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International Journal of Small and Medium Enterprises and Business Sustainability,Vol.1, No.1 (July 2015), pp. 24-50

© 2015 by Center for Industry, SME and Business Competition Studies, USAKTI

ISSN:2442-9368 electronic

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International Journal of Small and Medium Enterprises and Business Sustainability,Vol.1, No.1 (July 2015)



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Editorial Team

Chief Editor: Tulus Tahi Hamonangan Tambunan Assistant Chief Editor: Ida Busnetty

Editorial Assistant: Willy Arafah

Editorial Board Members

Ganeshan Wignaraja (Asian Development Bank Institute, Philippines) Jack Qingjie Xia (Peking University, China)

Mark Goh (National University of Singapore, Singapore) Greg Barton (Monash University, Australia)

Kyosuke Kurita (Kwansei Gakuin University, Japan) Toshiro Nishizawa (University of Tokyo, Japan)

Larry Strange (Cambodian Development Research Institute, Cambodia) Lee Saw Hoon (Malaysia Productivity Corporation, Malaysia)

Muhammad Ikmal Mohd Said (Centre for Poverty and Development Studies, Malaysia) Remy Herrera (University of Paris, France)

Savita Shankar (Keio university, Japan) Siew Mee Barton (Deakin University, Australia) Yau Jr (Economic Development Bureau, Taiwan)

Kriengkrai Techakanont (Thammasat University, Thailand) Anna Bakiewicz (University of Social Sciences, Poland)

Colin C Williams (University of Sheffield, UK) Tomoko Oikawa (University of Limeric, Ireland) Michael Schaper (Curtin University, Australia)

Sunil Dutt (WASME, India)

Associate Editors

Bogdan Piasecki (University of Social Sciences, Poland) Anna Rogut (the National Centre for Research and Development, Poland)

Nataliya Chukhray (Lviv Polytechnic, Ukraine) Marcela Rebeca Contreras (Universidad de Occidente, México)

John Chetro-Shivos (Clark University, USA) Suriyani BT. Dato' HJ. Muhamad (UMT, Malaysia)

Fachru Nofrian (University of Indonesia, Indonesia)

Advisory Members

Thoby Mutis (University of Trisakti, Indonesia) Roman Patora (University of Social Sciences, Poland)

Kar-yiu (University of Washington, USA) Lukasz Sulkowski(University of Social Sciences, Poland)

Asep Hermawan (University of Trisakti, Indonesia) Andrzej Marjanski (University of Social Science, Poland)

Yuswar Z. Basri (University of Trisakti, Indonesia) Farida Jasfar (University of Trisakti, Indonesia)




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Guidelines for Contributors

1. All manuscripts should be typed on one side of A4 (8.27" x 11.69") and be

double-spaced, 2 centimeter margin with Times New Roman font type and size

12.

2. The length of the manuscript is approximately 6000-7.000 words or

approximately 15-25 pages (A4 paper).

3. All manuscripts should be sent by email to: [email protected]

4. To assure anonymous review, authors should not identify themselves directly or

indirectly in their papers.

5. In sending a manuscript, it should have a cover page which includes the title of

the paper, the author's full name, title and affiliation, mailing address, phone and

fax number, email address, and any acknowledge.

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biography of 50 words.

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be serially numbered

8. Spell out numbers from one to ten, except when used in tables, figures and lists,

and when used with mathematical, statistical, scientific or technical units and

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week, 20 years, 4 meters. All other numbers are expressed numerically.

The systematically writing should cover the followings:

1. Title: it should be specific and effective with maximum 150 characteristics

2. Abstract: maximum 200 words and should concisely inform the readers of the

manuscript's topic, its objectives, its methods and its main findings.

3. Keywords: at least four keywords in alphabetical way.

4. JEL classifications: at least two codes

5. Introduction: it should cover systematically the paper's background, motivation,

purposes, and method.

6. Theoretical Framework/Literature Review: the author (s) should explain

theoretical framework used or previous key similar studies/literature

7. Methods: the author (s) should explain analysis method used, including sources

of data, data collection approach, measurements, and operational variable

definition (if any).

8. Results and Discussion: the author (s) should elaborate clearly main research

finding(s). If the author (s) used an econometric or a statistical approach in

his/her (their) research, in this part (section) of the paper, he/she (they) should

prevented from "too mechanic" in explaining/discussing the results. Instead, the

author (s) should answer the question that most likely to be asked by the

readers: "what the findings mean in reality?"

9. Conclusion: it should contain key research findings, meaning of the findings and

suggestion for the future research (if any).

mailto:[email protected]




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10. Appendices: if any, it should contain further information (which can be in the

form of a table or a figure or a list, or others) directly related to information or

data given in the paper in which the author (s) considered it also important for

the readers.

11. References: only references cited in the paper, and they should be stated with

the following order: author surname, publication year, title of the paper, journal

name and its volume and page number. Or if it is a chapter of a book, it should be

added with surname of the book's editor, title of the book, page number, name of

publisher, and city of the publisher.

Some examples:

-Research/working paper:

Abeberese, A.B (2012), "Electricity Cost and Firm Performance: Evidence from India", research paper, August, Department of Economics, Columbia University, New York, NY (https://www.dartmouth. edu/~neudc2012/docs/paper_292.pdf).

-Report:

Anh, L.H, Nguyen T. and Nguyen T.T.P. (2013), "The Inflationary Impacts of Fossil Fuel and Electricity Price Reform in Viet Nam", report of the UNDP project Fossil Fuel Fiscal Policies and Greenhouse Gas Emissions in Viet Nam – Phase II-Developing a Roadmap for Fossil Fuel Fiscal Policy Reform, Hanoi.

-Journal:

Jamal, M. and A. Ayarkwa (2014), "Fuel Price Adjustments and Growth of SMEs in the New Juaben Municipality, Ghana", International Journal of Small Business and Entrepreneurship Research, 2(3): 13-22.

-Book:

Tambunan, T.T.H. (2009b), Development of SMEs in ASEAN Countries, Readworthy Publications, Ltd, New Delhi

-Seminar paper:

Tambunan, T.T.H. (2014b), "Government efforts to improve community access to health care and education: a story from Indonesia", paper presented at the Second International Conferece on Social Security", 3-5 December 2014, Social Security Research Centre (SSRC) and the Department of Development Studies and Institutions and Economies, Faculty of Economics and Administrations, University of Malaya, Kuala Lumpur.

-Book chapter:

Tambunan, T.T.H. (2014), "Ongoing trade facilitation improvement: Its impact on export-oriented small and medium-sized enterprises in Indonesia", in Ravi Ratnayake, et al. (eds), Impacts of trade facilitation measures on poverty and inclusive growth: Case studies from Asia, UN-ESCAP and ARNeT, Bangkok.

https://www.dartmouth./




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Submission

Please send your abstract not more than 200 words or full

papers not more than 5000 words including references. With

title of the paper, name(s), e-mail address of the authors(s) and

organization name to

Tulus Tambunan

Editor International Journal of Small and Medium Enterprises

and Business Sustainability

Email: [email protected]




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Content

i Editorial Team

ii Author’s Guidelines

iii Submission

1 - 23 The Likely Impact of the Implementation of ASEAN Economic Community

2015 on Local Small And Medium Enterprises

Tulus T.H. Tambunan

24 - 50 The SMEs during Economic Slowdown in Poland. The Experiences from the

Latest Global Financial Crisis.

Anna Bąkiewicz

51 - 82 Entrepreneurship in the Shadow Economy: A Review of the Alternative Policy

Approaches

Colin C Williams

83 - 101 ‘Collectivism’ and Innovation: Small and medium-sized enterprises as

local/rural industry in some East Asian countries

Tomoko Oikawa

102 - 130 Relationship Management in Tourism Microenterprises as an Element in

Building a Competitive Advantage

Maciej Debski & Michał Szaniawski

131 - 155 Exploring characteristics of FTA use among SMEs in Malaysia

Menaka Arudchelvan

156 - 176 Social entrepreneurship in Asia: a literature review

Savita Shankar

177 About The Authors

International Journal of Small and Medium Enterprises and Business Sustainability,Vol.1, No.1 (July 2015), pp. 1 - 23



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The Likely Impact of the Implementation of ASEAN

Economic Community 2015 on Local Small And

Medium Enterprises

Tulus T.H. Tambunan

Center for Industry, SME and Business Competition Studies

University of Trisakti

Grogol, West-Jakarta, Indonesia

E-mail: [email protected]

Abstract

This paper, as part of ongoing research activities by the Center for Industry, SME

and Business Competition Studies, University of Trisakti (Indonesia), aims to assess the

likely impact of the implementation of ASEAN Economic Community by the end of 2015

on small and medium enterprises (SMEs) in ASEAN member states (AMSs). The key

question that this paper tries to answer is the following: through what channels the AEC

2015 will affect local SMEs? Although the economic integration of ASEAN in the context

AEC 2015 is not only on trade but also on foreign direct investment (FDI), capital,

production and human resource/skilled workers, the analysis in this paper focuses only on

regional trade liberalization.

Keywords: SMEs, AEC 2015, trade liberalization, export performance, ASEAN-trade

JEL: F14, F15, H3, L25

Introduction

In 2003, ASEAN leaders agreed to establish, by 2020, an ASEAN Community,

comprised of three pillars: the ASEAN Political-Security Community (APSC), ASEAN

Economic Community (AEC) and ASEAN Socio-Cultural Community (ASCC). In 2007,

the leaders affirmed this commitment with a decision to bring forward the creation

of an ASEAN Community to 2015. In particular, they agreed to hasten the process of

regional economic integration with the adoption of the so-called 2007 AEC Blueprint

for the establishment of the AEC by 2015. The first initiative of AEC 2015 is a vision

for a single market and production base for ASEAN member states (AMSs), to




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promote the free movement of goods, services, investment and skilled labor across

the ASEAN region. The main aim of AEC 2015 is to foster equitable economic

development across the region and create a highly competitive economic region that

will be fully integrated into the global economy (ASEAN, 2011).

The theoretical expectation is that the implementation of AEC 2015 will

transform ASEAN into a single market and production base, like the European Union

(EU), to enhance ASEAN’s competitiveness. All existing tariffs on exports and imports

will be eliminated and non-tariff barriers (NTBs) will be gradually phased out.

ASEAN investors will be free to invest in all economic sectors throughout the region.

Simple, harmonized and standardized trade and customs requirements are expected

to reduce transaction costs. The AEC 2015 will then boost the development of

production networks, foster the regional integration of priority sectors and allow for

the free movement of business persons, professionals, skilled labor and talents.

An ASEAN single market and production base comprises five core elements:

the free flow of goods, services, investment, capital and skilled labor. A single market

for goods and services will enhance ASEAN’s capacity to serve as a global production

centre to better meet the demands of the global supply chain. According to the

ASEAN Secretariat, sectors targeted to benefit from the single market and production

base include the following priority integration sectors: agro-based products, air

travel (air transport), automotive, e-ASEAN, electronics, fisheries, healthcare, rubber-

based products, textiles and apparel, tourism, wood-based products, and logistic

services. Many of these sectors are also the most important sectors for MSMEs in all

member states (ASEAN, 2011, 2013).




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This paper, as part of ongoing research activities by the Center of Industry,

SME and Business Competition Studies, University of Trisakti (Indonesia), aims to

assess the likely impact of regional trade liberalization in the context of AEC 2015 on

local small and medium enterprises (SMEs). The main question of this paper is:

through what channels it will affect local SME?

ASEAN Trade

The main objective of forming an economic union, a regional economic

cooperation, an economic integration, or a regional free trade area (FTA) in a region

(like ASEAN for countries in Southeast Asia or the EU for countries in Europe) is,

among others, to increase trade among them; known in international trade literature

as intra-trade. In other words, a successful FTA, or an economic integration, should

be reflected by more intra-trade volumes among member states than extra-trade

volume between them and the rest of the world.

The facts show, however, that since the birth of ASEAN many decades ago

intra-ASEAN trade has never been larger than extra-ASEAN trade. As of November

2011, total value of intra-ASEAN trade was US $598.24 billion or only about 25% of

ASEAN total trade, whereas ASEAN trade with non-ASEAN was US$1,790.35 billion

(75%). The value of intra-and extra trades, as well as shares in regional total trade,

vary between individual member states (Table 1). For all individual member states,

countries such as China, Japan, the European Union (EU-27) and the USA remain the

most important trading partners for both exports and imports (Table 2).




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Table 1

Intra-and Extra-ASEAN Trade, November 2012 (US$ million)

Member states Intra-ASEAN trade Extra-ASEAN trade Total Trade

Value Share to total

trade (%) Value

Share to total trade (%)

Brunei Darussalam

2,912.1 19.6 11,910.2 80.4 14,822.3

Cambodia 3,003.8 23.4 9,840.3 76.6 12,844.1 Indonesia 99,353.2 26.1 281,579.1 73.9 380,932.3 Lao PDR 2,530.3 64.0 1,425.5 36.0 3,955.9 Malaysia 108,139.7 26.0 307,582.2 74.0 415,721.9

Myanmar 7,207.7 48.3 7,717.4 51.7 14,925.1

Philippines 23,675.6 21.2 88,076.0 78.8 111,751.6 Singapore 205,670.9 26.5 569,481.7 73.5 775,152.6 Thailand 111,450.8 24.3 347,453.5 75.7 458,904.4

Viet Nam 34,298.1 17.2 165,284.0 82.8 199,582.1

ASEAN 598,242.2 25.0 1,790,350.0 75.0 2,388,592.3

Source: database from ASEAN Secretariat (www.asean.org).

Table 2

ASEAN Trade by Most Important Partner Country/Region, November 2012

(US$ million)

Partner country/region

Value Share to total ASEAN trade

Exports Imports Total trade Exports Import

s Total trade

ASEAN 327,531.8 270,710.4 598,242.2 26.4 23.6 25.0 China 127,908.5 152,497.1 280,405.5 10.3 13.3 11.7 Japan 145,197.7 128,149.4 273,347.1 11.7 11.2 11.4 EU-27 126,593.5 108,182.6 234,776.2 10.2 9.4 9.8 USA 106,305.6 92,480.3 198,785.9 8.6 8.1 8.3

Republic of Korea 54,468.0 70,002.9 124,470.9 4.4 6.1 5.2 India 42,754.7 25,674.1 68,428.8 3.4 2.2 2.9 Australia 37,253.9 22,220.5 59,474.4 3.0 1.9 2.5 Russia 2,689.4 11,278.5 13,967.9 0.2 1.0 0.6

Canada 5,292.7 5,478.4 10,771.1 0.4 0.5 0.5 New Zealand 4,569.3 3,667.5 8,236.7 0.4 0.3 0.3 Pakistan 6,001.8 765.7 6,767.4 0.5 0.1 0.3

Total most important partner countries/regions 986,566.9

891,107.3

1,877,674.2 79.4 77.7 78.6

Others 255,719.5 255,198.6 510,918.0 20.6 22.3 21.4

Total ASEAN 1,242,286.4 1,146,305.

9 2,388,592.

3 100.0 100.0 100.0


http://www.asean.org/




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With respect to exports, as shown in Table 3, the total value of intra-ASEAN

exports, as of November 2012, was around US $27.53 billion or only approximately

26.4% of ASEAN total export value. Whereas, in that same year, extra-ASEAN export

value was near to US $914.76 billion or almost 74% share. By member state on the

intra-export side, besides Singapore, Thailand has the largest value in intra-ASEAN

export with US $72.23 billion, followed by Malaysia with US $56.05, and Indonesia in

third place with almost US $42.1 billion. On the extra-export side, again besides

Singapore, Malaysia has the largest amount with US $172.13 billion, followed by

Indonesia with almost US $161.40 billion.

Table 3

Intra-and Extra-ASEAN Export, November 2012 (US$ million)

Member states Intra-ASEAN export Extra-ASEAN export Total

Export Value

Share to total

export (%) Value

Share to total

export (%)

Brunei Darussalam 1,721.1 13.9 10,641.2 86.1 12,362.3

Cambodia 833.7 12.4 5,876.8 87.6 6,710.6

Indonesia 42,098.9 20.7 161,397.8 79.3 203,496.7

Lao PDR 959.8 55.0 786.7 45.0 1,746.5

Malaysia 56,049.7 24.6 172,129.5 75.4 228,179.1

Myanmar 3,957.4 48.7 4,161.8 51.3 8,119.2

Philippines 8,635.3 18.0 39,406.9 82.0 48,042.2

Singapore 127,544.5 31.2 281,899.0 68.8 409,443.5

Thailand 72,226.6 31.6 156,594.1 68.4 228,820.7

Viet Nam 13,504.8 14.2 81,860.7 85.8 95,365.6

ASEAN 327,531.8 26.4 914,754.6 73.6 1,242,286.4


If the above intra-ASEAN trade results are caused by man-made trade barriers

in individual member states (e.g. high import duties, high export tax, complex custom

procedures) rather than by other reasons (e.g. more preferences for trading with

countries beyond ASEAN), it is generally expected that the implementation of a single

ASEAN market in 2015 will encourage member states to trade more with each other,

and thus intra-ASEAN trade will, ceteris paribus, automatically increase. But, now the




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question is: what commodities are likely to increase in intra-ASEAN trade? This

question is especially important for ASEAN SMEs, because if exports of commodities,

in which many SMEs are engaged as producers/suppliers/exporters either directly

or indirectly (having production or trade links with large enterprises (LEs) or foreign

direct investment (FDI)-based firms) are likely to increase, then it can be expected

that the implementation of AEC 2015 will give benefits to ASEAN SMEs producing

those commodities, ceteris paribus. In this regard, Table 4 shows the main important

goods in intra- and extra- ASEAN trade, based on latest data from the ASEAN

Secretariat. Further, of those commodities, the top 10 ASEAN trade commodity

groups are given in Table 5.

It is most likely that key ASEAN exported goods will benefit more from the

implementation of AEC 2015. Among them are the following top 5 exported goods:

(1) electronic machinery, equipment and parts, sound equipment, television

equipment; (2) mineral fuels, mineral oils and their products; (3) machinery and

mechanical appliances; (4) rubber and its products; and (5) animal/vegetable fats

and oils and their cleavage products. In addition to these goods, it is also expected

that ASEAN’s most important intra-traded goods will also increase with the

implementation of AEC 2015. The top 7 ASEAN intra-traded goods are: (1)

animal/vegetable fats and oils and their products; (2) mineral fuels, mineral oils and

their products; (3) organic chemicals; (4) plastics and their products; (5) rubber and

its products; (6) machinery; and (7) vehicles: parts and accessories.

Further, the WTO database (www.wto.org) shows leading exporters within

ASEAN for the following goods: (a) chemicals: Singapore and Thailand; (b)

pharmaceuticals: Singapore; (c) office and telecom equipment and EDP: Singapore,




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Malaysia, Thailand, Philippines, Indonesia, and Vietnam; (d) telecommunication

equipment: Malaysia, Singapore, Thailand, and Indonesia; (e) integrated circuits and

electronic equipments: Singapore, Malaysia, Philippines, and Thailand; (f)

automation products: Thailand; and (g) textile and garments: Indonesia, Thailand,

Vietnam, and Malaysia. Those member states are expected to continue as the leading

exporters of those goods in ASEAN intra-trade with the implementation of AEC 2015.

With respect to SMEs, it is stated in the Roadmap for ASEAN Community

2009-2015 (ASEAN, 2011b), “The AEC will establish ASEAN as a single market and

production base making ASEAN more dynamic and competitive with new

mechanisms and measures to strengthen the implementation of its existing economic

initiative; accelerating regional integration in the priority sectors; facilitating

movement of business persons, skilled labor and talents; and strengthening the

institutional mechanisms of ASEAN” (page 133). In short, as generally expected, the

AEC 2015 will transform ASEAN into a region with free movement of goods, services,

investment, skilled labor, and freer flow of capital. Or ASEAN will become a single

market region like the EU. For the owners or managers of SMEs in all member states,

it is important then to be fully aware that free movement of goods presents market

and production opportunities but also threats for them. Some SMEs will face

opportunities as well as threats directly, while others indirectly. Direct opportunity,

for instance, a local SME has a greater opportunity to sell its goods or services to

other member states. Or, as a direct threat, it will face direct competition for its

goods/services in local market from similar goods/services produced by SMEs from

other member states. Indirect opportunity, for instance, a local SME making certain

components or half-finished products for a local assembling company gets more




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order because the company is expanding its market to other state members.

Whereas, indirect threats can be that a local SME receives less order from its

assembler as the latter company reduce its production due to heavy competition

from other member states in local market. In other words, because the assembler lost

its domestic market share, its subcontractors also lost their orders.

Whether the implementation of AEC 2015 will provide more opportunities or

more threats to local SMEs, it depends on at least two main factors, namely the

readiness of local SMEs and the seriousness of governments in individual member

states in supporting/promoting capacity building in them. Unfortunately, there are

no studies so far explicitly on the readiness of local SMEs in facing the AEC 2015.




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Table 4

Intra-and Extra-ASEAN Trade by Commodity Group, November 2012 (US$ million)

Two digit HS

Commodity Intra-ASEAN Trade Extra-ASEAN Trade Total ASEAN

Export Import Total trade Export Import Total trade Export Import Total trade

01 Live animals 375.1 279.4 654.5 38.2 461.5 499.7 413.3 740.8 1,154.1 02 Meat and edible meat offal 212.1 39.0 251.1 177.1 2,410.9 2,588.0 389.2 2,449.9 2,839.1 03 Fish, crustaceans & aquatic invertebrates 1,324.9 1,294.5 2,619.4 9,679.7 3,616.2 13,295.9 11,004.5 4,910.7 15,915.3

04 Dairy produce; birds eggs; honey and other edible animal products

873.2 827.6 1,700.8 741.5 4,545.9 5,287.3 1,614.6 5,373.5 6,988.1

05 Other products of animal origin 23.4 22.4 45.8 96.6 219.7 316.2 120.0 242.1 362.0

06 Live trees, plants; bulbs, roots; cut flowers & ornamental foliage

65.9

90.1

156.0

301.4

88.9

390.3

367.3

178.9

546.3

07 Edible vegetables & certain roots & Tubers 751.9 629.0 1,381.0 2,447.2 1,717.8 4,165.0 3,199.2 2,346.8 5,545.9

08 Edible fruit & nuts; citrus fruit or melon peel

578.7 718.7 1,297.4 3,467.4 2,007.3 5,474.7 4,046.1 2,726.1 6,772.2

09 Coffee, tea, mate & spices 1,000.4 612.8 1,613.1 3,929.6 1,090.8 5,020.4 4,930.0 1,703.6 6,633.6

10 Cereals 4,953.7 2,964.7 7,918.5 4,626.2 6,456.2 11,082.4 9,579.9 9,420.9 19,000.9

11 Milling products; malt; starch; inulin; wheat gluten

594.2 573.6 1,167.7 1,306.2 1,413.4 2,719.5 1,900.3 1,986.9 3,887.2

12

Oil seeds & oleaginous fruits; miscellaneous grains, seeds & fruit; industrial or medicinal plants; straw & fodder

222.1

317.1

539.2

596.6

3,626.2

4,222.8

818.6

3,943.4

4,762.0

13 Lac; gums, resins & other vegetable sap & extracts

39.1 33.4 72.5 234.1 257.8 491.9 273.1 291.3 564.4

14 Vegetable plaiting materials & other vegetable products

43.7

59.8

103.5

120.5

38.6

159.2

164.3

98.4

262.7

15 Animal or vegetable fats and oils and their clevage products; prepared edible fats; animal or vegetable waxes

7,040.8

6,207.6

13,248.4

40,215.5

1,004.2

41,219.7

47,256.3

7,211.8

54,468.1

16 Edible preparations of meat, fish, crustaceans, mollusks or other aquatic invertebrates

698.6

351.3

1,049.9

8,830.5

407.3

9,237.8

9,529.1

758.6

10,287.7

17 Sugars and sugar confectionary 2,281.5 1,744.7 4,026.2 3,096.8 2,502.1 5,598.9 5,378.3 4,246.8 9,625.1




2

18 Cocoa and cocoa preparations 1,188.3 1,099.8 2,288.2 2,388.6 1,306.5 3,695.0 3,576.9 2,406.3 5,983.2

19 Preparations of cereals, flour, starch or milk; bakers wares

1,834.0

1,387.3

3,221.3

2,221.3

1,050.0

3,271.2

4,055.3

2,437.2

6,492.5

20 Preparations of vegetables, fruit, nuts or other plant parts

364.0

216.5

580.5

2,813.0

837.8

3,650.8

3,177.0

1,054.3

4,231.3

21 Miscellaneous edible preparations 1,946.7 1,537.7 3,484.4 2,244.3 2,005.0 4,249.4 4,191.1 3,542.7 7,733.8 22 Beverages, spirits and vinegar 2,554.2 669.6 3,223.9 1,769.9 3,118.2 4,888.1 4,324.2 3,787.8 8,112.0

23 Food industry residues & waste; prepared animal feed

807.9 778.6 1,586.6 1,735.3 6,024.4 7,759.7 2,543.2 6,803.0 9,346.2

24 Tobacco and manufactured tobacco substitutes

1,510.8 879.0 2,389.8 847.0 1,418.6 2,265.5 2,357.8 2,297.6 4,655.3

25 Salt; sulfur; earth & stone; lime & cement plaster

1,084.6 1,428.0 2,512.5 779.8 1,983.8 2,763.6 1,864.4 3,411.7 5,276.1

26 Ores, slag and ash 405.4 225.5 630.9 9,105.6 2,951.7 12,057.3 9,511.0 3,177.2 12,688.2

27 Mineral fuels, mineral oils & products of their distillation; bitumin substances; mineral wax

82,107.8

79,561.6

161,669.5

145,978.5

171,773.6

317,752.1

228,086.3

251,335.2

479,421.6

28

Inorganic chemicals; organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes

1,015.8

874.7

1,890.5

2,137.1

8,915.0

11,052.1

3,152.9

9,789.6

12,942.5

29 Organic chemicals 7,628.7 6,321.9 13,950.5 29,118.7 19,428.0 48,546.6 36,747.3 25,749.9 62,497.2 30 Pharmaceutical products 893.4 660.4 1,553.8 6,264.1 7,655.6 13,919.8 7,157.5 8,316.0 15,473.5 31 Fertilizers 1,189.5 975.3 2,164.8 508.7 8,129.4 8,638.1 1,698.2 9,104.7 10,802.9

32

Tanning or dyeing extracts; tannins & derivatives; dyes, pigments & coloring matter; paint & varnish; putty & other mastics; inks

1,256.0

914.8

2,170.7

1,636.0

4,519.1

6,155.1

2,891.9

5,433.9

8,325.8

33 Essential oils and resinoids; perfumery, cosmetic or toilet preparations

2,692.6

1,709.0

4,401.6

4,579.0

4,019.3

8,598.3

7,271.6

5,728.3

12,999.9

34 Soap; waxes; polish; candles; modeling pastes; dental preparations with basis of plaster

1,287.5

979.0

2,266.5

2,348.4

1,990.8

4,339.2

3,635.8

2,969.9

6,605.7

35 Albuminoidal substances; modified starch; glues; enzymes

415.7

333.3

749.0

808.0

1,215.2

2,023.3

1,223.7

1,548.5

2,772.2

36 Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations

42.0

60.4

102.4

40.5

223.1

263.7

82.6

283.5

366.1

37 Photographic or cinematographic goods 277.0 76.7




3

353.8 221.7 950.5 1,172.2 498.7 1,027.3 1,525.9 38 Miscellaneous chemical products 2,997.0 2,345.3 5,342.4 10,114.1 10,386.2 20,500.3 13,111.2 12,731.5 25,842.6 39 Plastics and articles thereof 12,113.6 10,132.6 22,246.2 25,209.5 25,004.2 50,213.8 37,323.1 35,136.8 72,460.0 40 Rubber and articles thereof 12,381.0 5,031.0 17,412.0 40,182.5 7,704.3 47,886.9 52,563.5 12,735.3 65,298.8

41 Raw hides and skins (other than furskins) and leather

250.8 333.1 583.8 770.8 1,636.3 2,407.1 1,021.6 1,969.3 2,990.9

42 Leather articles; saddlery and harness; travel goods, handbags & similar; articles of animal gut [not silkworm gut]

375.5

170.8

546.3

2,037.8

1,798.2

3,836.0

2,413.3

1,969.0

4,382.2

43 Furskins and artificial fur; manufactures thereof

7.5 1.1 8.6 19.5 92.1 111.6 27.1 93.2 120.3

44 Wood and articles of wood; wood charcoal 1,294.8 1,831.3 3,126.1 12,372.9 1,616.8 13,989.7 13,667.7 3,448.1 17,115.8 45 Cork and articles of cork 0.7 6.1 6.8 1.1 8.6 9.6 1.8 14.6 16.4

46 Manufactures of straw, esparto or other plaiting materials; basketware & wickerwork

11.5

4.5

16.0

233.5

19.0

252.5

245.0

23.5

268.5

47 Wood pulp and waste of paper or paperboard

293.6 343.2 636.8 1,778.7 2,878.5 4,657.2 2,072.3 3,221.7 5,294.0

48 Paper and paperboard, articles of paper pulp

3,315.4 3,506.1 6,821.5 6,769.0 5,627.5 12,396.5 10,084.5 9,133.6 19,218.1

49 Printed books, newspapers, manuscripts, etc.

883.2 377.2 1,260.4 7,095.1 2,004.8 9,100.0 7,978.3 2,382.1 10,360.4

50 Silk, including yarns and woven fabric thereof

15.2 5.8 21.0 56.6 112.7 169.3 71.9 118.4 190.3

51 Wool & animal hair, including yarn & woven fabric

9.1 15.7 24.7 128.7 351.9 480.6 137.8 367.6 505.3

52 Cotton, including yarn and woven fabric thereof

549.2 455.8 1,005.0 2,278.2 7,310.2 9,588.4 2,827.4 7,766.1 10,593.5

53 Other vegetable textile fibers; paper yarn and woven fabrics of paper yarn

5.0 4.5

9.4

100.9

91.3

192.2

105.9 95.7

201.7

54 Manmade filaments, including yarns & woven fabrics

746.2 599.8 1,346.0 2,905.0 2,821.6 5,726.5 3,651.1 3,421.3 7,072.5

55 Manmade staple fibres, including yarns & woven fabrics

943.8

732.5

1,676.3

4,175.2

4,107.1

8,282.3

5,119.0

4,839.5

9,958.6

56 Wadding, felt and nonwovens; special yarns; twine, cordage, ropes and cables and articles thereof

330.2

204.2

534.5

599.0

965.4

1,564.4

929.3

1,169.6

2,098.9

57 Carpets and other textile floor coverings 79.7 43.6 123.3 216.4 188.3 404.7 296.1 231.9 528.0 58 Special woven fabrics; tufted textile




4

fabrics; lace; tapestries; trimmings; embroidery

132.8 126.0 258.8 311.1 1,102.3 1,413.4 443.9 1,228.3 1,672.2

59 Impregnated, coated, covered or laminated textile fabrics; textile articles for industrial use

193.0

156.2

349.2

674.9

1,785.7

2,460.6

867.9 1,941.9 2,809.8

60 Knitted or crocheted fabrics 518.8 367.2 886.0 294.9 4,333.0 4,627.9 813.7 4,700.2 5,513.9

61 Apparel articles and accessories, knitted or crocheted

495.1 647.9 1,143.0 17,005.0 1,390.7 18,395.7 17,500.1 2,038.6 19,538.7

62 Apparel articles and accessories, not knitted or crocheted

526.1

326.3

852.5

13,664.0

1,845.2

15,509.2

14,190.2

2,171.5

16,361.7

63 Other textile articles; needlecraft sets; worn clothing and worn textile articles; rags

294.8

171.4

466.2

1,350.0

754.9

2,104.9

1,644.8

926.3

2,571.1

64 Footwear, gaiters and the like and parts thereof

571.0 442.8 1,013.8 9,887.2 1,522.6 11,409.8 10,458.3 1,965.3 12,423.6

65 Headgear and parts thereof 21.3 13.1 34.5 279.6 74.9 354.4 300.9 88.0 388.9

66 Umbrellas, walking-sticks, seat-sticks, riding-crops, whips, and parts thereof

2.6 2.5

5.1

22.6

61.7

84.3

25.2

64.3

89.5

67 Prepared feathers, down and articles thereof; artificial flowers; articles of human hair

4.2 4.1

8.3

354.5

55.5

410.0

358.7

59.6

418.3

68 Articles of stone, plaster, cement, asbestos, mica or similar materials

554.7

475.1

1,029.7

649.8

1,113.1

1,762.9

1,204.5

1,588.1

2,792.7

69 Ceramic products 424.1 402.4 826.5 1,269.1 1,558.2 2,827.3 1,693.2 1,960.6 3,653.8 70 Glass and glassware 1,381.8 1,215.7 2,597.5 2,152.9 2,572.6 4,725.5 3,534.7 3,788.3 7,323.0

71

Natural or cultured pearls, precious or semiprecious stones, precious metals and metals clad therewith and articles thereof; imitation jewelry; coin

3,294.4

4,129.8

7,424.2

22,441.9

29,598.6

52,040.5

25,736.3

33,728.3

59,464.7

72 Iron and steel 5,166.5 4,097.0 9,263.5 4,215.5 36,127.7 40,343.2 9,382.0 40,224.7 49,606.8 73 Articles of iron or steel 4,998.2 4,081.4 9,079.6 7,479.0 16,483.5 23,962.5 12,477.2 20,564.8 33,042.1 74 Copper and articles thereof 4,300.2 4,087.0 8,387.1 6,293.2 8,274.9 14,568.1 10,593.4 12,361.9 22,955.3 75 Nickel and articles thereof 83.5 31.3 114.8 1,667.7 752.9 2,420.6 1,751.1 784.2 2,535.4 76 Aluminum and articles thereof 1,727.3 1,667.0 3,394.2 3,386.7 8,934.0 12,320.7 5,113.9 10,601.0 15,714.9 78 Lead and articles thereof 139.8 123.3 263.1 216.2 1,039.5 1,255.7 356.0 1,162.8 1,518.8 79 Zinc and articles thereof 122.5 91.4 213.9 269.6 961.7 1,231.2 392.1 1,053.1 1,445.2 80 Tin and articles thereof 2,371.0 2,332.1 4,703.1 3,091.3 360.1 3,451.4 5,462.3 2,692.2 8,154.5

81 Other base metals; cermets; articles thereof

29.7 27.5 57.2 281.0 634.9 915.8 310.6 662.4 973.0




5

82 Tools, implements, cutlery, spoons & forks of base metal & parts thereof

786.9

381.7

1,168.6

1,650.7

3,609.7

5,260.4

2,437.6

3,991.4

6,428.9

83 Miscellaneous articles of base metal 854.8 637.4 1,492.2 1,172.8 1,983.6 3,156.5 2,027.6 2,621.0 4,648.7

84 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

42,606.5

27,099.6

69,706.1

91,852.4

118,686.8

210,539.2

134,458.9

145,786.4

280,245.3

85 Electric machinery, equipment and parts; sound equipment; television equipment

58,800.9

53,058.5

111,859.4

190,789.8

168,882.5

359,672.3

249,590.6

221,941.0

471,531.7

86

Railway or tramway. Locomotives, rolling stock, track fixtures and parts thereof; mechanical & electro-mechanical traffic signal equipment

56.4

33.0

89.3

177.0

687.8

864.7

233.3

720.8

954.1

87 Vehicles, (not railway, tramway, rolling stock); parts and accessories

12,435.5

9,277.8

21,713.3

18,901.4

25,061.5

43,963.0

31,336.9

34,339.3

65,676.2

88 Aircraft, spacecraft, and parts thereof 1,784.2 714.5 2,498.7 6,548.9 15,430.1 21,979.0 8,333.1 16,144.6 24,477.7 89 Ships, boats and floating structures 3,602.9 3,985.3 7,588.2 6,433.6 4,263.0 10,696.7 10,036.5 8,248.4 18,284.9

90

Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments/apparatus; parts & accessories

5,587.7

3,613.7

9,201.4

18,463.7

19,691.2

38,154.9

24,051.4

23,305.0

47,356.3

91 Clocks and watches and parts thereof 1,013.1 674.4 1,687.6 1,553.4 3,049.7 4,603.1 2,566.5 3,724.1 6,290.6

92 Musical instruments; parts and accessories thereof

88.3 76.5 164.7 577.8 360.1 937.9 666.0 436.5 1,102.6

93 Arms and ammunition; parts and accessories thereof

12.5 25.7 38.2 35.5 474.5 510.0 48.1 500.2 548.2

94

Furniture; bedding, mattresses, cushions etc; other lamps & light fitting, illuminated signs and nameplates, prefabricated buildings

1,037.4

891.5

1,928.9

8,282.9

2,759.5

11,042.4

9,320.2

3,651.0

12,971.3

95 Toys, games & sports equipment; parts & accessories

491.4 233.7 725.1 2,243.2 1,628.9 3,872.0 2,734.5 1,862.6

4,597.1 96 Miscellaneous manufactured articles 415.4 319.8 735.2 903.9 1,496.9 2,400.8 1,319.3 1,816.6 3,136.0

97 Works of art, collectors' pieces and antiques

55.6 75.5 131.1 189.0 272.9 461.8 244.5 348.4 592.9

98-99

Others 2,364.9 994.7 3,359.6 53,225.8 29,813.6 83,039.4 55,590.8 30,808.2 86,399.0

Total 327,531.8 270,710.4 598,242.2 914,754.6 875,595.5 1,790,350.0 1,242,286.4 1,146,305.9 2,388,592.3





1

Table 5

Top Ten ASEAN Trade Commodity Group, November 2012 (US$ million) Two digit HS

Commodity Value Share to total ASEAN trade

Exports Imports Total trade Exports Imports Total trade

27

Mineral fuels, mineral oils & products of their distillation; bitumin substances; mineral wax

228,086.3 251,335.2

401,530.4 18.4 21.9

16.8

85 Electric machinery, equipment and parts; sound equipment; television equipment

249,590.6 221,941.0

273,577.5 20.1 19.4

11.5

84 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

134,458.9 145,786.4

261,453.4 10.8 12.7

10.9

39 Plastics and articles thereof 37,323.1 35,136.8 65,626.1 3.0 3.1

2.7

87 Vehicles, (not railway, tramway, rolling stock); parts and accessories

31,336.9 34,339.3

57,561.8 2.5 3.0

2.4

40 Rubber and articles thereof 52,563.5 12,735.3 53,638.2 4.2 1.1

2.2

29 Organic chemicals 36,747.3 25,749.9 45,748.1 3.0 2.2

1.9

71

Natural or cultured pearls, precious or semiprecious stones, precious metals and metals clad therewith and articles thereof; imitation jewelry; coin

25,736.3 33,728.3

41,802.3 2.1 2.9

1.8

15

Animal or vegetable fats and oils and their clevage products; prepared edible fats; animal or vegetable waxes

47,256.3 7,211.8

40,376.7 3.8 0.6

1.7

72 Iron and Steel 9,382.0 40,224.7 38,817.1 0.8 3.5

1.6

Top Ten Commodities 852,481.4 808,188.8 1,280,131.

6 68.6 70.5

53.6

Others 389,805.0 338,117.1 1,108,460.

7 31.4 29.5

46.4

Total 1,242,286.4 1,146,305.9 2,388,592.3 100.0 100.0 100.0


Does Liberalization in Trade Matter for Local SMEs? A Theoretical

Discussion

The past quarter of a century has witnessed, among many countries and

across the development spectrum, an unprecedented level of activity in the process

of trade and investment liberalization. Today, the conduct of international trade in

goods and services, either among countries, within regions, or between regions, is

much easier than two or three decades ago. More countries today have undertaken




2

significant trade reforms, and engaged in the process of integrating their economies

with the global economy, than ever before. AMSs (as with many other countries in

the world) are committed to fully adopting a free trade regime. Also, today as

compared to three decade ago, flows of investment (both short-term or portfolio

investments, as well as long-term or fixed investments between

countries/economies) are freer and with minimum obstacles. As portfolio

investment is different than fixed investment in nature, including the impact on the

host economy, liberalization in FDI rather than free-flow portfolio investment, will

certainly have effects on local SMEs.

With respect to trade among AMSs, there is little doubt that international

trade liberalization, in the context of AEC 2015, will generate immense competitive

challenges for individual member states (Dhar, 2008). However, the real impacts of

trade liberalization on the economy of individual member states remain a much

debated and controversial subject. Theoretically, at an aggregate level, the broad

benefits that are generated from an international trade reform include: improved

resource allocation; access to new and better technologies; inputs and intermediate

goods; economies of scale and scope; greater domestic competition; and the

availability of favorable growth externalities, such as the transfer of know-how

(Falvey and Kim, 1992). Raihan (2008) contends that international trade policy

reform works by inducing substitution effects in the production and consumption of

goods and services through changes in price. These factors, in turn, influence the

level and composition of exports and imports. The change of relative price induced

by international trade liberalization causes a more efficient reallocation of resources.

Moreover, international trade liberalization also enables the expansion of economic




3

opportunities by enlarging the market size and the enhancement of the impact of

knowledge spillover.

However, empirical evidence to support the above propositions is far from

conclusive. Feridhanusetyawan and Pangestu (2002) conclude that among the

existing liberalization commitments in the Asia-Pacific region, the implementation of

the two biggest commitments, namely the Uruguay Round and the Asia-Pacific

Economic Cooperation (APEC), would greatly benefit Indonesia. The ASEAN Free

Trade Area (AFTA), including the planned implementation of AEC 2015, on the other

hand, is expected to contribute little to welfare gain for many and especially

developing countries in the region. One explanation is that AFTA creates a

discriminatory trading block in ASEAN, where trade diversion is offsetting the

potential for trade creation. Though, the fear of trade diversion from AFTA is no

longer relevant since most member states of ASEAN have undertaken unilateral

liberalization following the Asian financial crisis in 1997/98.

Pambudi and Chandra (2006) and Hutabarat, et al. (2007), meanwhile,

contribute to the assessments of the implementation of the ASEAN-China Free Trade

Agreement (ACFTA) on the Indonesian economy. The first study highlights a number

of important findings. Firstly, based on the initial implementation of the so-called

Early Harvest Program (EHP), imports of the commodities included in the agreement

(e.g. vegetables, fruits and fish) were increased much faster than the country’s

exports for similar products to China. Secondly, various production costs in the

domestic market were expected to increase significantly. Thirdly, the study also

foresaw the decline of the real gross domestic product (GDP) in both short- and long-

term, primarily because Indonesia was expected to experience trade deficit with




4

respect to these commodities. Some provincial regions of the country were expected

to experience larger losses than others. The study also suggests that, should the

simulation be done on both sides, or where tariffs on imported commodities from

China to Indonesia are eliminated, it is more likely that Indonesia’s losses would be

greater than the current simulation setting would suggest. Furthermore, the second

study concludes with the following points. Firstly, ACFTA benefits Indonesia only on

certain commodities, such as rubber and palm oils, particularly when the study

suggests that Indonesian exports for these commodities increase. At the same time,

however, Indonesia would also expect some losses in other trade commodities vis-à-

vis China, especially rice, vegetables and oilseeds. Secondly, with respect to the AFTA,

the same study argues that Indonesian imports from other ASEAN countries would

increase, while ASEAN market diversification of Indonesian exports declines.

Following the 1997/98 Asian financial crisis and most recently the 2008/09

global economic crisis, the Indonesian government has revitalized the role of SMEs

by positioning them as the engine for export growth. This is especially the case for

manufactured goods, either directly or indirectly through subcontracting linkages

with LEs, including foreign companies operated in the country or by involvement in

regional/global production linkages/supply chains. Now, the key question is, can this

group of enterprises with all their problems play this new role? Or, can Indonesian

SMEs survive amid growing pressure from trade liberalization?

Recent debates among policy-makers and researchers on the subject of SMEs

in developing countries have focused on the ability of such businesses to survive or

sustain their existence amid growing pressure from economic globalization and

global trade liberalization. Some contributors to the debate are skeptical, given the




5

fact that most such enterprises in developing countries are lacking the necessary

resources, particularly technological advancement and skills, to remain competitive

in the global marketplace. There is little doubt that, in the era of trade liberalization,

SMEs in developing countries, including those in Indonesia, can only survive if they

possess the capability for internationalization. This is, indeed, a critical factor that

helps measure their competitiveness in the global market (Long, 2006). The weak

competitiveness of SMEs is a serious obstacle for such enterprises to access both the

international and domestic markets, particularly due to the low capacity of their

products to compete with imported goods.

Theoretically, trade liberalization affects individual local firms, including

SMEs, positively or negatively, in four major ways (Tambunan, 2008). Firstly by

increasing foreign competition: lower or elimination of existing import tariffs, quotas

and other NTBs have the effect of increasing foreign competition in the domestic

market as more and more imported goods and services enter the domestic market.

This is expected to push inefficient, unproductive or uncompetitive local firms to

improve their efficiency, productivity and competitiveness by eliminating

unnecessary cost components, exploiting external economies of scale and scope, and

adopting more innovative technologies and better management practices, or to shut

down. Therefore, the openness of an economy to international trade is also seen in

the increasing plant size (e.g. scale of efficiency), particularly as local firms adopt

more efficient technologies, management, organization and methods of production.

This argument is in line with general theory that suggests size is capable of affecting

export performance of firms positively. The new international trade theory posits a

positive impact of market size in view of economies of scale. It argues that the scale




6

economy provides costs advantages in production, research and development (R&D)

activities and marketing efforts. Export marketing literature, on the other hand,

suggests that LEs have greater resources to gather information on markets in foreign

countries and to face up to the uncertainties that prevail in a foreign market. As a

general hypothesis, therefore, it is more likely for LEs, instead of SMEs, to become

export-oriented firms.

The second way in which trade liberalization affects the development of SMEs

is by lowering production costs due to cheaper imported inputs. Local firms benefit

from lower input costs, thereby increasing their price competitiveness, so they can

compete more effectively in domestic markets against imports and in export

markets. Having said this, the validity of this hypothesis is only relevant under two

assumptions: (1) other competitiveness determinant factors, such as wage (labor

costs) and transportation costs are constant; and (2) many local firms are dependent

on imported inputs because of the absence of domestic production for these inputs,

or trade liberalization pushes prices for imported inputs lower than those made

domestically.

Thirdly, by increasing export opportunities, opening up to international

competition will not only induce increased efficiency in domestic firms but it will also

encourage them to export or it will stimulate more exports from the existing

domestic export-oriented firms. This view is generally supported by results from

many econometric analyses. However, this theoretical view is acceptable with the

assumption that other factors determining the ability of a firm to export, such as

production capacity, labor and energy costs, and governmental regulations, do not

change unfavorably against the SMEs.




7

The fourth way is by reducing the availability of local inputs. Eliminating

export restrictions on unprocessed raw materials will increase exports, at the cost of

local firms. Theoretically, if domestic products achieve better prices abroad than in

the domestic market, it would encourage domestic suppliers to sell more to abroad

than domestically.

As illustrated in Figure 1, the combination of lines (a) (imported goods) and

(b) (local made substitution goods) is the competitive effect of international trade

liberalization. If goods and services produced by domestic firms are less competitive

in comparison to those imported from other countries, domestic firms are likely to be

pushed out of the domestic market. Recklies (2001) stated free or

internationalization of domestic markets for sales and purchasing at least indirectly

influences businesses in the domestic economy. The example is given where the

entry of new competitors (i.e. imported goods and services) into formerly protected

domestic markets, or changes in domestic customers' behaviors or preferences

toward foreign made goods and services, will affect domestic producers of similar

goods and services. Even domestic SMEs only serving local markets with typical local

products, e.g. small restaurants providing traditional foods, will be affected directly

or indirectly by the opening of domestic markets.

Meanwhile, the combination of lines (c) (imported inputs) and (d) (local made

substitution inputs) is the production cost reduction effect of international trade

liberalization. As import tariffs and other NTBs are removed, resulting in cheaper

imported inputs than those produced domestically, domestic production costs are

likely to decline. Line (e), furthermore, is the export opportunity effect of firms. In

this context, domestic firms accrue greater export opportunities from the imposition




8

of an open economic system. Finally, the combination of lines (d) and (f) (local made

inputs sold abroad) is the domestic input scarcity effect of international trade

liberalization. The production cost reduction effect and the domestic inputs scarcity

effect can be put together as the overall supply-side effect, whereas the combination

of the competition effect and the export-opportunities effect can be referred to as the

overall demand-side effect of international trade liberalization. The overall supply-

side effects can be negative if the second effect is greater than the first one;

alternatively, it could be positive if it occurs the other way, or if one effect is fully

compensated by the other.

Figure 1

Four main ways that international trade liberalization affects SMEs

(a) (b)

(c) (e)

(d)

(f)

The impact of international trade liberalization or trade policy reforms on

many countries, including Indonesia, has been examined extensively at the macro

level. However, academic and policy analyses on the impact of trade liberalization on

the continuing existence, or growth, of SMEs in countries joining, or affected, by trade

liberalization remain scant. Only very few field studies or academic papers on the

effect of trade liberalization on SMEs can be identified so far. Many of them were

published in the 1990s. Among them is Lisk (1997) who argued that trade

Domestic

output market

Import Export

market

Local SMEs

Domestic

input market




9

liberalization could have some adverse effects on SMEs development and

competitiveness, at least in the short run. Rapid trade liberalization could lead to a

loss of market share of local SMEs because the products cannot compete in the

domestic market with cheaper imported products that are produced more efficiently.

On the export side, export opportunities of local SMEs could disappear due to lack of

global competitiveness of the enterprises and the economy as a whole.

Malhotra (1997) states that, while, trade liberalization proceeds at the same

time as severe global environmental problems, and the growing awareness of the

threat to the ecosystem, recently there have been more conflicts between

environmental protection and free trade policies. Various international agreements

on the protection of the environment allow a range of trade restraints to be enforced

for environmental protection purposes. Due to the intensive use of eco-labels for

tradable products, more trade barriers emerge for SMEs. Those enterprises have a

limited marketing budget to cover the costs of an eco-label, and do not have the

resources to inform themselves on the often complicated field of different label types.

As compared to LEs, most SMEs in developing countries, especially micro and small

enterprises (MSEs), have no promoter and/or initiator for the application for an eco-

label. May be less for LEs, but for many SMEs, especially MSEs, the technical

requirements of an eco-label are too stringent, the application procedure takes too

much time and managerial resources, and it is too expensive, therefore, nearly

impossible for these enterprises to fulfill.

Hine and Kelly (1997) have sought to identify factors that support and hinder

SMEs in their efforts to globalize through trade, or by involvement in regional/global

production networks. The study divided the factors into three different




10

environments: the internal environment; the external environment; and the strategic

environment. It was found that attitudes, values, perceptions of risk, continuous

learning, managerial and marketing skills, availability of resources (including

financial resources), adjustment of organizational structure, and the availability and

effective use of information, are all significant internal factors affecting the export

success of SMEs.

With respect to the external environment, according to Hine and Kelly,

expanding trade and commercial movements, differences in national values,

language, culture, economic structures, institutions, and histories, the distribution of

wealth between countries, the level of protection (i.e. tariff as well as NTBs policies),

exchange rate policies, red tape and other unnecessary administration procedures,

and multilateral, regional, and bilateral trade policies are all key macro issues

indirectly or directly affecting the ability of SMEs to enter global markets.

With respect to the strategic environment, there are different theories about

what steps SMEs should take to enter global markets. Generally, a firm enters

international markets and develops a competitive position through an incremental

process. For SMEs, it is probably better if they export for the first time via agents

such as trading or exporting companies, or through subcontracting arrangements

with export-oriented LEs, and then when they are good enough to export themselves

it can be done directly. Ramaseshan (1994), cited by Tambunan (2008, 2010, 2014)

also thought the same, that is, in the earlier phase of export activities, SMEs should

use an indirect means of exporting to overcome internal and external limitations.

Other researchers such as Perry and Pyatt (1995), Koch (1995), and Styles (1995),

cited by Tambunan (2010, 2014) suggest that networking, strategic alliances, and the




11

development of a long-term, stable relationship with local LEs, as well as with foreign

firms, are key components to successful SME competitiveness in both domestic and

global markets. Haar (1995), cited by Tambunan (2014), suggests that to compete in

export markets SMEs must have a long-term strategic focus. In similar terms,

Badrinath (1997), cited by Tambunan (2010, 2014) states that SMEs wanting to

increase their global competitiveness, and global market shares, should move from

short-term to long-term business plans. They must have a strong outward

orientation. While Axinn et al (1994), cited by Tambunan (2010, 2014) emphasize

that for SMEs to succeed in international markets they must believe in, and act on,

continuous learning.

In China, Wang and Yao (2002) found that gradual changes in China’s trade

regime toward liberalization in the late 1970s, precisely after the end of the culture

revolution and the death of the communist leader Mao Zedong, led to much

dynamism among Chinese SMEs. Not only have they grown rapidly, but SMEs have

also made a significant contribution to the overall Chinese economy. However,

findings from a much earlier investigation, carried out by Steel and Webster (1991),

cited by Tambunan (2014) who used firm-level data in Ghana, suggests that trade

liberalization squeezes the profit of SMEs as a result of rising input costs, weak

domestic demand and increased competition with foreign firms. Similarly, by using

firm-level data for the 1993-1996 period in Chad and Gabon, Navaretti et al. (2002)

found that the trade reform process, along with devaluation of the currencies in each

country, failed to generate growth for local SMEs. On the contrary, many of these

enterprises were found to have suffered from high input costs.




12

Valodia and Velia (2004) investigated the relationship between international

trade liberalization at the macro level, and its micro or firm-level adjustment effects,

in the South African manufacturing industry. Their findings suggest that there is a

strong relationship between the average firm size and the volume of cross-border

trade. More specifically, they found that more than half of firms that are not engaged

in international trade are SMEs. At the opposite extreme, almost half of the firms that

are involved in both importing and exporting are LEs employing more than 200

workers. It appears that LEs have been more successful than their smaller

counterparts at integrating their manufacturing activities into the global chain of

production (Tambunan, 2008).

In Tamil Nadu, Southern India, Tewari and Goebel (2002) carried out research

on the competitiveness of local firms, and found two interesting facts. Firstly, there is

a considerable variance among SMEs with respect to their competitiveness. Secondly,

those enterprises that are tied to the low-end of the market segments in large urban

or metro areas appear to be the most vulnerable to cheap import competition from

overseas, suggesting that those enterprises are likely finding trade liberalization

burdensome. Ironically, other SMEs that serve similar market niches in rural areas or

in small towns face the same pressures as those experienced by their counterparts

that serve the lower-end of the market segments. Access to intricate, socially-

embedded, distribution networks that link them to rural markets appears to be a

source of strength that non-local competitors find too costly to replicate. In other

words, such socially-embedded distribution networks are the main comparative

advantage that SMEs can count on in competing with cheap imported goods and

services.




13

Latin American countries’ experiences, on the other hand, suggest that

international trade liberalization has an ambiguous effect on SMEs in the informal

sector. A study carried out by Goldberg and Pavenik (2003), argues that while in

Brazil there is not much evidence between trade policies and the development of

these enterprises, a case-study done in Columbia indicates that liberal trade policies

help expand the capacity of SMEs to compete with imported goods and services.

Recklies (2001) found that many typical characteristics of SMEs, which are

independently owned or owned by one person or family, are small in size, have close

relationships to customers and business partners, and simple structures, may lead to

disadvantages and advantages in relation to trade liberalization or globalization.

Disadvantages to firms run by only one person, or a limited number of persons

(mostly family members), are: limited knowledge about all aspects related to running

a business (limited by the experiences and knowledge of the owner/s), difficulties

adapting corporate culture to new situations and challenges, and potential conflicts

between firm objectives and personal objectives. Advantages of this particular

characteristic of SMEs are long-term thinking, stability, no pressure for short-term

success, high identification with the business, a stable culture, and high commitment.

The main advantage of the small size is specialization that is often successful with

niche strategies. Whereas, the disadvantages of this particular characteristic are

limited resources – especially the financial means to finance market expansion or

export activities – and capacity for research and development or innovation that is

crucial for winning global market competitions and manpower, along with a lack of

internationally experienced employees. With respect to close relationships with

customers and business partners, the main advantages are a stable base for further




14

business, an ability to cooperate successfully for mutual advantage and an ability and

willingness to enter partnerships. While the risk of focusing too much on an existing

base of business is also the main disadvantage of this particular characteristic.

Regarding a simple structure, the three main advantages are high flexibility and

adaptability, short reaction times, and cross-functional communication and

cooperation within the organization. But, as Recklies explained, this characteristic

also has some disadvantages, including that a simple structure not being suitable in

some cases, especially for international business activities, which are often complex

in planning and implementation processes, and because of a low willingness to

introduce more sophisticated structures required for business expansion (e.g.

export).

In Vietnam, Kokko and Sjöholm (2004) tried to discover the expectations of

SMEs' owners regarding trade liberalization. The main research questions were the

followings. First, what do SMEs' owners expect from increased trade liberalization or

internationalization? Second, to what extent are Vietnam’s SMEs aware of the

opportunities available in the global marketplace? Third, or is it more appropriate to

talk about risk and challenges from further liberalization of the Vietnamese market?

These questions were raised with a large number of SMEs in various provinces in the

country, and it was found that a relatively low frequency of respondents expected

any benefits from the further liberalization of Vietnamese trade policies. Although

this varied between urban and rural SMEs and by form of ownership (i.e. household,

private, collective, and limited and shareholding). Only about 12% of the sampled

SMEs' owners reported positive expectations, with the limited liability and

shareholding enterprises (the most modern enterprise forms) being the most




15

optimistic. The number of questioned SMEs' owners expecting losses was also

relatively small. Instead, the most common replies were that the sampled enterprises

claimed not to know what further liberalization might mean, or that they did not

expect any notable changes. In particular, rural household enterprises did not have

any clear expectations about the effects of continuing internationalization: over 70%

replied that they did not know what further liberalization might mean. It is therefore

not a surprise that most of the respondents said that they do not take steps to face

increased trade liberalization or internationalization; although, again, the ratio

between those that did and did not take steps, varies between urban and rural and by

ownership form.

According to Kokko and Sjöholm (2004), one reason is likely to be very limited

experience of internationalization: SMEs have typically not been in formal contact

with foreign firms in Vietnam, they do not compete with imports, nor have they been

engaged in exporting activities. Those who do take steps, the most important one

being to reduce production costs, followed by introducing new technologies, training

the labor force, identifying new market outlets, and others. Kokko and Sjöholm also

state that one reason for the lack of clear expectations about continuing trade

liberalization and globalization is that most (if not all) SMEs in Vietnam are not

exposed to foreign competition or exporting activities. Without prior experience of

these dimensions of globalization, it is understandable that many SMEs find it hard to

respond to relatively abstract questions about further internationalization. From the

questioned SMEs, imported goods are not considered to pose much of a threat to

them. Not even Vietnamese state-owned enterprises (SOEs) are considered direct




16

competitors. This suggests that many of the surveyed SMEs believe they are

operating in market niches that are unattractive for larger and more advanced firms.

Overall, the literature discussed above strongly suggests that globalization

and world trade liberalization do matter for SMEs; although there are no definitive

conclusions as to whether the removal of all protective measures and the elimination

of NTBs generate a positive or negative effect, indirectly or directly, on the

development of SMEs. The impact on SMEs may, however, vary by location and

sector or group of industry. It may be true that SMEs in isolated locations, remote

rural areas or those operating in market niches may not feel the impact like those

located in urban areas or cities or those producing tradable goods. But, one thing is

clear that the opening up of the market is increasingly becoming inevitable as

countries in the world are integrating their economies with the global economy.

Consequently, SMEs are faced with challenges because of likely competition in a

more crowded domestic market that is open to both domestic- and foreign-made

goods and services.

Export Performance of ASEAN SMEs

One way to assess the readiness of local SMEs in individual AMSs to face the

AEC 2015 or their capability to compete not only in regional but also in domestic

markets against imported goods supplied by SMEs and LEs from other AMSs, is by

examining the export performance of the enterprises by member states.

Unfortunately, data on SMEs’ exports in some AMSs are either not available or

difficult to verify. All AMSs have databases on their SMEs, but mainly on total number

of units, total employment created and total output generated; not on total volume or

value of exports. So, it is not easy to examine how important these enterprises are for




17

national exports. However, some limited information sources, mainly research

papers and official estimates/assessments, may give some idea about the role of

SMEs in international trade or national export. For instance, based on

Wattanapruttipaisan’s (2005) study, direct contribution made by these enterprises

to total export earnings in Southeast Asian countries was not more than 20%. This

view is also supported by some earlier published literature/reports, such as APEC in

2003, which shows that SMEs in the region contributed less than 30% of direct

exports on average. According to Harvie (2009 SMEs in many Southeast Asian

countries are under-represented in the international trade relative to their role in the

domestic economy.

But, as some of these reports also argue, if indirect exports are also taken into

account, SMEs export contributions could be much larger than these percentages.

This is because SMEs in the manufacturing industry often make up a significant part

of the value or supply chain, and may not be included in the direct export data. It is

also suggested by a report on SMEs in Indonesia from the Asian Development Bank

(ADB, 2002) that the relatively low representation of SMEs in exports, compared to

their larger counterparts, is mainly due to a significant part of SMEs’ exports going

unrecorded because they occur indirectly through international trade networks or

subcontracting arrangements with intermediaries. In Harvie (2004) it is stated that

$SMEs generate about 30% of direct exports, compared to indirect exports, through

supply chain relationships with other firms (mainly LEs), which could rise to 50% of

total trade. Indirect exports take place through merchant exporters, trading houses

and export houses. Sometimes, these indirect exports are also in the form of export




18

orders from LEs, including multinational companies, where SMEs play the role of the

supporting manufacturer, or the supplier of parts, components and sub-components.

Based on various sources of information from some reports as well as some

literature, Table 6 shows current estimates of SMEs contributions to total national

exports in some AMSs. As can be seen, the contributions varied by member states

with Thailand reveals as the member state with the most export-oriented SMEs.

Many factors may explain this variety, such as government supports to exporting

SMEs, infrastructure and logistic which have significant effects on transaction costs

and hence regional price competitiveness of exporting SMEs, access to capital,

technology, skilled manpower, raw materials and information, and, of course, not less

important, level of 'internationalization' of entrepreneurs or owners of local SMEs.

Table 6

Percentage Share of SME in Total Exports in Selected ASEAN, 2000-2013

Country Average Share (%)

Thailand 30-40

Philippines 20-25

Vietnam 20-29

Indonesia 20*/16**

Singapore 16

Malaysia 15-19 Note: * only in manufacturing industry. ** total export

Source: data/information collected from Tambunan (2010, 2014), UN-ESCAP (2010), OSMEP

(2010), and Yuhua (2013),

Long (2006) states that the ability of SMEs to compete with imported

products and to export to some extent relates to their capability for

internationalization. It is also a critical factor measuring regional or global

competitiveness. SMEs’ low global competitiveness can be a serious obstacle for the




19

enterprises to access, not only the regional or international market, but also the

domestic market since their products cannot compete with imported goods.

Unfortunately, little effort has been made, until now, to assess the regional or global

competitiveness of SMEs in ASEAN. Therefore, not much can be said about ASEAN

SMEs; although the above table may give some clues as to the relative

competitiveness of the enterprises in at least some AMSs. The only initiative, so far,

has been from the APEC SME Innovation Center, which conducted a study on SME

global competitiveness in thirteen member economies of APEC in 2006 (APEC,

2006a,b), also covering some AMSs (Figure 2). In this study, competitiveness is

measured through a score index between one (the least competitive) and ten (the

most competitive). It was developed based on a number of factors, including types of

technology used, adopted methods of production and types of products made with

respect to the degree of technology embodied (i.e. low/traditional, medium,

high/advanced). The study revealed that Indonesia has the least competitive SMEs,

with a score below four. Moreover, according to this study, Indonesia also recorded

the least amount of funding for technological development, which was below 3.5 in

the ten scale index; while, technological upgrading is an important determinant

factor for competitiveness.




20

Figure 2

SME Competitiveness in Selected APEC Economies

Source: data collected from APEC (2006a).

Conclusions

No doubt that liberalization of trade and investment such as in the case of AEC

2015 on one hand will create greater market and production opportunities and, on

the other hand, big challenges for any local SMEs in all AMSs. This paper is not an

empirical study but merely a theoretical paper which suggests that there are two key

channels or markets through which the implementation of the AEC 2015 will affect

local SMEs, namely output and inputs markets. The effects can be in the form of

opportunities but can also become threats for their long-term growth or exist. The

key challenge for local SMEs with respect to the implementation of the AEC 2015 is

how they can make the effects to become their opportunities, and that will depend to

a larger extent on themselves, i.e. their readiness, and to a lesser extent, appropriate

government supports.

0 1 2 3 4 5 6 7 8 9

Hongkong-China

USA

Chinese Taipei

Australia

Canada

Singapore

Malaysia

Japan

Thailand

Philippines

Korea

China

Indonesia




21

Thus, every individual SMEs in all AMSs certainly will face a great challenge,

namely can they successfully compete not only in their own domestic markets

against imports but also in ASEAN market. For Indonesia, for instance, can local SMEs

in Jepara (the Central Java province) producing wood- or rattan-based furniture

compete with imported furniture made by SMEs in Viet Nam or can they export their

furniture to markets in Myanmar? If not, then it means the implementation of the

AEC 2015 will turn out to be a serious threat in the form of losing domestic market

shares.

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24

The SMEs during Economic Slowdown in Poland.

The Experiences from the Latest Global Financial

Crisis.

Anna Bąkiewicz

University of Social Sciences,

Warsaw, Poland


Abstract

The paper explores the reaction of small and medium enterprises in Poland to the

latest economic slowdown. In order to show some regularities that occurred in the way

the small businesses responded to the crisis numerous studies that represented different

perspectives and methodologies are summarized in the paper. The experiences of Poland

provide some convincing evidence that the resistance to the negative external factors of

particular subsectors of the SMEs depends on the specific futures of small businesses.

Moreover, it becomes evident that conservative business strategies adapted by the

majority of the SMEs make the later more resistant to the crisis. Generally, the results of

the study stand in opposition to the popular view in which small businesses are identified

with dynamic entrepreneurship and development.

Keywords: small and medium enterprises, global financial crisis

JEL codes: G01, L21, L26, O12

Introduction

The latest financial crisis initiated by the collapse of Lehman Brothers Bank

in September 2008 changed the external conditions of business operations. It is a

universal truth that the effects of macroeconomic turbulences for the companies

could be different and some of the businesses would just stay in a market, some of

them might even get stronger and some might fail to survive. The final effect

would be an outcome of many determinants, both external e.g. the strength and

scope of the macroeconomic changes, and internal ones, such as the features of





25

individual businesses and their resistance to macroeconomic shocks. In particular,

the reaction to the change of the exterior conditions could depend on the size of a

company and special futures related to this. And, it is generally accepted that

smaller businesses are more vulnerable to the influence of external factors than

larger companies as the later have more power to influence the environment they

operate in (Bąkiewicz, 2010).

The activities of small and medium-size enterprises (SMEs) have been

intensively studied for many years. The examinations have been made both within

the framework of development studies (from the perspective of economic growth,

income and employment generation), as well as the management studies (with the

focus on the specific character of small organizations) (Bąkiewicz, 2010). The

SMEs have been usually analyzed during "normal" settings, which is the time of a

relatively stable economy. Some studies only refer to the periods of economic

instability, crisis or slowdown. The later are certainly inspiring, if only because the

research of companies during economic crisis can be an opportunity to capture

the specificity of these businesses and their particular role in the economy

(Steinerowska-Streb, 2011).

The aim of the following study is to enrich our knowledge on the factors

that determine the reaction of SMEs to economic crisis. Picking up the issue is also

an attempt to find out if the crisis could be an opportunity for “creative

destruction” and what mechanisms that occur during the crisis, stimulate the

development of companies. And, the advancing of our knowledge on the specifics

of SMEs is the very basic objective of our investigation. The case of Poland as a

"green island" - the only economy in Europe which throughout the period of




26

economic downturn had a positive rate of growth is used here as an interesting

and informative case. Previous studies have already provided a glimpse of the

changes that took place in the non-financial enterprise sector in Poland during the

latest global financial crisis (Bąkiewicz, 2015). We know that the sector of SMEs in

Poland as a whole coped pretty well with the economic slowdown and after rather

deep but short-term decline, they quickly and strongly returned to the path of

dynamic growth.

There are many questions related to the issues mentioned above:

1. What specific features of SMEs are important for their reaction to the external

shocks?

2. Which of the characteristics make the SMEs resistant to the economic crisis?

3. Which of the typical attributes of the SMEs make them especially susceptible to

the slowdown?

4. What changes that occur during the crisis are especially harmful for the SMEs?

5. What strategies are adopted by the SMEs in the face of the crisis?

6. What are to results of the adaptation measures taken by the SMEs?

And, the present study aims at answering at least some of the questions.

There are some premises to say that the resilience of SMEs to the crisis is

determined by the specific characteristics of these companies, including first and

foremost the priority to survive and the conservatism associated to this. With such

a conservative approach to the economic activity the SMEs might be more flexible

and adapt quickly to fluctuating market conditions, which could then result in

their special role in balancing economic and social development during economic

turbulences. In other words, as we might be rather more inclined to argue that the




27

sector is full of enterprises oriented towards tradition and conventional practices

the above thesis goes against the popular wisdom stressing entrepreneurship and

innovativeness of the SMEs.

The subsequent research is based on the latest statistics and reports of

financial institutions, case studies, interviews and observations made by the

author. The analysis is conducted at the sectoral level of particular size classes of

the companies. Performance of individual businesses does not have to be

consistent with the results of the entire sector.

The paper is organized as following. Section 1 outlines basic theoretical

issues related to the determinants of the development of small and medium

enterprises and the specificity of the SMEs. Then we present the picture of the

SMEs in Poland with special focus on the changes that occurred during the latest

global financial crisis. Next, in the empirical part of the paper we review the

results of our investigations of the sources of the SMEs competitiveness during the

economic slowdown. In conclusions, both the outcomes of our study and possible

further steps are discussed.

The Determinants of the SMEs Development – Internal and External Factors.

Following the very basic ideas of marketing approach (Kotler, 2012) to the

issue we can offer the following set of determinants of the operation of any

company:

1. internal potential - microeconomic factors: the tangible assets, level of

technology, product quality and trademark return on sales, cooperative




28

relations, scientific and technical progress, staff and management skills,

entrepreneurship, and so on.

2. external conditions - macroeconomic settings: supply, demand, inflation,

regulation, economic growth, socio-cultural features, technological

development, tax system, etc .;

Internal factors - material and intangible assets are those for which the

company has the ability to modify. With the heterogeneity of the internal

characteristics of any company this is an entrepreneur who can be regarded as a

synthesizing factor because he/she is responsible for the entire operations of the

company. In other words, an entrepreneur is the most important element of a

business venture that shapes the effective and efficient management of available

resources. Within this approach we can define business as a set strategic

resources owned by a company and the ability to use it in order to take effective

action in response and reaction to the changes and transformations taking place in

the external environment.

Every company operates within certain environment that determines its

activity. From the company’s perspective the environment is mostly defined by

factors independent of the company. In other words, a company has a limited

impact on external conditions it operates in. Companies always operate in the

environment shaped by global economy and within national economy. They

operate in a specific region, at the local market and in a branch. All those platforms

generate both opportunities and threats. Moreover, the complexity of the external

settings is magnified by the increasing significance of technical, cultural and

political factors. The growing volatility of the environment poses additional




29

difficulties for businesses that are forced to adapt to external conditions. Due to

the complexity and variability of the external environment, companies are

increasingly less able to influence it (Borowiecki, 2010). As we want to find out the

regularities that occur during the latest global financial crisis the issue of the

external turbulences becomes especially important. The crisis and the dramatic

deterioration of the operation is a particular challenge.

The activities of the enterprises can be evaluated from the following

perspectives:

1. microeconomic/short-term perspective: the ability to operate effectively and

to maximize profit and market share;

2. macroeconomic/long-term perspective: the ability to generate employment,

value added and income.

Both perspectives are interrelated as the results of short-term operations

determine long-term development and the later enables the growth of short term

efficiency. As far as the specificity of the SMEs is concerned it is has been stated

that both from micro- and macroeconomic perspective small and medium

enterprises have many important features (Bąkiewicz, 2010; Michalczuk, 2009).

And, the majority of the literature on the SMEs is quite enthusiastic as far as the

efficiency and the role in the economy of the sector are concerned (Gibb, 2000).

The identification of the discriminative impact of the external environment on the

SMEs is the base for numerous recommendation for institutional support

(European Commission, 2012; OECD, 2009). The promotion of the SMEs is to

compensate weaker position of small organizations in a market and to mobilize

their positive impact on the economy.




30

On the other hand, there are quite a few studies that point at the

weaknesses of the small business both from the point of view of their

development potential and their impact on the economy. They mostly point at

poor employment conditions in the SMEs, lower wages, poor innovativeness of the

majority of micro and small enterprises, low exports potential and high sensitivity

to the negative impact of external factors (see eg. Bąkiewicz, 2010, 2012a;

Matejun, 2007; Piasecki, 1998). Poor human capital and managerial qualifications

together with high barriers to the access to information are identified as one of the

most important weaknesses of small organizations (Dominiak, 2005). As those

factors have direct impact on the possibility of acquiring customers and making a

commercial success, so they determine the survival and development of a

company. They might also put into question the positive impact of the SMEs on the

overall economic system.

As we deal with the reaction of the SMEs to the financial crisis, one thing

seems to be particularly important here - the availability of external financing.

Many studies stress the importance of the financial barrier for the development of

the SMEs. Among the most stimulating is the research made by Klein (2014) that

is based on the premises that the SMEs have especially limited access the external

financing. In particular, during the financial crisis the credit supply is being

strongly restricted by the banking sector so the small businesses have poor

settings to cope with the crisis and to restore their dynamics. And, the conclusion

made by Klein is that the financial crisis is especially harmful for small businesses

and the later hinder the economy to get out of the crisis.




31

The above issue is related to the overall problem of SMEs’ external

financing. The theory of agency offers here quite promising framework for the

examination of the issue (Barney and Ouchi, 1986). The agency costs in this case

relate to the relations with potential borrowers. In particular, Petersen (2004)

found a long-term tendency of banks to concentrate on the relations with the

borrowers based on „hard” information, mostly numerical, that can be easily

standardized and recorded. During “normal” times this tendency induces banks to

prefer as their borrowers the bigger firms as the later have better organized

bookkeeping than smaller firms. This tendency would discriminate smaller

establishments and make their access to credit more difficult (Garcia-Appendini

2011). But, other studies found that during economic slowdown when the

economic conditions change over the above tendency does not operate (D’Aurizio

et al., 2014). In those special circumstances the reduction of the supply of credit

affects all the companies, but the limits hit bigger companies harder than smaller

ones. It comes from the observation that in the period of high economic

instabilities when the extra attempts are made by banks to reduce the risk

involved in credit provision the role of “soft” information, and gathered informally

within direct contacts with the companies becomes more important for the

creditors. It then effects in better access to credit for smaller companies. It relates

to the smaller agency costs assigned to the SMEs (Presbitero et al., 2014).

All the above contradictive statements on the development potential of

SMEs together with the great expectation concerning the functioning of SMEs in an

economy make the research on the reaction of small businesses to the economic

slowdown quite an encouraging and challenging task.




32

The SMEs in Polish Economy

According to the law of 1999, the enterprise sector in Poland is divided into

four size categories (Table 1). The definition takes into account both employment

and turnover limits and meets the EU standards.

Table 1

Definition of SME in Poland.

Employment Turnover

Micro 0-9 up to 2 million Euro

Small 10-49 2 - 10 million Euro

Medium 50-249 10 - 50 million Euro

Source: EUROSTAT (2015)

The statistics of the enterprises of different size show that the majority of

firms in Poland are very small ones (Table 2). More than 95% of enterprises

employ less than 10 workers. Small enterprises account for 3.56% of enterprises

and medium firms constitute almost 1%. Large enterprises make up only 0.19% of

enterprises. As in any other economy, in terms of numbers SMEs predominate in

the business sector in Poland. The shares of SMEs in employment and value added

are visibly smaller than their shares in the number of enterprises. SMEs employ

less than 70% of total labor force in non-financial sector and produce slightly

more than half of value added. This is consistent with the universal rule that TFP

(total factor productivity) in SMEs is lower than the one in LEs (Bąkiewicz, 2010).




33

Table 2

Size structure of enterprise sector in Poland and EU, 2015 (per cent). 1

Size class (employment)

Number of enterprises Number of employment Value added Poland EU-28 Poland EU-28 Poland EU-28

Micro (0 – 9)

95.27 92.29 36.62 28.86 14.89 21.5

Small (10 – 49)

3.56 6.46 13.80 20.69 14.59 18.28

Medium (50 – 249)

0.98 1.05 18.73 17.4 20.89 18.55

Large (250+)

0.19 0.2 30.85 33.05 49.62 41.67

Total 100 100 100 100 100 100 SMEs 99.81 99.98 69.15 67.95 50.38 58.33

Source: EUROSTAT (2015)

The Macroeconomic Symptoms of the Global Financial Crisis

The signs of the global financial crisis have been well described in the

economic literature (Bourke, 2014; Steinerowska-Streb, 2011). The key

macroeconomic developments since 2008 were observed in the area of finances,

production and demand. It was manifested by the drop of gross domestic

production, employment and income. It was also accompanied by the sharp

decline in gross capital formation (housing, structures, plant and equipment) and

much stronger growth in exports of goods and services than final domestic

demand in most EU economies.

The economic slowdown changed the business environment through the

inhibitions or declines in consumer and government spending, increased

competition, the reduction of the supply of external financing and the

1 Eurostat’s structural business statistics cover the ‘business economy’, which includes industry,

construction and many services (Sections B to N and Division 95); financial and insurance activities

(Section K) are treated separately within structural business statistics because of their specific nature and

the limited availability of most types of standard business statistics in this area. As such, the term ‘non-

financial business economy’ is generally used to refer to those economic activities covered by Sections B

to J and L to N and Division 95 and the units that carry out those activities. Structural business statistics

do not cover agriculture, forestry and fishing, nor public administration and (largely) non-market

services, such as education or health (EUROSTAT, 2015).




34

deterioration in of financial liquidity of many companies related to this

(Czerwińska-Lubszczyk and Michna, 2013). The funds available to companies for

investments and production growth were significantly reduced. The rise of the

costs of deposits, the deterioration of the climate for investments, loss of

confidence in financial markets were also important for the reduction of the

availability of credit after the collapse of the Lehman Brothers Bank. The rise of

uncertainty in the market forced many banks to tighten the credit risk assessment

criteria. Sharp reduction in the level of economic downturn and rising

unemployment also reduced demand for goods and services. It all resulted in the

deterioration of the financial outcomes of the companies and increased rate of

bankruptcy (Euler Hermes 2009). So, it is not surprising that even in Poland,

where the financial crisis was relatively mild, almost ¾ of the companies

perceived the crisis as an important factor that negatively affected their

operations (Zelek, 2011).

The depth of the economic downturn contrasted sharply among EU

Member States. Among the East-European economies Hungary and Romania were

especially seriously hit by the crisis, and the other countries of the region as Czech

Republic and Slovakia, were hardly touched by the economic slowdown. For

Poland the manifestations of the crisis were rather slight and the economy

maintained the positive rate of growth over the entire period of the slowdown

(GUS, 2014). GDP growth in Poland dropped from more than 6% in 2006 and

2007, 5,1% in 2008, to 1,6% in 2009, 3,9% in 2010, 4,5% in 2012, 2,0% in 2013

and 1,6% in 2014. More, domestic demand (adjusted for inflation) was higher in

2013 than in 2008 in only a handful of countries (Germany, Luxembourg, Sweden,




35

Poland, and to a lesser extent, France, Belgium and Austria) and the difference was

the highest in Poland (7%) compared to average minus 4% for EU-28. The export

change 2008-2013 was positive in the majority of EU members, with the average

7% for EU-28 and 20% for Poland. Summing up, Polish economy was one of not

many that experienced rather shallow economic decline and fast recovery from

the crisis.

The Performance of SMEs in Poland during the Economic Slowdown.

The statistics show that just before the crisis the dynamics of the SMEs was

significantly higher than in the rest of the economy (European Commission, 2012;

GUS, 2015).2 And, in the very beginning the crisis strongly hit the SMEs and the

later were responsible for the majority of bankruptcies in Poland at that time

(Table 3).

Table 3

The changes in the enterprise sector in Poland during the global financial

crisis, 2008-2015 (2008=100).

Number of enterprises

Employment Value-added Gross investments

Size class (employment)

2009 2015 2009 2015 2009 2014 2009 2011

Micro (0 – 9)

92.75 94.80 94.85 92.60 77.36 96.58 64.45 64.63

Small (10 – 49)

93.05 100.97 96.82 99.94 75.75 116.45 63.47 67.34

Medium (50 – 249)

99.95 91.73 99.51 93.40 81.43 105.12 66.98 70.50

Large (250 +)

98.21 88.80 96.90 92.81 83.00 115.34 68.51 70.92

Total 92.86 94.96 96.62 93.76 80.70 110.07 67.32 70.00 SMEs 92.82 94.98 96.49 94.20 78.63 105.34 65.72 68.77 Source: Bąkiewicz (2015)

2 As we know, this is a part of the long-term trend of the Polish economy that started with the

transformation from the centrally planned economy and leads to being like the structure developed in

high-income European economies (Bąkiewicz 2012b).




36

The data on the number of enterprises, employment, production and investment

that include the de-lamination of the non-financial businesses into four size

classes make an interesting picture of the enterprise sector in Poland during the

economic slowdown. First, the small enterprises recorded the strongest slowdown

in the very first months of the crisis. And, in this sector the recovery was the

fastest one and the final results were the most visible one. In other words, the

economic growth in the longer term was recorded mostly in small enterprises.

And, this reaction of the SMEs to the crisis confirms their big sensitivity to the

changes of external environment.

Second, as far as the large enterprises are concerned, they were the second most

active sector in Poland during the slowdown. The results of the crisis became

visible here with a few months delay and the recovery was then quite intensive.

Although the sector lost much employment in 2009 it then regain the value added

to the pre-crisis level. It might suggest that capital-intensive technology upgrading

in the largest companies took place, so the crisis forced the modernization of the

sector.

Third, the micro enterprises managed to pass the crisis with a visible loss. As we

know, many of them stay in a market regardless the production level or revenue

as they are the only source of employment and income generation (Bąkiewicz,

2015). But, following the development model of mature economies, they lose their

share in production and the crisis seems the accelerate the process.

Finally, the records of medium size companies are rather disappointing. Their lost

quite a lot of employment from 2008 level and did not managed to regain their




37

pre-crisis production level up to 2014. It points at the weakness of this size class

of enterprises in Poland. It contrasts with the developments typical for mature,

high-income economies.

The Specificity of SMEs – Crisis Perspective

As we know Polish economy has coped quite well with the crisis and the

slowdown was rather mild. The final effect was surly a result of a aggregated

reaction of all economic agents, the SMEs among them. In this paper we argue that

the reactions of the SMEs to the global turbulences were determined by the

characteristics of small business. The major features of the SMEs from the crisis

perspective are presented below.

External financing in the SMEs during global financial crisis

The sharp reduction of the availability of external financing is the very first

symptom of the financial crisis that one may call over. The impact of this factor

depends on the company’s demand for external financing and scale of the drop of

supply of external funds. As far as the first factor is concerned the SMEs in Poland

use any external financing to a lesser extent (60.1% in 2010) than larger

companies (71.4%, respectively) (PARP, 2013) and the leasing is the most popular

form of external financing used by the SMEs in Poland. As far as the demand for

credit for investments is concerned ¾ of the SMEs in Poland use their own

finances only. The structure of finances in Polish SME only slightly differs from the

EU average (Table 4). A clear difference appears only in the proportion of

companies that use external financing only. It may be associated with a significant

share of EU structural funds in the financing of Polish enterprises.




38

Table 4

Finances of the SMEs, Poland and EU average, 2009 (per cent).

Sources of financial capital Credit applications Own only

Own and external

External only

With other sources

Not submitted Fearing refusal

Lack of own funds

Other reasons

EU 27 16 31 28 22 7 39 30 Poland 13 27 41 19 8 43 29 Sources: GUS (2011), European Commission (2009)

According to the study made by National Bank of Poland (NBP, 2009) the

majority of the owners of the SMEs are anxious to use external financing. Bank

credit is usually seen by them not as a chance to develop a business but as an

eventual rescue at risk of bankruptcy. More, the loans are regarded as costly and

time consuming source of funds. That is why the majority of the managers of small

business in Poland has any experience in applying for credit or even subsidy.

Paradoxically, the better the company’s condition the bigger its knowledge about

the possibilities of external financing and the higher its involvement in external

financing.

The structure of financing seems to reflect the overall strategy of the

majority of SMEs in Poland (IWI, 2009). Namely, the majority of them operates

according the conservative strategy, does not take risky actions, innovate or make

dramatic changes of their operations (Orłowski et al., 2009; Dominiak, 2005). As a

result, a typical SME in Poland is not engaged in risky financial operations, its

external liabilities are small and its dependency on external financing is not

significant one (IBDPP, 2009). Such a cautious approach might reduce a dynamic

influence of SMEs on the economy, but it can reduce the danger of bankruptcy




39

under economic downturn and still have a stabilizing effect on the economy in the

turbulent times.

As far as the availability of credit during the financial crisis in Poland is

concerned in 2008 during the first wave of the crisis the banking sector reduced

the supply of credit sharply and lifted their expectations concerning guarantees

and formal requirements. The data on the value of corporate loans in Table 5 show

that in 2009 compared to 2008 the businesses lending fell by more than 5%. The

large enterprises faced much sever reduction of credit (over 12%) while the value

of loans to SMEs increased by 1.5%. The reduction of credit to large enterprises

was recorded in 2010, too, but the drop was not as big as the year before. The

increase of loans to SMEs in two subsequent years was very high and almost twice

exceeded the growth in loans to large enterprises. And, the data show that

restriction on bank lending at the beginning of the crisis was much more focused

on large enterprises. Small businesses also experienced the deterioration of

external financial conditions, but too much smaller extend. As we can see, the

availability of credit during crisis for companies of different size in Poland is not

consistent with the statements Klein (2014) regarding the availability of funds in

the corporate sector in crisis conditions.

Summing up, weak dependence on external financing of the SMEs in Poland and

moderate only and temporary worsening of financing conditions make the direct

impact of financial factors on the SMEs operations rather insignificant. More, there

are premises to say that the experiences of small businesses in Poland are in line

with the records of the Italian SMEs during the economic turbulences. In the latter

case rising instability in financial markets during the crisis made the banks more




40

sensible to informal “soft” information that in turn made small business more

attractive as a lenders (D’Aurizio et al., 2014).

Table 5

Credit for the enterprises in Poland, 2008-2013 (million PLN and per cent).

Year

Value of total credit (million PLN)

Change of the value of total loans (per cent)

Total SMEs LEs Total SMEs Les 2008 233,3 125,3 108 2009 222,1 127,2 94,9 -5,27 1,5 -12,13 2010 219,7 127 92,7 -1,08 -0,16 -2,32 2011 264,5 159 105,5 20,39 25,2 13,81 2012 272,3 164,9 107,4 2,95 3,71 1,8 2013 278 163,9 114 2,09 -0,6 6,14 Source: UKNF (2014)

Domestic versus external market for the SMEs

Aggregated demand is one of the basic factors that determine the level of

production. In case of Poland during the global financial crisis the drop of demand

was recorded in exports mainly and the changes of domestic demand were rather

small (Table 6). More, the drop of exports in Poland in 2008 compared to the EU

average (12%) was not very big and in 2009 the growth of exports was recorded.

In the 2nd quarter of 2009 only the drop of domestic demand in Poland occurred.

Though the initial decline of demand, the upward trend has been maintained.

Table 6

Domestic demand and exports change in Poland, 2008-2009 (per cent).

I Q 2008

II Q 2008

III Q 2008

IV Q 2008

I Q 2009

II Q 2009

Domestic demand 6,4 6,3 5,0 2,9 0,9 -1,4 Exports growth 0,0 -0,8 -0,1 -0,2 0,9 2,9 Source: GUS (2015)




41

The impact of two basic components of demand on the enterprises depends

on the structure of their market – domestic versus foreign one. As the data in

Table 7 show, the internationalization of the enterprises in Poland presents

universal regularities in which the smaller the enterprises the lower is the

propensity to export. The share of small enterprises in exports in Poland is

approximately ¼, that is much less than their share in employment and

production. In other words, for the SMEs in Poland the domestic demand is much

more important as a determinant of the level of production than external demand.

Many studies confirmed that the local demand and the level of living of the local

population is the most important factor here (Wach, 2007). The SMEs in Poland

are strongly represented across all sectors with the exception of financial services

and capital-intensive sectors like energy and cement production (see figure

below). The VA share of Polish SMEs is especially high (above 50%) in

construction, retail trade, hotels, restaurants and property administration. And,

the above mentioned regularity is the strongest among small businesses operating

on retail trade and services, so the large part of the SMEs.

So, we can explain good records of the SMEs in Poland during the latest

financial crisis at least partially with the low level of internationalization of the

sector. In other words, their concentration on domestic market helps them to pass

the crisis rather smoothly and it may also explain the relatively rapid return of

small business to the growth path.




42

The perception of the crisis by the SMEs and their strategic response

As the study made by Kaliszczak and Urban (2009) shows 1/3 of the SMEs

have not taken any special action during the economic slowdown. The actions, if

any, concentrated on costs reduction (41% of companies that make any special

steps) and investments’ cuts (14%). It means that the majority of the SMEs resign

from using the crisis to modernize. The other study displayed that almost a half of

the entrepreneurs in Poland regards crisis as a chance to develop their businesses

(Table 8). SMEs are more active towards crisis than the micro ones. The other

studies made by PKPP Lewiatan and Deloitte (2009) and WOG (2011) suggest also

the modernization tendency to be greater the larger the company.

Table 7

Internationalization of enterprises in Poland, 2007-2011 (per cent).

Size of employment 2007 2008 2009 2010 2011 Importers (per cent of enterprises) Total 6,0 5,4 5,3 5,2 7,1 0–9 4,5 3,6 3,5 3,4 5,4

10–49 37,7 41,8 39,2 39,6 39,2

50–249 55,8 59,8 58,5 57,4 57,3

> 249 86,9 90,2 87,2 88,2 89,1 Exporters (per cent of enterprises) Total 3,4 3,3 3,6 3,5 3,9 0–9 2,2 1,8 2,1 2,0 2,6

10–49 28,4 32,0 32,1 32,4 28,6

50–249 43,9 47,7 48,6 47,5 45,0

> 249 64,3 69,1 66,1 66,3 66,9 Exports as a share of total sale Total 13,4 13,1 13,7 14,6 15,2 0–9 3,3 3,0 2,9 3,2 3,1 10–49 7,3 6,4 7,6 8,4 8,0 50–249 10,8 10,4 10,7 11,3 12,3 > 249 20,3 19,1 18,8 19,1 20,2 Share of SMEs (10+) in exports 26,8 26,5 27,3 26,3 25,7

Source: GUS (2015)




43

Branch structure of enterprises of different size in Poland, 2012.

Source: ECORYS (2013)

Table 8

The attitudes towards economic crisis by the entrepreneurs.

Acceptance of the statements in per cent The enterprises Micro Small Medium

During the economic crisis a company must follow its precise plan of action. 41 52 63 The way my company operates during the economic crisis depends only on the steps made by the company. 52 49 41 I am optimistic as far as the future of my business is concerned and I believe the economic situation will improve soon. 65 68 59 I am afraid my company will go bankrupt if the currents economic crisis last a little bit longer. 19 17 14 Crisis can be a good opportunity for searching new chances to develop my business. 46 50 51 During the economic crisis a company should aim to survive and do not invest. 37 35 23 I am so concentrated on the current problems of my business that I do not have time to think about development. 21 26 16 Source: Orłowski et al. (2010).

Poland scores above the EU average as far as entrepreneurship is

concerned. Self-employment rate in Poland in 2010 was 18% compared to 14% in

EU. 14% of adults in Poland in 2009 have started their business or were taking

steps to start one, compared to 12% in EU (European Commission, 2012). But, the




44

studies concerning the organization and the controlling of the small businesses

give rather poor picture of the managerial qualifications. Study by Kaliszczak and

Urban (2011) showed, the overwhelming majority of the SMEs do not have any

procedures to deal with the deterioration of the macroeconomic situation. The

medium businesses and exporting enterprises only are better prepared for the

economic slowdown. And, more than ¾ of the entrepreneurs have any long-term

strategy of their business development. They mostly concentrate on everyday

duties that are regarded as so time consuming that there is no time left for

planning. They - as a rule - do not see the need to build comparative advantage as

they concentrate on short term financial outcomes. The strategies for building

relations with customers and employees are very rare. The importance of human

capital in a company is manifested by the attempts to maintain employment in

times of crisis rather that to build human capital as a routine operation. The plans

if any concentrate on market penetration (39% of the SMEs that have formal

strategies) and diversification of production (34%) rather than on cost

optimization or strategic alliances. They are based on intentions and do not

contain precise steps that are to lead to the aims pursued. One could also take into

consideration the fact that the SMEs in Poland are the less innovative in European

Union (18 per cent of the SMEs in Poland were innovative ones in 2006-2008

compared with 75% in Germany at the same time (PARP, 2013).

The response of the SMEs to the deterioration of the external conditions is

a consequence of the perception of its significance by the entrepreneurs, too. As

far as the latest global financial crisis is concerned more than half of the SMEs

owners were quite optimistic about the economic situation in Poland during the




45

first wave of the crisis (BCC, 2009). In September 2008 almost ¾ of the SMEs

predicted and increase of revenues, more than 70% expected growing income and

1/3 expected their market share to rise, 40% planned to introduce new product to

the market. They expected better access to external financing, European funds

including reduction of the informal economy, investments and the modernization

of technology. The expectations of entrepreneurs in 2009 in Poland were the most

optimistic in Europe (60% of managers expected an increase of turnover in the

next 2-3 years - such high scores are recorded in Austria and Norway only and the

lowest rates were recorded for Greece and Malta - less than 20%) (European

Commission, 2015). The pessimism of the entrepreneurs in Poland raised in 2010

only and 30% of entrepreneurs expected the economic situation to deteriorate.

The problems were identified mostly in the reduction of orders and revenues.

Even at that time less than 20% of entrepreneurs were afraid of bankruptcy due to

the economic crisis (Euler Hermes, 2011).

The questionnaires made in 2009 showed that many entrepreneurs were

more pessimistic as far as the macroeconomic situation in Poland is concerned as

well the condition of the branch their operate in than the market for their own

products (PricewaterhouseCoopers Polska, 2011). They did not change the

perception of the major barriers of their operations and the competition, taxes and

bureaucracy barriers remained the most important determinants. As research

made by Kaliszczak and Urban (2011) showed for the majority of the

entrepreneurs the intuition rather than market research was the foundation of

their decision making. And it could suggest, that the entrepreneurs were shaping

their ideas concerning the crisis on the basis of the media reports and popular




46

opinions and not their own business experiences. The good records of both

domestic and external demands in case of Poland during the global domestic crisis

seem to confirm the thesis, that for many entrepreneurs the crisis remained a

media phenomenon only. So, paradoxically, the optimistic approach to the

business perspectives could be at least partly explained by the lack of information

that shapes their perception of the chances and threats offered by the market.

And, the awareness of the crisis by the SMEs in Poland could be a result both of the

scale of the economic slowdown and the access to the information by the

entrepreneurs. Such an approach to business development can at least partially

explain quite limited steps undertaken by the majority of the SMEs during the

slowdown.

Conclusions

The SMEs in Poland fared quite well during the global financial crisis. After

a relatively deep but short deterioration, they quickly returned to the growth path.

In general the impact of the economic crisis on the majority of the SMEs was

rather limited. The majority of entrepreneurs did not make any radical changes in

their activities. They usually were concentrated on cost reduction and

investments’ cuts, if any. The search for new markets, products and technology

modernization was observed in a few cases only. They were usually concentrated

on survival rather than on using a chance to modernize and develop.

The modest reaction to the crisis could be at least partially a result of

rather mild slowdown in Poland during the global financial crisis. But, there are

promises to say that the crisis exposes poor strategic thinking among small




47

businesses in Poland as the entrepreneurs in reaction to the crisis would rather

hold their breath for a while to get some time to look at the situation around,

rather than implement hitherto planned corrective procedures. It may be a part of

the problem that the majority of small businesses are run without professional

management, and they lack long term strategy and risk taking procedures.

Generally, the short term perspective that predominates in small businesses

prevents them from using the crisis to modernize. But, on the other hand, such an

conservative approach makes them quite resistant to the external shocks.

At the macroeconomic level response to the crisis, SMEs can be crucial for

determining the role of these enterprises in the economy. Indeed, there are

reasons to believe that the specific features of small businesses are the base for

their stabilizing function in the economy. However, their conservative approach to

risk taking and investments in unstable conditions may limit the role of the SMEs

in innovations and development. All in all, it may mean that – opposite to the

popular view that identifies small business with, entrepreneurship,

innovativeness and dynamics the SMEs would be an economic stabilizer rather

than accelerator. And this is definitely an important issue that deserves further

study.




48

References

Barney, J.B. and Ouchi, W.G. (1986), Organizational Economics, Jossey-Bass, San Francisco.

Bąkiewicz, A. (2010), Strukturalnie aspekty rozwoju gospodarczego, Doświadczenia azjatyckie, Warsaw University, Warsaw.

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51

Entrepreneurship in the Shadow Economy: A

Review of the Alternative Policy Approaches

Colin C Williams

Sheffield University Management School (SUMS),

University of Sheffield

Conduit Road, Sheffield S10 1FL, UK.

E-mail: [email protected]

Abstract

The aim of this paper is to review the various policy approaches that can be used

to tackle entrepreneurship in the shadow economy. To do this, it firstly reviews four

possible policy options, namely taking no action, eradicating shadow entrepreneurship,

moving legitimate entrepreneurship into the shadow economy, or transforming shadow

entrepreneurship into legitimate entrepreneurship. Revealing that transforming shadow

entrepreneurship into legitimate entrepreneurship is not only the most viable option but

also the approach most commonly adopted by supra-national agencies and national

governments, a review is then undertaken of how this can be achieved using either direct

controls, which seek to increase the costs of shadow entrepreneurship and/or the

benefits of legitimate entrepreneurship, or indirect controls that seek to generate a

commitment to compliance and greater self-regulation. How these approaches can be

combined is then reviewed. The outcome is a comprehensive review and evaluation of the

various policy approaches available to policy-makers for addressing shadow

entrepreneurship along with some recommendations regarding the way forward.

Keywords: entrepreneurship; informal economy; shadow economy; tax compliance;

public policy.

JEL codes: E26, H26, J46, O17

Introduction

In recent years, a burgeoning literature has emerged on entrepreneurship

in the shadow economy (Achua and Lussier, 2014; Aidis et al., 2006; Bruton et al.,

2012; Bureau and Fendt, 2011; Kus, 2014; Mróz, 2012; Welter and Smallbone,

2011; Williams, 2006; Williams and Nadin, 2010a). This literature has investigated

not only the prevalence of shadow entrepreneurship (Autio and Fu, 2014;





52

Williams, 2013) and the determinants of its variable prevalence (Dau and Cuervo-

Cazurra, 2014; Siqueira et al, 2014; Thai and Turkina, 2014), but also who

participates (Thai and Turkina, 2014; Williams and Martinez-Perez, 2014;

Williams and Nadin, 2010b; Williams and Round, 2007, 2008; Williams and

Youssef, 2013) and their motives, such as whether they are necessity- and/or

opportunity- driven (Adom, 2014; Adom and Williams, 2012; Maloney, 2004;

Perry et al., 2007; Williams et al., 2009). However, despite this growing

understanding of the prevalence, nature and motives underpinning shadow

entrepreneurship, scholarship is lacking on what is to be done about

entrepreneurship in the shadow economy. The aim of this paper is to fill this gap

in the literature.

To do this, the next section evaluates the range of potential policy options

available for tackling shadow entrepreneurship. Identifying that the consensus is

that shadow entrepreneurship needs to be legitimized, the third section provides

a conceptual framework of the potential policy approaches available. This is

followed in the fourth section by a review of the direct controls that can be used to

legitimize shadow entrepreneurship followed in the fifth section by the indirect

controls that can be used to do so. Rather than treat these direct and indirect

controls as either/or choices, the sixth section then reveals the various policy

approaches that can be adopted which combine direct and indirect controls when

tackling shadow entrepreneurship, namely the responsive regulation and slippery

slope approaches. The seventh and final section then draws conclusions about the

ways forward for tackling shadow entrepreneurship. The outcome is a




53

comprehensive review of the policy approaches and measures available to policy

makers along with some suggestions regarding the way forward.

At the outset nevertheless, entrepreneurship in the shadow economy need

to be defined. Reflecting the strong consensus in the literature, the shadow

economy is here defined as monetary transactions not declared to the state for tax,

benefit and/or labor law purposes when they should be declared but which are

legal in all other respects (Williams and Nadin, 2010a). The working definition of

an entrepreneur meanwhile, is somebody actively involved in starting a business

or is the owner/manager of a business (Harding et al., 2006; Reynolds et al.,

2002). Shadow entrepreneurs are therefore those starting a business or are the

owner/manager of a business engaged in monetary transactions not declared to

the state for tax, benefit and/or labor law purposes when they should be declared

but which are legal in all other respects. The only illicit aspect of such endeavor in

consequence, is that when trading licit goods and/or services, some or all of their

monetary transactions are not declared. Entrepreneurs trading illicit goods and

services (e.g., drug trafficking, gun-running) are not shadow entrepreneurs, but

part of the separate criminal economy (Smith and McElwee, 2013).

Hypothetical Policy Options

Hypothetically, four potential policy options exist with regard to tackling

shadow entrepreneurship. Policy-makers can either choose to: take no action;

pursue the eradication of shadow entrepreneurship; move legitimate

entrepreneurship into the shadow economy; or transform shadow

entrepreneurship into legitimate entrepreneurship. Even if some of these possible




54

policy options might appear a little far-fetched, commentators have advocated

them all in recent decades. Consequently, one cannot reject any of them without

evaluating their implications.

Take no action

A first potential option is for governments to take no action. The rationales

for doing nothing about shadow entrepreneurship are that it is a seed-bed for new

venture creation, a breeding ground for the micro-enterprise system and a test-

bed for fledgling enterprises and therefore no action should be taken. Indeed, a

2012 survey of 595 small business owners in the UK reveals that 20% report that

they traded in the shadow economy when starting-up their business venture, with

64% stating that the main reason for doing so was to test the viability of their

business venture (Williams and Martinez, 2014a,b).

The problem with doing nothing however, is that shadow entrepreneurship

has significant deleterious implications for legitimate entrepreneurs (e.g., unfair

competition), shadow entrepreneurs (e.g., pressure to enter exploitative

relationships with the legitimate sector), customers (e.g., lack of legal recourse if a

poor job is done) and governments (e.g., reduced public revenue) (for a review,

see OECD, 2015; Williams, 2014a, 2015). Until now however, no evaluations have

been conducted of the extent to which such deleterious impacts are valid in

practice. This is a significant gap that needs to be filled in future studies. Despite

this lack of evidence however, the strong consensus of both scholars and policy-

makers is that on balance, the deleterious impacts outweigh any benefits of

shadow entrepreneurship. The consequent consensus is that doing nothing is not




55

a feasible option. Interventions are viewed as necessary. What type of

intervention, therefore, is needed?

Move legitimate entrepreneurship into the shadow economy

A second potential option is to shift legitimate entrepreneurship into the

shadow economy. Although not explicitly argued by any commentators, there have

been policy proposals which err in this direction. Some scholars advocate a de-

regulation of the legitimate sector in order to tackle shadow entrepreneurship

based on the belief that shadow entrepreneurship because of over-regulation in

the market (Sauvy, 1984; De Soto, 1989, 2001). The consequent objective is to de-

regulate the legitimate realm so that all activities are performed in a manner akin

to what is currently the shadow sector, although they would no longer be shadow

entrepreneurship because they would be conforming to the regulations that

remain.

However, several intransigent problems exist with this hypothetical option.

The view is that de-regulation reduces shadow entrepreneurship. The evidence

nevertheless is that decreasing the level of state intervention does not result in a

legitimatization of shadow entrepreneurs but quite the opposite, greater levels of

shadow entrepreneurship (Kus, 2010, 2014; Williams, 2013b, 2014a,b). As such,

this option is not viable. Indeed, few currently advocate such a possibility.

Eradicate shadow entrepreneurship

Another hypothetical option is to eradicate shadow entrepreneurship. If

shadow entrepreneurs are viewed as “rational economic actors” who evade tax so

long as the pay-off is greater than the expected cost of being caught and punished




56

(Allingham and Sandmo, 1972), eradication can be achieved by altering the

cost/benefit ratio confronting those engaged or thinking about engaging in

shadow entrepreneurship (e.g., Grabiner, 2000; Hasseldine and Li, 1999;

Richardson and Sawyer, 2001). This can be achieved by raising the costs of

operating as a shadow entrepreneur firstly, by increasing the perceived or actual

likelihood of detection and secondly, the penalties and sanctions for doing so. In

this “negative reinforcement” approach in consequence, shadow entrepreneurship

is eradicated using “sticks” to punish “bad” (non-compliant) behavior.

However, whether this is practical and desirable is open to question. On the

practicality side, the issue is whether this is effective. Although some studies

reveal that improving detection and/or penalties reduces the shadow economy

(De Juan et al., 1994; Slemerod et al., 2001), others identify that the shadow

economy grows (Bergman and Nevarez, 2006; Murphy, 2005) and thus that “it is

not sensible to penalize illicit work with intensified controls and higher fines”

(Schneider and Enste, 2002: 192). This is because a penalizing approach alienates

shadow entrepreneurs, reducing their willingness to comply and increases the

shadow economy by reducing their belief in the fairness of the system (Murphy,

2005).

It can also be questioned whether eradicating shadow entrepreneurship is

desirable. If shadow entrepreneurship is recognized as a breeding ground for the

micro-enterprise system and a seedbed for enterprise culture, this realm is a

potential asset that needs to be fostered (e.g., Williams, 2006). Eradicating this

sphere will consequently eliminate precisely the enterprise culture and

entrepreneurship that governments wish to nurture. The consequent challenge for




57

policy-makers is to “join-up” their policy approach towards shadow

entrepreneurship with their agendas to foster enterprise culture and

entrepreneurship. Indeed, unless achieved, then governments with each new

initiative to eradicate shadow entrepreneurship will destroy precisely the

entrepreneurship and enterprise culture that they wish to nurture.

Transform shadow entrepreneurship into legitimate entrepreneurship

Rather than take no action, transfer legitimate entrepreneurship into the

shadow economy or eradicate shadow entrepreneurship, a final option is to

transform shadow entrepreneurship into legitimate entrepreneurship (Dekker et

al., 2010; European Commission, 2007, Renooy et al., 2004; Small Business

Council, 2004, Williams, 2006; Williams and Nadin, 2012a,b, 2013, 2014; Williams

and Renooy, 2013). The benefits of doing so vary according to whether legitimate

and shadow businesses, customers or the government, are considered.

For legitimate entrepreneurs and enterprises, transforming shadow

entrepreneurship into legitimate entrepreneurship would stop the unfair

competitive advantage of shadow businesses over those playing by the rules

(Evans et al., 2006; Renooy et al., 2004). It would also enable the business

community to pursue a “high road” rather than “low road” approach by shifting

towards greater regulatory standards on working conditions such as health and

safety and labor standards (Grabiner, 2000; Renooy et al., 2004; Williams and

Windebank, 1998). For shadow entrepreneurs meanwhile, the benefits of

legitimizing are manifold. They escape the pressure to enter exploitative

relationships with the legitimate realm (Gallin, 2001; Williams and Windebank,




58

1998) and achieve the same levels of legal protection as legitimate entrepreneurs

(ILO, 2014; Morris and Polese, 2014). They are also able to secure legitimate

intellectual property rights for their products and processes (De Beer et al., 2013)

and overcome the structural impediments which prevent business growth such as

their lack of access to advice and support as well as capital (ILO, 2014).

For customers, the advantages of legitimizing shadow entrepreneurship

are that such customers benefit from legal recourse if a poor job is done, have

access to insurance cover, enjoy guarantees with regard to the work conducted,

and have more certainty that health and safety regulations are followed (Williams

and Martinez, 2014c).

Finally, the benefits for government of transforming shadow

entrepreneurship into legitimate entrepreneurship are that this improves the

level of public revenue, thus enabling governments to pursue higher expenditure

on social protection and integration projects (Williams and Windebank, 1998). It

also facilitates a joining-up of the policy approach towards shadow

entrepreneurship with the more general policy approach towards harnessing

enterprise culture and entrepreneurship (Dekker et al., 2010; European

Commission, 2007, Small Business Council, 2004).

Summary of hypothetical policy options

This review of the four hypothetical policy options towards shadow

entrepreneurship reveals that the first option of doing nothing is unacceptable.

This would leave intact the current negative impacts on legitimate entrepreneurs

(e.g., unfair competition), shadow entrepreneurs (e.g., the inability to gain access




59

to credit to expand), customers (e.g., no guarantee of health and safety standards)

and governments (e.g., taxes owed are not collected). Secondly, transforming

legitimate entrepreneurship into shadow entrepreneurship is undesirable

because little evidence exists that de-regulation reduces the shadow economy and

third and finally, eradicating shadow entrepreneurship is unacceptable because it

results in governments stamping out precisely the enterprise culture and

entrepreneurial endeavor that they otherwise wish to foster. Transforming

shadow entrepreneurship into legitimate entrepreneurship therefore appears to

be the most viable policy option. How, therefore, can this be achieved?

Policy Approaches towards Shadow Entrepreneurship

To understand the policy approaches available for transforming shadow

entrepreneurship into legitimate entrepreneurship, next table sets out a heuristic

conceptual framework. This distinguishes between direct and indirect controls.

Direct controls seek to transform shadow entrepreneurship into legitimate

entrepreneurship by ensuring that benefits of operating in the legitimate economy

outweigh the costs of working in the shadow economy. This is accomplished either

by using deterrence measures to increase the costs of non-compliance (“sticks”)

and/or by making the conduct of legitimate entrepreneurship more beneficial

(“carrots”). Indirect controls meanwhile, shift away from using “sticks” and

“carrots”, and instead focus on developing the psychological contract (or what

might also be called the social contract) between the state and its citizens in order

to encourage a commitment to compliance among entrepreneurs and therefore

greater self-regulation. Here, each approach is reviewed in turn so as to highlight




60

the measures available for transforming shadow entrepreneurship into legitimate

entrepreneurship.

Typology of policy approaches for tackling shadow entrepreneurship

Approach Method Measures

Direct controls:

deterrents

(“sticks”)

Improved

detection

Data matching and sharing

Joined up strategy

Joint operations

Increased

penalties

Increased penalties for evasion

Direct controls:

Incentives

(“carrots”)

For start-ups

Simplification of compliance

Direct and indirect tax incentives

Supply chain responsibility

Support and advice to start-ups

For established

shadow

entrepreneurs

Supply-side incentives (e.g. society-wide

amnesties; voluntary disclosure; smoothing

transition to legitimization)

Demand-side incentives (e.g. service vouchers;

targeted direct taxes; targeted indirect taxes)

Indirect

controls:

reduce

asymmetry

between formal

and informal

institutions

Change informal

institutions

(values, norms and

beliefs)

Tax education

Normative appeals

Education and awareness raising of benefits of

legitimate entrepreneurship

Change formal

institutions (laws,

regulations and

codes)

Procedural fairness and justice

Redistributive justice

Wider economic and social developments

(e.g., social protection, equality, growth

strategies for quality employment,

entrepreneurship support)

Direct Controls Approach

The conventional policy approach for tackling the shadow economy in

general and shadow entrepreneurship more particularly, is to use direct controls.

As the OECD (2008: 82) summarize, “Combating informal employment requires a

comprehensive approach to reduce the costs and increase the benefits to business

and workers of operating formally”. To evaluate this direct controls approach

therefore, firstly, the use of deterrence measures to detect and punish non-

compliant (“bad”) behavior (i.e., shadow entrepreneurship) is reviewed followed




61

secondly, the use of incentives (“bribes”) that make it easier to undertake and

reward compliant (“good”) behavior (i.e., legitimate entrepreneurship).

Deterrence measures

During the early 1970s, Allingham and Sandmo (1972) argued that the

non-compliant, such as shadow entrepreneurs, are rational economic actors who

evade tax when the pay-off is greater than the expected cost of detection and

punishment. To deter them therefore, the objective is to change the cost/benefit

ratio facing those participating or considering participation in shadow

entrepreneurship (e.g., Grabiner, 2000; Hasseldine and Li, 1999; Job et al., 2007;

Richardson and Sawyer, 2001). When using deterrence measures, this is achieved

by increasing the actual and perceived risks and costs associated with

participation in shadow entrepreneurship firstly, by raising the perceived or

actual likelihood of detection and/or secondly, increasing the penalties and

sanctions for those caught. This is therefore a “negative reinforcement” approach;

it seeks to use “sticks” to punish non-compliant (“bad”) behavior.

A large and expanding body of scholarship nevertheless, reveals that

increasing penalties or the probability of detection does not lead to greater

compliance (Feld and Frey, 2002; Murphy, 2005; Varma and Doob, 1998; Shaw et

al., 2008; Webley and Halstead, 1986). Instead, it raises non-compliance, not least

due to a breakdown of trust between the state and its citizens (Ayres and

Braithwaite, 1992; Murphy and Harris, 2007; Tyler et al., 2007; Williams, 2001).

Indeed, the most telling critique of the use of deterrents is the finding that many

voluntarily comply even when the level of penalties and risks of detection would




62

suggest that they should not if they were truly rational economic actors (Murphy,

2008). Obviously, other factors must be at work engendering this commitment to

compliance beyond the level of deterrents.

Another reason for caution with regard to the use of deterrents is that their

unintended and unwanted broader impacts. As already mentioned, they lead to

one hand of government eradicating precisely the entrepreneurial endeavor that

other hands of government wish to foster. When this is combined with the

recognition that punishing non-compliant (“bad”) actions is not necessarily the

most effective means of changing the behavior of shadow entrepreneurs, the

result has been a questioning of the value of such measures. New measures have

thus emerged.

Incentive measures/“bribes”

Given the goal of transforming shadow entrepreneurship into legitimate

entrepreneurship, rather than eradicating it, a shift has taken place away from

deterrence measures and towards providing incentives to encourage shadow

entrepreneurs to legitimize their endeavor (Small Business Council, 2004;

Williams, 2006). Put another way, rather than punish “bad” (non-compliant)

behavior, measures have sought to reward “good” (compliant) behavior, rather

than taking it as given. When tackling shadow entrepreneurship, and as displayed

in Table 1 above, these measures take two forms.

On the one hand, a range of measures can be introduced that provide

incentives for entrepreneurs at the business start-up stage to establish their

ventures on a legitimate basis. These measures can include the simplification of




63

compliance so as to make it easy to do so, the use of direct and indirect tax

incentives to make it beneficial to start-up legitimately, and the provision of

support and advice to entrepreneurs about how to start-up legitimately.

On the other hand, measures can be introduced that provide incentives for

established shadow entrepreneurs to make the transition to legitimate

entrepreneurship. Such measures can take the form of either supply-side

measures targeting shadow entrepreneurs or demand-side measures targeting

their customers and providing them with incentives to use legitimate rather than

shadow enterprises. Firstly, therefore, supply-side measures that in effect seek to

“bribe” shadow entrepreneurs to make the transition to legitimate

entrepreneurship can be used, such as the use of society-wide amnesties,

voluntary disclosure schemes and the introduction of schemes that facilitate them

to undergo a smooth transition to legitimacy. Secondly, there are demand-side

measures that again in effect “bribe” customers to use legitimate rather than

shadow enterprises when sourcing goods and services. These include the use of

for example service vouchers and targeted direct and indirect tax incentives (see

Williams, 2015).

Indirect Controls Approach

The problem with using direct controls to alter the cost/benefit ratio

confronting shadow entrepreneurs is that they are not only expensive but also

often effective (Alm, 2011). Rather than “bribe” somebody to be compliant for

example, it has been recognized that a more effective approach is to engender a

commitment in them to being compliant so that self-regulate. The result has been




64

a move beyond the use of “sticks” and “carrots” and the adoption of indirect

controls to improve the psychological contract between the state and

entrepreneurs (Alm et al., 1995; Torgler, 2003; Weigel et al., 1987; Wenzel, 2002).

The goal is to engender voluntary commitment to compliant behavior rather than

force entrepreneurs to comply using threats, harassment and/or bribes (Kirchler,

2007; Torgler, 2007, 2011).

To understand the tools that can be used to achieve this, it is first necessary

to recognize that there exists an institutional asymmetry between the laws, codes

and regulations of legitimate institutions and the norms, beliefs and values of

shadow institutions. Shadow entrepreneurship occurs when the norms, values

and beliefs (informal institutions) differ to the laws and regulations (formal

institutions), resulting in what formal institutions deem to be illegal activities

being seen as socially legitimate in terms of the norms, values and beliefs of

entrepreneurs (Williams and Shahid, 2015). To tackle shadow entrepreneurship

therefore, there is a need to reduce this asymmetry between the formal and

informal institutions. This can be achieved either by changing the informal

institutions and/or the formal institutions.

Changing the informal institutions

To change this institutional asymmetry, one approach is to change the norms, values and beliefs of

potential and existing entrepreneurs regarding the acceptability of working in the shadow economy so

that these are in symmetry with the formal institutions. This can be achieved by improving tax

knowledge, using awareness raising campaigns about the costs of shadow entrepreneurship and benefits

of legitimate entrepreneurship work, and normative appeals.




65

Improving tax knowledge.

Educating entrepreneurs about the benefits of acting legitimately is

important if the norms, values and beliefs are to be in symmetry with the codified

laws and regulations of formal institutions. To do this, entrepreneurs require two

types of education. Firstly, there is the need to educate entrepreneurs about what

the current system requires by providing information regarding their

responsibilities. A significant portion of tax evasion is unintentional, resulting from

a lack of knowledge, misunderstandings and a false interpretation of their

responsibilities (Hasseldine and Li, 1999; Natrah, 2013). A solution in

consequence, is to provide greater information to entrepreneurs (Internal

Revenue Service, 2007; Vossler et al., 2011).

Secondly, and more broadly, entrepreneurs also need educating about the

value and benefits of paying taxes in order to prevent intentional evasion by

developing their intrinsic motivation to comply. A solution to reduce intentional

evasion in consequence, is to educate entrepreneurs about where their taxes are

spent by informing them of the public goods and services they receive (Bird et al.,

2006; Saeed and Shah, 2011). Signs such as “your taxes are paying for this” on civil

construction schemes (e.g., new roads) are one way of doing so by conveying a

clear message of where taxes are being spent. Signs in hospitals, schools, medical

centers and on ambulances can also be used in this regard.

Awareness-raising campaigns.

A further means of changing attitudes towards compliance is to raise

awareness by informing either: entrepreneurs of the costs and risks of operating




66

in the shadow economy; potential customers of the risks and costs; entrepreneurs

of the benefits of being legitimate, and/or potential customers of the benefits of

using the legitimate economy. Indeed, the evidence is that such advertising

campaigns are effective and cost efficient. In the UK, an evaluation of the

advertising campaigns run by the tax office reveals that as a result, some 8300

additional people registered to pay tax who would not have otherwise done so,

paying tax of £38 million over three years, providing a return of 19:1 on the

expenditure of £2 million. This compares with an overall return of 4.5: 1 on the

£41 million a year spent on all its compliance work in 2006-07 (National Audit

Office, 2008).

Using normative appeals.

Normative appeals to entrepreneurs to act legitimately are another

potential way forward. Their effectiveness depends in part on the nature of the

appeal made. Chung and Trivedi (2003) examine the impact of normative appeals

on a friendly persuasion group who were required to both generate and read a list

of reasons why they should comply fully and compared with a control group not

asked to do so. The participants in the friendly persuasion groups report higher

earnings than the control group.

Changing the formal institutions

Besides changing the norms, values and beliefs of entrepreneurs in order to

align them with the formal institutions, policy can also seek to better align the

formal institutions with the norms, values and beliefs of society. This is

particularly important in societies in which there is a lack of trust in government,




67

such as due to public sector corruption (European Commission, 2014) or in

societies where entrepreneurs do not believe that they receive back from

government what they expect. Two types of change are required so far as formal

institutions are concerned. Firstly, there is often a need to change internal

processes in the formal institutions to improve the perception amongst

entrepreneurs that there is tax fairness, procedural justice and redistributive

justice. Secondly, there is a need to change the products of formal institutions by

pursuing wider economic and social developments. Here, each is considered in

turn, starting with the changes required in internal processes.

Improving procedural justice.

Procedural justice refers to the extent to which entrepreneurs perceive the

government to treat them in a respectful, impartial and responsible manner

(Braithwaite and Reinhart, 2000, Murphy, 2005; Taylor, 2005; Tyler, 1997,

Wenzel, 2002). This has a significant effect on compliance. If entrepreneurs view

the tax administration as treating them in such a manner, then entrepreneurs are

more likely to be compliant (Hartner et al, 2008; Murphy, 2003; Murphy et al.,

2009; Torgler and Schneider, 2007; Wenzel, 2002). As Wenzel (2006) finds,

compliance was significantly higher among taxpayers perceiving there to be

interactional fairness. Being treated politely, with dignity and respect, being given

a say, and having genuine respect shown for one’s rights and social status all

enhance compliance (Alm et al., 1993; Feld and Frey, 2002; Gangl et al., 2013;

Hartner et al., 2008; Murphy 2005; Tyler, 1997, 2006; Wenzel, 2002).




68

Developing procedural fairness.

Procedural fairness refers to the extent to which entrepreneurs believe that

they are paying their fair share compared with others (Kinsey and Gramsick,

1993; Wenzel, 2004a,b). Entrepreneurs receiving procedurally fair treatment are

more likely to trust the authorities, accept its decisions and follow its directions

(Murphy, 2005). The fairness of the tax system is one of the most important

determinants of whether they do so (Bobeck and Hatfield, 2003; Hartner et al.,

2007, 2011; Kirchgässner, 2010, 2011; McGee, 2005, 2008; McGee et al., 2008;

Molero and Pujol, 2012). Conversely, where there are grievances among

entrepreneurs that they are not receiving fair treatment, non-compliance

increases (Bird et al., 2006).

Enhancing redistributive justice.

Redistributive justice refers to whether entrepreneurs believe they receive

the goods and services they deserve given the taxes that they pay (Kinsey and

Gramsick, 1993; Kinsey et al., 1991; Richardson and Sawyer, 2001; Thurman et al.,

1984). Taxes are the prices paid for the goods and services provided by

government. The question for the moral evaluation of taxes is whether this price

corresponds to the value of these goods and services (i.e., whether it is seen as

“just”), namely whether there is a “just price” (Kirchgässner, 2010). Entrepreneurs

are more likely to break the psychological contract with the state, the less they

perceive the tax system as fair. To achieve commitment, the tax system must be

seen as fair. If entrepreneurs do not receive the goods and services they think that

they deserve given the taxes they pay, then non-compliance increases (McGee,




69

2005). The result is that entrepreneurs need to be educated about where their

taxes are spent. When entrepreneurs do not know, or do not fully understand

what public goods and services are provided with their taxes, then compliance is

lower (Lillemets, 2009). There is thus a need for government to explain how taxes

are spent and to elicit agreement regarding the public goods and services

provided by government.

Changing the products of formal institutions: wider economic and social

developments.

To achieve self-regulation amongst entrepreneurs, it is also necessary to

change the products of formal institutions in terms of the wider economic and

social developments pursued (Vanderseypen et al., 2013; Williams and Renooy,

2013, 2014). Until now, there have been three contrasting theoretical standpoints

regarding what broader economic and social developments are needed to reduce

shadow entrepreneurship.

Firstly, the “modernization” thesis purports that shadow entrepreneurship

decreases as economies modernize and develop and therefore that economic

development and growth is needed to reduce shadow entrepreneurship (ILO,

2012). Secondly, the “neo-liberal” thesis asserts that the prevalence of shadow

entrepreneurship directly results from high taxes, public sector corruption and

state interference and therefore that tax reductions, resolving public sector

corruption and reducing the regulatory burden are required (De Soto, 1989, 2001;

London and Hart, 2004; Nwabuzor, 2005; Sauvy, 1984; Schneider and Williams,

2013). Third and finally, the “structuralist” thesis argues that shadow




70

entrepreneurship is the outcome of inadequate levels of state intervention in work

and welfare. The focus therefore should be less upon transforming shadow

entrepreneurship into legitimate entrepreneurship and more upon introducing

social protection, reducing inequality and pursuing labor market interventions to

help vulnerable groups (Castells and Portes, 1989; Davis, 2006; Gallin, 2001;

Slavnic, 2010; Taiwo, 2013).

In recent years, these competing theories have been evaluated

(Vanderseypen et al., 2013; Williams, 2013a, 2014a,b,c,d; Williams and Renooy,

2013, 2014; Williams et al., 2013a). Analyzing the relationship between cross-

national variations in the level of shadow entrepreneurship and cross-national

variations in the various aspects of the broader economic and social environment

deemed important by each perspective, the finding is that shadow

entrepreneurship is lower in wealthier economies with stable high quality

government bureaucracies and those with lower poverty levels, more equality,

greater levels of social protection, more effective redistribution via social transfers

and greater state intervention in the labor market to protect vulnerable groups.

Combining Direct and Indirect Controls

To tackle shadow entrepreneurship, it is not an either/or choice between

direct or indirect controls. Although most national governments have used direct

controls, especially punitive measures to increase the costs of participating in

shadow entrepreneurship (see OECD, 2015; Williams, 2015a), this does not mean

that the solution is to use either “bribes” or indirect controls. These approaches

are not mutually exclusive.




71

Indeed, a growing recognition has been that even if indirect controls are a

useful and innovative way of transforming shadow entrepreneurship into

legitimate entrepreneurship which could be usefully adopted (Williams, 2014a;

Williams and Renooy, 2013), they are insufficient on their own. Direct controls are

also needed. For example, governments may change the culture of tax offices

towards a more customer-oriented approach and introduce public campaigns to

engender greater commitment to compliance, whilst simplifying regulatory

compliance for business start-ups and introducing incentives for established

shadow entrepreneurs (e.g., amnesties). However, at the same time, and in

relation to those who do not comply, they may also pursue improvements in the

probability of detection and tougher sanctions.

The debate at present therefore is not over whether to use direct or

indirect controls. The emergent consensus is that both are needed. Instead, the

major issue is determining which specific policy measures in each approach are

most effective and what is the most effective way of combining and sequencing

these measures to engender effective compliance. For example, measures to

improve detection through inspections are currently often combined with

campaigns to raise awareness. Tougher sanctions furthermore, often follow

amnesties and voluntary disclosure schemes. However, whether these are the

most effective combinations and sequences are not known. Despite this, two

particular approaches have emerged recently that provide ways of combining

these approaches in particular sequences, namely the responsive regulation

approach and the slippery slope framework.




72

Responsive regulation

Responsive regulation engages entrepreneurs to openly think about their

obligations and accept responsibility for regulating themselves in a manner

consistent with the law. This is an approach that seeks to win their “hearts and

minds” so as to engender a commitment to compliance so that they regulate

themselves rather than need to be regulated by external rules. Nevertheless,

although this approach gives primacy to the use of indirect controls, it does not

exclusively limit itself to such measures (see Braithwaite, 2009).

The Australian Tax Office for example has gone some way to adopting this

responsive regulation approach. In the first instance indirect controls are used to

facilitate voluntary self-regulation, followed by persuasion and only for the small

minority refusing to be compliant does it then use punitive measures (Braithwaite,

2009; Job et al., 2007). Pu another way, this approach is based on a regulatory

pyramid. This sequence’s the measures used from the least intrusive which are

used first to the most intrusive which are employed as a last resort. It is founded

upon the belief that tax authorities do not need in the majority of cases to pursue

coercion to engender compliance. Instead, it commences with the indirect control

measures and only if these do not work, does the level of intrusiveness escalate

until it reaches the policy intervention that elicits compliance. This is founded

upon the recognition that there exists a continuum of attitudes towards

compliance and different policy responses can be therefore sequenced starting

with indirect controls and moving through bribes to sanctions.




73

Whether this ordering is the appropriate combination and sequence is

debatable. Until now, no evaluations of whether this sequencing is the most

appropriate and/or effective means of engendering compliance have been

conducted. Although it seems logically the most appropriate and effective, no

evidence-base currently exists that this is the case.

Slippery slope framework

Another way of combining direct and indirect controls is to adopt the

“slippery slope framework” (Kirchler et al., 2008). This distinguishes two types of

compliance approach, namely voluntary compliance (akin to an indirect controls

approach) and enforced compliance (akin to a direct controls approach).

Voluntary compliance is viewed as occurring where there is trust in the

authorities. Enforced compliance meanwhile is viewed as requiring the authorities

to have power (i.e., the ability to get citizens to do what they were before not going

to do, in the way in which the authorities wish them to do it). When there is

neither trust in authorities and authorities have no power, then shadow

entrepreneurship will be prevalent.

To tackle shadow entrepreneurship therefore, one can either increase the

power of authorities and/or trust in the authorities. The direct controls approach

puts the emphasis on increasing the power of authorities, whilst the indirect

controls approach puts more emphasis on increasing the trust of authorities. In

practice however, these are not mutually exclusive. Both can be used together. The

slippery slope framework does so in order to elicit legitimate entrepreneurship.




74

Wahl et al. (2010) randomly presented participants with one of four

different descriptions of a fictitious country, in which the authorities were

depicted on the one hand, as either trustworthy or untrustworthy and on the

other hand, as either powerful or powerless. Their results reveal that participants

paid significantly more taxes when both power and trust were high. They

additionally revealed that voluntary compliance was highest when the authorities

were both trustful and powerful, while enforced compliance was highest when

authorities were portrayed as powerful, but not trustworthy. This is further

reinforced by two additional surveys of real-world taxpayers (Muehlbacher et al.,

2011a,b). The outcome is that a combination of both greater trust in authorities

and the greater power of authorities are viewed as a potent combination. Based on

this, the suggestion is that pursuing both is the most effective means of tackling

shadow entrepreneurship (Kogler et al., 2015).

Conclusions

This paper has reviewed what might be done to tackle shadow

entrepreneurship. To do this, it has reviewed four possible policy options, namely

taking no action, pursuing the eradication of shadow entrepreneurship, moving

legitimate entrepreneurship into the shadow economy, or transforming shadow

entrepreneurship into legitimate entrepreneurship. This has revealed that doing

nothing would leave intact the current negative impacts on legitimate

entrepreneurs (e.g., unfair competition), shadow entrepreneurs (e.g., the inability

to gain access to credit to expand), customers (e.g., no guarantee of health and

safety standards) and governments (e.g., taxes owed are not collected). There is no




75

evidence, moreover, that de-regulation of the legitimate sector tackles shadow

entrepreneurship, whilst eradicating shadow entrepreneurship would result in

governments repressing and eradicating precisely the entrepreneurial endeavor

and enterprise culture that they otherwise wish to foster. Transforming shadow

entrepreneurship into legitimate entrepreneurship is thus revealed to be the most

viable policy choice.

To show how this can be achieved, this paper has revealed how either

direct controls or indirect controls can be employed, and the various direct control

measures have been reviewed along with the various indirect controls. This has

displayed that the currently dominant approach of using direct controls that seek

to improve detection and increase punishment is a rather limited approach and

that there is a much larger toolkit available for tackling shadow entrepreneurship.

Moreover, the various tools are not mutually exclusive. To display this, this paper

has outlined various ways of combining direct and indirect controls when tackling

shadow entrepreneurship, namely responsive regulation and the slippery slope

framework. The outcome is that a comprehensive review has been provided of the

various policy approaches available to policy makers along with some suggestions

regarding how they can be combined. If this paper thus encourages governments

to experiment with wider measures for tackling shadow entrepreneurship, then it

will have achieved its goal. If it also encourages more research on the most

effective means of combining and sequencing these measures, then it will have

achieved its wider objective.




76

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83

‘Collectivism’ and Innovation: Small and

medium-sized enterprises as local/rural industry

in some East Asian countries

Tomoko Oikawa

Euro-Asia Centre,

Dept of Economics,

Kemmy Business School,

University of Limerick

Castletroy, Co. Limerick, Ireland


Abstract

Small and medium-sized enterprises (SMEs hereafter) in the local districts in

Southeast Asian countries, Thailand, Indonesia and Japan are explored. The aim is to show

how ‘collectivism’ in these Asian countries is linked with innovation in rural/local

industry. ‘Collectivism’ is an abstract concept itself. The exploration of community-based

‘collectivism’ in actuality in these countries shows that ‘collectivism’ is the dynamic of

innovation to fight against economic difficulties, depopulation and poverty in rural/local

district. The main focus is on ‘one village, one product’ movement in Japan and Thailand.

Indonesia is an interesting case of innovation in terms of community-based industry. In

the case of Japan, other rural/local movement among SMEs is introduced in relation to

community-based collectivism and innovation. The paper explores the issues why things

were, how they were, how they got to be that way and what was making them change. For

this a historical, political economy, and anthropological perspective is necessary. The

main findings are: 1. ‘Collectivism' is the inner dynamic of innovation in rural/local

industry in these Asian countries. 2. Community-based ‘collectivism’ as solidarity and

cooperative capability is the foundation of innovation. 3. SMEs as rural/ local industry as

such could be gathering momentum in these countries. 4. These rural/local industries

tend to be self-reliant and sustainable.

Keywords: ‘collectivism’, innovation, SMEs, rural/local industry, Japan, Thailand,

Indonesia

JEL codes: D2, Z1

Introduction

SMEs are fundamental for local economy in terms of job creation and local

prosperity. Having faced 'hollow-out' and increasing cheaper imported




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commodities, in line with decreasing of local population, local SMEs need to be

innovative for survival, development and prosperity. This is the case for Japan in

particular. SMEs in Southeast Asia are greatly highlighted as supporting industry

for multinationals. However, the paper is concerned with rural industry, which

consists overwhelmingly of micro enterprises. It is worth noting that they have

shown a remarkable development and they could show the potential for further

development to be the leading or viable rural industry.

The paper focuses on the actualities of these businesses in rural/local

district in these Asian countries and their linkage to the dynamic of ‘collectivism’

in relation to innovation. Such kind of culture could have been a major drive for

their fight to survive against hard times. Such culture could have inspired and

supported innovation. ‘Collectivism’ can be power in such a way. The salient

features of ‘collectivism’ could be seen in community-based innovation in these

Asian countries. How such a relationship would have worked out in these

countries. This is the main argument in this paper. The case studies about

Thailand, Indonesia and Japan are presented here. They are built up on the basis

of secondary materials (Asian Economy, Journal of Asian Studies, Journal of

Southeast Asian Studies, and others).

Thailand and Indonesia are at the different phases from Japan in terms of

economy and technology. However, with regard to the significance of SMEs as

rural/local industry there is no difference between these countries. The recent

studies (Mizuno, 1996; Sakata, 2012; Kurose, 2011; Yokomoto, 2008; Nakamura,

2009: Shibayama, 2011) show that community-based rural/local industries have

succeeded in innovation of organization, product and process in Indonesia,




85

Thailand, Vietnam and Japan. A lot of articles and books are published about ‘one

village, one product (OVOP)’ movement and policy both in Thailand and Japan

(Natsuda, et al.,2012; Takei, 2007; Kaewmanotham, 2008; Matsui and Yamagami,

2006). In reality, there have arisen a number of issues in the process in this

movement and policy. This could be explained from the viewpoints of historical,

political economy and cultural values to pertinent district and/or country.

The paper argues: (1) there are differences between Thailand, Indonesia

and Japan in terms of ‘collectivism’, (2) community-based industry with

innovative activities are picking up in the case of Japan (Nakamura, 2009;

Shibayama, 2011), and Thailand and Indonesia have witnessed the rise of

community-based innovation as rural/local industry (Mizuno, 1996; Kurose,

2011; Yokomoto, 2008). (4) ‘collectivism’ has shown the dynamic of innovation

with great potentialities for sustainable economic development.

The paper is divided into five sections as follows: (i) literature review; (ii)

‘One village one product movement (OVOP)’ and other rural/local SMEs in Japan;

(iii) ‘One Tambon (villages) one product movement (OTOP)’ in Thailand; (iv)

community-based innovation in rural industry in Indonesia; (v) significance of

community-based rural/local industry – historical and cultural background of

‘collectivism’; and (vi) conclusion.

Literature Review

‘Collectivism’ and innovation

Schumpeter (1934 (2008)) states that innovation is not just technology

development but the social process of destruction of gewohnten bahnen (beaten




86

tracks). Recent studies (Numagami, 1999; Page, 2007) claim that innovation is the

social process where the optimal choice is taken via interaction among various ideas.

There has been published the voluminous works in relation to

‘collectivism’ and individualism, mostly from the viewpoints of psychology and

management. There are a small number of studies concerning relationships of

innovation with individualism and/or ‘collectivism’ (Taylor and Wilson, 2012;

Černe et al., 2013; Morris et al., 1993) found so far. These studies focus on the

psychoanalysis of ‘collectivism’ and individualism for inventive activities.

Although the term ‘‘collectivism’’ is not mentioned, Fujimoto (2007) indicates that

among product-process architecture (integral, modular, closed, and open types),

integral architecture is Japan specific way of product-process design. It is carried

out through integration of various ideas from various divisions in the company.

The integral architecture may show a type of ‘collectivism’ representative of

Japanese cultural values. This aspect further leads to the principles of the keiretsu

relationships as the cultural core values in Japanese society (Oikawa, 2011). The

keiretsu relationships between suppliers and users would be said to be

interdependent in terms of improvement or innovation. The relationships are

based on the cultural core values - trust and dependence as social relations in

Japan. These values are embodied in the keiretsu relationships and could be at the

national level (Oikawa, 2011). Basically as an abstract concept, '‘collectivism’' in

Southeast Asian countries and Japan may be interpreted in relation to innovation

when it is approached from the viewpoints of history, political economy and social

anthropology. In historicization of culture and social organization as observed

ethnographically, the point is to try to make sense of why things were how they




87

were, how they got to be that way, and what was making them change (Wolf,

1982).

Other studies with regard to the relationships between ‘collectivism’ and

innovation as empirical studies (Goncalo and Staw, 2006; Yao, et al., 2012) may

not necessarily be positive about the linkage between ‘collectivism’ and

innovation. The former (Goncalo and Staw, 2006) compares individualism with

‘collectivism’ in terms of group creativity, and concludes that individualistic

groups are more creative than collectivistic groups. The latter investigates Chinese

employees’ individualism–’collectivism’ culture orientation and their idea

generation behavior. It concluded that partial correlation results showed that both

horizontal individualism and horizontal ‘collectivism’ had positive influences on

idea generation, but vertical ‘collectivism’ had a positive impact on idea

implementation. All in all, most of these studies shown above have taken the

approach from psychological and managerial viewpoint in organizational settings

– established company.

Classification of SMEs

SMEs can be classified depending on i) nature, and ii) activity in relation to

innovation. Concerning (i), Kiyonari (1972) classified SMEs into four categories: 1)

local industry, 2) community-based industry, 3) production related big business,

4) none of the above. Activity in relation to innovation is divided into three

categories: suppliers, independent enterprises or entrepreneur, and ‘between’

(White Paper on Small and Medium Enterprises in Japan). Kiyonari (1972) defines

community-based industry as follows:




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Community-based industry mainly develops out of traditional industries and

is a corporate group that procures its labor resources and raw materials

from pre-existing local markets. In many cases, the labor supply for such

industries is closely connected to local agriculture and is employed in labor-

intensive production processes. The enterprises involved are mostly from

small to petty in scale. The products manufactured are in many cases locally

typical items, and the markets for them are not limited locally, but located

throughout the country and the overseas (Kiyonari, 1967: 63)

In fact community-based enterprises may be mingled with local SMEs, for

example, in the case of rural/local economy revitalization movement (Nakamura,

2009).

‘One Village One Product (OVOP)’ Movement in Japan

It originally started in 1961 in a village, Oyama, in the Oita Prefecture in

south-western Japan as a ‘village revitalization movement’. The aim was

revitalization of the village’s economy. Its catch phrase was ‘Let’s go to Hawaii on

holidays planting plums and chestnuts.’ This is called NPC (new plum and

chestnut) movement. The village is mountainous and each farmer’s rice field was

very small. 80 per cent of the village is forested mountains and fields. Despite of such

circumstances both the central and prefectural government encouraged the increase of

rice production and of livestock farming. Many villagers were working in forested

mountains and as seasonal workers to earn additional income. The villagers with the

agricultural cooperative and the mayor of the village started the campaign to contribute

to local economy development and poverty alleviation. The original concept of this




89

movement was to select products unique to the region. The village is naturally suitable

for plums and chestnuts ubiquitous, which require light labor and earn much income.

At present, apart from plum and prune, the main focus is mushroom – enoki and then

shiitake added - , for which saw dust is used and it is plentiful in the village. In

addition, wild herbs are on the list. Older people are joining to collect herbs, which are

highly valued in the market. Above products are just the main examples. OVOP

movement has developed into enhancing local communities’ entrepreneurial skills by

utilising local resource and knowledge, creating value-adding activities through

branding of local products in local economy. The basic principle of this movement is

that the grassroots in the community are the leading driver of self-reliance, and the

administration is for indirect support, not financial but technical help. The governor of

Oita prefecture subsequently backed this movement. In this movement the education of

people is most important, which makes it feasible to be self-reliant and creative, for

sustainable development, and 'local link, global reach'. The movement has continued,

developed, and expanded. There have arisen problems, depopulation for example, but

they have found a solution. The principle is the ‘products must be super best quality

and local people must be employed (Yahata Kinji, the President of the Oyama

Agriculture Cooperative, 2009).

One Tambon (Villages) One Product Movement and Policy in Thailand

In 2001 the Thai government introduced 'One Village One Product (OVOP)'

scheme in Japan as One Tambon (villages) One Product (OTOP)' in Thailand to

promote rural and local development. By that time Thai had fulfilled a high

economic growth rate through industrialization policy relying on foreign direct

investment inflows and export expansion through multinational corporations.




90

However, on the other hand, this high economic growth caused inequalities

between urban and rural areas. While having supported Thai economy supplying a

plenty of resources and cheap labor force, rural areas had suffered poverty,

depopulation, and destruction of environment. Further the Asian economic crisis

in 1997 and its aftermath have exhausted these areas.

In order to make a breakthrough in such a situation and to revitalize rural

economy, the Thaksin government loaned up to 1 million baht to every Thai

village for development projects and at the same time established a Village and

Rural Revolving Fund, which serves as a source of capital for the OTOP project as a

model of OVOP movement in Oita (Kaewmanotham, 2008).

However, the OTOP project is basically distinctive from the OVOP

movement in terms of drive (Fujioka, 2007). It is the Thaksin government that had

taken the initiative throughout the process. The distinction is obvious in particular

in terms of the relationships between grassroots community, local government

and the central government. The OVOP in Japan is by and for local people, who are

the subject of the movement, and the local government was the main helper even

against the central government. The OTOP project in Thailand took priority to

achieve visible outcome over to encourage and to promote the grassroots’

initiative. In fact no new organization was established in Tambon, the base of the

grassroots community. It is noted that in most communities there had been only

limited people who participated in local products in terms of labor force, raw

materials, design and market before the OTOP project is introduced and the

project had no actual attempt to break such a situation. The OTOP project targeted

at the support for superior, promising producers rather than for strengthening




91

weak ones’ technology and group management. As a whole, the project even had

created the gap expanding between local producers rather than alleviating. The

grassroots communities did not take a keen interest in sharing the benefit from

the project. It is getting difficult for the local people to maintain solidarity, and

mutual aid. Self-reliance spirit also is getting weak (Kaewmanotham, 2008).

Recently, the Thai government launched the “sufficient economy policy”, in which

the government claims to strengthen rural communities. However, this does not

necessarily result in the strengthening of rural communities (Rakyutidharm,

2009). It is the reality that OTOP project created new job and chance to be

employed. People are not necessarily to work away from home (Kaewmanotham,

2008), but there also exists the fact the income is not enough for their living,

depending on the types of process where they are engaged in and whether they

have access to get financial supports (Takei, 2007).

Community-based Innovation in Rural Industry in Indonesia

Most of sentra industri (industrial center), which consists of at least 20

enterprises producing more or less the same products, are located in Java

(Tambunan and Supratikno, 2004). Distinctive from the case of rural/local

industry in Thailand, Indonesia has no definite leading industry for development

and looks that leading developing industry is dispersing (Sato, 2011).

This section will explore two case studies on rural weaving industry in

West Java. One is village-level textile industry with more than 50 years' history

(Mizuno, 1996), and the other silk weaving industry with about 10 years’

(Yokomoto, 2008).




92

During the late 1960s and 1970s big business advanced and rural

industries were declining, threatened by competition from large urban

corporations by the open policy towards foreign investment and promotion of

Indonesian-Chinese investment under the Suharto administration. Until then this

surveyed rural weaving industry was developing into a factory production system

under the Sukarno administration’s policy for indigenous Indonesians (pribumi)

through a system of cooperatives. Indonesia’s weaving industry is a mixture of

enterprises, consisting of foreign capital, state corporations, Chinese-owned

capital, cooperatives, and pribumi entrepreneurs who are the owners of most

small-scale manufacturing businesses and employ two-thirds of Indonesian

industrial work force. Such an overwhelming number of petty enterprises seldom

invest in forms of manufacturing, and even export industries remained organized

as petty enterprises depending mainly on family labor (Mizuno, 1996).

Background – (1)

In 1993 the governor of West Smatra visited Oita for OVOP movement.

Since then until 2002 the West Smatra government organized the exchange event

with Oita prefecture every year. However, the OVOP movement has never been

materialized in Indonesia. There seems to be three main reasons for this (Matsui,

2007): 1) the central government had been indifferent to the OVOP movement. In

particular the Suharto government had held fast to the centralized administrative

framework and ruined the potential of local revitalization measures based on the

local initiative before it had a chance to develop; 2) the existence of village was

based on the administrative desa, which was introduced by the Suharto




93

government and destroyed the traditional framework of naturally developed

village. Under such circumstances village itself is weak in identity; and 3) under

the Suharto government the village is not located as the subject for development,

but the object for the administrator to enter, to monitor and to develop. In line

with this policy, ‘the movement back to village (GKD)’ was advocated by the

governor in 1995. The GKD movement consists of four factors: One village one

good production, entry of technology and of entrepreneur into village, prosperity

of village market. The basic idea of this movement is that the development of

villages depends on funds, talent and technology provided from the outside.

Background – (2)

After the collapse of the Suharto government in 1998, the new Habbie

government started the decentralization, and its local development policy

changed. In this process the locally produced using local resources movement is

expanding. The phrase of ‘the government is facilitator’ became common

knowledge (Matsui, 2007).

Case studies

A Case Study of community-based weaving industry in West Java (Mizuno,

1996)

The Majalaya region in West Java has a long history as weavers. During the

late 1960s the weavers were not able to continue the factory system they had

organized up until that time. It was not until 1976 that this surveyed village began

to see any chance of recovery from the disastrous situation that had occurred in its

weaving industry over the previous three years. The villagers and surrounding




94

areas took the following measures to overcome the crisis: i) they experimented

with a number of new products, the market for had not yet been monopolized by

the large textile firms and power-loom weaving firms, and attempted to make

existing products cheaper than power-loom weaving firms; ii) for this purpose

they made concerted efforts to cut production costs; iii) they organized a new

division of labor among themselves; iv) many weavers turned to commerce in an

attempt to open new urban markets for their products among middle- and low-

end consumers. And a large number of locally based traders took innovative

measures to open up new marketing networks. Measures (iii) and (iv) were

especially effective. As a result a weaving production area/community centering

around the village was formed, which was freed from dependence on either

factories or wholesalers in other regions. The weaving business within this new

division of labor put out some work to home workers and hired very little wages

labor, thus realizing a system of production that must be classified as “petty

commodity production”. This new division of labor reflects the village’s economic

status differences. This makes it possible for members of the village’s lower and

middle strata to easily set up weaving and cloth trading businesses with very

small amounts of initial capital. Further there are added issues in terms of cultural

values.

Mizuno (1996) got to the additional points which should be considered in

this community-based weaving rural industry. One is that in spite of the fact that

the pay is better working for others as wage labor or weavers, the choice of lower

paying independence can be attributed in part to the community’s character,

which prefers self-employed work to working for someone else. Another is that




95

independent businesses, despite the low income offered for weavers, produce

about the same amount of income as rice farming among middle-strata owner

operators in the village.

Silk industry in Tasikmalaya Prefecture, in West Java (Yokomoto, 2005,

2008).

In this prefecture, the Sericulture Cooperative took the lead in the silk

industry, buying cocoons from farmers, producing silk and selling the silk

products and the sericulture farmers play the role of suppliers of raw material. In

doing so, the industry secured stable supply of raw material and created new job

opportunities. In short, the Sericulture Cooperative is establishing social division

of labor of local industry in Tasikmalaya Prefecture. This is outstanding.

West Java is one of the most prosperous in silk industry in Indonesia. In

1993 PT Indo Jado Sutera Pratama started operation of silk mill, which is the

largest in Indonesia. This company bought cocoons from sericulture farmers and

sold silk mill to silk industry in Indonesia. In fact most cocoons are imported.

However, since the Asian economic crisis it became impossible to import because

of the dramatic depreciation of Indonesian currency and increase of imported

cocoon price. The company was closed down in 2003, October. This has led to

integrated system of silk production. The Sericulture Cooperative has succeeded

in this production system based on cocoon production as raw material since

January in 2004, thus incorporating raw material producers in division of labor

system, and forming social division of labor of local industry. Such rural/local

industry subdivides production process and entrusts it to specialists and ordinary




96

workers. It creates low-cost production system and chance of employment for

ordinary workers.

Significance of Community-based Rural/Local Industry – Historical and

Cultural Background of ‘Collectivism’ and Innovation

‘One Village One Product’ movement in Japan started from a small village as

community-based movement with the passionate leader as the mayor of village.

Hereafter, the mayor of the prefecture acknowledged the significance of this

movement and supported technically and commercially. In retrospect this

movement has a long history as the background of mainly agriculture

cooperatives’ movement which may ascend to before the Second World War

(Matsui, 2006). Through such rural areas’ organization, rural economy

improvement, agricultural improvement or life improvement has continued

slowly but steadily (Matsui, 2006). In fact there have existed a lot of similar

movements in local areas among community and/or local SMEs in Japan at

present. They are not always limited in OVOP policy, but their targets are same,

revitalizing the rural/local economy to be independent and sustainable through

establishment of the basic rural/local industry (Nakamura, 2009, 2013). For this a

lot of local villages/towns are challenging for independence and sustainability

through innovative activity to establish local economic circulation. Local SMEs are

expanding the keiretsu networking to new ‘meshing’ (2007 White Paper on Small

and Medium Enterprises in Japan). This movement includes the establishment of

cooperatives and joint projects, joint R & D, or Joint production. They shift to local

industrial association (56.4%), heterogeneous business cooperatives and studying




97

circles (64.1%). They exchange information, ideas or knowledge with other SMEs.

The main aim is that each enterprise brings in their own strength each other for

the cooperatives and creates new value-added commodities (2008 White Paper on

Small and Medium Enterprises in Japan). They pay a visit to other companies on a

daily basis and get merits such as, that they are able to judge precisely their

clients’ level of technology or skills (73.0%), or that it is straightforward for them

to modify or to propose technical matters with their clients (65.1%) (2010 White

Paper on Small and Medium Enterprises in Japan). The keiretsu principles as the

cultural core values, trust and dependence, (Oikawa, 2011) should provide a solid

foundation for these movement.

Thailand has a distinctive community culture (watthanatham chumchon),

which consists of a wide variety of numerous community cultures depending on

the district (tambon). Originally the idea of ‘community (chumchon)’ appeared in

the early 1980s among NGO activists, researchers and intellectuals (Shigetomi,

2009). These people understood local agricultural groups in terms of traditional

mutual cooperation and friendships, as ‘community (chumchon)’. In line with the

motion above around the 1980s rural people created new type of economic

organization such as ‘savings cooperative’ and ‘rice bank’. These organizations

were funded and managed by the people themselves. This thought, watthanatham

chumchon, has spread wide in Thai society and had considerable impact on

politics in Thailand at present (Shigetomi, 2009).

Indonesia has two outstanding cultural values, gotong royong (mutual and

reciprocal assistance) and musyawarah mufakat (consensus and unanimous). The

historical background of gotong royong in origin is opaque. However, it is since the




98

independence day of Republic of Indonesia in 1st of June 1945 that gotong royong

is publicly and officially declared as the embodiment of the principles of the

national foundation. Apart from gotong royong, musyawarah mufakat (consensus

and unanimous) has a long history in Indonesia. It goes back to the village

ordinance in 1906. This is a kind of Indonesian village-level democracy (Mizuno,

2008). Musyawarah mufakat has been functioning well outside the parliament, for

example in the case of labor dispute. Its principle is a democracy based on the

belief in God (Mizuno, 2003).

Conclusions

The community-based rural/local industry needs to persevere in their

effort for innovation. Their innovation is the process of people' consensus

formation in community. Its salient features are that these community-based

enterprises employ local people, and use rural/local resources, less wasteful. They

are concerned about protecting environment. They are attached their

surroundings.

Important, they can make rural/local economy independent and

sustainable by creating regional economic circulation. At the very bottom of these

community-based movements the cultural core values should exist.




99

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102

Relationship Management in Tourism

Microenterprises as an Element in Building a

Competitive Advantage

Maciej Debski & Michał Szaniawski

University of Social Sciences

Lucka Str. 11, 00-842

Warsaw, Poland

Emails: [email protected] & [email protected]

Abstract

Tourism is central to the growth of numerous regions across the world, including

Poland. A substantial part of infrastructure designed to serve tourists is created by

microenterprises. These entities possess limited human or financial resources, and this

translates into reduced possibilities for applying diverse competitiveness instruments. It

seems that an attractive concept recommended to be pursued for their growth is

relationship marketing. For the purposes of this paper, the authors conducted consumer

research using the PAPI method and a series of interviews within the companies

discussed. The results obtained helped to positively verify the hypothesis presuming that

microenterprises enjoy substantial potentials for establishing relationships, though these

potentials are not fully used. Moreover, the findings from the consumer research revealed

the factors pivotal in delivering tourist satisfaction, which is then an essential

requirement for developing positive relationships.

Key words: relationship marketing, tourism, microenterprises, loyalty

JEL codes: M31, M10

Introduction

As evidenced by statistics, tourism is a significant sector of the economy

which proves to be at the core of regional growth across many areas. It should be

also highlighted that following a certain decline over 2008-2010, the tourism

demand, and thus tourism expenditures tend to soar. As a consequence, shifts

occurred in the supply domain and they show up as: an increased number of

tourism enterprises, including entities providing accommodation facilities. This is




103

also the case in Poland evidenced by a robust expansion of hotel facilities, with a

wide range of microenterprises offering accommodation services. In essence,

there are hundreds or even thousands of them in localities attracting tourism

traffic, thereby spawning strong competition and seeking diverse competitive

advantages which are likely to stimulate the demand for their services.

An important component underpinning competitiveness of the tourism

enterprise is an appropriate establishment of relationships with customers as well

as stakeholders constituting the microenvironment surrounding the facility. Such

a situation results from several factors, among which two prevail. First, it is

necessary to indicate the specifics underlying Poland as a tourism destination.

Basically, this is a country standing out for its immense attractiveness, though at

the same time, it is not at a level likely to be compared to many European

countries such as, e.g. Italy, France, Spain, or Greece. As a result, the prevailing

group of tourists in Poland are domestic visitors. This situation is significant for

enterprises operations, because for that group of customers it is more probable

that they will return and stay at the same place again, which certainly provides the

argument in favour of forging relationships with customers. Furthermore, for

Poland as well as for the majority of countries, a key reason behind tourism

travels is a leisure motive. However, that does not imply that a cognitive motive is

irrelevant. After all, it is more typical for incoming tourists, and for numerous

domestic tourists that this constitutes a complementary element. The prevalence

of leisure tourism produces increased probability that a satisfied customer returns

to the same site, which is another argument in support of developing relationships

and building customer loyalty.




104

Second, it is also important to keep in mind the specifics of the tourism

product. This is a product where a remarkably vital role is given to services and

human resources in the enterprise, thereby delivering customer satisfaction in a

specific manner, which proves to be the bedrock for positive relationships or even

a peculiar partnership between an entrepreneur and customer. For instance, it is

relatively easy to imagine that deficiencies in the facility will be offset by the

attitude and behaviour exhibited by the owner or their employees and despite

some shortcomings, a tourist will be satisfied at the end of their stay.

It seems that today in countries across Europe, systemized operations

geared towards establishing relationships are principally performed by larger

tourism enterprises, particularly hotel enterprises, which makes it worthwhile

considering what activities in this field may be undertaken by microenterprises, as

in their case such activities may be seen as innovative and a vital source of the

competitive advantage. Specifically, it should be emphasized that appropriate

management of relationships with customers should result not only in repeated

use of enterprise’s services, but also in recommending it to others.

As a consequence, the objective of the paper is to analyse the activities

facilitating the development of relationships with customers using tourism

microenterprises and to identify the potentials in this respect. The objective

outlined is related to the primary research hypothesis holding that appropriate

development of relationships with customers using tourism microenterprises may

be a key contributor to the competitive advantage, though potentials for

harnessing marketing tools are not fully used.




105

Relationship marketing in the light of the literature

The significance of the establishment and cultivation of relationships with

an enterprise’s partners is displayed in an explicit way by Kotler and Keller (2012)

while writing “build an effective network of relationships with key stakeholders,

and profits will follow” (page 22). This statement specifies relationships

adequately established as a requirement sufficient for generating profit by an

enterprise. Whereas Sherrell and Bejou (2007) bring attention to the fact that

forging strong relationships with customers is a source of significant competitive

edge that is difficult for competitors to copy. Meanwhile, Tareq (2012)

underscores that relationship marketing is markedly important for services due to

their intangible character and thus resultant strong interactions with customers.

Nevertheless, it is advisable to consider what relationship marketing stands

for. Kotler and Keller (2012) define it as activities aimed at building mutually

satisfying long-term relationships with key parties – customers, employees,

marketing partners and entities from the financial industry. Importantly, they

argue that the cultivation of these relationships becomes the overruling aim of

marketing.

A broad review of definitions illuminating relationship marketing is

conducted by Otto (2004). The author underscores that the essence of the concept

investigated is manifested by the approach embraced by Rydel and Ronkowski

claiming that “relationship marketing means a concept of management and

operation on the market, whereby market efficiency of companies is dependent on

their establishment of partner relationships with market stakeholders. The

concept involves building loyalty relationships with customers and strategic




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alliances with business partners” (Otto 2004:43). It should be kept in mind that

the authors above place an emphasis on the fact that the source of organizational

benefits may not only be building relationships with customers but also

strengthening collaboration with diverse external partners. Overall, such an

approach is consistent with one of the key theoretical models illustrating

relationships – the six market model (Christopher, et al., 1994). Its authors

highlight the expedience of building a positive image and relationships with such

stakeholders as: suppliers, influential institutions, intermediaries, employees or

potential employees, and thus it is possible to generate better value for customers,

and subsequently to nurture their loyalty.

Another fundamental issue related to the idea of relationship marketing is

addressed by Shirazi and Som (2011, 2010) who argue that its aim is to create

long-term, trust-based and mutually beneficial relationships that have an impact

on customer satisfaction and loyalty Essentially, it is necessary to put a

tremendous focus on the issue of mutual benefits arising from partnerships, as

they seem to be the key to forging any relationships. The focus on that topic and a

strategic dimension of relationships was brought by Casielles, et al. (2005) who

defined relationship marketing as a competitive strategy seeking to create, sustain

and develop positive relationships with customers, which today is perceived as a

management concept concerned with the whole marketing activity and generating

benefits to both companies and consumers alike.

Currently, the issue of relationship marketing is quite often addressed in

the reference literature. A wide range of authors point out benefits produced by

implementation of the concept discussed. Goldsmith and Tsiotsou (2012) specify




107

three benefits: (i) maintaining a customer costs less than acquiring a new one; (ii)

when a client is familiar it is easier to tailor the offer to his needs; and (iii) a

satisfied customer creates a positive word-of-mouth endorsement for a product.

Clearly, these benefits seem fairly obvious, but on the other hand, while observing

entrepreneurs, doubts may emerge as to whether these profits are widely

appreciated. Many doubts as to the application of the concept discussed and the

quest for maximising its effectiveness causes that relationship marketing, also in

the tourism sector, comes into spotlight of scientists and their research efforts.

Typically, analyses conducted reveal benefits resulting from building partnerships

with entities from the environment surrounding various organizations,

particularly customers. Though, it should be underlined that with the abundance

of studies dedicated to the use of the discussed concept by multiple entities,

analyses centred on tourism enterprises are in short supply (Richard and Zhang

2012). And if there are any, the majority of them refer to larger organizations,

specifically travel agencies and hotels. For example, Goswami and Sarma (2014)

investigated the drivers triggering “delight” among customers. In effect, they

considered what elements of their product may push its assessment as to

substantially surpass expectations. In another study which did not actually pertain

to tourism enterprises, Helgesen (2007) sought for sources of customer

satisfaction on the B2B market while showing that the price is not necessarily the

only source (2007).

This view is consistent with that outlined in the research conducted by

Jang, et al. (2006) who, using a group of 39 hotels, examined correlations between

the level of websites use utilized to cultivate relationships with customers and




108

financial performance. The results gained corroborated the existence of a robust

correlation between these two variables. In general, a plethora of studies refer to

the application of information technologies, including CRM systems, in a bid to

develop relationships with customers. For instance, such an analysis for hotels

was completed by Ku (2014) who turned the attention to the shift in the

importance if IT systems across enterprises analyzed. The author argues that their

role not only involves the support of transaction processes but increasingly strives

for strategic reinforcement through opportunities for collecting information, and

thus customizing the offer.

The literature also includes, though fewer, empirical studies devoted to the

exploitation of relationship marketing in microenterprises. In this group the

attention should be paid to the research carried out by Choo and Petrick (2012)

among customers staying at American farms. They showed that relationships not

only with owners of facilities they made use of, but also with other tourists and

enterprises in the region were pivotal for the respondents, and these findings will

be essential for further discussions.

In the paper presented, the authors concentrate on the narrow

understanding of relationships as well as the issues of cultivating ties, building

commitment and loyalty among customers. The efficacy of activities in this respect

entails the need to alter the philosophy and mind-set in many enterprises.

Specifically, Morais, et al. (2005) place the spotlight on such transformation driven

by growing competition processes on the tourism market. The specifics

underlying this shift were clearly illustrated in Table 1. Principally, it provides the

collation differentiating the traditionally understood marketing seeking to




109

conclude a transaction and the concept behind relationship marketing. The

collation explicitly emphasizes long-term operations striving for building

relationships, indicates the significance given to retaining a customer and

stimulating his shopping, or reveals the implications of the quality and issues of

customer service.

Table 1

Transaction marketing versus relationship marketing Transaction marketing Relationship marketing Focus on single sale Focus on retaining a customer Product attributes are principal Benefits yielded by purchase of the product are

principal Short-term operating scale Long-term operating scale Customer service not so important Customer service tremendously important Limited customer commitment to the company High customer commitment to the company Minor contact with a customer Continuous contact with a customer Production departments responsible for quality Everybody responsible for the quality

Source: Payne (1996), Marketing usług, PWE, Warsaw, p. 53.

It should be remembered that a fundamental effect of building

relationships with customers is their loyalty, which should result in repeated

purchase of the product offered by the specific marketer. However, it seems that

similar importance is attached to the second effect of loyalty that is product

recommendation, which should stimulate the demand for them. This effect is

remarkably important in tourism where tourists, driven by a dominating cognitive

motive in their travels, in most cases fail to return to the same site. Yet, at the

same time they may give recommendations to it.

Broadly speaking, it seems that the majority of enterprises, especially small

ones, across Poland fail to perform systemized operations aimed at developing

relationships with customers. As emphasized by Ławicki (2005) “attempts made

by domestic producers and retailers in the domain of customer acquisition end

when he walks away from the cash desk” (page 17). Certainly, this assertion




110

suggests the need to address the topic of creating appropriate relationships

among Polish entrepreneurs. These themes, in relation to microenterprises

operating on the tourism sector, will be explored in further sections of this paper.

Relationship management in tourism microenterprises – model approach

The issue of building and managing relationships across tourism

microenterprises may be analysed from at least two perspectives: process and

tool. In the first approach (in line with the model – Figure 1) the issue discussed

should be viewed as a management process in the enterprise. The immense

emphasis should be placed on the fact that customer loyalty will not be effectively

created due to accidental, one-off and unplanned operations. Above all, its

creation, manifested in repeated use of services provided by the specific

enterprises and its recommendations, is the outcome of informed and long-term

activities.

As displayed in Figure 1, the starting point for the process investigated is a

travel decision which entails selection of destination and accommodation facilities

at the destination. While searching for information in order to make a choice, a

consumer encounters diverse marketing messages from both entities responsible

for growth of tourism regions as well as tourism enterprises. Principally, a

potential customer is made a promise during promotional activities, and then

“customer creation” begins; over this period the initial contact between the

entrepreneur and the tourist is established, and subsequently promises that are

made will be verified during the stay. If the entrepreneur promises more than he




111

is capable of providing, it may give rise to customer disenchantment and

dissatisfaction even when the product offered was relatively good.

Figure 1

Building relationships – process approach

Source: Own study

According to Richard and Zhang (2012) satisfaction may be defined as

disparity perceived between expectations, and being a consequence of

consumption, an assessment of the real product value. Thus, it is important to

prevent the disparity from occurring, and accordingly when practising long-term

management, it is advisable not to overstate the offer.

The outcome of effective activities within marketing communication should

be purchase made, which thus result in the stay at the specific destination and use

of services offered by a specific entrepreneur. During the stay, consumption takes

1. Travel decision 2. Location

selection

4. Purchase

3. Accommodation

selection

4. Stay

5. - no contact – relationship, - possibility of return;

- possibility of recommendation

Satisfaction or its lack

Promotion

Promise

Beginning of “customer

creation”

intermediary

Striving for loyalty




112

place, thereby delivering satisfaction or dissatisfaction with the purchase

completed. As a consequence, as shown in Figure 1, a customer may repeatedly

make use of enterprise service or recommend it. It is rather hard to anticipate

such positive behaviours in the case of lack of satisfaction with the purchase made.

However, it should be simultaneously underlined that arguably, repeated contacts

between a tourism entrepreneur and his individual customers do not take place,

which appears to be the most common consumer behaviour. Even in the case of

satisfaction delivered by the stay, the tourist typically does not experience any

bond with the entrepreneur. Particularly, when a cognitive motive tends to be a

prevailing incentive behind travelling, a tourist does not consider quick return to

the specific enterprise. Therefore, it is essential to exploit tools facilitating the

establishment of relationships, enhancement of loyalty and stimulation of

behaviours positive to the enterprise.

The model displayed in Figure 1 presented “customer creation” from the

process viewpoint. On the whole, it was stressed that the process starts once the

promotional activities are launched when initial contacts are established between

an entrepreneur and a client and the promises are made. In addition, attention

was also drawn to the relevance of the demand and its satisfaction for further

behaviours exhibited by consumers. However, this model passed over the tool

aspect intended to enhance relationships, and therefore it appears expedient to

expand it by an instrumental model which will set the stage for the research

conducted.




113

Figure 2

Tool model – building relationships with a customer of the tourism

microenterprise

Source: Own study

The aim of the paper prepared and, as a consequence the research presented, is

to disclose the specifics and identify the opportunities for setting up relationships with

customers of microenterprises offering accommodation services. The theoretical

analysis which produced the model presented in Figure 2 made it possible to formulate

four research hypotheses:

H1: Key factors influencing the selection of the microenterprise providing

accommodation services may include recommendations. Location, standard

and related price, which is typical for most of entities providing

accommodation services

Promotion

Promise

Purchase and consumptionsumpcja

Repeated purchase and recommendation

Promotion instruments

Satisfaction

Incentives to return

Product quality

Internal quality

External quality

Keeping the promises

H1

H2

H3

H4




114

H2: A crucial factor contributing to the satisfaction with the demand, which

distinguishes a microenterprise as compared to large accommodation

facilities, is hospitability and the ambience created by the owner.

H3: A primary incentive facilitating repeated purchase and giving

recommendation to accommodation service is satisfaction with the stay.

Once a tourist leaves, activities conducted in this regard have curtailed

importance, and a microenterprise enjoys less potential to act than a

medium-sized or large enterprise.

H4: Due to reduced resources at the disposal of tourism microenterprises, it is

vital to build relationships with surrounding environment in a bid to create a

value for customers

The above hypotheses implied seeking for answers to key research

questions. First, the authors intended to recognize the factors guiding the

selection of the accommodation facility by tourists, and to inspect whether any

differences emerge between microenterprises and larger entities. Overall, it was

assumed that key factors driving purchase decisions made by tourists are similar,

while keeping in mind various expectations held by customers searching for

accommodation in a guesthouse and those looking for accommodation in a hotel.

Principal, practical objectives behind the establishment of relationships with

customers are to induce them to make a repeated purchase and recommend the

product to other, potential customers. According to the model previously revealed,

which was also emphasised in the third hypothesis, satisfaction with the stay

proves to be a core requirement for these activities. Therefore, it was justified to

raise the question of which factors generate customer satisfaction? The second




115

hypothesis supported that elements distinguishing micro-facilities include

hospitability, specific ambience and opportunities for direct contact with owners,

which should constitute a significant source of the competitive advantage.

Altogether, it is necessary to remember, as highlighted in hypotheses 3 and

4, that microenterprises definitely possess less human and financial resources,

which translates into limitations concerned with affecting their environment. This

fact involves relatively scant potentials for harnessing tools designed to stimulate

tourists to return, though on the other hand these specifics should foster the

expansion of diverse cooperative links with other entrepreneurs in the region

with the goal of generating extra value for customers. Rewards stemming from

collaboration with other stakeholders should emerge across all stages of building

relationships with a customer, starting from joint promotion, through offering

extra value when staying in the facility, to encouraging their return.

It should be noted that a tourist while leaving his dwelling place not only

typically buys access to attractions or a one-off tourism service. More broadly, the

service package is subject to tourist consumption and, as emphasized by

Vassiliadis (2008), tourist satisfaction relies on numerous elements of the tourism

product such as: transport, catering infrastructure, accommodation facilities,

attractiveness or service costs. The upshot of the situation is the fact that robust

interdependencies occur among elements of the destination tourism product;

these are fragmentary products being complementary to one another. In effect,

collaboration among stakeholders of the tourism market within a specific region

proves to be advisable as cooperation may yield a significant competitive

advantage over other destinations and entities operating in their areas.




116

Building relationships with customers of microenterprises offering

accommodation services – research findings

In order to verify the research hypotheses formulated, a two-section own

research was conducted. The first part, being the consumer survey in its character,

rested on the PAPI (paper and pencil interview) method. Its aim was to recognize

consumer behaviours with regard to the topics addressed in the paper. As a result,

141 adequately completed questionnaires were obtained. Meanwhile, it should be

underscored that a survey was preceded by an introductory phase designed to

prepare an appropriate questionnaire. During that phase 41 interviews were

carried out in the paper form where respondents faced questions related to

factors influencing their selection of a guesthouse, satisfaction with the stay, as

well as instruments likely to induce them to return to the guesthouse or to

recommend it to acquaintances.

Table 2 illustrates the respondents’ demographic structure. The attention

needs to be drawn to the fact that persons aged below 25 accounted for 73%

which will certainly have implications for the survey findings. However, these are

persons who largely make use of smaller accommodation facilities rather than

hotels. Moreover, young people stand out for their high tourism activity. Another

feature characteristic to the group selected is the fact that nearly half of the

respondents come from large cities, which may leave these people relatively more

eager to travel to areas marked by superior environmental appeal, and the survey

demonstrated in this paper was continued among enterprises operating in this

region.




117

Table 2

Characteristics of respondents

Respondents’ sex

Men 36% Women 64%

Respondents’ age

Below 25 years 25-35 36-45 Above 45 years

73% 17% 9% 1%

Respondents’ place of residence

Countryside Town up to 10,000 Town 10,000-

100,000

Cities above 100,000

22% 8% 22% 48%

Source: Own study based on the survey results

In the second section of the survey, the authors placed focus on

entrepreneurs, and its objective was to verify consumer's expectations with real

operations performed in tourism microenterprises. During this phase the survey

was aimed at 166 entities functioning in the territory of the Nowosądecki District

identified as a tourist attractive mountain area. 12 entities decided to take part in

the survey and provide responses to the interview questions. Due to the low

number of stakeholders participating in this part of the survey, the results

obtained should be approached with caution and avoiding generalizations.

Nevertheless, it should be underscored that these findings allowed for formulation

of several interesting suggestions.

The first issue addressed in the consumer survey was an attempt to answer

the question of whether loyalty to regions and tourism facilities has a significant

importance. When looking at the responses given by the respondents and

presented in Table 3, the answer should be affirmative. More than 71% of those

surveyed at least occasionally return to places previously visited, whereas more

than 60% of respondents reported that they occasionally at least, recommend

accommodation facilities. Evidently, these answers, even having considered the




118

sample size, suggest immense relevance of the problems analysed. These insights

were also confirmed by entrepreneurs in their responses in the second section of

the survey – 70% of them indicated “tremendously high” significance of persons

who return for operating their enterprises, while 90% said that they experience

tourist visitations as a result of recommendations. However, a positive picture

painted by the responses given may be tarnished by the frequency of tourism

travels practiced by the respondents. Over half of them travel once a year or even

more rarely which, combined with their age structure, means that they did not

have many opportunities of “returning” to either the locality or the facility.

Table 3

Collective compilation of answers to questions selected Frequency of travels for purposes of tourism

1 a year or more rarely 2-3 times a year More than 3 times a year

54% 35% 11%

Frequency of returns to the same locality

Frequently Sometimes Rarely Never

23% 48% 25% 4%

Frequency of returns to the same accommodation facility


24% 40% 25% 11%

Frequency of recommendations given to the accommodation facility


11% 47% 17% 15%

Source: Own study based on the survey conducted

The model portrayed in Figure 2 indicates promotional activities as a basis

for building relationships with customers of accommodation facilities, when a

potential customer faces a specific promise regarding the facility. Important

information for creating effective demand is included in the answers to the

question as to what factors drive the selection of the accommodation facility by




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consumers, because these are elements to be exploited in promotion. As can be

seen in Table 4, key factors include price, room standard, facility amenities and

friends’ recommendations. Thus, it should not come as a surprise that the highest

average rating went to the price – which is a measurable factor and holds the key

to the selection in the case of most products. Subsequent places were taken by the

offering components that determine its quality, which alongside the price, appear

to be the second key incentive for purchase decisions. Though focus should be

brought to high ratings of factors related to location of the facility, e.g. transport.

These are product components offered by the enterprise which remain beyond its

control. Whereas high ratings for recommendations and opinions corroborate the

previous conclusions, and they provide an argument in support of the hypothesis

holding that it is tremendously important to strive for customer satisfaction so as

to prompt positive commentaries. While analysing the factors guiding the

selection of the accommodation facility it should be noted that in line with

hypothesis 1, the factors specified by the respondents are universal in their

character and do not expose the specifics behind tourism microenterprises.




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Table 4

Factors guiding the selection of the accommodation facility Factor Average

rating

Factor Average

rating

Price 4,55 Availability of stores 3,65

Room standard 4,24 Opportunity of purchasing breakfast

and lunch

3,6

Facility amenities 4,15 Development of the area around the

guesthouse

3,51

Proximity to attractions 4,06 Discounts on services provided by

other entrepreneurs in the region, e.g.

restaurants, excursions

3,47

Friends’ recommendations 3,97 Parking spaces 3,45

Facility appearance – photos on

website

3,97 Extra services offered by the

guesthouse, e.g. fitness, sauna,

fireplace room, etc.

3,36

Accessibility to transport 3,83 Options to use the kitchen 3,29

Opinions in the Internet 3,79 Options to stay with pets 1,84

Options for reservation through the

Internet

3,73

Notice: Respondents assessed the relevance of individual factors within the scale 1-5

Source: Own study based on the survey findings

According to the model previously presented, the effect of selecting an

accommodation facility was the stay in it, consumption of its product, which

ultimately should deliver tourist satisfaction. Emergence of satisfaction with the

purchase made is, as shown in the hypothesis 3, the mainstay for building loyalty

among facility’s customers. Therefore, it is necessary to pose the question about

the elements of the product that create satisfaction with the stay.




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Table 5

Implications of the selected product elements of the accommodation facility

for satisfaction with the stay Factor Average

rating

Factor Average

rating

Cleanness of rooms 4,78 Delicious breakfasts 3,86

Respect for privacy 4,69 Options to spend time in front of the

guesthouse, e.g. barbecue

3,72

Attractive price 4,69 Access to the kitchen 3,52

Conformity of previous promises

(e.g. from the website) with the

reality

4,55 Free coffee, tea, or cake 2,78

Convenient location 4,34 Fireplace room in the guesthouse 2,5

Friendly and helpful host 4,31 Option to be given a lift to the

railway station by the hosts

2,36

Room amenities – e.g. hair-dryer,

fridge, towels, etc.

4,06 Little welcome gift 2,24

Properly operating Internet 4,02



The factors that topped the list were “cleanness of rooms”, “respect for

privacy” and “attractive price”, namely the elements that will strongly influence

satisfaction, also in the case of larger entities (see Table 5). But it is necessary to

emphasize that the fifth place was occupied by “friendly and helpful host” which is

typical for small accommodation facilities where a host welcomes guests, is

available to them and sets the tone for facility hospitability. Also, this parameter is

influenced by product elements that scored the last positions in the list, receiving

lowest ratings, i.e. option to be given a lift or a little welcome gift. Yet, it seems that

despite low ratings they should not be discarded, because while striving to create

an image of facilities, it is fundamental to grasp any opportunities for its

enhancement.




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In Table 5 the spotlight should be placed on the place 4 and high ratings

awarded to “conformity of previous promises with the reality”. Such scores

suggest that in a bid to build long-term relationships with customers, it is vital to

keep to reality and refrain from making promises unlikely to be delivered so that

the tourist does not have a feeling of being deceived when running promotional

activities and making promises with regard to the product offered. And if such a

situation occurred, it may result in granting negative recommendations and

discouraging from taking use of facility services.

When discussing the ratings provided in Table 5, the focus should be

brought to high coherence with answers given by entrepreneurs. “Maintaining

cleanness in the facility” was ranked 2, and furthermore high positions were

scored by parameters affecting hospitality – “we strive to be nice, talk to our

guests” and “we are available to guests”. Moreover, elements related to the

amenities in the facility received high ratings. All in all, with all limitations to the

survey taken into account, it may be claimed that entrepreneurs properly identify

factors affecting tourist satisfaction with an accommodation facility.

A potential consequence of the satisfaction with the stay in the

accommodation facility, specified in the research model, may be repeated use of

its services, which is the most manifest evidence of loyalty to the product.

Therefore, a reasonably administering manager should seek to stimulate such

behaviours among his customers. The subsequent question of the survey referred

to assessment of potential tools likely to have positive implications for repeated

purchase of the product. The highest ratings were given to “ensuring a good

product during the stay”, which is consistent with the assertion displayed in the




123

hypothesis 3. Additionally, it should be also noted that two subsequent spots, with

slightly lower rating average, were taken by the financial rewards offered to

tourists for their repeated purchase made. Such behaviours should not be a

surprise as they are characteristic when purchasing most of the products. A

definitely lower score was earned by other instruments aimed at stimulating

loyalty; consumers indicated their relatively minor impact impetus.

Table 6

Assessment of tools encouraging to repeated use of the facility services Factor Assessment Factor Assessment

Ensuring a good product during

the stay will be the best incentive

to the return

4,06 Competition for customers, e.g. a

photo from the stay, or memory

from the stay. For the winner,

e.g. free stay

2,85

Discount coupons for subsequent

stay granted at departure

4,01 Sending acknowledgement for

the stay together with a photo

2,66

Regular customers granted

discounts for an offer provided

by other entrepreneurs in the

neighbourhood, e.g. in

restaurants

3,96 Questionnaires used to measure

satisfaction with the stay

2,32

Loyal programmes offering

increasing discounts during

subsequent stays

3,66 Sending holiday greetings 2,12

Sending information about

special offers for regular

customers

3,48



It should be noted that the findings obtained repeatedly appeared to be

consistent with the answers provided by entrepreneurs, which should be

positively gauged. From among 12 interviews conducted, 11 owners reported that

“they strive to offer top-class services” and “the key to the return of customers is




124

their satisfaction with the stay”. Moreover, 7 persons confirmed the use of

discounts in order to urge to repeated purchase. No other instruments designed

for creating loyalty was indicated by more than 3 respondents, which implies their

negligible application. To some extent, such activities seem proper, consumers

pointed to their minor influence. Though, on the other hand, these tools are largely

cheap instruments, and their use could contribute to better perception of the

facility. Hence, they should not be easily disregarded. To recap, it should be

highlighted that answers given by entrepreneurs in interviews conducted gave

rise to the argument supporting the second part of the hypothesis 3.

Table 7

Importance given to selected elements of facility location and their impact

on purchasing decisions Factor Assessment Factor Assessment

Competent information about

neighbouring attractions

3,99 Organizing tours to

neighbouring attractions

3,61

Discounts on other attractions in

the neighbourhood

3,96 Discounts on restaurants 3,49

Discounts on ski lifts 3,82 Cooperation with travel agency

– offer of travels to the

neighbouring area

3,24

Cooperation with a transport

company – transport facilities

for customers of the guesthouse

3,63 Cooperation with producers of

local products – their offer in

the guesthouse

3,19



Frequently, it is exposed that microenterprises possess limited financial

resources, which thus translates into diminished possibilities of operations,

including reduced possibilities of harnessing specific marketing instruments.

However, these entities should not abandon opportunities to create value for

customers. For facilities offering accommodation services, due to immense




125

complementarity among tourism products, such opportunities are generated by

the surrounding environment, and the last hypothesis set in the survey assumed

relatively low use of these opportunities.

It should be revealed, as noted in Table 7, that respondents awarded a low

rating to the impact of enumerated elements of the surrounding environment on

their purchasing decisions. Though, it should be kept in mind that in the question

discussed, the authors focused only on opportunities arising from cooperation

with other entities operating on the territory of the specific destination. The

previous questions evaluated factors connected with location, transport and

accessibility to attractions. As evidenced by the findings, survey participants

principally expect discounts on products offered by other entrepreneurs.

Meanwhile, entrepreneurs predominantly indicated granting information about

the neighbourhood (9 persons and cooperation with local authorities – 6 persons).

While remaining opportunities stemming from the collaboration, including

discounts offered on complementary products, were tapped by more than 3

respondents. Such a result constitutes an argument in favour of adopting the

hypothesis 4, and lead to the conclusion that potentials related to the environment

and complementary among tourism products are not fully exploited, which is

further confirmed by casual statements expressed by entrepreneurs with regard

to barriers curbing the collaboration:

“I did not demonstrate any initiative in this direction”

“In our region many people hold the view that it is better to act alone

without any collaboration”




126

“Collaboration is seen as competition, everybody wants to retain guests at

their place and for themselves”

“Not everybody understands that we are strong in the group”

Above declarations, even though they only represent some examples, show

the attitude among minor entrepreneurs which is typical to multiple regions

across Poland. On the whole, it seems that operations centred on changes in

awareness among owners of the stakeholder group analysed are an essential step

along the road to the extensive use of horizontal relationships (with other

stakeholders in the region). Fundamentally, in tourism regions it is necessary to

launch initiatives seeking to disclose benefits derived from collaboration and

producing platforms for cooperation.

Conclusions

The principal hypothesis underpinning the paper referred to high

competitive potentials embedded in relationship marketing for tourism

microenterprises, but at the same time it emphasized insufficient exploitation of

opportunities ensued. Taken together, it seems that during the surveys numerous

arguments were found in support of its adoption. Both respondents as well as

entrepreneurs, as previously described, highlighted immense importance of

recommendations and “repeated purchases” for stirring up the demand for

services offered by accommodation facilities. Meanwhile, those tasked with

managing microenterprises who took part on the survey indicated limited use of

tools dedicated to the cultivation of relationships with customers.




127

In essence, detailed hypotheses formulated in the research section of the

paper helped extend the contents concerned with the second part of the

hypothesis set. Their verification allowed for identification of key factors being

core to purchasing decisions made on the accommodation facility. Alongside the

elements being integral to the product offered by the enterprise, the key role in

the purchasing process was played by location. It is necessary to remember that

factors critical to tourists should be displayed during promotional activities,

thereby becoming a specific promise made to a consumer.

The surveys found that consumer satisfaction with the stay is an issue

remarkably important for developing relationships with customers. Central to

satisfaction is a high rating given to the product consumed, which corresponded to

the findings from surveys carried out among agritourism enterprises by Laureiro

and Gonzalez (2008). Another crucial factor driving satisfaction indicated by

respondents is keeping to promises made during activities performed within

marketing communication.

Another conclusion significant for enterprises operations is hugely

restrained utilization of complementary inherent to tourism products and paucity

of mechanisms generating value for customers due to collaboration with the

surrounding environment. Specifically, the significance of benefits yielded by this

type of cooperation were corroborated by, for instance, the findings from the

research by Choo and Petrick (2012). Since microenterprises possess limited

resources, and the surveys show that it has relevance for intensity of activities

with regard to relationship marketing (Essawy, 2012), they should strive to

generate satisfaction among consumers or create incentives to encourage




128

repeated purchase of the service thanks to the partnership with other

stakeholders. While the rewards derived from long-term creation of such

relationships were found in the research conducted by Moliner-Velazquez, et al.

(2014).

The surveys summarized allowed for formulation of a plethora of

interesting conclusions, but on the other hand they failed to address all questions

posed, and they simply provoked new questions, e.g. why don’t entrepreneurs use

incentives to stimulate repeated purchased of their product, or what would should

happen to make them cooperate more closely. Therefore, further studies are

required to give insights into the domain discussed, specifically among

entrepreneurs.




129

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131

Exploring characteristics of FTA use among SMEs

in Malaysia

Menaka Arudchelvan

Asian Development Bank Institute Kasumigaseki Building 8F

3-2-5, Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan


Ganeshan Wignaraja1

Asian Development Bank 6 ADB Avenue, Mandaluyong City,

1550 Metro Manila, Philippines Email: [email protected]

Abstract

The rapid proliferation of free trade agreements (FTAs) in Asia has sparked

academic and policy interest in FTA preference use by SMEs. Using firm survey data, this

paper evaluated the characteristics of SMEs that utilize FTA preferences in Malaysia, and

the policy implications. The econometric analysis indicates that certain SME

characteristics - firm size, a good understanding of FTA provisions, exposure to trade, and

a central geographical location – are positively associated with the likelihood of using

FTAs. The descriptive analysis suggested that key reasons for non-use of FTAs by SMEs

are a lack of information on the implications of FTAs and the absence of FTAs with major

trading partners. Concluding FTAs with major trading partners and improved business

support for SMEs (though public and private service provision) will help facilitate SME

use of FTAs.

Keywords: small and medium enterprises (SMEs), free trade agreements (FTAs), Asian

regional economic integration, empirical studies, survey

JEL codes: F13, F14

1 The views expressed in this article are solely those of the authors and should not be attributed to the Asian

Development Bank or the Asian Development Bank Institute.





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Introduction

Malaysia is an interesting case study of small and medium sized enterprises

(SME) internationalization. The countryand its enterprises have considerable

engagement in global value chain (GVC) trade and are actively pursuing

liberalization through various routes, including unilateral liberalization and free

trade agreements (FTAs) (Kam, 2013; WTO, 2014). Although the People’s

Republic of China (PRC) is increasingly dominating Asia’s GVC trade, Malaysia is

also an active participant and accounted for 2.7% of global and 5.2% of Asian GVC

trade over the period 2009–2013.2 Interestingly, Malaysia ranks as the fourth

most active Asian economy in GVC trade and is only behind the PRC, Japan, and the

Republic of Korea. The electronics sector is particularly well-integrated and is the

key driver of Malaysia’s participation in these chains.

Furthermore, Malaysia has been actively pursuing the Economic

Transformation Programme (ETP), which aims to elevate the country to

developed nation status by 2020, targeting a gross national income per capita of

$15,000 (Pemandu, 2014). Encouraging SMEs to move up the production chain

and achieve greater internationalization are important steps in reenergizing

private sector activity and achieving developed nation status.

One of the six Strategic Reform Initiatives under the ETP is related to trade

liberalization (Pemandu, 2014). In an effort to strengthen local capabilities,

enhance capacity through greater foreign investment and technology, and foster

GVC participation, Malaysia has been following a multitrack approach of

negotiating multilateral trade and bilateral FTAs alongside unilateral liberalization

2 Authors estimates based on gross trade in parts and components and using data from the UN Comtrade database.




133

(WTO, 2014). Since signing the Association of Southeast Asian Nations Free Trade

Area (AFTA) in 1993, Malaysia’s network of FTAs has grown to 12 bilateral and

regional FTAs with 18 trading partners as of 2014. A further six agreements are

under negotiation (ADB, 2015).

However, despite the increasing number of FTAs to smooth the flow of

trade, there is mixed evidence of FTA utilization (Kawai and Wignaraja, 2011,

2013; Tambunan and Chandra, 2014) and there is scarce literature on the use of

FTAs by SMEs. In Malaysia, SMEs account for 97% of all enterprises but only 19%

of total exports. This paper seeks to improve our understanding of SME use of

FTAs in Malaysia. Policy implications from the research are also explored.

The paper is organized as follows. Section 2 reviews relevant literature on

firm-level use of FTA preferences. Section 3 maps the pattern of FTA use by SMEs.

Section 4 considers the SME characteristics associated with FTA use. Section 5

looks at SME perceptions of impediments to FTA and FTA strategy. Finally, Section

6 concludes.

Literature Review on Free Trade Agreement Preference Utilization

The “new new” trade theory of Melitz (2003) and Helpman et al. (2004)

emphasize that firm heterogeneity matters in international trade (i.e., that firms

are considered different in terms of efficiency and fixed and variable costs when

involved in trade). Accordingly, only a few highly efficient firms are able to export

and invest overseas as only they are able to make sufficient profits to cover the

large trade costs required for overseas operations.




134

Implicit in the above theory is the notion that SMEs are at a disadvantage in

participating trade and using FTAs. Compared to larger firms, SMEs face many

challenges in the global environment. Ting’s (2004) analysis of Malaysian SMEs

identified five key challenges: lack of access to finance, human resources

constraints, limited or no ability to adopt technology, lack of information on

potential markets and customers, and global competition. He also argued that

there is a high risk SMEs will be wiped out if they do not increase their

competitiveness in the new, rapidly changing world of globalization. Given these

challenges, the probability of SMEs engaging in international trade and using FTAs

is lower than that of large firms.

One of the major challenges to researching the impact of FTAs is the lack of

published information on trade flows (or individual business transactions)

enjoying tariff preferences. Transaction records on exports and imports for

preferential tariff purposes are filed with the authorities of origin, such as national

customs authorities or trade ministries, but not published. Thailand is one

exception to this norm, publishing annual information on FTA preference use,

albeit in the Thai language. Using Thai data, Chirathivat (2008) has shown that the

overall actual utilization rate for Thailand’s FTA partners has been rising, and

nearly doubled (from 16% to 27%) during 2005–2008. The 2008 utilization rates

of Thailand’s partners vary by market, with 72% for the Thailand–Australia FTA

and 28% for AFTA. Using data from Thai secondary sources, Kawai and Wignaraja

(2013) have shown that the overall actual utilization rate for Thailand’s FTA

partners rose further to around 61% in 2011, while the FTA utilization rate for the

Thailand–Australia FTA increased to 91% and AFTA to 52%. Tambunan and




135

Chandra (2014) narrow in on SMEs in ASEAN. In their scan of economic literature

and government supported programs they find that SMEs are by far the least

active economic actors in the region to make use of the flourishing trade

agreements.

In the absence of published data on preference utilization, micro-level

information obtained from interviews with firms as well as large-scale enterprise

surveys can be useful. In an early study, Kumar (1992) interviewed 15 trading

companies and manufacturers in Kuala Lumpur, Singapore, and Jakarta to identify

possible impediments to successful implementation of AFTA in the future. Kumar

reported that the main bottlenecks were likely to be non-tariff barriers

(standards, testing procedures, and customs procedures), a lack of information

about the Common Effective Preferential Tariff (CEPT) scheme of ASEAN,

domestic investment regulations, and subsidy schemes.

The Asian Development Bank (ADB) and the Asian Development Bank

Institute (ADBI) have also conducted comprehensive enterprise surveys in recent

years on the business impact of FTAs in several Asian countries (Kawai and

Wignaraja, 2011). The economies of Japan, the PRC, the Republic of Korea, and

three Southeast Asian countries (Singapore, Thailand, and the Philippines) were

included in the first round of surveys of 841 firms, with 28% indicating they used

FTA preferences. Interestingly, the average FTA use among the three Southeast

Asian economies was reported to be somewhat lower than for manufacturing

giants like Japan and the PRC. Furthermore, only 20% of the sampled firms said

that multiple rules of origin (ROOs) significantly added to business costs.

Weighing up the firm-level evidence, the study concluded that concerns about the




136

Asian FTA “noodle bowl” effect on business might have been overstated at the

time of the surveys.3 Nonetheless, the study noted the risk of an Asian “noodle

bowl” problem in the future with the growing number of FTAs in the region.

Some studies have explored the factors affecting FTA use at the firm level

using econometric analysis. Using a sample of Japanese firms, Takahashi and Urata

(2008) examined the influence of several enterprise characteristics (e.g. firm size,

trading relations with FTA partners, the ratio of overseas sales to total sales,

overseas business bases, and manufacturing membership) on FTA use. Firm size

and trading relations with FTA partners were found to be positive and significant

parameters. The authors concluded that large firms were more likely to use FTAs,

reflecting the costs of such practices, and that trading experience in FTA markets

also influenced the likelihood of FTA use.

In their study of Japanese multinational corporations (MNCs), Hiratsuka et

al. (2009) tested the relationship between firm size and FTA use, and various

enterprise characteristics (e.g., the share of local inputs among total inputs, the

share of imports with zero tariffs, and sector and country dummy variables). One

key finding was that large firm size (proxied by employment) positively correlated

with FTA use. Another was that firms actively engaged in international

fragmentation are likely to use FTAs for exports.

These econometric studies provide useful insights into the determinants of

FTA use at the firm level. However, they also focus on firms from Japan—a

developed industrial economy with relatively well-functioning markets and

3 The “noodle bowl” refers to the observation that multiple rules of origin in overlapping Asian FTAs may

raise transaction costs for businesses, particularly SMEs, for using tariff preferences in FTAs.




137

institutions—from which it is difficult to extrapolate to newly industrializing

economies. Furthermore, there may be methodological gaps in these studies. For

instance, in Takahashi and Urata (2008) the exclusive use of dummy variables as

regressors resulted in a model with weak explanatory power. On the other hand,

Hiratsuka et al. (2009) employed a sophisticated panel data analysis of a large

sample of Japanese MNCs but only a few explanatory variables were explored,

which could contribute to omitted-variable bias in the results.

Factors affecting firm-level FTA use in Indonesia, Malaysia, and the

Philippines were considered by Wignaraja (2014). Econometric analysis using

firm-level data produced some interesting results. Key results included: firm-

heterogeneity matters in FTA use. Acquiring knowledge about FTAs through in-

house efforts and actively forging links with FTA support institutions, building

technological capabilities, and membership of industrial clusters show up as

significant factors affecting the likelihood of firm-level regional trade agreement

(RTA) use. A lack of information about FTAs and the absence of FTAs with major

trading partners are the main reasons for non-use of RTAs. Key policy implications

include the need to improve business support for RTAs, to conclude RTAs with

major trading partners, and to create a database on preference use in RTAs. The

methodological approach of the paper will be utilized in this paper in assessing

the characteristics of firms participating in production networks and FTAs.




138

Mapping Patterns of FTA Use by SMEs

In 2012, ADB and ADBI developed and conducted a survey of 234 exporters

and importers in Malaysia.4 Manufacturing firms and in particular textiles and

garments; food and beverages; wood and wood products; electronics and

components; and automotive parts firms were targeted. The survey was

conducted across Malaysia covering firms in the northern, central, and southern

regions.

Firms in the sample were asked whether they used tariff preferences in

FTAs for exports, imports or both. These questions, along with those covering firm

characteristics, form the basis of this analysis of SMEs that use FTA preferences.

For more information on the survey please refer to Appendix (Table A1).

Use of FTA preference by firm size is shown in Table 1. Use of FTA

preferences is positively related to size with over 85% of giant firms in the sample

using FTA preferences compared to less than 22% of SMEs.

Table 1

Use FTA preferences by firm size Firm Count

Small 45

Large 12

Giant 6

Total 63

% of firms

Small 21.7

Large 60

Giant 85.7

Total 26.9

Source: Authors’ calculations based on ADB/ADBI survey data.

4 The Malaysia survey was conducted as a part of the ADB/ADBI research project on the business impact of

FTAs. For the methodology for the firm surveys and the first wave of results, see Kawai and Wignaraja (eds. 2011).




139

Narrowing in on SMEs we consider the FTAs that are currently in use and

those SMEs plan to use (Table 2). The bigger FTAs involving large regional groups

and large economies for example AFTA and ASEAN-PRC have greater use/planned

use. FTA use is also positively related to the FTA age, with older FTAs such as

AFTA, ASEAN-PRC, Malaysia-Japan, Malaysia-Korea having relatively greater

use/planned use than newer FTAs like Malaysia-Chile, which was came into effect

just before the this survey was conducted in January 2012. Large markets offer

greater business opportunity and economies of scale when doing business. With

the phased reduction in tariffs older FTAs note only offer grater margin of

preference but are also more likely to be known by businesses.

Table 2

Profile of SMEs that use, plan to use FTAs, by FTA

AS

EA

N F

TA

(01

Jan 1

993)

AS

EA

N P

RC

CE

P

(01 J

uly

2005)

AS

EA

N-J

apan

CE

P

(01 D

ec 2

008)

Mal

aysi

a-Ja

pan

EP

A (

13 J

uly

2006)

AS

EA

N K

ore

a C

EP

(01 J

un 2

007)

AS

EA

N-I

ndia

CE

P

(01 J

an 2

010)

Mal

aysi

a-In

dia

EC

A

(01 J

uly

2011)

AA

NZ

FT

A (

01 J

an

2010)

Mal

aysi

an-P

akis

tan

CE

P (

01 J

an 2

008)

Mal

aysi

a-N

Z F

TA

(01 A

ug 2

010)

Mal

aysi

a-C

hil

e F

TA

(18 A

pri

l 2012)

Number of SMEs

Used/Using 37 34 17 9 8 6 4 3 4 1 0

Plan to use 63 65 36 41 36 32 29 22 11 14 5

Use and plan to use 100 99 53 50 44 38 33 25 15 15 5

Number of SMEs as a share of total SMEs (%)

Used/Using 18.0 16.5 8.3 4.4 3.9 2.9 1.9 1.5 1.9 0.5 0.0

Plan to use 30.6 31.6 17.5 19.9 17.5 15.5 14.1 10.7 5.3 6.8 2.4

Use and plan to use 48.5 48.1 25.7 24.3 21.4 18.4 16.0 12.1 7.3 7.3 2.4

Note. The entry into force of each FTA is shown in the parenthesis. Multiple answers allowed.





140

Characteristics of SMEs that Use Free Trade Agreements

Model and Hypotheses

In seeking out the SME characteristics related to FTA utilization we use a probit model.

The FTA use model is specified as:

The hypotheses and variables in the model are described below.

FTAUSE is the dependent variable. It takes on a value of 1 if the firm

responds positively to the question “does your firm use tariff preference in FTAs

for exports, imports, or both,” or is 0 otherwise.

SIZE is measured by the number of permanent employees and is expected

to be positively related to FTA use. The larger the SME, the more resources it is

likely to have to meet the associated costs of using FTAs.

AGE is measured as the number of years the SME has been in operation.

Once again, we are ambivalent about the direction of causation. Older firms may

be more experienced in navigating trading rules and utilizing FTAs, but could also

be set in their ways and less inclined to utilize preferential tariff rates.

Alternatively, younger firms might be more active in taking advantage of the

opportunities made available through FTAs.

LOCATION takes on a value of 1 if the firm is located in central Malaysia or 0

otherwise. A firm’s geographical location is expected to be positively associated

with FTA use. Firms concentrated in major industrial centers are more likely to

use FTAs than geographically isolated firms, for two reasons. First, geographical




141

clusters of networked firms are characterized by information spillovers and

exchanges (including know-how on tariff preferences, rules of origin, and origin

administration). Second, public and private sector FTA support institutions are

more likely to provide technical assistance to firms in major industrial centers.

The sectoral dummy AUTO takes on the value of 1 if the firm is in the auto

industry or is 0 otherwise. Auto imports in Malaysia attract a high tariff and

therefore firms engaging in auto trade have a greater incentive to use preferences

available in FTAs. This variable is therefore expected to be positively correlated

with FTA use.

The variables FOREIGN OWNERSHIP, EXPORT SHARE OF SALES, and

PROPORTION OF RAW MATERIALS IMPORTED capture the extent to which the firm

is outward oriented. These variables are expected to be positively related to FTA

use. The greater the outward orientation the higher the likelihood the firm is

aware of international markets and trade regulations (including import tariffs,

FTA preferences, rules of origin, and custom procedures). Additionally, firms with

higher exposure to international trade have more to gain for using preferences

made available in FTAs.

KNOWLEDGE OF FTA is a dummy variable taking on the value of 1 if a firm

has some knowledge of FTAs or 0 otherwise. The variable captures the firm’s

proactive efforts in better understanding FTAs. FTA texts are complex, lengthy

legal documents requiring significant investment in specialist skills (e.g., trade

law, customs procedures, and business strategy) to derive the benefits of FTAs.

Given this firms that invest time in acquiring relevant in-house FTA expertise and




142

that actively build linkages with FTA support institutions are more likely to be

equipped to take advantage of FTA provisions.

Results

The regression results of factors affecting the use of FTAs are summarized

in Table 3 with a baseline specification (equation i) and alternative specifications

(equations ii–iv). In the discussion that follows we will be referring to the full

model (i.e., equation iv). The pseudo R2 in equation (iv) suggests that the

regressions explain about 20% of the variation in the data.

Table 3

Probit model of factors influencing FTA use Malaysia

(i) (ii) (iii) (iv)

SIZE 0.0125 0.0135 0.0106 0.0103

(0.00)*** (0.00)*** (0.00)** (0.00)**

AGE -0.0110 -0.0118 -0.0075 -0.0081

(0.01) (0.014) (0.01) (0.01)

AUTO 0.4716 0.4321 0.6732 0.6119

(0.23)** (0.24)** (0.25)*** (0.26)**

LOCATION 0.5142 0.8069 0.7889

(0.21)** (0.23)*** (0.24)***

FOREIGN OWNERSHIP -0.6325 -0.5235

(0.56) (0.57)

EXPORT SHARE OF SALES 0.0062 0.0082

(0.00) (0.00)*

PROPORTION OF RAW

MATERIALS IMPORTED

0.0157 0.0135

(0.00)*** (0.00)***

SOME KNOWLEDGE 0.4884

(0.25)*

Constant -1.0303 -1.2227 -1.7589 -1.8764

(0.18)*** (0.20)*** (0.25)*** (0.27)

n 207 207 207 207

Wald Chi2 14.72 20.64 47.33 51.16

Pseudo R2 0.07 0.10 0.22 0.24

Notes: Dependent binary variable: 1 = use of FTA preferences.




143

Standard errors are reported in parentheses. ***, **, and * indicate

significance at the 1%, 5%, and 10% levels, respectively.

The Pearson correlation coefficient matrix can be found in the Appendix

(see Table A2).


Size is significantly and positively associated with FTA use, suggesting that

even among a group of SMEs it is the larger firms that are more likely use FTA

preferences. The model suggests that the probability of use increases from 17% to

25% as the firm size increases from 25 to 50 employees. It increases further from

34% to 44% as firm size increases from 75 to 100 employees.

FTA use among firms in the auto industry is also significant and positive,

with the probability of using FTA preferences increasing by 15% for firms in the

auto industry. SMEs located in central Malaysia are also more likely to use FTAs

than geographically isolated firms. The probability of using FTA preferences

increases by 19% if the SME is located in central Malaysia, highlighting the greater

availability of support and technical assistance in major industrial centers and the

scope for information spillovers and exchanges between firms.

Exposure to international trade, as captured by the export share of sales,

and the proportion of raw materials imported are positive indicators of FTA use.

The probability of FTA use increases from 24% to 30% when the export share of

total sales increases form 50% to 75%. Similarly, as the proportion of raw

materials increases from 50% to 75%, probability of FTA use increases from 31%

to 43%. Finally, a firm’s investment in acquiring knowledge to use FTAs also

increases the probability of use by 12%.




144

This is a very interesting result suggesting that an SME’s use of FTAs is

largely related to its capability in terms of understanding FTA provision, access to

financial and human resources captured by size, exposure to trade captured by the

proportion of raw materials imported, and firm location and sector.

SME Perceptions of Impediments to FTA Use and FTA Strategy

This section looks at descriptive information from the firm survey on the

perceived impediments to using FTAs, views on FTA content and support services

sought by SMEs.

Perceived Impediments

The survey results suggest that the most significant barrier to FTA use

among SME firms is lack of information, with 114 SMEs ranking lack of

information as one of their top three reasons for not using FTAs (Figure 1). Two

other major barriers are that firms do not see the need to use FTAs and that firms

are not interested in trading with current FTA partners.

Figure 1

Impediments to FTA use

(number of firms)

FTA = free trade agreement.





145

SME Views on FTA Content

With the proliferation of FTAs there is a need to future proof FTAs to cover

21st century issues. So FTAs not only eliminate tariffs and non-tariff barriers to

trade in goods and services and agriculture, but also seek to establish or expand

rules on a wide range of issues including intellectual property rights, foreign direct

investment, competition and consumer policy, trade and labor, trade and

environment and other trade-related issues.

When enquired about the issues most pertinent to SMEs their response

was strongly in favor issues that reduce the cost of doing business and increasing

international engagement (Figure 2). Trade facilitation was ranked as the most

pertinent issue for SMEs. That is simplifying the procedures and controls

governing the movement of goods across national borders. For example increased

transparency in rules and regulations, simplifying the clearance process so there is

little need for multiple documents in different formats and with different data

elements, harmonizing the standards and practices with international convention,

and standardizing documents and electronic data requirements will all reduce the

transaction cost at the interface between business and government.




146

Figure 2

SME responses to areas appropriate to be covered by FTAs

(number of firms)

Note: Multiple responses allowed


The second most highly ranked issue to be included in FTAs is related to

foreign direct investment. Investment provisions in FTAs are meant to make it

easier for foreign investors to invest in the market under consideration. For

example through easier market access, national treatment so foreign investors

don’t face unfair discrimination when competing with local firm and other

regulations on the performance requirements such as local content and

employment. For a cash-strapped SME foreign investment is not only an important

source of funds but also a key vehicle for launching themselves onto the

international market.

Other 21st century issues like Intellectual property, competition law,

government procurement, environmental standards and labor standards did not

rank as being key issues of concern for SMEs.




147

Support Sought by SMEs

To encourage greater FTA use, the SMEs in the sample would like the

government to provide more information on the implications of FTAs for

businesses, more training on the FTAs under implementation, and enhanced

consultations before, during, and after FTA negotiations (Figure 3). This suggests

there is a real role for public policy in addressing limited FTA use.

Figure 3

Services requested by firms to adjust to FTAs

(number of firms)

FTA = free trade agreement, SME = small and medium-sized enterprise.


The most sought public sector organizations for FTA-related issues were

Malaysia’s Ministry of Trade and Customs department (Figure 4). Among private

sector institutions were business and industrial associations and chambers of

commerce.




148

Figure 4

Forms of institutional support sought by SMEs when encountering problems with FTAs

(number of firms)


Conclusions

This paper evaluated the characteristics of SMEs that utilize FTA

preferences in Malaysia, and the policy implications. The analysis was carried out

using survey data of 234 exporters and importers. It sought to improve our

understanding of the internationalization of SMEs in Asia and contribute to the

scant literature.

Several findings come out of the econometric analysis. First, SME size is

positively associated with FTA use capturing perhaps the costs associated with

understanding the complex and lengthy legal documents. Second, in addition to

size, a good understanding of FTA provisions and exposure to international trade

encourages greater use of FTAs. Firms that invest resources in acquiring relevant

in-house FTA expertise and that actively build linkages with FTA support




149

institutions were found to be more likely to use FTAs. Third, the study also found a

positive and significant relationship between exposure to trade, as measured by

export share of sales and the proportion of raw materials imported, and FTA use.

This result is not surprising since the greater the outward orientation, the higher

the likelihood the firm is aware of international markets and trade regulations

(including import tariffs, FTA preferences, rules of origin, and customs

procedures). Additionally, firms with higher exposure to international trade have

more to gain from using the preferences made available in FTAs. Fourth, firms

located in central Malaysia are also more likely to use FTA preferences,

highlighting perhaps the greater availability of support and technical assistance in

major industrial centers and the scope for information spillovers and exchanges

between firms.

The descriptive analysis on the barriers to FTA use found that lack of

information is the predominant reason for not utilizing preferences under an FTA.

Other top responses included firms not seeing the need to use FTAs and firms not

being interested in trade with the current FTA partners. For instance, a given firms

main trading partner might be the United States and Malaysia presently lack an

FTA with the United States. The Trans-Pacific Partnership (TPP) – which includes

the United States and Malaysia – was under negotiation at the time of writing this

paper.

Trade facilitation and foreign investment were identified as pertinent

issues of interest to SMEs seeking greater international engagement through FTAs.

Increased trade facilitation is seen to reduce the transaction cost at the interface

between business and government while greater foreign investment helps SMEs




150

gain greater access to finance and launch themselves onto the international

market.

The above findings from Malaysian firms reinforce what researchers have

known from micro-level studies of international trade— firm size is positively

related to firm-level trade performance and FTA use (e.g. Greenaway and Kneller,

2007; Tambunan and Chandra, 2014). The findings also provide new insights on

impediments to FTA use with a lack of information emerging as a key barrier to

SMEs using FTAs.

This information hurdle can be addressed by enhanced SME policy support

including providing more analysis on the implications of FTAs on businesses,

more training on FTAs under implementation, and enhanced consultations before,

during, and after FTA negotiations. A combination of public and private

institutional support services is an effective means of delivering institutional

support services to SMEs. This would also involve close coordination among the

following intuitions: the Ministry of Trade and Customs, business and industrial

associations, and chambers of commerce. With these policies in place, SMEs in

Malaysia and Asia may internationalize more efficiently and access the global

market.

Furthermore, a country lacking an FTA with a firm’s main trading partner

(such as the United States) can discourage FTA use by SMEs. If a TPP (including

both Malaysia and the United States) eventually gets concluded, Malaysian SMEs

will have an incentive to make use of such an agreement with a major trading

partner.




151

Some limitations in the data and methodology should be noted. Firstly,

given the small sample size, the statistical power of the estimation is reduced

leading to the possibility of a Type II error, where the significance of a variable

under consideration is incorrectly dismissed. Secondly, the FTA preference use

model are static as only cross-sectional data were available. As panel data

becomes available over time, we will become increasingly able to investigate the

changes in policy and enterprise responses. Finally, there are other factors that

may influence FTA preference use, such as trade policies, domestic regulations,

infrastructure, and business support services. Attempting to incorporate these

policy factors in future econometric work may provide additional insights. Thus,

the results should be interpreted with caution.




152

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154

Appendix

Characteristics of firms

The survey included both exporters and importers and the majority of

firms (216) were importers compared with 86 exporters (Table A1). Of these

firms, 69 were both exporters and importers of goods. The firms were distributed

across five key manufacturing sectors and were predominantly small firms—

88.5% of the firms in the sample were small firms with fewer than 100 employees.

Table A1

Characteristics of surveyed firms C

ount %

Type of Traders Exporters only 17 7.3 Importers only 147 62.8 Export and import 69 29.5 No answer 1 0.4

Size Small 2

07 8

8.5 Large 2

0 8.5

Giant 7 3 Sector

Textiles and garments 49

20.9

Food and beverages 26

11.1

Wood and wood products 23

9.8

Electronic products and components

87

37.2

Automotive and parts 47

20.1

Other 2 0.9

Foreign Ownership Foreign owned 2

4 1

0.3 Domestically owned 2

10 8

9.7 Total Number of

Respondents 2

34 1

00 Source: Authors’ calculations based on ADB/ADBI survey data.




155

Table A2

Pearson correlation coefficients

Size Age Auto Electronic

s Central

Foreign

ownershi

p

Tech.

license R&D ISO

Labor

productivity

Export

share

of

sales

Proportio

n of raw

materials

imported

Size 1.00

Age 0.25 1.00

Auto 0.06 0.02 1.00

Electronics -0.07 -0.03 -0.38 1.00

Central -0.05 0.01 0.07 -0.06 1.00

Foreign ownership 0.28 -0.04 0.01 -0.01 -0.10 1.00

Tech license 0.31 0.02 -0.10 0.09 -0.05 0.49 1.00

R&D 0.05 -0.10 0.06 0.10 0.06 0.28 0.25 1.00

ISO 0.35 0.15 0.15 -0.04 0.05 0.23 0.22 0.31 1.00

Labor productivity -0.08 -0.10 -0.03 -0.03 0.25 -0.02 -0.05 -0.08 -0.05 1.00

Export share of sales 0.36 0.02 -0.05 -0.08 -0.14 0.37 0.42 0.15 0.14 -0.06 1.00

Proportion of raw

materials imported 0.18 -0.04 -0.10 -0.03 -0.15 0.44 0.33 0.14 -0.01 -0.06 0.67 1.00

Some knowledge of FTAs 0.02 0.02 0.20 -0.21 0.09 -0.06 -0.08 -0.07 -0.01 0.07 -0.06 0.10

FTA = free trade agreement, R&D = research and development.





156

Social entrepreneurship in Asia: a literature

review

Savita Shankar

Keio Business School

Keio University

Yokohama Kanagawa, Japan

E-mail:[email protected]

Abstract

This paper reviews the literature in peer-reviewed journals on social enterprises

in South, East and Southeast Asia. The country studies indicate that evolution of social

enterprises in a country seems to be closely related to historical events that create

favorable conditions. Typologies of social enterprises that develop in a country appear to

be a result of its socio-economic circumstances, cultural factors and regulatory

environment. The literature on social enterprises in the Asian context is largely limited to

some studies on development of social enterprise in specific countries and conceptual

papers in which the Grameen Bank case features as an example. This limited nature of the

literature is a surprising finding if one were to consider the current level of social

enterprise activity in Asia. The short history of social entrepreneurship research, the

difficulties in developing a working definition of a social enterprise and the dominance of

Western debates in the social entrepreneurship literature have all contributed to the lack

of adequate literature based on empirical studies in Asia. The deeply embedded nature of

social enterprises and the development potential they hold are important reasons for

addressing this research gap.

Keywords: Asia, Literature review, Not-for-profit organization, Social entrepreneurship.

JEL: L31,M14, N85, O35.

Introduction

In recent times, “social entrepreneurship” has become a widely used term.

Broadly, the term denotes the application of business techniques to address social

problems. While activities that are similar to social entrepreneurship have existed

for a very long time, it is estimated that the term was used for the first time in

academic literature in 1954 (Sassmannshausen and Volkmann, 2013). It is widely

acknowledged that the term became popular in the early 1980s, as a result of its




157

usage by Bill Drayton, the founder of Ashoka, a not for profit organization that

supports a global network of social entrepreneurs1. Since then, there has been

rapid growth in the number of social enterprises as well as initiatives to support,

finance and develop social enterprises. As a result, “social entrepreneurship” has

very quickly progressed into a distinct and popular field of study in universities

(Kickul and Lyons, 2012). Moreover, a number of centers focusing on social

entrepreneurship have been set up within major universities. Chairs and

professorships have also been institutionalized. Some Governments, notably those

of United Kingdom and Canada, have articulated policies with respect to social

enterprises, reflecting the important role envisaged by them for these entities.

Development financial institutions such as the Asian Development Bank and

World Bank support the growth of social enterprises.

As a consequence of increasing interest in the topic, literature on

social entrepreneurship has proliferated. Sassmannshausen and Volkmann

(2013) use bibliometrics to measure the maturity of social entrepreneurship

research and find that that the growth in literature on the subject from 1999

onwards has been exponential. According to “Google Scholar”, the number of new

publications per year containing the word “social entrepreneurship” numbered

approximately 2370 by 2011, more than double the number for 2009. Similarly,

peer reviewed articles on the subject made an appearance in 1999, but numbered

more than 50 per year by 2011. These trends are indicative of a significant growth

in the body of literature on the subject.

1 https://www.ashoka.org/.




158

Major contributions to the social entrepreneurship literature

however have come from Western sources. Hackett (2010) points out that most of

the debates in the current literature on social enterprises are focused on Western

countries as most of the “expert voices” on the subject are from these countries.

She gives examples of important political and economic debates about social

enterprises and shows that these are relevant mainly in developed country

contexts.

However, social entrepreneurship is important for Asia, where sixty

per cent of the world’s population lives. The commonly cited reasons for the need

for social enterprises such as pressing unaddressed social problems, market

failure, Government failure and inadequacy of public budgets are very relevant in

the case of most Asian countries. While the developing countries in Asia have

challenges of poverty, unemployment and health to address, in developed

countries, social enterprises have a role to play to address other social problems

such as long-term care for the aged.

Method

This paper proposes to review the academic literature to ascertain the

state of knowledge about the social enterprise sector in Asia. Granovetter (1985)

argued that economic environments are embedded in social and structural

relationships that alter neoclassical predictions of economic behavior. While this

is true of entrepreneurship in general, as compared to business enterprises, social

enterprises are even more embedded in the local context (Guo and Bielefeld,




159

2014). It is therefore useful to analyze the literature that is relevant to the specific

context.

The scope of the literature review is articles in peer-reviewed journals on

social enterprises in South, East and Southeast Asia. The articles can be grouped

into two categories. The first category highlights Asian case studies in their

discussion on general issues relating to social entrepreneurship. Another category

studies in-depth a particular Asian country or set of countries and focuses mainly

on the themes of evolution of the social enterprise sector and the typologies of

social enterprises commonly observed. The next section entitled “Review of the

literature” will attempt to summarize the existing literature. The following section

on “Discussion about the existing literature” will assess why certain aspects

relating to social enterprises in Asia have been researched while other aspects are

yet to be studied. The “Conclusions” section will highlight the gaps in the literature

that need to be addressed by future research.

Review of the Literature

Social entrepreneurship cases from Asia quoted in the literature

The case of Grameen Bank of Bangladesh is often quoted as one of the

pioneering social enterprises in the world. The bank, promoted by Professor

Muhammad Yunus in 1976, is a striking example of an organization that addressed

a pressing social need (small value loans for low income Bangladeshi women) in

an innovative manner. In many ways, the Grameen Bank case exemplifies the

nature of social enterprise. Most popular books on social entrepreneurship start

with the Grameen Bank example (e.g. Bornstein and Davis, 2010).




160

The Grameen Bank example is also used by Mair and Marti (2006) who aim

to elucidate the meaning of social entrepreneurship by clarifying key concepts and

constructs relating to it in their article “Social entrepreneurship research: A

source of explanation, prediction and delight”. In order to explain the “social”

nature of social enterprises, they use three examples of successful social

enterprises. Two out of these are examples from South Asia: Grameen Bank from

Bangladesh and Aravind Eye Hospital from India. While Grameen Bank provides

financial services to low income women, Aravind Eye Hospital established in 1976

by Dr.Venkataswamy, provides eye care services and cataract surgery at a fraction

of the cost in developed countries. Mair and Marti (ibid) explain how these

organizations innovatively combine resources to address a social problem and

thereby change the existing social structures. The objective is to create both social

and economic value, though the emphasis is on the former. The creation of

economic value is primarily for ensuring the sustainability of the venture.

The Grameen Bank example is also quoted by Defourny and Nyssens

(2010) when they trace the origins of the debate on social entrepreneurship in the

United States. They mention that part of the debate was fueled by the activities of

Bill Drayton and Ashoka whose approach was exemplified by Muhammad Yunus

and the Grameen Bank.

Hackett (2010) discusses the cases of Grameen Bank and Grameen Energy

(also known as Grameen Shakti) to show that the debates in the social

entrepreneurship literature are often more relevant to developed country

contexts. Grameen Shakti, a not for profit company of the Grameen Bank group

provides renewable energy products to rural households and businesses. Hackett




161

(ibid) mentions how in developed countries social enterprises are credited with

addressing social problems caused by market failures. In the United Kingdom for

instance, social enterprises have been acclaimed for helping with social exclusion

while in Australia, they are praised for providing employment opportunities to

marginalized individuals. However, there is debate in these countries on whether

the Government, business or social enterprises are best placed to address these

market failures. In developing country contexts however, there are often multiple

market failures that make the analysis more complicated. Social enterprises in

developing countries such as the Grameen Bank often traverse formal and

informal sectors and hence are often well placed to fill in gaps in the services.

Similarly, the political debates in Western countries regarding whether the

Government is using social enterprises in order to shirk its welfare

responsibilities are irrelevant in developing countries with minimal welfare

policies. The funding for social enterprises in developing countries often comes

from foreign sources, which changes the political equations considerably. Another

stark difference in the two contexts is that while in Western countries there is

debate about whether social enterprises can balance their social and financial

goals, in developing countries the more important question is about the extent to

which market based approaches can be used to address the large development

challenges. Using all these examples, Hackett (ibid) makes the point that the

circumstances in which social enterprises operate in developed and developing

country contexts are very different and hence the debates surrounding them need

to necessarily vary.




162

Evolution of the social enterprise sector in the Asian context

Defourny and Develtere (1999) point out that social enterprises emerge

when two conditions prevail – there is a “condition of necessity” and a “condition

of shared destiny”. By “condition of necessity” they refer to an urgent problem or

issue. However this by itself could merely lead to individual survival strategies or

top down public policies. However if individuals realize the shared nature of their

destiny in facing the problem and develop an appreciation of the power of

collective potential, social enterprises to address the issue are likely to emerge. In

Western countries, even though there is prosperity, there are pressing issues such

as that of environmental degradation or the need for good quality food products.

Western societies may not display collective dynamics but the high level of

education and the awareness of specific challenges have resulted in the formation

of social enterprises to address challenges.

Both conditions for emergence of social enterprises have existed on

numerous occasions in Asian countries and hence social enterprises have emerged

in most of them. However, literature in peer-reviewed journals on the evolution of

social enterprises is restricted to only a few countries in Asia. This literature is

summarized below.

The forerunners of social enterprises in Bangladesh are not for profit

organizations, which have a long history in the country, starting in the aftermath

of its war of independence in 1971. Grameen Bank, widely acknowledged as one of

the pioneering social enterprises in the world (Bornstein and Davis, 2010) was set

up in Bangladesh in the year 1976. Since then, numerous social enterprises have




163

been set up. However, Hackett (2010) points out that there is not much scrutiny or

debate about them.

In Indonesia on the other hand, a relationship between the growth of social

enterprises and the social movement for independence has been observed (Idris

and Hati, 2013). The modern concept of social entrepreneurship was however

introduced by the Ashoka Foundation in 1983 when it launched its program to

identify, train and fund local entrepreneurs. Three factors were identified by Idris

and Hati (2013) as the main drivers of social entrepreneurship in pre-

independence Indonesia: quest for educational and economic empowerment, the

influence of Islam and the presence of aristocratic leaders. Based on the study,

they identify three factors that could positively influence the development of the

social entrepreneurship in Indonesia: the perception regarding economic

empowerment due to social enterprises, the Islamic identity of social enterprises

and the spread of social activism in the country.

In Hong Kong, numerous social enterprises emerged subsequent to the

Asian financial crisis in 1997 when unemployment increased. In the early 2000s,

the Hong Kong Government introduced schemes to encourage the growth of social

enterprises and units to oversee their growth. The objective was to make subsidy

expenses more productive (Chan et al., 2011).

In Taiwan, during the period 1990 to 2010, a number of social issues led to

the creation of numerous not for profit organizations, leading to intense

competition for resources among them. This prompted some not for profit

organizations to pursue sustainability and adopt a social enterprise kind of model.

The Government also started partnering with social enterprises to address issues




164

such as unemployment and this gave a further boost to the sector (Chan et al.,

2011).

In China, since the late 1970s when market reforms were introduced, the

Government was increasingly expected to replace state owned enterprises and

rural communes both as a provider of public services such as health and education

and as a provider of social protection. This posed both a financial and a managerial

challenge to the Government. To address this, local authorities were empowered

to mobilize resources from and partner with the market economy as well as the

emerging civil society. This contributed to the emergence of social enterprises in

the country. The other driving forces were the growing interest of private sector

entities in corporate social responsibility and the promotional activities of

international players aiming to foster social entrepreneurship in China (Yu, 2011).

In South Korea, the concept of social entrepreneurship had its roots in civil

society and citizens’ movements before finding a place in the Government agenda.

The particular features of the labor market in the country placed a number of

individuals at risk of social exclusion and this led the Government to enact the

Social Enterprise Promotion Act in 2006, which gave recognition to these entities.

The policy discourse on social enterprises in South Korea was very much

influenced by the experiences in Europe and USA (Bidet and Eum, 2011).

In Japan, three generations of social enterprises have been identified

(Kaneko, 2013). The first generation enterprises were started during the period

1900 to 1975 and consist of neighborhood organizations typically with limited

geographic scope but strong social orientation. The second generation of

enterprises commenced during the period 1975 to 2000 and consists of not-for-




165

profit organizations and community businesses that like the first generation ones

have a strong social mission but are wider in scope. Many of these organizations

came into existence after the Great Kobe earthquake that struck in 1975.

Subsequently, a legal framework for not profit organizations was enacted,

spurring the growth in their numbers. The third generation is distinct from the

first two due to its greater market orientation and higher degree of innovation,

even while adhering to a strong social mission.

Evolution of social enterprises in a country seems to be closely related to

historical events in the country that create favorable conditions.

Typologies of social enterprise observed in Asia

Before proceeding to the Asian case, it is useful to note that Defourny and

Nyssens (2010) have identified two distinct growth trajectories of social

enterprises in Europe and the United States. In Europe, social enterprises were

characterized by participatory involvement of stakeholders in the tradition of

cooperatives and constraints on the distribution of profits. These safety features

helped them access Government support which came through legal frameworks

and at times through subsidies and fiscal exemptions. In the United States on the

other hand, the aforementioned safety features did not always exist and hence

foundations played a key role in providing finance to social enterprises. However,

in both Europe and the States, the concept of social entrepreneurship was actively

promoted by research networks such as EMES European research network and

academic institutions such as Harvard business school (Defourny and Nyssens,

2010).




166

Yu (2011) points out that the absence of any specific legislation on

social enterprises in China makes it difficult to elaborate a working definition.

Nevertheless, social enterprises have emerged in a wide range of sectors. Yu

(ibid) further elaborates on the important differences observed between social

enterprises in China and their Western counterparts. First, the institutional

context in China is less developed with respect to financial, technical, intellectual

and human resources for social enterprises. Second, the ownership structure

commonly observed is either private or quasi-government. Multi stakeholder

ownership structures are not common. A unique aspect in China is that not for

profit organizations do not receive favorable tax statuses. This makes it harder for

such organizations to raise funds. The governance model that is most popular in

China is the stewardship model which places the management in the most

powerful position (Yu, 2013). Participatory governance structures are not

common. Yu (ibid) therefore opines that the ownership patterns, governance

structures and governance models of Chinese social enterprises cannot be

explained by the social enterprise governance theories developed on the basis of

practices of Western social enterprises.

In Japan, social enterprises follow the European tradition in the sense that

they are community based and receive institutional support from the Government

(Kaneko, 2013). However, the extent of support they receive is not as much as

that received by European enterprises. The only support they currently receive is

with regard to tax incentives for grass roots donations to not for profit

organizations. Laratta et al. (2011) identify three different conceptual approaches

to explain the emergence of social enterprise in Japan – the earned income not for




167

profit approach, the not for profit cooperative approach and the social business

approach. These approaches have in turn led to the emergence of three common

types of social enterprises in the country – the Takurojos or innovative elderly

care institutions, work integration social enterprises and social businesses. While

the former two are usually specified not for profit organizations, the latter are

typically incorporated as for profit stock companies. Laratta (ibid) identifies three

major constraints that bind social enterprises based on the organizational form

they adopt when incorporated. These are the legal requirements that are imposed,

the level of trust they enjoy from the general public and the sources of funding

available to them. Ironically, unlike in Western countries, traditionally not for

profit organizations in Japan do not enjoy much trust from the general public as

they are considered less professional than private or Government entities.

Japanese not for profit organizations also faced another disadvantage until 2011

as donations to them did not receive tax exemptions. In recent years, special

banks (known as cooperative banks) have been set up to lend to not for profit

organizations though these are few in number. Until then, such organizations

could mainly borrow only from individuals due to lack of understanding about

their ways of operation.

In South Korea, the Government follows the European terminology in

distinguishing between social enterprises providing social services and work

integration social enterprises. The latter employ disadvantaged individuals (such

as physically challenged people) and try to integrate them into the work force.

After 2006, when the Social Enterprise Promotion Act was passed, organizations

that want to be called “social enterprises” need to apply for certification to the




168

Ministry of Labor with proof of the connection between their activities and a social

mission. Four types of social enterprises can received certification, those that

provide social services, the work integration enterprises in which at least 50

percent of the employees are disadvantaged, the “mixed” type which shows

characteristics of both the first two types and finally the “others” category in

which social enterprises that don't fit into any of the other categories (such as

those that focus on environmental issues) are accommodated. Certified social

enterprises can receive various types of subsidies. Private companies are

encouraged to support social enterprises in various ways, for which they can

receive tax rebates. Another kind of social enterprise in South Korea is the “self

sufficiency enterprise” which is an economically sustainable enterprise with

collective ownership where at least one third of the employees are beneficiaries of

the National Basic Livelihood Scheme (NBLS). NBLS is a scheme under which

persons having resources below a certain threshold and meeting certain

conditions receive public aid. Besides these two forms, there are “de facto” social

enterprises which function as social enterprises as generally defined in the

academic community but are not labeled such as per South Korean regulations.

Overall, the South Korean model follows the European model but is more “top

down” with the Government controlling the use of the term “social enterprise”

(Bidet and Eum, 2011).

A study on governance of South Korean social enterprises by Bertotti et al.

(2014) found that the governance models commonly discussed in the literature on

social enterprises in the United States and Europe did not fit the South Korean

context. The authors found that 70 per cent of the social enterprises studied fall




169

into a category they call “the interdependent model” where a range of stakeholder

interests are represented, there is strong control over the chief executive and the

mission is more likely to be social rather than commercial. This seems to indicate

that “mission drift” is not as big a concern in the case of South Korean enterprises

as in the case of their U.K. counterparts (Bertotti et al., 2014, Spear et al., 2007).

Contrasting the social enterprises in Hong Kong and Taiwan, Chan et al.

point out that the former are more market oriented compared to the latter. While

both countries have broadly three kinds of social enterprises: employment

oriented enterprises (similar to work integration enterprises), empowerment

oriented enterprises (that focus on community development) and business

oriented enterprises, business oriented ones are dominant in Hong Kong primarily

due to the capitalistic nature of the society. In Taiwan on the other hand, due to

the strong civil society in the country, community development oriented

enterprises are also substantial in number. The study also found that more

number of social enterprises in Hong Kong obtained their revenues from sale of

products and services than in Taiwan. Government grants and fees was a bigger

source of revenue in the case of Taiwanese social enterprises, as Government

entities are required to prioritize purchase from such enterprises and hence

represent a big market for them. It was found that Hong Kong enterprises were

more focused on financial independence than their Taiwanese counterparts. In

Taiwan, profits from a social enterprise set up by a not for profit organization

were often used for the overall financial management of the not for profit

organization.




170

Defourny and Kim (2011) attempt a cross-country analysis of social

enterprises in Eastern Asia and find that the diversity among social enterprises

makes it impossible to isolate a single typical model per country or region. The

authors also argue that the social enterprise landscape in East Asia is marked by

the strong influence of state policy. While in Western Europe, social enterprises

can be said to be located “at the crossroads of market, public policies and civil

society” (Nyssens, 2006) in East Asia, they are currently located mainly at the

intersection of state and the market though the influence of civil society is

increasing steadily over time.

Typologies of social enterprises that develop in a country appear to be a

result of its socio-economic circumstances, cultural factors and regulatory

environment.

Discussion about the Existing Literature

As can be seen from the earlier section, the literature in peer-reviewed

journals about social enterprises in Asia is very limited at present. While the

Grameen Bank case is often used as an example in papers dealing with conceptual

issues in social entrepreneurship, the literature on specific aspects of the social

entrepreneurship process or the impacts of social enterprises is absent. Five of the

papers on evolution of social entrepreneurship and the commonly observed

typologies of social enterprises in East Asia were the result of research conducted

in collaboration with EMES European Research Network.

This limited nature of the literature is a surprising finding if one were to

consider the level of social enterprise activity in Asia. For example, in India,




171

reports such as the Asian Development Bank’s India Social Enterprise Landscape

Report (2012) 2indicate that the sector is growing rapidly. The report further

mentions that India is one of the most advanced impact investing markets3in

terms of number and size of investments even though the impact investment

space is still nascent. Yet, there is a lack of peer-reviewed articles on social

enterprises in the country.

Various factors have contributed to the limited nature of the social

enterprise literature relating to Asia.

The first factor is the prevailing state of research in the field. Social

entrepreneurship as a field has a relatively short history. Short, Todd and

Lumpkin (2009) review the literature on social entrepreneurship and argue that

research on the subject is still in an embryonic state. Their literature review found

that there was very little scholarly output in mainstream journals on the subject

and that conceptual papers greatly outnumbered the empirical studies. The

empirical studies that were published also often lacked formal hypothesis and

rigorous methods. While there has been an increase in the number of journal

articles since 2009, the number of empirical studies till date still remains low. As a

result, papers specifically relating to Asia are few in number.

The second factor has to do with the lack of legislative mention of social

enterprises in most countries in Asia. Rigorous research on social enterprises

requires a working definition of a social enterprise as a starting point. As has been

pointed out by Short, Todd and Lumpkin (2009), despite increased interest in

2 http://adb.org/sites/default/files/pub/2012/india-social-enterprise-landscape-report.pdf. 3 Impact investment refers to investments made into companies, organizations and funds with the objective of

generating measurable social and environmental impact along side a financial return (www.thegiin.org).




172

social entrepreneurship, scholarly research has been challenging because

definitions of the concept have been developed in different domains and a unifying

definition is yet to emerge. In countries where Governments have provided

definitions of a social enterprise, researchers have a basis for their research. For

example, the U.K. Government defines a social enterprise as “a business with

primarily social objectives whose surpluses are principally reinvested for that

purpose in the business or in the community, rather than being driven by the need

to maximize profit for shareholders and owners"4.

In Asia, except in South Korea, no legislative definitions of social

enterprises exist, which means delineating the various types of social enterprises

that exist in a country is in itself a challenging task. While awareness about social

enterprises is increasing, not all organizations with social missions call themselves

social enterprises. For example, even though Grameen Bank is often quoted as an

example of a social enterprise, Hackett (2010) points out that microfinance

practitioners in developing countries often do not identify themselves as social

entrepreneurs. The only exception is Grameen Bank itself as Yunus (2007) defines

the enterprises that are part of the Grameen group as social businesses. This

makes the task of identifying social enterprises in these countries difficult, as

some may be “de jure” social enterprises while others might be “de facto” social

enterprises. The lack of definition of the boundaries of social enterprises makes

rigorous research on the topic in Asian countries particularly challenging.

4https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31677/11-1400-guide-

legal-forms-for-social-enterprise.pdf.




173

A third factor is the nature of the debates in the social entrepreneurship

literature. As pointed out by Hackett (2010), these have so far been framed in

Western terms and some of the debates are irrelevant to Asian contexts. As a

result of this, a contribution to the existing literature based on research in an

Asian context is challenging without first redefining some of the theoretical

concepts, restating the underlying assumptions and modifying the basic research

questions.

Conclusions

Though there has been a volumetric increase in the literature on social

entrepreneurship, the discourse on social entrepreneurship is still in an early

stage of development. The literature review on social entrepreneurship in Asia

indicates that there is indeed a large gap in the research relating to Asian contexts.

Peer reviewed journal articles relating to Asian social enterprises usually confine

themselves to well known case studies or country studies on evolution and

typologies of social enterprises.

The studies on social entrepreneurship in Asian countries that are available

underline how social enterprises are deeply embedded in the local context. For

example, the studies on Hong Kong and Taiwan show how though the countries

are geographically close to each other but on account of their different socio-

economic contexts, social enterprises have shown different growth trajectories. It

is therefore important to conduct empirical studies on social entrepreneurship in

various contexts to more fully understand the concept and make the discussion on

the subject more global in nature.




174

In the case of developing countries in Asia, social enterprises can play an

important role in addressing the large development challenges. It is therefore

important to study the conditions that favor their growth and the constraints that

they commonly face that need to be addressed. Another important area that needs

to be researched is the impact that these organizations have on development

indicators and how their impact can be enhanced.

Currently, most of the social entrepreneurship literature is from the

business and entrepreneurship perspective. In developing countries, development

issues need to necessarily play a central role in the social enterprise debate.

Including sociological and public policy perspectives into the debate on social

entrepreneurship will result in a richer understanding of Asian social enterprises

and their potential role in society and the economy.




175

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About The Authors

Tulus T.H. Tambunan is a lecturer in the Faculty of Economics, University

of Trisakti in Jakarta (Indonesia). Currently he is also the head and the main

researcher of the Center for Industry, Small and Medium Enterprises, and

Business Competition Studies in the same university. He was graduated and holds

a PhD in economics from the Erasmus University in Rotterdam, the Netherlands.

Since 1995 he has been the country researcher representing Indonesia for the

World Economic Forum (WEF) in Geneva, which publishes, annually, The Global

Competitiveness Report. He has done many studies on various issues related to

micro, small and medium enterprises, economic crises, regional trade, and

inclusive development.

Anna Bąkiewicz is a researcher and an academic teacher with almost

thirty years of experience. Before she was a former associate professor

at University of Warsaw, Poland, and now she professor at the University of Social

Sciences. Her professional background includes both international research

programs and teaching courses. With a particular focus on the study of

entrepreneurship and intercultural communication, she leads teaching courses

and seminars related to SMEs management and development.

Menaka Arudchelvan was a project consultant at the Asian Development

Bank Institute (ADBI). Her research interests in applied economics are in trade,

regional integration, SME and inclusive growth. Prior to joining ADBI, she worked




178

as an economist at the New Zealand Ministry of Foreign Affairs and Trade and as a

statistical analyst at Statistics New Zealand. She completed her academic

qualification at the Victoria University of Wellington, New Zealand, with majors in

Economics, Econometrics and Money and Finance.

Ganeshan Wignaraja is Advisor, Office of the Chief Economist of the Asian

Development Bank (ADB). During 2012-2015, he was the Director of Research of

the ADB Institute in Tokyo. Previously, he has held positions at the ADB, the

Commonwealth Secretariat, the OECD, Oxford University, Overseas Development

Institute, the UN University Institute for New Technologies and a major UK

consulting firm. He has published widely on international economics, regional

integration, small and medium enterprises, development economics and

development finance. He holds a DPhil in economics from Oxford University and a

BSc in economics from the London School of Economics.

Savita Shankar is an Associate Professor at the Graduate School of

Management, Keio University, Japan. She has earlier taught at the Asian institute of

Management, Philippines and the Institute for Financial Management and

Research, India. She did her Ph.D. at the Lee Kuan Yew School of Public Policy,

Singapore. Prior to her academic career, Savita has ten years of work experience

in corporate banking with ICICI Bank, India’s largest private sector bank and

Export-Import Bank of India, a development financial institution in India. Savita’s

research interests are in the areas of financial inclusion, microfinance and issues

relating to micro, small and medium enterprises. She has led research studies




179

involving primary data collection in India, Philippines, Cambodia and Pakistan.

She has consulted for the Asian Development Bank, Habitat for Humanity

Philippines and Habitat for Humanity Cambodia.

Colin C Williams is Professor of Public Policy in the Management School at

the University of Sheffield in the United Kingdom. His research interests include

the informal economy, entrepreneurship and the future of work. His books include

Confronting the Shadow Economy: evaluating tax compliance and behaviour policies

(2014, Edward Elgar), The Shadow Economy (2013, Institute of Economic Affairs)

and The Role of Informal Economies in the Post-Soviet World: the end of transition?

(2013, Routledge).

Tomoko Oikawa is researcher for Euro-Asia Centre in Kemmy Business

School, University of Limerick in Ireland. Her main research interest is in small

and medium enterprises (SMEs) in both Europe and Asia, in terms of innovation,

organization and cultural values. She has done many studies on rural SMEs in

Eastern Europe and South-east Asian countries. Currently, she is conducting a

research on the concept of collectivism, which is merely categorized into

‘collectivism’.

Maciej Debski is currently deputy director of Institute of Economics,

University of Social Sciences, and he was former Dean of the Faculty of Economy

and Rector of Warsaw School of Social and Economic Studies, Head of Department

of Economy and Economic Policy at the Maria Skłodowska-Curie Warsaw




180

Academy. His is a marketing specialist, with particular interest in tourism

marketing. He is also a lecturer at bachelor, master, doctoral, post-graduate and

MBA programs. He is the author of the book: Creating a strong brand, coauthor of

Tourism policy. The creation - development - main areas, and the author of over 50

scientific publications and participant in over 20 national and international

conferences.

Michał Szaniawski graduated from the Catholic University of Leuven

(Belgium); and a PhD student at the Department of Management, University of

Warsaw (Poland). Since 2005 he has been working at Consulting Plus Ltd., and

became partner and board member in 2009. The company specializes in

management consulting, in particular, in the tourism sector. He gives marketing

and strategy development advices to many family tourism companies. He is

Interested in crowd funding, and a co-founder and board member of the Polish

Crowd Funding Association. He is also a co-founder of fundujesz.pl, i.e. the first

Polish crowd funding platform focusing in social projects.

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