Experience of SMEs in South and South-east...

SouthAsia Enterprise Development Facility

10 Gulshan Avenue, Dhaka 1212, Bangladesh Tel: 880 2 9861711-20 Fax: 880 2 989 4744

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International Finance Corporation The World Bank Group

Experience of SMEs in South and South-east Asia

Presented by: Anil Sinha

General Manager SouthAsia Enterprise Development Facility


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SEDF / Asia: Regional Experience of SMEs / Research Paper / December 2003

Experience of SMEs in South and

South-east Asia

Anil Sinha , General Manager SEDF Purpose and Scope of the Paper

1 The SouthAsia Enterprise Development Facility (SEDF) is a five-year multi-donor funded Small and Medium Enterprise (SME) support initiative managed by the International Finance Corporation and supported by the World Bank Group’s SME Department. Headquartered in Dhaka, Bangladesh, it also serves Nepal, Bhutan and Northeast India, and has the following major strategic components :

improving access to finance, facilitating provision of quality business development services (BDS), improving the business enabling environment (EE),.

2 This paper charts the regional experience of SMEs in South and South-east Asia, in particular to highlight how factors have influenced the SME sector’s status and development. This paper is essentially based on a paper prepared by Enterplan UK, an internationally reputed firm, for SEDF. It is based on existing secondary information, drawing in particular on a recent study commissioned by the UK Department for International Development (DFID)1/, which investigated causal relationships between SME development, economic growth and poverty reduction. It also draws on recent research conducted by the World Bank2/.

SME Development in Context

The Increasing Priority Placed on SME Development

3 The role of SMEs in providing productive employment and earning opportunities has emerged as an important concern among policy makers, donor agencies and researchers. Since the 1970s there has been growing recognition that emphasis on large-scale industrialisation in developing countries had only moderate success in generating employment growth and alleviating poverty, and that enhancing the development of SMEs may be crucial to fostering growth and equity.

4 This growing commitment to the development of the SME sector is based largely on the following three core arguments3/.

SMEs enhance competition and entrepreneurship, and hence have external benefits on economy-wide efficiency, innovation and aggregate productivity growth. Thus direct government support of SMEs will help countries exploit the social benefits from greater competition and entrepreneurship.

1/ “SME Development and Pro-poor Economic Growth: Developing Financial Service Markets in Asia”. This work, being undertaken by Enterplan Limited, commenced in January 2003 and is due for completion in March 2004.

2/ A bibliography of all materials referred to in the production of this paper, as well as a listing of all abbreviations used, has been included in Annex A1.

3/ World Bank, 1994, 2002, 2004


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SMEs are generally more productive than large firms, but financial market and other institutional failures impede SME development. Thus, pending financial and institutional improvements, direct government financial support to SMEs can boost economic growth and development.

SME expansion boosts employment more than large firm growth because SMEs are more labour intensive. From this perspective, subsidising SMEs may represent a poverty alleviation tool.

What does Available Evidence Suggest?

5 In this respect the research conducted by Enterplan UK, under DFID’s recent study into SME development in Asia4/ provides a useful starting point. A key component of this study was an investigation of the comparative experiences of the Asian Newly Industrialised Economies (NIEs, or “Tigers”), the findings of which tend to suggest that, whilst some of the sceptical arguments are valid, the importance of SME development should not be underestimated.

6 The Tigers took varied approaches to the stimulation of economic growth and poverty reduction, this tending to support the industrial organisation approach and the emphasis on natural endowments. Evidence suggests that the “Asian Miracle” was founded on clear government policy, in all cases growth being enabled by outward-oriented industrial policies that featured heavy investment in transport and communications, and education and skill training. Sectorally there were massive shifts in the level and composition of exports. In Taiwan in 1958 agricultural products accounted for 86.5 percent of exports. In 1966 the share of total foodstuffs in exports had fallen to 35.76 percent; by 1989 the top ten export items included automatic data-processing machines, sport items, television receivers, footwear, integrated circuits and micro assemblies.

7 Even though there is no clear evidence from the NIEs to suggest that prioritisation of SMEs was a prerequisite for economic growth and/or poverty reduction - in some cases the SME sector was the driving force, whilst in other cases it followed developments such as the growth of export-oriented large enterprises. In fact, in each of the Tiger economies (with the exception of Hong Kong), large foreign and/or domestic enterprises have played a key centre or anchoring role in the growth process, with SMEs linked closely as their downstream suppliers. For example, in Taiwan, centre firms have supported SMEs by providing equipment or collateral for subcontractors, while subcontracting between SMEs has encouraged business linkages that have enhanced sector efficiency and productivity.

8 Thus the overall conclusion might be that key to success of the Tigers was a clear understanding of their respective endowment advantages and the implementation of policy that favoured these. Within this there is evidence of a well-developed understanding of the appropriate role for the SME sector as a component of overall policy, and the pursuit of measures that helped SMEs fulfil the sector’s specifically required role. Patterns of evidence also suggest the following.

Governments created an environment where entrepreneurship could flourish. In Taiwan post 1960 a series of statutes to encourage investment were promulgated.

4/ Enterplan, 2002.


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Such general measures were supplemented by the prioritisation of favoured industries. For example, from the 1980s onwards, the Taiwanese government developed industrial parks, and encouraged the creation of geographic and sectoral clusters of SMEs, by targeting specific industries. Foreign firms were encouraged to locate but were strictly controlled, with Foreign Direct Investment (FDI) being allowed only in target industries, and only firms with a technology to transfer permitted to locate.

In all cases where the SME sector experienced significant growth, and despite the undoubted importance of financial services, non-financial instruments emerge as the primary stimulants. A range of approaches was evident, including well-targeted technology transfer, and the fostering of forwards and backwards linkages. Financing mechanisms were developed to then support this growth.

The rapidly growing SME sectors in the Tigers generally focused on labour intensive activities that employed more lower-skilled workers than did large enterprises (for example, in 1989 in Taiwan the average capital/labour ratio was 1.305 in large enterprises and 0.187 in SMEs). Consequently SMEs were a major source of employment creation (in China, Japan, Taiwan, Thailand and Vietnam SMEs account for over 70 percent of total employment) and so, seemingly, played a major role in poverty reduction.

The relationship between SME growth and poverty reduction does not appear to be uniform – for example, the very high importance of SMEs to growth in Hong Kong does not seem to have had the same income re-distributive effects that emerge in Taiwan. This indicates that specific policy measures have determined the degree to which SME development contributes to poverty alleviation.

Implications of this Evidence for this Research Exercise

9 If this paper is to provide a clear assessment of the key enablers and inhibitors to SME development in the South Asia region, and highlight lessons that will help guide the design and implementation of future SME initiatives, consideration must be given to the different types of roles for the SME sector, so that SME development can be seen as part of a broader policy agenda, and not an end in itself.

10 This raises one particular methodological difficulty, as different countries tend to use varying definitions of SMEs. As far as possible, to ensure comparability, this paper applies definitions currently adopted by the SME Department of the World Bank5/, and highlights any known deviations from this norm. SEDF uses the GOB’s definition of SMEs, as per the Industrial Policy 1999.

5/ Microenterprise – up to 10 employees, total assets of up to US$10,000 and total annual sales of up to

US$100,000; small enterprise - up to 50 employees, total assets and total annual sales of up to US$3 million; medium enterprise - up to 300 employees, total assets and total annual sales of up to US$15 million.


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11 Also, to help highlight lessons for the countries in South Asia6/, comparison is made to data available for APEC countries7/, to broaden the basis on which conclusions are formed. These summaries include reference to the Asia “Tigers” sub-group, by extracting relevant findings from DFID’s study into pro-poor SME development.

What Role does the SME Sector Play in Asian Economies?

APEC

12 The view of APEC is that a vibrant entrepreneurial society is central to the growth of the APEC economies, as substantial entrepreneurial activity will generate demand for new services, products and jobs. In particular innovation and start-up SMEs are identified as key elements of success that shape economic growth. The capability of SMEs to benefit from the new economy relies on innovation, since innovation is both the source of competitiveness and the key to survival in the new economy. In this world of accelerating economic globalisation, advances in science and technology continue apace, and knowledge is recognised as a core competence in accumulating wealth. Technological innovation is a driving force behind social and economic development, this in turn relying on more and more new technologies, new products and new industries, as well as increasing linkages among industries, universities and research institutions.

13 Thus the objectives of APEC’s Integrated Plan of Action for SME Development (SPAN) include to:

accelerate the pace of SME development in accordance with its growth potential in the APEC region;

maximise SMEs’ efficiency along the region’s key economic sectors – primary, industrial, trade and services; and

achieve socio-economic goals through micro, small and medium sized enterprises (MSMEs) as a source of growth and employment especially in the rural sector of the developing economies of APEC.

14 Despite these clear intentions, available evidence suggests that annual growth of the total number of SMEs in APEC countries has not kept pace with annual GDP growth. There appears to have been very little net real growth in the number of SMEs over the past decade in APEC; after allowing for new members and statistical factors, the net increase has been only about 2.97 million, or around seven percent over 10 years. Most of the growth has been in Australia, USA, Korea, Mexico and Chinese Taipei, whilst the number of SMEs has shrunk in Japan and China.

6/ In the context of this paper “South Asia” includes Bangladesh, Bhutan, India, Nepal, Pakistan and Sri

Lanka. 7/ Asia-Pacific Economic Cooperation, which includes Australia, Brunei Darussalam, Canada, Chile, the

People’s Republic of China, Hong Kong (China), the Republic of Indonesia, Japan, the Republic of Korea, Malaysia, Mexico, New Zealand, Peru, the Republic of the Philippines, Russian Federation, Singapore, Chinese Taipei, Thailand, the United States of America and Vietnam. Those countries that have been italicised are NIEs also included in the DFID study into SME development and poverty reduction.


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15 SME employment growth has also been less than GDP as well as total employment growth. However, this overall performance disguises national trends, SME employment growth having matched or outstripped total employment growth in about half of the APEC economies. It has been the underperformance of the larger economies of USA, Japan, China, Hong Kong China, Japan and the Russian Federation that has contributed to SME employment growing more slowly than total employment growth. SMEs were the major job engine in Australia, New Zealand, Singapore and Chinese Taipei throughout the 1990s.

16 These aggregate figures may also disguise the vital roles that the SME sector has played in some developing countries. For example, in China the SME sector during the eighties and first half of the nineties comprised mainly of rural enterprises called Township and Village Enterprises (TVEs). Between 1985 and 1995 this sector was responsible for creating 59 million new jobs, and thus fulfilled a pivotal role in the transition phase between a planned and market-orientated economy. Consequently, considerable responsibility for employment creation in China is now falling on SMEs. In the less developed regions, SMEs have become a main driver for industrialisation and a key channel for absorbing labour.

17 The Government of Vietnam also perceives the SME sector as an important engine of growth. While Vietnam's rapid growth from the introduction of Doi Moi in 1986 through to the mid 1990s relied on the expansion of agricultural production and agro-technological gains, the agricultural sector is now in relative decline. In addition, although the shares of the state (40 percent) and non-state sectors (60 percent) in overall GDP have remained about the same since 1995, the state-owned sector's share of GDP is expected to begin to decline as state-owned enterprises (SOEs) are restructured. Accordingly, the private sector – and SME in particular - needs to grow rapidly if Vietnam is to maintain its overall 10 percent per year target for growth.

The Asia “Tigers”

18 The contributions of SMEs to GDP in the East Asia region are generally around 30 to 60 percent, with wages from SMEs typically accounting for over half the GDP. In China, Japan, Taiwan, Thailand and Vietnam they play a major role and account for over 70 percent of total employment; the equivalent figure is around 40 percent in Indonesia and Malaysia. In Singapore, even though SMEs are not that significant in numbers relative to some of the other countries, they are important in providing a flexible skill production base that attracts FDI. Contributions of SMEs to exports are greatest in Taiwan where they were, and still are, a major export growth engine. In China, Korea, Malaysia and Taiwan SMEs are relatively more export orientated than in Indonesia, Malaysia, Singapore and Thailand.

19 Given the importance of its SME sector Taiwan may provide the most salient lessons. In 1976, SMEs accounted for 61 percent of total employment; by 1989 this had risen to nearly 71 percent. The majority of SMEs were in the manufacturing sector, which, in 1992, accounted for 43 percent of Taiwan’s economy. In 1966 42.7 percent of employment in SMEs was in manufacturing; by 1990 this figure had risen to 69.4 percent. At their peak in the early eighties, and as evident from Figure 1, small firms accounted for almost 70 percent of export earnings.

Figure 1: Export Shares of Taiwanese Enterprises

Year Large Enterprises SMEs


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Year Large Enterprises SMEs 1976* 39.10 56.80 1981 31.90 68.10 1985 38.80 61.20 1990 42.69 57.31 1995 49.35 50.56 1997 51.23 48.77

Source: White paper on SMEs in Taiwan 1998 MOEA (*MOEAs).

20 Based on evidence such as this it seems highly likely that SMEs impacted positively on employment, family incomes, economic stability and growth of many manufacturing sectors. Between 1965 and 1990 average GDP growth in Taiwan was 8.9 percent. In 1989 SMEs employed 70.8 percent of all those employed in Taiwan, and the average capital/labour ratio was 1.305 in large enterprises and 0.187 in SMEs. Clearly SMEs, with their small-scale labour intensive production, generated income for a vast number of families. Subcontracting resulted in a constellation of SMEs ranging from relatively high tech firms right down to home-workers (most of whom were unskilled female workers).

21. In Thailand during the high growth period of 1987 to 1990, employment in large firms grew the fastest at 24.0 percent a year, followed by the growth of employment in the medium-sized firms (14 percent), small-sized firms (nine percent), and micro industries (five percent). During the slower growth period of 1990 to 1995, employment in the medium-sized firms grew the fastest at 16 percent, followed by the employment growth of the large firms (13 percent), small firms (13 percent) and micro industries (8 percent). Finally, during the stagnation period of 1995 to 1996, employment grew at the fastest rate of nine percent in the small industries, followed by the growth rate of micro industries at eight percent. Employment in medium and large firms grew at rates of only six and four percent, respectively.

21 The Thailand experience does suggest that the contribution of SMEs to employment growth is related to industrial growth rates. During the high growth period, large and medium firms seem to contribute more in terms of employment growth because many small firms graduated to become larger firms. The employment generation of a previously small firm became the contribution of a medium or a large firm. During the period of slowest growth or stagnation, not only did employment of large firms grow the slowest, but many firms also laid off workers and some even ceased operations altogether. In this situation, it is possible that the growth of many small firms resulted from the efforts of former employees of a medium or a large firm.

22 In this sense the experience of some NIEs, rather than suggesting that the SME sector drives growth, might depict SMEs, particularly the small ones, as crisis shock absorbers that not only help provide employment during difficult times, but also prepare new entrepreneurs for graduating to run a larger firm when the economy recovers.

South Asia

23 Many governments in South Asia appear to have recognised the key impact that the SME sector could have on economic growth and poverty reduction. In some cases this recognition is quite recent, and specific policy measures are only just


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beginning to emerge and/or take effect. What is particularly noticeable is the common emphasis on the SME sector as a potential source of employment creation, often to compensate for the decline of traditional (and generally large-scale) industry. SME development is also a key component of efforts to diversify economic activity and thus contribute to stabilisation measures. What is not always clear is how the SME sector can be expected to fulfil its intended role.

24 The Bhutanese economy is dependent mainly on hydropower, whose exports account for some 45 percent of Government revenues. In the near term, the hydropower sector will continue to be the mainstay of the economy. However, given the high capital intensity and low employment elasticity of this sector, the Government is providing incentives for development of other industries and services such as the information technology industry, and controlled expansion of tourism and tourism-related services. Cottage and mini industries comprise about 85 percent of the country's total establishments, and SMEs are expected to play a greater future role in absorbing the growing number of young and educated Bhutanese, because public sector employment will be limited. However, trade liberalisation has made the Indian market, which until recently was a ready market for finished and semi-finished product from Bhutan, increasingly competitive.

25 In India development of the SME sector has been a consistent element of industrial and employment policy since the 1970s, with the objectives of creating jobs and reducing economic imbalance, notably in rural and less developed areas. Today, small-scale industry (SSIs) account for some 95 percent of all industrial units, 40 percent of industrial output and 35 percent of national exports. This suggests some success in implementing SME policy, although poverty and lack of employment opportunities are still prevalent. The current Tenth Five Year Plan 2002-07 expects the SSI sector to grow by 12 percent and create 4.5 million jobs (nine percent of the total), in particular by taking advantage of the potential of India’s natural resource base and large domestic market to stimulate real value and jobs along supply chains.

26 Whilst for long periods SMEs were considered to be of little more than minor significance by the government in Nepal, they have still become a significant part of the country’s private sector. Evidence indicates that more than 80 percent of the national value addition in the manufacturing sector comes from SMEs, the share possibly being even higher in the non-manufacturing sectors. SMEs employ 98 percent of the non-agricultural labour force and attract around 40 percent of all industrial investment. There are now signs that the government is becoming more aware of the critical role that SMEs could play as the fulcrum of a strategy designed to use indigenous resources, respond to local markets, absorb new technologies, compete in the external market, create employment, stimulate balance in regional development and arrest the growing influx of surplus rural labour to urban centres. The eighth and ninth development plans have included measures specifically targeting SMEs, the emphasis generally being on export-orientation and strengthening the base of import-substitution.

27 Similar trends are apparent in Pakistan where, in the past 50 years, government policies have not been supportive of SMEs and have in many ways impeded the growth of the sector. Despite this lack of positive support, and whilst only 20 percent of investment is made in SMEs, the sector has generated around 70 percent of total employment, contributing more than 30 percent to GDP and absorbing more than 80 percent of non-farm employment. Units employing between


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10 and 99 workers absorb an additional 20 percent of labour in the manufacturing, service and trade sectors. Having recognised the sector’s under-utilised potential for generating employment, increasing incomes and reducing poverty, the Government now affords much higher priority to the development of SMEs, and its I-PRSP emphasises the importance of the private sector and enhanced investment as core elements of the strategy for high growth and employment generation.

The Status of the SME Sector across the Asia Region

APEC

Definitions of SMEs

28 As highlighted in Figure 2, definitions used for SMEs vary widely. A common feature is that an SME in APEC employs less than 100 people, but there are many exceptions (China8/ less than 500; Korea, Japan9/ less than 300; Vietnam, Thailand, Chinese Taipei, Philippines less than 200; Malaysia less than 150).

Figure 2: Main Elements of the Definition of SMEs in APEC Countries

Employ Capital Assets Sales Share-holders

Production Capacity

PRC Hong Kong China 100 Indonesia 100 Japan 300 Korea 300 Malaysia Philippines 200 Singapore 100 Chinese Taipei Thailand 200

Source: The APEC Survey on SMEs. Note: employ - figures indicate the maximum number of employees in a firm defined as an SME.

29 Definitions vary by industry, with manufacturing usually having a larger cut-off than, say, services industry SMEs. The most common criterion is number employed (11 of the 18 economies already use employment as a defining characteristic), but capitalisation, assets, sales or turnover and production capacity are also used.

Characteristics

30 A key observation is that 80 percent of SME jobs were in the services sector in 1990, this having increased to 82 percent in 1999. Manufacturing now accounts for only about 15 percent of SME jobs, and the primary sector for about four percent or less. On the evidence available, SMEs create more than 70 percent of net new jobs. About seven percent of SMEs in APEC “die” (but only 0.7 percent go bankrupt) and eight percent are born each year10/. Small firms (in this case defined as having five to

8/ China uses a number of different definitions that are usually industry specific. 9/ Japan changed its definitions in 1999 to reduce the criteria for SMEs in services from 100 to 50

employees. 10/ Profile of SMEs and SME Issues in APEC 1990 – 2000, APEC Small and Medium Enterprise Working

Group, in cooperation with Pacific Economic Cooperation International.


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19 employees) have increased their share of jobs by about six percent in the last decade, mostly at the expense of micro enterprises (except in Japan). This seems to reflect increasing international competition.

Figure 3: Employment by Non-agricultural SMEs as a Percentage of Total Employment11/

Country 1990 1996 Latest (1998 to 2000) China 17.3 18.0 17.2 Hong Kong, China 53.3 45.8 43.4 Indonesia 39.6 33.7 34.2 Korea 49.3 39.7 44.3 Philippines 2.4 2.3 14.5 Singapore 14.4 16.8 21.9 Thailand 4.2 0.0 5.0

31 In economies such as Indonesia, Philippines and Thailand, medium sized enterprises may be under-represented. The shortage of medium sized enterprises tends to be made up by a higher percentage and contribution coming from micro enterprises. For example, SMEs, including micro enterprises, form the backbone of the Indonesian economy (accounting for 82 percent of total employment and almost 58 percent of GDP). According to the Central Bureau of Statistics, the more than 39 million micro and small enterprises - enterprises with a turnover of less than one billion rupiah - accounted for 99.85 percent of the total number of enterprises in Indonesia in 2000. Medium-scale enterprises - those with an annual turnover of between one and fifty billion rupiah - number around 55,000, or 0.14 percent of all enterprises, accounting for 16 percent of GDP in 200012/.

32 The “missing middle” is an important phenomenon because medium sized firms are often a major source of growth and of international competitive advantage, since they play an important role in the supply chains of large firms as subcontractors and in their own right as internationally competitive niche players. In Korea, which has an already developed SME sector that is internationally competitive, medium sized enterprises contribute 36.2 percent of employment and make up 8.6 percent of Korean enterprises.

33 It is therefore not surprising that SMEs continue to be under-represented in the international APEC economy (in terms of trade and FDI from SMEs) relative to their contribution in domestic areas and relative to larger firms. Available evidence suggests that there is the potential for SMEs to add about US$ 1 trillion in trade and about US$ 150 billion in FDI per annum to the APEC economy if structural changes allow a simpler, more business friendly, more integrated economy to emerge. Despite this apparent relative exclusion from international trade SMEs have maintained a relatively high productivity growth (output per person) of about four percent per annum, which does suggest a response to increased competitiveness, and therefore perhaps exposure to the influences of foreign firms.

11/ Agricultural SMEs are excluded because it is difficult to get accurate estimates of the numbers,

especially in some less developed economies. Total employment includes public and private sectors including agriculture and is from ILO database statistics http://laborsta.ilo.org.

12/ The equivalent figure was 20 percent in 1997, the subsequent decrease largely reflecting problems medium sized enterprises experienced following the economic crisis.


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34 Also of note are some major structural differences between those economies seeking to achieve 2010 APEC trade liberalisation targets and those seeking to meet 2020 targets13/, the former generally being more “developed” economies. 2010 economies have 19 percent of APEC’s human population but 33 percent of the SMEs, while 2020 economies have 81 percent of the people and 67 percent of APEC’s SMEs, with 61 percent of people being employed by SMEs. China has half of APEC’s population but only 16.6 percent of APEC’s SMEs.

35 2010 economies have about 20 people per SME (an entrepreneur density of five percent), whilst 2020 economies have over 115 people per SME (an entrepreneur density of 0.96 percent). This indicates that there is a shortage of about 70 million entrepreneurs in APEC. For example, China has 1.2 billion people. If one in every 20 of those people were an entrepreneur (as is approximately the case in developed countries) then there would be about 60 million entrepreneur managers in China. In fact there are only eight million SME managers in China, and only 1.4 million of those have real private sector experience. The challenge is to train about 60 million entrepreneurs so that China is competitive in a WTO/2020 world.

36 In Vietnam the number of registered domestic companies has more than doubled since the new Enterprise Law came into effect on 1 January 2000. The non-farm private sector in Vietnam now provides jobs for around five million people, with jobs provided by the “formal” domestic private sector accounting for one fifth of this. Of the more than 35,000 enterprises that have registered since 2000, around 70 percent are new, while the remainder have moved from the informal to the formal sector. These enterprises have aggregate paid-up capital of US$ 2.6 billion, equivalent to around nine percent of Vietnam’s annual GDP. Although the data is highly incomplete experts estimate that employment in the formal private sector has almost doubled since early 2000.

Women Entrepreneurs in SMEs in the APEC Region

37 According to a survey of eight member economies - Australia, Canada, Indonesia, Korea, Mexico, the Philippines, Chinese Taipei and the US – women own and operate approximately one-third of firms in the formal sector of the APEC economy: around 30 percent in Indonesia; 32 percent in Korea; 34 percent in the Philippines; and 38 percent in the United States. It also seems that the growth in the number of women-owned firms exceeds overall business growth by 2:1 in Canada and 1.5:1 in the United States.

38 Almost all women-owned firms - indeed, the vast majority of all firms regardless of gender of ownership - have no employees other than the owner. In Korea, the number of own-account workers is 4.5 times larger than the number of women employers. However, the importance of women as employers is growing. In Korea, for example, 15 percent of all of the employers in the private sector are women. In the United States, one out of every four company workers is employed in a woman-owned business.

39 Women throughout APEC face many of the same challenges once they have started their businesses. Most of those challenges are related to access to capital,

13/ 2010 economies: Australia, Canada, Chile, Hong Kong China, Japan, New Zealand, Singapore, Chinese Taipei and USA; 2020 economies: Brunei, China, Indonesia, Korea, Malaysia, Mexico, PNG, Peru, Philippines, Russia, Thailand and Vietnam.


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information and support networks. Women’s entrepreneurship seems to be embedded in their private networks, as they tend to rely on family and friends at all the phases of the entrepreneurial process. Quite often, the formal and informal networks that are available for men business owners are closed to women. Women have made some inroads in these areas, such as developing women’s networks within industry associations, but these are few, and are viewed by many as auxiliary chapters out of the main flow of information and power. Thus, many women are starting their own business associations, as they value networks as fora for sharing challenges and solutions, getting advice and ideas, and opening up business opportunities. In the Philippines, there were 200 registered women-related organisations in 1980; by 1994, that number grew to 558.

40 In studies that have compared women and men business owners and their access to capital (Australia, Canada, Mexico), women business owners in APEC countries are found not to have the same level of access to capital for the growth of their businesses. There is also a clarion call from women business owners for more formal training and education in business management issues - including marketing, financing, personnel matters and technology. Women entrepreneurs unanimously indicate their desire for the opportunity to learn more about how to be more effective business leaders and managers. For example, nine out of ten women entrepreneurs interviewed in Korea feel they need education in business management issues.

South Asia

Definitions

41 Various definitions of SMEs are used amongst the south Asian countries, and a uniform definition of SMEs does not yet exist in Pakistan. Sri Lanka favours an asset-based definition, with small enterprises having assets (excluding land and buildings) of SLRs 1 to 20 million, and medium enterprises assets of SLRs 21 to 50 million. In India the focus is on SSIs, which are classified as follows:

small scale industries engaged in manufacture, processing or preservation of goods, with a ceiling of INRs 10m of investment in plant and machinery, although in selected sectors, such as knitwear, hosiery, and hand tools, the ceiling is higher at INRs 50;

tiny enterprises with an investment ceiling of INRs 2.5m; and

the decentralised sector which means traditional (cottage or home based) industries such as artisans, hand made textiles, sericulture and handicrafts.

42 This generally used definition can be said to include micro-enterprises that are engaged in some form of manufacturing such as food processing and handicrafts including textiles and other cottage based industries. It excludes micro, small and medium enterprises operating in the services and trade sectors, even though half of GDP is generated by these industries.

43 In Nepal there is no universally accepted definition of SME. The nearest to an acceptable definition is the classification found in the Industrial Enterprises Acts and subsequent related policies. These focus on the size of investment or value of capital assets. The current Industrial Enterprise Act of 1992 with amendment in 1997 classifies enterprises or industrial units into four types. At the lowest spectrum is the


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cottage industry. Certain occupational activities, specified by the Act and that are generally associated with traditional crafts, are classified as cottage industry whatever the size of the unit. All other industrial activities are classified into three types: Small, Medium and Large. Currently industrial units with fixed assets worth less than NRs 30 million are considered to be small. Units having fixed assets worth between NRs 30 million and 100 million are considered to be medium. Units having fixed assets worth more than NRs 100 million are grouped as large enterprises.

Characteristics

44 There are currently about 27,000 SMEs in Bangladesh, a large proportion owned by women. It is estimated that SMEs contribute half of Bangladesh’s industrial sector GDP and provide employment for about five million people (equivalent to nearly 82 percent of the total industrial labour force). It generates between 45 and 50 percent of the total manufacturing value added, although available information indicates that their production processes are often marked by outdated technologies. Over the past decades SMEs have contributed significantly to fostering labour-intensive growth. Whilst there is a lack of reliable evidence, that which is available suggests that SMEs create sustainable jobs at a rate faster than population growth, encourage competition and lower prices, supply vital agricultural inputs, and process primary agricultural products.

45 As of December 2001, Bhutan had about 409 small-scale and 43 medium-scale enterprises in industry, production and manufacturing. The country also has about 878 cottage industries and 2,435 mini enterprises.

Figure 4: Overall Growth of SSI Sector in India since 1991-92

INRs. billions

Year

Number (millions) Exports Production at

current prices Production at

constant prices (1990-91)

Employment (in millions)

1991-92 2.08 (6.9)

138.83 (43.66)

1,786.99 (15.04)

1,601.56 (3.10)

12.48 (3.59)

1992-93 2.24 (7.88)

177.85 (28.10)

2,093.00 (17.12)

1,691.25 (5.6)

13.40 (3.28)

1993-94 2.38 (6.01)

253.07 (35.78)

2,416.48 (15.46)

1,811.33 (7.09)

13.93 (3.97)

1994-95 2.57 (7.98)

290.68 (14.80)

2,939.90 (21.66)

1,994.27 (10.1)

14.65 (5.13)

1995-96 2.72 (5.95)

364.70 (25.5)

3,562.13 (21.16)

2,221.62 (11.40)

15.26 (4.13)

1996-97 2.85 (4.88)

392.49 (7.61)

4,126.36 (15.83)

2,473.11 (11.30)

16.00 (4.84)

1997-98 3.01 (5.5)

444.42 (13.2)

4,651.71 (12.73)

2,681.59 (8.43)

16.72 (4.5)

1998-99 3.12 (3.55)

494.81 (11.35)

5,275.15 (13.40)

2,947.34 (9.91)

17.15 (2.61)


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Figures in brackets give percentage increase over previous year. 46 There is no information that seeks to assess the total aggregate size of the SME sector in India as whole, but it would not be unreasonable to estimate that there are probably more than seven million such businesses employing perhaps as many as 40 million people. Official figures indicate that there are some 3.4 million registered SSIs employing 19.2 million people, nearly 80 percent of which are in manufacturing. Available data indicate that Northeast India has approximately 180 medium-sized and large enterprises with assets larger than US$ 450,000, and 47,000 small enterprises with assets below US$ 450,000 (mostly at the smaller end).

47 Figure 4 shows that, despite liberalisation policies, SMEs in India achieved higher growth rates compared to the overall industrial growth rates. Although Indian SMEs have achieved considerable progress in terms of growth of number of units, gross output, employment generation and exports, it is evident from Figure 5 that exports of manufactured goods from the small scale sector still constitute less than 10 percent of the total output of this sector. This is due to the vast domestic market for manufactured goods in India, which discourages SMEs from confronting the additional risks of export markets.

Figure 5: Growth Rate of Small Industries in India after Liberalisation in 1991 (Overall Growth Rates)

Year (April to March)

Small Industries (percent)

Total Industrial Sector (percent)

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

3.1 5.6 7.1

10.1 11.4 11.3

9.5 9.9

0.6 2.3 6.0 9.4

12.1 7.0 4.7 4.0

48 SMEs now form the predominant part of the Nepalese private sector, although there is an absence of reliable data on which to quantify their contribution. Nepal has approximately 4,000 registered enterprises that employ 10 or more workers, mostly at the small end; firms catering to tourists abound. The data of the Census of Manufacturing Establishments 1996-97 reveals that SMEs constitute more than 98 percent of all establishments covered by the census, and contribute 63 percent of the value added. A survey of small manufacturing establishments not covered by the census (engaging less than 10 persons but having at least one paid employee) carried out three years later by Central Bureau of Statistics revealed that small establishments produced value added that was about one third of that generated by the establishments covered in the census. This indicates that more than 80 percent of the national value addition in the manufacturing sector comes from the SME sector. In the non-manufacturing sectors the share may be similar or even higher.

49 Specifically the survey revealed that a total of 3,557 establishments in Nepal had provided employment to 187,316 people. Working proprietors and unpaid family workers accounted for a further 9,392 persons. (This meant a decrease in the number of establishments of 714 and in the number of employees of 26,337 in


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comparison to the last census in 1991-92. This decrease took place mainly among the carpet and rugs, garments, bricks, distilleries and printing establishments.) Total wages and salaries distributed were found to be NRs 4,058,069 (average of US$ 319 per worker).

50 In Pakistan SMEs contribute about 30 percent of GDP, while 99 percent of the 2.3 million enterprises that are very small absorb 60 to 70 percent of labour in the manufacturing industry, service and trade sectors. Units employing between 10 and 99 workers absorb an additional 20 percent of labour.

51 In Sri Lanka a recent survey14/ revealed that the SME sector comprises largely well-established businesses, of which sole proprietorships and partnerships account for 80 percent of all SMEs surveyed. This might suggest that the sector is not particularly dynamic, in terms of either new entrants or growth of established businesses (SMEs with less than 30 employees account for 85 percent of all SMEs, the average current employment size being 22.7 employees for all SMEs surveyed, whilst survey findings show that 82 percent of SMEs have an average annual business turnover of SLRs 10 million or less). The principal business market for 86 percent of SMEs surveyed is mainly domestic, with 14 percent engaged in predominantly export markets or a combination of domestic and export markets.

Key Factors that have Fostered SME Development in the Region

APEC

52 All APEC economies have adopted policies and programmes that are designed to support SMEs, and for the most part are aimed at making SMEs more globally competitive. However, there are some major differences in the approaches used to actually do this. For example, about half of the APEC economies have adopted an “SME Basic Law” or the “SME Magna Carta” and half have not. About 40 percent now adopt a non-discriminatory approach, where they develop policies aimed at supporting firms no matter what their size, and about 60 percent adopt policies that intentionally target and discriminate in favour of SMEs. Almost all APEC economies have a strong focus on the areas of technology and human resource development (HRD).

53 As shown in Figure 6 there are large differences in budget allocations for SMEs between economies. Programme budgets for 1994-95 were around an average of US$ 265 per SME, with little difference between 2010 and 2020 economies. By 2001 this average allocation had grown to US$ 762, and a wide gap had opened between 2010 and 2020 economies. As evident from Figure 7, about 83 percent of the average APEC member economy’s SME budget is allocated to just three areas: finance, technology and HRD. There seems to be a shift in 2020 economies to channelling more assistance via financial programmes, rather than specific allocation on HRD or technology. The 2010 economies seem to have an allocation per SME about five times that of the 2020 economy average.

Figure 6: SME Programme Budget Comparisons, 1994-95 and 2000-01

Country 1994-95 2000-01

14/ Conducted by Enterplan in February to April 2003 on behalf of ADB and the Ministry for Enterprise Development, Industrial Policy, Investment Promotion and Constitutional Affairs under TA No 3822-SRI.


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Nominated budget in

millions USD

Budget per SME in USD

Nominated budget in

millions USD

Budget per SME in USD

Australia 304.82 402.62 1,300.00 1,169.27 China 0.41 0.05 Hong Kong, China 301.33 1,084.38 1,002.00 3,431.69 Indonesia 1.81 0.15 Japan 950.80 146.63 289.00 47.13 Korea 2,070.60 988.52 856.00 317.15 Malaysia 0.01 0.00 Singapore 3.93 124.87 Chinese Taipei 28.80 36.38 1,095.00 1042.50 Thailand 0.80 12.66 Average 265.54 762.01 Average 2010 285.10 907.61 Average 2020 238.15 179.59

54 A review of individual country programmes reveals a sharp increase in the proportion of economies adopting one stop shops, having a single agency responsible for SMEs, and providing microfinance, venture capital support, business matching services, access to government procurement markets for SMEs, and support for technology development commercialisation and IT use in SMEs.

Figure 7: Comparison of Budget Allocations by Main Programme Areas

Percentage of Funds Allocated to Each Area

Info

rmat

ion

Acce

ss

Fina

nce

Tech

nolo

gy

HR

D

Mar

ket

Acce

ss

Wom

en a

nd

Adm

in

Bur

den

Country

1994

-95

2000

-01

1994

-95

2000

-01

1994

-95

2000

-01

1994

-95

2000

-01

1994

-95

2000

-01

1994

-95

2000

-01

Australia 0.5 0.0 63.3 0.0 10.6 96.1 25.7 0.3 0.0 3.5 0.0 0.1 China 0.0 0.0 57.1 42.9 0.0 0.0 Hong Kong, China 0.0 0.0 0.0 73.0 11.4 19.3 88.6 7.7 0.0 0.0 0.0 0.0 Indonesia 0.0 76.9 23.1 0.0 0.0 0.0 Japan 0.0 2.1 0.0 1.0 95.8 3.5 4.2 41.2 0.0 52.3 0.0 0.0 Korea 0.0 3.4 66.8 87.4 22.6 8.2 1.0 1.0 9.6 0.0 0.0 0.0 Malaysia 0.0 0.0 0.0 0.0 100.0 0.0 Singapore 0.0 0.0 16.7 83.3 0.0 0.0 Chinese Taipei 0.0 0.0 45.9 87.4 39.2 10.2 14.8 2.3 0.0 0.1 0.0 0.0 Thailand 0.0 0.0 0.0 13.2 86.8 0.0 Average 1.2 0.9 28.0 51.4 28.8 19.9 28.3 10.8 13.1 15.7 0.7 1.4 Average 2010 1.2 0.5 23.1 46.8 41.2 21.3 33.4 12.0 0.0 17.7 1.2 1.6 Average 2020 1.3 3.4 33.6 87.4 14.7 8.2 22.4 1.0 28.1 0.0 0.0 0.0

55 In Japan, which hosts the largest number of SMEs among industrialised countries, the list of drivers is quite consistent with lists derived from the experiences in the United States and Europe. Aside from the differences in historical circumstances, the distinctly Japanese element lies in the ways in which Japanese firms organise their business activities around, and the local governments promote, local clusters. The extensive use of subcontracting; the hierarchical relationship between manufacturers and multiple layers of suppliers; the small size of suppliers; the importance of on-the-job training; the low degree of labour mobility of skilled workers between firms; the preference for internal over external labour markets to


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allocate human resources; the establishment of various public testing, research and technical centres by local governments; the existence of various institutions such as trade, business and wholesalers associations; and the roles such institutions play in facilitating the communication between firms in a cluster, are all relevant to the propensity of SMEs to form clusters in Japan. According to the 1996 survey of the Small and Medium Enterprise Agency, 537 clusters exist throughout the country. These seem to generate advantages for SMEs by supporting large numbers of specialised suppliers, and by organising market structures that encourage inter-firm linkages and facilitate the transmission of knowledge among firms.

56 In China certain aspects of the institutionalisation of policy have been significant drivers in SME development. However, the extent to which the 2002 SME Promotion Law will help SMEs to set up and grow is not yet clear. Similarly Vietnam’s legal system has continued to be subject to rapid and dramatic change including vigorous implementation of the Enterprise Law. Nevertheless, and despite a number of favourable developments, the private sector remains more constrained in Vietnam than in other countries in the region, including China.

Conclusions from Comparative Experiences in the Region

57 Based on international experience there has emerged a degree of consensus about the best environment for business development. This is one in which markets for business inputs and outputs function effectively, and offer a variety of appropriate services to enable businesses to develop and grow. It is also one where government focuses on its core functions and on undertaking these efficiently, rather than on seeking to displace or distort markets.

58 When looking specifically at SME development, comparison of the situation in South Asia with that in the NIEs provides only qualified support of this philosophy. Whilst the Asian Tigers have encountered their own difficulties their economic transformations do suggest that they got much of their economic and industrial policy right. On the face of it the generally interventionist approaches adopted in just about all of these countries would appear to be contradictory to the market-driven approaches currently favoured.

59 However, this would be a simplistic conclusion. What seems to separate the programmes implemented in the Tiger nations from the far less successful approaches taken elsewhere is the entrepreneurial, market-friendly nature of the governments in the NIEs. These governments believed in the importance of the private sector, and did not wish to become a substitute for it. At the same time it believed that markets were imperfect, and governments needed to provide essential support if business was to flourish. It therefore sought to stimulate desired private sector activity, whilst taking care not to crowd-out enterprise or distort market forces.

60 Whilst there were substantial differences in the levels of government intervention in the NIEs, various steps were taken to catalyse growth, the choice tending to reflect the comparative advantages of respective countries (so Korea supported their chaebols whilst Hong Kong allowed their SMEs to benefit fully from


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the nation state’s position as a major hub and thus drive growth). In all cases growth was enabled by outward-oriented industrial policies that, for differing reasons (such as subcontracting in Korea and increased investment in Singapore), saw expansion in the role of the SME sector in the economy. In general SMEs focused on labour intensive activities and thus were a major source of employment creation.

61 Apparently similar philosophies have been applied – and have failed – elsewhere. India is a case in point. To a large extent the problem seems to be less to do with the nature of the policy measures that were favoured, and more a reflection of the underlying implementation ability and mentality of the Government officials.

62 Another key characteristic of SME development in the Tigers was the highly integrated nature of the policy environment. It was understood that SMEs had vital – and often differing – roles to play if maximum use was to be made of a country’s natural endowments, and that these roles had to relate effectively to other sectors of the economy. It was also understood that SMEs required a comprehensive range of support instruments, encompassing financial and non-financial factors, birth and growth processes, and technical aspects. The drivers for SME development – such as FDI from TNCs or export market opportunities – were identified and appropriate support measures were taken.

63 Again the experience in South Asia contrasts unfavourably with this. Where measures to foster the SME sector have been evident these seem to have been in pursuit of a general hope that this would contribute to economic growth and, in some cases, poverty reduction. There has been little effort to determine what role the SME sector should be playing in the overall economy, what the key drivers will be, what its size and composition should be (in terms of the proportion of small and medium enterprises), and therefore what steps should be taken to achieve the objectives. Consequently SME development has often been in conflict with other parts of economic and industrial policy.

64 The more targeted approach taken by the NIE governments enabled them to concentrate on technology transfer that fostered the SME sector. At the same time they gave high priority to the training and human resource development that is generally so lacking in South Asia and which, even should the environment otherwise be supportive of enterprise, is bound to limit the growth of the SME sector.

65 This review suggests that strong SME sectors are characteristic of successful economies. SME policy must be formulated as part of coherent industrial and economic policy, and reflect a realistic assessment of the country’s endowments. In particular, as suppliers of inputs, components and services, SMEs influence the competitiveness of large enterprises, including foreign investments, while the latter can create additional market opportunities for SMEs.

66 It would seem that fundamental to the success of SME policy in BBNNI that the policy makers have empathy with entrepreneurs, and a greater appreciation of


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where and how the State can make a difference. It is not sufficient to promote what is considered “best practice” in SME policy, as effective measures can still be ineffectively implemented.

The Governments should formulate quite specific SME strategies and policies, including well-defined roles for the public sector. The general principle should be minimal regulatory burden and an environment that enables all sizes of business to play their intended roles in the national economy, with a clear focus for public expenditure in support of SME development.

67 Emphasis should be placed on a cluster-based development approach, supporting both local, bottom-up clustering and upgrading “clustered sectors” of key national relevance, and maximising the value of forwards and backwards linkages consistent with coherent industrial policy. Recognising the vital role that information plays in functioning markets, and limited commercial opportunities for information providers in developing economies, governments should prioritise measures that promote effective communications infrastructure as well as information provision.

68 Recognising the degree to which policy integration and comprehensiveness of support measures were fundamental to success in the Tigers, and the scarcity of resources in South Asia, it is essential that SME policies are supported by “road maps” that clearly prioritise and sequence the actions to be taken in pursuance of agreed strategy. Whilst it should be possible to make short-term impact the approach being recommended really requires a medium term perspective, which sees the evolution of an SME support infrastructure in accord with the development of the sector itself.

69 As a key aspect of this medium-term perspective, high priority must be given to training and development of the human resource base. It is clear that there remain many cultural barriers to SME development in South Asia, with many of the most able and educated attracted into careers other than business management. There must be a focus on developing a population base that is motivated and able to create new business, and another with the technical skills required by the growth sectors. Such HRD programmes must become fundamental parts of the poverty reduction process.

Abbreviations and Bibliography

A1 - 1


Abbreviations and Bibliography

A1

Abbreviations

ADB Asian Development Bank APEC Asia-Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations BDS Business Development Services BIMP Brunei Darussalam, Indonesia, Malaysia, Philippines BMO Business Membership Organisation DFID UK Department for International Development EAGA East Asia Growth Area EE Enabling Environment EPB Export Promotion Board EPZ Export Processing Zone FDI Foreign Direct Investment GDP Gross Domestic Product HRD Human Resource Development INR Indian Rupee I-PRSP Interim Poverty Reduction Strategy Paper L/C Letter of Credit MSME Micro-, Small- and Medium-sized Enterprise NIE Newly Industrialised Economy NR Nepal Rupee R&D Research and Development SME Small- and Medium-sized Enterprise SEDF SouthAsia Enterprise Development Facility SIMAP Small Industries Management Development Programme SLR Sri Lankan Rupee SPAN Integrated Plan of Action for SME Development SSI Small-scale Industry STUP Skill and Technology Upgrade Programme TA Technical Assistance TNC Transnational Corporation TVE Township and Village Enterprise WTO World Trade Organisation


2


SMEs and Business Environment Across the World

A2 - 1


SMEs and Business Environment

Across the World A2

The table below extracts information presented in “SMEs Growth and Poverty: Cross-country Evidence” (2003), by Thorsten Beck, Asli Demigrüç-Kunt and Ross Levine.

GDP per capita is the log of real GDP per capita averaged over the period 1990-2000. SMEOFF is the SME sector’s share of employment according to the official definition of the SME sector. SME250 is the SME sector’s share of employment when 250 employees is taken as the cut-off for the definition of an SME. Institutional development is an aggregate indicator of institutional quality. Business environment is a principal component indicator of Property Rights, Contract Enforcement, Entry and Bankruptcy. Country GDP per

capita SME250 SMEOFF Institutional

Development Business

Environment Asia Honk Kong 21,824 61.50 0.99 0.99 Indonesia 963 79.20 -0.76 -1.37 Japan 42,520 71.70 74.13 0.95 1.09 Korea, Rep. 10,508 76.25 78.88 0.48 1.03 Philippines 1,099 66.00 66.00 0.21 -0.70 Singapore 22,874 44.00 1.44 1.17 Taiwan 12,474 68.60 68.60 0.89 Thailand 2,590 86.70 86.70 0.15 0.44 Vietnam 278 74.20 74.20 -0.38 -0.99 Elsewhere Australia 20,930 50.60 1.41 1.30 Canada 19,947 58.58 1.43 2.21 France 27,236 67.30 62.67 1.02 0.51 Germany 30,240 59.50 70.36 1.37 0.82 UK 19,361 56.42 56.42 1.50 USA 28,232 52.54 1.29 2.26 Ecuador 1,521 55.00 55.00 -0.32 Kenya 341 33.31 33.31 -0.78 -1.00 Kyrgyzstan 972 63.22 63.22 -0.42 Mexico 3,390 48.48 48.48 -0.07 -0.25 Russia 2,614 13.03 13.03 -0.54 -0.18 South Africa 3,923 81.53 0.11 -0.21

Experience of SMEs in South and South-east...

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