SME Development in the GMS

Masato Abe, Ph.D.Economic Affairs OfficerUnited Nations ESCAP

Bangkokabem@un.org

Challenges for SME development

• Scattered targets leading to high transaction costs

• Lack of economies of scale

• Limited public resources

• Limited understanding about the targets, i.e., SMEs

• Limited communication channels

• Limited knowledge and skills

Objectives of SME development

• Increase the number of startups• Increase their survival rate• Encourage incorporation or formalization• Foster SME graduates (to be large enterprises)• Facilitate the smooth exit of failed firms, with

leniency for bankruptcy• Enhance access to markets (e.g., increased

exports and exporting to wider markets)• Sustainable and inclusive enterprise

development (e.g., environment, gender, youth, and minorities)

International SME definitionAsian Development Bank

SME No definition None

European Union Micro

Small

Medium

<10 employees; turnover ≤ €2 million or balance sheet total ≤ €2 million<50 employees; turnover ≤ €10 million or balance sheet total ≤ €10 million<250 employees; turnover ≤ €50 million or balance sheet total ≤ €43 million

Employment and turnover or balance sheet total

United Nations Development Programme (UNDP)

SME ≤200 employees Employment

United States of America

MicroSmallMedium

<20 employees20-99 employees100-499 employees

Employment

World Bank SME ≤300 employees; turnover ≤ US$15 million; assets ≤ US$15 million

Employment, turnover, and asset

Sources: European Union (2003); Gibson and van der Vaart (2008)

GMS SME definition Cambodia Micro

SmallMedium

<1011-5051-100

Employee

China SmallMedium

<300 employees; turnover < 30 million yuan300-2,000 employees; turnover 30-300 million yuan

Employment and turnover

Lao PDR SmallMedium

≤ 19≤ 99

Employee

Myanmar MicroSmallMedium

< 1010-5051-100

Employee

Thailand Small (production and service)Medium (production and service)

≤50 employees or capital ≤50 million baht

51-200 employees or capital 51-200 million baht

Employment and capital

Viet Nam SME ≤300 employees; capital ≤VND 10 billion

Employment and capital

Startups by sector Japan (2009)

SMEs by sector Thailand (2010)

Services 29.3 8.3

Wholesales and retailing 16.5 49.7

Restaurants and hotels 13.9 9.3

Medical services and healthcare 14.8 0.3

Construction 9.5 3.5

Manufacturing 6.2 17.9

Transport and storage 3.6 3.9

Education 1.3 0.1

Others 5.1 7.1

Total 100.0 100.0 Sources: Japan Finance Corporation (2009); Office of SMEs Promotion (2011).

Startups by sector in Japan; SMEs by sector in Thailand (%)

SMEs’ net income in Japan

0.0

0.5

1.0

1.5

2.0

2.5

3.0

01 02 03 04 05 06 (Year)

(%)

Manufacturing

Construction

AverageServices

Retail

Transportation

Wholesales

Source: National Life Finance Corporation (2007).

GDP contribution of the SME and informal sector based on income levels

Source: Ayyagari, Beck, and Demirgüç-Kunt (2003).Note: ‘Residual’ includes large enterprises and public sector.

Simplified SME life cycle

Profit

Years

0

Startup

Pick-up

Maturity

Decline

Exit

Grow to a large firm

Loss

Growth

SME typology

TopicCategory 1 Category 2 Category 3 (if

applicable)

Stage of economic development

Low income$1,005 or less

Middle income$1,006 to $12, 275

High income$12,276 or more

Market orientation Domestic Gradual global Born global

Pace of innovation Incremental Radical

Use of technology Isolated Connected

Corporate life stage Nascent (<2 years) Young (2-5 years) Mature (5+ years)

Another SME typologyby market and technology

Source: Modified from Uchikawa and Keola (2009).

Startup profiles in Japan

• Entrepreneurs• Average age was 41.4 years old• 84.5 per cent were men; 15.5 per cent women• 33.1 per cent held a college degree or higher• Enterprises• 3.9 employees• Startup funds: US$ 100K

– Own capital: 35 per cent– Support of family, relatives and friends: 15 per cent: – Public grants and commercial loans, with collaterals and/or

partially covered by public loan guarantee schemes: 50 per cent• 60 per cent of startups achieved break-even within 15

months. • Source: National Life Finance Corporation (2008)

Characteristics of SMEs

• Born out of individual initiatives, knowledge, and skills

• Greater operational flexibility• Low cost of production• Specialization to niche markets• High propensity to adopt technology• High capacity to innovate• High employment orientation• Utilization of locally available human and

material resources• Reduction of geographical imbalances

Disadvantages of SMEs

• Low bargaining power for both sales and procurement

• Weak market access• Low technology adaptation• Lack of brand development• High debt structure• Weak management with less training• Weak human resource base with low level

of compensation• Inadequate institutional support

Constitutions of enterprises

Source: IFC (2009)

Share of SMEs to SMEs’ contributions, various sources & years

Countries/regionExport share

in GDPSME share in

exportsSME share of total

enterprisesSME share of total

workforce

Developed countries

Japan 13.0 53.8* 99.7 70.2

United States 11.0 22.2 99.9 55.8

European Union n/a 43.4 99.8 67.4

Asia and the Pacific

China 27.0 69.2 99.0 74.5

India 20.0 40.0 n/a n/a

Indonesia 24.0 20.0 99.9 99.6

Malaysia 96.0 14.2 99.2 65.1

Pakistan 13.0 30.0 97.9 78.5

Republic of Korea 50.0 39.0 99.9 87.7

Singapore 221.0 16.0 91.5 51.8

Taiwan Province of China n/a 17.0 97.8 77.2

Thailand 57.5 30.6 99.6 69.0

Viet Nam 68.0 20.0 99.9 77.3

The number of SMEs per 1,000 people, 2001-2006

61.8

29.6

14.9

63.2

27.0

9.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Developed Developing LDC

Global Asia-Pacific

Source: ESCAP (2009b).

Entry and exit rates between Japan and USA

Source: The authors, developed based on data from JSBRI (2011).

National culture and entrepreneurship: Japan & USA

0

10

20

30

40

50

60Perceived opportunity

Perceived capabilities

Fear of failure

Entrepreneurial intentions

Uncertainty avoidance

Long term orinetation

Japan United States of America

Sources: GEM (2011); Hofstede (1991).

Productivity differentials by enterprise size

Source: ADB (2009).

Competitiveness framework for SMEs

- Market access- Access to resources

- Business related regulatory framework- Supporting services

- Contestable market power- Capacity to respond effectively to competitors

- Capacity & flexibility to respond to changing environment- Capacity to create new market niches

SMEs

QCD (Quality, Cost, Delivery)

Market Share, Profitability

Six key areas

1. Business environment, including policy and regulatory framework and infrastructure development

2. Entrepreneurship

3. Financing

4. Business development services

5. Innovation and technology

6. Market access

Business enabling environment

• A transparent, open, fair, and competitive business framework

• Clear, independent rule of law for all firms

• Easy establishment and dissolution of businesses

• Equal and stable legal treatment for national and cross-border transactions

Source: ADB (2009).

Business regulatory compliance costs by firm size, Lao PDR

BusinessEnabling

EnvironmentFor SMEs

FactorEndowment

EntrepreneurshipCulture

Infrastructure

EconomicPolicies

RegulatoryFramework

Technology

BEE components

BEE survey

• Ease of Doing Business

• Economic Freedom of the World Exercise

• Corruption Perception Index

• Sub-national survey

Ease of doing business in Asia and the Pacific

12.6

42.4

85.992.3 95.3

117

0

20

40

60

80

100

120

140

DevelopedEconomies

East andNorth-East

Asia

North andCentral

Asia

Pacific South-EastAsia

South andSouth-West

Asia

Subregion

Ave

rage

ran

k o

ut

of 1

83

Source: World Bank (2012).

Ease of doing business in Asia and the Pacific, 2012

Overall Ease of Doing

Business Rank

Starting a Business

Getting

Electricity

Registering

PropertyGetting Credit

Paying Taxes

Trading Across Borders

Enforcing Contracts

Thailand 17 78 9 28 67 100 17 24

China 91 151 115 40 67 122 60 16

Viet Nam 98 103 135 47 24 151 68 30

Cambodia 138 171 130 110 98 54 120 142

Lao PDR 165 89 138 72 166 123 168 110

Source: World Bank (2012).

Economic freedomEconomy Rank Economy Rank

Hong Kong, China

1 Malaysia 78

Singapore 2 Azerbaijan 84

New Zealand 3 Indonesia

Australia 5 Viet Nam 88

Japan 22 Philippines 89

Taiwan Province of China

26 China 92

Republic of Korea 30 India 94

Mongolia 36 Bangladesh 103

Kazakhstan 56 Sri Lanka 107

Papua New Guinea

61 Pakistan 114

Thailand 65 Nepal 129

Kyrgyzstan 70 Myanmar 140

Fiji 77Source: Gwartney, Hall and Lawson (2011).

Corruption ratings in Asia and the Pacific

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

North andCentral Asia

South andSouth-West

Asia

Pacific South-EastAsia

East andNorth-East

Asia

DevelopedEconomies

DevelopedAsia and the

PacificNations

Source: Transparency International (2011).

Subnational surveys• Most SMEs have relatively limited relationships with

national agencies, interfacing with municipal or provincial bodies and conduct their activities largely or entirely within that sphere

• Provincial competitiveness index in Viet Nam– 64 provinces of Viet Nam– (a) costs of market entry; (b) access to land and security of

tenure; (c) issues relating to the transparency of regulations and their enactment by provincial bodies; (d) the time required to comply with regulations; (e) informal charges imposed; (f) bias towards state-owned enterprises; (g) the pro-activity of provincial authorities to assist firms; (h) the provision of business development services (BDS); (i) the availability of training for employees; and (j) the quality of legal institutions

• Provincial business environment scorecard in Cambodia– 10 most economically active provinces– 10 sub-indices such as tax administration, crime prevention, and

dispute resolution.

Monthly enterprise registration, Cambodia, 2004

Source: Baily (2007).

BEE reformsStage of economy Policy objectives Policy recommendations

Developing Provide basic infrastructureEnsure legal system is fairCreate competitive marketsEncourage female participation

Earmark budgets for roads, etc.Reform regulations to encourage new entrantsRefrain from government intervention.Provide more education to girls and remove roadblocks to female participation in the economy.

Middle Provide financingExpand market access

Ascertain financing needs of SMES and fulfill them (see chapter 5).Educate SMEs about exporting and other forms of participation in the global economy (see chapter 8).

Advanced Adopt technologySpur innovation

Provide incentives for learning about latest technologies and innovations (see chapter 7).

Key success factors of entrepreneurs

Entry barriers to entrepreneurship

• The ‘fear of failure’– Mindset

• Lack of confidence due to inadequate skills and knowledge

• Low aspirations

– socioeconomic and cultural factors:• Negative peer pressures (e.g., parents, relatives,

and friends)• No respectable exit route without economic

punishment• Social stigma

Relationships among culture, policy, and entrepreneurship

Figure 1Institutions and Culture

StagnantLed

(Top down)

Repressed

(Bottom up)Entrepreneurial

UnfavorableU

nfav

orab

leFavorable

Favo

rabl

e

Policy

Culture

A Typology - "Start Point" for Policy Change

Source: Dennis (2005).

SME financing gaps, OECD and non-OECD countries

Source: OECD (2006)

Collateral, interest rate and nonperforming loans

Source: IFC (2009).

Business growth stages and cash flows

The biggest reason of SME failure

Forms of finance for SMEs

Financial sources for Malaysia SMEs, 2004 (%)

Phase of life cycle / financing sources

Startup Established Matured

Self financing 68.0 21.0 25.0

Government schemes 7.8 13.0 9.0

Venture capitals 10.8 8.5 4.5

Short-term loans from banks

20.8 28.6 23.1

Medium-term loans from banks

10.4 32.6 21.8

Long-term loans from banks

7.4 23.7 37.2

Non-bank financial institutions

8.7 7.1 10.9

Source: Rozali et al. (2006)

Financial gap in SME financing

Source: Modified from JFC (2011).

SME financing through public-private partnership in Japan

Types of BDS

• Market access and development

• Supporting infrastructure

• Supplies

• Technical assistance and training

• Technology and product development

Three core segments of BDS

Operational Advisory Advocacy

Services Short-term support services and hand-holding such as accounting, legal and regulatory advice, accessing technical information, labour management, secretarial service

Long-term development services, such as training, strategic management, marketing assistance, and knowledge transfer.

Services to improve business environment through policy advocacy and infrastructure development.

Target clients

Individual firms Individual firms Public sector, business associations

BDS actors and their roles

Source: Modified from AAMO (2007).

Traditional BDS approach

Source: Modified from DCED (2001).

Market-oriented BDS approach

Source: Modified from McVay and Miehlbradt (2001).

An overview of innovation

Market Access: Major challenges

• Intensified competition

• Internationalization

• Trade and investment liberalization

• Management skills

Stages in the process of export product identification

Trade promotion tools for SMEs

• Develop or refine products (and services) for export by communicating with potential customers

• Gain new customers/intermediaries in neighbouring, regional, and global markets

• Strengthen relationship with existing customers and intermediaries

• Increase the amount of exports• Achieve the above objectives effectively and

efficiently

Various trade promotion tools: cost and target

High

Cost

Low

Salesperson

Advertisement(Newspaper,

magazine, journal, directories, TV, radio)

Direct mail(Mail, email, telephone)

Internet(Homepage/portal)

WideTarget customersNarrow

Trade fair/mission

Source: Modified from Japan Finance Corporation (2008)

Special economic zones

Source: FIAS (2008)

Advantages of special economic zones

Static advantages Dynamic advantages

Direct employment creation and income generation

Technology transfer

Export growth and export diversification Skill upgrading

Increase in foreign direct investment Local development

Increase in foreign exchange earnings Empowerment of women

Government revenue Indirect employment creation

Source: FIAS (2008).

How SMEs fit into global supply chains

Source: UNIDO (2001)

AEC 2015

• The ASEAN Economic Community (AEC)

• Regional economic integration by 2015 for ASEAN countries

• Free movement of goods, services, investment, skilled labour and freer flow of capital

AEC: Key objectives

• A single market and production base

• A competitive economic region

• A region of equitable economic development

• A region fully integrated into the global economy.

AEC: Key characteristics

• Fair competition

• Consumer protection

• Intellectual Property Rights

• Infrastructure development

• Product and service standards

AEC: Present status

• Completed 187 measures (67.5%) out of 277 measures by the end of 2011

• Some measures due for implementation have not been fully implemented– Delays in ratification of signed ASEAN-wide

agreements and their alignment into national domestic laws as well as delays in implementation of specific initiatives

• E.g., Measures for the free flow of service, transportation, cooperation in food, agriculture and forestry etc.

CLMV countries in AEC 2015

• Relatively less developed than the ASEAN 6 counties

• Special schedule for CLMV countries– mainly in the elimination of tariffs and non-tariff

barriers)• Completed most of the tasks for AEC 2015 with

some weaker links remained compared to other countries– For example, intellectual property rights, SME

development and taxation• ASEAN Integration (IAI) Work Plan 2 (2009-

2015)– Human capital and institutional strengthening– Slow implementation

The impact of AEC on SMEs

• Challenges– Intensified competition domestic and international players– Access to credit, labour mobility, technology development,

market access and political risk– More measures for promoting SMEs

• A survey conducted by The University of the Thai Chamber of Commerce (2012)– The majority of Thai SMEs did not understand the benefits and

challenges of regional integration• Investment liberalisation, service liberalisation, reduction of non-

tariff barriers, rules of origins and single standards for Asean products

– Lack of readiness on financial support, low development of human resources at both the management level and workers, low development of ICT, high production and labour costs, low support from government agencies, and a low level of logistics development

Case of Myanmar

• Development of Industries with agriculture• Enhancement of production and quality of industrial

products• Increased production of new types of machinery and

equipment• Creation of suitable conditions for industrialized state• Human resource development• Coordination among various agencies in economic and

social activities• Integration of the business community into international

trade and globalized economy