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Export-led SME Development

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Title: Integrating SMEs into Global Value Chains Author: UNESCAP Last modified by: ESCAP Created Date: 7/3/2006 4:23:31 AM Document presentation format – PowerPoint PPT presentation

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Title: Export-led SME Development


1
Export-led SME Development Entrepreneurshipin
the GMS
  • ASEAN SME Regional Gateway Forum
  • Mekong Institute
  • Khon Kaen, 6 September 2010

Masato Abe Trade Investment Division
2
About ESCAP
  • United Nations Economic and Social Commission for
    Asia and the Pacific
  • Asia Pacific
  • 58 regional members associated members
  • Policy advocacy, analytical work technical
    assistance for regional development
  • Headquarters in Bangkok
  • Nine branches

3
Development Strategies in the GMS
  • Export FDI driven development
  • Agro industry development
  • Gradual industrialization toward products with
    high value added
  • Infrastructure development
  • Technology transfer adaptation
  • Subregional cooperation (ASEAN, GMS BIMST-EC)
  • SME development
  • Eco-industry

4
SMEs Role
  • Consisting of more than 95 of total enterprises
  • 99 for China 98 for Thailand (2003) 99 for
    Viet Nam (2002)
  • Creating about 60 of private sector jobs
  • 75 for China 65 for Thailand (2003) 77 for
    Viet Nam (2002)
  • Contributing about 20-30 of GDP
  • 65 of industrial output (China) 47 of GDP
    55 of exports (Thailand) 20 of exports (Viet
    Nam) (2003)

5
SMEs Role (cont.)
  • Innovation dynamism
  • Graduating to large enterprises (
    multinationals)
  • Many in the informal sector
  • Critical part of the social safety net

6
SME Typology
Export
Cottage Enterprises
Export-oriented Enterprises
High Tech
Low Tech
Supporting Enterprises
Domestic Market-oriented Enterprises
Domestic/Local Market
(Uchikawa Keola 2009)
7
Definition of SMEs
  • In Asia-Pacific ( GMS), typically less than
    100-300 employees for manufacturing sector

Country Number of Employees Number of Employees
Cambodia Micro Small Medium lt 10 11- 50 51- 100
China MSME lt 100
Lao PDR Small Medium 19 99
Myanmar Micro Small Medium lt 10 10-50 51-100
Thailand (4 people per firm) Small Medium lt 50 200
Vietnam SME 300
8
SMEs per 1,000 people
Source ESCAP (2009), developed based on data
from World Bank (2000-2006)
9
SME Life Model
Grow to a large firm
Profit
Maturity
Decline
Growth
Discontinuation?
0
Years
Start-up
Different supports needed at the different stages
Loss
10
Start-ups in Japan
  • 41.4 years old (Entrepreneurs)
  • 3.9 employees
  • 100K US of start-up funds
  • 35 Own capital
  • 15 Support of family, relatives and friends
  • 50 Public grants commercial loans, including
    public loan guarantees
  • Man 84.5 Women 15.5
  • College degree or above 33.1
  • 60 of start-ups achieve break-even within 15
    months
  • Data
    National Life Finance Corporation (2007)

11
Start-up Difficult Time
  • 2/3 discontinued within 5 years (USA)
  • 40 discontinued within 2 years (UK)
  • Approx. 40 in red after 1 year (Japan)

12
Sector Composition
Japan (2006)
Thailand (2005)
Services
26
22
Wholesale/retailer
  • 20

33
Restaurants/hotels
17
N/A
Medical/health care
16
N/A
Construction
  • 8

14
Manufacturing
5
11
Others
8
20
Total
100
100
13
SMEs Net Income in Japan
Income before Tax / Total Sales
14
Policy Objectives
  • Increase the number of start-ups
  • Facilitate their growth
  • Increase their survival rate
  • Foster SME graduates (to be large enterprises)
  • Facilitate the smooth exist of losers, providing
    second ( more) chance
  • Encourage to be incorporated
  • Foster SME exporters supporters

15
Challenges
  • Scattered targets (high transaction costs)
  • Lack of the economies of scale
  • Limited public resources
  • Limited understanding about the targets, i.e.
    SMEs
  • Limited communication channels
  • Limited knowledge skills
  • Limited information on global regional markets

16
Six Areas for Interventions
  • Pro-business legal regulatory framework
  • Supporting infrastructure (e.g. ind. zones)
  • Enhanced access to finance
  • Entrepreneurship development
  • Technology transfer adaptation (plus RD and
    product standards)
  • Business development services

Entrepreneur centred development strategy
17
SME Development Approaches
ADB (2000) APO (2007) DFID (2008) GTZ (2010) ILO (2009) JICA (2006) OECD (2005) SDC (2010) UNCTAD (2010) UNDP (2007) UNIDO (2010) USAID (2010) World Bank (2002)
Policy and regulatory framework ? ? ? ? ? ? ? ? ? ? ? ? ?
Infrastructure ? ? ? ? ?
Access to finance ? ? ? ? ? ? ? ? ? ? ? ?
Entrepreneurship / human resource development ? ? ? ? ? ? ? ? ? ? ?
Technology transfer and adaptation ? ? ? ? ? ? ?
Business development services ? ? ? ? ? ? ? ?
18
Entrepreneur Centred Development
Business Environment
Access to Finance
Infrastructures
Export-minded Entrepreneurs
Business Development Services
Technology
19
SME Business Network
Information Incubation Consulting Training
Linkage Policy dialog Information Consulting Train
ing
Training Information
SME Development Agencies
SME Training Institutions
Business Associations
Export-minded Entrepreneurs
Export-minded Entrepreneurs
Export-minded Entrepreneurs
Export-minded Entrepreneurs
Export-minded Entrepreneurs
Financial Institutions
Technical Centers
Technology Standards Certificates Training
Finance Information
Launching of New Export Businesses
Success Case Replication
20
Global Value Chains
21
In the era of globalization
Can SMEs compete in the international market?
Can SMEs learn to be competitive?
Will SMEs benefit from the globalization?
Can SMEs survive in the global competition?
What can we do to bring the benefit of the
globalization to the poor?
22
The ideal is
  • Selling products directly to the international
    consumers with Brand Presence Pricing Power
  • - Have information related to market/process/produ
    ct
  • - Have capabilities over the full Value Chain
    design,
  • production, marketing, distribution, etc.
  • - Respond effectively to the changing market
    conditions

Very difficult for SMEs in developing countries
  • Alternate option Reaching global market through
    global value chains

23
Global Value Chain (GVC)?
  • Full range of value-added activities involved in
    conception, design, procurement, production,
    marketing, distribution, after service, etc.
  • Firm can focus on one or more activities in a VC.
  • When activities are geographically dispersed
    across borders to multiple countries the value
    chain becomes global or regional

Garment/Apparel Value Chain
24
Characteristics of GVCs
  • A lead firm (a larger enterprise/a multinational)
    regulates a GVC with specific competences, making
    a higher profit
  • Brands, resources, technology, expertise and/or
    goodwill
  • Customer vs. Production vs. Natural Endowment
    driven value chains
  • Inviting outside experts on specific functions to
    manage complicated tasks to maximize the
    efficiency and effectives of the entire GVC

25
Characteristics of GVCs (cont.)
  • Contracting with a selected number of capable
    SMEs typically as subordinate partners for
    specific tasks or functional support
  • Integration of business process, coordinated
    behaviours and information sharing among
    independent firms
  • Mutual investment into business process and
    long-term relationship

26
Emergence of GVCs Drivers
  • Multilateral and regional free trade agreements
  • Policy Liberalization
  • Trade, investment, capital finance, HR
  • Compliance with local content requirements
  • Technological innovation
  • Transportation and ICT
  • Increasing competition (pressures for lower cost,
    higher efficiency/ quality etc.)
  • New management strategies
  • JIT, e-commerce, ERP, supply chain management

27
Shift in the GVC governance during the past three
decades
TNCs controlling all production
Ownership of overseas subsidiaries/ franchises
Outsourcing to suppliers (no legal
ownership) TNCs focus on core values
Source UNIDO, Integrating SMEs in Global Value
Chains
Opportunity for SMEs in developing countries
Specialize in a limited set of activities or
components in the GVC
28
Levis Case
29
Emergence of GVCs Consequences
  • Smaller number of dominant lead firms
  • Emergence of large/strong suppliers
  • Intensified competition toward high-value added
    activities
  • Competition on continuous skill development and
    knowledge enhancement
  • Economic disparities at the region, country,
    community and firm levels

30
Lead Firms Objectives with SME Suppliers
  • Cost down / quality up QDC (Quality, Delivery
    and Cost) improvement
  • Strategic focus and outsourcing non-core
    functions
  • Speed, effectiveness and flexibility
  • Access to expertise / technology
  • Long-term security
  • Control over supply chain networks
  • Local content requirements and local supplier
    development

31
Opportunities for SMEs in developing countries
  • Access to international markets
  • Support from TNC (training/investment in business
    process/information sharing etc.)
  • Technology and knowledge transfer
  • Long term buyer-supplier relationship secured
    orders
  • Reputation and brand development
  • Opportunity to up-grade and move up to the next
    tier

32
Challenges for SMEs in developing countries
  • Lack of awareness, capacity and resources
  • Infrastructure
  • Capital
  • Skilled labour
  • Managerial expertise
  • Knowledge and technology
  • Contacts / networks

33
Challenges for SMEs in developing countries
(cont.)
  • High entry barriers -- International Standards
  • Have to deliver specified product, required
    quantity and right quality at competitive price
    and agreed leadtime
  • Competition is not solely based on cost but also
    based on product and process related standards,
    such as quality, safety, environmental
    preservation and respect for labour

34
Challenges for SMEs in developing countries
(cont.)
  • Unfavorable national business environment
  • Rules and regulations
  • Red tape/corruption
  • Political instability
  • Insufficient business development services

35
Regional average of ease of doing business rank
Source ESCAP (2009), calculated by ESCAP based
on Doing Business 2009, World Bank (2008)
36
The GMS
  • Centre of 3 rapidly growing subregions

Northeast Asia
  • Export FDI driven development strategy

South Asia
GMS
  • Increasing amount of FDI in
  • the region
  • Growth of south-south investment
  • Increasing investment in China can stimulate
    greater FDI throughout the region (FDI is not a
    zero sum game)
  • TNCs from developed companies (Intel Vietnam,
    GM Thailand- spill over effect possible in
    neighboring countries)

37
Population by Subregion
1,500
China (90)
(Million)
India (75)
1,350
260
Northeast
GMS
310
South
ASEAN - GMS
38
Purchasing Power Parity
USA 10,000
11,000
China (55)
Japan (33)
3,300
India (80)
670
Northeast
GMS
1,300
(US Billion)
South
ASEAN - GMS
39
GMS Markets (GNP, US Billion)
50
Yunnan Guangxi
20
20
3
Lao PDR
Viet Nam
Myanmar
140
20
4
Thailand
Cambodia
40
GVCs in GMS
  • Thailand various GVCs in auto, electronics,
    high-tech, agri-business, consumer-goods sectors.
  • Yunnan VCs mainly serves other provincial
    markets
  • Viet Nam GVCs under development in garment,
    consumer goods, auto and electronics sectors
  • Cambodia, Lao PDR and Myanmar Agro-business and
    garments need promotion to attract GVCs although
    some FDI have been observed advanced
    manufacturing sectors recently (underdeveloped
    domestic markets)

41
Example Thailand Automotive Part industry
  • Thailand invested in cluster development,
    particularly in Rayong and Samutprakan, south of
    Bangkok
  • Cost competitiveness is based less on
    productivity, and more on low factor input costs,
    which are now rising (e.g. costs of labour and
    land)
  • Key challenge to Thai auto parts suppliers is to
    improve productivity and lower costs or move up
    to the next tier within the GVC
  • Subregional coordinated strategy could provide
    opportunities for neighboring lower cost
    countries such as Cambodia (which also has
    rubber) to become lower tier suppliers of
    selected components to the Thai auto parts cluster

42
Opportunities for SMEs
  • Geographical advantage
  • Centre of 3 rapidly growing subregions
  • Export FDI driven development strategy
  • More donor assistance expected
  • The combined resources of donors, governments,
    the private sector currently provides 20 of
    needs
  • Underdeveloped intra-regional trade investment
  • Potential home markets
  • Yunnan Guangxis integration
  • Flexibility specialization

43
SMEs Corporate Strategies
  • Improve quality and develop brand
  • Reach the global market through existing GVCs
    that are most likely dominated by lead firms
  • Enter into lower tiers with a low-value role in
    GVCs
  • Move up GVCs to high-value added activities over
    time
  • Find adequate financing for the investments and
    accessing quality workforce
  • Collaborate with other SME players vertically and
    horizontally in a GVC
  • Establish joint ventures with foreign investors

44
SME actions needed
  • Improvement of quality
  • Performance
  • Reliability
  • Durability
  • Serviceability
  • Perceived quality
  • Aggressive marketing (networking and branding)
  • Catalogues
  • Trade journals directories
  • Sales representatives
  • Trade missions / fairs / exhibitions
  • Internet

45
SME actions needed (cont.)
  • RD and technology adaptation in cooperation with
    public/private research/technological
    institutions
  • Seek finance and credit opportunity with
    governments and banks
  • Seek services from business associations
  • Develop and involve in producers associations
  • Seek aggressively investment opportunity in
    cooperation with both domestic and foreign
    investors

46
Government actions needed
  • Change of FDI strategy Attract GVCs fit for the
    country.
  • Develop GVCs by participating in neighbouring
    countries GVCs.
  • Classic SME export promotion
  • Marketing research, export promotion, product
    development, export financing, trade fairs and
    missions
  • Create enabling business environment
  • Laws and regulations and their enforcement, ICT
    and logistic infrastructure and software
  • Enhanced access to SME finance

47
Government actions needed (cont.)
  • Capacity and HR development for SMEs and related
    government agencies
  • Fostering capacity and quality of business
    associations
  • Training on working relationship in a
    multicultural environment
  • Focus on agri-business value chains
  • Foster stronger backward linkages with SMEs
    through intra-regional South-South investment

48
Government actions needed (cont.)
  • Facilitate SMEs adoption of world standards and
    credible certifications
  • Productivity improvement through infrastructure
    development and logistical improvement
  • Improving the cross-border flow of goods
  • Sector based value chain studies
  • Foster national lead firms Graduates from the
    SME sector with quality and brand ???

49
Government Strategies (cont.)
Additional GVC strategies
  • Supply side capacity building
  • Training/ counseling and advice/ micro
    financing/ market intelligence etc.
  • Develop opportunities through cooperation (i.e.
    SME clusters)
  • Economies of scale/ joint action/ information
    sharing/ enhancing attractiveness to global
    buyers by reducing transaction costs etc.
  • Promote the GVC mindset

50
GMS Subregional Cooperation
  • Develop GVC mindset in cross-border cooperation
    among GMS countries
  • Strengthen cross-border (GMS/subregional)
    logistics systems
  • Focus trade facilitation cooperation (e.g. in GMS
    Programme) on particular GVCs
  • Facilitate GMS supplier development, including
    development of SME clusters across borders (and
    share information/ best practices etc.)
  • Facilitate cross-border linkages of domestic
    business institutions (e.g. GMS-BF)

51
Further reading
  • Two in-depth studies on SME development in Asia
    the Pacific are available at ESCAP website
    (www.unescap.org)

52
For further inquiry, contact Masato Abe,
Ph.D. Economic Affairs Officer Private Sector and
Development Section Trade and Investment
Division United Nations ESCAP Bangkok,
Thailand abem_at_un.org www.unescap.org
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