5.1 3.06 10.05

India 4.2 5.0 6.7 7.6 7.1 4.7 6.3 6.55 6.37

Indonesia 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 2.0

Lao People’s Democratic Republic 7.0 5.9 8.1 7.1 6.9 6.5 5.0 5.0 5.7

Malaysia 8.9 9.9 9.2 9.8 10.0 7.3 --7.4 5.81 8.54

Maldives 6.3 6.2 6.6 7.2 6.5 6.2 6.0 8.55 7.58

Marshall 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 5.46

Nepal 4.1 3.8 8.2 3.5 5.3 5.0 3.0 3.94 5.99

Pakistan 7.8 1.9 3.9 4.1 4.9 1.0 2.6 4.33 5.09

Papua New Guinea 11.8 16.6 1.9 --2.6 2.9 --2.4 1.4 3.15 --1.21

Philippines 0.3 2.1 4.4 4.8 5.8 5.2 --0.6 3.32 3.95

Republic 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 3.5

Singapore 6.5 12.7 11.4 8.0 7.5 8.4 0.4 5.86 9.89

Solomon Islands 9.5 2.0 5.4 10.5 3.5 --2.3 0.5 --0.5 --1.0

Sri Lanka 4.3 6.9 5.6 5.5 3.8 6.4 4.7 4.3 6.0

Taiwan Province of China 6.8 6.3 6.5 6.0 5.7 6.8 4.7 5.42 5.98

Thailand 8.1 8.4 9.0 8.9 5.9 --1.7 --10.2 4.22 4.31

Tonga 0.3 3.7 5.0 4.8 --1.4 --4.4 --1.5 – 1.5

Vanuatu --0.7 4.5 1.3 2.3 0.4 0.6 6.0 --2.5 3.97

Viet 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 6.0

Azerbaijan --22.7 --23.1 --19.7 --11.8 1.3 5.8 10.0 7.4 10.27

Georgia --44.9 --29.3 --10.4 2.6 10.5 10.7 2.9 2.9 1.5

Kazakhstan --5.3 --9.2 --12.6 --8.2 0.5 1.7 --1.9 2.8 9.44

Kyrgyzstan --13.9 --15.5 --19.8 --5.8 7.1 9.9 2.1 3.6 5.04

Mongolia --9.5 --3.0 2.3 6.3 2.4 4.0 3.5 3.2 2.98

Russian Federation --19.4 --10.4 --11.6 --4.2 --3.4 0.9 --4.9 3.2 7.5

Tajikistan --28.9 --11.1 --21.4 --12.5 --4.4 1.7 5.3 3.7 8.3

Turkmenistan --5.3 --10.0 --17.3 --7.2 --6.7 --11.3 5.0 16.0 17.6

Uzbekistan --11.1 --2.3 --4.2 --0.9 1.6 2.5 4.3 4.4 4.0

Source: IMF, World Economic Outlook 2000, Statistical Appendix. Available at <www.imf.org/external/pubs/ft/weo/2001/01/

data/growth_a.csv>.a Excluding Central Asian economies.


5




Table I.2. Selected economies of the ESCAP region: rates of economic

growth and inflation, 2000-2004

(Percentage)

Real GDP Inflationa

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

Developing economies of the

ESCAP 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 4.5

Islamic Republic of Iran 5.9 5.5 6.5 6.5 6.0 12.6 12.0 14.0 14.0 11.5

Nepal 6.4 5.9 5.0 6.0 6.5 3.5 2.4 4.5 5.0 5.0

Pakistan 3.9 2.6 4.0 4.7 5.2 3.6 4.7 5.0 5.0 5.0

Sri Lanka 6.0 0.9 3.3 5.5 5.9 6.2 13.0 9.0 7.5 6.6

Turkey 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 5.0

Indonesia 4.8 3.3 3.8 4.9 4.6 3.7 11.1 9.8 6.3 5.3

Lao 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 4.0

Myanmar 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 5.0

Singapore 9.9 --2.0 2.0 5.8 5.7 1.4 1.0 0.8 1.5 1.7

Thailand 4.4 1.5 2.5 2.5 3.5 1.6 1.6 1.8 2.5 3.1

Viet 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 2.5

Hong Kong, China 10.5 --2.0 1.0 6.0 6.3 --3.8 --1.6 --1.0 2.5 4.0

Mongolia 1.1 1.4 4.0 5.0 6.0 11.8 8.8 6.0 5.0 5.0

Republic of Korea 8.8 3.0 3.9 4.6 5.0 2.3 3.2 2.8 2.6 3.4

Taiwan Province of China 5.9 --2.2 1.7 4.0 5.4 1.3 0.0 0.0 1.0 1.5

Pacific island economies --1.0 --1.2 2.7 2.7 2.5 7.1 7.2 8.2 7.1 5.9

Cook 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 3.0

Papua New Guinea --0.8 --3.3 1.2 1.8 2.1 10.0 10.3 12.0 10.0 8.0

Samoa 7.3 6.5 4.8 4.3 4.1 1.0 1.5 2.0 2.0 2.0

Solomon Islands --14.5 --7.0 5.5 3.0 2.0 6.0 8.0 10.0 6.0 5.0

Tonga 6.1 3.0 2.5 2.9 3.0 7.0 8.0 3.0 3.0 3.0

Vanuatu 4.0 2.0 3.0 3.5 3.5 4.1 3.0 2.0 2.5 2.5

(Continued)

6



Table I.2 (continued)

(Percentage)

Real GDP Inflationa

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

Developed economies of the

ESCAP 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 2.9

Japan 2.4 --0.5 --1.2 1.4 1.4 --0.7 --0.7 --0.9 --0.5 0.0

New 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 11.0

Uzbekistan 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); Asian

Development Bank, Key Indicators of Developing Asian and Pacific Countries 2001 (New York, Oxford University

Press, 2001) and Asian Development Outlook 2001 (New York, Oxford University Press, 2001); Economist Intelligence

Unit, 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 India

and 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 the

regional and subregional growth rates.

globalized and as transport and communication

costs are reduced, the intensity of competition

increases, and it becomes desirable to search for

new economical sites to produce different

products, parts and components to serve differentmarketplaces.

For all developing countries including the

least developed ones and the economies in transi-

tions, some form of industrialization and industrial

growth must be recognized as the principal means

to provide stability and economic growth. Abun-

dant natural resources, low labour rates and even

large markets are no longer indispensable factors

for development, nor sufficient attractions for

investors. 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 development

continues to be the main channel for value added,

together with certain related service sectors. Whileindustry remains the principal engine for economic

growth and overall prosperity, at the same time,

because of the liberalized process, the increased

globalization of industry and the extraordinary

and rapid pace of technological innovations and

adaptation, new challenges and prospects for

industrialization are being created. It is therefore

essential not only to reiterate the key role of the

industrialization of developing countries in the new

context, but it is also necessary to assess the

current industrial development trend and prospectsfor new international relationships at the enterprise


7




and institutional levels. As a result, industrial

growth in developing countries is likely to become

increasingly complex and difficult during the

coming years. Furthermore, in developing coun-

tries of the region, major institutional changes andnew strategies and mechanisms will be required for

the successful integration of developing countries

into the mainstream of international trade, invest-

ment and technological flows. Industrial policy

reforms and the role of government will need

major changes and adjustments to ensure that

market shortcomings are adequately adjusted and

corrected through appropriate policy interventions

to improve long-term economic performance

and ensure that economies can be truly part of

the mainstream of global trade and investment.Countries must increasingly assume a leading role

in enhancing both domestic and international com-

petitiveness and the increased export orientation of

local enterprises. At the same time, the growing

complexity of industrialization in the light of

global economic developments highlights the need

for specialized institutional support at the interna-

tional level to provide a range of technical services

for accelerated industrialization and technological

process in developing countries.8

2. Liberalization and globalization

process and SMEs

Thus, it has to be underscored that the

process of globalization and liberalization has

assisted individual firms in operating across

national boundaries in Asian and Pacific countries,

affecting thereby the whole process of industrial

development in different economies. Increasingly

it is being realized that the opening of global

markets through trade liberalization is not only

making 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 technological

and marketing linkages to promote rapidly chang-

ing and high-quality products and services. This is

where the importance of international and global production networks lies. It is very essential that

all countries and economies be somehow linked

and integrated into such production networks so

that sustainable regional and global production

structures could be created for everyone to play

mutually beneficial economic roles.

Furthermore, as a result of globalization

factors, the world has witnessed unprecedented

growth in output and trade over recent decades.

World output grew by an annual average of 2.7 per cent during 1981-1990 and 3.5 per cent in 1996

and 1997, before the crisis reduced growth to 1.9

per cent in 1998. However, it increased to 3.8 per

cent in 2000, but fell to 1.3 per cent in 2001.9

World trade has grown at about twice the rate, at

4.5 per cent on average during 1981-1990 and

about 7.0 per cent during 1991-1997 with a growth

rate of 10.5 per cent in 1994 largely owing to

sustained trade liberalization. World trade volume

grew by 12.4 per cent in 2000, but declined to -0.2

per cent in 2001.10 In 2002 the world trade

volume is expected to increase by 2.5 per cent.

Average tariffs in industrial countries fell from 40

per cent in 1946 to about 5 per cent in 1990. By

the early 1990s, world exports (adjusted for

inflation) were nearly 10 times higher than 40

years earlier.11 Even in 1998, world trade grew at

twice the rate of growth in world output.12 In

2003 world trade is expected to grow by 6.6 per

cent in comparison with the world output growth

of 4.0 per cent in that year.13 Global FDI flows

rose from US$ 24 billion in 1990 to US$ 120

billion 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 and

challenges in 21st century”, paper presented at the Work-

shop on the Emerging Economic Map of Asia: Regional

Production 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.

8



capital flows. In 1990, official capital provided

half the loans and credits to 29 major developing

countries (including India, China and the Republic

of Korea in Asia). By 1999 private flows totalled

about US$ 136 billion to these countries comparedwith only US$ 22 billion in government capital

flows.14

As indicated above, the Asian and Pacific

region also witnessed rapid economic growth

during the 1980s and 1990s as a result of globali-

zation factors in combination with conducive

national policies. To a large extent, this economic

growth was triggered by the impressive growth of

the industrial sector, in particular manufacturing,

especially after the switch from import substitutionto export promotion as the main development

strategy adopted by most East Asian economies.

This policy has proved tremendously successful as

judged by the rapid export growth of selected

Asian countries.

A rise in the share of manufactured exports

and imports as a share of total merchandise trade

would be consistent with rapid growth in manu-

facturing value added. Manufactured exports have

indeed shown a steadily increasing share of totalmerchandise exports with very large increases in

each ASEAN country and increases among

SAARC countries as well.15

Indonesia had a spectacular rise in manu-

factured exports as a share of total merchandise

exports from just 2 per cent in 1980 to over 50 per

cent in 1995 and 1996. Manufactured exports had

become dominant in the exports of Malaysia (76

per cent), Singapore (84 per cent), Thailand (73

per 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 in

South Asia. Imports of manufactured goods in

much of South Asia were subjected to high tariffs

and several types of controls.

However, in general there has been a

dramatic shift in the pattern of developing country

trade, with a shift away from dependence on

commodity exports to much greater reliance on

manufactures and services and the greatly in-

creased importance of exports to other developing

countries. While national-level policy initiatives

remain the principal focus of trade policy reforms,

developing countries have become increasingly

involved in regional and multilateral trade negotia-tions. The multilateral system has made substan-

tial adjustments to the increased importance of

developing countries, but reforms in governance

and a sharper distinction between positive and

negative approaches to integration seem likely to

be needed. Furthermore, between 1980 and 1985

manufactured exports and imports grew slowly in

ASEAN (with the exception of Indonesia, where

manufactured exports rose rapidly from a very

small base between 1980 and 1985). The slow

growth during the first half of the 1980s reflects

the period of economic recession in the region.

Import growth was sharply negative in the

crisis-ridden Philippines in 1980-1985. Notably,

there was a dramatic recovery of growth of manu-

factured imports and exports in the Philippines

once the economic and political situation had been

stabilized after 1986. In South Asia manufactured

imports grew very slowly in Bangladesh, Pakistan

and Sri Lanka during 1980-1985, but have shown

higher growth since then. In Nepal, manufactured

imports decelerated after 1985 and growth became

negative between 1990 and 1995. Growth inimports of manufactured goods fluctuated in India.

The performance of manufactured exports of

India after 1990 was quite good compared with

1980-1985. Nepal steadily increased its exports

of manufactured goods. The performance of

Pakistan’s manufactured exports fluctuated. Sri

Lanka had fairly strong growth in manufactured

exports during the 1980s.

Indeed, it is now widely recognized that the

maintenance 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 capital

flows comprise bank loans, bond financing, equity

investments in local stock markets and foreign direct

investment.

15 Export Competitiveness and Sustained Economic

Recovery, Studies in Trade and Investment No. 46,(ST/ESCAP/2150), pp. 38-39.


9




East Asia and other successful developing coun-

tries. It not only allowed for large inflows of FDI

but also for the rapid export growth generated to a

large extent by foreign-invested companies. East

and South-East Asia have been the leading destina-

tion among developing countries for global FDI

flows. FDI inflows have been particularly high in

those countries, which also witnessed large export

growth. It is evident that those countries which

failed to open their economies and adopt an export

promotion strategy also failed to reap the benefits

of the globalization process. Globalization, inter-

preted as constituting growing opportunities for

world trade and investment, after all enabled coun-

tries with an export promotion strategy to actually

increase their exports. Without globalization, indi-vidual countries, including developed countries,

would have continued their protectionist policies,

so common in the direct aftermath of the

global depression of the 1930s, and would have

prevented East Asian and other developing coun-

tries from increasing their exports at such high

rates.

The latest success story in Asia with respect

to export growth has been China since the country

started to liberalize its economy in the early 1980s.China is a very large economy in terms of absolute

size of production and trade. China has proved

attractive to foreign investors as a result of its

rapid economic growth, large size, abundance of

low-cost labour and increasing trade orientation.

Recent studies have found that Chinese manu-

facturing industries and firms have proven to be

formidable competitors with ASEAN counterparts

in both the United States and Japan. The export

shares of China in labour-intensive manufactures

rose sharply in the 1990s in both the United Statesand Japan and had an undeniable impact on the

market share of ASEAN. China devalued the yuan

twice in 1990 and 1994 and strengthened its

competitiveness vis-à-vis the ASEAN countries as

they by and large pegged their currencies to United

States dollar, which appreciated strongly against

the yen and most other major currencies in 1995

and 1996. The sharp currency realignments in

1997 and 1998, coupled with China’s pledge to

avoid competitive devaluation, had eroded this

competitive advantage, however. It is also note-worthy that China, like most of South-East Asia

(the Philippines being the exception), experienced

an export slowdown in 1996. Thus, China is not

able to avoid cyclical swings in export markets any

more than other Asian economies. South Asian

industries and firms may also have experienced

some competitive pressure from China, particularly

in markets for labour-intensive manufactures such

as textiles, apparel, footwear and leather goods,

toys and other miscellaneous manufactures. None-

theless, trade with China also appears to have

been expanding rapidly in the case of India

between 1991 and 1997, with exports and imports

both expanding impressively. China maintains a

merchandise trade surplus with the SAARC region.

Both SAARC and ASEAN members have an

interest in the terms and conditions of China’saccession to the World Trade Organization (WTO)

and may wish to consider commercial benefits and

costs in that context.

The growing trend of intraregional trade and

investment is in fact a reflection at the regional

level of global trends, which are pushed by

globalization. However, as globalization is likely

to continue at an accelerated pace, the implications

for industrial development and restructuring in

line with the requirements of globalization arewide-ranging and include both opportunities and

challenges. That having been said, it should be

noted, especially in the context of promoting

SMEs, that a critical long-term policy challenge

which the ESCAP region will face is how to

manage globalization, extend the duration of the

current recovery and broaden its reach so that

the poor can benefit from economic growth. Much

will depend on creating new sources of growth

by 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 the

competitiveness of SMEs will depend and attempts

will be made to seek answers to the following

questions:

(a) What are the policy reforms that will

ensure that the region can sustain the international

competitiveness of SMEs in a globalizing worldeconomy?

10



(b) How can the productivity and

efficiency of SMEs be boosted? What institutional

and infrastructural factors are necessary for

improving the efficiency of SMEs?

(c) What are the implications of the

currency exchange rate crisis for the long-term

stability 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 policy

issues are important for the promotion of SMEs

and their competitiveness at the international

market?

C. Role of SMEs in the development

process: some country experiences

1. General observations

SMEs all over the world have played a

fundamental role in promoting economic and in-

dustrial production. In particular, SMEs providethe necessary foundations for sustained growth and

rising incomes in the less developed and transi-

tional economies. Sustained and healthy growth of

the SME sector in weaker economies is obviously

necessary, as it is difficult to imagine raising

overall living standards and social peace in those

economies without SME development. In general,

SMEs provide the bulk of the entrepreneurs and

employment in those economies and they are

mostly in the private sector. The development of

the SMEs and their linkages with larger enterpriseshave also played a significant role in the highly

successful business practices of the vertically

integrated Japanese “keiretsu” financial-industrial

groups during most of the post-war period. Simi-

lar linkages appear to have been important in

recent successes of “township and village enter-

prises” (TVE) in China. Another quite different

synergistic relationship, based on both horizontal

and vertical linkages, is represented by the kind

of 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, the

SME sector in many developing countries has

usually been neglected and discriminated against in

terms of access to government attention, access to

finance, management and marketing expertise and

technology, as compared with large enterprises.

This has been particularly so in the economies in

transition, where the large-scale State sector had

assumed the major role in economic and industrial

development. Private sector development in the

economies in transition and in the least developed

countries should, therefore, start by strengthening

and promoting SMEs as to allow these enterprises

to grow into medium- to large-scale enterprises

and enable them to take over the functions of the

previously State-owned enterprises.

Although there are variations in the

proliferation of SMEs and their contributions to

the economy, in recent decades there have been

some efforts to improve the conditions for SME

promotion in the Asian and Pacific region.

Policies have been adopted and attempts made to

improve the institutional facilities for their func-

tioning. However, it also has to be noted that in

the Asian and Pacific region SMEs comprise a

wide range of plant sizes and technologies, bothacross and within countries, covering three broad

tiers of activities. At the top, there is the modern

SME sector, often closely linked with large enter-

prises as subcontractors and producing modern

consumer and manufacturing products such as

metal goods, paints, processed foods, plastic goods

and wood products. These types of enterprises

generally use more modern technology and

are located nearer to cities and ports with well-

developed infrastructure facilities. In addition,

urbanization and localization tend to facilitate the

growth of the modern SME sector. At the other

extreme can be found the traditional SME sector,

consisting of artisans, workshops, household units

and craft industries and other industries, which are

normally found in rural areas. Enterprises operat-

ing in this segment of the SME spectrum usually

16 Robert McIntyre, The Role of Small and Medium

Enterprises in Transition: Growth and Entrepreneurship,

Research for Action No. 49 (United Nations University,

World Institute for Development Economics Research[WIDER], December 2001), p. 5.

11





employ rudimentary implements and rely on local

markets for the supply of raw materials and the

sale of the final products. Here, the agrarian

nature of the economy and fragmented markets,

low technology and weak infrastructure favour labour-intensive manufacturing at the household

level. Between these two sets of SMEs are

the agro-based industries, most often found in

semi-urban areas, which utilize agricultural raw

materials as major production inputs but may

depend on distant markets to sell their products.

These types of SMEs, clustering around townships

and population centres, have a great potential in

meeting some of the urgent needs of developing

countries, especially those with weaker economies.

In most less developed economies and

economies in transition in the Asian and Pacific

region, the bulk of the industrial labour force is

engaged in small- and medium-scale enterprises.

Small-scale and cottage industries in LDCs usually

employ around 80 per cent of the entire industrial

workforce of the country. This sector also makes a

valuable contribution to the industrial value added

of the economy. However, most of the value

added, 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 the

economy. In the more advanced economies, SMEs

are found in a wide array of industries.

2. Selected country experiences

SMEs in Bangladesh have contributed

significantly to manufacturing growth and employ-ment creation. There are around 27,000 medium-

sized enterprises and around 150,000 small-scale

enterprises in the country. At present, 80 per cent

of manufacturing establishments are SMEs,

accounting for 80 per cent of the labour force and

50 per cent of the output of the sector and 5 per

cent of GDP. SMEs provide vital linkages to

larger enterprises, particularly in the high-growth

export sector, and also form part of the core

business 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 as

important activities for the development of SMEs.

Over the past decades, SMEs have contributed

significantly to fostering labour-intensive growth

and reducing poverty. Their production processes

are often marked by outdated technologies. SMEs

in general cannot offer the requisite collateral and

meet the transaction costs for obtaining access to

institutional credit. SMEs also find it relatively

more difficult to access key infrastructure, includ-

ing electricity and gas. The policy environment is

not conducive to the growth of SMEs. They are

subject to the same procedural rigours of registra-

tion, taxation, credit disbursement, export andimport as large enterprises, thus adding high costs

to their operations.

In India, small-scale industries (SSIs)

account for 95 per cent of the country’s industrial

units, 40 per cent of industrial output, 80 per cent

of employment in the industrial sector, 35 per cent

of value added by the manufacturing sector, 40 per

cent of total exports and 7 per cent of net domestic

product.

In Pakistan, the SME sector employs about

80 per cent of the industrial labour force and

makes up about 60 per cent of the manufacturing

sector. However, the contribution of SMEs to

GDP is only 15 per cent.

In Indonesia, before the 1997 economic

crisis, almost two thirds of small business were in

the agricultural sector, over 17 per cent in trading

(including restaurants and hotels), over 7 per cent

in processing industries, 5 per cent in the servicesector, 2.5 per cent in consultancy and 4 per cent

in other sectors. Thus, although SMEs account for

more than 90 per cent of the total number of

companies in Indonesia, their share in the Indone-

sian economy is very insignificant, as 80 per cent

of GDP is produced by large corporations.

SMEs constitute a large portion of

Thailand ’s national economy as they account for

70 per cent of employment in the industrial sector

and 4.7 per cent of total manufacturing valueadded. About 98 per cent of establishments in the

12



manufacturing sector in Thailand are SMEs,17

which are scattered in both the Bangkok Metro-

politan area and regional areas. The main indus-

tries which are dominated by SMEs in Thailand

include metal and steel, plastic products, rubber

and garments. The competitiveness of SMEs is

thus a crucial component of the national competi-

tiveness agenda. The SME Promotion Act was

enacted in February 2000. The SME Promotion

Committee, chaired by the Prime Minister, and the

Office of Small and Medium Sized Enterprise

Promotion, have been established to promote

the development of SMEs. The SME Promotion

Fund has also been established with seed money

from the Government and other private sources.

The Fund can be used for lending to SMEsor groups of SMEs and for funding projects

of government departments, other government

agencies, State enterprises and private sector or-

ganizations as approved under the SME Promotion

Action Plan.

Concerted efforts are being made to support

SMEs through: (a) strengthening of technological

and management capabilities; (b) developing skills

and 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 their

potential for job creation.

SMEs in Malaysia, defined as companies

having paid-up capital of less than M$ 25 million

with not more than 150 full-time employees, are

primarily involved in the manufacturing, engineer-

ing and printing areas. SMEs contributed almost

30 per cent of total output, 17.6 per cent of value

added and 17.5 per cent of employment in the

manufacturing sector in 1995. Figures for that

year show that only 20 per cent of SMEs are

involved in exports. Currently more than 80 per

cent of total manufacturing firms in Malaysia areSMEs. Malaysian Industrial Development Finance

Berhad, which covers the manufacturing sector,

provides 60 per cent of its coverage to SMEs.

In the Philippines, SMEs accounted for

99 per cent of all enterprises, 45 per cent of

employment and 28 per cent of value added in the

manufacturing sector in the mid-1990s.

Singapore has no statistics for SMEs, but it

is estimated that SMEs account for over 40 per cent of manufacturing production and over 25 per

cent of value added in manufacturing.

In the Republic of Korea, SMEs accounted

for 70 per cent of employment, 46 per cent of

gross output and 47 per cent of value added in

1997. Since the mid-1990s, SME policies in the

Republic of Korea have focused on fostering

competitive SMEs, accelerating the shift towards a

more sophisticated and value-added industrial

structure through automation- and information- based processes and providing assistance for tech-

nology development and quality improvement.

SMEs have been encouraged to form cooperative

ties with large companies and enhance their market

competitiveness at home and abroad. Short-term

policies have focused on ensuring stability for

SMEs in, for example, access to financing, particu-

larly in the wake of the financial crisis. In addi-

tion, sanctions against unfair transaction practices

between large companies and SMEs have been

strengthened, and support for SME technologydevelopment projects has been increased. SME

policies also place emphasis on promoting exports.

The Small and Medium Business Administration

(SMBA) was established in 1996 as the central

support organization to assist SMEs. SMBA has

11 regional offices throughout the country, working

in cooperation with related organizations such

as the Small and Medium Industry Promotion

Corporation (SMIPC), Korea Federation of Small

Business (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 on

Korean and Other APEC Member Countries (October

1999), pp. 116-117.

18 Research Institute for Development and Finance, Japan

Bank for International Cooperation (JBIC), Issues of

Sustainable Development in Asian Countries: Focused

on SMIs in Thailand , JBIC Research Paper No. 8-1(January 2001), pp. 9-12.

13





In China, the Government has not adopted

a comprehensive SME policy yet. However, the

State Economic and Trade Commission has deve-

loped policies to support SMEs’ management

control, financing and technology developmentsince it established its Small and Medium Enter-

prises Department in 1998. In March 1999, the

National People’s Congress recommended more

reforms and restructuring of SMEs and recently

government circles have started to use the term

SME more frequently. It is known that measures

to support SMEs, especially in financing and

preferential tax policies, have been implemented

actively. The large State-owned corporations’

difficult management situation has prompted the

Chinese Government to implement a promotion policy for SMEs. Currently there are no accurate

statistics on SME exports; however, it is roughly

estimated that 60 per cent of total exports from

China come from the SME sector. The main area

that the Chinese Government is focusing on to

promote SMEs is financial support, which includes

relieving SME debt through policy adjustments

and providing credit and preferential tax treatment

to SMEs. Especially to provide credit loans to

SMEs, the Government encouraged banks to

expand 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 ESCAP

region, SMEs are now exporting a wide variety of

products and continue to play a crucial role in

generating and diversifying exports. Although the

developing 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 of

growth, the importance of SMEs in exports has

taken on a new dimension. In particular, SMEs

play a significant role in the first or early phase

of an export-oriented industrialization strategy by

supplying low-cost labour-intensive products such

as textiles and garments, leather goods and other

consumer products. Again, as SMEs begin to

modernize, they have been active in producing

light engineering goods such as forgings, castings,

diesel engines, simple machinery, machine tools,

domestic appliances and construction hardware.

Electronics is in a different category, being

knowledge-intensive but requiring little capital and

infrastructure; it provides a valuable opportunity

for a new breed of young entrepreneurs, techni-

cally and professionally qualified, to make their

mark. In countries such as the Republic of Korea,

China, India, the Philippines, Thailand and Indone-

sia, this sector is proving to be highly productive

especially for exports from the SME sector. At the

margin, imports of SMEs also tend to be less

capital-intensive than those of large enterprises.

This pattern of exports and imports not only

generates additional employment, but also has a

positive impact on the trade balance. In all the

newly industrialized economies (NIEs), the export-

oriented development strategy made a significantcontribution and in that context SMEs had a

major role to play. Even after Japan and Asian

NIEs reached an advanced stage of development,

SMEs in their economies continued to play a

critical role in the export of manufactured

products, especially in those that are technology-

and skill-intensive such as computers and software,

and specialized parts and components for the

machinery, transport and aircraft industries. While

promoting the ESCAP region’s export competitive-

ness of SMEs entails creating new sources of productivity growth in the SME sector with

stability and further trade liberalization and greater

flow of information, the contribution of SMEs to

direct exports is considerable in most economies of

the region. This contribution is even higher if

indirect exports are included. Statistics are usually

only available to limited extents for direct exports

and once again, the picture varies across countries

in the region. In India, SMEs account for about 35

per cent of total exports. Since SMEs in Indonesia

do not play a very significant role, only less than 5 per cent of SMEs are involved in exports but this

figure is much higher when indirect exports are

included in terms of export items, textiles, fabrics,

garments and agro-based products. In recent years

exports of jewellery products from SMEs have

increased rapidly in Indonesia. In Malaysia, SME

exports make up about 20 per cent of total exports.

In Pakistan, SMEs exports account for about 80

per cent of total exports of manufactured products.

In the Philippines, some 90 per cent of exporters

fall into the category of SMEs and their contribu-tion to exports is estimated at around 20 per cent.

14



In the Republic of Korea, SMEs accounted for

41.8 per cent of exports in 1996. Main export

items include electric and electronic products,

machinery, other household goods and plastic

items. In China, textiles and light industry have

emerged as SME-dominated export sectors. These

two sectors now account for over one third each of

the total exports of China. In Japan, although

SMEs occupy a very important place, in terms of

exports, they are not significant. SMEs play a very

important role in the exports of Taiwan Province of

China. In Singapore, as companies are focusing

on direct or indirect export of goods through multi-

national corporations, the ratio of exports from

SMEs is not high.

Other developing countries trying to repeat

the success of the NIEs face vastly different

external market conditions. In particular, the

product structure of SMEs would have to change

in line with changes in external demand. Since

external demand is shifting to human capital and

information-intensive products, the SMEs of the

Asian NIEs are better placed than SMEs in other

countries of the region to respond to this change.

The newcomers, particularly countries eager to

repeat the success of the NIEs, may find that their SMEs are less favourably placed. They are likely

to encounter increased competition from other

SMEs from outside the region. In addition, the

high cost of some capital goods and exchange rate

volatility add to their difficulties.

SMEs make a valuable contribution as

subcontractors to large enterprises, which often

tend to be transnational corporations (TNCs).

They produce parts and components for large

enterprises on a contractual basis, using localresources and skills. In terms of economic fluctua-

tions, they act as “shock absorbers” for the large

enterprises, adjusting their own employment and

production levels to reflect changes in demand

and supply conditions. In these ways, they add to

the flexibility and viability not only of the large

enterprise sector but also of the entire economy.

While the importance of such linkages is recog-

nized, the actual existence and utilization of the

vast potential to forge and strengthen such linkages

have remained limited and therefore requireincreased government attention.

4. SMEs and foreign direct investment

Although information on FDI by SMEs is

difficult to obtain, in some cases it is obvious that

SMEs are playing an increasingly important role inFDI, especially from the more advanced develop-

ing countries. However, not all countries collect

comprehensive data on SME-related FDI. Excep-

tions in this regard are Japan and the Republic of

Korea. However, there is no survey to identify

inward or outward FDI by SMEs. Nevertheless, in

the Republic of Korea, investment abroad by small

businesses amounted to 65.7 per cent of total

outward investment in 1996 or US$ 3,968 million.

In 1996 small and medium-sized TNCs accounted

for 55 per cent of new foreign affiliates byJapanese firms.19 In Thailand, 46 per cent of the

approximately 2,500 Japanese firms operating

in the country are SMEs.20 In 1997 the United

Nations Conference on Trade and Development

(UNCTAD) undertook a questionnaire survey and

analysed the problems and obstacles facing invest-

ment by SMEs. This is the only comprehensive

analysis on the subject.21

On the basis of the above analysis, it

appears that SMEs are quite important in their

contribution to overall development in countries of Asia and the Pacific. They have also increasingly

become 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 economy

through employment promotion, entrepreneurship

development and exports. However, globalization

also has its costs and has affected SMEs somewhat

negatively, in particular when one looks at it with

reference to the recent Asian crisis. Some such

implications of the globalization process for SMEsare presented in the following section of this study.

19 UNCTAD, World Investment Report 1999: Foreign

Direct 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 by

Small and Medium-sized Enterprises: Lessons from Asia(United Nations publication, Sales No. E.97.II.D.4).


15




D. Promoting the competitiveness

of SMEs within the ongoing process

of globalization

The analysis and information provided in

the earlier sections of this study have pointed out

that globalization and its various aspects have

impacted in different ways on the SMEs, which

has not been positive all the time. Furthermore, in

most of the developed countries, SMEs enjoyed

the support of the Government in terms of

appropriate legislation for the provision of credit,

technical support and other incentive measures and

built-up their capacity to deal with the adverse

impacts of globalization. However, in developingcountries, SMEs enjoy only limited support from

government for the same types of facilities. In

addition to the problems that the SMEs have to

face in developing countries, new challenges have

unfolded as a result of the globalization process.

SMEs of developing countries, particularly small

manufacturing firms, are facing serious challenges

due to new developments at the regional and

global levels, leading to severe competition in

domestic as well as international markets. Some

of these challenges are presented below.

1. Trade liberalization and multilateral

agreements

While SMEs in Asia and the Pacific will

mainly benefit in the long run from trade liberali-

zation within the region, the various provisions of

regional and multilateral agreements including the

Uruguay Round agreements have led to substantial

tariff cuts in developed countries, changing thestructure of export markets, especially for products

which are important to SMEs. For instance,

above-average cuts involve seven product groups,

which together account for over 70 per cent of

industrialized countries’ imports: metals; mineral

products and precious stones; electrical machinery;

wood, pulp, paper and furniture; non-electrical

machinery, chemicals and photographic supplies;

and other manufactured articles, all of which are

sectors in which SMEs are direct producers or

suppliers. However, not only SMEs in Asia andthe Pacific will benefit, but SMEs from other

regions will as well, which will intensify the level

of competition among SMEs globally for exports

to developed countries. Moreover, high tariffs are

maintained in developed countries on products

which are also important to SMEs, such as textiles

and garments, rubber, leather, footwear and travel

goods. It is also to be noted that regional

economic groupings are gaining power and are

changing the patterns of international trade.

For those countries with a less developed

economy and industrial sector, including the LDCs

in South and South-East Asia, their commitments

under the regional and multilateral agreements

will provide both opportunities and challenges, in

particular for SMEs. While opportunities liemainly in the necessity to upgrade national capa-

bilities and the performance of both public and

private enterprises forced by international competi-

tion, challenges include mobilizing the necessary

financing, political commitment and skills to do so.

While trade liberalization provides major opportu-

nities for SMEs to increase their exports, a major

challenge will be to improve their competitiveness

not only for exports but also at home as SMEs

have to compete with imports and larger inflows of

FDI, including foreign investment from other SMEs.

One of the most significant outcomes of the

Uruguay Round was the decision to incorporate

world trade in textiles and apparel into the General

Agreement on Tariffs and Trade (GATT)/WTO and

to phase out the multifibre arrangement (MFA)

over a period of 10 years ending in 2004. The

implications of this measure for SMEs are

considerable as they play an important role in the

production of textiles and garments and relatedareas. The Governments of South and South-East

Asia should monitor the implementation of the

agreement. In the meantime, it will be essential

to promote competitiveness in the region’s textile

industry. For SMEs, the important thing is to

seek out niche markets for lower-quality low-price

garments and textiles. To the extent that they are

direct exporters, competition is expected to be

fierce. To the extent that they are suppliers to

TNCs, they will also face challenges as it will

become easier for TNCs to shop around the worldfor the most suitable supplier. Increasingly, there

16



will be a shift away from low-price low-quality

goods to higher quality in conformity with ISO

9000 (international standards for quality manage-

ment systems) and ISO 14000 (international

standards for environmental management systems).

However, niche markets for low-priced goods will

continue to exist, in particular in the region. As a

result, SMEs need to concentrate on competing at

home and in the region rather than at the global

level.

Technical standards are a vexing problem

in expanding trade in machinery, particularly elec-

trical machinery, telecommunications equipment,

motor vehicles and transport equipment. They also

are very important in food, pharmaceuticals andother consumer products, sectors where SMEs play

an important role to various extents, mainly as

subcontractors. As such, they are indirectly

affected by technical standards. The diversity of

technical standards and capabilities in the region

and globally presents a formidable barrier to the

free flow of trade as was recognized in the

Uruguay Round Agreement on Technical Barriers

to Trade (TBT). Countries are able to restrict

imports through rather onerous and costly con-

formance requirements. Imported products may be subject to laboratory testing and other pro-

cedures that are non-transparent and add

substantially to the item’s cost. This has given rise

to greater efforts by Governments, firms and

industry associations to meet standards set at

the international level and gain certification by

the 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 end

of 2004). The use of performance requirements

is unnecessary when outward-looking policies

are already in place. However, in cases where

tariff and non-tariff protection provides higher

profits to domestic sales, TRIMs may be a

temporary necessary evil. Regulations restricting

foreign ownership are likely to be redundant unless

a 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 export

performance requirements.22 The importance

for SMEs is that investment liberalization will

expose them to more intense competition from

TNCs in the home market and for their export

markets.

An important development is the adoption

of the Agreement on Trade-related Aspects of

Intellectual Property Rights (TRIPs). The TRIPs

Agreement has incorporated all the essential

provisions of the international conventions govern-

ing intellectual property protection administered

by the World Intellectual Property Organization

(WIPO) and made them universally applicable

on a most-favoured nation (MFN) basis.23 So far,many developing countries in the Asian and

Pacific region have continued to violate intellectual

property rights and incurred sanctions from deve-

loped countries, notably the United States. As

many SMEs are in businesses where intellectual

property rights have been violated, the implementa-

tion of TRIPs will directly affect them. It may

also lead to increased investment inflows, which

could crowd them out. However, opportunities are

created to improve their competitiveness and their

own rate of innovation. SMEs are known for their flexibility and innovativeness and TRIPs may give

them an extra stimulus to undertake their own

research and development (R&D). In addition,

technology transfer will be facilitated as TNCs will

now have better guarantees that the technology

transferred will not be abused with detrimental

effects to their own operations. The absence of

intellectual property rights protection has been

seen as a major impediment to technology transfer

to developing countries.

Subsidies, safeguards and countervailing

duties have been traditionally used and abused as a

hidden form of trade protection. In developing

countries, 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 over

time”, ICSEAD Working Paper No. 98-18.

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

17





Countervailing Measures has limited the use of

these instruments but not altogether eliminated

them. Major subsidy programmes in developed

countries are exempted from the prohibitive

provisions 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 judge

and is therefore subject to different national

interpretations. Developing countries should be

wary of developed countries’ practice of levying

countervailing duties while their own practice

with regard to subsidies would have to be severely

restricted in order to conform to the Agreement

and strengthen competitiveness in the domestic

markets. A similar argument can be made withrespect to safeguards. However, it will give deve-

loping countries the same tools to protect their

domestic industries, including the SMEs.

In the end, trade liberalization within the

region is probably of more significance than at the

global level. The implementation of the ASEAN

Free Trade Area (AFTA) will directly open up

avenues for SMEs in the ASEAN region to

increase their exports and foreign investment while

also exposing them to increased FDI and importsat home from countries at similar or slightly higher

development levels. Competition at this level will

be the fiercest. However, less developed countries

such as Cambodia, the Lao People’s Democratic

Republic and Viet Nam are likely to benefit from

FDI from developing countries in the region at a

higher development level, which may provide more

appropriate competition and advantages to their

indigenous business sector than similar investment

and 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 taken

to improve the competitiveness of SMEs of their

member States, ranging from financial support

(such as venture capital) to the establishment of

data banks and information centres and technology

support as well as modalities for skills develop-

ment and human resources development in the

SME sector. In particular, SMEs will benefit from

initiatives within APEC to improve the businessenvironment through the harmonization of regula-

tions and other measures through the Business

Advisory Council. In addition, the APEC Center

for Technology Exchange and Training for

Small and Medium Enterprises (ACTETSME) is

intended to support the sustainable development

and growth of SMEs in the Asian and Pacific

region and at the same time make them globally

competitive. The Center is envisaged to perform

the role of an information clearing house and

referral facility.

While it is generally recognized that SMEs

can greatly benefit from global and regional trade

and investment liberalization, the actual impact on

SMEs has been mixed but on the whole not very

positive. For instance, it is reported that in many

countries in the region liberalized imports of

finished products has led to dumping at below-cost

prices against which small-scale units could not

compete while it shifted demand away from

domestic goods to imported goods. In general, it

is pointed out that SMEs have not benefited from

the economic boom in various countries of the

region: while they have gained better access to

land 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 competition

has driven many SMEs out of business. In addi-

tion, any import benefits may not accrue in those

countries, such as in South Asia, where SMEs

have to go through middlemen for their imports.

In those cases where import tariffs were lowered

on both consumer goods (areas of activity of

SMEs) and inputs such as machinery and equip-

ment, the SMEs have suffered. In cases where

tariff cuts on consumer goods were sequenced (or

are scheduled) after import liberalization on inputgoods (such as India), SMEs have been able to

survive in better shape.24

24 Rizwanul Islam, ed., Small and Micro Enterprises in

a Period of Economic Liberalization: Opportunities

and Challenges (New Delhi, ILO/SAAT, 1996). This

publication also notes that the sequencing of trade

liberalization with respect to cutting tariff and non-

tariff barriers has also shifted incentive structures for

SMEs to the advantage of large enterprises in variouscountries.

18



2. Information technology and SMEs

Creativity and innovations through major

breakthroughs in technology, particularly in infor-mation technology, has created many opportunities

and challenges for the SMEs, bringing with them

new changes in production management and

commercial practice. It should be noted that in

order to succeed in the emerging global economy,

managers of small and large businesses alike need

to redefine how they interact with their customers,

suppliers and competitors. To that end, organi-

zational strategies and interaction with other

stakeholders must be continuously reviewed and

repositioned with a view to the enhancement of

corporate functioning and the speedy flow of

information and decision-making. Information

technology (IT) offers a wide variety of supports

and alternatives which are of crucial importance

to dynamic firm management. In that context,

small enterprises have to move effectively into

more integrated management methodologies using

IT applications. In this process, with the advance

of enterprise-wide client-server computing comes

a new challenge: how to control all major busi-

ness processes with a single software architecture

in real time. The integrated solution, known asenterprise resource planning (ERP), promises

benefits ranging from increased efficiency to

improved quality, productivity and profitability.25

A negative implication of this process is the

replacement of labour by labour-saving techno-

logies adopted by the larger enterprises, raising

their productivity to much higher levels than

the competing SMEs. SMEs can ill afford the

high costs involved in adopting similar techno-

logies and run the risk of being driven out of

business. However, in the area of informationtechnology, the Internet and the possibility of

electronic commerce have opened up myriad

opportunities for SMEs to start, operate and

expand 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 create

new products and services. In addition, e-com-

merce would enable them to compete against

larger, more established firms and in new and

previously untapped markets. While SMEs donot have the brand recognition of the large

enterprises, with e-commerce they can create a

presence and compete in markets that were tradi-

tionally dominated by the large enterprises.

Internet use in general would also greatly facilitate

communications, which would lower their operat-

ing costs.

The main challenge for SMEs is therefore to

upgrade their technological capabilities with regard

to Internet use and conduct e-commerce effec-tively. A major constraint is the lack of telecom-

munication infrastructure or the restrictive regimes

present in various Asian economies. For instance,

while computer density is 21.6 in Singapore, it is

only 0.3 in Viet Nam and China. Telephone main

line density ranges from 51.3 in Singapore to 1.1

in Papua New Guinea in the APEC region. Of the

less developed countries in the Asian and Pacific

region, Malaysia stands out with a telephone main

line 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 the

full potential of the Internet and computerization of

their operations. It should be noted that in this

period of knowledge-based development processes,

SMEs must transform themselves as learning

organizations and become increasingly knowledge-

based organizations.

3. Investment flows and integration of

capital markets affecting SMEs

The rapid increase of FDI flows, including

intraregional inflows has major implications for

the SME sector in two respects. The first respect,

as indicated earlier, refers to the role of SMEs

in domestic markets as suppliers of parts and

components or basic services, largely on a subcon-

tracting basis, to foreign investors. The second is

25 ESCWA, Potential of Manufacturing Small and Medium

Enterprises for Innovation in Selected ESCWA Countries(2001), p. 21.

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

19





the internationalization and transnationalization of

SMEs themselves as SMEs increasingly invest

abroad. With regard to the first respect, it has

been mentioned that SMEs have been integrated

in complicated global production and investment

networks set up by TNCs as part of their global

strategic management policies. The Asian and

Pacific region in particular has witnessed27 a

strong rise in the number and extent of such

networks characterized by the importance of

strengthened linkages of various kinds between

SMEs and TNCs, which in turn have contributed

to the emergence of national competitive advan-

tages of selected less developed countries in the

region in particular areas and industrial subsectors.

Thus, semiconductors have become a major andleading export industry in Singapore and later

Malaysia, auto parts and components in Thailand,

computer peripherals in Taiwan Province of China,

software design in India and textiles and garment

production at various stages in many countries in

the region ranging from the more advanced

ASEAN economies to South and Central Asian

and even Pacific island economies such as Fiji.

In all these cases, indigenous SMEs have been

increasingly 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 networks

for further processing. More important, it can be

demonstrated that those countries that have been

most successful in forging such linkages between

their SMEs and TNCs have done relatively better

in the overall economic and industrial development

process and have been able to optimize the

benefits of foreign investment as such linkages

ideally translate into the transfer of much-needed

technology, capital and expertise and provideindigenous companies with better access to

international markets. While these linkages refer

mainly to backward linkages, forward linkages

involving retail and service operations under-

taken by SMEs have also become increasingly

important and still have enormous potential, further

widening and broadening global production

networks.

With regard to the second respect, as

pointed out earlier it can be observed that SMEs

worldwide, but particularly in Asia, have increas-

ingly become foreign investors themselves or

recipients of foreign investment usually in the

form of joint ventures. Interest in the role of

SMEs in FDI flows derives from the potential

special contribution which these companies can

make to developing countries. Their relatively

recent arrival as investors provides a new source

of foreign capital for these countries. Their

assumed specific characteristics, i.e., their greater

flexibility, relatively labour-intensive technologies,

greater adaptability to local economic conditions

and capacity to serve small communities, could

make them more suited to the conditions of most

developing countries than their large TNC counter-

parts. Therefore, for policy makers in developing

countries the FDI flows that SMEs can provide

may constitute a valuable supplement to flows

of more conventional types of TNCs, which, as

indicated above, have been reducing their involve-

ment in certain regions of developing countries inrecent years.

In many developing economies, SMEs have

now firmly begun to enter the international market.

In most cases, SMEs invest abroad for the same

reasons as large firms. As with large firms, they

need to be close to the markets they are serving.

Local production is necessary when tariff barriers

exist that obstruct their imports. Also, those SMEs

which supply components and other parts to large

enterprises follow their clients abroad as theythemselves internationalize their activities. Many

TNCs now have, through the system of “partner-

ship sourcing”, rather close relations with their

suppliers. Instead of using many small suppliers,

they tend to choose a few and contract with

them to supply goods produced to the higher

standards of design and production and delivered

to strict schedules. By using these closer relations,

supplier firms can follow their clients abroad,

knowing that their products will have a ready-made

market.

27 See “SME FDI in Asia: extent, pattern and trends”, in

UNCTAD, Handbook on Foreign Direct Investment by

Small and Medium-sized Enterprises: Lessons from Asia

(United Nations publication, Sales No. E.97.II.D.4), pp.27-34.

20



While investments from SMEs clearly have

advantages for host countries, they may be a mixed

blessing as on the one hand overseas SMEs

strengthen national competitive advantages through

their contribution to quality and exports but on the

other hand they risk crowding out indigenous

SMEs. A more preferable investment pattern from

a domestic point of view is the establishment of

joint ventures between larger enterprises from

countries at relatively higher development levels

on the one hand and SMEs from other countries

at relatively lower development levels. The

UNCTAD World Investment Report 1999 explains

that “in today’s globalizing world economy, the

increasing competitive pressures faced by firms of

all sizes impel more and more of them to establishan international portfolio of locational assets to

remain competitive. However small parent firms

and their foreign affiliates may be, they are part

of an increasing network of production linkages

across borders”. As a result, the region has

witnessed significant growth in the level of intra-

regional investment flows in the form of joint

ventures involving SMEs. This process has been a

particular feature of the development process

in countries and areas like Taiwan Province of

China and Singapore but recently also countrieslike China and countries in Indo-China have

benefited from joint ventures with enterprises from

neighbouring countries, often involving SMEs.

Subregional economic cooperation frameworks

such as ASEAN have facilitated and promoted

such joint ventures through a variety of industrial

complementarities and cooperation schemes.

However, with respect to overall inflows of FDI,

the share of FDI coming from SMEs is as yet

relatively small owing to numerous problems

SMEs face, not only in their investment butin their general operations. Lacking government

attention and support, despite paying lip service to

their cause, has prevented SMEs in many countries

from growing and making up an essential “middle

class” of enterprise which would facilitate their

linkages 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 the

national economic development process, it is

most definitely not a sufficient policy in itself.

The development of national entrepreneurial acti-

vity and capabilities resulting in the formation of

healthy domestic enterprises which are able to

compete internationally is probably even more

important. Only with a strong indigenous enter-

prise sector is FDI likely to make a positive impact

with less potential to crowd out domestic invest-

ment but more potential to transfer technology,

capital and expertise either separately or as a

convenient package. At the same time, the chance

that mutually beneficial linkages between the

indigenous business sector, which consists mostly

of SMEs, and TNCs can be successfully forged

is much higher. Governments and private sector

institutions alike have a role in formulating and

implementing policies and strategies to attract

and promote FDI and promote their domestic SME

sector with the objective of establishing a healthy

business sector at the national level which includes

an environment that ensures fair competition

between foreign and domestic companies and

facilitates and promotes linkages between the two

sectors to the extent that such linkages are indeed

useful. As far as the Government is concerned,

support for SMEs does not necessarily have

to come in the form of direct financial and techni-

cal support but rather in providing a conducive

macroeconomic and legal framework which does

not discriminate unfairly against SMEs but, as

indicated above, creates a level playing field for

large and small companies and domestic and

foreign companies alike. SMEs should be assisted

in such a way that they can help themselves.

Assistance should mainly consist of clearing

unnecessary hurdles and obstacles, which are

mostly of a legal and financial nature, rather than

subsidies and other forms of handouts. Supporting

policies 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 sector

institutions could set up extensive data and

information networks which SMEs can tap at little

cost on such issues as market access and tech-

nology availability among others. At the same

time, Governments need to develop comprehensive

21





national policies for the development of SMEs,

which involves focusing on specific subsectors and

cluster formation in line with a country’s national

competitive advantages. In this context, the esta-

blishment of specific industrial parks for SMEs in

particular industrial subsectors which have access

to adequate infrastructural facilities and which are

in close touch with R&D institutions and centres

of excellence and higher learning as well as with

foreign companies could be considered. As part of

such policies, the consolidation of SMEs and

the forging of horizontal linkages among SMEs

should be encouraged in line with the global

merger and acquisition trend among TNCs. With

TNCs getting bigger and bigger, SMEs cannot

afford to stay behind. Lastly, active measures to

improve the quality of SME products and services

need to be taken which would make them more

responsive to consumer needs both at home and

abroad but would also make them more attractive

partners for TNCs.

The integration of capital markets for SMEs

has opened new avenues for financing. Tradi-

tionally constrained by adequate access to financial

resources, the liberalization of financial marketshas enabled the larger SMEs to tap international

capital markets. In fact, the larger presence of

foreign banks in domestic economies facilitated

foreign investment of SMEs following their larger

counterpart abroad. As such, FDI by large enter-

prises is followed by FDI by banks and SMEs

conveniently replicating similar business networks

existing at home. However, for the majority of

indigenous SMEs, access to finance remains a

problem 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, particularly

for high-tech SMEs, has improved the situation

considerably. These SMEs also benefit from

increasing capital available from global venture

capital funds which are roaming the world for

investment. The formation of joint ventures

between SMEs has also provided new ways for

financing SME activity through capital brought in

by the foreign partner.

E. Conclusions and recommendations

1. Conclusions

It is obvious that globalization and its mani-

festations have already had clear impacts on SMEs

of Asia and the Pacific, which have not altogether

been positive, despite the great potential for SMEs.

In recent years, while it is easier to point to market

forces as the ultimate saviour of development and

growth including the development of SMEs, there

is a general consensus that rapid and not well-

thought-out means of liberalization of trade and

investment, including too rapid and inappropriate

sequencing of reform measures, will do more harm

than good, especially for SMEs. While market

forces would squeeze out inefficient SMEs and

would, at least in theory, improve economic

efficiency at the national level, the social conse-

quences of overreliance on the market and

uncontrolled liberalization measures should be the

major consideration to continue active government

support for SMEs in developing countries, to

allow them at least time to adapt to changing

global and regional economic realities. One of the

major challenges for Governments in developing

countries is the evaluation of various economic

policies affecting SMEs. In many cases, policies

do not effectively address the key problems

confronting small firms, and measures taken in

different areas are inconsistent. Assessing the real

impact of each policy measure is not easy and has

been attempted in a rather haphazard manner in

several countries. Nonetheless, all Governments in

developing countries of Asia and the Pacific can

benefit from sharing their experiences on both

successful and unsuccessful practices, with insights

of the private sector to inspire more mutually beneficial policy frameworks for globalizing small

firms. Effective benchmarking is one way to

highlight weaknesses and help to build momentum

for shaping policies that can allow for greater

benefits from cross-border business networking. It

can also help Governments to address the costs

and challenges which arise from global industrial

restructuring affecting SMEs. In so doing,

Governments need to realize that SMEs have

already changed themselves to some extent along

three major lines:

22



1. There is a growing “professionalism”

in SME management as well as more dependence

on formal financial institutions;

2. SMEs are increasingly diversifying their products into knowledge- and skills-based sectors

such as electronics, informatics, precision compo-

nents and parts;

3. SMEs are increasingly diversifying their

markets away from domestic markets to overseas

markets.

However, the share of SMEs actually

involved in more sophisticated and higher value-

added activities remains as yet small in mostcountries of the region. There is therefore a need

for a comprehensive and well-integrated package

of measures and incentives, both on the supply

side and on the demand side, to foster the

growth of a vibrant SME sector and improve the

competitiveness of SMEs in both domestic and

international markets. In developing such a com-

prehensive and well-integrated support package,

careful consideration should be given to several

aspects. First , the ever-present temptation to

create new organizational structures would haveto be resisted, and existing institutions, suitably

reorganized, reformed and strengthened, should be

utilized to extend support services and input to the

SMEs. In that regard, decentralized organizational

structures should be used to reach out to the

SMEs. Second , support measures should be

extended only to deserving SMEs and not to those

which are likely to waste resources. Perpetual

support and subsidies should not be granted to

inefficient SMEs. Third , promotional measures

should be development-oriented rather than protective or restrictive. In a development-oriented

approach, market structures that increase competi-

tiveness, innovation and resilience are emphasized

so that SMEs can become self-reliant and an effec-

tive source of competition for the large enterprises.

Fourth, incentive measures should be direct and

use prices and markets as far as possible. Fifth,

there may be instances where the Government

finds it difficult to reach the SMEs, especially

those 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 and

delivering support services to the SMEs. In low-

income countries such as Bangladesh and Nepal,

some NGOs have proved to be highly effective

in delivering credit and providing other kinds of

support to rural-based small and craft industries.

Overall, the ability of SMEs to compete in the

global marketplace depends on their access to

certain critical resources, the most important of

which are finance, technology and managerial

skills. TNCs have been an important means for

SMEs to gain access to new technologies and

management know-how. The shift in corporate

production strategies from simple integration to

more complex integration has widened the oppor-

tunities for SMEs while at the same time raisingthe requirements for entering TNC networks. The

current challenge for developing countries is

first to adopt policies to deepen the developmental

effects of FDI by attracting TNCs willing to forge

such linkages and then to undertake measures to

promote such linkages between TNCs and

SMEs.28 Specifically, the support measures for

the improvement of competitiveness of SMEs can

be categorized as follows:

(a) Organizational and policy support

measures

All countries of the region have evolved

institutions to support SMEs. In particular, in the

developing economies of the region, organizational

support has assumed two distinct roles, which can

be classified as (a) regulatory and (b) promotional.

The regulatory role is concerned with aspects

such as a framework of laws and regulations for

registration 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 SMEs

through linkages” (TD/B/COM.3/EM.11/2), paper pre-

sented to the Trade and Development Board Commission

on Enterprise, Business Facilitation and Development

Expert Meeting on the Relationship between SMEs and

TNCs to Ensure the Competitiveness of SMEs, Geneva,27-29 November 2000.

23





constraints. The promotional role is the positive

role with respect to inputs such as infrastructure,

financial support, training, technology and market-

ing. The regulatory and promotional aspects

are applicable to both new entrants and existing

units.

In almost all countries there is either a

separate policy statement for SMEs (or for cottage

and small industries) or a general industrial policy

statement with some portions of it relating to this

sector. There is a ministry or a department in

overall charge of industry and a host of institutions

dealing with or extending support to SMEs. Very

few Governments have, however, enacted special

legislation to back up SMEs.

There is a perceived need for individual

economies to set up focal points for SMEs at the

national level which are linked to other similar

focal points in neighbouring countries and other

countries in the region and even outside the region.

Such linkages provide for quick and efficient

information exchange on trade and investment

opportunities for SMEs. In this context, extensive

use could be made of the Internet. Such focal

points could also provide training and informationon sources of technology and finance and act as

instigator for setting up and strengthening linkages

among SMEs under cooperative marketing and

joint manufacturing arrangements and linkages of

various kinds between SMEs and large enterprises,

both domestic and foreign. Subsidiaries of such a

focal point could be set up in various areas of a

country. Thus, the Governments in developing

countries should adopt a comprehensive set of

selective support measures for linkages between

SMEs and large firms as well as TNCs. Businessassociations should also play an important role in

facilitating such linkages, as well as networking of

SMEs.

The globalization process has called for a

drastic reorientation in terms of domestic economic

policy issues calling for a change in the Govern-

ment’s role towards SMEs. One of the principal

measures in support of the SMEs would have to

involve the attenuation of macroeconomic and

sectoral policy biases against them which haveaccumulated over the years in many developing

countries of the region. The elements of these

policies and their consequences are fairly well

known. Trade and exchange rate policies in

support of rapid industrialization efforts often give

rise to overvalued exchange rates, which make the

exports of SMEs non-competitive in international

markets. Tariffs and taxation are important

elements of policy in all countries. However it

has been found that in most cases they benefit

large industry and not necessarily SMEs. It has

been established that import regimes (including

tariff rates) are inherently biased in favour of

large industry. As far as tax concessions are

concerned, only in a few countries like India does

exemption from central excise tax seems to be

directed to SMEs. In most other countries, taxconcessions seem to be given on the basis of

considerations other than size. Investment incen-

tives are generally scale-based, favouring large

projects and enterprises and capital-intensive

production techniques over small-scale and labour-

intensive technologies. Macro policies also tend to

protect large enterprises against competition from

SMEs.

It is therefore necessary to define new key

elements in policies and in the role of the Govern-ment in adopting measures to remove the barriers

that prevent SMEs from prospering. The elements

relate to self-reliant policy (helping SMEs to help

themselves); stronger private sector empowerment

(membership organizations, self-regulation, policy-

making); private and non-governmental business

development services (with government funding

but without direct government intervention);

information technology-driven assistance (use the

information superhighway); greater linkage be-

tween SMEs and large enterprises (creating themissing middle); and industry clusters for critical

mass.29 Such measures should lead to a reduction

in biases in terms of access to economic inputs

such as credit, training and technology. Reforms

towards low and uniform tariffs and quotas,

realistic interest rates and relaxing physical

controls on size and output go a long way towards

29 UNIDO, Proceedings of the Asia-Pacific Regional

Forum on Industry, Bangkok, 23-24 September 1999, p. 23.

24



harmonizing macro and sectoral policies with

measures designed to benefit SMEs. On the de-

mand side, macro and sectoral policy measures

should aim at fostering agricultural and rural

development, especially in raising rural incomes

and encouraging exports so as to harness the

potential of external demand to the maximum.

In low-income economies, macro and sectoral

policies favouring agricultural development have

particular relevance, for such policies can increase

rural income, thereby creating demand for income-

elastic SME products. In addition, economic liber-

alization and deregulation measures should take

into account the situation of SMEs and proceed in

an appropriate way of sequencing which would not

unduly harm the SME sector.

(b) Entrepreneurial and managerial skills

SMEs which are trying to enter global

markets require good entrepreneurial and manage-

ment skills. Thus, any support, including

infrastructural support, would have to be combined

with sound institutions in developing an efficient

SME sector through measures designed to support

the development of SME entrepreneurs andmanagers who have great potential in generating

benefits not only for the SMEs but also for

other enterprises. In general, entrepreneurs in

the SME sector are often “home-grown”, acquiring

their skills and leadership qualities in their own

workplace and business environment. Beyond a

certain point, this “learning by doing” approach

becomes less and less useful in assisting small

enterprises in graduating into modern small enter-

prises, equipped with newer forms of technology

and marketing skills. Furthermore, SME manage-ment needs to be experienced and able to

communicate both inside the enterprise and with

outside parties. Therefore, training and support

programmes may be needed to improve the quality

and skills of both employees and management.

Moreover, SMEs would need practical assistance

in legal and consulting services to negotiate for

better 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 to

changing requirements through innovation and

foresight. The prime objective of forging such

links should be to make the entire effort a two-way

process in which the supporting institutions and

SME entrepreneurs find themselves in a continu-

ous dialogue. This is especially true for rural and

remotely-based SMEs whose needs are too often

neglected.

One of the most critical areas in which

strong support needs to be extended to the SME

entrepreneur is in access to information. Access to

strategic information, e.g., on potential foreign

business partners, regulations and business envi-ronment issues in foreign markets, is another

challenge for SMEs. These barriers need to be

addressed as they can prevent SMEs from partici-

pating in international alliances and other global

business linkages. In fact, the intensity of strategic

partnering tends to rise with the size of companies,

indicating that larger firms actively seek and find

external opportunities through strategic linkages.

Government Internet home pages for SMEs and

other private services (e.g., market research) can

improve small-firm access to business-relatedinformation in foreign markets.30 Thus, SMEs

often fail to prosper because they have limited

access to information. This may be because infor-

mation is controlled or available but not accessible

because of ignorance or relative isolation from

information centres and sources. Computerization

and the introduction of the Internet would go a

long way towards providing SMEs with proper

access to information, although in many countries

Internet use is still controlled while SMEs may not

have the necessary skills and other resources (e.g.,capital) to acquire this technology and effectively

utilize it. Governments and private sector institu-

tions such as chambers of commerce could assist

in setting up data and information banks on

markets, technology and other areas of concern to

SMEs. 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.

25





(c) Provision of finance

The most pressing problem faced by

SMEs in improving their competitiveness is the

lack of adequate financing facilities. All countries

of the region recognize the importance of this

vital input and have created a network of financial

institutions and banks, and many of them have

created specialized institutions to meet the specific

needs of SMEs. However, the traditional small-

scale enterprises relied little on external finance.

In recent times there has been an increasing

tendency on the part of SMEs in developing

countries to seek finance from banks and other

financial institutions. In virtually all countries,

however, there are numerous complaints aboutthe paucity of loan funds available to SMEs and

the onerous terms imposed for accessing formal

finance, thereby restricting the possibilities of

improving the competitiveness of SMEs. Addi-

tionally, despite increasing awareness of the need

for a seed capital scheme and venture capital,

the institutional framework for these cannot be

considered well developed. In some countries,

supervised credit in its commonly applied form of

supply of machinery on a hire-purchase basis has

been introduced. Supervised credit also sometimestakes the form of assistance in the purchase of raw

materials and intermediate inputs.

Some countries have adopted fiscal policies

or provided tax relief directed explicitly at SMEs

or at firms contributing in some special way to the

development effort, regardless of size. In India,

for example, small-scale industries are exempted

from the payment of excise duties on production

up to a certain limit. Tax holidays are given in

Malaysia and other countries.

There are several issues in the area of

providing development financial assistance to

SMEs which require careful consideration. Re-

gardless of the stage of development of the

economy, a number of factors determine the

accessibility of organized finance for SMEs,

including the structure of financial institutions, the

terms and conditions of credit and the diversity of

the financial instruments offered. Generally, these

are geared to serve the financial needs of largeenterprises and better-established public sector

enterprises with which the SMEs lack both the

managerial resources and informational advantage

to compete effectively.

While it is widely recognized that SMEs

may indeed qualify for institutional finance, the

interest rate policy generally works against them.

Most countries of the region offer finance at subsi-

dized rates to their industry. One consequence of a

subsidized interest rate policy is the creation of

excess demand over supply. Faced with such an

excess demand, financial institutions are forced to

ration out the credit at their disposal. One crite-

rion used in the choice of clients in a rationing

scheme such as this is enterprise size, where the

large-scale sector has an advantage. At times, their size is taken by financial lenders as an indicator of

their profitability and hence the lenders consider

the risk of loans advanced to them to be lower. In

the process, SMEs progressively get squeezed out

of the organized sector and many of them find

themselves dependent on the informal sector for

external finance, especially those that are located

in townships and rural areas.

This raises an important question relating

to mobilization of financial resources for SMEs.The mobilization of financial resources for SMEs

can be an uphill task given the intense competition

for domestic resources in all the developing

countries of the region. While the majority of

small enterprises depend on retained profit and

informal sources of credit for expansion, the

need for external finance increases rapidly with

the growth in size, first as working capital and

then as fixed capital. The latter requirement for

external finance is found mostly in the modern

and better-established segment of the SMEs. Theresponse of the developing countries has been

the establishment of a variety of institutions and

agencies, as indicated above, with varying degrees

of success.

In recent years, following the successful

example of Japan in mobilizing savings, many

countries in the region have introduced savings

schemes and experimented with a wide array of

new financial instruments and innovations. Along

with efforts to boost savings mobilization,measures have been adopted to increase the

26



accessibility of SMEs to organized finance. One

such measure has involved the growing use of

guarantees for loans advanced to SMEs.

Many countries have also tried to restrict

the activities of informal credit intermediaries.

However, given the inability of the formal sector

to meet the credit requirements of SMEs, it may

be more useful to increase the complementa-

rity between formal and informal credit markets.

In that regard, the banks could lend to the

informal credit intermediaries for on-lending to

small enterprises, thereby reducing the administra-

tive and other costs of the formal sector’s direct

lending.

(d) Technology capacity-building for

SME competitiveness

One of the most important factors in

capacity-building for improved competitiveness of

SMEs is through technological upgrading. The

need to apply modern efficient and relevant

technology in order to survive in an increasingly

competitive environment has never been so urgent.

It is often stated that globalization and liberaliza-tion have opened new opportunities for firms in

developing countries to acquire technology from

abroad and that increased competitiveness in

technology markets has made technologies cheaper

and more accessible. This may indeed occur in

some industries and sectors, while in others tech-

nology remains costly and access is still difficult

for SMEs in the developing world. Acquiring

technologies and the technological capacities

needed to master technologies involves time,

effort, cost and risk and complex interactions between firms as well as between firms and

institutions. Very often the transfer of technology

to solve the problems of industries is available.

However, transfer agents are needed to make it

accessible to these industries, which also have to

be assisted by dissemination of information on

choice of technology, source of equipment, know-

how and “show-how”. It should also be noted

that every effort should be made to promote the

wider applications of information technology in

the SME sector. However, lack of finance andskills has constrained this. Although information

and communication technology (ICT), including

the Internet, has great potential for allowing SMEs

to expand their customer base, enter new product

markets, rationalize their businesses and search

globally for potential business partners, many small

firms have not fully exploited these opportunities

owing to a lack of awareness and skills and the

necessary resources to make initial investments.

Costs of installation, access and use of ITC, which

vary widely across countries, present barriers for

small firms. Governments have to make special

efforts to enhance small-firm awareness and skills

for the use of ICT and electronic commerce. In

this context, there is an equally urgent need on

the part of multilateral and other international

agencies, to assist countries in promoting the

application of ICT for SME use.

Available evidence indicates that technical

information and technology for SME use obtained

from countries at similar stages of development are

more useful and relevant. However, some of the

major impediments in this respect include lack of

local 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 monitoring

capabilities that would enable them to access and

evaluate technological information. SMEs, be they

in developing or developed countries, generally

tend to be risk-adverse, particularly when it comes

to the introduction of innovations based on new

technologies. Despite these limitations, new forms

of inter-firm technology cooperation are beginning

to emerge that involve longer-term mutual benefits

and go beyond short-term financial gain. Thecommon feature of these new forms of coopera-

tion is the sharing of capabilities to develop

new products, technologies and processes, or to

produce and market new products. It is in consi-

deration of these factors that increasing emphasis

has to be placed on technical cooperation among

developing countries (TCDC) and economic

cooperation among developing countries (ECDC)

with the active cooperation and assistance of the

developed countries and multilateral and bilateral

aid agencies in implementing TCDC and ECDC projects.

27





The need for technological upgrading has

become more urgent in a globalizing world. SMEs

can ill afford to be left behind in the process

of technological upgrading and the information

technology revolution, which has led to an ever-

increasing use of the Internet for companies’

communication and information needs. Sustained

programmes with specific focus on SMEs need

to be adopted by Governments to allow the

introduction of computers and other information

technology in the private sector while adopting the

necessary legislation to that effect.

(e) Regional cooperation measures for

SME competitiveness

The potential of intraregional trade and

investment flows, as a means to spur the growth

of a modern, export-oriented SME sector is

awaiting full utilization. Regional cooperation in

SME development is based on the premise that

it will enable them to take advantage of econo-

mies of scale. At the national level, cooperatives

have historically been viewed as conduits to

assist SMEs in reaping economies of scale in

marketing and purchasing. Regional cooperationcan extend this process, enabling national SMEs

to take advantage of scale economies more

effectively. Additionally, regional cooperation in

SME development can improve the prospects

of developing countries to create the necessary

conditions for the growth of a viable and modern

SME sector. This in turn can stimulate the

development of a vibrant industrial sector.

Subcontracting systems at a regional level can

also be utilized, thus promoting closer interface

and interdependence between large enterprisesand SMEs. However, it is essential to identify

priority industries in devising regional cooperation

measures.

There are three broad possibilities here

which could be pursued on a regional basis. First,

specific SMEs with export potential could be

identified, in such areas as textiles, leather goods

and electronics. Once such an identification is

done, each industry could be closely evaluated to

see where and how it needs assistance in productdevelopment, standardization, technology upgrad-

ing and skills development. Second, once these

industries are identified for assistance, regional

initiatives could be launched to develop arrange-

ments through which market-sharing schemes can

be designed. In this way, much wasteful competi-

tion for foreign markets can be replaced by

cooperation for access to these markets on an

equitable basis. Third, in the area of forging

linkages between large industries and SMEs,

specific industries from Japan, China and the

Republic of Korea can be studied to see how such

linkages were developed, what risks did they face

and how they succeeded. Lessons thus gathered

can then be disseminated to other developing

countries. Technology flow, technical and finan-

cial assistance, improved supply and marketingarrangements, promotion of industrial activities

and training of personnel are a few areas where

such schemes may be formulated to foster such

cooperation.

Regional cooperation measures would have

to be supplemented by measures at the national

level, particularly by removing those barriers that

hinder the growth of SMEs. These measures

would include removal of obstacles in obtaining

access to inputs such as technology, credit and

training, reforming tariff structures and removing

quotas, introducing realistic interest rates and

dismantling physical controls on size and output.

Four specific areas where regional cooperation can

be enhanced are:

1. New and emerging technologies for

SME-development;

2. Support to SME entrepreneurs and

managers for enterprise development;

3. Skills development for SME growth;

4. Mobilization of financial resources as

both fixed and working capital.

The role of national focal points and

subregional and regional networks of such focal

points for SMEs was discussed before. As far

as finance is concerned, the establishment of

subregional development banks or even a regionaldevelopment bank for SMEs in Asia and the

28



Pacific, with financial and technical support from

and under the auspices of the Asian Development

Bank or International Finance Corporation of the

World Bank for instance, could be considered.

Technology information and supply centres are

currently managed by regional organizations such

as ASEAN and APEC while at the regional level

at large the Asian and Pacific Centre for Transfer

of Technology (APCTT) plays a fundamental role.

In the long run, as such subregional cooperation

widens to a larger level, such centres could be

integrated and consolidated into truly regional

centres which are electronically linked to global

centres and data banks.

2. Recommendations

The previous sections presented the current

situation of SMEs in Asia and the Pacific and

prospects and challenges facing them in a globaliz-

ing world. At the moment it seems that SMEs

are negatively affected by globalization as the

policy environment in which they have to operate

at the national level is often not conducive. While

Governments pay lip service to their cause, the

ruling elites in many countries often have stakesin the large enterprises and as a result the SMEs

find themselves on the losing end. Even potential

linkages with TNCs are not entirely the result of

the efficiencies of the market subject to political

will and commitment. While globalization is

forcing Governments to take more integrated

action to help SMEs – the recent Asian crisis

made their importance painfully clear – there is a

risk that the big money attached to TNCs and

large-scale operations will divert Governments,

banks and major business concerns (with oftenoverlapping interests) once again away from

attention to the SME sector. There are clearly

exceptions. In economies like Malaysia, Singa-

pore and Taiwan Province of China, SMEs have

been a fundamental cornerstone of development

success. The relative neglect of the SMEs in a

country like the Republic of Korea was certainly

part of the process that set the crisis in motion.

In fact, various studies have indicated that SMEs,

in particular the smaller ones, were more affected

by national and local conditions than by globali-zation per se.

While Governments play an important

role in supporting SMEs, the SMEs themselves

cannot sit idle and wait until they get some

support which may never come. In fact, the most

successful SMEs are those that are actively

seeking partners and support themselves and

realign their competitive strategies to the realities

of the global marketplace. It is important for

SMEs to adopt modern financial management

techniques and actively look for suitable tech-

nology that is affordable and would improve

their productivity. They need to be ready to

take risks as risk-taking is the main characteristic

of the successful entrepreneur, in exploring

overseas markets for exports or even for direct

investment. In this context, the proper selectionof partners for joint cooperation schemes in

financing, management or technology, both at

the national level and across borders, is very

important. However, it is imperative for SME

entrepreneurs to overcome their pride and

reluctance to give up management autonomy in

their own, often family-owned businesses. After

all, TNCs will not enter into joint ventures and

mergers unless there are clear advantages to doing

so. Given the surge of mergers and acquisitions

between large TNCs at the global and regionallevels, SMEs cannot afford to lag behind as

huge TNCs will not be able to do business with

tiny enterprises. Even the SMEs that cater for

domestic demand will find themselves ultimately

linked in a larger enterprise network which

comprises other SMEs and large enterprises,

including TNCs, in an economic environment

which can be truly termed global.

Thus, there is an urgent need to improve

the competitiveness of SMEs in this globalizing

world. This aspect has to be dealt in a com-

prehensive and coherent manner encompassing

policies, institutions and other support measures.

Specifically, the following urgent actions are

required:

1. National Governments have played a

crucial role in the growth of SMEs through a

variety of support programmes such as credit

and reservation policies as well as mandatory procurement programmes and technology support.

29





In order that SMEs continue to operate effectively,

Governments in Asia and the Pacific need to

provide a conducive economic environment with

a minimum of restrictions on production, trade

and investment. They also need to implement the

right macroeconomic policies to maintain price,

exchange rate and interest rate stability, appro-

priately liberalize trade and investment regimes

and provide a proper financial, legal and institu-

tional framework. In this task, Governments

may decentralize decision-making mechanisms to

be as close to the SMEs as possible and involve

industry associations and NGOs to a greater

extent;

2. For the above-mentioned purpose,

Governments may review the policy frame

followed in their countries relating to the SMEs

(specially in respect of export-oriented units) so

as to take into account the many changes that

inevitably take place in the next few years as a

result of the multilateral agreements including the

Uruguay Round and the new round of agreements.

Governments may also make the SMEs in their

countries fully aware of the implications of those

agreements (through workshops and seminars) and

prepare them adequately to meet the challenges

of increased competition both at home and

abroad. Such a comprehensive and critical review

should also take note of the need to harmonize

these challenges with the social and economic

compulsions in those countries;

3. The SMEs in the ESCAP region have

demonstrated a proven capability to export

a wide range of products particularly in textiles

(and ready-made garments), leather and leather products, light engineering (including electrical

appliances), agro-based products and electronic

items (including computer software). They

contribute in many countries as much as 50

per cent of industrial production, 60 per cent of

employment and 40 per cent of direct exports;

4. Policies may be reoriented to streng-

then the export sector through effective marketing

information networks, assisting SME delegations

in going abroad to study at first hand opportunitiesfor export and also organize joint marketing

through collective action and launch awareness

campaigns on the need to maintain quality and

environmental standards by conforming to widely

accepted standards such as the ISO 9000/14000

series;

5. Governments have a critical role to

play in providing the necessary infrastructure –

both physical and social – to enable SMEs to

operate efficiently and provide them with a

skilled workforce that can function with high

productivity. Private sector assistance could be

enlisted in this task through carefully designed

fiscal policies and tax incentives. Vocational

training programmes for workers and improved

entrepreneurial and management skills for super-

visory personnel have to be organized in close

cooperation with industry associations and training

institutions;

6. It is now widely recognized that

low wages, by themselves, cannot sustain for

long a viable growth process, which can only

be done by continued technology upgrading and

exposure to improved management and organiza-

tional techniques. Governments have to set up(if not already existing) suitable national R&D

centres for each relevant subsector where relevant

innovation practices could be developed and

diffused widely throughout the industry and the

sector as a whole, as has been done effectively

under the Sparks Programme in China. It is

necessary, however, to ensure that such tech-

nologies are eco-friendly and attempts should

be made to acquire them for dissemination

throughout the country. In this connection,

APCTT may function as a focal point in pro-viding information to member countries on

the availability and suitability of such techno-

logies;

7. One method that has proved effective in

several developed countries as well as in some

countries of the ESCAP region is to enhance the

collective efficiency of SMEs through operation

in clusters specializing in a specific product. Such

clusters can consist of both large and small

enterprises and other units to provide specializedservices. Each cluster can have a resource centre

30



to coordinate the activities of the cluster, collect

and disseminate information and generally function

as the brain of the cluster. While such clusters

need to arise on their own, Governments can

provide support services to enable them to

operate efficiently preferably by cluster industry

associations. Current international economic reali-

ties demand a holistic view of trade, technology,

investment and capital flows, not only for large

industries but for SMEs as well;

8. It is noted that a number of regional

arrangements such as APEC, AFTA and SAPTA

(South Asian Preferential Trading Arrangement)

could provide greater opportunities for SMEs in

the region to come together. In addition,subregional groupings (in the shape of growth

triangles or quadrangles) could be proposed where

SMEs may find it easier to work in close

cooperation. In such groupings, an inventory of

the SMEs with the capability to participate in

regional networking arrangements for production

and exports can be made and publicized widely.

Within this context, local authorities may consider

networking themselves to make this idea more

effective;

9. Any such regional networking would,

however, require some concrete steps to be

taken such as: (a) uniformity in standards and

testing procedures; (b) compatible management

and operational styles; (c) liberal tax laws (includ-

ing avoidance of double taxation); (d) clearly

defined pricing policies and arbitration procedures;

(e) supportive R&D as well as entrepreneurship

development programmes and vocational skills

development programmes; (f) clear agreement on

the 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 country

which can help to coordinate efforts;

10. It is noted that easy access to credit on

reasonable terms continues to be a major problem

for SMEs in most countries. In that context,

governments may advise the financial institutions

in their countries to provide deserving SMEs with

long-term as well as short-term credit so as to beable to operate to their full capacity;

11. The heartening feature of the SME

scene in many countries in recent years is the

involvement and participation of women both on

the shop floor and entrepreneurs managing small

businesses. It is felt that the presence of womenin the industrial field will have a beneficial effect

on the economic and social life of society as a

whole and Governments may therefore provide

special support to such women entrepreneurs

through various incentives and exemptions.

Efforts should be made to organize women’s

entrepreneurship programmes at the national and

regional levels and facilitate training programmes

and other supporting activities as extensively as

possible. Regional organizations such as ESCAP

and the Asian Development Bank (ADB) shouldassist countries in such activities;

12. Ultimately, it is the entrepreneurs who

will have to adopt the right strategies to compete

successfully in a changing economic environment.

To this end, they need to focus on specialization

strategies, be responsive to market needs, seek out

market niches, adopt superior and relevant tech-

nologies, develop higher skills levels and generally

cultivate an attitude which would combine a com-

petitive spirit with a willingness to cooperate with

other units in joint collaborative arrangements;

13. It should be noted that regional

cooperation programmes could be initiated under

the auspices of various regional organizations and

regional arrangements, aimed at strengthening

national capacities in promoting SMEs in general

and export-oriented ones in particular. In this

respect, regional bodies such as ESCAP and ADB

and regional and subregional bodies such as

APEC, ASEAN and SAARC should also initiate

and strengthen their activities aimed at assistingGovernments in undertaking reviews of their

policy directions, organize training in specific

areas such as financial and marketing management

and technology transfer, strengthen selected institu-

tions for the SMEs and help to foster subcon-

tracting through a network of clusters. ESCAP

may consider promoting networking of SME

associations through appropriate projects. Particu-

lar attention should be paid to the needs of the

LDCs, Pacific island economies and economies in

transition so that the growth process is acceleratedto keep pace with the rest of the region;

31





31 Ibid., p. 30.

14. The most important aspect in en-

hancing the global competitiveness of SMEs is

to make them attractive business partners for

foreign firms. SMEs do not necessarily have

to establish foreign facilities for production to become more international. Small firms can ex-

port their products and services through exploiting

international distribution networks. Governments

can help small firms to compete globally by

ensuring easy access to strategic business informa-

tion.31 Therefore, Governments need to play a

proactive role in supporting SMEs by helping

them to improve their competitiveness in a globali-

zation process.

32



A. Introduction

This paper deals with the prospects

and challenges for promoting resource-based and

agro-based SMEs for employment generation and

export promotion, thereby helping countries to

promote integration at the regional and globallevels. The paper identifies areas for policy

orientations, institutional capacity-building and

private sector-led rural enterprise development with

a view to improving employment in rural areas and

productivity improvement for poverty alleviation.

As the study is concerned with the role of

agro-based and resource-based SMEs for employ-

ment generation and poverty alleviation, the time

frame of the study is confined mainly to the 1990s.

For analytical purposes, Asian economies consi-

dered in the study have been grouped into the

following regions:

• South Asia, comprising Bangladesh,

Bhutan, India, Maldives, Nepal, Pakistan

and Sri Lanka;

• The NIEs, comprising Hong Kong,

China; the Republic of Korea; Singapore;

and Taiwan Province of China;

• Developing economies in South-East

Asia, comprising Cambodia, Indonesia,

the Lao People’s Democratic Republic,Malaysia, Myanmar, the Philippines,

Thailand and Viet Nam. These countries

along with Brunei Darussalam and

Singapore constitute ASEAN and AFTA.

Three other economies in East Asia, i.e.,

Japan, Mongolia and China, are also included in

the study.

II. PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs

IN ASIA AND THE PACIFIC

Tarun Das*

B. Resource-based and agro-based

industries: the sector’s main

characteristics

1. Economic significance

(a) Contribution to GDP

The growth rate of manufacturing value

added (MVA) and the share of MVA in GDP in

selected Asian countries are given in table II.1.

It is observed from the table that the share of MVA

in GDP in 2000 was highest in South and East

Asia at 30.4 per cent. China had the highest share

at 42.8 per cent followed by the Republic of Korea

(35 per cent), Malaysia (32.4 per cent), Thailand

(31.7 per cent) and Mongolia (30.1 per cent).

(b) Contribution to employment

Table II.2 presents male and female employ-

ment by economic activity in selected Asian

economies in 1990 and 2000. It is observed from

the table that in the NIEs, the service sector has

the predominant share of both male and female

employment followed by industry and agriculture

in that order, whereas in most of the countries

in South Asia and South-East Asia, agriculture

and allied sectors have the predominant share of both male and female employment. Over time,

consistent with the change in sectoral shares in

GDP, both the male and the female labour force

have shifted from agriculture to industry and ser-

vices in the NIEs and South- East Asian countries.

Table II.3 provides information on the share

of females in total employment by different

branches of manufacturing in selected Asian coun-

tries (Macao, China; Taiwan Province of China;

India; Indonesia; Japan; Malaysia; Myanmar;

Nepal; Philippines; Republic of Korea; and SriLanka) in the most recent period for which

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

33




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

Total MVA Per capita MVAShare of MVA

Country or area Growth rate (%) Growth rate (%) Value (US$) in GDP

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

Newly industrialized economies

(NIEs)

Hong Kong, China 4.7 --1.8 3.5 --3.6 1 499 20.9 16.3 8.9

Republic of Korea 12.1 7.5 10.8 6.6 3 434 25.6 28.9 35.0

Singapore 6.6 6.7 4.3 3.6 5 049 22.2 27.2 25.4

Taiwan Province of China 8.4 5.1 7.0 4.2 3 920 35.7 32.7 29.3

China and Mongolia

China 10.7 13.2 9.1 12.1 347 31.6 33.1 42.8

Mongolia 5.8 1.1 2.7 --0.2 210 26.5 29.0 30.1

South-East Asia

Cambodia 8.0 8.7 3.8 5.4 13 4.1 5.2 7.7

Indonesia 12.6 6.6 10.5 5.0 201 17.2 20.7 24.8

Lao People’s Democratic Republic 6.8 12.1 4.1 9.4 53 7.6 10.0 17.9

Malaysia 8.9 9.3 6.1 7.0 1 258 19.9 26.5 32.4

Myanmar --0.1 6.6 --2.0 4.9 70 8.5 7.8 8.2

Philippines 0.2 3.0 --2.2 0.8 187 24.6 24.8 24.1

Thailand 9.5 5.8 7.6 4.4 650 22.0 27.2 31.7

Viet Nam 7.1 11.1 4.7 9.3 28 14.0 12.3 16.4

South Asia

Bangladesh 3.0 7.3 0.4 4.9 53 13.4 12.7 16.0

Bhutan 12.7 10.5 9.9 8.3 30 5.7 8.1 12.1

India 7.4 7.2 5.2 5.3 92 17.1 18.7 20.0

Maldives 12.0 8.8 8.6 5.6 63 5.3 5.4 6.1

Nepal 6.6 8.5 4.3 5.9 21 5.9 6.0 8.8

Pakistan 7.7 3.6 4.5 1.0 65 16.3 17.4 17.0

Sri Lanka 6.3 8.1 4.6 6.9 122 12.6 14.8 19.0

East Asia

Japan 4.8 0.6 4.2 0.3 6 865 25.8 25.8 23.9

World

Industrialized countries 2.8 1.9 2.0 1.4 2 669 22.9 22.4 21.5

Developing countries 5.1 6.4 3.0 4.6 314 21.4 22.2 25.5

Least developed countries 2.2 4.3 --0.6 1.7 37 10.2 9.7 10.0

Low-income 5.9 5.9 3.4 3.8 88 15.3 16.8 18.3

Middle-income 2.4 3.2 0.2 1.4 556 22.2 21.9 21.7

High-income 8.5 5.8 6.3 4.3 2 685 21.2 22.7 25.3

Africa 3.9 2.9 1.0 0.4 78 12.6 12.3 12.3

Latin America 1.4 2.9 --0.6 1.2 643 25.0 24.1 22.8

South and East Asia 9.0 8.9 6.9 7.3 300 22.8 25.1 30.4

ASEAN 7.5 6.5 5.3 4.7 292 18.9 23.0 25.9

West Asia and Europe 4.0 2.7 1.3 0.5 580 16.8 16.2 16.8

World 3.1 2.8 1.4 1.3 1 037 22.7 22.4 22.3

Source: World Bank, World Development Report 2002.

34



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

Agriculture Industry Services

Male Female Male Female Male Female

Country or area % of male % of female % of male % of female % of male % of female

labour force labour force labour force labour force labour force labour force

1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998-

1982 2000 1982 2000 1982 2000 1982 2000 1982 2000 1982 2000

Newly industrialized economies

(NIEs)

Hong Kong, China 2 0 1 0 47 28 56 12 52 71 43 88

Republic of Korea 31 10 39 13 32 34 24 19 37 56 37 68

Singapore 2 0 1 0 33 33 40 23 65 67 59 77

Taiwan Province of China .. .. .. .. .. .. .. .. .. .. .. ..

China and Mongolia

China .. .. .. .. .. .. .. .. .. .. .. ..

Mongolia .. .. .. .. .. .. .. .. .. .. .. ..

South-East Asia

Cambodia .. .. .. .. .. .. .. .. .. .. .. ..

Indonesia 57 .. 54 .. 13 .. 13 .. 29 .. 33 ..

Lao People’s Democratic Republic 77 .. 82 .. 7 .. 4 .. 16 .. 13 ..

Malaysia 34 21 44 13 26 33 20 29 40 46 36 58

Myanmar .. .. .. .. .. .. .. .. .. .. .. ..

Philippines 60 47 37 27 16 18 15 13 25 36 48 61

Thailand 68 50 74 47 13 20 8 17 20 31 18 36

Viet Nam .. .. .. .. .. .. .. .. .. .. .. ..

South Asia

Bangladesh .. .. .. .. .. .. .. .. .. .. .. ..

Bhutan .. .. .. .. .. .. .. .. .. .. .. ..

India .. .. .. .. .. .. .. .. .. .. .. ..

Maldives .. .. .. .. .. .. .. .. .. .. .. ..

Nepal .. .. .. .. .. .. .. .. .. .. .. ..

Pakistan .. .. .. .. .. .. .. .. .. .. .. ..

Sri Lanka 44 38 51 49 19 23 18 22 30 37 28 27

East Asia

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

World

Low- and middle-income .. .. .. .. .. .. .. .. .. .. .. ..

East Asia and Pacific .. .. .. .. .. .. .. .. .. .. .. ..

Europe and Central Asia .. 22 .. 21 .. 31 .. 16 .. 48 .. 64

Latin America and Caribbean .. 20 .. 11 .. 28 .. 14 .. 52 .. 75

Middle East and North Africa .. .. .. .. .. .. .. .. .. .. .. ..

South Asia .. .. .. .. .. .. .. .. .. .. .. ..

Sub-Saharan Africa .. .. .. .. .. .. .. .. .. .. .. ..

High-income 7 4 6 2 42 36 22 15 51 60 72 82

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

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

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

35




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

(Percentage)

Taiwan

Province RepublicBranch (ISIC) Macao, of India Indonesia Japan Malaysia Myanmar Nepal Philippines of Sri

China China Korea Lanka

1997 1997 1997 1999 1999 1997 1999 1996 1995 1999 1998

Food products (311-312) 48 45 15 41 59 38 .. 8 33 50 34

Beverages (313) 24 34 6 35 31 38 .. 9 9 24 12

Tobacco (314) 39 93 35 82 34 16 47 7 45 19 71

Textiles (321) 70 53 9 52 60 49 .. 37 52 47 62

Wearing apparel,except footwear (322) 81 79 55 78 84 73 .. 18 80 74 86

Leather and fur products(323) 58 34 16 55 50 71 53 8 67 42 69

Footwear (324) 78 65 38 73 54 55 73 16 58 49 57

Wood and cork products(331) 10 41 9 36 29 35 .. 3 17 23 35

Furniture, fixtures,except metallic (332) 6 38 1 32 28 28 21 5 29 23 4

Paper (341) 20 32 4 23 32 34 .. 19 23 20 20

Printing and publishing(342) 29 37 3 .. 30 38 45 7 31 31 12

Industrial chemicals (351) .. 24 1 17 11 18 .. .. 20 11 19

Other chemicals (352) 50 45 19 47 34 40 46 10 33 30 41

Petroleum refineries (353) .. 10 0.3 .. 9 11 13 5 13 .. ..Petroleum, oil, lubricant

and coal products (354) .. 11 5 .. 15 13 .. .. 23 .. ..

Rubber products (355) 40 41 4 23 29 45 35 12 41 20 30

Plastic products (356) 30 45 5 49 40 43 47 7 27 26 40

Pottery, earthenware (361) .. 39 7 .. 42 55 50 .. 44 51 48

Glass (362) 17 38 2 .. 24 28 36 6 9 17 17

Other non-metallicmineral products (369) 16 23 7 .. 19 16 .. 15 14 14 28

Iron and steel (371) .. 15 1 4 10 13 .. 0.1 8 7 6

Non-ferrous metals (372) .. 23 1 14 17 22 20 .. 18 12 3

Metal products (381) 11 33 2 25 25 25 27 2 19 20 7 Non-electrical machinery

(382) 17 35 2 17 24 42 .. 1 48 19 ..

Electrical machinery (383) 69 52 8 62 37 67 .. 5 70 41 45

Transport equipment (384) 4 24 1 11 17 21 .. .. 12 10 10

Professional and scientificequipment (385) 57 57 12 63 36 91 .. .. 80 36 30

Other manufactures (390) 68 52 16 .. 42 71 38 21 65 43 74

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

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

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

36



data are available. It is observed from the table

that in many countries, the share of female

employment in total sectoral employment is

higher than that of male employment in tobacco,

textiles, wearing apparel, footwear, leather and fur products, chinaware and potteries.

(c) Contribution to productivity

Table II.4 presents value added per em-

ployee in different branches of manufacturing in

selected Asian countries (Japan; Bangladesh; Hong

Kong, China; Macao, China; Taiwan Province of

China; India; Indonesia; Malaysia; Republic of

Korea; Singapore; and Sri Lanka) in the latest year

for which data are available and may provide someindication about differences in labour productivity

in different segments. For almost all the countries,

iron and steel has the highest labour productivity,

while the sector with the lowest value added per

employee is not uniform across the countries.

However, the productivity of the majority of agro-

based and resource-based industries such as food

products and beverages, textiles and clothing,

apparel, leather products and footwear was rela-tively high in most of the countries.

2. Issues at stake

(a) Prospects of agro-based and

resource-based SMEs

Up to mid-1997, the economies of South-

East Asian countries experienced robust economic

growth due to:

• Political, social and economic stability

• Endowment of natural and human

resources

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

(Hundreds of US$)

Hong Taiwan Republic

Japan Bangladesh Kong, Macao, Province India Indonesia Malaysia of Singapore Sri

Products (ISIC) China China of China Korea Lanka

1999 1997 1999 1997 1990 1998 1999 1997 1999 1999 1998

Food products (311-312) 738 37 356 108 276 26 46 208 639 463 60

Textiles (321) 535 11 327 128 161 20 42 197 427 335 28

Wearing apparel (322) 339 9 276 113 203 26 25 74 238 180 25

Leather and fur products (323) 635 39 213 74 124 20 28 78 421 342 40

Footwear (324) 505 33 142 83 123 21 27 80 267 187 51

Wood and cork products(331) 621 17 277 67 109 13 38 101 423 291 22

Furniture and fixtures(332) 427 15 261 142 226 25 20 101 363 235 8

Paper (341) 1 030 24 351 99 231 28 81 173 715 498 50

Rubber products (355) 1 013 11 336 .. 141 47 46 167 570 409 46

Plastic products (356) 853 38 294 119 160 28 36 168 484 303 33

Pottery, earthenware(361) 615 13 .. .. 116 20 72 102 260 .. 28

Iron and steel (371) 1 440 82 460 .. 442 67 149 741 1 175 750 80

Non-ferrous metals (372) 1 096 .. 462 .. 347 68 198 337 773 343 35

Metal products (381) 869 23 326 129 132 34 56 172 409 354 30

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


37




• Efficient legal and institutional frame-

work

• Pro-business and pro-foreign direct

investment policies

• Sound macroeconomic policies

• Emphasis on the market, private enter-

prise, outward-looking industrialization

and relatively open economies

Despite this growth, Asian SMEs suffered

from age-old problems:

• Low level of productivity, lower average

value added and output levels per

employee

• Inadequate access to financial institu-

tions and high credit cost

• Higher costs of raw materials because

of small quantities ordered

• Inadequate level of technology and

managerial skills due to lack or inad-

equacy of R&D and difficulty of access

to technological information

• Difficulties in marketing and distribu-tion due to lack of direct overseas

market exposure and penetration

Although many government programmes

focused on developing the SME sector, these

support programmes suffered from the following

deficiencies:

• Involvement of too many government

agencies with minimal coordination

• Short-run and unfocused approach for the development of SMEs

• Absence of continuity or frequent

revisions to many programmes

• More benefits accrued to large and

medium industries compared with small

industries

• Involvement of many non-governmental

organizations for private groups (local

chambers, federations and associations)

necessitating need for greater coordi-nation

Economic liberalization affected small and

medium industries in many ways with some

positive as well as negative effects:

• Decrease in number of microenterprises

• Better access to and low prices for

machinery, equipment and tools

• Greater competition in consumer goods

sectors

• Improved access to the system of new

and universalized government incentives

• Increased access to financial resources

• High costs of support services includinginfrastructure

• More opportunities for subcontracting

and networking from foreign investment

• Greater competition from foreign invest-

ments in modern market and labour

force

The East Asian economic crisis diminished

the positive effects, at times even negating them

and magnifying the negative effects. The crisis

exposed weaknesses in the competitive ability

of the traditional manufacturing and had dispro-

portionate effects on small and medium-size enter-

prises. Although East Asian firms, including

those in crisis countries, were adept at adopting

new manufacturing techniques, they faced con-

tinual challenges from low-wage developing

countries and from China and Japan. As in the

case of the Mexican crisis, the East Asian crisis

led to a sharp fall in production and investment in

non-tradable sectors. This is expected because

currency depreciation, which favours traded goods,reduces the incentive to invest in non-tradable

sectors.

(b) Major issues for consideration

The above analysis indicates that major

issues at stake for the development of agro-

based and resource-based SMEs include the

following:

• Integration of agriculture and agro- based industries

38



• Availability of raw materials and credits

• Location of industry, transport costs and

access to markets

• Economies of scale and size of markets

• Availability of skilled labour and

capacity-building

• Lack of modern technology

• International barriers to trade

• Role of multinationals and foreign

investment

• Environment and sustainability

In many developing countries there is lack

of coordination for the development of agriculture

and agro-based industries due to several restric-

tions imposed on both internal and external trade

in agricultural commodities. Owing to lack of

basic infrastructure such as electricity and

transport, agro-based food processing industries

are generally established close to the cities and

towns, which are the major consumption and

demand centres for these goods. As a result, trans-

port costs for raw materials become high andimpose a burden on the cost of production. In

order to reap several fiscal and monetary benefits,

agro-based and resource-based industries generally

lack vertical expansion and therefore suffer from

the low economies of scale.

C. Rationale for development

and contribution of agro-based and

resource-based industries to

poverty alleviation

1. Rationale for development

of agro- and resource-based SMEs

The rationale for promoting agro- and

resource-based SMEs lies in their valuable contri-

butions to employment generation and poverty

alleviation. These enterprises contribute signifi-

cantly to poverty alleviation and promote economic

and social justice by employing a significant portion of the poor and low-skill workforce, which

may otherwise remain unemployed or underem-

ployed. Higher employment in rural areas helps

in the reduction of inequalities, development of

backward areas and balanced regional growth and

development.

Poor persons cannot participate in the

growth process for reasons of extreme deprivation

or vulnerability combined with poverty or face

continuing exposure to risks of ill health and

malnutrition, which may jeopardize their ability to

participate in the opportunities offered by growth.

Employment generated by SMEs provides effective

safety nets that ensure the rural poor against the

income fluctuations.

Development of agro-based and resource-

based industries provides opportunities for the

growth of economic activities in the informal

sector and microenterprises in both rural and urban

areas. The informal sector remains an important

source of income and employment for the poor and

self-employed in developing countries. This sector

is very diverse and covers multiple economic

activities ranging from petty trading and personal

and domestic services to manufacturing, transport

and construction. The social groups includeartisans and craftsmen, hawkers, fruit and vegeta-

ble vendors, women and daily labourers for

construction and other services. Employment or

ownership of microenterprises provides the poor

with a source of empowerment and income

security and enables them to participate actively in

rural and overall economic development.

Agro-based industries open up new channels

of distribution and marketing for agricultural

commodities produced by the small and marginalfarmers and raise their incomes. Development of

resource-based industries, particularly SMEs, in

rural areas leads to valorization of agricultural

land, agricultural commodities and other resources.

The location of agro-based and resource-

based industries in rural areas helps to distribute

the benefits of economic growth broadly among

the rural poor. It also improves value addition and

the productivity of rural industries through wider

distribution networks and greater access to bothinternal and external markets.


39




A dynamic small and medium industries

sector serves not only to create employment but

also to earn foreign exchange through exports,

upgrade the quality of the labour force and diffuse

technological know-how throughout the economy.

These industries help to mobilize domestic re-

sources by utilizing the savings, labour and

agricultural raw materials that otherwise remain

idle. They serve the low-income consumer

markets and produce a wide variety of goods that

also includes sophisticated products for export.

The location of small and medium industries

in rural areas creates livelihood opportunities that

help to stop migration to urban centres. They

provide a training ground for small-scale entre-

preneurs and business management personnel, who

may later join larger undertakings.

The role of financial markets as an instru-

ment to promote SMEs and alleviate poverty is

generally focused on supplying credit facilities.

However, credit is only one of the financial

services that the poor need. Access to bank

accounts or savings facilities in the rural areas is

equally important. For example, people whoderive their income primarily from agriculture

must build up financial assets following harvests to

sustain themselves for the rest of the year. Even

the poorest households are eager to save if they

can obtain positive real interest rates and there are

conveniently located deposit collecting facilities.

This point has been confirmed by the experience in

Bangladesh and Indonesia.

Integration of SMEs into global market

offers the potential for more rapid growth and poverty reduction. Increased market access for

agricultural products would work to directly

address poverty reduction in developing countries.

While the rapid expansion of demand for unskilled

labour in manufacturing and urban services in

many developing countries has sharply reduced

rural poverty, about three quarters of the world’s

poor still live in rural areas, where agriculture is

often the dominant economic activity. Agriculture

accounts for about 27 per cent of GDP in develop-

ing countries, a similar share of exports and 50 per

cent of employment. This dependency on agricul-

ture is even higher in LDCs. But agricultural

markets are among the most heavily distorted and

attract tariffs several times higher than those facing

manufactured imports.

Historically, textiles and clothing have

played a unique role in economic development and

poverty reduction. Their contribution to the indus-

trial revolution in Western Europe and North

America in the eighteenth and nineteenth centuries

is well known, and they continued to spearhead

industrialization in many developing countries in

the twentieth century. Since textile and clothing

production often requires only simple technology

and is intensive in unskilled labour, many develop-

ing countries have a strong comparative advantage

in these sectors. In the mid-1960s, developing

countries accounted for 15 per cent of world textile

exports and less than 25 per cent of world clothing

exports. By 1998, these shares had reached 50 per

cent and 70 per cent, respectively. However, the

sector has also long been a prime target for protec-

tionism.

Despite these positive aspects, SMEs are

criticized for their inability to realize economies of

scale in procurement and production and have

higher costs of production. In many countries,

SMEs exist on the strength of costly government

support programmes in terms of several fiscal,

monetary and other concessions.

2. Growth and poverty alleviation

In many Asian developing countries, agro-

based and resource-based small and mediumindustries have succeeded in achieving the

intended objectives of absorbing surplus labour,

alleviating poverty and bringing about more

balanced regional growth. In many cases, SMEs

have succeeded in raising their share in terms of

number of establishments, employment and output

vis-à-vis large-scale industries. This is clearly

illustrated in the Philippines in the case of

professional and scientific equipment, electrical

machinery and non-metallic products, pottery, glass

products and electrical equipment.

40



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

(Percentage)

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

15. Food and beverages 4.7 100.0 2.6 0.4 1.6 0.0

16. Tobacco products 2.6 .. 0.8 .. .. ..

17. Textiles 8.3 4.3 --3.1 --5.6 7.0 --2.1

18. Wearing apparel, fur products --4.4 26.6 --5.0 --5.4 .. --1.2

19. Leather, leather products, footwear 1.7 .. --7.6 --1.5 .. ..

20. Wood and wood products(except furniture) 0.5 --3.5 --3.1 --3.6 14.5 ..

21. Paper and paper products 10.9 28.2 5.4 --1.4 10.0 2.4

22. Printing and publishing .. --3.6 0.6 4.4 .. ..23. Coke, refined petroleum products,

nuclear fuel 4.0 10.7 19.0 1.8 .. ..

24. Chemical and chemical products 8.3 .. 13.6 17.1 1.1 --4.7

25. Rubber and plastic products 3.0 .. 3.7 1.5 .. --7.1

26. Non-metallic mineral products 18.3 4.6 2.6 1.5 0.2 ..

27. Basic metals 9.3 12.6 7.3 --0.6 0.1 --4.9

28. Fabricated metal products 2.3 0.3 1.4 2.5 5.7 ..

29. Machinery and equipment n.e.c. 8.0 --9.7 4.1 3.9 .. --5.5

30. Office, accounting and computingmachinery 3.4 .. 73.9 .. .. ..

31. Electrical equipment and apparatus 5.3 2.8 6.2 5.8 .. 0.2

32. Radio, television and communication

equipment 10.6 .. 55.7 .. .. ..

33. Medical, precision and optical instruments 2.7 --6.5 3.7 .. .. ..

34. Motor vehicles, trailers, semi-trailers 13.4 --4.8 14.3 2.6 .. ..

35. Other transport equipment 7.5 .. 25.7 .. .. ..

36. Furniture manufacturing n.e.c. .. .. --2.1 --5.3 .. --3.7

37. Recycling .. .. .. .. .. ..

Total manufacturing 7.1 3.9 9.9 8.1 3.1 --1.9

S ource: UNIDO, International Yearbook of Industrial Statistics 2002.

Notes: ISIC = International Standard Industrial Classification.n.e.c. = not elsewhere classified.

Table II.5 presents the average annual

growth rates by broad branches of manufacturing

in selected Asian economies (India; Indonesia;

Republic of Korea; Singapore; Sri Lanka; and

Hong Kong, China) during the 1990s. Althoughgrowth rates of agro-based and resource-based

industries were adversely affected in the East

Asian countries due to economic crisis at the end

of 1990s, India and Sri Lanka achieved significant

growth rates in the value added of these industries

in the 1990s.

During the 1990s, sectors achieving average

annual growth rates exceeding 8 per cent (i.e.,

the average growth rate of MVA recorded by

East Asian countries in the 1990s) include the

following:

• Non-metallic mineral products, motor

vehicles and trailers, paper and paper

products, radio and TV sets, textiles,

chemical products, basic metals, and

machinery and equipment in India


41




• Food and beverages, wearing apparel

and fur products, paper products, coke

and petroleum, and basic metals in

Indonesia

• Coke and petroleum products, chemical

products, basic metals, computers and

office machinery, radio and TV sets,

motor vehicles and other transport

equipment in the Republic of Korea

• Chemical products in Singapore

• Wood and paper products in Sri Lanka

• None in Hong Kong, China, which

recorded negative growth for most of the subgroups

Of all the crisis economies, the Republic

of Korea’s industrial production recovered the

fastest, rising above the pre-crisis levels within two

years, whereas the levels of industrial production

in Malaysia, Thailand and Indonesia remained

below the pre-crisis level even after two years

(World Bank, 2000). The more rapid recovery in

the Republic of Korea partly reflects its greater

strengths in sectors such as electronics, computers

and telecommunications. The Korean firms also

performed well in transport equipment, whereas

Malaysian and Thai firms suffered in these sectors.

The Republic of Korea had poor performance

in traditional and resource-based sectors such

as food, chemicals, base metals, paper and pulp

products.

Traditional manufacturing sectors were

expected to lead the way to recovery in the crisis

countries having lower wages. In Thailand the

textiles sector grew rapidly following thedepreciation of baht, but output fell back to

pre-crisis levels as the currency appreciated and

Thai products faced steep competition in export

markets. Traditional manufacturing in the

Republic of Korea rebounded only slightly after

the crisis, reinforcing a secular decline.

Small and medium-sized firms were

adversely affected in all crisis countries. While

aggregate Korean industrial output started to

increase in late 1998, production by SMEs conti-nued to fall in absolute terms until July 1999,

resulting in a decline by one third from pre-

crisis production levels. In other countries,

where SMEs had a larger proportion in industrial

production, poor performance by SMEs intensified

the overall industrial setback. For example, more

than 50,000 small firms and 400,000 households

throughout Thailand accounted for about 50

per cent of non-performing loans in 1999. The

inability to restructure these debts effectively

contributes to financial sector problems, which

feed back into the continued financial difficulties

of SMEs.

Despite these adverse effects of the

economic crisis, countries continued with their

commitment to liberalization and globalizationwhile strengthening international regulation for

financial markets and capital flows. Countries

continued to review the rigid and outdated laws,

rules and regulations, particularly in services,

finance, labour, technology and all production in-

puts. As SMEs account for almost 80 per cent of

industrial establishments in Asia, and these SMEs

faced a serious shortage of capital, markets

and professional management, all the countries

continued to have special programmes for the

development and technology upgrading of a SMEs.They also emphasized the development of both

physical and social infrastructure, especially public

utilities, research and development and technical-

oriented infrastructure, which are particularly

needed by the small and medium enterprises.

The countries continued to move from

resource-based and labour-intensive types of indus-

tries to skill- and knowledge-based and medium-

and high-technology industries. They also further

liberalized foreign investment policies to attractmore of the widely accepted foreign direct invest-

ment and portfolio investment.

Table II.6A to II.6C presents sectoral shares

in manufacturing employment and value added in

selected countries (India; Indonesia; Philippines;

Republic of Korea; Singapore; China; Hong Kong,

China; Sri Lanka; and Thailand) in the most recent

year for which data are available. These tables

indicate that agro-based and resource-based manu-

facturing units account for major shares in valueadded in all these countries.

42



• In India, chemical products had the

highest share in MVA (15.7 per cent)

followed by textiles (12.4 per cent),

food and beverages (12.2 per cent), basic metals (9.1 per cent) and electrical

machinery (8.5 per cent). Sectors

having a significant share in employ-

ment include food and beverages,

tobacco, textiles, chemical products,

basic metals, machinery and equipment,

and automobiles.

• Dominant sectors for MVA in Indonesia

include food and beverages (having a

share of 13.6 per cent in MVA), textiles

(12.6 per cent), tobacco products (8.9 per cent) and wood products (7.5

per cent). Sectors having a significant

share in employment include food and

beverages, textiles, chemical products,

non-metallic mineral products, basicmetals, machinery and equipment, elec-

trical machinery and automobiles.

• Dominant sectors for MVA in

Philippines include food and beverages

(29.8 per cent) and chemical products

(12 per cent). Sectors having a signifi-

cant share in employment include food

and beverages, textiles, wearing apparel

and fur products, chemical products,

non-metallic mineral products, electrical

machinery, radio and TV sets andfurniture.

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

(Percentage)

Products by ISIC

India Indonesia Philippines

Labour MVA Labour MVA Labour MVA


16. Tobacco products 5.3 2.0 6.0 8.9 0.7 4.1

17. Textiles 17.1 12.4 15.7 12.6 4.8 2.1

18. Wearing apparel, fur products 3.3 1.0 10.7 5.0 14.2 5.2

19. Leather, leather products, footwear 1.5 0.5 7.0 3.7 3.8 1.0

20. Wood and wood products (except furniture) 0.9 2.5 10.2 7.5 2.1 0.9

21. Paper and paper products 2.0 2.0 2.4 3.8 2.1 2.2

22. Printing and publishing 1.3 1.3 1.3 2.9 2.7 2.0

23. Coke, refined petroleum products, nuclear fuel 0.8 2.0 0.1 0.2 0.2 9.7

24. Chemical and chemical products 9.6 15.7 4.7 7.2 5.0 12.025. Rubber and plastic products 3.4 3.7 6.9 5.3 3.8 2.5

26. Non-metallic mineral products 5.2 5.3 0.1 0.0 4.3 4.8

27. Basic metals 7.3 9.1 1.4 4.5 3.5 3.9

28. Fabricated metal products 3.2 4.0 2.7 2.9 3.6 1.8

29. Machinery and equipment n.e.c. 8.8 5.8 1.2 0.8 3.3 1.7

30. Office, accounting and computing machinery 0.2 0.5 0.0 0.0 2.1 3.2

31. Electrical equipment and apparatus 3.1 8.5 1.7 3.1 4.3 3.4

32. Radio, television and communication equipment 1.7 2.4 3.7 4.9 11.3 2.8

33. Medical, precision and optical instruments 1.0 1.5 0.5 0.6 3.3 1.2

34. Motor vehicles, trailers, semi-trailers 3.3 4.7 1.0 2.6 1.8 2.0

35. Other transport equipment 3.4 4.3 1.6 6.9 1.0 1.8

36. Furniture manufacturing n.e.c. 1.3 1.5 6.9 2.8 5.0 1.9

37. Recycling 0.0 0.1 0.1 0.0 0.1 0.0

Total manufacturing 100.0 100.0 100.0 100.0 100.0 100.0


Note: n.e.c. = not elsewhere classified.


43




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

(Percentage)

Products by ISIC

Republic of Korea Singapore China




17. Textiles 9.0 5.5 0.4 0.2 11.0 6.7









27. Basic metals 4.2 6.6 0.4 0.4 8.3 9.0










37. Recycling 0.2 0.1 0.1 0.1 0.1 0.1




• Dominant sectors in MVA in the

Republic of Korea include radio and TV

sets (16.2 per cent), chemical products

(9.5 per cent) and food and beverages(7.8 per cent). Sectors having a signifi-

cant share in employment include food

and beverages, textiles, wearing apparel

and fur products, chemical products,

rubber and plastic products, fabricated

metal products, machinery and equip-

ment, radio and TV sets, electrical

machinery, and automobiles.

• Dominant sectors in MVA in Singapore

include computers and office machinery

(22.5 per cent), radio and TV sets(19.4 per cent) and chemical products

(18.5 per cent). Sectors with high

employment potential include food

and beverages, chemical products,

fabricated metal products, machineryand equipment, computers and office

equipment, radio and TV sets, and

automobiles.

• China had a significant share of

MVA in food and beverages, chemical

products, basic metals, radio and TV

sets and automobiles. Sectors having a

significant share in employment include

food and beverages, textiles, chemical

products, non-metallic mineral products,

basic metals, computers and officeequipment, and automobiles.

44



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

(Percentage)

Products by ISIC

Hong Kong, China Sri Lanka Thailand




17. Textiles 14.0 10.9 15.2 9.3 10.1 6.8









27. Basic metals 0.9 1.0 0.3 0.5 4.2 1.5










37. Recycling 0.0 0.0 0.0 0.0 0.0 0.0




• Dominant sectors in MVA in Hong

Kong, China, include food and

beverages, textiles, wearing apparel,

printing and publishing, and radio andTV sets. Sectors having a significant

share in employment include food and

beverages, textiles, wearing apparel and

fur products, printing and publishing,

radio and TV sets, furniture and auto-

mobiles.

• Sri Lanka had dominant shares of

MVA in food and beverages, tobacco

products, wearing apparel, chemicals

and rubber and plastic products.

Sectors with high employment include

food and beverages, tobacco products,

textiles, wearing apparel, rubber and

plastic products, non-metallic mineral products, and furniture.

• Thailand had dominant shares in food

and beverages, motor vehicles, non-

metallic mineral products, textiles and

rubber and plastic products. Sectors

with high employment include food and

beverages, textiles, wearing apparel,

rubber and plastic products, non-

metallic mineral products, radio and TV

sets and furniture.


45




The significance of SMEs in the deve-

lopment process may be beyond the recorded

shares in MVA and employment that are directly

attributed to them. They are often the vehicles

which facilitate the birth and expansion of large-scale industries in the structural transformation

that occurs with growth in income. For example,

in the Republic of Korea, much of the increase in

employment of factories with 100 or more workers

since the 1960s came from small firms that grew

larger and larger over time. In India, Indonesia

and the Philippines, most of the enterprises now in

existence began as household firms, subsequently

growing into SMEs and larger enterprises in a

number of cases.

In order to achieve faster growth and

alleviation of poverty, industrialization in many

developing countries has focused on development

of textile and clothing industries. As a labour-

intensive sector, clothing provides significant job

opportunities in labour-abundant economies having

a comparative advantage due to lower wages.

Moreover, for over two decades the quota regula-

tions of the Multifibre Arrangement enabled late-

comers to access markets for clothing and textiles

once other countries filled their MFA quotas.

More recently, improvements in production

and communication technologies and declining

transport costs have enabled geographical separa-

tion of the labour-intensive segments from the

skills- and capital-intensive segments of the manu-

facturing process in textiles and clothing. For

example, while growing automation has increased

the capital intensity of the pre-assembly stages

of the production process, the assembly stages

have remained relatively labour-intensive. As a

result, it has become both technically feasible andeconomically profitable for high-wage country

manufacturers to relocate their assembly stages of

production to low-wage countries and reimport the

end products for domestic sale or for export to

third markets. The NIEs in East Asia were the

first to establish production facilities under

outsourcing agreements with large United States

retailers and brand-name merchandisers.

It is generally held that prices of manufac-

tures are much less flexible than prices of primarycommodities in world trade, because markets for

manufactures are much less competitive. Most

markets for manufactures have high barriers to

entry; many are oligopolistic, controlled by a small

number of producers who often compete on the

basis of quality, design, marketing, branding and product differentiation rather than prices.

In most major industrial countries, wages

in firms are not flexible owing to a number of

labour market regulations, including minimum

wage legislation, collective bargaining and restric-

tions on hiring and firing. The absence of such

conditions in the labour markets of most deve-

loping countries, together with large amounts of

surplus labour, often implies that wages in deve-

loping countries are much more flexible than in

industrial countries. This increases the ability of

firms to lower wages when there are price declines

so those profit margins are maintained. It thus

allows them to compete on the basis of prices in

markets for labour-intensive manufactures.

Furthermore, the East Asian experience

shows that mobility of low-skilled labour is greater

among developing countries than between deve-

loping and industrial countries. All these factors

combined not only introduce greater price

flexibility in the markets for developing countries’

labour-intensive manufactures vis-à-vis those

exported by industrial countries, but also exert

downward pressure on their prices and terms of

trade.

The share of developing countries in world

exports grew considerably during the period 1980-

1998 for both clothing and selected products from

the electronics industry, which are labour-intensive.

However, the increase was concentrated in a small

number of economies. The NIEs accounted for

two thirds of all clothing exports from developingeconomies during the first half of the 1980s, but

their share declined thereafter to about one fifth by

the mid-1990s, as they upgraded their exports and

began to exit from the clothing markets. Their

market shares were taken up by other developing

countries in Asia, notably those in South Asia,

the ASEAN-4 (comprises Indonesia, Malaysia, the

Philippines and Thailand), China, Turkey and

Mexico.

In the markets for the selected products

from the electronics sector, NIEs accounted for most of the spectacular increase in the share of

46



developing countries in world exports in 1980-

1995. During this period, the share of these

economies increased from two thirds to three

fourths of all developing country exports of these

products. Other developing countries, such as theASEAN-4, China and Mexico, have succeeded in

increasing their market shares in the past few

years. It is interesting to note that the ASEAN-4

and China have gained market share in the elec-

tronics sector much more rapidly than in clothing.

3. Employment generation

Small and medium industries have predo-

minant shares in output, exports and employment

in agro-based and resource-based industries inmany Asian countries such as Bangladesh, India,

Pakistan, China, the Republic of Korea, Indonesia,

Thailand and the Philippines. They played a sig-

nificant role in economic development even in the

United States, Germany, Japan and Singapore.

They are mainly in textiles, garments, wood prod-

ucts, food processing, leather products, fabricated

metals, machinery and equipment, rubber and plas-

tic products, pottery, and printing and publishing.

International experience indicates that evenunder the most competitive conditions, unorgan-

ized and small business enterprises not only

provide major employment opportunities but also

survive alongside the highly organized sector. For

example, there are about 23 million small business

enterprises in the United States that constitute the

principal source of new jobs in the economy. All

firms under the United States Small Business Act:

• Employ 53 per cent of the private

workforce

• Represent 99 per cent of all employers

• Account for more than 50 per cent of

GDP

• Account for 28 per cent of jobs in the

high-technology sectors

• Provide 55 per cent of all innovations

• Provide virtually all new jobs in the

economy

• Account for 47 per cent of all sales inthe country

• Account for 35 per cent of federal

contract deals

• Account for 51 per cent of private

sector output

• Represent 96 per cent of all United

States exporters.

Nearly 60 per cent of United States small

businesses have 4 employees or less, 18 per cent

have 5 to 9 employees, 11 per cent have 10 to 19,

9 per cent have 20 to 99 and only 1.4 per cent

have 100 to 499, the traditional high-end demar-

cation in qualifying in the small business segment.

As regards Asian countries, in 1990 smalland medium enterprises accounted for 95 per cent

of establishments in Bangladesh, 98 per cent in

Thailand, 93 per cent in Malaysia, 70 per cent in

Indonesia and 80 per cent in the Philippines.

The SSI sector in India produces over 7,500

products ranging from consumer goods to sophi-

sticated machinery and computer peripherals and

covers a wide spectrum of industries. Small-scale

industries basically fall under the unorganized

sector, which accounts for 93 per cent of employ-

ment. In addition, the SSI sector contributes over

40 per cent of the gross turnover in manufacturing

output, 45 per cent of manufactured exports and 40

per cent of total exports.

In Japan, of the total of 54,160,000 people

engaged nationwide (excluding those in primary

industries), 42,270,000, i.e., 78 per cent of employ-

ment, are in small and medium enterprises. Their

share of employment in various manufacturing

subsectors ranged from 41 per cent in transport

machinery to 100 per cent in silverware. SMEsaccounted for 99 per cent of all business establish-

ments, 52 per cent of both manufacturing value

added and exports, 64 per cent of wholesale

business and 78 per cent of retail sales.

Development in the Republic of Korea has

largely been driven by the expansion of conglo-

merates, but in the 1980s, the SME sector began to

grow rapidly. There are now nearly 96,000 small

and medium manufacturing enterprises, which

employ 1 to 300 persons each. They account for 69 per cent of total employment in this sector.


47




Like the Republic of Korea, Taiwan Pro-

vince of China has made rapid strides in expanding

its industrial base and enhancing exports. SMEs in

Taiwan Province of China account for 90 per cent

of enterprises and 65 per cent of exports. The root

of the progress made by both the Republic of

Korea and Taiwan Province of China is the

combined result of sound economic policies and

a strong scientific and technological base. Like

the Republic of Korea, Taiwan Province of China

benefited tremendously from the Asian export

boom to the United States. The main exports

have been textiles, clothing, footwear, furniture,

chemicals, electric appliances and consumer and

computer electronics.

In China, the highest priority is given to

employment generation, environmental and eco-

logical protection, poverty eradication and raising

the living standards of people in rural areas by

increasing agricultural productivity. In China,

SMEs provide nearly 75 per cent of urban job

opportunities and the number of units has

exceeded 8 million, being 99 per cent of total

enterprises in China. A large number of these

enterprises employ around four persons per unit

under the SME sectors. SMEs account for 78 per cent of employees, 64 per cent of industrial

turnover, 52 per cent of corporate profits and 52

per cent of fixed assets held by industry.

In 1985, the Government of China started

the Spark Programme, a project aimed at establish-

ing “big agriculture” in the vast rural areas to

foster the development of industrialized agricul-

ture, animal husbandry, forestry and all types of

agro and forest produce processing industries. The

Spark Programme is a scientific and technologicaldevelopment plan implemented by the State

Science and Technology Commission (SSTC) to

develop advanced technologies for township

enterprises. From 1986 to 1993, more than 50,000

projects had been implemented at various levels

under the Spark Programme, covering more than

85 per cent of the total number of towns and

training 30 million technical and management

personnel. Over 400 types of advanced technical

equipment had been developed and more than

100 Spark technology-intensive zones had beenestablished. Since 1993, 71 regional pillar indus-

tries, 43 Spark technology-intensive zones and 173

industries in provinces have been established all

over China. Today, there are over 2,000 techno-

logy trade markets all over China employing about

1 million people.

In China, rural industries dominate pro-

duction in cement, iron and steel, fertilizers,

hydropower and agri-machinery and contribute 25

per cent of rural employment. The initial focus of

rural industry in China was on primary processing

of farm products, handicrafts, manufacture and

repair of simple farm tools, and developing and

processing local industrial resources. The indus-

tries were small and used primitive techniques.

Reforms in China have encouraged rural indus-trialization along with the entry of multinationals

in export-oriented sectors.

Subcontracting and ancillarization have

helped the dispersal of industry and the growth of

the small and medium industries and rural non-

farm sector in many countries. The most success-

ful example of subcontracting from large urban

areas to small rural entrepreneurs is in Japan. The

division of responsibility and resources, in keeping

with its economic propensity, has given Japan anunparalleled global edge. Its success is attributed

to expanding demand, limited capital of large

companies, low basic skills required by small units

and paternalistic relationships. Big business

houses share the production process, technology

and innovation with small/medium industries.

Thailand, Malaysia and Indonesia have

adopted the Japanese model with variations to suit

each nation’s cultural and social environment. In

Thailand large companies are allowed to developancillaries, which can operate within the same

factory premises and yet are entitled to have

independent recruitment, wage structure and

service conditions.

In Pakistan, subcontracting has been

practised over a long period in traditional products

such as carpets, garments and footwear. Subcon-

tracting is also strong in the labour-intensive

activities of rattan in Indonesia and for garments in

Philippines. The “Bapakangkat” (parent unit) and“Anakangkat” (related units) of Indonesia are good

48



examples of networking. Under the scheme, in

addition to contractual networking, the Bapa-

kangkat provides technical and financial assistance,

leases plant and equipment and trains people,

leading to higher employment and lowering the

cost of production.

These facts suggest that although the

definition of SSEs may not be uniform across

countries, they contribute significantly to employ-

ment generation. As unemployment is the root

cause of poverty, the SMEs through employment

generation help in poverty reduction. However,

all available studies show that the growth and

quality of employment in the SMEs have been very

much affected by the absence of timely low-cost

credit, improved technology, good infrastructure,

quality consciousness, modern marketing, proper

organization and a synergy with large, organized

industries.

All measures should be taken to improve

technology, quality and productivity by vocational

and other training, skills development, organiza-

tional changes like cluster development, etc.

Indeed barely 5.3 per cent of Indian youth in the

labour force in the age group 19-24 in 1999-2000

are trained in vocational skills through formal

training as against nearly 30 per cent in selected

least developed countries (LDCs) and above 70 per

cent in developed countries.

SMEs have high employment elasticity.

Their employment intensive-character should be

protected by selecting proper labour-intensive

technology drawn from all sources, including the

grass-roots indigenous level. Proper rules andregulations should be laid down so that benefits

of higher growth are translated in the form of

increased earnings for the workers.

As the major portion of the poor exist in

the unorganized sector, faster growth and produc-

tivity in this sector will also reduce poverty. In the

attempt to increase labour productivity, it is

necessary to improve job quality and security by

major changes in legislation regarding basic social

security, working conditions, minimum wages and protection of labour interests.

D. Economic policies and strategies

for development of agro-based and

resource-based industries

1. Industry development formulation

The development of the agro-based and

resource-based industries provides the poor with

opportunities to generate income and assets. But

these industries face many barriers to development

and cannot fulfil their potential to generate income

or improve wealth distribution to the poor and to

contribute to poverty alleviation. In rural areas,

the business environment may not be favourable to

thriving agro-based industries. This reflects notonly low skills development but also low access

to capital, information and technology. These

constraints are discussed in detail in the following

sections.

Even after the establishment of WTO, there

are still several barriers in multilateral trading

arrangements for market access in agro-based

manufactures. Although there have been some

initiatives in this area such as preferential market

access provided by the European Union (EU) andthe United States, the improved access they offer is

restricted to the poorest countries. Given that

those countries generally are not large exporters

of labour-intensive manufactures, the initiatives do

little to improve market access for such exports.

In Canada and the United States, tariff peaks are

concentrated in textiles and clothing; in the EU

and Japan, in agriculture, food products and

footwear.

The majority of developing countries withthe capacity to expand exports of agro-based

products continue to face significant barriers.

Trade in textiles and clothing continues to be

governed by quota regulations, and developing

countries’ manufactured exports encounter high

tariffs and increased contingent forms of protec-

tion, such as anti-dumping action and labour and

environmental standards.

The roadblock towards technological

upgrading and transfer of technology to SSIs isalso due to complex modalities of technology


49




transfer, lack of knowledge about the new global

trade system which is being engineered by WTO

through GATT, the General Agreement on Trade in

Services (GATS), TRIMS and TRIPS, and various

technical and non-tariff barriers for exports of

products of SSIs imposed by advanced countries

on the grounds of the environment, health and

labour among other factors. Another important

constraint pertains to inadequate availability of

finance for the acquisition or patenting of any

indigenously developed technology or product.

Technology quality management by adhering to

ISO standards has been found lacking in many

SSIs.

After the establishment of WTO, the

roles of intellectual property rights (IPRs) and

patenting have become dominant in the flow

of technologies and international trade. IPRs

include copyrights, patents, trademarks and de-

signs. All these have far-reaching implications

for SSIs since reverse engineering, an important

source of technology for SSIs, is difficult under

the stricter IPR regime. The issues of IPRs

and patenting have serious implications for

specific segments like agro and food processing,

biotechnology and chemicals including pharma-

ceuticals.

In order to learn from international best

practices and formulate appropriate policies for

the development of agro-based and resource-

based industries, the following measures are

suggested:

(a) A task force at the regional level

may help to come up with an action plan toformulate strategies to support the development of

agro-based and resource-based industries;

(b) A regional capacity-building pro-

gramme could help regional governments or

development agencies to work with the private

sector to stimulate growth and opportunity;

(c) Identification of some pilot pro-

grammes in progressive regions can provide a

good demonstration or benchmark for other regions to replicate.

2. Business environment

(a) Licences and regulatory system

All countries have a specialized, organized

and very elaborate system of rules and regulations,

licences and control for the development of SMEs.

Fiscal and other incentives are also given in some

form or other to SMEs and export-oriented units in

almost all countries, including developed countries.

Some of these policies are directed explicitly at

these industries, while others are generally aimed

at firms in certain priority sectors on account of

their special role in development.

The nodal agency for SSI promotion anddevelopment in the United States is the Small

Business Administration (SBA). Established in

1953, SBA provides financial, technical and

management assistance to enable Americans to

start, run and grow their business enterprises.

SBA has a portfolio of US$ 45 billion in business

loans and is the United States single-largest

promoter of small business. It provides loans, loan

guarantees and what are called “disaster loans”. In

1998, SBA offered management and technical

assistance to more than 1 million business entrepreneurs.

Japan has enacted the Small and Medium

Enterprise Basic Law, which stipulates that the

Government must implement necessary measures

in a comprehensive manner in the following areas

for the SME sectors:

(a) Modernization of equipment;

(b) Improvement of technology;

(c) Stimulation of demand;

(d) Rationalization of management;

(e) Structural upgrading of small and

medium enterprises;

(f) Prevention of excessive competition

and establishment of proper subcontracting.

The Spark Programme on rural industrializa-

tion approved by the Chinese Government in 1986

aims at modernizing the rural economy throughscience and technology. The Programme works at

50



three levels – county, province and central Govern-

ment. In general, units under Spark include (a)

village and township enterprises having R&D units

in cooperation, (b) R&D units which have village

or township units for cooperation and (c) ascientific and production consortium. Spark has

adopted a mechanism of setting up a technology

development and extension network that interlinks

local sectors and central departments and institu-

tions for continuous flow of technology.

In addition, China has set up non-profitable

productivity centres promoted by SSTC that

provide comprehensive service to medium and

small-sized enterprises. These productivity centres

are equipped with computers, fax machines andtraining equipment and systems used in the United

States; Japan; Hong Kong, China; Italy; Australia;

the EU; and Singapore. China’s experience in

providing 100 million jobs in rural enterprises

under the non-farm sector during 1986-1993

reveals that its rural non-agricultural enterprises

owe their success to a market-orientation, availabi-

lity of infrastructure, stress on higher technology,

incentive-linked wages, competitiveness, diversity

in products and community cooperation.

Small and medium-sized enterprises play an

important role in the Republic of Korea’s economy

that is supported both by the Government and

a well-developed institutional mechanism and

infrastructure. The development of SSIs has the

support of the Republic of Korea’s Constitution,

which states that “promotion of SSIs is the duty of

the nation”, while the country has also developed

comprehensive SME legislation.

In India, the primary responsibility for

developing village and small industries restswith the state governments. However, the central

Government provides various fiscal and monetary

incentives and support services for the promotion

of SSIs and also for the development of all

industries in industrially backward areas to

reduce regional imbalances. The Government

prescribes minimum credits (currently 40 per cent

of total credits) that government-owned commer-

cial banks must lend to the priority sectors, which

include agriculture, SSI and retail trade and trans-

port operators. In addition, it has establishedspecialized institutions that extend long-term

finance for fixed-asset purchases. Some credits

and equity funds also come from State industrial

development corporations. Government provides

various other fiscal, monetary and non-monetary

incentives to promote SMEs and export-orientedunits.

India has a unique policy of reserving

products for exclusive manufacture in the SSI

sector as a promotional and protective measure for

SSI, which was initiated in 1967 with 47 items and

reached a peak of 873 items in October 1984. The

policy is applicable only to manufacturing units

and not for servicing or repair activities. This

policy has statutory backing from the Industries

(Development and Regulation) Act, 1951. As at30 June 2001 there were 799 items on the reserved

list. One item, ready-made garments, was de-

reserved in January 2001; a further 12 items were

de-reserved in June 2001 and another 14 items in

2002.

(b) Fiscal and investment incentives

Tax incentives accorded to firms are in the

form of exemptions from sales taxes, customs

duties and income taxes. Such exemptions are

granted for a variety of purposes and have

selective effects from the standpoint of firm size.

In India, for example, small firms are given a

central excise duties exemption which declines

with firm size until it disappears for large indus-

tries. However, many countries generally grant tax

concessions on the basis of considerations other

than size. Tax holidays are granted for the estab-

lishment or expansion of industries, which are

classified as new or necessary or particularly desir-

able, such as infrastructure and core industries.

Investment incentive packages are also

provided for diversifying exports and for regional

dispersion of growth and employment opportuni-

ties. India, which perhaps has the biggest pro-

gramme and network for small industries, has an

elaborate organization to promote investments in

different small industries and ancillaries. These

provide for industrial estate facilities, tax holidays,

export incentives and other direct subsidies such

as transport subsidies, concessional credit and purchase and price preference.


51




In Indonesia and the Philippines, new

investment promotion facilities such as import duty

concessions on capital goods and raw material

imports are available to firms, including small and

medium industries, in priority sectors.

The general nature of the investment

incentive system, except in India, however, places

the SMEs in a disadvantageous situation for the

following reasons:

• The proliferation of licences, permits,

taxes and duties and control over

agricultural price policies impose major

costs on agro-based and resource-based

SMEs.

• Administrative procedures, documenta-

tion and follow-up activities for incen-

tives involve fixed costs, and the net

value of the implicit subsidy is much

lower for SMEs.

• SMEs have less capability in financial

management and project evaluation,

making it more difficult to meet

documentation and project feasibility

prerequisites for a loan.

• Investment boards are generally located

in the capital, and the travel time and

expense can be a significant burden on

SMEs, which are generally located in

the rural areas.

• Many types of tax concessions, e.g.,

exemption from duties on imported

machinery, are more valuable to large

firms than to small labour-intensive

firms.

• General tax rates on corporate and

individual incomes are very high in

many countries in Asia (see table II.7).

(c) Export promotion schemes

Of all the policies pursued in East Asia,

“export promotion” is the most often talked about.

This policy starts from a basic principle in inter-

national economics, that any tax on imports is a

tax on exports, either through raising the cost of export production or through making the domestic

market more attractive. In East Asia, one major

factor for economic success has been the main-

tenance and encouragement of export competitive-

ness, while retaining some degree of domestic

protection.

East and South-East Asia, in addition to

maintaining realistic exchange rates and reducing

the average level of tariffs, pursued policies

directly in support of exports by granting free trade

status for all export activities. This is achieved

through: (a) fenced private or public free trade

zones (FTZs); (b) non-fenced FTZs; (c) bonded

manufacturing warehouses (BMWs); (d) duty

exemptions; and (e) duty drawbacks/rebates. The

first three were specialized schemes, which had been widely and effectively used in countries at

the early stages of development. Duty exemptions

and drawbacks are economy-wide schemes that

were desirable complementary systems, used at

the advanced stage of development. However,

development experience suggests that in many

low-income countries, the implementation of

economy-wide schemes has been flawed, owing

to inadequate development of the necessary

instruments, institutions and mechanisms (World

Bank, 1996).

The fundamental features of the Republic of

Korea’s pioneering export promotion drive were

the duty drawback scheme, implemented through

the domestic letter of credit and the export finance

system. The instruments selected for the Republic

of Korea’s export drive were comprehensive

and far-reaching. They included the provision of

income tax deductions, import duty exemptions

and drawbacks, liberal access to pre- and post-

shipment and investment finance at preferential

rates, export finance guarantees and creditinsurance, preferential rates for electricity and rail

transport, and supportive infrastructure investment,

such as the provision of free trade zones.

Taiwan Province of China also effectively

used the system of duty drawbacks for export

promotion, but the scheme was significantly

different. In Taiwan Province of China, unlike in

the Republic of Korea, duty rebates are claimed on

the basis of customs documents of exports and

imports. Export credit (through banks) is muchless significant as a proportion of export value than

52




T a b l e I I . 7 .

T a x p o l i c i e s i n s e l e

c t e d A s i a n e c o n o m i e s i n 1 9 9 0 a

n d 2 0 0 0

T a x

T a x e s

D o m

e s t i c

E x p o r t

I m p o r t

H i g h e s t m a r g i n a l i n c o m

e t a x r a t e

r e v

e n u e

o n i n c o m e ,

t a x e s o n g o o d s

d u t i e s

d u t i e s

p r o f i t s a n d

a n d s

e r v i c e s

I n d i v i d u a l

C o r p o -

c a p i t a l g a i n s

r a t e

C o u n t r y o r a r e a

R a t e

E x e m p t i o

n

r a t e

%

l i m i t

%

%

o f c o r r e

s p o n d i n g

%

%

o n i n c o m

e

o f

G D P

o f t o t a l t a x e s

v a l u e

a d d e d

o f t a x r e v e n u e

o f t a x r e v e n u e

%

( U S $ )

%

2

0 0 0

1 9 9 0

2 0 0 0

1 9 9 0

2 0 0 0

1 9 9 0

2 0 0 0

1

9 9 0

2 0 0 0

2 0 0 0

2 0 0 0

2 0 0 0

N e w l y i n d u s t r i a l i z e d e c o n o m i e s ( N I E s )

H o n g K o n g ,

C h i n a

. .

. .

. .

. .

. .

. .

. .

. .

. .

1 7

1 3 4 6 2

1 6

R e p u b l i c o f K o r e a

. .

3 8

. .

7

. .

0

. .

1 3

. .

4 0

6 3 5 0 7

2 8

S i n g a p o r e

1 6

4 5

5 0

4

5

0

0

4

3

2 8

4 0 0 0 0 0

2 6

T a i w a n P r o v i n c e o f C h i n a

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

C h

i n a a n d M o n g o l i a

C h i n a

7

5 0

7

1 . 5

6 . 5

0

0

2 2

7

4 5

1 2 0 8 9

3 0

M o n g o l i a

2 2

2 8

1 6

9

1 6

0

2 . 3

2 0

8

. .

. .

. .

S o

u t h - E a s t A s i a

C a m b o d i a

. .

. .

. .

. .

. .

. .

. .

. .

. .

2 0

3 8 4 1 2

2 0

I n d o n e s i a

1 7

6 5

6 5

6

6

0 . 1

0 . 5

7

2

3 5

2 0 9 4 9

3 0

L a o P e o p l e ’ s D e m o c r a t i c R e p u b l i c

. .

. .

. .

. .

. .

. .

. .

. .

. .

4 0

6 5 8

. .

M a l a y s i a

. .

4 3

. .

6

. .

1 0

. .

1 5

. .

2 9

3 9 4 7 4

2 8

M y a n m a r

3

3 0

3 5

7

4

0

0

2 3

9

3 0

. .

3 0

P h i l i p p i n e s

1 4

3 3

4 4

6

5

0

0

2 8

2 1

3 2

1 0 0 0 0

3 2

T h a i l a n d

1 4

2 6

3 4

9

8

0 . 2

0 . 3

2 4

1 2

3 7

9 2 8 2 9

3 0

V i e t N a m

1 5

. .

3 2

. .

8

. .

0

. .

2 1

5 0

5 6 9 5

3 2

S o

u t h A s i a

B a n g l a d e s h

7

. .

1 5

. .

5

. .

0

. .

3 0

. .

. .

. .

B h u t a n

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

I n d i a

1 0

1 9

3 6

7

5

0 . 1

0 . 1

3 6

2 7

3 0

3 2 2 2

4 0

M a l d i v e s

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

N e p a l

9

1 3

2 1

7

7

0 . 4

1

3 7

3 1

. .

. .

. .

P a k i s t a n

1 2

1 3

2 8

9

8

0

0

4 4

1 6

3 5

1 7 2 7 1

. .

S r i L a n k a

1 5

1 2

1 5

1 5

1 4

4

0

2 7

1 3

3 5

3 6 3 0

3 5

E a

s t A s i a

J a p a n

. .

7 3

. .

2 . 4

. .

0

. .

1 . 4

. .

3 7

1 5 6 8 6 3

3 0

S o u r c e s : W o r l d B a n k ,

W o r l d D e v e l o p m e n

t I n d i c a t o r s 2 0 0 2 a n d W o r l d D e v e l o p m e n t R e p o r t 2 0 0 2 .

N o t e

:

T w o d o t s ( . . )

i n d i c a t e t h a t d a t a a r e n o t a v a i l a b l e .

53




in the Republic of Korea. More of the credit

comes through suppliers’ credit (in the form of

post-dated cheques), or buyers’ credit (mainly from

Japanese trading companies, which account for an

estimated 30 to 50 per cent of Taiwan Province of China’s exports). Indirect exports cannot get ex-

port credit on the basis of documentary proof of

their production for export. Finally, the Republic

of Korea’s system differs from that of Taiwan

Province of China’s in the area of input coeffi-

cients. For many products they have been set more

generously in the Republic of Korea, so as to give

more of a subsidy to exports through an extra

rebate.

Indonesia, Malaysia and Thailand alsoapplied export support instruments including tax

incentives, duty drawbacks and exemptions, and

export and investment finance. But the intensive

efforts were initiated only in the early 1980s and

the system of exemptions and drawbacks was

unsatisfactory because of limited access (especially

by small and indirect exporters) and slow and

cumbersome procedures. Compared with the

Republic of Korea, the South-East Asian systems

have not been as comprehensive in coverage or as

automatic in access.

There are four main methods of financing

trade: (a) company credit; (b) bank credit; (c) bank

loans; and (d) self-financing. In most developing

countries, exporters cannot meet financing needs

through company credit or bank credit because

they lack modern banks and trading companies that

can internalize the risk-taking. Therefore, the

immediate objective of ensuring access to trade

financing must be met through bank loans.

The three instruments for the bank loan- based trade financing system are: (a) transaction-

based, self-liquidating mechanisms for trade

financing (including rediscount mechanisms of the

central bank); (b) institutions to deal with export-

ers’ non-performance risk, i.e., pre-shipment export

finance guarantees (PEFG); and (c) institutions to

deal with overseas buyers’ non-payment risk, i.e.,

export credit insurance and guarantees (ECI/G).

The Bank of Korea’s trade financing mechanisms

are particularly good examples of successful bank

loan-based trade financing and consisted of allthese instruments.

3. Development of skills and technology

Despite attractions such as political stability,

the rapid pace of deregulation, moderate inflation,

availability of relatively cheap labour, large domes-

tic market and plentiful natural resources, most of

the Asian developing countries face obstacles to

technology transfer. These difficulties vary in

degree across all Asian countries especially in

agro-based industries given their different levels of

technological development and absorptive capacity.

They fall broadly into the following categories:

(a) Poor infrastructure and utilities;

(b) Strict laws and regulations on foreignfirms, and inefficiencies in the implementation of

deregulation policies;

(c) Shortage of trained technical and

managerial workforce;

(d) Weak local supporting industry in the

production of parts and components;

(e) Low rate of diffusion of technology to

the rest of the economy except for FDI;

(f) High cost of technology agreements;

(g) Transfer of technology which is not

environment friendly.

An important condition for successful tech-

nology transfer is the ability of the host countries

to attract foreign investment and provide an envi-

ronment that enhances the willingness of foreign

investors to take a long-term view and transfer

know-how to local partners and workers.

Lack of transparency and excessive bureauc-

racy in the implementation of foreign investment

laws often cause a big gap between approval and

actual realization rates, which may be as low as 30

to 35 per cent in the case of several countries in

the Asian and Pacific region. Furthermore, the gap

between approval and actual investment is as long

as two to three years.

Most of the SAARC countries share com-

mon strengths and problems. The problems relateto the low level of technology, environmental

54



degradation and a limited export base concentrated

on natural resources and semi-finished products.

For a long time, these countries were dependent on

the West for their technological needs and paid

little attention to building their own technological

capabilities.

By and large, SAARC countries encouraged

transplantation of turnkey projects operating at a

suboptimal level of efficiency and capacity utiliza-

tion and were unable to absorb, adapt and develop

technologies needed for their economic develop-

ment. Whatever science and technology (S&T)

infrastructure was developed, it remained weak in

establishing linkages with the productive sectors.

Furthermore, much of the aid acquired in the pastwas spent on public sector projects that were

inefficient. There is also a lack of sufficient

linkages and networking among academia and

enterprises.

The Chinese case is an example that has met

with considerable success in technological upgrad-

ing of its small-scale sector through transfer of

technology by creating sufficient institutional

mechanisms. In this direction, the Spark Pro-

gramme was initiated in 1986 for village and town-

ship enterprises (VTEs) in rural areas and the

Torch Programme (for high- technology areas) was

initiated in 1988 to cater for industries mostly in

120 high-technology development zones (HTDZs)

in urban areas. To facilitate transfer of technology

and reduce the barriers between research institu-

tions and enterprises, some 55,000 new technology

enterprises (NTEs) have been set up. The Govern-

ment provides soft bank loans, preferential taxation

policies and development of infrastructure facilities

and risk capital for start-up for NTEs through a

government-financing agency known as the

Venture Investment Corporation.

With the onset of economic liberalization in

India in 1991, the Government of India liberalized

the import of technologies by domestic manufac-

turers. Some salient features relating to the tech-

nology import policy are:

• There is a commitment to development

and utilization of indigenous capabilities

in technology and manufacturing, andtheir upgrading to world standards.

• Foreign investment and technology

collaboration are welcome to obtain

higher technology to increase exports

and expand the production base.

• The relationship between domestic and

foreign industry is much more dynamic

in terms of technology and investment.

• Indian companies are free to negotiate

terms of technology acquisition with

their foreign counterparts according to

commercial judgment.

• Procedures for foreign investment,

foreign technology agreements and

services of foreign technicians have been made easier and more liberal.

• Imports of capital goods have been

completely liberalized with a significant

reduction in import duties.

India has acquired imported technologies,

either by outright purchase, direct foreign invest-

ment and joint ventures or on the basis of royalty

payments. For the acquisition of foreign technolo-

gies, Indian companies have also received supportand assistance from international organizations like

APCTT, the United Nations, UNIDO and the Inter-

national Development Research Centre (IDRC) of

Canada.

The main sources of imported technologies

have been the United States, the United Kingdom,

the former Union of Soviet Socialist Republics,

Germany, France and Japan. Many financial and

non-financial support systems built over a period

of time helped in the acquisition, adaptation andassimilation of imported and indigenous technolo-

gies. India was also able to provide technical and

consultancy services not only to African and Asian

developing countries but also to some developed

countries. However, India still lags far behind in

its R&D activities when compared with advanced

countries, since the expenditure on R&D is very

low (see table II.8).

The R&D expenditure at 0.6 per cent of

GNP in India, 0.4 per cent in Malaysia, 0.2 per cent in the Philippines, 0.1 per cent in Thailand,


55




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

Scientists Technicians Science and Science Expenditures High-technology

and engineers in R&D engineering and for exports

in R&D students technical R&D

Country or area journal % of

% of total articles Billions manu-

per million per million tertiary level % of of factured

people people students GNP US$ exports

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

Newly industrialized

economies (NIEs)

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

Taiwan Province of China .. .. .. .. .. .. ..

China and Mongolia

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

South-East Asia

Cambodia .. .. 13 3 .. .. ..Indonesia .. .. 39 123 0.07 5.7 16Lao People’s

Democratic Republic .. .. 20 2 .. .. ..Malaysia 154 44 27 304 0.42 40.0 59Myanmar .. .. 56 3 .. .. ..Philippines 156 22 14 159 0.21 8.5 59

Thailand 102 75 18 356 0.10 13.9 32Viet Nam 274 .. .. 106 .. .. ..

South Asia

Bangladesh 51 32 47 130 .. 0 0Bhutan .. .. .. .. .. .. ..India 158 115 25 8 439 0.62 1 245 4Maldives .. .. .. .. .. .. ..

Nepal .. .. 13 35 .. 0 0

Pakistan 78 14 32 232 .. 0 0

Sri Lanka 188 45 34 61 .. 0.1 3

East Asia

Japan 4 960 663 21 43 891 2.80 127 368 28

World

Low- and middle-income .. .. 35 75 298 .. 156.8 16

East Asia and the Pacific 496 193 43 14 817 0.88 100.5 25Europe and Central Asia 2 212 478 44 34 905 0.83 15.6 10Latin America and Caribbean 287 .. 30 10 075 0.58 40.5 16

Middle East and North Africa .. .. 29 3 106 .. .. 1

South Asia 158 114 24 8 896 0.62 .. 3

Sub-Saharan Africa .. .. 29 3 499 .. .. 8High-income 3344 .. 25 437 339 2.30 847.0 22

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

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

56






China has a pilot project to introduce credit

guarantee schemes for SMEs covering 30 pro-

vinces. As per estimates, a corpus of around 7.6

billion yuan has been raised. Like India, China

has the National Technological Innovation Fund tosupplement technology upgrading among SMEs.

In Bangladesh, the Government directs

funds to SMEs through scheduled banks, which

are obliged to lend prescribed share of their total

resources to these industries as working capital.

Some nationalized banks have also helped to

finance subcontracting arrangements of small

industries to large ones, but these constitute a

small portion of the banks’ loan portfolio, and as

with the other loans, the recovery rate is low. InIndonesia the most important among the priority

schemes has been the provision of working capital

and small investment credit for fixed-asset

acquisition, but lending has been below target as

the lending agencies involved have exercised

extreme caution in the disbursement of such loans.

The Philippines also has specialized

programmes for SMEs.

Despite all these measures, in virtually all of the countries, small and medium industries com-

plain about the paucity of funds available to them

and the onerous terms associated with loans they

receive. Interest rates on government loans are

lower than market rates but the funds available are

limited and high collaterals are required by both

private and government banks. Interest rate

spreads are very high in many countries.

(b) Specialized financial institutions

In industrialized countries, in addition to

commercial banks which undertake general

lending, there are large numbers of specialized

financial institutions including those in rural areas

that focus on lending of particular types, such as:

• Factoring companies, which lend

against trade receivables and which

frequently undertake the task of debt

collection for companies using their

services. The receivables themselves provide the security for the loan.

• Leasing companies, which lend for the

purchase of capital equipment, allowing

the lessee to take delivery of equipment,

which effectively serves as the collateral

for the leasing contract.

• Trade credit suppliers, which finance

purchases of raw materials and use raw

material inventories as collateral.

• Mortgage finance companies, which

specialize in financing mortgages.

The specialized financial institutions play a

vital role in allowing businesses to grow, including

agro-business. In most developing countries there

are very few leasing or trade credit entities as thefinancial and judicial systems necessary for their

effective operations do not exist.

(c) Role of microfinance institutions

Since the late 1980s, the number of

microfinance institutions (MFIs) has grown rapidly

in many developing countries. MFIs can be de-

fined as formal, semi-formal or informal providers

of financial services to low-income clients, includ-

ing the self-employed. Financial services generally

are restricted to lending although some MFIs also

provide savings, insurance and payments services.

There are a number of reasons why MFIs

are likely to bring benefits to the poor. MFIs enjoy

better local knowledge and proximity, which is an

important advantage because the majority of poor

households live in vast rural areas that are unde-

served by the commercial banks. Furthermore, the

semi-formal and informal MFIs complement the

formal financial system by providing financialservices to those who have limited access to the

formal financial system.

However, the importance of microfinance

as an instrument of poverty alleviation should be

treated with caution. The quality of the loan

portfolio of MFIs is often poor because of inad-

equate management. A large number of these

institutions are not efficient and survive on subsi-

dies from their donors. Lending rates charged by

MFIs are usually very high. The linkages betweenMFIs and commercial banks are often weak.

58



Replication of successful MFI models is often

impossible owing to differences in demographic

or cultural contexts. Finally, there are still no

countries with a comprehensive network of

microfinance institutions.

The above analysis indicates that access to

capital is a critical factor for the development of

agro-based industries, particularly SMEs. Funding

is critical to these industries in their early stages of

development. Commercial banks should offer

more appropriate instruments to SMEs and develop

microcredit schemes with the support of govern-

ment.

There is also a need to develop specialized banks for the supply of venture capital, trade

credits, mortgage finance, factoring and leasing

services to SMEs.

Commercial banks in the East and South-

East Asian countries are suffering lending

constraints in the aftermath of the Asian crisis.

Governments and multilateral lending institutions

(like ADB) should consider establishing special

funds dedicated to helping to fund SMEs in the

agro-based and resource-based sectors.

5. Infrastructure and information

technology

Development of a proper legal and institu-

tional set-up and efficient infrastructure (transport

and telecommunications) is essential for the deve-

lopment of SMEs. In open economies, such as

Singapore; Hong Kong, China; or Mauritius, only

minimal investment laws and regulations exist and

administrative costs are negligible. Most develop-

ing countries like India are faced with a transition

period. The experience of countries such as Indo-

nesia, Malaysia, Taiwan Province of China and

Thailand suggests that the transition can be man-

aged well. The faster an economy is reformed, the

easier the management of private investment in-

cluding foreign investment. Regulations can be

simple and their administration can be made effi-

cient and transparent.

As regards infrastructure, some of the meas-

ures to improve the production and marketing of SMEs are suggested below:

(a) Cluster development

A “cluster” refers to a geographically

bounded concentration of similar, related or com-

plementary businesses, with active channels for

business transactions and communications that

share specialized infrastructure, labour, markets

and services. The cluster approach assists SMEs

in introducing innovative marketing. UNIDO has

helped to develop clusters for exports of textiles,

rubber and pharmaceuticals in India to improve

their international competitiveness.

(b) Trading houses

The Japanese experience in this area is

worth noting. Japan is the pioneer in setting up

large trading houses known as “Sogo Sosha”.

These companies assisted in the marketing of

products of Japanese SMEs. In order to encourage

exports of products of SMEs, the Government of

India encouraged the setting up of export houses

and trading houses and also extended various

facilities and incentives to export houses and

trading houses.

(c) E-commerce and development of

information technology

E-commerce has revolutionized international

trade owing to:

• Reduction in transaction costs globally

• Direct contractual relations between

buyers and sellers

• More transparency in dealings

The three major directions of commercial

activity, i.e. (a) business to business (B2B), (b)

business to consumer (B2C) and (c) business to

government (B2G), have been very much captured

through e-commerce and can help SMEs to expand

their market and obtain information on both

demand and supply and behaviour of customers.

Hong Kong, China and Singapore are aggressively

expanding their ICT infrastructure to improve

their ability to take advantage of the Internet andglobalization.


59




All developed and developing countries are

now attaching special importance to the develop-

ment of IT infrastructure through the formulation

of national policies on IT and related sectors. The

Government of India has adopted a convergence

bill to cover telecommunications, IT and broadcast-

ing under the same Act. Under the framework of

WTO, there is a special international arrangement

on IT under which all participating countries have

agreed to duty-free entry for all IT products and

components.

(d) Networking

Networking can play a dominant role insupporting SMEs in marketing their products.

Networking is of many types. However, vertical

(aimed at finding complementary activities in the

development of a new product) and knowledge

networks (associations geared to solving a common

technology or market information) are more

relevant in the context of the market.

E. Role of the World Trade

Organization for the developmentof agro-based and resource-based

industries

1. Role of the World Trade

Organization

The prevailing world trade order came into

existence in 1995, with the culmination of the

Uruguay Round of trade talks. The institutionali-

zation of this order is represented by WTO, which

monitors the compliance of member countrieswith a number of agreements on trade relationships

between countries and also acts as a dispute reso-

lution mechanism.

The current order is fundamentally different

from the previous regime, manifested primarily in

GATT and focusing mainly on commodities and

manufactured goods. In addition to commodities,

a number of other factors have become extremely

important in cross-border transactions. These

can be broadly classified in three categories:services, knowledge and capital. The agreements

administered by WTO now cover the first two

categories, while a collective agreement on capital

flows is also on the agenda for future talks. Thus,

the new order is far wider in scope than the one it

replaced.

Quantification of all these various impacts is

obviously very difficult. Most of them are outside

the purview of this study. However, the most

significant impact on the developing countries is

likely to be that of the elimination of quantitative

restrictions (QRs) under GATT.

While the Uruguay Round agreements

achieved a sizeable reduction in the use of non-

tariff measures (NTMs), the phasing-out periodfor the existing NTMs differed significantly for

different products. NTMs in agriculture, affecting

temperate zone food products (particularly grains

and dairy products) exported mainly by developed

countries, were to be phased out almost immedi-

ately, but those on textiles and clothing were given

a transition period of 10 years and voluntary export

restraints (VERs) four years. These imbalances

are reinforced by the unequal incidence of

VERs across exporting countries and products.

For example, as at 1992, of the 79 VERs outsideagriculture and textiles and clothing, 69 involved

Japan and the Republic of Korea as exporters,

and they applied mainly to motor vehicles and

consumer electronics.

Regarding broad product categories, avail-

able evidence suggests that trade liberalization has

been limited and slow in agriculture, textiles and

clothing, compared with other sectors. Access to

markets for these products continues to be much

more restricted. Agricultural subsidies, particularlyin the EU, have been largely responsible for

restricting the growth of exports of a number of

agricultural commodities from developing coun-

tries.

In manufacturing, except in textiles and

clothing, differences in the evolution of market

access conditions are not large enough to explain

the differences in the pace of expansion of trade in

these products. Among other factors, the growing

importance of international production networksappears to have played a greater role.

60






(c) Because of preference schemes and

differing export structures, the barriers faced

by exporters to the same market can vary

widely;

(d) Uncertainty over market access related

to contingent protection, interpretation of norms

and procedures and the discretionary nature of

many preference schemes may represent a further

disincentive to exporters.

Developing countries generally face higher

barriers to their exports than industrial countries.

Adoption by all industrial countries of schemes

that provide unrestricted market access for LDCs

could have significant benefits without imposing

undue costs on other suppliers, given the very

small share of LDCs in world trade (around 0.5

per cent). Trade preferences also have duty draw-

backs. Apart from the economic inefficiencies,

they create vested interests and should therefore be

set firmly within a context of rapid multilateral

liberalization.

Improved market access for LDC exports

will not be sufficient to ensure sustained growth in

exports as constraints in key infrastructure sectors

like telecommunications, transport and financial

services often add more to export costs thanforeign trade barriers (World Bank 2002b).

(b) Agreement on agriculture

Agriculture has traditionally been heavily

protected from import competition. It was not

until the conclusion of the Uruguay Round in 1994

that the sector was brought under effective GATT

discipline. The Uruguay Round marked the begin-

ning of a gradual liberalization process in agricul-

ture, initially over 6 years for industrial countriesand 10 years for developing countries. WTO

members also made a commitment to engage in

negotiations to continue the reform process in

the final year of the 6-year implementation period,

part of the so-called “built-in agenda”. The key

commitments entailed a move away from quanti-

tative restrictions, a binding of maximum tariff

rates and the reduction of domestic support and

export subsidies (see box II.2).

Tariffication and binds: Non-tariff measures to be converted to bound tariff at the start of the imple-

mentation period with average tariff cuts by industrial countries of 36 per cent over six years from a 1986-1988

base, and a minimum cut of 15 per cent on any tariff line.

Minimum import access: Tariff rate quotas were introduced to guarantee minimum market access by the

end of the implementation period.

Domestic support, as measured by the total aggregate measurement of support (AMS), to be reduced by

20 per cent from a 1986-1988 base over the implementation period. Exempt are domestic supports of less than 5

per cent, “green box” subsidies allowed for purposes such as development and technical progress and “blue box”subsidies linked to output reduction schemes.

Export subsidies to be reduced by 36 per cent in value and subsidized exports by 21 per cent in volume

for each product over the implementation period from a 1986-1990 base.

Special safeguard provisions, triggered by volume increases or price reductions, permit the imposition of

additional duties up to specified limits.

• Greater flexibility was given to developing countries in their commitment to market access reductions

in domestic and export subsidies (generally two thirds of developed country commitments and a

longer implementation period of 10 years).

• For subsidies excluded from the reduction commitments, the measures will be considered

non-actionable in terms of countervailing duties and legal challenges at WTO until the end of 2003.

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

62



Under the Agreement on Textiles and Cloth-

ing (ATC), quota restrictions are being gradually

abolished (as products are “integrated”) over the

• Under the Uruguay Round ATC, MFA quotas are to be phased out progressively over a 10-year period.

In the first stage, which began on 1 January 1995, WTO members were required to integrate products

representing not less than 16 per cent in volume terms of their 1990 imports of T&C. In stage 2, starting

January 1998, not less than a further 17 per cent was to be integrated; and in stage 3, from January 2002, a

further 18 per cent. Finally, on 1 January 2005, all remaining products (amounting to a maximum 49 per

cent) are to be automatically integrated.

• Products not yet integrated are subject to a special transitional safeguard mechanism, whereby an importing

country can apply quantitative restrictions for up to three years on imports from a particular source of supplywhich causes or threatens to cause serious injury to the domestic industry. After integration, regular GATT

safeguards apply.

• In addition to this integration process, ATC accelerated the growth rates for the remaining quotas.

The annual growth rates of quota volumes were increased by a factor of 16 per cent for the first stage of the

Agreement, by a further 25 per cent for the second stage and another 27 per cent for the last stage. LDCs

enjoy one-stage advancement in the acceleration of quota growth.

• In additional to the MFA quotas, T&C imports are subject to exceptionally high tariffs in both developed and

developing countries. Trade-weighted average (applied) tariffs for non-OECD countries are 16 per cent.

This average conceals large variations among individual countries. The largest developing country exporters

tend to have higher tariffs. ASEAN, China and South Asia all have tariffs in the range of 20-33 per cent on

textiles and of 30-35 per cent on clothing.

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

period 1995-2005 and quotas that have not been

removed are subject to a progressive increase in

their growth rates (see box II.3).

F. Conclusions and recommendations

1. Role of agro-based

and resource-based industries

In many developing countries, agro-based

and resource-based SMEs contribute significantly to

GDP growth, employment generation and poverty

alleviation. In general, SMEs have higher labour

elasticity and have grown at a higher rate than the

overall industrial sector. This proves their ability to

compete globally. But these industries face a

number of problems and constraints, which include

the following:

(a) Lower productivity and outdated tech-

nology;

(b) Lack of skilled labour and managerialskill;

(c) Constraints on infrastructure;

(d) Low economies of scale;

(e) Lack of modern marketing;

(f) Increased capital intensity;

(g) High cost of domestic credit and lack

of foreign investment;

(h) Increased competition due to removal

of QRs and reduction of customs duties.

A wide range of opportunities can be

seized by small-scale and labour-intensive indus-

tries. This is particularly so in the Asian region,

where the horizontal division of labour through

trade and joint venture projects is increasingsharply.


63




The following measures need to be given

priority to strengthen the SMI sector:

• It is necessary to facilitate the transfer

of technology to SMEs by suitablearrangements such as regional infor-

mation networks and the provision of

timely and adequate finance to SMEs.

• Adequate backward and forward

linkages need to be established between

small and large units in terms of

subcontracting, production sharing and

manufacture of parts.

• Suitable measures should be taken to

enhance the access of the SMI sector to information particularly relating to

external markets and foreign invest-

ment.

• Vertical expansion of SMEs may be

limited owing to reservation of items

and limits on investment. A review of

the reservation policy and investment

limits is necessary to facilitate capacity

expansion, technology upgrading and

economies of scale.

• Much of the existing growth of

SMEs has taken place in and around

the metropolitan areas, but balanced re-

gional growth requires that the process

of industrialization be extended to the

countryside. In this respect, the expe-

rience of China in setting up township

enterprises on a large scale may be

particularly relevant for other develop-

ing countries.

• SMEs are most vulnerable to trade

protectionism and exchange rate fluc-

tuations. Undesirable tariffs and non-

tariff restrictions on their products must

be removed to enhance the export

potential of SMEs.

2. National-level policies

At the national level, the development of

agro-based and resource-based SMEs calls for various policies, including the following:

Marketing – Sectors with a competitive

advantage need to be identified and sector-specific

innovative marketing support devised. SMEs need

to be promoted as ideal destinations for franchising

and outsourcing. A mandatory policy on govern-ment purchases would provide a captive market.

The United States Small Business Act provides for

the compulsory purchase of 24 per cent of govern-

ment purchases from small business.

Technology – In the pre-liberalization era,

technology upgrading was often the last priority

for SSIs. With limited competition in the market-

place, depreciated machinery provided a cost

advantage. This has changed with liberalization,

which emphasizes better quality. As technologyupgrading becomes a key parameter of competi-

tiveness, it is necessary to focus on enhancing

technology information through a technology bank

and facilitating technology transfers through soft

financing and a capital subsidy scheme.

Infrastructure – Power, water, industrial

estates, roads, telecommunications and a clean

environment are some of the more critical aspects

of infrastructure for doing business. Production

and commerce are heavily dependent on these

inputs. Improvement in infrastructure facilities for

SMEs is necessary to enhance their efficiency and

productivity.

Clusters – Clusters have the potential to be

springboards of core competencies. The creation

of common facilities, upgrading of infrastructure,

demonstration projects, capacity-building, streng-

thening of associations, targeted credit delivery and

brand building are activities that it is suggested be

built around clusters.

Cluster development has to be accorded

priority for existing ones and potential clusters

would have to be identified and an appropriate

action plan worked out for their integrated deve-

lopment. The programme needs support in the

form of adequate infrastructure for the clusters and

active involvement of industry associations in the

maintenance of their services.

Access to information – The World Wide

Web is changing the face of the marketplace.Information is being described as the fifth factor of

64



production. Databases on market-related and

financing-related information need to be identified

and made accessible in a user-friendly manner.

Governments must provide more of their SSI-

related services through the Internet.

Innovative financing techniques – There is a

need to develop innovative financing measures

such as setting up venture capital funds, leasing

companies, mortgage finance companies, factoring

companies, trade credit suppliers and microfinance.

Microfinance – The development of

microfinance promotes economic growth, thereby

contributing to poverty alleviation. Not only does

financial development foster economic growth and

create employment opportunities for the poor, but

it also helps to mobilize savings.

3. Development strategy for agro-based

and resource-based industries

While agro- and resource-based small and

medium industries play important roles at different

stages of a country’s economic, social and political

development, various studies conclude that many

of the small and medium industries in Asiandeveloping countries are less efficient and less

productive than their larger counterparts. They

suffer from high-mortality rates, which inflict

heavy costs to the economy. Many of them lack

entrepreneurial and technical resources to make

them successful. While various incentives may

make them profitable, the efforts might be

economically wasteful.

(a) Macroeconomic policies

Macroeconomic stability is one of the

necessary conditions for efficient development

of the resource base of industries and poverty

reduction. Macroeconomic volatility puts a break

on economic growth. High and unpredictable

inflation hurts everybody, particularly the poor as

their incomes are not indexed to prices, and thus

contributes directly to higher poverty rates.

However, sound macroeconomic policies

have only limited capacity to alleviate poverty

directly. These policies should be directed at

promoting growth through prudent implementation

of macroeconomic goals, developing direct inter-

ventions for protecting the interests of the poor and

for target groups of industries with employment

potential and comparative advantage.

The experiences of India, Bangladesh,

Pakistan, China, the Republic of Korea, Indonesia,

Thailand, the Philippines, Japan and Singapore

suggest that given appropriate programme and

policy assistance, small and medium industries can

make substantial contributions not only to output

and employment but also to exports. Rather than

general subsidies, selective support should be

extended to qualified firms and industries only

with fixed-term finance for the specific purpose of assisting them in becoming competitive.

(b) Fiscal incentives

In many countries, tax holidays have been

given as an investment incentive, but the benefit

has been marginal either because they are not

available to small and medium industries or they

are more accessible to larger industries. Moreover,

tax holidays have been less effective in theregional dispersal of industries, as industries tend

to be located near the main demand centres or

regions with better infrastructure facilities. Instead

of providing tax breaks for industries, it may

be more productive to develop basic infrastructure

facilities in backward areas through increased

allocation of public funds.

A reform of government policies should

redirect the focus from the microeconomic level of

the firm to the macroeconomic level of businessand the economic environment. Instead of focus-

ing on the different concessions to be provided,

greater emphasis should be placed on creating an

environment conducive to long-term development

of not only efficient but also viable small and

medium industries. This may entail the disman-

tling of costly incentives and subsidies that

encourage inefficiency and waste in firms, increas-

ing the availability of essential inputs and bank

credits for small and medium industries and

introducing a wide array of marketing options and

possibilities.


65




(c) Technology development

One of the major problems faced by SMEs

is technological obsolescence and the use of

outdated plant, machinery and equipment. Consi-

dering the urgent need to attain technological

competitiveness of SSIs in the face of global

competition, it is important to stimulate technolo-

gical revolution in SSIs.

However, developing countries should not

blindly adopt advanced technologies but acquire

or develop technologies that are appropriate to

local needs and ensure a smooth transition from

outdated traditional technologies to more modern

technologies conforming to local conditions. It isgenerally agreed that instead of importing and

adopting advanced technologies from the West,

developing countries should acquire, adapt and use

technologies that are available from “regional

sources” as these are more compatible with the

local culture, skills, raw materials and demand.

The technology policies adopted by SSIs

should be an integral part of the overall S&T

policies in all countries. The experiences of the

developed economies of the United States, Japan

and Europe have shown that the average size of a

firm increases with the growth in national and per

capita incomes. SSIs in the developed countries

are far more productive than even large firms

because of the usage of modern technology and

management techniques. Economic development

is invariably accompanied by a reduction in wage

disparities among different sectors, industries and

firms of different sizes.

In order to remain competitive in the era of

globalization, it is imperative that SMEs upgradetheir technology, which may involve (a) introduc-

tion of new tools and equipment, (b) changes in

the manufacturing process, (c) improvement in the

quality of products, (d) introduction of new de-

signs, (e) use of new raw materials and (f) use of

modern management and information technology.

This requires an integrated approach encompassing

identification, technology transfer, adaptation and

absorption. Governments should provide financial

assistance to SMEs for technology upgrading and

modernization. The following are some of therecommendations for such an integrated approach:

Technology information – Setting up a

technology bank at the country and regional levels

which will have information on technologies

available and their sources is recommended. In

addition, the bank could provide information ontechnology policy, technologies for different

sectors and their applications, institutional infra-

structure, sources of finance for acquiring techno-

logy within the country and from abroad. To start

with, it will disseminate information on upgrading

of technology, process know-how and design

along with institutions and also provide consul-

tancy services or any other input required. A

compendium of available technologies from R&D

institutions in various countries could be brought

out on a sectoral basis and circulated among thefacilitating institutions and industry associations

for dissemination of technology related informa-

tion.

Financial assistance – Financing may also

be provided to units entering into collaboration for

technical know-how and technology upgrading

with a view to enhancing the marketability of their

products or entering into buy-back arrangements

for exports. Concessional customs duties within

the WTO framework may be provided for the

imports of environment friendly plants and machi-

nery for technology upgrading of SMEs as is

generally applicable to export-oriented units.

Industry clusters – As major portions of the

exports of SMEs emerge from industrial clusters,

a massive programme needs to be launched to

modernize export-oriented industrial clusters.

Quality upgrading – More SMEs should be

encouraged to obtain ISO 9000. Encouragement

could be given to small industry associations in theform of financial grants to set up and operate

testing laboratories. Strengthening of existing test-

ing facilities in technical institutions would also be

necessary. At least one testing facility for each

major cluster should be set up to fulfil their needs.

Role of FDI – The diversity of experiences

in Asia with respect to FDI requires different

policy approaches on the part of host countries.

Those countries that have only recently been open

to FDI need to ensure that the “open door policy”is maintained and remains stable. They should

66



examine the possibility of a further liberalization

of FDI regimes; the harmonization of FDI and

related policies on industry, trade and technology;

and improving the efficiency of their administrative

set-up for investment approvals. In doing so, allcountries in the region should pay particular atten-

tion to firms from neighbouring countries so as to

capitalize on the growing intraregional investment.

Special attention needs to be given to small and

medium-sized enterprises whose special needs –

dictated by their limited financial and managerial

resources and insufficient information – may call

for incentives for joint ventures. The Asian market

has high potential for small and medium-sized

TNCs.

Consortia for SSI marketing – Governments

may promote the setting-up of more consortia for

SSI marketing and provide them with financial

and other support. The participation of SMEs in

domestic and international trade fairs should be

encouraged and promoted.

(d) Infrastructure and human resources

development

Efficient physical infrastructure and skilledlabour are critical factors for enhancing produc-

tivity and efficiency. For the more dynamically

traded goods and services, telecommunications are

the most important facilitator of investment, and

technological and organizational innovations drive

foreign investment into those countries which have

trained and skilled workforces and fairly high

educational standards. This points to the overrid-

ing importance for developing countries of invest-

ing more in the development of human resources,

infrastructure and services. It also highlights therisk of being marginalized in the case of least

developed countries with a lowly of skilled labour

force and infrastructure constraints. The existence

of a dynamic local business sector creates a

supportive environment through efficient networks

of local suppliers, service firms, consultants,

partners or competitors. It is therefore necessary

to concentrate efforts on the development of

local entrepreneurship. Equally important is the

availability of high-quality telecommunications

and transport systems, energy supply and other utilities.

(e) Competent and committed bureaucracy

Another important institutional prerequisite

appears to be the establishment of a competent

economic bureaucracy. The complexity and diffi-culty of managing targeted industrial policies

places high demands on the economic administra-

tors, who must be able to balance financial support

for targeted industries with penalties for non-

performance. The economies of Japan, the

Republic of Korea and Taiwan Province of China

had economic bureaucracies capable of imposing

discipline on private industry. In short, the

management of a set of successful industrial poli-

cies requires a stable macroeconomic framework

and committed economic bureaucracy capable of running complex pricing policies and objectively

running public subsidy schemes.

(f) Legal, institutional and regulatory system

It is also necessary to strengthen the

regulatory system and the legal and institutional

set-up for the orderly growth of industries. As

regards the limits and nature of government inter-

vention in private sector activities, it is necessary

to devise optimal rules for the regulatory system,which while serving its legitimate purpose will not

transcend its limits to the disadvantage of private

sector development. First, any policy affecting

allocation of resources and regulation of the

private sector needs to be transparent and based on

a specified set of procedures. Second, even when

there is strong presumption in favour of govern-

ment intervention, it is imperative to limit it to the

minimum necessary scale. Third, from among the

available alternative regulatory sets, it is necessary

to select the one which provides the least scope

for rent-seeking.

Along with deregulation, more important

measures need to be directed towards creating a

legal and institutional infrastructure for the smooth

functioning of the private sector. This is well

illustrated by the Indonesian experience. Although

Indonesia’s industrial policy, trade and financial

sector reforms were deep and sweeping, they failed

to achieve the full benefit as Indonesia lagged in

changing its corporate law and other laws vital to

trade and industry. The same applied to issues of land and property rights.


67




An important lesson from the East Asian

development experience is that a holistic approach

to deregulation is more productive than partial

deregulation in any one sphere, say in industrial

policy, which is divorced from any reform in other areas. Domestic deregulation should proceed in

tandem with liberalization of trade and tariffs in

order to ensure optimal allocation of resources

between traded and non-traded goods.

4. Role of external trade

(a) Trade and techniques of production

A detailed analysis of the relationship

between trade and MVA in the UNCTAD Tradeand Development Report 2002 shows that for more

than a decade, world trade has been growing on

average faster than world income as a result of

rapid integration. Policies governing market

access for both goods and FDI had a more decisive

influence on the evolution of trade in many

products. The increased mobility of capital,

together with continued restrictions on the mobility

of labour, has accelerated trade in a number of

sectors where production chains can be split up

and located in different countries.

Policies in developing countries have also

contributed by offering various incentives to FDI

and encouraging TNCs to operate in their territo-

ries with minimum restrictions. UNCTAD further

observed that the aggregate picture conceals

considerable diversity in the developing world:

• First, countries that have not been able

to move away from primary commo-

dities the markets for which are rela-

tively stagnant or declining have been

marginalized in world trade.

• Second, most developing countries that

have been able to shift from primary

commodities to manufactures have

done so by focusing on resource-

based, labour-intensive products which

generally lack dynamism in world

markets.

• Third, a number of developing countries

have also experienced a rapid rise in

skill- and technology-intensive products.However, with some exceptions, the

involvement of developing countries in

the manufacture of such products has

been confined to labour-intensive and

assembly-type processes with little value

added.

• Fourth, a few developing economies

have seen sharp increases in their shares

in world manufacturing value added.

This group includes some East Asian

NIEs that had already achieved

considerable progress in industrializa-

tion before other developing economies

began to shift their emphasis to export-

oriented production.

•Fifth, with the exception of this last

group, exports of developing countries

continue to be concentrated on resource-

based, labour-intensive products.

However, market growth is slow for

many of these products, which continue

to be protected by both tariff and non-

tariff barriers in industrial countries.

The above trends lead to the conclusion that

a simultaneous drive by a large number of develop-

ing countries to expand their existing exports and

increase competition among them for attractingFDI in labour-intensive products could be self-

defeating, as this could cause significant terms-of-

trade losses and create frictions in the global

trading system. UNCTAD suggested that these

problems could be avoided by three sets of factors:

• First, by faster growth of markets for

labour-intensive manufactures in more

advanced economies (both the indus-

trialized countries and the NIEs), which

in turn depends on faster income growth

and improved market access.• Second, the middle-income countries

should diversify their trade and produc-

tion and move out of labour-intensive

manufactures and create space for

lower-income countries, both in the

markets of advanced countries and in

their own markets.

• Finally, the developing countries them-

selves should expand their domestic

markets by overcoming their deep-

seated problems of unemployment and poverty.

68



A return to rapid and sustained growth and

full employment policies in the industrialized

countries is crucial for averting problems associ-

ated with potential frictions within the multilateral

trading system. The growth in trade among deve-loping countries is also crucial for expanding

markets for labour-intensive products. In particu-

lar, industrial upgrading in more advanced deve-

loping countries would allow new players to

take over labour-intensive activities in line with

the “flying geese paradigm”. This has already

happened to some extent. China and the other

highly populated low-income countries that have

adopted more export-oriented strategies gained

much of the market shares given up by NIEs when

those economies shifted to more capital- and

technology-intensive exports.

The industrial upgrading needed in the

middle-income countries depends, to a large extent,

on the policies they pursue in such areas as trade,

industry and technology. It also depends on the

extent to which large economies such as China,

India and Indonesia will rely on foreign markets to

create jobs and incomes for large segments of their

population.

Rapid industrialization in the NIEs, particu-larly at the early stages of their development,

depended heavily on expansion of exports. As

these countries were poor in natural resources, they

depended on expansion of labour-intensive manu-

facturing to earn foreign exchange to import capi-

tal goods and some essential primary commodities

such as oil. They had also small domestic markets

and their industries needed foreign markets to

achieve the necessary economies of scale in

production. But large countries such as China and

India can rely less on foreign markets for their

industrialization. The skills mix and resourceendowments in China and India are sufficiently

well developed to allow rapid upgrading in a

number of technology-intensive sectors to enable

them to earn the foreign exchange needed for

sustained economic growth and development of

agro-based and resource-based industries.

(b) Role of export promotion policies

Export promotion schemes have been a criti-

cal part of East Asia’s economic success and meritspecial consideration. These schemes consisted

mainly of duty exemption and drawback systems.

But such schemes had limited success in other

Asian developing countries owing to cumbersome

rules and procedures, and the costs from delays

and paperwork outweigh the reductions in duty.A review of experience in East Asia and Africa

suggests that simple exemption schemes focusing

on the direct exporter are more sustainable and

attractive to the private sector than drawback

mechanisms

One of the key requirements of a modern-

ized duty exemption or drawback should be the

development of a system of pre-tabulated and

published input-output coefficients. The work of

pre-tabulating the quantity or value coefficientsshould be carried out by technical persons, sepa-

rated from the customs, while the customs office

should focus on the implementation of exemptions

and drawbacks based on the pre-tabulated and

published coefficients. This is based on the expe-

rience of (a) the Republic of Korea and Taiwan

Province of China; (b) recent experiences of deve-

loping countries such as India and Bangladesh;

(c) almost 50 World Bank projects (during 1980-

1990) on the implementation of duty-free import

administration reforms most of which failed prima-

rily owing to the mishandling of input-output

coefficient administration; and (d) the new GATT

rules on export subsidies, which require the

systematic documentation of input-output coeffi-

cients.

The other key measure of export support has

been the supply of export credits to exporters,

especially for pre-shipment finance. It is necessary

to restructure and strengthen the existing financial

system with a focus on trade finance, rather than

creating new institutions for supply of export or foreign exchange credits.

It is also necessary to modernize customs

administrations in many countries for quick dis-

bursement of duty drawback claims. An inefficient

customs administration comes in the form of slow

or non-existent rebates and negative effective

protection. An alternative solution that merits con-

sideration would be zero tariffs on imported raw

materials and intermediates, coupled with increased

reliance for revenue purposes on domestic indirecttaxes, such as value added tax (VAT).


69




(c) Free trade zones

Free trade status for export activities can be

achieved through (a) fenced private or public

FTZs, (b) non-fenced FTZs or (c) bonded drawbacks/rebates. These specialized schemes have

been widely and effectively used in countries at the

early stages of development. The fundamental

feature of the Republic of Korea’s pioneering

export promotion drive was the duty drawback

scheme implemented through the domestic letter of

credit (DLC) and the export finance system. In the

Republic of Korea, the Input Coefficient Adminis-

tration, which estimates and publishes detailed

input-output coefficients, band and individual com-

modity drawback rates and the back-to-back creditsystem offered through domestic DLCs, has

efficiently provided tax-free inputs and ready

access to working capital finance for direct and

indirect exporters. India, Taiwan Province of

China, Indonesia, Malaysia and Thailand also have

export support instruments including tax incen-

tives, duty drawbacks and exemptions, and export

and investment finance for exporters.

Four broad conclusions can be drawn from

the Asian experience for the development of export promotion zones:

• Where the general economic climate

is reasonable, or becoming so, the

development of FTZs can be a useful

instrument in the development of ex-

port-oriented industry, as they can lower

initial investment costs for investors and

encourage economies of agglomeration.

• FTZs should be a component of a

broader outward-oriented developmentstrategy, rather than a substitute for such

a strategy, or an excuse to delay much-

needed economy-wide trade reforms.

• FTZs should have proper infrastructure

and linkages with other parts of the

country through proper hinterland deve-

lopment.

• The benefits from FTZs in terms of

foreign exchange earnings, employment,

technology transfer and linkages withdomestic markets may be limited unless

accompanied by an appropriate policy

framework and human capital develop-

ment for sustained export development.

• While accepting that sometimes marketfailure justifies a potential role for the

public sector in the development of free

trade zones, the pricing of land in such

zones should not be subsidized. Simi-

larly, as part of a general programme to

promote foreign investment, Govern-

ments should be sure to remain open to

the private development of such indus-

trial estates, as is being done in China.

5. Participation at the regional level

(a) Regional economic cooperation

A strengthening of regional economic coop-

eration could help this process along in East and

South Asia. The successful use of strategic trade,

industrial and macroeconomic policies led to a

pattern of regional division of labour, described as

the “flying geese” model. As the leading econo-

mies in the region successfully shifted from

resource-based and labour-intensive industries to

sophisticated manufacturing activities, they pro-

vided space for the less developed countries to

enter simpler manufacturing stages. Regional trade

and investment flows played a central role in

this process by helping to create markets and by

transferring skills and technology to neighbouring

countries. The challenge now lies in the extension

of this regional dynamics and growth pattern to

include newly emerging countries such as China

and India, as well as other less developed countries

in South and East Asia.

Since regional economic arrangements

imply close interdependence among a group of

economies, there is the risk of a contagion effect-

ing that the problems in one country may be

transmitted to its neighbours. In fact, a number of

financial problems in the regional integration at the

end of the 1990s contributed to volatile capital

flows fuelling a boom-bust cycle in East Asian

economies. Thus, maintenance of stable and rapid

regional growth needs not only credible economic policies for upgrading of production and exports,

70



but also appropriate regional arrangements to

ensure the stability of financial markets, including

lending facilities and agreement on a sustainable

pattern of exchange rates (UNCTAD 2001).

(b) Role of ESCAP

ESCAP and its regional institutions such as

APCTT, the Asian and Pacific Centre for Agricul-

tural Engineering and Machinery (APCAEM) and

the Regional Coordination Centre for Research and

Development of Coarse Grains, Pulses, Roots and

Tuber Crops in the Humid Tropics of Asia and the

Pacific (CGPRT), have carried out many activities

in the past and could do more in the future to

promote the exchange of national experiences,skills training and endogenous capability-building,

research on sectoral restructuring, dissemination of

information and specific technology and environ-

mentally sound technologies (ESTs) through semi-

nars, workshops and technology fairs.

(i) FDI and technology transfer

FDI-related technology transfer has played a

major role in the development of many developing

members of ESCAP, such as the Republic of Korea and Taiwan Province of China, as well as

South-East Asia, as is evident from their flexible

and practical approach to FDI. Other ESCAP

members are advised to take a similar approach.

In particular, ESCAP members that have

abundant, low-cost labour should welcome labour-

intensive technology; this should be the case even

in countries that have already built up a high level

of science and technology, for instance, China and

India. Technology is a means for developing theeconomy and improving the standard of living.

Low-level technology is usually appropriate for

those economies seeking to attain full employment,

which is the best policy for eradication of poverty.

(ii) FDI and export promotion

FDI can be critical in introducing wide-

spread technological change, improving the agility

and competitiveness of firms and providing access

to skills and global markets. This is evident inChina, and to a lesser extent in Bangladesh, India

and Kenya, where FDI is increasingly generating

spillover effects in many sectors. Successful cases

show the importance of having Governments

promote and welcome FDI, particularly in infra-

structure such as communications and energy.

They also show the importance of avoiding exces-

sive regulation and restrictions on expatriates and

financial flows and the business activities of firms.

Export promotion through FDI is a key

reason for the Governments’ desire to attract FDI.

FDI can help to channel capital into industries that

have the potential to compete internationally, and

the global linkages of TNCs can facilitate their

access to foreign markets. The share of foreign

affiliates in total Chinese exports increased from anegligible amount in 1978 to 27.5 per cent in

1993, with even higher shares in electronics,

machinery, footwear, toys, travel goods and textiles

and clothing. Given that the absolute volume of

China’s total exports has also been increasing

substantially, this is a remarkable achievement.

(iii) Multilayered bilateral cooperation

FDI and technology are increasingly flowing

into ESCAP member countries from not onlydeveloped countries but also from Asian NIEs and

other dynamic Asian economies. Technology from

the latter may often be more appropriate than that

of Japan in the case of less-developed economies,

in the sense that in the former it is more labour-

intensive. For this reason, the flow of FDI and

technology from Asian NIEs and other dynamic

Asian economies should be actively encouraged by

all organizations including ESCAP.

(iv) Cooperation at the subregional level

In the ESCAP region, ASEAN and SAARC

are major subregional associations. The fact that

both the associations are building up intrasub-

regional cooperation for preferential trade with

minimal discrimination against other countries is a

welcome move. These arrangements will realize

economies of scale for their member countries, the

size of which will be measured by manufacturing,

including in India and Indonesia. It is hoped that

discrimination against non-member countries willnot intensify.


71




(v) Role of NGOs

NGOs can serve as technical advisers to

importing agencies by helping them in the choice,

appraisal and negotiation of technology transfer,

and in the assimilation and dissemination of

imported technologies. They may also be objec-

tive observers in monitoring the government

activities needed to facilitate the transfer process.

Their comments on the activities can serve as

bases for the national legislative institutions, such

as parliament, to force the Government to improve

services and cooperation. NGOs may conduct

long-term studies on the technology requirements

of a country or enterprise and help in skills

training and access to information.

(vi) Source book on ESTs

In 1993 APCTT, with support from the

Ministry of Environment of India, published a very

useful book entitled 101 Environmentally Friendly

Technologies, giving details of technology in

different sectors, in such areas as the use of

solar energy, energy conservation, energy from

wastes, building materials, material conservation,

new products and equipment, food processing,

waste composting, waste treatment and waste

recycling.

It would be appropriate to prepare a similar

source book containing information on ESTs. This

could be prepared by ESCAP in cooperation with

APCTT and other technology transfer institutes

in the region. Technology sourcebooks from tech-

nology-supplying countries of the region would be

very valuable, but it must be ensured that they are

updated periodically.

(vii) Cooperation among country

associations

There is a need for national Governments,

NGOs and international organizations in Asia and

the Pacific to intensify their efforts to facilitate

technology flows to and from countries of the

region. For this there should be continual inter-

action and dialogue among country federations,chambers and associations of industries.

A number of initiatives could be taken

by them, either jointly at the regional level or

separately at the national level, to promote stronger

technology transfer and greater economic deve-

lopment in the region. The initiatives should

include:

(a) In-depth studies on the status of endog-

enous capabilities of developing coun-

tries of the ESCAP region in agro-

based and resource-based industries,

with a view to identifying areas of

comparative advantage and cooperation

on the basis of complementarity;

(b) Research on problems in technology

flows between developed and deve-

loping countries, and their role and

influence in different sectors of the

economy;

(c) Establishment of a regional scheme

of demand-oriented training in skills

involved in different aspects of tech-

nology transfer. Such a scheme would

utilize institutional and on-the-job

training facilities of more advanceddeveloping countries and could be

operated with the cooperation of

national technology transfer centers;

(d) Organization of seminars, workshops

and conferences to provide for the

exchange of national experiences, in-

troduce new investment forms and

disseminate particular technologies;

(e) Strengthening of the existing informa-

tion networks on technology transfer so

that they can better satisfy the require-

ments of the developing countries;

(f) Formulation of a common strategy for

the prevention and removal of barriers

to flows of investment, technology,

goods and services;

(g) Establishment of national and then

regional databases on imported tech-

nologies and an information-sharingnetwork;

72



(h) Provision of a suitable form of linkage

between research institutions, techno-

logy brooking agencies and concerned

government departments in the deve-

loping countries of the region;

(i) Strengthening the cooperation between

regional institutions such as APCTT,

CGPRT and APCAEM, and the divi-

sions of the ESCAP secretariat, and

between ESCAP and other interna-

tional organizations.

6. Multilateral level actions

(a) Role of WTO

Improving market access for developing

country exports requires a comprehensive approach

to liberalization. The Doha Development Agenda

of WTO contains important commitments but

initial efforts need to be sustained. Particular

issues include:

• The phasing-out by all countries of

tariff peaks (tariffs of 15 per cent or

higher) and multiplicity of rates is

essential for the development dimension

of the current round of multilateral trade

negotiations.

• Developing countries should receive

more technical assistance in implement-

ing product and process standards.

• Schemes that provide unrestricted

market access for all least developed

countries should be extended by all

large trading nations.

• In agriculture, effective liberalization

must cover border protection and

subsidies in both industrial and deve-

loping countries. The Organisation for

Economic Cooperation and Develop-

ment (OECD) countries must de-link

agricultural income support from

production and coordinate reforms of

subsidy and tariff regimes.

• In textiles and clothing, the priority

must be to accelerate the removal of quotas in order to avoid an adjustment

shock in 2005 as a result of the

phasing-out of quotas under the

Uruguay Round Agreement on Textiles

and Clothing (ATC). The simultaneous

reduction in import tariffs would help tomitigate adjustment pressures.

• Reform of market access in developing

countries themselves would contribute

as much to a development-oriented

multilateral trading system.

• Distribution effects of reforms should

be recognized and dealt with properly.

Food security issues and the concerns of

poor consumers, in particular, must be

addressed as part of overall povertyreduction and development strategies by

the multilateral organizations.

(b) Market access for agriculture

and T&C exports

Market access barriers in world trade

remain significant for products of export interest

to developing countries. The liberalization of

imports, especially for agricultural products and

textiles and clothing, can generate large benefitsfor developing countries in terms of incomes,

exports and employment. These benefits would

derive partly from the elimination of access barri-

ers to industrial country markets and partly from

reforms of the trade regimes of developing coun-

tries themselves. In the aggregate, further opening

of external trade is a win-win proposition for both

industrial and developing countries.

It is desirable to accelerate the removal of

quotas on textiles and clothing imports. Given the

risks associated with the backloading of quota

removal under ATC, the objective should be to

limit the adjustment shock at the end of the

transition period for both importing and exporting

countries.

It is also desirable under the Doha round

negotiations to substantially lower tariffs on T&C

trade, in both industrial and developing countries.

Tariffs in this sector are exceptionally high and

liberalization can be expected to carry large

benefits for developing countries in terms of exports, employment and income.


73




In order to prevent anti-dumping action from

taking the place of quotas and tariffs once these

are liberalized, trade remedy rules should be

reviewed with the aim of limiting the scope for

discretion and incorporating consumer interest.

7. Technical assistance

For stronger regional integration in South

Asia as well as East and South-East Asia, many

countries are starting to coordinate and harmonize

policies for tariffs, taxation, investment and busi-

ness regulations. But the most productive impetus

to regional integration would come from removing

the restrictions on movements of goods, capital and people. Regional integration is also likely to get

a boost from strengthening the regional growth

centres in South Asia and South-East Asia. These

could produce important pull effects on growth

throughout the continent. They would also help

to promote FDI by enlarging markets. Regional

integration should not be a substitute for globaliza-

tion, but should be a means to strengthen it.

Multilateral agencies have helped the deve-

loping countries by providing financial and techni-cal support and investment guarantees for the de-

velopment of infrastructure and human resources.

They have also played a more catalytic role in

mobilizing funds from a wide range of private

sources. External assistance should further be

increased and continue to be provided on

concessional terms, given the long-term nature of

investment in human capital and its link to poverty

alleviation, skills formation and enhancement of

industrial productivity and efficiency.

Although the technical assistance received

from these institutions has been found to be very

valuable, there is scope for improvement in the

following fields:

• Promotion of regional cooperation in

human resources development, R&D,

S&T development, technology blending,

use of IT and computer training and

facilities

• Consultancy and training aimed at tech-

nology upgrading and skills improve-

ment for the growth and globalization

of SMEs with special attention to entre-

preneurs from rural areas, ethnic minor-

ity areas, economically backward areas,

ethnic and backward classes, and

women and young entrepreneurs

• Regional technical assistance pro-

grammes on harmonization of nationaland regional policies on trade, tariffs,

taxation, investment and business

regulations and plans for private sector

development and foreign investment

• Promotion of technology management,

evaluation, assessment and enterprises

cooperation for the blending of indig-

enous technology and imported tech-

nology

• Improvement of the institutional ma-chinery and administrative and legal

framework with a view to facilitating

private investment, including foreign

investment

• Advisory services for developing coun-

tries and LDCs to strengthen capital

markets and attract foreign portfolio

investment

• Technical support for developing

countries and countries in transition to

upgrade their institutional capacity to

identify, design, negotiate and imple-

ment schemes on BOT/BOO/BOLT for

infrastructure development

74



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, 1996b. “Practical lessons for Africa

from East Asia in industrial and trade

policies”, World Bank Discussion Paper

No. 310 (Washington).

, 1998a. The World Bank Group:

Supporting Private Sector Development: A

Status Report (Washington).

, 1998b. “Social consequences of the

East Asian financial crisis” (Washington).

, 2000. East Asia: Recovery and

Beyond (Washington).

, 2002a. World Development Report

2003: Sustainable Development in a Dynamic World: Transforming Institutions,

Growth, and Quality of Life (Washington,

Oxford University Press and World Bank).

, 2002b. Development, Trade, and the

WTO: A Handbook (Washington).

76



A. Introduction

Horticultural production has emerged as a

major economic activity in developing countries,

especially those which were hitherto heavily

dependent on agricultural production, often at

subsistence levels, but are now increasingly look-

ing for ways to increase both national and family

incomes. Asia alone has around 44 per cent of

the world’s acreage under fruit, covering a wide

range such as apples, bananas, oranges, grapes and

mangoes in addition to tropical and sub-tropical

fruits such as pineapples, papayas, guavas, lycheesand passion fruit.

Quite primitive systems of cultivation,

harvest and post-harvest handling and treatment of

horticultural produce as well as poor infrastructure

in terms of transport, storage and marketing in

many developing countries contribute to a high

proportion of wastage of this perishable com-

modity, estimated to range between 20 and 50 per

cent. Major infrastructure limitations in deve-

loping countries also continue to impose severeconstraints on domestic distribution as well as

export of horticultural produce.

Losses are this high in many developing

countries, especially in Asia, because of difficulties

in collecting horticultural produce from numerous

small farms and lack of efficient transport to

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

domestic or export markets. Lack of adequate

systems and procedures for grading and sorting permit even greater spoilage during storage and

transport. The situation is further compounded in

tropical and subtropical countries, whose warm,

humid climates accelerate the spoilage of the

produce. Post-harvest losses of vegetables and

fruit in most Asian and many other developing

countries are so high and the causes so diverse that

a great deal of research, training and upgrading of

systems and procedures is needed for preventive

measures to take effect.

Against this background, processing of

horticultural produce into different products is

increasingly being seen as a major aspect of

endeavours to reduce wastage and boost the

competitiveness of horticultural produce from

developing countries and particularly tropical fruits

from the Asian region. Processing helps to tackle

some of the problems posed by perish-ability and

seasonal gluts, especially in the context of poor

storage and transport infrastructures. In addition to

extending shelf life, processing also results invalue addition and employment generation, as well

as enabling vertical integration and diversification.

Recent technological innovations in processing and

packaging also favour fruit processing. Addition-

ally, over the past decade or more there has been a

steady increase in demand for processed horticul-

tural products both internationally and in domestic

markets in producing countries although, given the

somewhat weaker growth in domestic demand and

the attractiveness of export markets, the latter have

assumed greater importance in most developing

countries.

77

III. ISSUES AND STRATEGIES FOR THE TRANSFER

AND ADOPTION OF PROSPECTIVE TECHNOLOGIES

BY SMEs AND SMALL GROWERS FOR

PROCESSING OF HORTICULTURAL PRODUCE

IN DEVELOPING ASIAN COUNTRIES

K. Lakshminarayanan*




1. Prevalent market scenario

Market demand for fresh horticultural

produce grew steadily during the 1990s and thatfor processed fruits and nuts grew at about 60 per

cent per annum. However, only about 15 per cent

of this trade involves developing countries.

Further, exports of fruit from Asia lag behind those

from other major fruit-producing regions such as

Central America, which has 33 per cent of global

exports, and South America with 37 per cent for

several reasons related to domestic conditions as

well as impediments to trade with importing

regions of the world.

International trade in processed fruits and

vegetables is very large with an ever-increasing

number of different types being processed and

exported. Whereas even a few decades ago

processing was limited to mostly temperate fruits

and vegetables as were grown and consumed in

mostly Western developed countries, the range

has now broadened to include tropical and

subtropical produce. World trade in processed

horticultural products increased from about US$

13 billion in 1991 to about US$ 14.9 billion in1995 and this overall trend has continued since.

In general, the world market for fruit juices,

the largest group of processed horticultural

products, is expected to show further growth and

also a sharper rise in growth rates both because of

the current low per capita consumption in some

growing markets and growing health consciousness

in most markets favouring consumption of such

products.

The dietary preferences of consumers havenow become considerably more diverse than

earlier. For instance, people in North America and

Europe have exhibited a growing fondness for

tropical fruit and vegetables, both fresh and

processed. Also, processing and preservation

techniques have been improved substantially so

that the final product is tasty and nutritious and has

long shelf life. Many developing countries have

taken advantage of this continuing and rising

worldwide demand for processed fruits and vegeta-

bles and have earned valuable foreign exchange

from exports of products.

In the case of tropical produce, pineapples,

mangoes, papayas and bananas form the backbone

of trade in tropical products, while other produce

such as lychees, rambutans, jackfruit and vegetable

products such as okra also have a good, if smaller

demand. There is also growing demand in several

European markets for tropical fruit salads, two- or

multiple-fruit products, e.g. papaya/mango/guava,

frozen tropical fruit products for use in bakery and

dairy products and baby foods, and for tropical

jams, syrups and other retail tropical fruit products.

Many processed products are produced by manu-

facturers in the importing developed countries from

imported raw material or intermediates. Often,

trade from developing countries constitutes what

are termed “bright cans” where the branding andmarketing is done by the importer who attaches his

own label to the imported product. Nevertheless,

some companies in Thailand and the Philippines

have been successful in exporting labelled

products, as have some companies from the

Caribbean.

Apart from export markets, which are

understandably emphasized in the case of smaller

countries and those countries in which horticulture

constitutes a large proportion of the economy,growing domestic consumption within developing

countries, which is rising further with the rising

prosperity at least of the middle class, is an

increasingly important factor influencing the de-

mand for both fresh and processed horticulture

produce. Processed products are increasingly

finding good and growing markets in developing

countries both for local producers and for multina-

tional corporations (MNCs) and other international

corporations bringing substantial foreign invest-

ment into Asia, Africa and Latin America.

Many studies have pointed to “spillover”

advantages of horticultural produce into areas

such as balanced diets and nutrition and social

rituals attached to ornamentals and flowers, all of

which are perceived as signs of refinement

and upward mobility. Horticulture also plays an

important role in providing raw materials for

conventional pharmaceuticals and herbal medi-

cines, aromatics, cosmetics, organic dyes and a

variety of value added products which are gainingincreasing importance in the international market.

78



These achievements in horticulture have

been achieved through active researches into

cultivation, preservation, processing and related

technologies, as well as the extension of these

technologies downstream through technology

transfer both within countries and between coun-

tries and regions. And yet seen in the initial

paragraphs of this section, serious problems remain

to be tackled, chief among them being the enor-

mous differentials that remain between developed

and developing countries in respect of technologi-

cal capability, access to and degree of participation

in international trade and the contribution of horti-

culture to both production and consumption in

developing countries.

2. Current trends in developing

countries

We may now note some of the major trends

in horticulture processing in some developing

countries in Asia and elsewhere, focusing on

technological and managerial aspects, so as to

indicate the major issues that need to be addressed

in technology transfer in this sector.

In Bangladesh, the modern organized fruit

processing industry comprises relatively small

volumes of canning, freezing and dehydration.

However, jams, jellies and pickles are made in

large quantities, chiefly by small entrepreneurs at

the home or cottage scale, and extruded snacks,

puffed rice and potato chips are made and sold in

the domestic market by small and medium enter-

prises. Some units, especially larger ones, have

modern facilities operating hygienically in con-

formity with the United States good manufacturing practices (GMP). On the whole, however, most

facilities are in need of upgrading and personnel

require considerable training on a wide range of

aspects.

In Thailand, earlier horticultural export-

oriented production involved manioc and other

tubers but steadily gave way to processed fruits

and vegetables exported to markets in the United

States, the EU and South-East Asia and today

representing about 50 per cent of total horticulturalexports from the country. Processed fruit products

exported from Thailand include canned and juiced

pineapple, canned banana, of which over 30 per

cent goes to the United States, whereas over 90 per

cent of fresh banana exports are to Hong Kong,

China; dried and canned mango exported mostly to

United States and EU markets while most fresh

mango exports are to Asian markets. Smaller

quantities of fresh and processed longan, rambutan,

durian, lychee, ginger and dried tamarind are also

produced and exported. Processed vegetables are

also important products of the Thai horticultural

processing industry and its exports. Other impor-

tant products exported from Thailand are processed

or canned asparagus exported to Japan, canned

baby corn exported to the United States, the EU

and Asia, processed or preserved bamboo shootcomprising over 90 per cent of total bamboo shoot

production to the United States, which absorbs

over 60 per cent of these exports and frozen okra.

Recently, the production and export of fresh cut

flowers and orchids has assumed greater impor-

tance in Thailand.

As may be imagined, given the requirements

of the markets to which Thailand mainly exports,

the processes and facilities in Thailand are of

relatively high standard so as to ensure competi-tiveness in these demanding market environments.

In India, the world’s second largest producer

of fruits and vegetables, the horticultural process-

ing industry is quite rapidly changing its profile,

especially in the last decade or so after economic

liberalization was initiated especially in respect of

licensing and foreign investment policies generally

and also specific to this industry. While most

processing activity in India continues to take place

in a highly decentralized manner, mostly in small-scale industries or in cottage/home-scale units with

relatively small capacities of up to 250 tons/year,

there are several large units contributing abut 15

per cent of total production run by MNCs or big

Indian corporations with capacities in excess of 30

tons/hour. Many export-oriented units also operate

in India. India’s domestic consumption has also

increased substantially in recent times with a

burgeoning middle class with considerable spend-

ing power, a phenomenon which has served to

attract substantial foreign direct investment in thissector, amounting to over US$ 250 million up until

III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and

Small Growers for Processing of Horticultural Produce in Developing Asian Countries

79




1997, for manufacture of processed horticulture

products in both the domestic and international

markets. By the end of the eighth plan period

(1992-1997), investment in the organized food

processing industry is estimated to have reached

US$ 5 billion, of which about US$ 1 billion is

estimated to be FDI.

While traditional processed products made

in and exported from India comprised chiefly fruit

pulp or juice, ready-to-serve beverages, canned

fruit and vegetables and a wide range of jams,

squashes, pickles and chutneys, the product range

now increasingly includes frozen pulp and vegeta-

bles, frozen or dried fruits, vegetable curries in

retortable pouches, canned mushrooms and mush-room products, etc. Exports of cut flowers and

dried flowers are also increasing. Yet for all these

changes, India still accounts only for a measly 1

per cent of global trade in this sector and the scope

for technological upgrading of the industry at all

its different stages is enormous.

In Africa, 40 per cent of all manufacturing

value added is created in the food processing

subsector. In Uganda and the United Republic of

Tanzania, since supply and market linkages areweak but crucial, only a few entrepreneurs have

ventured beyond processing traditional or basic

food products. In Uganda some enterprises have

successfully entered into fruit processing, in

particular drying of fruits and juice extraction.

Studies have shown that obtaining suitable tech-

nologies and attractive packaging materials are

some of the problems that these enterprises face.

Given the constraints posed on both raw material

and market fronts, most food processors sell their

products in the domestic market, exceptions being plantation commodities such as coffee, tea and

cashew, dried spices especially from Zanzibar,

some dried fruits produced mostly on contract with

importing companies in Europe (chiefly the United

Kingdom) and some other products, for instance

honey, that gain entry into Europe through the fair

trade market segment.

Former Soviet countries in Central Asia

such as Uzbekistan, for instance, are now attempt-

ing to diversify their processed horticulture products to cater for the newly accessible markets

in Europe. Products such as syrups, concentrated

juice, pulp, canned fruit and other fruit- and

vegetable-based products are being focused on

as future exports. The programme to develop

this area of the country’s economy providesfor replacement of equipment, reconstruction of

processing plants and introduction of new produc-

tion lines, attracting foreign credit and establishing

joint ventures based on modern technologies, state-

of-the-art equipment and experience. Specialist

farms and agricultural companies with foreign

collaboration are sought to be established in order

to build solid backward linkages for supply of

assured quantities and quality of raw materials to

supply units which make products such as juice,

tomato paste, wines, cognac, vodka, tinned fruitand vegetables.

Despite the addition of production capacities

and consequent increase in processing volumes,

it is felt that the full potential has yet to be

realized. Some of the constraints felt are the lack

of suitable packing materials to meet international

requirements, the state of the existing plant and

machinery and the lack of the latest technologies,

all of which are to be tackled through suitable

foreign partnerships in terms of both technologyand investment.

It must be emphasized that lack of or

weaknesses in infrastructure or technology are

not the only constraints as far as the export of

processed horticultural products in developing

countries is concerned. Large importing compa-

nies based in developed countries are relatively

conservative, and often act as strong lobbies

against changes in existing distribution structures,

making new entry more difficult than usual, and

problems of marketing of products in developedcountry markets can be quite daunting for most

enterprises from developing countries. Non-tariff

barriers and costs of market entry of branded

goods are also very high in most developed

countries. Thus, in Europe, for instance, major

suppliers from outside the EU are Brazil, Israel,

South Africa, the United States, Thailand, China,

Mexico, the Philippines and Kenya, with Poland

being the main supplier from Eastern Europe and

the Andean countries from South America also

featuring owing to their special duty free privileges.

80



In general, therefore, several factors make

it difficult for developing countries to compete

with exporters from the United States, the EU and

Israel, all of which have substantial horticultural

processing industries. Additional competition isalso emerging from Eastern Europe, especially for

some temperate-zone processed products. Given

other financial, physical and human resource

factors, trade is increasingly being dominated by

a few large MNCs or by some well-established

individual export companies.

Yet there are several examples of success

among small and medium firms from several

developing countries. Studies have shown that

factors behind these successes have includedspecific targeting of quality markets and products,

large volumes allowing diversification of markets,

efficient linkages among processing industries as

well as between them and growers, effective

governmental policies and promotion of the

industry as a whole and exports in particular, as

well as good logistical management given most

developing countries’ distance from the main

importing markets.

3. Developments in horticultureprocessing technology

The number and variety of processed fruit

and vegetable products has increased substantially

in recent years at least partly owing to the in-

creased recognition and emphasis by consumers of

the importance of these products in a healthy diet.

Updated and modernized processing and

preservation technologies such as heating, freezing

and drying together with the more recent commer-

cial introduction of a variety of processing tech-

niques continue to provide the consumer with an

increased choice of products. This has been

achieved, apart from new process protocols and

products, by new heating and freezing techniques

such as microwave or ohmic heating or cryogenic

freezing, combined with new packaging materials

and technologies such as aseptic packing and

modified atmosphere packaging.

In overall terms, the trend in new processed

fruit and vegetable products is to add value byincreasing taste or flavour, having a greater variety

of fruit and vegetable products with longer and

more stable shelf life, making available processed

horticultural products cutting across seasons and

providing increased convenience to the consumer.

New fruit varieties and advances in dehydra-

tion technologies have given a fresh impetus to

dried fruit. Apart from traditional dried fruit such

as raisins, apricots, peaches, prunes, figs and dates,

new fruit such as cherries, apples and a variety

of berries such as cranberries, raspberries and

strawberries have been made available in varying

degrees of dehydration. Such dried fruits are

increasingly perceived as value added products in

themselves or by adding flavour, colour, texture

and diversity to other preparations such as cakes, puddings and other desserts. Dried fruits which

are not only simply dehydrated but also osmoti-

cally dehydrated (i.e., dehydrated by infusing the

product with sugar while natural water is drawn

out, both processes taking place through osmosis

while the produce is immersed in optimized sugar

solutions) are available these days, allowing for

greater variety in recipes using such products.

Dried fruit is also more widely available in

different forms, including whole dried, cut, diced

and powdered. The growing interest in ethnic

cuisines in developed countries and among more

affluent sections in developing countries and a

shift towards a lifestyle perceived as more healthy

have also contributed to the popularity of dried

fruit in markets throughout the world.

Dried herbs and herbal powders are another

value added item used for culinary purposes and as

intermediates in herbal or other medicines, cosmet-

ics and other products. Dehydration processes also

lead on to products such as onion, garlic, ginger

and tomato powders as well as a wide range of herbal and spice powders which are consumer-

friendly convenience products as well as inter-

mediates used by manufacturers of ketchups, soup

powders, biscuits or other baked products, confec-

tionaries and condiments and so on. Dehydrated

pre-cut and diced vegetables are an extremely

viable and attractive substitute for similarly

prepared frozen vegetables, although such products

have yet to make any significant impact on the

market except for some traditional products

such as sun-dried tomatoes, dried mushrooms anddesiccated coconut. Dehydrated vegetables do not



81




require a cold chain from production through

wholesaler/retailer to consumer and can be

prepared, transported, stocked and retained by the

consumer without any level or degree of energy-

intensive refrigeration at any stage of theentire marketing chain. Dehydrated horticultural

products thus have the potential to open up a

whole range of new or otherwise value added

products. Dehydration technologies are also

available in a range of scales and degrees of

sophistication, from simple solar drying through

forced-air dryers to freeze or spray drying, lending

themselves to varying scales of operation and

especially to decentralized production systems

stretching right down to the farm level.

B. Technology gaps

As can be seen from the above, the

manufacturing and value added chain from farm

to factory to consumer in different developing

countries, as well as in different scenarios within

individual developing countries, contains numerous

technology gaps which need to be addressed

through technology transfer. Obviously, no single

approach or strategy can be applied across the

board and, indeed, the first step would be toclearly identify these gaps, the technologies which

need to be introduced or upgraded in order to fill

them, as well as the other issues which need to be

addressed integrally along with technology issues

in order to make the system as a whole work

as desired. It would be presumptuous and well

beyond the scope of this paper to even try to

enumerate technology gaps in individual develop-

ing countries, but some attempt may be made here

to broadly point to the major areas likely to require

attention in many, if not most, developing

countries.

1. Overall system deficiencies/gaps

Before coming to specific technology issues,

it needs to be emphasized that deficiencies or gaps

at the overall level need to be recognized and

addressed since, clearly, technologies do not

operate in a vacuum but rather within a system.

In most developing countries, the further

growth and development of horticultural process-ing suffers from several constraints, such as:

• Poor quality or limited range of varie-

ties, cultivars and planting material

• Poor or obsolescent on-farm practices

during cultivation, harvest and post-harvest handling

• Weak transport system and related

infrastructure impeding effective long-

distance transport of fresh and

processed commodities

• Limited availability, distribution and

continuous supply of electricity parti-

cularly in rural areas

•Inadequacies in maintaining hygiene

and sanitary/phyto-sanitary standards

during preservation and processing

• Weaknesses in grading, standardization,

packaging material and systems, all

contributing to losses and poor quality

• Weaknesses in human resources

especially in technical and managerial

skills, again particularly in the rural

producing areas

• Shortage of technical and marketinformation

• Low domestic consumer income or

other factors limiting domestic demand

for processed foods

• Obsolete or low-level technologies

causing high processing losses and

low-quality products

Many of these issues have already been

touched upon in previous sections and require nodetailed explanation. It will, of course, be evident

that not all these issues can be addressed through

technology transfer and call for much wider

system-level action in specific country contexts.

Nevertheless, experience shows that practical

interventions in technology transfer must take into

account of these factors and must, in each specific

intervention, address these issues to the extent

possible within the scope of the particular inter-

vention itself. Without such a holistic approach,

technology transfer endeavours are unlikely tocreate or leave behind working models which

82






processing. In some developing countries, models

for such decentralized networked production

have been effectively developed and demonstrated,

such as in India, where such demonstration

projects are being pilot tested in the north-easternstates with the support from APCTT and the

Government of India’s Ministry of Science and

Technology.

3. Backward linkages

While the emphasis in this paper is on

processing technologies proper, it is evident that

these cannot be addressed in isolation. Indeed,

experience in all countries has clearly shown thatthe processing industry is crucially dependent on

backward linkages to the raw material in terms of

its quality both inherent to the variety as well as in

relation to the effect of harvest, post-harvest and

storage/transport handling.

Often the issues are as much economic as

technology- or quality-related. It is common in

developing countries in Asia and other regions for

sophisticated post-harvest procedures to be used

for some export commodities by large commercial

enterprises, alongside simple, low-cost methods

used by smallholders, who only have access to

small local markets. There is also an increasing

gap between the industrialized and less indus-

trialized countries, in terms of the quality of their

storage and marketing facilities and their food

processing technology. For instance, the marketing

chain in Japan is longer and more sophisticated

than in most other countries. Many methods of

preventing post-harvest losses have been developed

so that produce can meet the exacting standards of

Japanese consumers. These include sophisticatedand expensive methods such as vacuum pre-

cooling, individual packing of items and packing

produce in plastic trays wrapped in film. Such

methods inevitably mean high marketing costs and

therefore high prices for the consumer.

Keeping in mind these economic and

managerial issues, within the horticultural field

itself, produce, and especially fruit, handling

systems notably in harvest, post-harvest, storage

and transport, as well as marketing infrastructureand other arrangements, in most developing

countries require major improvements if qualitative

shifts are to be made away from the present rather

low level of exports. Apart from infrastructural

issues, most of these can be achieved through

effective training and other human resources

development strategies which need to be built in to

any technology transfer endeavour. This would

require collaboration between institutions or

agencies dealing with processing aspects on the

one hand and with horticulture on the other so that

necessary synergy is brought about.

One of the recommendations often made

in respect of backward linkages is to tie up

producers, especially small growers, to processing

units through contract farming systems as a meansof ensuring quality raw material supply. Many

large corporations, especially MNCs, have adopted

this procedure in many developing countries, the

linkage with the farmers extending to supplying

them with quality seeds or planting material or

even sponsoring research into developing new

strains and then disseminating them. A brief

discussion on the potential and problems asso-

ciated with organized contract farming linked

to fruit-processing units is called for since the

literature and available experience in several deve-loping countries have thrown up many issues for

debate.

In general, opinion is divided between those

who feel that contract farming is a means to trans-

fer new technologies to small farmers and raise

their incomes and those who argue that contract

farming is only another version of the “putting-

out” system in manufacturing which makes the

farmer captive to the processing unit through this

new form of indentured labour. Studies quotedextensively in the literature appear to show that the

reality lies somewhere in between, that there are

situations where the grower has benefited while

there are others in which he has not and, more

particularly, that there are crops and situations

which are suitable for small-holder participation

while others are not.

One must also understand the economic

motivations behind the system and its individual

manifestations, particularly the issue of institu-tional and market failure that drives much of

84



contract farming. In the first place it must be

recognized that in many developing countries,

small growers mostly do not participate in activi-

ties linked to value added production for either the

domestic market or for export. Small growers are

extremely vulnerable to price fluctuations and

other market vagaries and therefore see some

benefit in assured purchases by corporate process-

ing units through contracts in addition to obtaining

better inputs in the form of planting material and

entering into a wider market. However, cases of

small growers being pressured into accepting lower

prices or being denied inputs and so on are not

infrequent.

Experience seems to suggest that whereascontract farming may suit some MNCs or other

large corporations, processing units in general may

benefit more from the kinds of synergistic arrange-

ments spoken of earlier between processors’ and

growers’ associations with the catalytic support of

Governments. Models and examples of growers’

cooperatives themselves running processing enter-

prises are also available and increasing, as are

networked systems involving growers in clusters

being partners in a common processing enterprise.

It must also be stated that several simple

technological interventions are available and can

be adopted for post-harvest handling such as for

heat dissipation, reduction of physical injury and

pest or disease control and all these can have a

significant impact on reducing losses and increas-

ing product quality. A variety of treatments and

other measures designed to extend shelf life are

also very important and need to be systematically

introduced into the mainstream of horticultural

production in developing countries. Infestation byfruit flies is a major problem in production and

especially in the export of tropical fruit and the

problem needs to be tackled at different levels,

from field-level controls to various types of

treatment to ensure complete freedom from any

infestation enabling clearing of quarantine restric-

tions currently applied in major markets such as

the United States and Japan.

In the longer term, systematically carried out

horticultural research in plant breeding may be auseful approach to loss prevention as studies have

shown that losses differ with different varieties.

Biotechnology also has important contributions to

make to sustainable agriculture, for instance in

tissue culture for multiplication of different varie-

ties, gradual replacement of chemical pesticides by

biocontrol and biopesticides, use of biofertilizers

that enhance nitrogen fixation and other aspects

adding value to the produce.

C. Problems and prospects in

technology transfer

We may now turn to some constraints

inhibiting equitable growth in the global horticul-

ture processing industry as well as in the transfer

of technologies within it. We shall also, in this

section, look at the potentialities and possibilities

of overcoming some of these obstacles and of

promoting technology transfer.

1. Barriers in international trade

It is well known and widely agreed that

international trade in agriculture and horticultural

products is characterized by production and marketdisequilibria. As stated earlier, profitable horticul-

ture is a visible sign of advanced agriculture in

sound and growing economies, and it therefore

follows that the policy of most such countries is

to protect horticulture because of its role in pro-

viding and supporting higher standards of living.

In the long run, such policies contrast with the

concepts and workings of free trade. This is one

of the reasons why there is greater consensus in

WTO on global liberalization in various other

sectors than in agriculture. Fortunately, given itsdependence on climate and seasonality and the

perishability of its produce, horticulture to some

extent forces a degree of integration of producing

zones and a mutuality of interests in trade.

However, even with such an offset of inherent

disadvantages, some problems of inequity will

remain so long as different countries with quite

different levels of economic strength and techno-

logical capability produce the same commodities in

the same season at significantly differing costs as

happens today with apples, tomatoes and flowersand other ornamentals.



85




Some countries such as Bangladesh in Asia

and several African nations had hoped to gain

from the Uruguay Round of the WTO agreements,

in particular the provisions made with respect to

developing and least developed countries, but these

hopes have been largely belied.

World Bank studies have shown that

protectionist trade barriers have affected exports of

processed foods in the so-called “Quad” countries,

i.e., the United States, Canada, the EU and Japan,

with food industry products including fruit juices,

canned meat, peanut butter and sugar confec-

tionaries having import duty rates exceeding 30 per

cent in several markets as against average duties of

4-8 per cent for other commodities. Higher protec-

tion will clearly prevent all but the most efficient

horticultural producers in developing countries

from entering developed country markets while

enabling even relatively more inefficient producers

in these countries to retain their market share. The

case of cut flowers from Africa, as also its greater

trade shares in fruits and vegetables facing lower

protection and subsidies, shows that many of the

poorest countries could expand their exports if

protection in agriculture is lowered in developed

economies.

2. R&D and S&T capability

The expectedly high differential between

developed and developing countries as regards

research on horticulture and related processing,

and S&T institutions and capabilities in these

sectors is another major barrier both to growth of

this sector in developing countries as well as to

technology transfer, which requires at least some

extent of scientific and technical capability in the

recipient country.

Whereas developed countries have a long

history of research in horticulture and related

areas as well as institutionalized capabilities in the

State sector, private sector and university system,

developing countries have adopted different

approaches to achieve the necessary capabilities

in their own internal contexts and in order

to remain competitive internationally. Different

developing countries have evolved varying models

involving appropriate mixes of public and private

sector research and facilities. The experience of

different developing countries has shown that

a collaborative approach, where all elements

complement each other, works better than systems

in which there is no common ground between

the public and private sectors as in some countries

of South America and Asia where the public

sector lacks skilled researchers, funds, facilities,

projects, international exchanges and the like.

While in most cases this approach may also corre-

spond to national horticulture interests and aims,

in others it could take the dangerous form of

natural resource exploitation and the transfer of

results abroad.

Product or process development in the

area of horticulture processing is mostly carried

out in-house by individual processing units or

corporate entities, while research on more sophis-

ticated machinery development and packaging

materials/processes is carried out mostly by corpo-

rate manufacturers as well as research institutions

and the university system.

However, the bulk of the research is being

conducted in horticulture itself, and research

subjects which have emerged as priority areas and

which obtain most support are:

• Genetics, including breeding, biodiver-

sity, gene banks and plant genetic

resources

• Biotechnology

• Integrated and sustainable productionsystems

• Post-harvest handling and storage

• Marketing and consumer education

There are many factors which act as

constraints on regional/international cooperation in

R&D. It would be natural to assume that countries

in contiguous regions or similar agro-climatic

zones would have common produce and may there-

fore have greater chances of success in research

86



collaboration. Yet the commodity approach has

been successful to date only for major food crops

like soybean, grain, maize, rice, etc. Part of the

reason may be the lack of major international fund-

ing for similar researches on horticultural produce

since, after all, such produce does not represent

enormous trade volumes internationally and is not

considered, even by Food and Agriculture Organi-

zation of the United Nations (FAO), as commodi-

ties relevant to food security. At the same time,

crops like coffee, cocoa, bananas and apples do

have global reach and may some day attract inter-

nationally collaborative R&D. Some limited suc-

cesses in collaborative researches have, however,

been achieved in the case of banana and plantain

in Africa funded by international agencies, and themostly private sector-funded researches on tomato

in collaboration with researchers’ associations,

and there are also umbrella groups for nuts as

well as for medicinal herbs and plants. A kind of

intermediary role between regional and commodity

cooperation in research and policy-making is also

played by certain large agencies and organizations

like FAO and the International Plant Genetic

Resources Institute (IPGRI) for plant genetic

resources.

In the area of technology transfer in

horticultural processing, which is the subject of

this paper, it is not envisaged that R&D of such a

fundamental nature would be required or under-

taken. Rather, the need would be for technology

adaptation and adaptive research to suit local

conditions, which would be essential for any

technology transfer in this sector, where one

can rarely conceive of a direct implantation of a

process from one region/country to another giventhe variations in produce type/variety, agro-climatic

conditions and local factors relating to infra-

structure and product range, among others. For

such adaptive research, however, there are no

ready-to-hand mechanisms or institutional struc-

tures. It is clear, therefore, that some new efforts

need to be launched, perhaps on a more limited

scope both geographically and in terms of

subject areas, to undertake the necessary adaptive

research required as part of technology transfer

endeavours.

D. Technology management issues

Perhaps the most important issues relevant

to technology transfer are those relating totechnology management, which would be informed

by all the different macro-level considerations

discussed hitherto. It is necessary to underline the

fact that technology transfer does not involve

disembodied processes or equipment; rather, these

need to be embodied in a particular facility, unit

or enterprise which would have to be set up in

relation to specific parameters such as raw mate-

rials available, their quality and quantity, market

scenario and target market, product range with

quality and other specifications, scale of opera-tions, technology choice, plant and machinery,

human resources available and required, backward

linkages and forward linkages for sales. In many

technology transfer exercises, there is a faulty

assumption that the task is to bring in the latest/

best technologies, irrespective of the specifics

involved, and that this would make it possible to

tackle the problems initially encountered. Far from

being a generic exercise, technology transfer has

indeed to be tailor-made for each concrete field

situation. At the country level, some degree of

generalization is inevitable but it too must be

context-specific rather than take any single or

common approach.

1. System design

The first major issue to be addressed and

decided upon in the production system to be

adopted pertains to the scale of operations.

A system involving large-scale processingrequires substantial capital investment and high

technical and managerial skills. Because of the

high demand for processed foods in recent years,

many large-scale factories were established in

developing countries with mixed results but with

conspicuous failures in West Africa. Most of these

failures were apparently related to high labour

inputs and relatively high cost, lack of managerial

skills, high cost and supply instability of raw

materials and changing governmental policies.

These experiences underlined the necessity of establishing better backward linkages for raw



87




materials, for better overall planning and especially

for more in-depth feasibility studies prior to setting

up production facilities.

While large-scale industries can certainlynot be ruled out in developing countries, histori-

cally small- and medium-scale processing have

proved to be more successful than large-scale

processing in developing countries, especially

since the marketing is fraught with uncertainties

except for well-established players and large

MNCs. For the technology transfer exercises

envisaged, it is suggested that the focus clearly

remain on small enterprises since, apart from other

considerations, this is the sector requiring the

greatest assistance and where spread effects arelikely to be the maximum in developing econo-

mies.

2. Choice of technology

Cumulative experience in many countries as

well as recommendations of FAO and several other

agencies suggest that system design and related

choice of processing technologies in developing

countries should be guided by the need to combine

labour, material resources and capital so that notonly the type and quantity of goods and services

produced are taken into account, but also the

distribution of their benefits and the prospects of

overall growth. These criteria should include:

• Increasing incomes of growers and

workers/artisans through maximum

utilization of locally available raw mate-

rial and maximum possible local pro-

curement of equipment/machinery

• Reducing production and transport costs

and overheads by optimum utilization of

renewable energy (e.g., solar energy

and biogas) and reducing the moisture

content of products wherever and to

the maximum extent possible before

transport

• Engendering better distribution of

income and greater local value addition

by decentralizing processing activities

and involving growers themselves atleast in some semi-processing activities

• Maximizing national output by reducing

royalty payments and capital costs and

minimizing imports of equipment, pack-

ing materials, additives, etc.

• Maximizing the availability of high-

quality, standard processed products

for internal and export markets, thereby

reducing post-harvest losses, giving

added value to indigenous crops and

increasing the volume and quality of

agricultural output

3. Post-harvest operation

The importance of linking up processingunits and operations with the procurement and

quality of the raw produce itself cannot be overem-

phasized and must form part of the overall activity

undertaken. Leaving aside issues pertaining to

improved varieties and planting materials, and even

taking the currently available raw material as

given, a great deal can be achieved through

effective backward linkages in terms of the

viability and profitability of the unit, improvement

in incomes of growers and reduction of produce

losses.

Grading and sorting of raw material will

have a considerable effect on product quality by

eliminating poor produce and promoting better

material handling. Growers supplying raw material

should be encouraged to undertake proper grading

and sorting practices not only to facilitate better

product quality but also to encourage a process of

learning the true value of their raw material and

the importance of its quality in fetching better

prices. However, it must be recognized that

grading or sorting never improve quality, butmerely separate produce on the basis of size and

quality respectively.

Practices and measures while produce is still

on the tree, at harvest time and during post-harvest

handling are also vital in promoting the quality of

produce before it enters the production process or

the market. Proper application of pesticides, other

pest-prevention measures, correct timing of the

harvest, correct plucking techniques, adequate

storage procedures and other such measures willgo a long way towards reducing losses and

88



promoting produce quality. While efficient pre-

and post-harvest handling cannot compensate for

poor initial quality of horticultural produce, great

improvements can be achieved through improved

management. The production system could there-fore have in-built appropriate procurement pricing

systems and managerial practices to further this

process.

4. Market considerations

As emphasized earlier, horticulture pro-

cessing is a highly market-driven industry, heavily

dependent on transient consumer tastes and charac-

terized by enormous variability and competition in

market conditions. Many an enterprise has folded

because of erroneous decisions regarding scale,

product definition and range, pricing, branding and

labelling, etc., which have not matched the targeted

market. These are extremely important aspects of

technology management in this sector.

A huge variety of processed products are in

the market today both domestically in different

countries and internationally. In designing the

production system of an enterprise, decisions have

to be taken with respect to the range of products to be made in relation to the available produce.

In small or medium enterprises, experience

has shown that all-year production based on the

various types of produce available locally in the

different seasons is a better option than single-

produce operations, which are likely to be only

seasonal, limiting capacity utilization, employment

generation and market spread, to guard against

failures. Similarly, both finished and intermediate

products can be made and both have their ownadvantages and disadvantages, the former involv-

ing the enterprise getting involved with retail

marketing with its attendant risks and additional

costs of branding, labelling and sales, while the

latter increases the dependence of the enterprise on

a few buyers who can cartelize and control prices.

Product quality, pricing and other factors such as

whether the product should or should not contain

chemical preservatives, added flavours and colours,

added sugar and so on are all crucial decisions

with a direct bearing on the positioning andmarketability of the products.

Careful and rigorous market analysis is

essential to address the above issues before

setting up the unit and commencing production.

Unfortunately, these kinds of exercises are usually

beyond the means of small or medium enterprises,

but recourse can be had to existing market studies

and intelligence and local consultancies. Prior

discussions with trade representatives can also

help.

Experience also suggests that, despite the

attractiveness of export markets and the importance

to the host nation of export earnings, small and

medium enterprises should give importance to

and specifically address local and wider domestic

markets. The latter are likely to be more familiar and involve less risks, would permit relatively

easier entry and access and could constitute the

foundation of economic viability with exports as

the icing on the cake. Large corporations and

MNCs also tend to deal with fewer products in

much larger quantities as this matches their

production and marketing systems well and lends

itself to more effective market promotion, thus

leaving space for SMEs with a wider and more

differentiated product range with less competition.

Locally preferred products and flavours can also be more readily built in to the product range

of such enterprises, creating a market niche for

themselves.

The need for continuous monitoring of

the market and variations in demand should be

explicitly recognized and built in to the enterprises

and the systems sought to be transferred, so that

the enterprise is not caught unawares by changes

in consumer preferences or entry of rival products,

and once again underlining the market-drivennature of this industry.

5. Human resources development

Managerial and technical skills are ex-

tremely important in this industry perhaps even

more so than in most others, especially because the

product lines are likely to keep undergoing change

in tune with market trends and because continuous

and rigorous quality control and management areessential.



89




Technical personnel should be properly

trained and measures taken to periodically upgrade

their knowledge and skills so that they are in

touch with technological improvements, quality

specifications and sanitary/phyto-sanitary require-

ments.

Managerial personnel should be similarly

trained and periodically exposed to new develop-

ments and encouraged to keep abreast with market

trends, new processes and equipment and other

developments in the industry.

Together, these personnel should be

equipped to undertake periodic updating of equip-

ment and processes to guard against obsolescence,

maintain product quality and competitiveness.

These HRD aspects are critical aspects of techno-

logy management in this industry since the success

or otherwise of the enterprise ultimately rests on

them.

E. Conclusions

Some recommendations may now be made

regarding programmes and strategies for techno-

logy transfer to SMEs in developing countries,

keeping in mind the various issues discussed

above.

1. Technology transfer at the

enterprise level

We may first list some of the salient aspects

which should form an integral part of the process

of planning and establishing any and each enterprise or unit in horticulture processing, so that

these in turn become integral components of the

envisaged technology transfer programme and

strategies:

• Locally felt needs as regards raw

material utilization and losses, prices

obtained, marketability, etc., should be

properly studied and ascertained; em-

phasis should be given to produce with

small farmers, who should be networkedfor procurement or partnership

• The overall market situation should be

carefully studied and a preliminary

product range defined in relation to both

the market and raw material availability;

the properties, quality, etc., of the

different products may also be initially

laid down

• In the light of the above, a broad system

design laying down proposed scales,

mechanisms for the procurement of raw

material and other supplies, marketing

strategies and human resources re-

quired/available should be worked out

• Technology needs/gaps should beidentified to match the above system

design and new/upgraded equipment

and machinery required, preferably

available domestically and maximally

capable of local maintenance/repair

should be listed with specifications

• Personnel at technical and managerial

levels should be fully and properly

trained

• Processes and protocols for different products should be standardized, quality

control measures worked out and

mechanisms for quality management put

in place

• Trial production and trial marketing on

a pilot basis should be undertaken to

iron out production problems, assess

consumer/buyer response, assess costs

and viability and finalize product range

• Full-scale production and marketingwith continuous monitoring of feedback

2. Strategies and programmes

for effective technology transfer

and adoption

With the above requirements in mind, the

following major issues and other elements of an

envisaged strategy for the transfer of prospective

technologies to promote horticultural processing inAsian developing countries may be considered:

90



• Greater priority should be given to the

development of technology assessment

capabilities for sustainable development

and institutional linkages for evaluating

relevant technologies

• Emphasis must be on “technology

management”, i.e., integrating entre-

preneurship technology, finance and

marketing aspects instead of transfer of

technology/techniques only

• Agribusiness incubators should be set

up to encourage start-up entrepreneurs/

enterprises

•The technology package and system

design evolved and transferred should

be holistic, needs-based and context-

specific while being up to date with

respect to international quality and

hygiene standards and aiming at long-

term market opportunities to ensure

sustainability

• Adaptive research towards appropriate,

locale-specific and improved techno-

logies should be encouraged with the

active participation of NGOs and R&Dagencies

• Introduction of sophisticated processing

equipment and packaging materials

must be based on the specific needs of

domestic and export markets

• Decentralization of technology transfer

activities must be planned to assist

small farmers and institutional linkages

must be strengthened

• Training must focus on the promotion

of best practices and experiences of

other developing countries

• Backward linkages down to the farm

level should be built in, including

measures relating to the improvement of

produce quality, on-farm practices and

post-harvest handling

• Advocacy regarding horticultural policy

frameworks should also be articulated

• Linkages with complementary sectors

should be promoted wherever feasible

and promising

• Demonstration projects should be

encouraged to pilot test technology

transfer at the national, subregional and

regional levels

• “Clearing houses and IT kiosks” should

be set up to promote and transfer new

and innovative technologies

• Regional and subregional networks/

associations should be promoted to

facilitate R&D and enterprises coopera-

tion



91




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92



The Expert Group Meeting on Promoting

Resource-based Export-oriented SMEs for Poverty

Alleviation in Asia and the Pacific was organized

by the United Nations Economic and Social

Commission for Asia and the Pacific (ESCAP), atthe United Nations Conference Centre, Bangkok,

from 21 to 23 January 2003.

The overall objective of the Meeting was

to deliberate on the critical issues related to the

promotion of agro- and resource-based SMEs

which could be export-oriented and which could

utilize the resources available, especially in the

rural areas. The other objective was to explore

the possibilities for enterprise development in rural

areas with a view to alleviating poverty in thoseareas.

A. Regional overview of the status

of the resource-based export-oriented

SMEs and their impacts on poverty

alleviation in Asia and the Pacific

The Expert Group Meeting pointed out that

SMEs played an important role in the economiesof all the Asian countries, irrespective of their

stage of development. In many countries of the

region, SMEs accounted for 40 to 50 per cent of

the total output, employing over two thirds of the

workforce. SMEs were generally seen as being

more employment-oriented and tended to have a

large presence in items like food processing,

leather, footwear, furniture, metal fabrication,

printing and in recent years producing parts and

components in a wide range of the engineering

industry. Since they used labour-intensive techno-logy, their growth was considered to be beneficial

IV. REPORT OF THE EXPERT GROUP MEETING

ON PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs

FOR POVERTY ALLEVIATION IN ASIA AND THE PACIFIC

ESCAP secretariat

to labour-abundant economies for employment

generation and poverty alleviation. Capital pro-

ductivity was generally high in SMEs with no

clearly established evidence on total factor produc-

tivity.

SMEs were the continuous breeding ground

of entrepreneurs and a source of savings. As many

large firms had their roots in the SME sector, the

significance of small firms’ performance went

beyond their immediate contribution to output and

employment. In achieving the objectives of equita-

ble distribution of income and regional dispersal of

economic activities, especially in the promotion of

rural industrialization and rural resource utilization,

the SME sector could make a valuable contribu-tion. Rural SMEs, by their location, created more

dispersed economic activities and even in the

urban areas, small-scale enterprises contributed to

the more even spread of work centres and popula-

tion. These features exerted a positive influence

on the distribution of income.

The Meeting also pointed out that Govern-

ments of the region had adopted a wide range of

institutional and promotional measures in the areas

of infrastructure, finance, human resources deve-lopment and technology to spur the growth of

the SME sector. However, these policies and

measures had produced mixed results. In addition

to many gaps, a lack of coordination among the

financial support schemes and technical assistance

programmes was clearly evident in several

countries, especially the developing ones. Despite

many attempts at redressing the imbalance, many

economies still showed policy-induced biases

against SMEs. In some instances, financial and

fiscal policies tended to operate less in the interestof SMEs and more in the interest of large-scale

93




enterprises. The large enterprises had superior

managerial and financial resources to deal with

government agencies, reinforcing their institutional

advantage over the SMEs.

During the course of deliberations, the

experts were of the opinion that despite the new

challenges caused by the rapid pace of globaliza-

tion and global integration of economic activities,

SMEs in the developing as well as developed

countries of the region needed to demonstrate

and establish a great deal of interdependence with

large enterprises, thereby generating benefits for

each other. This feature of their coexistence could

become a useful source of structural change

through the development of linkages betweenthem, either vertically or horizontally. As many

SMEs faced limited markets and were often

constrained by lack of resources to expand, sub-

contracting arrangements with large enterprises

could become an important element in the design

of a new strategy for the development of SMEs.

The rural-based SMEs in weaker economies such

as LDCs and economies in transition were likely

to face increased competition as investments in

physical infrastructure were increased. It was

pointed out that that would require significant

efforts, especially in the developing economies of the region in creating more linkages across sectors

as well as between enterprises of different sizes.

New export markets could also be explored to

relax the constraints posed by a limited market.

The Meeting was of the opinion that the

major problem faced by SMEs in developing

economies was the lack of a skilled labour force

and technological upgrading. Those inadequacies

had prevented SMEs from being linked properly

in the economic restructuring process at both the

domestic and regional levels. It was therefore

desirable that in the context of changing techno-

logical situations and marketing strategies for

SMEs which constituted the backbone of the

economy in several economies, to receive fair

and appropriate treatment in overall planning and

development programmes. In that context, it was

emphasized that special measures targeting tech-

nology capacity-building for rural SME promotion

should be initiated. It was pointed out that

Governments as well as international donor agen-

cies could look into the possibilities of setting upagro-based rural technology/business incubators.

It was also emphasized that research and develop-

ment activities for innovations in promoting rural

resource-based enterprises should be promoted

with the cooperation of government and academic

institutions. The experts also pointed out that un-der the existing international agreements and

mandates, there were several mandatory require-

ments to meet the technical and environmental

standards. Furthermore, under the new round of

multilateral agreements, it was likely that new

mandates would evolve requiring SMEs from all

countries to abide by those mandates. It was there-

fore necessary to apprise the enterprises in rural

areas of these developments and to build up

capacities to meet the requirements. In that con-

text, linkages were necessary between researchinstitutes and enterprises.

The Meeting emphasized that access to

finance was one of the critical problems faced

by SMEs in both rural and urban areas. That

problem was quite critical regardless of whether

the enterprises were resource-based or otherwise.

The experts were of the opinion that subsidized

credit programmes had failed badly as they did

not actually benefit the targeted SMEs. It was

pointed out that the experience of Grameen Bank

in Bangladesh was a successful case in rural

enterprise financing and needed review for possi-

ble replication. It was also emphasized that the

strengthening of rural banking and other financial

facilities was urgently needed, including the

promotion of venture capital funding. The view

was also expressed that it was timely to explore

and institute market-oriented financial services in

the rural sector rather than subsidized credit. It

was further emphasized that there was an urgent

need to promote an efficient rural financial market

with the institutional capacity to mobilize ruralsavings and leverage such funds through the

commercial markets for the benefit of rural

resource-based SMEs.

The Meeting strongly pointed out that the

Government’s role was very important in pro-

moting resource-based rural SMEs. A clear

transparent national policy framework with a clear

institutional mechanism for its implementation was

essential. It was also necessary for Governments

to be involved in the provision of rural infrastruc-tures, rural financial reforms and land and property

94



registration systems but more importantly in human

resources development, including the promotion

of entrepreneurships. Furthermore, such skill de-

velopment should also become a priority area for

NGOs and the private sector, as the availability of skills and entrepreneurship was vital for resource-

based enterprise development as well as for the

identification of proper opportunities in the rural

areas. The private sector as an end-user should

also be more involved in developing training

curricula. As NGOs had proved to be successful

in several countries in identifying and training

entrepreneurial talent at the grass-roots level, they

could also increase awareness of the governmental

human resources development projects. The

private sector could play an important role as“mentor” for new entrants.

While Governments had to shoulder heavier

responsibilities in augmenting the supply of

adequately trained manpower, both technically and

managerially, it was also important for Govern-

ments in most of the developing countries to

improve and re-engineer the public institutions to

assist SMEs. There was an urgent need to reorient

and reform public institutions so that they could

adequately and appropriately respond to the needs

of rural private enterprises.

B. Evolving model of

programmes for enhancing the

competitiveness of SMEs, and issues

and strategies for the transfer and

adoption of prospective technologies for

processing horticultural produce

A presentation highlighted the specific programme activities initiated by APCTT in pro-

moting rural industrialization and enhancing the

competitiveness of resource-based SMEs in

selected sectors such as bamboo, fruits and

vegetables, herbal medicine and garment sectors.

The emphasis of the programmes was on streng-

thening technology management capabilities at

both the institutional and enterprise levels. The

approach was to evolve model programmes to

address capacity-building issues relating to SMEs

in facing local and global competition in thenew WTO regime and knowledge-based economy.

In view of the high growth potential existing

for SMEs in the fruits and vegetables processing

sector, the presentation dealt with the developmen-

tal issues involved in small-scale and high-quality

processing techniques in the present market

scenario and the strategies and technology transfer

issues introduced in aspects pertaining to the

production system, technology choice strengthen-

ing backward linkages and capacity-building for

human resources development and in the techno-

logy area, i.e., market development. With this in

view, the specific demonstration projects being

undertaken by the Centre in cooperation with

ESCAP, national and other international agencies

were elaborated. The methodology stressed the

need to evolve new mechanisms to address the problems of microenterprises and also integrate

technology management dimensions in enhancing

the competitiveness of both the enterprises and

intermediary agencies.

The Meeting emphasized the role of inter-

national organizations especially in strengthening

entrepreneurship development programmes and

in promoting agribusiness incubator capabilities

among SMEs in rural areas. It was also pointed

out that in order to sustain the long-term competi-tiveness of resource-based SMEs, there was also a

need to promote and further strengthen industrial

clusters in selected traditional sectors. The appli-

cation of ICT was considered to be an important

tool in strengthening the linkages between

products, markets and technology. This must form

an important component in the demonstration

activities planned in member countries to enhance

networking at various levels.

C. Country experiences

The various country presentations high-

lighted the policy issues and other facilities

implemented at the national level with a view to

promoting resource-based SMEs.

In Bangladesh, the main thrust in SME

promotion was in the development of agro-based

processing and essential consumer goods products.

The important area of investment was in agricul-tural tools and equipment, irrigation pumps, motors

IV. Report of the Expert Group Meeting on Promoting Resource-based Export-oriented SMEs

for Poverty Alleviation in Asia and the Pacific

95




and other equipment, fertilizers and insecticides,

dyes and chemical, leather and rubber products,

rural transport equipment, sports goods, food, fruit

and vegetable preservation and processing, fish,

poultry and cattle feed, cotton spinning, textiles,

handlooms, hosiery and silk products, machine

tools, poultry and dairy products. The techno-

logical levels of the majority of SMEs in Bangla-

desh were low. Many governmental, semi-govern-

mental and non-governmental organizations and

other institutions at the national level were respon-

sible for providing assistance to entrepreneurs

through SMEs in the country. Industrial credit in

Bangladesh was financed through a multi-agency

system consisting of: (a) government-sponsored

industrial banks – Bangladesh Shilpa Bank, Bang-ladesh Shilpa Rin Sangshtha; and (b) commercial

banks and specialized financial institutions like

Bangladesh Krishi Bank, the Bank of Small Indus-

tries and Commerce and the Bangladesh Small and

Cottage Industries Corporation (BSCIC).

In Cambodia, the small and medium

industries constituted 98 per cent of total industrial

establishments and basically consisted of food,

beverages and tobacco and wood-based products.

In recent years, garments had emerged as animportant export item. The SME sector suffered

from low technological levels, lack of formal

finance and inadequacy of trained manpower, both

technical and managerial. There was an urgent

need to initiate legal and regulatory measures to

support and promote SMEs in Cambodia.

In China, during the past few years, with the

deepening of reform measures and opening up,

especially after the country’s entry into WTO, the

economy was increasingly in transition towardsmarket economy. Thus, a more favourable envi-

ronment for SME development had been created.

Some of the key strategies that China was

implementing to boost economic development were

expected to effectively push SME development

forward. Such policies were:

(a) Establishing special laws to guarantee

SMEs’ healthy development;

(b) China’s western region development

strategy to boost SME development;

(c) Lifting restrictions on foreign trade

licences to benefit the development of SMEs’

foreign trade business;

(d) Tertiary sector development to enableSMEs to further exert their advantages;

(e) Strengthened guidance to SMEs in

their technical innovations and personnel training;

(f) Consolidating regional economic

cooperation and boosting the export of resource

products.

Owing to all the factors mentioned above, it

was expected that the Chinese SMEs would

strengthen their development environment andwould have a more favourable environment in the

future. In the years to come, China was expected

to realize comprehensive socio-economic progress

by boosting SME development and help to free

more people from the fetters of poverty.

In India, SMEs had occupied an important

place for a long time. SSI consisted of 3.5 million

units and employed 19.3 million people. Its share

in industrial production was 39 per cent and in

exports, 34 per cent in 2001. The SSI sector had been growing at the rate of 6 per cent and

consisted of 8,000 items. The technologies used in

the SSI sector ranged from simple traditional

village types to the most sophisticated ones. Major

production items included drugs and pharmaceu-

ticals, pesticides, fertilizers, synthetic detergents,

textiles, leather and leather products, agricultural

implements, etc. The SSI sector had always been

treated as an area of employment promotion in the

context of the Indian economy. Various measures

at both the central and state levels had beenenacted. The major challenge was still to upgrade

the technological levels of a large number of

establishments in the SSI sector.

Malaysia had relied on the production

and export of primary commodities for a certain

period of time. SMEs, which were defined as

companies with annual sales turnover not exceed-

ing RM 25 million and full-time employees up to

150, accounted for 90 per cent of total manu-

facturing establishments and contributed 33.3

per cent to the total manufacturing value added.

96



The Government, with the active support of the

private sector, had launched several programmes

to assist SMEs in such areas as (1) industrial

linkages, (2) technology development, (3) techno-

logy acquisition, (4) skills development, (5) marketdevelopment, (6) infrastructure development and

(7) advisory services. Special programmes for

export-oriented SMEs consisted of (1) tax relief,

(2) duties and sales tax exemption, (3) other finan-

cial incentives and schemes, etc. However, the

SMEs in Malaysia needed technological upgrading

and reduction in factor costs if they were to

compete at the global and regional levels by

improving the export competitiveness.

In Nepal , SMEs, which had fixed assets of less than Rs 100 million (US$ 1 = Rs 78), were

viewed as an important source of employment

generation and rural industrialization, helping to

create backward and forward linkages in the

economy and thereby increasing the rural income.

The Government provided various incentives and

facilities including interest rebates in selected

priority areas as well as institutional support for

the choice and adaptation of modern technologies.

Most of the SMEs suffered from technological

difficulties and lack of skilled manpower.

In the Republic of Korea, SMEs accounted

for 84 per cent of total employment and 35 per

cent of total exports. Various arrangements such

as the Small and Medium Business Administration

(SMBA), the Small and Medium Business Centre

(SMBC) and other SME-related associations had

been set up. In recent years the Government had

been putting a great deal of emphasis on SME

development in the Republic of Korea, instead of

the earlier emphasis on the “Chaebol” system.

In Thailand , SMEs had always occupied an

important place. In recent years the Government

had implemented a new “one village one product”

initiative, which was aimed at building self-

reliance at the local community level, by utilizing

local resources and adding higher value. Through

its various offices, especially the Ministries of

Agriculture and Cooperatives, Commerce, and

Science and Technology, the Government provided

various services in the areas of production,

management, marketing, standardization, qualitycontrol and product design. Most of the products

consisted of textiles and garments, food and herbs,

ceramics and other handicrafts. Although the

initiative had been in operation for only two years,

34 per cent of the products under the scheme were

already being exported.

In Viet Nam, SMEs played an important role

in the nation’s economic growth in creating

employment, in export promotion and in reducing

poverty. However, SMEs in general were facing

serious problems in the areas of adequate provision

of capital, low levels of technological capabilities

and information on markets. The Government had

implemented several measures to support SMEs,

however, the implementation of those measures

needed to be speeded up.

D. Recommendations

At the national level, the development of

agro-based and resource-based SMEs calls for

various policies, including the following:

(a) General policies

(i) In general, the private sector should

be allowed to take the leading role inthe development of SMEs. However,

Governments should create an enabl-

ing environment for the sustained

growth and development of SMEs

by strengthening legal institutional,

administrative and financial set-ups and

formulating appropriate policies at both

the micro and macro levels.

(ii) Member countries should take appro-

priate policy and operational measures

to promote backward and forward link-ages among resource-based small and

medium industries and large industries

with a view to developing resource-

based and export-oriented SMEs.

(b) Fiscal policies

Instead of providing special tax holidays and

other fiscal incentives, the focus should be on

strengthening the rural infrastructure and public-

private partnerships for the dispersal of SMEs and balanced regional development.

IV. Report of the Expert Group Meeting on Promoting Resource-based Export-oriented SMEs

for Poverty Alleviation in Asia and the Pacific

97





A. Globalization and foreign

direct investment

Globalization is an inevitable and irrevers-

ible process, and dealing with the imperatives of

globalization capitalizing on its positive aspectsand mitigating the negative ones is perhaps the

most important challenge for the new millennium.

Globalization has enhanced the opportunities for

success, but it has also posed new risks to deve-

loping countries.

Globalization has many faces; however,

globalization is first and foremost comprehended

in economic and financial terms. In this sense, it

may be defined as the broadening and deepening

linkages of national economies into a worldwide

market for goods, services and especially capital.

As a result of a revolution in telecommunications

and information technologies, the last 15 years

have witnessed dramatic increases in trade linkages

and cross-border capital flows, as well as radical

changes in the form, structure and location of

production.

Perhaps the most prominent face of globali-

zation is the rapid integration of production and

financial markets over the last decade; that is, trade

and investment are the prime driving forces behindglobalization. Foreign direct investment (FDI)

has been one of the core features of globalization

and the world economy over the past two decades.

It has grown at an unprecedented pace for more

than a decade, with only a slight interruption

during the recession of the early 1990s. More

firms in more industries from more countries are

expanding abroad through direct investment than

ever before, and virtually all economies now com-

pete to attract multinational enterprises (MNEs).

As a result, global flows reached a historic high

of US$ 340 billion with the global stock of FDI

reaching US$ 3,266 billion in 1996.

This trend has been driven by the complex

interaction of technological change, evolving

corporate strategies towards a more global focus

and major policy reform in individual countries.

The past two decades have witnessed an unparal-

leled opening and modernization of economies in

all regions, encompassing deregulation, demono-

polization, privatization and private participation in

the provision of infrastructure, and the reduction

and simplification of tariffs. An integral part of

this process has been the liberalization of foreign

investment regimes. Indeed, the wish to attract

FDI has been one of the driving forces behind

the whole reform process. Although the pace

and scale of reform have varied depending on

the particular circumstances in each country, the

direction of change has not.

Most developing countries were starting to

look to FDI as a source of capital when flows of

official development assistance (ODA) declined

sharply in the 1990s. FDI usually represented along-term commitment to the host country and

contributed significantly to gross fixed capital

formation in developing countries. FDI had

several advantages over other types of capital

flows, in particular its greater stability and the fact

that it would not create obligations for the host

country, as had been observed in the context of the

Asian financial crisis of 1997-1998.

Emerging issues in the areas of foreign

direct investment are an essential part of the core process of globalization. Of particular urgency is

* Economic Affairs Officer, Investment and Enterprise

Development Section, Trade and Investment Division,

Economic and Social Commission for Asia and thePacific.

99

V. FOREIGN DIRECT INVESTMENT: DETERMINANTS,

TRENDS IN FLOWS AND PROMOTION POLICIES

Joong-Wan Cho*




the issue of the quality of the policies that need to

be adopted by countries as a result of the growth

of FDI and the role it plays in their competitive

position in global and regional markets. FDI can

play a key role in improving the capacity of thehost country to respond to the opportunities offered

by global economic integration, a goal increasingly

recognized as one of the key aims of any develop-

ment strategy.

B. Foreign direct investment flows:

determinants and recent trends

1. Review of host country

determinants of FDI

Nowadays, virtually all countries are

actively seeking to attract FDI, because of the

expected favourable effect on income generation

from capital inflows, advanced technology,

management skills and market know-how. It

would be useful to review the key determinants

and factors of FDI based on the theories of interna-

tional investment.

Table V.1 lists three key determinants and

factors associated with the extent and pattern of

FDI in developing host countries: attractiveness of

the economic conditions in host countries; the

policy framework towards the private sector,

trade and industry, and FDI and its implementation

by host governments; and the investment strategies

of MNEs.

The review of host country determinants

is closely linked with the role of national policies

and especially the liberalization of policies, a key

factor in globalization, as FDI determinants. Loca-

tion-specific determinants have a crucial influence

on a host country’s inflow of FDI. The relative

importance of different location-specific determi-

nants depends on at least three aspects of invest-

ment: the motive for investment (e.g., resources,

Table V.1. Host country determinants of FDI

• Markets Size; income levels; urbanization; stability and growth prospects;

access to regional markets; distribution and demand patterns.

Economic conditions • Resources Natural resources; location.

• Competitiveness Labour availability, cost, skills, trainability; managerial technical

skills; access to inputs; physical infrastructure; supplier base;

technology support.

• Macro policies Management of crucial macro variables; ease of remittance;

access to foreign exchange.

• Private sector Promotion of private ownership; clear and stable policies; easy

Host country policies

entry/exit policies; efficient financial markets; other support.

• Trade and industry Trade strategy; regional integration and access to markets;

ownership controls; competition policies; support for SMEs.

• FDI policies Ease of entry; ownership, incentives; access to inputs; transparent

and stable policies.

• Risk perception Perceptions of country risk, based on political factors, macro

management, labour markets, policy stability.

MNE strategies • Location, sourcing, Company strategies on location, sourcing of products/inputs,

integration integration of affiliates, strategic alliances, training, technology

transfer.

Source: Sanjaya Lall, Attracting Foreign Investment: New Trends, Sources and Policies, Economic Paper 31 (CommonwealthSecretariat, 1997).

100



market or efficiency-seeking), the type of invest-

ment (e.g., services or manufacturing), and the size

of the investors (small and medium MNEs or large

MNEs) (UNCTAD 1998a).

As a consequence of globalization and

economic integration, one of the most important

traditional FDI determinants, the size of national

markets, has decreased in importance. At the same

time, cost differences between locations, the

quality of infrastructure, the ease of doing business

and the availability of skills have become more

important (UNCTAD 1996). Traditional economic

determinants, such as natural resources and

national market size for manufacturing products

sheltered from international competition by hightariffs or quotas, still play an important role in

attracting FDI by a number of developing and

developed countries as well as economies in

transition (e.g., China, Australia and Kazakhstan).

The economic determinants related to large

markets, trade barriers and non-tradable services

are still at work and account for a large share

of worldwide FDI flows. Although FDI remains

strongly driven by its traditional determinants, the

relative importance of different locational determi-

nants for competitiveness-enhancing FDI is shift-

ing. While low-cost labour remains a locational

advantage, the increasingly sought-after advantages

are competitive combinations of wages, skills and

productivity (UNCTAD 1998a).

With the creation of regional integration

frameworks (e.g., ASEAN), access to the regional

market supersedes access to national markets as an

important FDI determinant. This also depends on

how well the country is integrated into the regional

bloc in terms of policy harmonization as well as physical accessibility, which gives policy determi-

nants an increasing importance.

For foreign investors, the host country

policies on the repatriation of profits and capital

and access to foreign exchange for the import of

intermediaries, raw materials and technology are

particularly important. The pattern of recent FDI

flows supports the conclusion that liberal policies

on technology, which tend to go hand in hand with

more liberal policies in general, serve to attractmore and better foreign investments.

Core FDI policies consist of rules and

regulations governing the entry and operations of

foreign investors, the standards of treatment

accorded to them and functioning of the markets

within which they operate (UNCTAD 1997).Among the supplementary policies used to

influence locational decisions, trade policy plays

the most prominent role. Asian countries have

used both FDI and trade policies to encourage

MNEs to contribute to their export-oriented

development strategies. Other related policies may

include privatization policies and policies deter-

mined by international agreements, such as bila-

teral investment treaties (BITs). BITs augment the

international dimension to national direct invest-

ment policies focused on insurance and protectionand other broader issues. However, as in the case

of BITs, it is precisely the function of the enabling

framework to allow other determinants, especially

economic determinants, to assert their influence.

2. Summary of recent trends

in FDI flows

After a decade of steady and strong growth,

foreign direct investment flows declined sharply

in 2001 and continued their decline in 2002,

decreasing further by 27 per cent. In 2002, the

volume of FDI inflows reached about US$ 534

billion, which contrasts with US$ 735 billion in

2001, and is equivalent to a third of the US$ 1,492

billion peak in 2000 (see table V.2). A major

factor behind this decline is the slowdown in the

world economy, which has reduced world demand

and accentuated and accelerated the global restruc-

turing process of major MNEs in sectors character-

ized by excess capacity. The decline in FDI in

2001 also reflects the aftermath of the 11 Septem- ber 2001 incident.

The decline in 2001 was mainly con-

centrated in developed countries as a result of a

considerable drop in cross-border mergers and

acquisitions (M&As). FDI inflows to developed

countries decreased by 59 per cent, compared with

14 per cent in developing economies. In 2002,

similar trends continued with a major decline in

developed countries and a smaller decline in

developing countries. FDI in 2001 was higher than that in 1998, after which dramatic increases

V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies

101




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

(Billions of US$)

Host region 1997 1998 1999 2000 2001

World 478.1a 694.5a 1 088.3a 1 491.9a 735.1a

Developed economies 267.9 484.2 837.8 1 227.5 503.1

(56.0) b (69.7) b (77.0) b (82.3) b (68.4) b

Developing economies 191.0 187.6 225.1 237.9 204.8

(39.9) b (27.0) b (20.7) b (15.9) b (27.9) b

Africa 10.7 9.0 12.8 8.7 17.2

(5.6)c (4.8)c (5.7)c (3.7)c (8.4)c

Asia and the Pacific 106.0 96.4 103.0 133.8 102.3

(55.5)c (51.4)c (45.8)c (56.2)c (49.9)c

Latin America and the Caribbean 74.3 82.2 109.3 95.4 85.4(38.9)c (43.8)c (48.5)c (40.1)c (41.7)c

Central and Eastern Europe 19.1 22.6 25.4 26.6 27.2

(4.0) b (3.3) b (2.3) b (1.8) b (3.7) b

Source: World Investment Report 2002: Transnational Corporations and Export Competitiveness (UNCTAD/WIR/2002).

a Including FDI inflow figures of least developed countries and oil exporting countries. b Percentage share of the world total.c Percentage share of the developing economies total.

in cross-border M&As led to record flows in1999 and 2000. This is the third downward cycle

in FDI since the late 1980s, which reflects such

short-term factors as business cycles, portfolio

investment sentiment and M&As, which work in

parallel with longer-term factors (UNCTAD

2002).

The economic slowdown has intensified

competitive pressures, forcing companies to search

for cheaper locations. This may have resulted

in increased FDI in activities that benefit from

relocation to low-wage economies. FDI outflowsmay also have risen from countries in which

domestic markets have been growing slower than

foreign markets. There are signs that both factors

have contributed to the recent increase of Japanese

FDI in China. In general, there has been a redis-

tribution of FDI towards developing countries,

where growth has reportedly been higher than

in developed countries. The rise in developing

countries’ shares may also reflect the further

liberalization of their FDI regimes, which was

reinforced by the growth in the number of bilateralinvestment promotion and protection treaties.

In spite of the substantial liberalizingmeasures of the 1990s, developing countries still

attract less than a third of world FDI flows, and

these flows remain highly concentrated. In 2001,

the five largest host countries in the developing

world received 62 per cent of total inflows. The

decline in FDI flows in 2001 largely reflects a fall

in cross-border M&As, the principal vehicle since

the mid-1990s for FDI in developed countries. It

could be argued that 2001 saw a return of FDI to

normal levels after the surge of M&A activities in

the period 1999-2000. In developing countries and

economies in transition, FDI in 2001 in fact proved

fairly resilient despite the global downturn and the

11 September 2001 incident. This resilience was

more pronounced in comparison with inflows of

portfolio investment and bank lending. On a net

basis (inflows less outflows), FDI flows were the

only positive component of private capital flows to

developing countries and economies in transition

during 2000-2001 (UNCTAD 2002).

It is worthwhile to note that FDI in develop-

ing countries has been larger than official inflowssince 1997. It was 10 times larger than bilateral

102



FDI flows to China, the largest recipient

among the developing countries for most of the

1990s, regained their momentum after three years

of stagnation, to reach US$ 47 billion in 2001.

The upward trend in FDI is likely to be sustainedin the coming years, particularly in the light of the

country’s accession to WTO in November 2001.

In addition to investment by new entrants,

reinvested earnings of foreign affiliates in China

have become an important source of FDI, account-

ing for about one third of the total inflows during

2000-2001. FDI continues to play a prominent

role in China’s economy. For example, foreign

affiliates now account for 23 per cent of the total

industrial value added, 18 per cent of tax revenues

and 48 per cent of total exports (MOFTEC 2001).


ODA in 2000. This contrasts with the latter half

of the 1980s, when the two were about equal. It

needs to be stressed, however, that for the least

developed countries, ODA remains of paramount

importance.

3. FDI inflows to the

Asian and Pacific region

FDI flows to the developing economies of

Asia and the Pacific declined from US$ 134 billion

in 2000 to US$ 102 billion in 2001. Much of the

decline was due to an over 60 per cent drop in

flows to Hong Kong, China, which had recorded a

massive inflow of US$ 62 billion in 2000 (see

table V.3).

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

(Millions of US$)

Host subregion/economy 1997 1998 1999 2000 2001

Asia and the Pacific 105 978 96 386 103 008 133 795 102 264

Asia 105 828 96 109 102 779 133 707 102 066

West Asia 5 645 6 705 324 688 4 133

Islamic Republic of Iran 53 24 35 39 33Turkey 805 940 783 982 3 266

Central Asia 3 844 3 152 2 466 1 895 3 569

Azerbaijan 1 067 1 085 510 130 227

Kazakhstan 2 107 1 233 1 468 1 278 2 760

South, East and South-East Asia 96 338 86 252 99 990 131 123 94 365

China 44 237 43 751 40 319 40 772 46 846

(41.7) (45.4) (39.1) (30.5) (45.8)

Hong Kong, China 11 368 14 770 24 596 61 938 22 834

(10.7) (15.3) (23.9) (46.3) (22.3)

India 3 619 2 633 2 168 2 319 3 403

Indonesia 4 677 --356 --2 745 --4 550 --3 277Malaysia 6 324 2 714 3 895 3 788 554

Philippines 1 249 1 752 578 1 241 1 792

Republic of Korea 2 844 5 412 9 333 9 283 3 198

Singapore 10 746 6 389 11 803 5 407 8 609

Thailand 3 626 5 143 3 561 2 813 3 759

Pacific 150 277 229 88 198

Fiji --11 140 --79 --69 --3

Papua New Guinea 88 110 296 130 179

Source: World Investment Report 2002: Transnational Corporations and Export Competitiveness (UNCTAD/WIR/2002).

Notes: Figures in parentheses ( ) denote percentage share of the regional total. Negative figures denote disinvestment.

103




Turning to North-East Asia, the FDI boom

has subsided with inflows falling from US$ 76

billion in 2000 to US$ 30 billion in 2001. FDI in

the Republic of Korea fell by some 67 per cent in

2001 to US$ 3 billion as the surge of post-financialcrisis M&As subsided.

Flows to South-East Asia stagnated at

US$ 13 billion; part of the reason was continued

divestment (US$ 3 billion in 2001) in Indonesia,

where divestments have exceeded FDI inflows

since late 1998. In Malaysia, FDI remained stag-

nant, whereas inflows to the Philippines rose from

US$ 1.2 billion in 2000 to US$ 1.8 billion in 2001.

FDI in Singapore also increased by 59 per cent to

US$ 9 billion, the first time since 1998, but still below the peak of US$ 11 billion reached in 1997.

Faced with the erosion of its competitiveness in

electronics vis-à-vis other countries in the region,

Singapore has designated the biomedical industry

as the next pillar of its growth area, and has

been improving infrastructure and targeting

high-potential companies in that industry through

various investment funds, including venture

capital. FDI in Thailand increased by US$ 1

billion to US$ 3 billion and the MNEs continued

to consolidate their regional auto-manufacturing bases in Thailand. Viet Nam is entering a new era

as host to FDI strengthened by the bilateral trade

agreement with the United States, and the prospect

of its accession to WTO.

Inflows into South Asia reached US$ 4

billion, a 32 per cent increase over 2000. Out of

the subregion’s total FDI, US$ 3.4 billion went to

India, a 47 per cent increase over the previous

year. India, which is by far the largest recipient in

the region, has been taking steps to liberalize its

FDI regime further. Inflows into other economiesin the subregion stagnated or declined apparently

owing to perceived instability in the investment

environment, particularly after the 11 September

2001 incident.

FDI in Central Asia rose by 88 per cent in

2001, to US$ 3.6 billion, driven by the doubling

of inflows into Kazakhstan (US$ 2.8 billion).

Resource-based activities, particularly in copper

and zinc as well as in oil and gas extraction, took

up the largest share (77 per cent) of inflows intothe subregion.

The Pacific region remains marginal in

terms of FDI inflows, with US$ 200 million in

2001. Political instability coupled with relatively

poor infrastructure added to the structural con-

straints of location and size in the Pacific island

countries.

Overall, the prospects for FDI in the Asian

and Pacific region remain bright. Surveys suggest

Asia will continue to be an important location

for the expansion of the international production

system, where China topped the list in Asia,

followed by Indonesia and Thailand. Greenfield

investment will once again become the preferred

option by far for FDI entry into the region follow-

ing the M&A boom during the financial crisis(MIGA 2002).

C. Host country FDI promotion

policy trends

Recently, the FDI inward policy regimes of

most countries around the world, both developed

and developing, have taken on a liberal framework.

The liberalization of core FDI policies consists of

reducing barriers for inward FDI, strengtheningstandards of treatment for foreign investors and

ensuring the proper functioning of markets and

a level playing field for all investors. Ironically,

with policy regimes becoming increasingly open

and similar, many countries have found that they

need to make further efforts to attract FDI in

such a competitive climate; FDI is now recognized

as one of the most important sources of much-

needed capital and managerial, technical and

marketing know-how not only in the manufactur-

ing industry, but also in services and the resource- based industry. Moreover, world-wide liberaliza-

tion convergence increases the locational choice

for FDI.

Measures aimed at attracting FDI are not

always sufficient to ensure the greatest possible

benefits that countries expect from FDI, such as

technology transfer to foreign affiliates and domes-

tic firms, more and deeper linkages with local

enterprises, higher exports, higher employment and

upgraded skills. At the same time, host countriesseek to reduce any negative effects related to

104



foreign investment, such as financial volatility,

anti-competitive practices, abusive transfer pricing,

the crowding-out of domestic firms and excessive

dependence on foreign ownership. In brief, for

host countries the central concern is to maximize

the positive effects of FDI and minimize its

negative effects.

When considering what host country

policies could effectively help developing countries

and economies in transition to attract FDI and

benefit from it, a wide range of host country policy

measures were implemented, for example, to:

• Create a sound and stable macro-

economic and political environment,including a transparent and predictable

business environment

• Develop physical and technical infra-

structure, and promote clusters

• Develop human resources

• Develop domestic enterprise capabili-

ties, especially SMEs

• Address environmental and social

concerns

• Adopt competition laws and reduce

restrictive business practices

• Influence the behaviour of investors

by offering investment incentives and

imposing performance requirements

• Create larger markets through regional

and bilateral cooperation

• Protect investment, including intellec-

tual property rights

Countries have implemented active FDI

promotion policies that have evolved over the

years, as the objective has shifted from simply

attracting a desired quantity of FDI to attracting

quality FDI with a highly beneficial impact on

the domestic economy. In the first generation of

investment promotion policies, many countries

adopt market-friendly policies. They liberalize

their FDI regimes by reducing barriers to inward

FDI, strengthening standards of treatment of foreign investors and assigning a greater role

to market forces in resource allocation. Some

countries can go a long way in attracting foreign

investment with these steps, if the basic economic

determinants for obtaining FDI are right.

On the issue of FDI performance require-

ments and effectiveness, almost all countries, both

developed and developing host countries, have had

recourse to such requirements at some stage in

their development. Specific objectives for the use

of performance requirements include:

• Deepening and broadening of the

industrial base

• Generation of employment opportunities

• Linkage promotion

• Export generation and performance

• Trade balancing

• Regional development promotion

• Avoidance of restrictive business

practices

• Technology transfer

Strong local firms attract FDI; the entry of

foreign affiliates, in turn, enhances the competi-

tiveness and dynamism of the domestic enterprise

sector. The strongest channel for diffusing skills,

knowledge and technology from foreign affiliates

is backward linkages with local firms. This can

contribute to the growth of a vibrant domestic

enterprise sector, the foundation of economic

development. Foreign affiliates, in turn, can

benefit from backward linkages as they reduce

costs and enhance access to local tangible andintangible assets. Hence there is a substantial

mutual interest between foreign affiliates and

domestic firms in creating and deepening back-

ward linkages. With respect to the technology

transfer requirement, technology and know-

how flowing from parent firms to their foreign

affiliates are one of the principal channels for

international technology transfer. MNEs are the

repositories of much of the world’s most advanced

technologies, and most technology transfer

takes place within the MNEs. Intrafirm paymentsof royalties and licence fees account for the


105




majority of the total sales of these transactions.

More competition in host country markets

increases the pressure and incentives for MNEs

to transfer more and better-quality technology to

affiliates.

In a globalizing economy, however, per-

formance requirements are used less frequently,

because they are increasingly considered an

unnecessary bother, which might discourage

foreign investors. In contrast, the use of invest-

ment incentives has proliferated. Sometimes coun-

tries even engage in direct competition for specific

investment projects with financial and other incen-

tives, and such competition can be very costly.

In spite of this competition, there is considerableevidence to suggest that incentives are a relatively

minor factor in the location decisions of MNEs

relative to other locational advantages.

Countries have used various policies and

measures to attract FDI and increase the benefits

from it, from targeted promotion policies to

incentives and performance requirements, as

well as measures to support the enterprise sector.

Many of these measures, however, have been

subjected to new international rules in the frame-work of multilateral agreements such as the

WTO Agreements on TRIMs and on Subsidies and

Countervailing Measures (SCMs). For example,

local content requirements have been phased out

by most countries in line with the requirement

of the TRIMs Agreement. At the same time, FDI

and trade liberalization, as well as more intense

competition for FDI, have reduced the reliance on

other investment performance requirements.

In the second generation of investment promotion policies, Governments actively seek to

attract FDI by marketing their countries, which

usually leads to the setting-up of national invest-

ment promotion agencies (NIPAs).

The third generation of investment promo-

tion policies takes as a starting point the enabling

framework for FDI and a proactive approach to

attracting FDI. It then proceeds to target foreign

investors at the level of industries and firms to

meet their specific developmental priorities, for example, in export promotion or linkage creation.

The key to the success of these new investment

promotion strategies is that they actually address

one of the basic economic FDI determinants while

understanding the changing locational strategies

of MNEs. Regardless of the level at which FDI

is promoted, the competitiveness of the domestic

enterprise sector and a pool of skilled people are

the keys to the product to be marketed. Another

important element of targeting is a sound analysis

of MNEs’ strategies affecting the choice of

location. In response to the increased geographical

and functional specialization in many industries,

countries may find it useful to identify production

niches through which they can link up with

international production systems.

There are, however, risks involved in

developing a more targeted and focused strategy.

Resources may be focused on attracting invest-

ments that do not materialize, or considerable

efforts and resources may be devoted to seeking

the wrong types of firms, or firms that would have

invested in any event. Improving the overall

policy environment for investment should not be

sacrificed to a selective focus on attracting a few

firms. Also, for most developing countries, the

investors to target will probably not be the largestMNEs in the world, but smaller firms within the

appropriate industry or activity. Although adopting

an investor-targeting strategy can clearly be

effective in attracting FDI, it presents considerable

challenges for Governments. Effective targeting

requires business-oriented NIPAs with well-

developed links to the private sector as well as

other branches of government, to identify and

create comparative advantages that are sustainable

(UNCTAD 1997).

In today’s highly competitive world

economy, the ability to attract FDI, especially high-

quality FDI, increasingly needs an investment

product. One implication of this is that countries

that want to attract high-quality FDI and benefit

from it need to develop differentiated and efficient

clusters that offer real and identifiable locational

advantages to international investors and even-

tually become brand names recognizable to any

national or international investor seeking this

particular configuration of advantages. Bangalorein India has such a brand name for the

106



development of software, as do Singapore and

Hong Kong, China, for financial services and

regional headquarters. It must be recognized, how-

ever, that such a targeted approach, and especially

the development of a locational brand name, is

difficult, costly and takes time. Moreover, a more

targeted and fine-tuned approach, which in the

end seeks to match the specific functional needs

of corporate investors with specific locational

products, requires fairly sophisticated institutional

capacities. It is, however, facilitated by the

proliferation of sub-national agencies, and also

even by municipal investment promotion agencies

that as a rule, seek to market more specific invest-

ment products. But this gives rise to another

challenge: the need to coordinate polices acrossvarious administrative levels in a country. Proper

consultation and coordination mechanisms between

central and provincial or municipal governments

need to be strengthened for proper and efficient

investment attraction (ESCAP 2002).

In sum, the continuous need for countries to

move up the ladder and improve the attractiveness

of their locational advantages is a challenging task

for policy makers in developing countries and

calls for sophisticated and comprehensive policyapproaches. Regardless of the level at which FDI

is promoted, and regardless of the precise mix of

the three basic investment promotion strategies

pursued, the competitiveness of the domestic

enterprise sector, including a pool of skilled

people, is the key to the investment product.

Investment facilitation measures

Host Governments have a choice betweenallowing in foreign investment without specific

approval or subjecting proposed investment to

screening and approval against specific criteria.

While the trend to creating a more enabling FDI

framework continues, many countries still evaluate

and screen FDI at the point of entry. The time

required to obtain the various licences, permits and

approvals needed can sometimes be considerable

and can negatively influence the cost-efficiency of

a location; the cost in terms of both money and

time are especially important to export-orientedforeign investors.

Investment and business facilitation mea-

sures include promotion efforts, provision of

incentives to foreign investors, reduction of unnec-

essary costs of doing business in a host country

(e.g., reducing or eliminating corruption and

improving administrative efficiency) and provision

of amenities that contribute to the quality of life

of foreign investors and expatriates. Investment

facilitation services are another increasingly

important component of promotion activities in

both developed and developing countries. Such

services consist of counselling, accelerating

the various stage of the approval process and

providing assistance in obtaining all the permits

needed.

Under the pressures of competition for FDI

in a globalizing economy, investment facilitation

measures and services have been extended to

include after-investment services. Sequential

investment, the reinvestment of earnings by

established foreign affiliates, can be a significant

source of FDI; also there is a growing awareness

that satisfied investors are the best evidence

of a good investment climate in a host country

and that they can therefore help to attract other

investors.

Countries compete increasingly for FDI

not only by improving their policy and economic

determinants but also by implementing pro-active

investment facilitation measures that go beyond

policy liberalization. Successful attraction of FDI

should also be followed up by efficient facilitation

and implementation of investment projects and

by ensuring that local investment regulation

and procedures are consistent with the central

government policies, laws and regulations (ESCAP2003).

NIPAs can reduce administrative barriers

by fostering the development of industrial and

export processing zones. In addition to good

infrastructure and tax incentives, such zones can

constitute islands of administrative efficiency and

provide a buffer between export-oriented foreign

investors and regulatory authorities. NIPAs can

also help to ensure the relevant laws and

regulations governing export-oriented FDI areeasily accessible by foreign investors. Increased


107




transparency of the administrative system and

investment procedures makes it easier for foreign

investors to predict costs for the realization

of investment projects. A range of instruments

could be applied to improve public governance,

including performance assessments, e-government

and codes of conduct for the officials at

NIPAs and other investment-related government

agencies.

One way for NIPAs to attack regulatory

inefficiencies and red tape is to develop so-called

“investor road maps”. These have been developed

by the Foreign Investment Advisory Service

(FIAS) as a tool for identifying and reducing

the number and scope of procedural steps,regulatory requirements and administrative barriers

that constitute the day-to-day interactions between

government and entrepreneurs (FIAS 2001).

The number of agencies whose supervision,

approval or other input is required in the invest-

ment process presents a Government with a

substantial risk of coordinating/avoiding duplica-

tion for each phase of the promotion strategy,

including image-building, generating specific

projects and, most specifically, facilitation servicesrelating to screening, approvals and follow-up.

To address this problem, there is a strong need to

launch an initiative to assist developing economies

in their efforts to promote good governance in

investment facilitation, which could be measured

by the efficiency and transparency of investment-

related procedures and practices. Establishment

of an office of an investment ombudsman at the

national level (for example, in the case of the

Republic of Korea) could be part of a good

governance programme in investment promotionand facilitation for other developing economies to

consider and adopt.

D. FDI by small and medium

enterprises

In a liberalizing and globalizing world

economy in which all enterprises, whether large or

small, are increasingly subjected to international

competition, the internationalization of SMEs,through both inward and outward investment,

deserves increasing attention, as these firms play

a central role in economic development. SMEs

constitute an important part of the economies

of most Asian countries, contributing substantially

to employment and production. They can also

make a major dynamic contribution to growth and

development. Internationalized SMEs, in particu-

lar, offer a significant potential source of growth

and development for developing countries. For

example, smaller MNEs are more likely to: (a)

transfer appropriate technology to developing

countries; (b) have a favourable impact on the

trade balance; and (c) have more flexible local

arrangements and contribute more to the local

economy by using subcontracting to a greater

extent (UNCTAD 1998b).

SMEs contribute to development in two

main ways:

• Through conventional contributions via

the normal production process, such as

investment in tangible and intangible

capital and technological processes.

The contribution of SMEs in this way is

probably relatively small, and roughly

in proportion to the role of SMEs in production or value added, around 40

to 60 per cent in the leading Asian

economies.

• Through the less conventional “entre-

preneurial engine”. In developed coun-

tries at least, SMEs’ contribution to

growth is larger than might be

suggested by conventional models, and

mostly comes from a relatively small

proportion of high-growth SMEs.

SMEs engaged in FDI are more likelyto be among this core group of high-

growth firms. It is important to take

this fact into account in the design of

policies to facilitate FDI for develop-

ment. The process of SME interna-

tionalization, especially through SME

FDI, can offer significant opportunities

for development.

FDI by SMEs has grown remarkably since

the mid-1980s. Driven, among other factors, bythe need to be present abroad to access markets

108



and resources in order to maintain their competi-

tiveness in a rapidly liberalizing and globalizing

world economy, small and medium MNEs are

increasingly internationalizing their production

activities. FDI by SMEs thus complements large

MNEs as a potential avenue for the transfer of

productive resources and technology that can

enhance the growth and competitiveness of deve-

loping countries. As a case in point, the first wave

of Japanese investment abroad, in the 1960s,

was led by small and medium firms seeking low

wage bases overseas. In the 1970s and 1980s, it

became dominated by large manufacturers, seeking

natural resources, production sites in or near large

export markets and low-cost assembly sites for

labour-intensive processes in South-East Asia. Thecurrent wave is led by support industries, which

produce parts and machinery for the big manu-

facturers and are finding it increasingly expensive

to supply components from their home base (Fujita

1998).

Most SMEs face several handicaps in

investing in developing countries. They lack

information on investment opportunities and local

conditions, they are particularly sensitive to

political risk and macroeconomic uncertaintiesand they are unfamiliar with the different legal

systems and regulations involved. Apart from

the right policy environment, with stable and non-

discriminatory policies and good market prospects,

the promotion of FDI by SMEs has to address

the information gaps and risk elements that are

inherent in the internationalization of small firms.

Many developing host countries are already

making efforts to do this. A number of countries

do not require formal approval for FDI below

a certain size. Several that had requirementsregarding the minimum size of foreign invest-

ments have abolished them: Malaysia, Thailand

and Indonesia are good examples. The Republic

of Korea has reduced the minimum size require-

ments over time. The reduction of clearance

formalities is being achieved by the setting-up of

one-stop agencies for FDI promotion. Policies

used by developing countries to help SMEs in

general, such as lower tax rates and credit,

infrastructure and other forms of assistance on

favourable terms, can also help SME MNEs if their entry is facilitated in other ways.

Entry into overseas markets by SMEs

also has been facilitated by a new array of cost-

saving and risk-reducing investment techniques,

allowing foreign companies to take effective

control and expand production abroad without

majority equity stakes or ownership control in the

venture. Such techniques include joint ventures,

international subcontracting deals, licensing

arrangements, franchising, management contracts,

turnkey projects, and production and risk-sharing

agreements. These new forms of investment

reduce the start-up and working capital costs of

investments, limit MNEs’ exposure to political and

commercial risks and allow them to circumvent

administrative barriers to market entry, without

losing competitive strength (Oman 1984).

In sum, SMEs that engage in FDI are an

important part of the entrepreneurial engine that

drives development and growth. In many deve-

loping countries, however, the SME sector is

insufficiently developed in terms of the core of

dynamic and fast-growing SMEs that contribute

significantly to development. FDI by SMEs has

the potential to strengthen the SME sectors of

home as well as host countries, contributing to thehealth and dynamism of their economies. The

potential in this regard is high, as more than 95

per cent of all firms are small or medium-sized.

Increasing the awareness and understanding in

developing countries of this insufficiently tapped

source of investment can thus usefully contribute

to their development, including the development of

their own SMEs. Carefully designed policies are,

however, needed to encourage FDI by and in

SMEs. A number of countries have considerable

experience as regards SME development generallyas well policies to attract investment by such

enterprises and to expand and strengthen its role in

development. An understanding of this experience

would be useful in formulating policies and pro-

grammes with respect to attracting and benefiting

from FDI by SMEs, since developing Asia has a

larger potential to mobilize FDI by SMEs than any

other developing region. Asian SMEs are likely to

be among the primary sources of future Asian

development. For this to be realized, appropriate,

enhanced Asian linkages have to be established atall levels.


109




E. Conclusions and implications for

regional action and cooperation

FDI inflows could bring important benefitsto the recipient economies in the form of capital

inflows, technology spillovers, human capital

formation, international trade integration, enhance-

ment of enterprise development and good govern-

ance. However, FDI could have negative effects

in such areas as market structure and balance

of payments and could lead to crowding-out

of domestic enterprises, as well as other social

impacts. Government policies are therefore

needed to enhance benefits and minimize negative

effects.

The role of an enabling environment for

FDI including political stability as a key factor

in attracting and maintaining investors cannot

be overemphasized. Another universally acknow-

ledged principle is the need to offer stable,

transparent and non-discriminatory regimes for

foreign investors. Such an environment would

consist, among other things, of a legal framework

maximizing a country’s potential for attracting

FDI, adequate infrastructure, good governance, aneffective judicial system and respect for the rule

of law.

The policy mix has to be adapted to

the special circumstances prevailing in different

countries and might have to evolve over time.

Factors influencing this mix are level of deve-

lopment, market size, domestic capabilities and

existing levels of FDI. Globalization offers better

opportunities for small economies to compete for

export-oriented FDI, but it also implies more competition between countries. Hence, it is becoming

increasingly important for countries to consider

what the best policy approach is for attracting

and benefiting from FDI in accordance with

their development objectives. Even at an early

stage of their development, countries need to

attach importance not just to the size of FDI, but

also to its qualitative aspects.

Concerns have arisen that competition to

attract FDI will intensify among countries, espe-cially the type of FDI that can bring major benefits

to recipient economies by enhancing their export

competitiveness or by providing linkages with

domestic enterprises. Indeed, countries are in-

creasingly recognizing the positive contribution

that FDI can make to economic development

through an increase in export capacity, employment

generation, transfer of technology, industrial

upgrading and training of labour. In this kind of

international investment environment, there is a

great need to strengthen the capacity of host

countries, particularly developing countries, in

dealing with FDI inflows. This involves devising

FDI policies and enhancing legislative and institu-

tional structures in order to attract new investment

and building new skills and capacity by training

policy makers, officials, managers and localentrepreneurs as regards what they can offer

foreign investors and how to attract and assist them

in FDI realization.

While most multilateral organizations

concentrate on promotion and attraction of FDI,

relatively little has been done in the area of invest-

ment facilitation and realization, which is of

particular concern for the further promotion of

investment. There seems to be a strong need to fill

this gap in investment facilitation and realizationwithin an effective framework of FDI promotion

policies, especially at the SME level, such as:

• Promoting the exchange of experiences

and the transfer of best practices and

establishing regional networks

• Enhancing FDI flows in small and

medium industries (SMIs) by organizing

investment promotion and facilitation

meetings at certain intervals, keeping in

view the needs and priorities of the host

countries in the region

• Providing regional perspectives on

emerging issues related to FDI and

SME capacity-building and undertaking

studies in those areas for the harmo-

nization of investment policies and

strategies. There is considerable scope

for the harmonization of the laws

and regulations, property rights, equity

sharing and other requirements relatedto FDI

110



Countries have used various proactive

policies and measures to attract and increase the

benefits from FDI, ranging from targeted pro-

motion policies to incentives and performance

requirements, as well as measures to support

the enterprise sector. Many of these measures,

however, have been subjected to new international

rules in the framework of multilateral agreements

such as the WTO Agreements on TRIMs and

SCMs and other regional or bilateral agreements.

The challenge for policy makers is to deepen their

understanding of what policies and policy tools are

most important from a development perspective

and how international rules in the area of invest-

ment would affect them.

Finally, while SME MNEs remain relatively

small players in the global FDI scene, their impor-

tance should not be underestimated in the long

term. They are bound to become more interna-

tional as the pace of globalization increases. They

can offer simple technologies and can diffuse skills

and know-how to local enterprises more readily

than large MNEs. In this context, the following

agenda for regional action and cooperation could

be envisaged:

• Regional information networking onFDI opportunities in the SME sector of

the region

• SME-specific measures, such as an

SME investors club which will focus

attention on SMEs and provide support-

ing activities by government agencies,

private industry and other SMEs

• Provision of a regional training

programme for members and associate

members to evolve comprehensiveinvestment promotion and facilitation

policy measures, especially at the SME

level

• Design and implementation of good

governance programmes in investment

promotion and facilitation at the

regional and/or subregional level


111




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FIAS, 2001. Investor Road Maps (Washington,

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Fujita, Masataka, 1998. The Transnational Activi-

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Lall, Sanjaya, 1997. Attracting Foreign Invest-

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Documents

Promoting Agro-Based Export-Oriented SMEs in Asia by Tarun Das