Export-led SME Development
& Entrepreneurship
in the GMS
ASEAN SME Regional Gateway Forum
Mekong Institute
Khon Kaen, 6 September 2010
Masato Abe
Trade & Investment Division
1
About ESCAP
• United Nations Economic and Social
Commission for Asia and the Pacific
• Asia & Pacific
– 58 regional members & associated members
• Policy advocacy, analytical work &
technical assistance for regional
development
• Headquarters in Bangkok
– Nine branches
2
Development Strategies in the GMS
• Export & FDI driven development
• Agro industry development
• Gradual industrialization toward products
with high value added
• Infrastructure development
• Technology transfer & adaptation
• Subregional cooperation (ASEAN, GMS;
BIMST-EC)
• SME development
• Eco-industry
3
SMEs’ Role
• Consisting of more than 95% of total
enterprises
– 99% for China; 98% for Thailand (2003); 99%
for Viet Nam (2002)
• Creating about 60% of private sector jobs
– 75% for China; 65% for Thailand (2003); 77%
for Viet Nam (2002)
• Contributing about 20-30% of GDP
– 65% of industrial output (China); 47% of GDP
& 55% of exports (Thailand); 20% of exports
(Viet Nam) (2003)
4
SMEs’ Role (cont.)
• Innovation & dynamism
• Graduating to large enterprises (&
multinationals)
• Many in the informal sector
• Critical part of the social safety net
5
SME Typology
Export
Cottage
Enterprises
Export-oriented
Enterprises
Low
Tech
High
Tech
Domestic
Market-oriented
Enterprises
Supporting
Enterprises
Domestic/Local
Market
(Uchikawa & Keola 2009)
6
Definition of SMEs
• In Asia-Pacific (& GMS), typically less than
100-300 employees for manufacturing sector
Country
Cambodia
Number of Employees
Micro
Small
Medium
< 10
11- 50
51- 100
MSME
< 100
Lao PDR
Small
Medium
≤ 19
≤ 99
Myanmar
Micro
Small
Medium
< 10
10-50
51-100
Thailand
(4 people per firm)
Small
Medium
< 50
≤ 200
SME
≤ 300
China
Vietnam
7
SMEs per 1,000 people
Global
70
Asia-Pacific
61.8 63.2
60
50
40
29.6
30
27.0
20
14.9
13.7
9.0
10
6.3
1.1
0
Developed
Countries
Developing
countries
Least
Developed
Countries
China
(2000)
Thailand
(2002)
Viet Nam
(2004)
Source: ESCAP (2009), developed based on data from World Bank (2000-2006)
8
SME Life Model
Grow to a large firm
Profit
Maturity
Growth
Decline
Discontinuation?
0
Loss
Years
Start-up
Different supports needed at the different stages
9
Start-ups in Japan
• 41.4 years old (Entrepreneurs)
• 3.9 employees
• 100K US$ of start-up funds
– 35%: Own capital
– 15%: Support of family, relatives and friends
– 50%: Public grants & commercial loans, including
public loan guarantees
• Man: 84.5%; Women: 15.5%
• College degree or above: 33.1%
• 60% of start-ups achieve break-even within 15
months
Data: National Life Finance Corporation (2007)
10
Start-up: Difficult Time
• 2/3 discontinued within 5 years (USA)
• 40% discontinued within 2 years (UK)
• Approx. 40% in red after 1 year
(Japan)
11
Sector Composition
Services
Japan
(2006)
26%
Thailand
(2005)
22%
Wholesale/retailer
20%
33%
Restaurants/hotels
17%
N/A
Medical/health care
16%
N/A
Construction
8%
14%
Manufacturing
5%
11%
Others
8%
20%
100%
100%
Total
12
SMEs’ Net Income in Japan
(%)
3.0
Manufacturing
Construction
2.5
2.0
Average
Services
Retail
1.5
1.0
Transportation
Wholesales
0.5
0.0
01
02
03
04
05
06 (Year)
Income before Tax / Total Sales
13
Policy Objectives
•
•
•
•
Increase the number of start-ups
Facilitate their growth
Increase their survival rate
Foster SME graduates (to be large
enterprises)
• Facilitate the smooth exist of losers,
providing second (& more) chance
• Encourage to be incorporated
• Foster SME exporters & supporters
14
Challenges
• Scattered targets (high transaction
costs)
• Lack of the economies of scale
• Limited public resources
• Limited understanding about the
targets, i.e. SMEs
• Limited communication channels
• Limited knowledge & skills
• Limited information on global &
regional markets
15
Six Areas for Interventions
•
•
•
•
•
Pro-business legal & regulatory framework
Supporting infrastructure (e.g. ind. zones)
Enhanced access to finance
Entrepreneurship development
Technology transfer & adaptation (plus
R&D and product standards)
• Business development services
Entrepreneur centred development strategy
16
SME Development Approaches
ADB
(2000)
APO
(2007)
DFID
(2008)
GTZ
(2010)
ILO
(2009)
JICA
(2006)
OECD
(2005)
SDC
(2010)
UNCTAD
(2010)
UNDP
(2007)
UNIDO
(2010)
USAID
(2010)
World Bank
(2002)
Policy and
regulatory
framework
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Infrastructure
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Access to finance
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Entrepreneurship
/ human resource
development
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Technology
transfer and
adaptation
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Business
development
services
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17
Entrepreneur Centred Development
Business
Environment
Access to
Finance
Infrastructures
Export-minded
Entrepreneurs
Technology
Business
Development
Services
18
SME Business Network
Linkage
Policy dialog
Information
Consulting
Training
Business
Associations
Financial
Institutions
Finance
Information
Information
Incubation
Consulting
Training
SME
Development
Agencies
Training
Information
SME
Training
Institutions
Export-minded
Export-minded
Export-minded
Export-minded
Entrepreneurs
Export-minded
Entrepreneurs
Entrepreneurs
Entrepreneurs
Entrepreneurs
Launching of New Export Businesses
Technical
Centers
Technology
Standards
Certificates
Training
Success Case Replication
19
Global Value Chains
20
In the era of globalization…
Can SMEs compete in the
international market?
Can SMEs learn to be
competitive?
Will SMEs benefit from
the globalization?
Can SMEs survive in the
global competition?
What can we do to bring the benefit of the
globalization to the poor?
21
The ideal is…

Selling products directly to the international
consumers with “Brand Presence” & “Pricing Power”
- Have information related to market/process/product
- Have capabilities over the full Value Chain: design,
production, marketing, distribution, etc.
- Respond effectively to the changing market conditions
Very difficult for SMEs in developing countries

Alternate option: Reaching global market through
global value chains
22
Global Value Chain (GVC)?



Full range of value-added activities involved in
conception, design, procurement, production,
marketing, distribution, after service, etc.
Firm can focus on one or more activities in a VC.
When activities are geographically dispersed across
borders to multiple countries the value chain becomes
global or regional
Garment/Apparel Value Chain
23
Characteristics of GVCs

A lead firm (a larger enterprise/a
multinational) regulates a GVC with specific
competences, making a higher profit
 Brands, resources, technology, expertise and/or
goodwill
 Customer vs. Production vs. Natural Endowment
driven value chains

Inviting outside experts on specific functions
to manage complicated tasks to maximize
the efficiency and effectives of the entire
GVC
24
Characteristics of GVCs (cont.)
• Contracting with a selected number of
capable SMEs typically as subordinate
partners for specific tasks or functional
support
• Integration of business process,
coordinated behaviours and information
sharing among independent firms
• Mutual investment into business process
and long-term relationship
25
Emergence of GVCs: Drivers

Multilateral and regional free trade agreements

Policy Liberalization

Trade, investment, capital & finance, HR

Compliance with local content requirements

Technological innovation

Transportation and ICT

Increasing competition (pressures for lower cost, higher
efficiency/ quality etc.)

New management strategies

JIT, e-commerce, ERP, supply chain management
26
Shift in the GVC governance during the past three decades
TNCs controlling all production
Ownership of overseas
subsidiaries/ franchises
Outsourcing to suppliers
(no legal ownership)
TNCs focus on core values
Source: UNIDO, Integrating SMEs in Global Value Chains
Opportunity for SMEs in developing countries:
Specialize in a limited set of activities or components
in the GVC
27
Levis Case
28
Emergence of GVCs: Consequences

Smaller number of dominant lead firms

Emergence of large/strong suppliers

Intensified competition toward high-value added
activities

Competition on continuous skill development and
knowledge enhancement
Economic disparities at the region, country, community and firm
levels

29
Lead Firm’s Objectives with SME Suppliers

Cost down / quality up; QDC (Quality, Delivery and
Cost) improvement

Strategic focus and outsourcing non-core functions

Speed, effectiveness and flexibility

Access to expertise / technology

Long-term security

Control over supply chain networks

Local content requirements and local supplier
development
30
Opportunities for SMEs in developing countries


Access to international markets
Support from TNC (training/investment in business
process/information sharing etc.)

Technology and knowledge transfer

Long term buyer-supplier relationship; secured orders

Reputation and brand development

Opportunity to up-grade and move up to the next tier
31
Challenges for SMEs in developing countries

Lack of awareness, capacity and resources

Infrastructure

Capital

Skilled labour

Managerial expertise

Knowledge and technology

Contacts / networks
32
Challenges for SMEs in developing countries (cont.)

High entry barriers -- International Standards
 Have to deliver specified product, required quantity and
right quality at competitive price and agreed leadtime

Competition is not solely based on cost but also
based on product and process related standards,
such as quality, safety, environmental preservation
and respect for labour
33
Challenges for SMEs in developing countries (cont.)

Unfavorable national business
environment
 Rules and regulations

Red tape/corruption

Political instability
Insufficient business development
services

34
Regional average of ease of doing business rank
South and South-West Asia
Pacific island economies
South-East Asia
North and Central Asia
East and North-East Asia
Developed ESCAP economies
0
20
40
60
80
100
120
Average Rank
Source: ESCAP (2009), calculated by ESCAP based on Doing Business 2009, World Bank (2008)
35
The GMS



-
Centre of 3 rapidly growing
subregions
Export & FDI driven
development strategy
Northeast
Asia
South Asia
GMS
Increasing amount of FDI in
the region
Growth of south-south investment
Increasing investment in China can stimulate greater FDI
throughout the region (FDI is not a zero sum game)
TNCs from developed companies (Intel: Vietnam, GM:
Thailand- spill over effect possible in neighboring countries)
36
Population by Subregion
(Million)
China
(90%)
1,500
India (75%)
1,350
260
GMS
Northeast
310
South
ASEAN - GMS
37
Purchasing Power Parity
USA
10,000
India3,300
(80%)
China (55%) Japan
11,000
670
(33%)
Northeast
GMS
1,300
South
(US$ Billion)
ASEAN - GMS
38
GMS Markets (GNP, US$ Billion)
Yunnan
& Guangxi
$50
$20
$20
3
Lao PDR
Myanmar
$140
4
Thailand
Cambodia
Viet Nam
$20
39
GVCs in GMS

Thailand: various GVCs in auto, electronics, high-tech,
agri-business, consumer-goods sectors.

Yunnan: VCs mainly serves other provincial markets

Viet Nam: GVCs under development in garment,
consumer goods, auto and electronics sectors

Cambodia, Lao PDR and Myanmar: Agro-business and
garments; need promotion to attract GVCs although some
FDI have been observed advanced manufacturing sectors
recently (underdeveloped domestic markets)
40
Example: Thailand Automotive Part industry




Thailand invested in cluster
development, particularly in
Rayong and Samutprakan,
south of Bangkok
Cost competitiveness is based less
on productivity, and more on low
factor input costs, which are now
rising (e.g. costs of labour and land)
Key challenge to Thai auto parts suppliers is to improve productivity
and lower costs or move up to the next tier within the GVC
Subregional coordinated strategy could provide opportunities for
neighboring lower cost countries such as Cambodia (which also has
rubber) to become lower tier suppliers of selected components to the
Thai auto parts cluster
41
Opportunities for SMEs
• Geographical advantage
– Centre of 3 rapidly growing subregions
• Export & FDI driven development strategy
• More donor assistance expected
– The combined resources of donors, governments,
the private sector currently provides 20% of needs
• Underdeveloped intra-regional trade &
investment
– Potential home markets
– Yunnan & Guangxi’s integration
• Flexibility & specialization
42
SMEs’ Corporate Strategies







Improve quality and develop brand
Reach the global market through existing GVCs
that are most likely dominated by lead firms
Enter into lower tiers with a low-value role in
GVCs
Move up GVCs to high-value added activities over
time
Find adequate financing for the investments and
accessing quality workforce
Collaborate with other SME players vertically and
horizontally in a GVC
Establish joint ventures with foreign investors
43
SME actions needed

Improvement of quality
 Performance


Reliability

Durability

Serviceability

Perceived quality
Aggressive marketing (networking and branding)

Catalogues

Trade journals & directories

Sales representatives

Trade missions / fairs / exhibitions

Internet
44
SME actions needed (cont.)

R&D and technology adaptation in cooperation
with public/private research/technological
institutions

Seek finance and credit opportunity with
governments and banks

Seek services from business associations

Develop and involve in producers’ associations

Seek aggressively investment opportunity in
cooperation with both domestic and foreign
investors
45
Government actions needed

Change of FDI strategy: Attract GVCs fit for
the country.

Develop GVCs by participating in
neighbouring countries’ GVCs.

Classic SME export promotion


Create enabling business environment


Marketing research, export promotion, product
development, export financing, trade fairs and
missions
Laws and regulations and their enforcement,
ICT and logistic infrastructure and software
Enhanced access to SME finance
46
Government actions needed (cont.)





Capacity and HR development for SMEs and
related government agencies
Fostering capacity and quality of business
associations
Training on working relationship in a multicultural
environment
Focus on agri-business value chains
Foster stronger backward linkages with SMEs
through intra-regional South-South investment
47
Government actions needed (cont.)


Facilitate SMEs’ adoption of world standards and
credible certifications
Productivity improvement through infrastructure
development and logistical improvement

Improving the cross-border flow of goods

Sector based value chain studies

Foster national lead firms – Graduates from the
SME sector with quality and brand 
48
Government Strategies (cont.)
Additional GVC strategies:

Supply side capacity building
Training/ counseling and advice/ micro financing/
market intelligence etc.


Develop opportunities through cooperation (i.e. SME
clusters)
Economies of scale/ joint action/ information
sharing/ enhancing attractiveness to global buyers
by reducing transaction costs etc.


Promote the GVC mindset
49
GMS Subregional Cooperation

Develop ‘GVC mindset’ in cross-border cooperation
among GMS countries

Strengthen cross-border (GMS/subregional) logistics
systems

Focus trade facilitation cooperation (e.g. in GMS
Programme) on particular GVCs


Facilitate GMS supplier development, including
development of SME clusters across borders (and
share information/ best practices etc.)
Facilitate cross-border linkages of domestic business
institutions (e.g. GMS-BF)
50
Further reading

Two in-depth studies on SME development in Asia &
the Pacific are available at ESCAP website
(www.unescap.org)
51
For further inquiry, contact:
Masato Abe, Ph.D.
Economic Affairs Officer
Private Sector and Development Section
Trade and Investment Division
United Nations ESCAP
Bangkok, Thailand
abem@un.org
www.unescap.org
52