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SMEs in Asian Developing Countries
10.1057/9780230250949 - SMEs in Asian Developing Countries, Tulus Tahi Hamonangan Tambunan
10.1057/9780230250949 - SMEs in Asian Developing Countries, Tulus Tahi Hamonangan Tambunan
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Tulus Tahi Hamonangan Tambunan
10.1057/9780230250949 - SMEs in Asian Developing Countries, Tulus Tahi Hamonangan Tambunan
Copyright material from www.palgraveconnect.com - licensed to University of California-CDL - PalgraveConnect - 2011-04-19
SMEs in Asian Developing Countries
© Tulus Tahi Hamonangan Tambunan 2009
No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2009 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN-13: 978-0-230-23037-8 ISBN-10: 0-230-23037-7
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All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.
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I dedicate this book to my wife, Maud Herati Tambunan, for all her support in my work and in my life, and my children, Priya and Adriel, for making me feel young and happy.
10.1057/9780230250949 - SMEs in Asian Developing Countries, Tulus Tahi Hamonangan Tambunan
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Contents viii
List of Tables
x
Preface
xiv
Acknowledgments
xvii
List of Abbreviations
xviii
1 Introduction
1
2 SME Development Pattern: A Theoretical Consideration
17
3 Recent Development: An Overview
37
4 Export Performance and Effects of Trade Liberalization
97
5 Competitiveness and Transfer of Technology
128
6 Development Constraints
159
7 Women Entrepreneurs in SMEs
185
Notes
220
References
229
Index
257
vii
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List of Figures
3.1 Output growth rates of SEs, MEs and LEs (%)
44
3.2 GDP growth contribution by size of enterprise (%)
44
3.3 SME GDP share (%)
53
3.4 SMEs’ value added and GDP growth rates (%)
54
3.5 Location of MIEs and SMEs by region in 2006 (%)
55
3.6 Manufacturing SMEs by subsector, 2005
65
3.7 Average size of labor of enterprises in the manufacturing industry by subsector (ISIC Code 2 digit), 2002
68
3.8 Distribution of manufacturing enterprises by size category (%)
70
3.9 Distribution of manufacturing output by size of enterprise (%)
71
3.10 Distribution of manufacturing employment by size of enterprise (%)
75
3.11 Total number of units of SSIs and workers in them
85
3.12 Growth rates of output in SSIs and manufacturing industry
85
3.13 Contribution of SSIs to total industrial production and GDP (based on 1999–2000 prices) (%)
86
3.14 Yearly compound real rate of growth of SMEs and LEs (%)
93
3.15 GDP contribution by size of enterprise (based on number of workers), 2003 (%)
94
3.16 GDP share of SMEs by main economic sectors, 2003 (%)
94
4.1 SMEs’ contribution to total export value (%)
100
4.2 Distribution of SEs’ export value by sector (%)
100
4.3 Distribution of MEs’ export value by sector (%)
100
4.4 Share of SMEs in total export value in manufacturing industry (%)
101
4.5 Export share of SMEs (%)
106
4.6 Share of SMEs’ exports in their total output
112
4.7 Percentage of SEs in total manufacturing exports
121
4.8 Growth of manufacturing SMEs exports (Rs 10m.)
121
viii
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Figures
ix
5.1 SME competitiveness in selected APEC economies
129
5.2 Annual number of SEs receiving an ISO 9000 certificate
131
5.3 Productivity comparison between ownership categories, 2002 (VND million)
131
5.4 Labor productivity of MIEs, SEs, and MEs in Indonesia (Rp/worker)
139
5.5 FDI stock/GDP in developing and LDCs in Asia (%)
144
5.6 Capital goods import intensity of developing and least developed countries in the Asian region (as a percentage in total merchandize imports) 147 7.1 SMEs in manufacturing industry by gender of entrepreneur/ owner in Indonesia, 2006 (%)
198
7.2 Women entrepreneurs by sector in the Philippines (% total entrepreneurs)
201
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Figures
1.1 Definitions of SME in some Asian developing countries
05
1.2 Main characteristics of MIEs, SEs, and MEs in Asian developing countries
15
2.1 Level of economic development and the size of the SME sector in selected countries
22
2.2 Pattern of SME development from the perspective of “classical” theories
27
2.3 Pattern of SME development from “Modern” theories perspective
29
3.1 Number of SMEs in selected Asian developing countries
38
3.2 SMEs’ contribution to GDP in selected Asian developing countries (%)
40
3.3 Total enterprises by size category in all economic sectors (000 units)
41
3.4 Structure of enterprises by size category in all economic sectors (%)
41
3.5 Distribution of SMEs and LEs by economic sector (%)
42
3.6 Structure of GDP by size of enterprise and economic sector (%)
43
3.7 Leading firms in some active and dynamic clusters
46
3.8 Level of firm size transition
48
3.9 Distribution of SMEs by size category and corporate form
49
3.10 Distribution of SME by size category and economic sector/ subsector
50
3.11 Distribution of SME by size category and province
51
3.12 Number of SMEs and their employment (persons)
52
3.13 Distribution of SMEs’ value added in three main economic sectors (%)
53
3.14 Distribution of enterprises by size category and economic sector
54
3.15 Total enterprises by size category and region
56
3.16 Total employment generated by size of enterprises and economic sector
58
x
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Tables
xi
3.17 Total manufacturing enterprises by size category
59
3.18 Manufacturing employment by size of enterprise (persons)
59
3.19 Manufacturing value added contribution by SMEs in major groups of industry (%)
59
3.20 Employment and GDP by formal and informal sector
61
3.21 Growth in number of enterprises by size category
62
3.22 Growth of employment by size of enterprise
62
3.23 Growth of domestic market value and share by size of enterprise (‘000 USD)
63
3.24 Registered SMEs in the manufacturing industry by subsector (units)
64
3.25 MEs and LEs in manufacturing industry by subsector, 2001 (% share) (MIME version)
65
3.26 SMEs by main economic sector, 2002 (MoC version)
66
3.27 Distribution of SMEs by region, 2001
67
3.28 Output and value added of SMEs in three main sectors, 2003
71
3.29 Distribution of SMEs by three main sectors
72
3.30 Distribution of SMEs in the manufacturing industry by subsector
72
3.31 Percentage of manufacturing SMEs and their output, value added, employment, fixed assets and capital–labor ratio, 2003
74
3.32 Average annual growth rate of output and main inputs in manufacturing SMEs, 1982–2003 (%)
75
3.33 Distribution of SMEs in the service sector by subsector
76
3.34 SMEs and LE in the retail trade subsector, 2000
76
3.35 SMEs and LE in the wholesale trade subsector, 2000
77
3.36 Distribution of SMEs in agriculture by subsector, 2003
77
3.37 Distribution of manufacturing SMEs by region, 1999
78
3.38 SMEs by economic sector
80
3.39 The share of SEs and MIEs in the manufacturing industry (%)
81
3.40 Regional distribution of incorporated SMEs, 2007
81
3.41 Distribution of incorporated SMEs by economic sector/ subsector, 2007
82
3.42 Growth rates of SSIs (%)
84
3.43 Classification of SME clusters by industry group
86
3.44 GDP share of manufacturing industry by size of enterprise (%)
87
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Tables
Tables
3.45 Growth rates of manufacturing industry by size of enterprise (%)
88
3.46 Distribution of SMEs by major sector, 2005 (%)
89
3.47 Share of key SME subsectors in the manufacturing industry, 2004
89
3.48 Contribution of the dominant subsectors in manufacturing value added by size of enterprise (%)
90
3.49 Distribution of SMEs’ shares of GDP by sector (%)
91
3.50 Changes in distribution of manufacturing SMEs by selected subsector
92
3.51 Growth of SEs and MIEs
93
3.52 Contribution of manufacturing LEs and SEs to GDP (%)
95
3.53 Registered manufacturing MIEs and SEs
96
4.1 Share of SME exports in total exports in selected Asian developing countries, 1990s and beyond
98
4.2 Exports of SMEs and LEs, 2000–6 (Rp billion)
99
4.3 Export share and potential presence of SMEs in the manufacturing industry by subsector, 2002
102
4.4 Export-oriented manufacturing SEs and MIEs by percentage of total production for export
103
4.5 Export channels of SMEs: findings from a 1999 survey (%)
105
4.6 SMEs contribution in top ten exports (%)
107
4.7 Leading markets for SMEs exports, 2004 (THB billion)
109
4.8 Export of electrical machinery and equipment and parts by SMEs to different markets
110
4.9 Export of cereals by SMEs to different markets
111
4.10 Export of motor vehicle and parts by SMEs to different markets
113
4.11 Percentage distribution of enterprises by export percentage and size category, 1999
114
4.12 Contribution of export-oriented SMEs, 2003 (%)
114
4.13 Proportion of SMEs’ products exported
115
4.14 Main customers of SMEs (unweighted averages, % of total sales)
117
4.15 Distribution of all SMEs and exporting SMEs by manufacturing subsector, 2002 (% share)
117
4.16 Export-oriented SMEs in manufacturing industry
119
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4.17 Number of exporting SMEs, MEs, SEs, 2007
xiii
122
5.1 Innovation at enterprises level by region, 2006
130
5.2 Innovation rates of enterprises, 2005
132
5.3 Value added per worker in manufacturing by size of enterprises
134
5.4 SME productivity indicators, 2003
140
5.5 TFP of SMEs in manufacturing industry (%)
141
6.1 Four most important constraints facing SMEs in Asian developing countries
160
6.2 Number of SEs and MIEs in manufacturing industry by main problem, 2003
161
6.3 Compliance of banks with mandatory allocation of credit to SMEs (in P billion)
163
6.4 Barriers to SMEs doing business
168
6.5 Main problem areas of SMEs
170
6.6 Distribution of number of firms by size and problems (%)
171
6.7 Difficulties of SE financing
176
6.8 Firms’ access by size to formal source of finance, 2002
181
7.1 Categories of women entrepreneurs (by reasons/motivations for starting the business) in Asian developing countries
188
7.2 Gender Development Index (GDI) and Gender Empowerment Measure (GEM) in selected Asian developing countries, 2007/2008
190
7.3 Gender Equity Index 2008 for selected Asian developing countries
191
7.4 The Global Gender Gap Index 2007 ranking and 2006 comparisons in selected Asian developing countries
193
7.5 Status in employment, by gender in Indonesia, 1990–2006 (%)
197
7.6 Entrepreneurs by gender in the Philippines (‘000 persons)
200
7.7 Distribution of informal sector workers by employment status in Pakistan (%)
207
7.8 Main indices of women’s education in selected Asian countries, 2007/2008
215
7.9 Women entrepreneurs in SMEs by university degree and region in Indonesia, 2004 (person)
216
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Tables
It has been recognized worldwide that small and medium enterprises (SMEs) play a vital role in the economic development of developing countries, including those in Asia, as the enterprises have proved to be the primary source of job/employment creation and output growth. SMEs are important not only from the economic perspective but also socially and politically because of their potential contributions to poverty reduction, improvement of income distribution, and rural development. For this reason, governments in many Asian developing countries such as Indonesia, Malaysia, Thailand, and India, are supporting capacity building in their SMEs largely through direct interventions with a variety of programs, of which subsidized credit schemes are the most important one. In Indonesia, for instance, government has intervened to support SMEs’ development in a number of ways such as subsidized credit, human resource development training in production technique, management, and entrepreneurship, provision of total quality control and technical assistance, Internet facility, advisory extension workers, subsidized inputs, marketing and promotion facilitation, establishments of business development services and common service facilities inside industry clusters, establishment of special small-scale industrial estates, partnership program, establishment of the export support board of Indonesia (DPE), and implementation of an incubator system for promoting the development of new entrepreneurs. Various government departments such as the Ministry of Industry, the Ministry of Trade, and the Ministry of Cooperative and SME have taken the lead in MSME development policies. In the past, in about the 1970s, international organizations, especially the World Bank, the Asian Development Bank (ADB), and the United Nation Industry and Development Organisation (UNIDO), initiated and implemented many programs and projects, financially as well as technically, to empower SMEs in Asian developing countries. Also many governments from rich countries have been actively supporting SMEs in Asian developing countries countries as well as in other developing countries, for instance, USAID and the Asia Foundation (United States), GTZ (Germany), CIDA (Canada) and JICA (Japan). This book is about development of SMEs in Asian developing countries, which include China, India, Pakistan, Indonesia, Malaysia, Thailand, Lao PDR, Bangladesh, and Vietnam. It is based on a survey of key literature and most recent national data on SMEs in the region with the focus on the following issues: (i) growth of SMEs, (ii) export development, (iii) main constraints facing SMEs, (iv) competitiveness, innovation and technology transfer, and (v) women entrepreneurs. xiv
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Preface
xv
The book is divided into seven chapters, including the introduction in Chapter 1. Chapter 2 provides a theoretical framework for understanding the development of SMEs vis-à-vis LEs (large enterprises) in the course of economic development. The main question addressed in this part of the book is whether there is a general or a systematic pattern of transformation of SMEs in the progress of economic development, or, more specifically, whether these enterprises will die out or grow along with the increase in real income per capita. Chapter 3 deals with recent development of SMEs in the region. Although promoting SMEs is currently an important public issue in many Asian developing countries and is increasingly getting attention not only from the academic world but also from policymakers, some of these countries have limited information (i.e. official data and literature) on the current state of their SMEs. As a result, some Asian developing countries are not covered in this chapter, and among countries included, SMEs in some countries are discussed more deeply than those in others. In some countries, for example, India, Pakistan, Thailand, and Indonesia, SMEs in the manufacturing industry have also been playing an important role in export, directly or indirectly (e.g. through subcontracting arrangements with LEs); although the level of export involvement varies by country. This issue is discussed in Chapter 4. It also addresses the question of whether trade liberalization will have positive or negative effects on SMEs. This is an important concern since over the past two decades international trade regimes in many Asian countries, especially in Southeast Asia, have undergone a fundamental change vis-à-vis liberalization. There is no doubt that the export performance of SMEs is influenced by their competitiveness. Most SMEs in developing countries have low global competitiveness.This can be a serious obstacle for the enterprises’ access not only to international markets but also to the domestic market since their products are unable to compete with imported goods. It is often argued in the literature that the key to increasing the competitiveness of SMEs in developing countries is to increase their capacity through improved technology. Technology development in SMEs can take place internally (inside the firm) or can be fostered through transfer of technology from developed countries. SMEs’ competitiveness and technology transfer to the enterprises are covered in Chapter 5. The development of SMEs is hampered by many constraints that differ from region to region. There may be differences between rural and urban areas, between sectors, or between individual enterprises within a sector. However, there are a number of constraints common to all SMEs, including the lack of capital, human resource, technology and information; difficulties in procuring raw materials, marketing and distribution; high transportation costs, etc. This aspect of the SMEs is discussed in Chapter 6. Chapter 7 deals with the issue of women entrepreneurs in SMEs. As in other parts of the world, women’s entrepreneurship development in Asian
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Preface
Preface
developing countries also has a great potential not only in empowering women but also society in the region. Yet in many of these countries, especially where the level of economic development, reflected by the level of income per capita and the degree of industrialization, is still low, this potential remains largely untapped. This chapter tries to identify and discuss main factors that influence the role of women as entrepreneurs in these countries.
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xvi
This book is based on a survey of key literature and published as well as unpublished government data. Recent data for some countries covered in Chapters 3 and 4, that is, Vietnam, India, Philippines, China and Lao, are obtained from the 2008 report of the ERIA Related Joint Research of SME Project, IDE-JETRO, edited by Hank Lim. I owe many thanks to Mitsuhiro Kagami, Ph.D., the President of Bangkok Research Center of IDE for allowing me to use the data. The case study on Tegal metalworking industry in Chapter 5 was part of a project on Rural Investment Climate Assessment (RIC) in Indonesia during the period 2005–6, led by Dr. Neil McCulloch. The RICA project is an undertaking of the World Bank’s Indonesian Poverty Team (INDOPOV). It was financed by the World Bank-Netherlands Trust Fund for Institutional Development and Capacity Building and the DFID Poverty Reduction Partnership Trust Fund. I am thankful to Dr. McCulloch for his permission to use the case study. I would also like to thank my friends and colleagues at the Center for Industry, Small and Medium Enterprises, and Business Competition Studies, University of Trisakti in Jakarta for all their support. I would also like to express my gratitude toward other organizations which helped me, directly or indirectly, to write this book. Most importantly, I thank my wife, maud Herati Tambunan, and our two sons, Priya and Adriel, who have supported me throughout.
xvii
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Acknowledgments
ADB
Asian Development Bank
APEC
Asia-Pacific Economic Cooperation
ASEAN
Association of Southeast Asian Countries
BPS
(Biro Pusat Statistik) Central Bureau of Statistics
DOS
Department of Statistics
FDI
Foreign Direct Investment
GDI
Gender Development Index
GDP
Gross Domestic Product
GEI
Gender Equity Index
GEM
Gender Empowerment Measure
GGI
Gender gap index
HDI
Human Development Index
ILO
International Labor Office
Les
Large Enterprises
Mes
Medium Enterprises
Menegkop & UKM
State Ministry of Cooperative and Small and Medium Enterprises
MIEs
Micro Enterprises
MIME
Ministry of Industry, Mines and Energy
MNC
Multinational companies
MoC
Ministry of Commerce
MSME
Ministry of Micro, Small and Medium Enterprises
NT
Nusa Tenggara
OSMEP
Office of the SMEs Promotion
Ses
Small Enterprises
SMEs
Small and Medium Enterprises
SMIDEC
Small and Medium Industries Development Corporation
SOEs
State-owned enterprises
SSIs
Small-scale industries
xviii
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Abbreviations
Abbreviations
United Nation Industry and Development Organisation
TVEs
Township and village enterprises
WEF
World Economic Forum
WTO
World Trade Organization Copyright material from www.palgraveconnect.com - licensed to University of California-CDL - PalgraveConnect - 2011-04-19
UNIDO
xix
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1
1.1
The importance of SMEs
In Asian developing countries, small-and medium-sized enterprises (SMEs) have a crucial role to play because of their potential contributions to employment creation, improvement of income distribution, poverty reduction, growth of exports of manufactured products, and development of entrepreneurship, manufacturing industry, and rural economy. It is widely stated in the literature that SMEs in developing countries are important because of a number of characteristics, including the following:1 (1) Their number is huge, and especially small enterprises (SEs) and microenterprises (MIEs)2 are scattered widely throughout rural areas and therefore they may have a special “local” significance for the rural economy. (2) As they consist largely of firms that have considerable potential for employment growth, their development or growth constitutes a significant element of policies to create employment and to generate income. Awareness of this fact may also explain the growing emphasis on the role of these enterprises in rural development in developing countries. The agricultural sector has been shown to be unable to absorb the increasing population in the rural areas. As a result, migration from rural areas has increased dramatically, causing high unemployment rates and related socio-economic problems in urban areas. Therefore, non-farm activities in rural areas, especially rural industries that are potentially quite a dynamic part of the rural economy, have often been examined for their potential to create rural employment, and in this respect SMEs can play an important role. This special role of SMEs in the creation of employment is explained by Berry (1998, p. 26) through different labor demand curves. He said that each economic sector has a demand for labor of each type, and within each sector there are differences between larger, more modern enterprises and smaller, more traditional ones, 1
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Introduction
(3)
(4)
(5)
(6)
(7)
not only in types of labor but also in quantity of labor demanded. At one end of the spectrum, on average, the labor demand curves of the first group of enterprises start higher and are more elastic than those of the second group of enterprises. This reflects the fact that in the first group of enterprises using advanced technology the level of labor productivity is much higher for a given amount of capital than that of the second group of enterprises using traditional technology or adopting non-mechanized modes of production. But since in the modern enterprises only a few workers are needed, their demand curve for labor falls steeply; they are not interested in employing more workers than necessary. At the other end of the spectrum, the smaller enterprises, especially in the micro category, have a flatter demand curve for labor, reflecting the fact that in such traditional enterprises much labor is needed for a given amount of capital. Not only are the majority of SMEs in developing countries located in rural areas, they are also mainly agriculturally based activities. Therefore, government efforts to support SMEs are also an indirect way to support development in agriculture. SMEs use technologies that are in a general sense more “appropriate” than modern technologies used by large enterprises (LEs) to factor proportions and local conditions in developing countries; that is, many raw materials are locally available but capital, including human capital, is very limited. Many SMEs may expand significantly, while the great majority of MIEs tend to grow little and hence do not graduate from that size category. Therefore, SMEs, especially medium enterprises (MEs), are regarded as enterprises having the “seedbed LEs” function. Although in general people in rural areas are poor, existing evidence shows that poor villagers are able to save and invest a small amount of capital; and they are willing to take risks in doing so. In this respect, SMEs provide a good starting point for the mobilization of both villagers’ talents as entrepreneurs and their capital; while, at the same time, rural SMEs can function as an important sector providing an avenue for testing and developing entrepreneurial ability. SMEs, especially SEs and MIEs, finance their operations overwhelmingly from the personal savings of their owners, supplemented by gifts or loans from relatives or from local informal moneylenders, traders, and input suppliers, and advance payments from consumers. These enterprises can therefore play another important role, namely, as a means to allocate rural savings that otherwise would be used for unproductive purposes. In other words, if productive activities were not available locally (in the rural areas), rural or farm households might keep or save any surplus money for zero interest inside their homes because in most rural areas there is no banking system. Or they use their wealth to buy land,
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2 SMEs in Asian Developing Countries
3
cars, motorcycles, or houses and other unnecessary consumption goods which are often considered by the villagers as status symbols. (8) Although many goods produced by SMEs are bought by consumers from the middle- and high-income groups, it is generally evident that SMEs’ products are overwhelmingly simple consumer goods, such as clothing, furniture and other articles made from wood, leather products including footwear, household items made from bamboo and rattan, and metal products. These goods cater to the needs of local low-income consumers. SMEs are also important for securing the basic necessities for this section of the population. However, many SMEs produce simple tools, equipment, and machines to meet the demands of farmers and producers in the industrial, trade, construction, and transport sectors. (9) An aspect of their dynamism is that SMEs often achieve rising productivity over time through both investment and technological change. However, developing countries may have different patterns of productivity depending on various factors. Such factors may include the level of economic development in general and that of related sectors in particular; accessibility to the main factors determining productivity, particularly capital, technology, and skilled manpower; and government policies that support the development of production linkages between SMEs and LEs as well as with foreign direct investment (FDI) or multinational companies (MNCs). LEs, on the other hand, achieve productivity increases largely by using generally available off-the-shelf technologies. Processes such as FDI, technology licensing, joint ventures, and access to engineering and other advances raise the productivity of LEs, but this is not the case for the majority of SMEs (Berry et al., 2001, p. 370). (10) One advantage of SMEs is that they are more flexible than their larger competitors. In Berry et al. (2001, p. 365), such enterprises are construed as being especially important in industries or economies that face rapidly changing market conditions, such as the sharp macroeconomic downturns that have bedeviled many developing countries over the past few years.
1.2
Definition, concept, and characteristics of SMEs
What constitutes an SME also varies widely between member countries. SMEs may range from a part-time business with no hired workers or a nonemploying unincorporated business, often called a self-employed unit, such as a traditional business unit making and selling handicrafts in rural Java in Indonesia, to a small-scale semiconductor manufacturer employing more than ten people in Singapore. They may range from fast-growing firms to private family firms that have not changed much for decades or have stagnated. They range from enterprises that are independent businesses
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Introduction
to those that are inextricably parts of large companies, such as those that belong to international subcontracting networks. The only true common characteristic of SMEs is that they are “not large”; that is, whether or not a firm is really an SME is relative. Most enterprises from the SME category are actually very small, and about 70–80 percent of them employ fewer than five people. Only a very small number of firms, typically ranging from about 1–4 percent, have more than 100 employees. As shown in Table 1.1, the definition and concept of an SME vary between countries. There is no common agreement on what distinguishes an MIE from an SE, or an SE from an ME, and an ME from an LE. In general, however, an MIE employs fewer than five full-time-equivalent employees, although many MIEs do not hire workers and are often called self-employment enterprises; sometimes they use family members as helpers or unpaid workers. An SME can range from fewer than 100 workers in, for instance, Indonesia, to as many as 3000 laborers in China. In Indonesia, LEs are those with 100 workers or more, while in Vietnam they are units with 300 or more full-time employees. Comparison between countries is that much more difficult because in different countries economic sectors define an SME differently, based variously on number of employees, value of fixed or productive assets (excluding land and building), or annual revenues (for example, Thailand, India, and China); in other countries (for example, Indonesia and Pakistan) definitions differ among departments or agencies. Some countries in the region do not usually define SMEs as such, but refer to SMEs in certain sectors. In Malaysia, for instance, before the formation of the National SME Development Council (NSDC) in June 2004, no standard definition of enterprises was in use. Different organizations or agencies that support or have to do with development of SMEs defined enterprises in light of their own criteria, usually benchmarking against annual sales turnover, number of full-time employees, shareholders funds, and, more recently, sales turnover. One example, the Small and Medium Industries Development Corporation (SMIDEC), defined SMEs as enterprises with annual sales turnover not exceeding RM 25 million and full-time employees not exceeding 150 (Table 1.1). Bank Negara Malaysia (Central Bank) defines SMEs as enterprises with shareholder funds worth less than RM 10 million. Previously, among various definitions, the one used by the Ministry of International Trade and Industry, which is responsible for industrial development, was more widely accepted, as the manufacturing sector in the economy consists predominantly of SMEs (Rainis, 1999). As in certain other countries, the absence of a standard definition of SMEs in Malaysia prevented the collection and compilation of SME data for assessment of development needs and business performance across the economic sectors. In order to assist in better identification of SMEs across all sectors and for more effective targeting of SMEs with respect to the design of policies and
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4 SMEs in Asian Developing Countries
Definitions of SME in some Asian developing countries
Member country
Employees
Annual sales/turnover
Fixed/productive assets
Brunei Darussalam(1) MIE SE ME
ⱕ5 6–50 51–100
— — —
— — —
— — —
Indonesia(2) a) MIE SE ME
ⱕ4 5–19 20–99
— — —
— — —
— — —
ⱕ Rp 300m > Rp 300 m– ⱕ Rp 2500 m > Rp 2500m–ⱕ Rp 50bn
ⱕ Rp 50m > Rp 50 m– ⱕ Rp 500 m >Rp 500m–ⱕ Rp 10bn
— — — — — — —
b) MIE SE ME
Invested capitala
ⱕ5
ⱕ RM 250,000
—
—
5–50 51–150 ⱕ5
RM 250,000– < RM 10m RM 10m–RM 25m ⱕ RM 200,000
— — —
— — —
5–20 20–50
RM 200,000– < RM1m RM 1m–RM 5m
— —
— —
Philippines(5) MIE – manufacturing SE – –,,– ME – –,,–
ⱕ9 10–99 100–199
— — —
ⱕ P 3m above P 3m–P 15m above P 15m–P 100m
— — — (continued )
Introduction
Malaysia(3) MIE – manufacturing and its related services SE – –,,– ME – –,,– MIE – service, incl. ICT, and primary agriculture SE – –,,– ME – –,,–
5
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Table 1.1
Employees
Annual sales/turnover
Fixed/productive assets
ⱕ 199
—
< S$15m
—
ⱕ4 < 50
— —
< THB 50m ,,
< THB 500,000 < THB 20m
< 25 < 15 50–200
— — —
,, < THB 30m THB 50m–THB 200m
25–50 15–30
— —
THB 50m–THB 100m THB 30m–THB 60m
ⱕ THB 9m ,, THB THB 20m–THB 100m THB 9m ,,
Vietnam(7) MIE SE ME
< 10 10–49 50–299
— —
— — —
– < VND 1bn VND 1bn–VND10bn
Myanmar(6) SME MIE
<200/100e) < 9b)
< Kt 10md) –,,–
— —
< Kt 5mc) –,,–
Cambodia(6) MIE SE ME
< 11f) 11–50f) 51–100f)
— — —
US$ 50,000 US$50,000–250,000 US$250,000–500,000
— — —
Singapore SME – manufacturing and services Thailand(4) MIE – manufacturing SE – manufacturing and services – trading:wholesaling – retailing ME – manufacturing and services – trading wholesaling – retailing
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Invested capitala
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(Continued)
Member country
6 SMEs in Asian Developing Countries
Table 1.1
K < 100 m K < 400m K < 2000m
K <70m K < 250m K < 1200m
— — —
0–5 < 300 < 600 < 100 –,,– < 500 < 400 –,,– 300–3000 600–3000 100–200 100–500 500–3000 400–1000 400–800
— RMB < 30m –,,– –,,– RMB < 10m RMB < 30m –,,– –,,– RMB 30m–300m –,,– –,,– RMB 10m–50m RMB 30m–300m –,,– RMB 30m–150m
— RMB < 40m –,,– — — — — — RMB 40m–400m –,,– — — — — —
— — — — — — — — — — — — — — —
India(8) MIE – manufacturing SE – –,,– ME – –,,–
— — —
— — —
INR ⱕ 2.5m INR 2.5m–50m INR 50m–100m
— — —
MIEs – services SE – –,,– ME – –,,–
— — —
— — —
INR ⱕ 1m INR 1m–20m INR 20m–50m
— — —
China(9) MIE SE – manufacturing – construction – wholesale – retail – transport – post – hotel & restaurant ME – manufacturing – construction – wholesale – retail – transport – post – hotel & restaurant
(continued )
Introduction
1–4 5–19 20–99
7
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Lao PDR(6) MIE SE ME
Employees
Annual sales/turnover
Fixed/productive assets
Pakistan(10) (a) MIE SE ME (b) SE ME (c) SE – manufacturing – service – trade ME – manufacturing – service – trade (d) SE ME
ⱕ9 10–35 36–99 1–9 10–300 ⱕ 50 ⱕ 50 ⱕ 20 51–250 51–250 21–50 — —
— — — — — — — — — — — — —
PR < 2m PR 2m–20m PR 21–40 — — PR 30m PR 20m PR 20m PR 30m–100m PR 20m–50m PR 20m–50m PR ⱕ20m PR 20m–100m
— — — — — — — — — — — — —
Bangladesh(11) (a) MIE and SE ME (b) SE – manufacturing – non-manufacturing ME – manufacturing – non-manufacturing (c) SE – manufacturing – trade – service (d) MIE SE ME
ⱕ 50 51–200 — ⱕ25 — 25–100 ⱕ 60 ⱕ 20 ⱕ 30 ⱕ 10 10–49 50–99
— — — — — — — — — — — —
— — Tk ⱕ15m — Tk 15m–100m — Tk 50,000–10m Tk 50,000–5m Tk 50,000–3m — — —
— — — — — — — — — — — —
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Invested capitala
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(Continued)
Member country
8 SMEs in Asian Developing Countries
Table 1.1
— — —
— — —
< SR 1m SR 1m– < 20m SR 20– < 50m
— — —
Nepal MIE–manufacturing SE –,,– ME –,,–
— — —
— — —
ⱕ NR 200,000 >NR 200,000–30m > NR 30m–100m
— — —
Notes: a) not including fixed assets; b) no limits for handicrafts; c) capital outlay; d) production value; e) dependent on sector; f) industrial sector. Sources: (1) ASEAN-EU Partenariat ’97 (http://aeup.brel.com); (2) (a) BPS = Central Bureau of Statistics and (b) the State Ministry of Cooperative and SMEs; (3) SMIDEC (1999,2002, 2004, 2005, 2006); (4) ACTETSME.ORG (Website), except MIE is from Allal (1999); (5) Sibayan (2005), Aldaba (2008); (6) UNESCAP (2004), Kyophilavong et al. (2007a, b), and Bailey (2008); (7) Sang (2007); (8) SIDBI (2000) and http://www.laghu-udyog.com/ssiindia/definition.htm; (9) Xiangfeng (2008); (10) (a) SMEDA, (b) ILO, (c) Government of Pakistan (the SME Policy, 2005), (d) SME bank; (11) (a) ILO, (b) Industrial Policy 2005, (c) Bank of Bangladesh, (d) BBS; others: APEC (2003a, b, c), Hall (1995), Harvie, and Lee (2002a), www.ifc.org/.../SriLankaGovt.Perspective/$FILE/....., Nepal et al. (2006).
Introduction 9
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Sri Lanka MIE SE ME
SMEs in Asian Developing Countries
programs, a new definition of SMEs in manufacturing (including its related services), agriculture and services (including the ICT) sector was introduced in 2005. The criteria used in defining SMEs are annual sales turnover and number of employees. They provide a broad definition of SMEs, along with specific definitions for MIEs, SEs, and MEs. For wider coverage, a business is considered an SME as long as it meets either of the thresholds set for annual sales turnover and number of full-time employees (UNDP, 2007). The “Guideline on Definitions of SMEs in Malaysia” was issued by the Secretariat, Bank Negara Malaysia on 13 September 2005 for circulation to ministries and agencies, as well as to financial institutions (APEC, 2003). Cambodia did not have a single official definition of an SME until 2005. The National Institute of Statistics (NIS) classified enterprises with fewer than ten employees as small, and with 11 or more as large. It also, at times, further classified enterprises with between 11 and 100 employees as medium-sized. The Ministry of Industry, Mines and Energy (MIME) defined SEs as those with fewer than 50 employees. Some ministries use either or both of these definitions, while others use different definitions, some based on asset value. This makes it difficult to compare SME data from different sources and, as definitions have been changed over time, from one period to the next. In July 2005 the Cambodia SME Sub-Committee proposed that the definitions of enterprise size as shown in Table 1.1 be applied to all ministries. It is unclear whether definitions have been used consistently since. For policy and statistical purposes the definition based on employee number is the preferred SME Sub-Committee option. When employee number is not suitable, such as when there is considerable variation over time in the number of employees in an enterprise, the definition based on financial assets is an alternative option (Bailey, 2008, p. 5). In Brunei Darussalam, SMEs are well facilitated in terms of their location in industrial sites, loan requirements, training of their workforces, factory expansion, and market growth. The support policy has the objective of creating sustainable activities and meaningful employment. For this purpose, SMEs are categorized by the amount of the employment opportunities created. Enterprises are small when employing fewer than ten people, medium when the numbers are 10–100, and large when the workforce is more than 100. According to this definition, about 98 percent of total business establishments in the private sector are SMEs. In the Philippines, there are two operational definitions of SMEs: one employment-based, the other asset-based. The former is the more widely used in the country (National Statistics Office and SMED Council Resolution No. 1, Series 2003) (Aldaba, 2008, p. 219). Like certain other countries, the Philippines has changed its official definition of SMEs several times since 1991. In that year, in order to encourage the development of SMEs, the government of the Philippines brought into force the Magna Carta of Small Enterprises (Republic Act 6977), which outlines general policies
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for the development of SMEs. Among other things, the law mandated the establishment of SME Development (SMED) Councils throughout the country to promote public sector–private sector partnerships in the promotion of SMEs. An SME is defined as any business activity or enterprise engaged in industry, commerce, agribusiness, and/or services, whether single proprietorship, partnership, cooperative or corporation, whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity’s office, plant, and equipment are situated, must have value falling under the following categories: MIEs are units with a maximum of nine employees and less than P 1.5 million in fixed assets; SEs with 10–99 workers and fixed assets of between P 1.5 million and P 15 million; and MEs with 100–199 employees and assets of between P 15 million and P 100 million (Aldaba, 2008, p. 219). The definition was then changed by Resolution No. 3 1995 issued by the SMED Council. The Council has defined an SME as “any business activity or enterprise”, whether engaged in industry, agri-business, or services and regardless of whether it is a single proprietorship, partnership, cooperative or corporation, whose asset size corresponds to the set amounts. In 2002, Republic Act No. 9178, otherwise known as the Barangay Micro Business Enterprise (BMBE) Act of 2002, has redefined the existing category by dividing SMEs into MIEs, SEs, and MEs, and in January 2003 the SME Development (SMED) Council did the same (Table 1.1). Thus, the Philippine SME has neither more than P 100 million in assets nor more than 200 employees. In March 2003, the Central Bank of the Philippines adopted the above SMED Council definition to apply to the SME programs run by financial institutions (Sibayan, 2005, p. 10). In Thailand, before the 1997/98 Asian financial crisis, no national definition of SMEs had been proposed and commonly accepted, and various public agencies had used their own SME classification criteria, primarily to suit their respective institutional needs. For instance, the Small Industry Finance Corporation (SIFC) and the Small Industry Credit Guarantee Corporation (SICGC) both defined an SE as having fixed assets worth less than THB 50 million (but it provided no definition of an ME). The value of fixed assets is also used as a classification criterion by many other countries. However, it is less easy to use than for example, number of employees because enterprises (particularly the smallest and also the most traditional ones, like MIEs) do not generally have a precise estimate of their fixed assets, or may not wish to provide this type of information. The value of fixed assets depends on the level of development of the country and on the sector under consideration. The Department of Industrial Promotion defined MEs as business units with fixed assets worth between THB 20 million and THB 100 million and with 50–200 workers, and SEs as having fixed assets worth less than THB 20 million and with fewer than 50 employees; the Federation of Thai Industries (FTI) classified MEs as firms with total assets in the range of THB
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Introduction
SMEs in Asian Developing Countries
20 million–THB100 million and 5–200 workers, and SEs as firms with fixed assets of less than THB 20 million and employing fewer than 50 persons as workers; and for the Bank of Thailand (BOT) firms with fixed assets worth no more than THB 50 million are considered as MEs and those with assets worth less than THB 20 million as SEs (White, 1999, p. 4). In fact, the many papers written on SMEs in Thailand contain different accounts of national definition of SMEs in Thailand. For example, according to Leopairote (1997, p. 6), before 1997 the Royal Thai government applied the following definitions to enterprise activities: (i) SEs employ no more than 50 workers and have no more than THB 10 million in registered capital; (ii) MEs employ 50–200 workers and have a registered capital of between THB 10 million and THB 100 million; and (iii) SMEs are establishments with fewer than 200 employees and less than THB 100 million in registered capital. In Indonesia there are several definitions of SMEs, depending on which agency provides the definition. The State Ministry of Cooperative and Small and Medium Enterprises (Menegkop & UKM) promulgated the Law on Small Enterprises No. 9 of 1995, which defines an SE as a business unit with total initial assets of up to Rp 200 million, not including land and buildings, or with an annual sales value of a maximum of Rp 1 billion, and an ME as a business unit with an annual value of sales of more than Rp 1 billion but less than Rp 50 billion. Although the law does not explicitly define MIEs, Menegkop & UKM data on SEs include MIEs. In 2008 the Ministry issued the new Law on SMEs Number 20 with the new definition of SMEs given in Table 1.1 Other bodies, such as the National Agency for Statistics (BPS), which regularly conducted surveys of SMEs, sometimes in cooperation with Mengkop and UKM, uses the number of workers as the basis for determining the size of an enterprise. In its definition, MIEs, SEs, and MEs are business units with, respectively, 1–4, 5–19, and 20–99 workers, and LEs are units with 100 or more workers; and the Ministry of Industry (MoI) likewise defines enterprises by size in its sector according to number of workers. In Vietnam the private sector had long been depressed and even eliminated in some economic domains in the northern part of the country during the wars against France and the US (1945–75) that preceded national unification, and it continued to be treated in such a way throughout the country during 1976–85. The genesis of private sector development in united Vietnam can be traced to 1986, when the government adopted the Doi moi (economic reform) policy and recognized the multi-stakeholder economy. Another important step was the 1992 Constitution, which recognizes the private sector in the economy and enshrines the protection of private ownership in the country’s economic life. Thereafter, in parallel with the restructuring of state-owned enterprises (SOEs) and attracting FDI, the pace of private sector reform began to accelerate. The promulgation of the Enterprise Law (1999) has created a new impetus, a breakthrough for the development of
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the private sector. To comply with World Trade Organization (WTO) rules and provisions, many laws were amended and newly promulgated, creating a fairer competition environment in the country. Vietnam has adopted more in-depth reforms as it promised to do after its recent (2006) accession to the WTO, contributing to the establishment of level playing field, which is considered to be very important for private sector development in the country (Cuong et al., 2008, p. 326). Vietnam’s official definition of an SME was slow to arrive, coming as it did after more than 20 years of private sector reform. As late as 23 November, 2001, the Government Decree 90/2001/ND-CP provided for the first time an official definition of an SME as an independent business entity that has registered its business in accordance with prevailing laws, with registered equity capital of no more than VND 10 billion or with an annual average workforce of no more than 300. According to this Decree, the SMEs include (i) enterprises registered and operating under the Enterprise Law of 1999; (ii) enterprises registered and operating under the Law on SOEs; (iii) enterprises registered by the Law on Cooperatives of 1996; and (iv) householders registered under Government Degree No. 02/2000/ND-CP dated 2/2/2000. Under this definition, any enterprise that meets the requirements of the two criteria (the number of employees and the amount of capital) is considered an SME. Because SMEs are defined by size regardless of form of ownership, they can be private enterprises, SOEs or cooperatives (Long, 2003). However, as Long argues, this definition does not reflect the full characteristics of each sector. The information technology sector is a symbolic example, since it does not require a large workforce but does require a huge amount of capital. Therefore, the official definition only partly captures the characteristics of SMEs (Long, 2003, p. 12). Before 1998 some provinces had stipulated their own SME criteria such as fewer than 500 regular laborers, (fixed) assets of less than VND 10 billion, and mobile capital and monthly revenue of less than VND 20 billion. In June 1998 the government published Public Letter 681/CP-KCN on directions of strategy and policy for developing SMEs, according to which an SME is an establishment with a registered capital of less than VND 5 billion or a regular workforce of fewer than 200 workers. This legal document laid the foundations for implementing measures to support SMEs’ development. Recognizing that the SME definition under Decree 90/2001/ND-CP was too general to provide useful data for policy formulation, the Agency for SME Development (ASMED) in June 2005 introduced a further size segmentation in its SME Development Plan for the period 2006–10. According to the new segmentation, SMEs are classified into MIEs (fewer than ten persons), SEs (10–49 persons) and MEs (50–299 persons) (Cuong et al., 2008, p. 327). However, as Cuong et al. (2008, p. 328) remark, the current SME classification still suffers from certain limitations. First, it does not
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Introduction
SMEs in Asian Developing Countries
“separate” an enterprise domain, which may need different amounts of capital and/or employ different necessary numbers of workers for production activities. For instance, the service sector does not normally need as much capital as the manufacturing sector. This is why the services sector (trade and repair) is the largest group in the total number of SMEs. Second, registered capital is not an “effective” criterion since at the moment of classification an enterprise’s working capital needs may change, and may exceed the earlier requirements. Besides number of employees, annual revenues, or value of invested capital as criteria to define MIEs, SEs, and MEs, in fact in developing countries MIEs can be distinguished easily from SEs or MEs just by reference to their different characteristics in many respects, such as market orientation, socioeconomic profiles of their owners, nature of the employment, organization and management system, degree of mechanization (nature of production process), sources of raw materials and capital, location, external relationships, and degree of women’s involvement as entrepreneurs (Table 1.2).
1.3 Scope, objective, and structure of the book This book is about SMEs in Asian developing countries. Based on key literature, most recent country data, and own case studies and surveys, its main objective is to present and discuss recent development of SMEs (for example, growth in unit and output, GDP contribution, sectoral concentration, and export) in a number of countries including China, India, Pakistan, Indonesia, Malaysia, Thailand, Nepal, Bangladesh, Brunei Darussalam, and Vietnam. The book also touches on certain important SME developmentrelated issues, such as the effect of trade liberalization on local SMEs, the main development constraints facing enterprises, their competitiveness and their ability to undertake innovations, transfer of technology from large enterprises, including multinational companies, to local SMEs, and the degree of women’s involvement as entrepreneurs in SMEs and its related main constraints. Although the development of SMEs is currently an important public issue in many Asian developing countries, and receives increasing attention not only from the academic community but also from policymakers, some of these countries have limited information (that is, official data and literature) on the current state of their SMEs’ development. Consequently, not all countries in Asia considered to be developing economies are covered in this book, and of the countries included SMEs in some are presented and discussed more comprehensively than in others. Specifically, the book is presented in seven chapters including this chapter. Chapter 2 discusses the pattern of SME development in the course of economic development from a theoretical perspective. Chapter 3 provides an overview of the recent development of SMEs in the region and more
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Aspect
MIEs
Formality
operate in informal sector, unregistered and pay no taxes Organization – run by the owner and – no internal labor division management – no formal management and accounting system (bookkeeping) Nature of majority use unpaid family employment members Nature of – degree of mechanization very production low/mostly manual process – level of technology very low Market majority sell to local markets and orientation for low-income consumers
Social and economic profiles of owners Sources of inputs
– majority use local raw materials and use own money – majority have no access to government programs and no business linkages with LEs
some operate in formal sector, registered and pay taxes – run by the owner – no labor division, – no formal management and accounting system (bookkeeping) some hired wage laborers
all operate in formal sector, registered and pay taxes – many hire professional managers – many have labor division, formal organizational structure, and formal accounting system (bookkeeping) – all hired wage laborers – some have formal recruitment system some use up-to-date machines many have high degree of mechanization/access to modern technology –many sell to domestic market – all sell to domestic market and many and export also export – many serve also middle- to – all serve middle- and high-income high-income group consumers – some have good education, – majority have good education and from non-poor households – many are from wealthy families – many have business/profit motivation – main motivation: profit – some import raw materials – some have access to banks and other formal credit institutions – many have good relations with government and have business linkages (such as subcontracting) with LEs (including MNCs/FDI). ratio of female to male entrepreneurs is high
– many use imported raw materials – majority have access to formal credit sources – majority have good access to government programs – many have business linkages with LEs (including MNCs/FDI) ratio of female to male entrepreneurs is low
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15
Women ratio of female to male entrepreneurs entrepreneurs is high
MEs
Introduction
External networks
– low or uneducated – from poor households – main motivation: survival
SEs
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Table 1.2 Main characteristics of MIEs, SEs, and MEs in Asian developing countries
16
SMEs in Asian Developing Countries
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discussion on selected Asian countries where data are available. Chapter 4 and Chapter 5 deal with, respectively, export performance and competitiveness and transfer of technology. The main constraints facing SMEs are discussed in Chapter 6. Finally, Chapter 7 discusses the development of women entrepreneurs in SMEs.
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2
2.1
Key theories
Economic development creates a natural place for the development and growth of enterprises of all sizes of establishment (micro, small, medium as well as large). The size of a business establishment depends on a variety of factors, of which the two most important are market and technology (Panandiker, 1996, p. 10). With respect to the first factor, if the market is small or very small, only small- or micro-scale economic activities, or SEs and MIEs, will be viable. The market size itself is determined by the level of real income per capita and the size of population, which together determine the actual number of buyers. In the manufacturing industry SMEs produce a variety of goods that, due to their nature or characteristics, can be grouped into two categories, namely, consumer goods and industrial goods. With regard to the first category, SMEs can be manufacturers of final products sold in the market. They survive and grow in competition with LEs manufacturing similar products. This is because SMEs differentiate their products by nature or acquirement, thereby creating niche markets for themselves. For instance, in many developing countries a large number of SMEs, particularly MIEs and SEs, specialize in a variety of simple items made by hand, such as handicrafts, which are outside the competitive area of items that are similar but more sophisticated and produced by LEs with machines. In such circumstances SMEs have a better chance to survive and hence to grow and develop, whereas they would be out-priced in the market if they tried to compete with LEs by making exactly the same products when the economic scale of output prescribes large enterprises accessing modern technologies. With regard to industrial goods, SMEs manufacture products for other manufacturers. They are often ancillaries to LEs. It has been observed in recent years that the relationships between SMEs and LEs in many countries have become increasingly important because of the trend toward what Richard (1996, p. 5) called “diverticalization.” LEs, in order to remain 17
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SME Development Pattern: A Theoretical Consideration
SMEs in Asian Developing Countries
competitive, increasingly focus on core competence and buy in other products and services. Through such production linkages, mainly in the form of subcontracting, SMEs are often exposed to the muscle power of the LEs, leading to unpleasantness and problems for SMEs. One obvious problem is that many SMEs, as the LEs’ suppliers, have difficulties meeting the tight schedules and product specifications (Semlinger, 1993). The problem, which is mainly of a technical, management and organizational nature, observably exists not only in developing countries but also in developed countries. Kaplinsky (1994, p. 339), for instance, found in a number of countries that SMEs face difficulties delivering products “just in time” and with high standards of quality, as is increasingly required by LEs. With respect to the technology factor, as explained in Panandikaer (1996, p. 10), if the economic size dictated by the technology is large, SMEs will be outcompeted in the market because they cannot produce efficiently due to a lack of economies of scale. For instance, in the electronics industry the state-of-the-art technology may indicate a large size, so LEs are viable. But neither the market nor the technology is fixed for all time; they constantly change. Since the late 1990s the world has witnessed rapid innovations in technology, at least in some fields like bioprocessing of materials, information, telecommunications, television, satellite, fax, cellular phones and pagers, computers and automation. Many LEs experienced serious problems in adapting themselves to changing technologies and hence the business environment in terms of making shifts in planned production and changes in planned investment and division of labor (including the recruitment of new workers with certain high skills needed by new technology), and are therefore unable to perform. In such circumstances, SMEs have a better chance of survival. In discussions of industrial systems and the role of SMEs within these systems and their pattern of overall development in developing countries, attention usually focuses on seminal articles by Hoselitz (1959), Staley and Morse (1965), Parker (1979), and Anderson (1982), among others. Their works are often classified as the “classical” theories of SMEs’ development. The “modern” theories, on the other hand, include the works of Berry and Mazumdar (1991) and Levy (1991; 1993), among many others, in the newly industrializing countries in East Asia like Taiwan and South Korea, and the literature on the flexible specialization thesis based on many experiences from SMEs in west European countries. These theories explicitly emphasize the importance of subcontracting networks and the economic benefits of agglomeration and clustering for the development of SMEs. In their substantial study, based on the experience of industrialized and developing countries, Staley and Morse (1965) identified three categories of conditions for the predominance of SMEs, namely, location, manufacturing process, and market. The two most important local conditions are factories processing dispersed raw material (mainly rural industries) as products for
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local markets and relatively high transport costs. Among the most important conditions for the predominance of SMEs with respect to manufacturing processes are separable manufacturing operations, craft or precision handwork, and simple assembly, mixing, or finishing operations. The market condition is differentiated by products with low-scale economies serving small markets. The significance of these influences may be different for SMEs in different subsectors. For instance, industries serving small markets are a particularly important determinant for the dominance of SMEs in the wood and furniture industries because total demand for such products is usually more limited than that for other consumer goods; whereas factories processing a dispersed raw material is considered as the condition for the dominance of small-and medium-scale food industries in rural areas. Among these conditions, Staley and Morse (1965) argued, separable or specific manufacturing operations (e.g. SMEs producing certain components for LEs) and differentiated products having low-scale economies were the most important explanatory factors for the presence of SMEs in developing countries.1 Although some authors have explored the relationship between the size of business establishments and the process of economic development by analyzing historical stages of development, the theoretical literature on the issue of how SMEs are influenced by increases in per capita real income (as an indicator of economic development) remains limited. Hoselitz (1959) first paid attention to this particular issue in his study on industrialization in Germany. His study indicates that in the “early” stage of development the manufacturing sector in the country was dominated by artisans or craftsmen, and as development proceeded many of them grew into large industrial establishments while others died out. However, Hoselitz (1959) did not deal explicitly with the nature of the relationship between the increase in the level of industrialization and structural change within the manufacturing sector. He emphasized more on the characteristic of low costs of production, which he concluded was the key to the success of SMEs. He attributed the low cost of production mainly to the use of unpaid family workers. Following Hoselitz’s work, Parker (1979) and Anderson (1982) developed general growth phase typologies based on the experience of the industrialized countries to explain changes in the size and structure of industry by region and over time in developing countries. According to this approach, in the course of economic development the composition of manufacturing activities, if classified according to scale, appears to pass through three phases. In phase one, at the “early” stage of economic or industrial development which may be characteristic of predominantly agrarian economies, MIEs or household and artisanal activities in manufacturing industry (they can be characterized as the most traditional type of enterprises in manufacturing industry) are predominant in terms of their total number
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SME Development Pattern
SMEs in Asian Developing Countries
of production units and share in total manufacturing employment. This is a stage of industrialization in which a large number of MIEs (mainly in rural areas) coexist with quite a limited number of larger-scale enterprises (mainly foreign firms or state-owned companies located in urban areas or large cities). In this stage, MIEs are predominant in activities such as garment-making, smithery, footwear, handicrafts, masonry, industries making simple building materials, and various crop-processing industries. They are closely related to agricultural production, as providers of rudimentary inputs to and of processing services for output from agriculture, and of the non-food needs of the rural population. In developing countries these subsectors are characterized by substantial ease of entry. Particularly for clothing, food, and handicraft industries, initial capital requirements are very low, and for the producers involved there is no need for high skills and special separated workshops to carry out these activities. Perhaps for this reason, the activities are undertaken largely by women and children working part time. However, the income function of such activities is important as it is the secondary source of family income for many poor households. Most enterprises in such activities are self-employment or one-person units in which the owner undertakes all activities. In phase two, in more developed regions with higher incomes per capita, small and medium workshops and factories emerge and increase at a comparatively rapid rate, and act to displace MIEs in several subsectors of manufacturing. Certain factors might explain the expansion of these industries in this particular stage. Steel (1979), for instance, emphasizes the importance of a growing cash market for the expansion of SMEs. He argues that growing urbanization and expanding cash markets reflecting economic modernization give rise to a shift from traditional household activities employing non-paid family members as workers/helpers (which in Asian developing countries are predominantly MIEs) to complete specialization of the entrepreneur in small- scale production using employed laborers (p. 9).2 In phase three, at the “later” stage of development, large factories become predominant, displacing the remaining SMEs in some activities. According to Anderson (1982, p. 914) this phase is partly a product of phase two, since the recorded growth of output and employment in LEs can be divided into (a) the growth of once small enterprises through the size structure and (b) the expansion of already large domestic and foreign enterprises (p. 914). However, the expansion of LEs at this stage may also be caused, to a certain extent, by new large-scale entrants, a possibility that Anderson does not explicitly take into account. A hypothesis similar to Anderson’s has also been proposed or supported by authorities such as Davila and Satterthwaite (1987), Little (1987), and Nanjundan (1989), stating that increasing levels of economic development inevitably will bring about the replacement of SMEs, especially the most traditional ones (i.e. MIEs) by larger factories (LEs).
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In this final phase, the use of economies of scale with respect to plant management, marketing, and distribution (depending on the type of product and flexibility in production), superior technical and management efficiency, better productive coordination and access to supporting infrastructure services and external finance, and concessionary finance along with investment incentives, tariff structures, and government subsidies are all powerful causal factors acting as incentives for firms to grow. In reality, it is often found that these factors are more favorable to large or modern industries than to small and traditional ones, and so they may explain the eventual better performance of larger enterprises than that of smaller ones in advanced stages of industrialization. Schmitz (1982, p. 25) states that only those SMEs that can take advantage of some or all of these factors can grow or, at least, survive against heavy competition from LEs. The empirical evidence on the systematic pattern of structural change in industrial establishments, though still limited, is richer than the corresponding theoretical literature. Empirical evidence from many countries collected by Snodgrass and Biggs (1996) and Tambunan (1994) may suggest that there is a systematic trend whereby the employment shares of MIEs and SEs in higher-income countries tend to be lower than those in lower-income countries.3 They claim that (i) many SEs may have grown into MEs and some MIEs into SEs; (ii) there might be many new small factories and medium and large-scale entrants in the industry; and (iii) many MIEs die out. Beck et al. (2003) undertook the first large cross-country empirical study on the link between SMEs and economic growth using a database on the share of manufacturing employment accounted for by SMEs in many countries in Africa, Europe, Asia and America. For the analysis, they constructed two measures of the size of the SME sector. The first measure (A) is the share of SMEs in the total official labor force in manufacturing, with 250 employees taken as the cutoff for the definition of an SME. This variable provided the authors with a consistent measure of firm size distribution across countries. The second measure (B) is the share of SMEs in the total official labor force in manufacturing when the official country definition of an SME is used, with the official country definition varying between 100 and 500 employees. Table 2.1 lists GDP per capita and the two measures of the size of the SME sector. As can be seen, there are large variations in economic development and the relative size of the SME sector. GDP per capita ranges from very low in Burundi (US$171) to very high in Luxembourg (US$ 45,185). The importance of SMEs varies from Belarus, with less than 5 percent of total formal employment in SMEs, to Thailand, with 87 percent, as indicated by SME 250. The output composition of SMEs in the manufacturing industry also appears to shift with development. As income per capita increases, the activities of SMEs shift from “light” manufacturing (such as food processing, beverages, wood, furniture, paper, printing and publishing, non-metallic
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SME Development Pattern
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SMEs in Asian Developing Countries
Country Luxembourg Switzerland Japan Denmark Norway Germany Austria United States Sweden Belgium Iceland Netherlands France Finland Singapore Hong Kong, China Australia Canada United Kingdom Italy Ireland Brunei New Zealand Spain Taiwan, China Greece Portugal Korea Rep. Slovenia Argentina Czech Rep. Hungary Chile Croatia Brazil South Africa Estonia Slovak Rep. Costa Rica Poland Mexico Panama Turkey Russian Fed.
GDP per capita (US$)
A (%)
B (%)
45,185 44,717 42,520 34,576 33,657 30,240 29,619 28,232 27,736 27,572 27,497 27,395 27,236 26,814 22,874 21,842 20,930 19,947 19,361 19,218 18,528 17,984 16,084 15,362 12,474 11,594 11,121 10,508 9,758 7,484 5,015 4,608 4,476 4,454 4,327 3,923 3,752 3,651 3,405 3,391 3,390 2,999 2,865 2,614
70.9 —* 71.7 68.7 — 59.5 66.1 — 61.3 69.25 — 61.22 67.3 59.15 — — — — 56.42 79.7 67.2 — — 80 68.6 86.5 79.9 76.25 — 70.18 64.25 45.9 86 62 59.8 — 65.33 56.88 — 63 48.48 72 61.05 13.03
70.9 75.25 74.13 78.4 61.5 70.36 66.1 52.54 56.5 69.25 49.6 58.5 62.67 59.15 44 61.3 50.6 58.58 56.42 73 72.1 69.4 59.28 74.95 68.6 74 81.55 78.88 20.26 70.18 64.25 45.9 86.5 62 59.8 81.53 65.33 32.07 54.3 61.81 48.48 72 61.05 13.03
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Table 2.1 Level of economic development and the size of the SME sector in selected countries
SME Development Pattern
23
Country
GDP per capita (US$)
Thailand Belarus Latvia Colombia Peru El Salvador Ecuador Romania Kazakhstan Bulgaria Guatemala Yugoslavia Fed. Rep. Ukraine Philippines Kyrgyz Rep. Indonesia Côte d’Ivoire Albania Georgia Honduras Cameroon Zimbabwe Tajikistan Azerbaijan Nicaragua Zambia Ghana Kenya Vietnam Nigeria Tanzania Burundi
2,590 2,523 2,419 2,290 2,162 1,609 1,521 1,501 1,496 1,487 1,460 1,271 1,190 1,099 972 963 746 744 737 706 653 643 566 558 432 419 377 341 278 257 183 171
A (%)
B (%)
86.7 4.59 — 67.2 67.9 — 55 37.17 — 50.01 32.3 44.4 5.38 66 63.22 — 18.7 — 7.32 — 20.27 15.2 — 5.34 — 36.63 51.61 33.31 74.2 16.72 32.1 —
86.7 4.59 20.63 67.2 67.9 52 55 37.17 12.92 50.01 32.3 44.4 5.38 66 63.22 79.2 18.7 9.49 7.32 27.6 20.27 15.2 35.91 5.34 33.9 36.63 51.61 33.31 74.2 16.72 32.1 20.51
* = no data available. Source: Beck et al. (2003, p. 23).
mineral products, textiles, clothing, footwear, construction, metal fabrication, and leather) with simple processing to “heavy” manufacturing producing intermediate and capital goods with more complicated processing. Industries in the heavy manufacturing category include rubber and related goods, chemical products, petroleum, basic metal, machine and transport equipment). In other words, the higher the income per capita, the lower is the share of light manufacturing in total employment in SMEs and the
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Table 2.1 (Continued)
SMEs in Asian Developing Countries
higher the share of heavy manufacturing, especially in the machine and transport equipment industries (Biggs and Oppenheim, 1986). As well, with the process of development a shift of SMEs also takes place from producing “traditional” goods (i.e. the kind of activities undertaken mainly by women and children) to making more sophisticated or “modern” goods, not only as between manufacturing subsectors but also within subsectors. In other words, in the course of development, the share of SMEs producing “traditional” goods as a percentage of total employment or units in a particular industry declines (Liedholm and Parker, 1989, p. 12).4 In addition, Biggs and Oppenheim (1986) show evidence which indicates that the sectoral shift or the shift from making traditional goods to making modern goods within an industry is also accompanied by changes in the size of industrial establishments, that is, from MIEs into SEs, from SEs into MEs, and from MEs into LEs. However, the authors do not clearly indicate in their study whether these sectoral shifts are causally related to, rather than only accompanied by, the shift in firm size. In earlier studies of SMEs in developing countries, these enterprises, in particular MIEs, were commonly treated and in a way dismissed as tradition-bound, low-income and economically backward activities, offering few and probably decreasing opportunities for raising incomes. But, as found in many African countries, MIEs were actively engaged in a much wider range of activities, including various resource-based and agro-processing activities, than only traditional activities producing “inferior” goods, as often thought. This evidence may suggest that with economic development not all MIEs will disappear. Indeed, in many developing countries a sizeable number of these industries survive to the present day. Some of them remain small and traditional while some others have developed into larger factories.5 An important factor that might explain why in many “more-developed” countries within the developing world a large number of MIEs survived and even grew larger, despite heavy competition from larger industries and policies biased against them, is a specific skill or specialization owned traditionally by the producers/owners. This is also indicated by Hoselitz’s study (1959) on early industrialists in Germany who started out as artisans or craftsmen and later came to own large industrial establishments. Within a country, differences in the pattern of transition within SMEs (that is, from MIEs to SEs, and SEs to MEs or from MEs to LEs) are also apparent between urban and rural areas. These differences are explained mainly by differences in the level of development between rural and urban economies and in the characteristics of rural and urban SMEs. As for differences in characteristics, many studies show that more “traditional” crafts such as blacksmithery, weaving, and mat- and pottery-making are relatively more important in rural areas and that they are characterized by a higher proportion of self-employment units, while MEs tend to predominate in urban areas. Apprentice and wage labor are relatively more important components
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of total employment in urban SMEs, while rural MIEs rely more heavily on unpaid family labor. Furthermore, the larger share of manufacturing employment, particularly in MIEs, in rural areas as compared with urbanbased SMEs is highly seasonable, consisting of part-time non-farm activities that peak during the slack season in farming activities.6 With respect to entrepreneurship, Liedholm (1973, p. 5) argues that in rural areas micro or small entrepreneurs have substantially different educational and occupational backgrounds from those of their counterparts in urban areas. People engaged in rural enterprises have a lower level of education than those in urban enterprises, even in the same size category, and in rural areas they are mainly from farm households in contradistinction to those in urban areas. Rural SMEs also differ from their urban counterparts in market orientation. Some studies found that rural SMEs appear to be less outward-oriented for both output and inputs than SMEs in the urban areas. Most rural SMEs serve only local markets and use local inputs, whereas many urban SMEs sell their products to other regions within a country, or export them. As well, many urban SMEs use imported inputs, though this depends very much on the goods produced.7 Further, Chuta and Liedholm (1985) found in some African countries that the growth rates of the total number of SMEs and of the persons employed in them are positively correlated to the size of the locality, indicating that the growth rate of SMEs in urban areas is higher than that in rural areas. The important reason, according to Anderson (1982, p. 920), why urban SMEs grow fast while their rural counterparts are declining or stagnating is the growing market in urban areas, which is due to a larger population (actual or potential buyers) growing at a higher rate, higher real income per capita, and, more importantly, larger middle- and high-income segments in urban areas. This condition creates more opportunities for urban SMEs to expand their output or to diversify their market; and urban SMEs servicing the urban high-income segment can also grow rapidly as urban demand from this income group increases.8 Moreover, intermediate demand from LEs is mainly concentrated in urban areas. This may thus provide more opportunities for urban SMEs servicing this market segment (for example, through subcontracting) to grow. In the rural areas or isolated regions, on the other hand, local enterprises are engaged in the production of more traditional and low- or negative-income elasticity goods, for a small local market, in particular for rural low-income segments (Mazumdar, 1976, p. 660). Byerlee (1973, p. 15) gives his own explanation of why such different patterns of change and development are really occurring. He states that the supply and demand pattern of rural enterprises is different from that of urban enterprises from the same size group. Both the demand for output and the supply side of rural enterprises are closely related to agricultural incomes and production, which vary seasonally.
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SME Development Pattern
SMEs in Asian Developing Countries
Given the above differences in characteristics and environments, urban SMEs may face problems and opportunities for growth that differ from those facing rural SMEs. Thus, it can be expected that economic development in terms of income increases and changes in market demand affect rural and urban SMEs differently. To sum up, the “classical” theories of SMEs maintain that in the course of economic development, reflected by the increase of per capita real income/ gross domestic product (GDP), the “economic” share of SMEs (that is, their shares in GDP, employment, sectoral output, and total enterprises) will decline steadily. The share of large and modern enterprises, on the other hand, will take off rapidly and finally dominate the economy. In other words, the level of income per capita (or poverty) and the importance of SMEs are negatively (positively) correlated: the economic share of SMEs declines as income per capita (poverty) increases (declines), or, put it in a different way, in poorer countries SMEs are more important than that in wealthier countries (Table 2.2). In the 1980s, a new concept “flexible specialization” emerged and many research or seminar papers, journal articles, and books on this subject have been published since then. The concept was the result of a long debate over how to interpret the new global pattern of production caused by the forces of globalization and industrial restructuring. These have changed the way in which production and labor are organized. Some authors have argued that global production is undergoing a transformation from Fordist (or mass production) to non-Fordist production.9 Flexible specialization is recognized as one of its most distinctive features (Piore and Sabel, 1984). The concept of flexible specialization has been closely associated with Piore and Sabel’s (1984) seminal work on the “second industrial divide” in which the authors discussed the re-emergence of craft-based regions in some countries in western Europe, namely, Italy, Austria, and Germany.10 In examining the development of craft-based regions in these countries, Piore and Sabel saw that SMEs located in these regions have become the new dominant form of industrial organization. These industries are characterized as industries with high- and multi-skilled workers, “flexible” machinery which embodies the latest technology, and small-batch production of a range of specialized products manufactured for the global market. Piore and Sabel’s (1984) study identifies four common organizational forms of flexible specialization: (1) flexible and specialized: firms in the community can rapidly adapt their production techniques but remain specialized in the production of one type of good, for instance, garments; (2) limited entry: firms in the community form part of a bounded community from which outsiders are largely excluded;
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Level of income per capita Low
High
Variable
Level of variables MIE
SE
Highest Highest Highest Traditional/simple consumption good Rural
High High Large Majority: traditional Majority: rural
– Employment share – Output share – Number of unit – Type of goods produced
Lowest Lowest Smallest Majority: traditional consumption goods
– Location
Majority: rural
LE
Lower Lower Smaller Majority: modern
Lowest Lowest Smallest Modern
Majority: rural
Urban
Lower Lower Smaller Majority: modern consumption & producer goods
High High Large Modern
Highest Highest Highest Majority highly sophisticated
Majority: urban
Majority: Urban
Urban
SME Development Pattern
– Employment share – Output share – Number of units – Type of goods produced – Location
ME
27
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Table 2.2 Pattern of SME development from the perspective of “classical” theories
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SMEs in Asian Developing Countries
Since the publication of Piore and Sabel’s book, not only have these new characteristics and modes of industrial organization been widely discussed, but several authors have attempted to assess the relevance of the flexible specialization paradigm in industrial districts in developed countries dominated by SMEs. Many others have also attempted to assess the implications for industry, in particular SMEs, in developing countries.11 The main argument of the flexible specialization thesis is that SMEs can grow fast or even faster than LEs with the process of development. In the west European countries mentioned and in other developed economies like Japan, Sweden, and the US, SMEs in some subsectors, especially electronics and automotive industries, have been found to be very significant sources of invention, innovation, and efficiency, and also capable of withstanding competition from LEs, and even of improving their relative position in several instances. The flexible specialization literature notes explicitly that new technologies (numerically controlled tools and computers) promote the relative viability of SMEs, reduce scale economies, and lead to smaller, efficient plants and firms. The need to increase the ability of industry to meet rapid changes in demand (especially in the world market) promptly, cheaply, and efficiently has also created a new role for SMEs in developed countries. This “new role” for SMEs in the economy can be used as an argument against the proposition of Anderson, among others, that in the long run the economy will be dominated by LEs (in terms of employment and output). To sum up, the flexible specialization literature, which can be classified as advancing “modern” theories of SMEs, suggests that in the course of economic development the “economic” share of SMEs would increase (Table 2.3), although the assumed positive correlation will vary among countries due to differences in many internal factors including the level and pattern of economic development, basic economic conditions, and macroeconomic policies.
2.2 Main factors affecting the pattern In the literature on SMEs in developing countries, among other factors the level of real income per capita and population density are often cited as two most important affecting the pattern or the nature of development and change of the industries. Theoretically, these two explanatory variables affect the transformation process of SMEs through their direct effects
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(3) a high level of competitive innovation: there is continuous pressure on firms in the community to promote innovation in order to keep an edge over their competitors; and (4) a high level of cooperation: limited competition exists among firms in the community over wages and working conditions, encouraging greater cooperation between them.
Level of income per capita Low
High
Level of variables
Variable MIE – Employment share
SE
ME
LE
High
Lower
Lowest
– Output share
Highest
High
Lower
Lowest
– Number of units
Highest
Large
Smaller
Smallest
– Type of goods produced
Traditional/simple consumption good
Majority: traditional
Majority modern
Modern
– Location
Rural
Majority: rural
Majority: rural
Urban
– Employment share
Lowest
Highest*
Highest*
Lower
– Output share
Lowest
Highest*
Highest*
Lower
– Number of unit
Smallest
Highest*
Highest*
Lower
– Type of goods produced
Majority: modern consumption goods
Modern consumption & producer goods
Modern & sophisticated
Majority: highly sophisticated
– Location
Majority: rural
Majority: urban
Majority: urban
Urban
Note: * SE and ME Highest.
SME Development Pattern
Highest
29
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Table 2.3 Pattern of SME development from “Modern” theories perspective
SMEs in Asian Developing Countries
simultaneously on the demand side (output market) and on the supply side (labor market) of the enterprises. The demand-side and supply-side effects of changes of these two factors are reflected in changes in market demand for the SMEs’ products and in the changes in labor supply to the enterprises, respectively. Systematic changes in the level and pattern of demand for SMEs’ products as per capita income rises constitute an important demand factor often mentioned in the literature. With respect to final demand, as income increases demand shifts gradually from food to non-food or manufactured goods (according to Engel’s Law) or from simple (traditional) items to more sophisticated (modern) manufactured goods. Or, as explained in Biggs and Oppenheim (1986, p. 1), on the demand side increases in per capita income result in a shift away from basic commodities toward manufactured products, which require a more sophisticated process of production and organization of supply of inputs and division of labor. This structural shift in the final demand leads to a decrease in the market demand for “inferior” goods, produced mainly by MIEs, and an increase in market demand for high-income elasticity goods, produced mainly by LEs and to a lesser extent by SEs or MEs. Biggs and Oppenheim (1986, p. 1) also argue that the emergence of new products (often imported) and new technologies with the process of development has made some traditional products and crafts obsolete. In the case of intermediate demand, the higher the level of development or industrialization, the greater is the industrial demand for sophisticated intermediate and capital goods.12 All these changes in demand lead to gradual changes in the manufacturing subsectoral composition of SMEs as well as to changes in the size distribution of enterprises. These changes are also explained in Biggs and Oppenheim (1986, p. 1), who argue that changes in the pattern of domestic demand affect the size distribution of enterprises basically through their influence on the composition of output by sector. If demand shifts toward those goods that are most efficiently produced by large-scale production, then this will be reflected in the shift of aggregate size structure of manufacturing activity from small to large enterprises. In other words, as mentioned before, these kind of demand-shifts in the course of income-increases, over time, may negatively affect enterprises such as MIEs producing inferior goods. However, as generally stated in the literature on “flexible specialization”, changes in the pattern of world demand in the 1980s, especially for consumption goods, in some cases have increasingly favored small, flexible, and efficient plants. From the debate between the “classical” literature on SMEs in developing countries and the flexible specialization literature, which relies heavily on the experiences of SMEs in a number of developed countries, it can be concluded that the effect of income increases and hence demand shifts on SMEs can be positive or negative. It depends especially on the characteristics of the change and how the SMEs adjust to it. The effect can be positive,
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as generally stated in the flexible specialization literature, for smaller but more efficient plants which are characterized by three main features: they employ highly skilled workers, they are well organized and managed and have records of their daily activities, and they adopt a certain degree of labor division. The modern or “Western” type of SME is better able than SMEs in developing countries to meet rapid changes in demand (the market). The effect can, however, be negative, especially for MIEs that use mainly low-skilled family workers without any kind of labor division and without the support of a good management and organization system. In terms of number of units and workers employed in them, SMEs in the developing world, especially in low-income or poor countries, are still dominated by these traditional, craft-based enterprises, and the majority of them are concentrated in rural areas. Because of their “primitive” way of doing business, they may not be able to compete with modern enterprises or to meet rapid changes in demand or the market (Saith, 1986, p. 12). Given that the vast majority of SMEs in developing countries (especially poor countries) are located in rural areas, the effect of rural income increases over time on rural demand for rurally made goods is an important issue. In the course of rural development, with the ensuing encroachment of urban culture and expenditure patterns and the improvement of infrastructure, usually accompanied by rural income increases, the preferences of many rural people change in favor of higher-quality goods produced by modern urban industries or imported from abroad. This leads to a decrease in rural demand for rural industries’ goods. The entry of “urban goods” (including imported goods) into rural markets, however, is related not only to the increase in rural incomes per capita, but also to the improvement of infrastructure in rural areas. Anderson and Khambata (1981) try to explain this as follows. In rural areas where agricultural output and rural incomes are rising, the newly created markets for consumer and capital goods like machine tools and equipment for agriculture, as a direct consequence of increases in income and hence demand, are highly dispersed. In a rural area where infrastructure is poorly developed and transport services are badly organized, making it difficult to reach markets, the increase in local incomes and hence local demand induces a fragmented pattern of production in local industries. In such conditions, rural industries are protected by extremely fragmented spatial markets. Differentiated products having low scale economies and products servicing only small markets are also important for the extent and growth of rural SMEs. A variety of tailoring and garments industries and especially food and handicrafts industries belong to this category. When infrastructure and transport facilities are improved, reducing the transport and marketing costs of many goods, not only do the rural markets for those goods broaden but an increasing degree of entry by urban-based larger producers producing similar goods is facilitated. In time and with continued development (including improvement in infrastructure and
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SME Development Pattern
SMEs in Asian Developing Countries
transport facilities) in the rural areas, the transport and marketing costs of goods from urban-based larger enterprises to rural markets will decline to the point where local industries producing similar goods no longer have a cost advantage. In other words, the improvement will reduce all “natural” barriers facing urban-based goods industries to rural markets, and, with local income increases, traditional goods produced in rural areas will be gradually replaced by modern goods made in urban areas.13 However, the improvement of infrastructure and transport facilities in rural areas may also create new markets (in urban areas), and hence a new growth impulse, for rural industries. Such improvement makes it easier for rural producers to sell their products, either with the help of traders or by themselves, in nearby urban areas. The improvement encourages rural small and medium producers to expand their business or to change their market location. Enterprises in villages near to urban centers will produce more goods for urban markets or have larger market areas than their counterparts in more isolated villages. This implies that rural–urban economic integration does not always mean that all rural industries are outcompeted or die. It depends especially on how rural industries can adjust quickly, for example, by changing or diversifying their product lines, increasing their products’ quality, and shifting their marketing strategy, in response to a changing situation (i.e. newly appearing market opportunities). This ability to adjust does not depend only on the abilities of the owners/ producers; the more “objective” and general characteristics of the establishments themselves also play a role. According to Chuta and Liedholm (1979, p. 9), based on their own observations, the rural industries most likely to be economically viable, and thus to have better opportunities to grow in the long run with the process of rural development and economic integration between rural and urban areas, have four common characteristics: (1) (2) (3) (4)
they use hired and better qualified workers; they are located in larger settlements; they operate in workshops away from home; and they are involved in product lines with better economic prospects such as tiles, furniture, baking, garments, and repair activities.
Increases in rural income stem mainly from output increases in agriculture. The rise in agricultural productivity (and hence income) creates more demand for non-agricultural products, implying that the demand constraint for rural industries’ products is partly linked to income growth in the agricultural sector (Islam, 1987, p. 3). It is often argued, however, that the increased demand comes more from the wealthier landowning classes than from poor farm households. Poor households spend a larger share of their incremental income on food grains than do rich households. This implies
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that, as far as consumption demand is concerned, not only the level but also the distribution of income in agriculture is important in determining the growth of demand for SMEs’ products. Further, increases in rural demand for non-agricultural products can be catered for by local SMEs, by urbanbased LEs, or by foreign firms.14 In this regard, the ability of rural SMEs to survive depends largely on whether their products can compete with those of urban-based LEs or with imported goods. Although data on the expenditure behavioral pattern of rural households in relation to the demand for rural industries’ goods are scarce and in many cases not very accurate, several studies have managed to identify goods produced by rural industries. These studies show that the rural income elasticities of demand for rurally produced non-food products are greater than unity. This evidence suggests that not all rural industries produce inferior goods. However, some have argued that the income elasticities of demand in rural areas for rural manufactured non-inferior goods tend to decline progressively, while those for construction, recreation, transportation, and services, including education and health care, tend to increase if long-term trends are considered and income increases significantly. Thus, there seems to be an indication that the rural consumption of manufactured products tends to increase less than the demand for the above items (construction, recreation, and so on) as rural income grows. Changes in the level of real income per capita also affect the pattern of employment changes in SMEs via the supply side of the enterprises, that is, through the labor market in terms of labor movement into (or out of) LEs or SMEs in other industries or sectors. Labor movement among units of production is to a certain extent caused by the wage or income gap between units. The association between the increase or level of income and the growth or level of employment in SMEs via the labor market can be positive or negative. With respect to a positive relationship, if real income per worker in, for instance, agriculture is relatively high or increases, reflecting high labor productivity in agriculture which leads to a labor surplus in the sector, then the movement of labor and/or entrepreneurs from agriculture to SMEs is also high or increases. With high earnings per hour or per day in agriculture, farmers or agricultural laborers have more time or more capital to undertake other non-farm activities. With respect to a negative relationship, if real income per worker in agriculture is relatively high or increases, reflecting better work opportunities in the sector, the supply of labor from agriculture into SMEs is low or decreases (“negative growth of labor supply”: there is less supply of labor or entrepreneurs to SMEs, or many people engaged in the enterprises move out and take other jobs). In terms of differences in level, it is expected theoretically that in a region with high income per capita fewer people are engaged in SMEs in that region than in a region with lower income per capita.
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SME Development Pattern
SMEs in Asian Developing Countries
MIEs in rural areas are especially perceived being operated largely by poor people or households, such as small farmers and landless agricultural workers (Islam, 1983; 1987). The industries act as a means for them to survive. It is generally believed that the people engaged in these enterprises are being “pushed” to undertake such activities, either as a primary source of income because they could not find other, better jobs, or as a secondary source of their income, which they need desperately in order to increase their total income (Saith, 1991, p. 467). This suggests that, in a poor region reflected in a low level of real income per capita, the employment share of MIEs is higher than in a rich region with a higher level of per capita real income. A study by Weijland (1992) on rural industries in Indonesia supports this theoretical proposition, showing that in the settled outer islands, where the people are less poor and labor productivity in agriculture is high, employment in rural MIEs is lower. These enterprises are less specialized, work fewer days per month, and provide less primary income than those in the densely populated center provinces, where the people are much poorer and labor productivity in agriculture is lower. From this finding, Weijland concludes that high supply of labor to MIEs is related to a very low average productivity of labor in agriculture, representing relatively lower earnings in the sector. The negative association between the increase of income and the growth of employment in SMEs, generating negative growth of labor supply to the enterprises, may suggest another important issue, namely, a positive relationship between employment growth in the enterprises and an increase of unemployed or poor people. It is often assumed that the level of poverty is partly negatively related to the level of income per capita, and partly determined by the nature of income distribution at a given level of income per capita. It means that the higher the rate of unemployment or the level of poverty, the greater is the supply of labor to SMEs. The relationship between per capita income or the poverty rate and the supply of labor to SMEs often relate to “push–pull” factors. To sum up the discussion, a theoretical hypothesis on the relationship between changes in the level of income and changes in the employment or output share of SMEs might be as follows. The increase in income affects SMEs’ activities positively through the product market (positive demandside effect: more demand for the SMEs’ goods and, thus, increases in the production volume and hence employment in them) and the labor market (positive supply-side effect: a positive growth of labor supply to SMEs), or negatively via the labor market (negative supply-side effects: a negative growth of labor supply to SMEs) and the product market (negative demandside effects). In other words, as income increases, it creates both supply-side and demand-side effects, and its “net” effect can be negative or positive. If, say, the negative supply-side effect of the income increases (that is, lower supply of labor) is weaker than the positive demand-side effect (more
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demand) then the net effect will be positive for the SMEs. In this regard, in terms of differences in level (not in change), it can be expected theoretically that in a high-income region demand for goods produced by SMEs (and hence production volume and employment in them) in the region is higher than that in a low-income region. The level of rural demand for rurally made goods depends not only on the level of real income per capita (and other factors), but, also, among other factors, on population density in the rural areas. In Weijland’s (1992) model of rural industries in Indonesia, population density is included as an important demand-side factor. As theoretically expected, in a highly populated region local demand for goods produced by SMEs in the region will be higher than in a less populated one. In addition, the change in population density affects the pattern of employment change in SMEs, through its effect on the labor supply to the enterprises. As stated above, the decline in relative average real income per worker in agriculture will “push” labor out of the sector into rural SMEs (or other non-farm activities). An important cause of low average real income or low productivity of labor in agriculture is the high population density caused by high annual growth rates of population in the rural areas. An overpopulated rural area creates an oversupply of labor in the agricultural sector, which results in downward pressure on earnings per worker in the sector. If annual labor-absorbing capacities of agriculture, LEs, and other sectors are limited, high annual rates of population growth may lead to high annual rates of growth in the supply of labor into SMEs or other “marginal” activities. White (1976, p. 97) drew a distinction between demand factors and supply factors in explaining the magnitude of rural non-farm employment. This employment is determined by a complex interaction between these two blocks of factors. He stated that there are two different types of conditions under which rural labor might shift out of agriculture: (i) when labor is “pulled” or attracted out of agriculture into better non-agricultural income/employment opportunities, such as in an expanding manufacturing industry or industrial sector; and (ii) when labor is “pushed” or forced out of agriculture by declining employment opportunities in the sector, due to, for example, land constraint or harvest failures, into non-agricultural activities with relatively worse conditions, for example, marginal occupations whose capacity to absorb large quantities of labor is achieved only at the cost of extremely low and possibly declining labor incomes, which can be found especially in MIE activities. To sum up, the relationship between changes in population density and changes in the employment share of SMEs is positive through the product market (positive demand-side effect) and the labor market (positive supply-side effect). At a given level of real income per capita, the increase in population density creates more demand for the SMEs’ goods and increases the supply of labor to the SMEs. In terms of differences in level, it can be
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SME Development Pattern
SMEs in Asian Developing Countries
expected, theoretically, that in a region with a high level of population density demand for the SMEs’ goods and the supply of labor to the industries are higher than those in a less populated region. As discussed above, the relationship between changes in the employment share of SMEs and changes in real income per capita can also be negative, as when the increase in income, reflecting better work opportunities in other sectors, leads to “negative growth of labor supply” to SMEs. This suggests that SME activities, at least many of them, act merely as a “last resort” for the poor. Many studies come with this conclusion. Islam (1983), for instance, argues that the increased involvement of poor farm households in non-farm activities, especially in more densely populated agricultural areas where the number of poor households is likely to be relatively higher, is a sign of distress adaptation to growing poverty and landlessness, since these activities may be undertaken only as a last resort. As a World Bank’s study in 1980 points out, the relative expansion of rural non-farm employment is susceptible to favorable or unfavorable interpretation. The question is whether the growth of rural SMEs reflects an “involutionary” pattern of rural development, as increasingly impoverished rural or farm households try to maintain their minimum incomes through increased participation by household members in non-farm activities, or is a result of the economic development or diversification of economic activities in the rural area. Is the increased involvement of rural people in SMEs, as Ho (1986, p. 5) stated, a symptom of distress or a sign of progress or development? The most intractable component of rural poverty in developing countries is the indigence of the landless and near-landless laborers and the marginal farmers who have very little or no access to agricultural land. Many of them must undertake non-farm activities, often under self-employment, in order to avoid unemployment and starvation. This condition was also observed by Saith (1991, p. 468) in many Asian developing countries, which shows that many rural households with inadequate access to land seek non-farm occupations in the slack agricultural season. As such, non-farm employment tends to even out the sharp peaks and troughs of the monthly employment and income generation pattern of rural households.
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3
3.1
Regional evidence
Asian developing countries have touted SMEs as the engine of economic growth and development, the backbone of national economies, the greatest employment generator, a great potential source for export growth and development, especially in the manufacturing sector, a potential tool for poverty alleviation by creating self-employment avenues, and crucial support for LEs. In Southeast Asian countries alone (i.e. Indonesia, Malaysia, Thailand, Singapore, the Philippines, Brunei Darussalam, Lao PDR, Cambodia, Vietnam, and Myanmar), notwithstanding various definitional issues and data problems, the combined available sources suggest a (rough) estimated total of around 52 million SMEs, with Indonesia being the largest contributor. According to the Association of Southeast Asian Nations (ASEAN) Development Blueprint for SMEs 2004–14, these enterprises employ about 75–90 percent of the domestic workforce, especially adult men and women (Lim, 2008, p. 2). In countries like Indonesia, Thailand, Malaysia, and the Philippines, the enterprises play strategic roles in private sector development, especially in the aftermath of the 1997 Asian financial crisis. In some countries, as their economies modernize or industrialize, SMEs provide the much-needed interfirm linkages required to support LEs to ensure that they remain competitive in world markets. In this region as well as in East Asia (countries such as China and South Korea), the total number of SMEs account, on average, for more than 99 percent of total enterprises (Table 3.1). One important characteristic of SMEs in developing countries as compared with those in developed countries is that they are strong in employment creation but weak in output contribution. In other words, in contrast to LEs, SMEs’ contribution to GDP formation is always lower than their employment generation. For instance, Wattanapruttipaisan’s (2003) own calculation shows that SMEs in Southeast Asian countries contribute a disproportionately limited share to the region’s GDP. It is well known from the literature 37
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Recent Development: An Overview
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SMEs in Asian Developing Countries
Table 3.1 Number of SMEs in selected Asian developing countries
Brunei Darussalam Cambodia*
Indonesia
Lao PDR Malaysia Myanmar Singapore Thailand
Philippines Vietnam India
China Pakistan Bangladesh Nepal
Number (‘000s) 30.000 0.369 1.000 24.097 25.406 25.985 28.747 39,767.3000 37,858.1000 43,466.8000 48,936.8000 22.000 25.993 516.855 518.996 34.000 72.000 779.033 1,639.427 1,995.929 2,274.525 68.000 72.696 59.831 98.233 6.79 7.65 8.97 10.11 11.34 12.34 2,370.260 2,880.000 6.000.000 3,485*
Year
2004 Mid-1950s 1958 1998 2000 2003 2005 1997 1999 2003 2006 1998 2004 2003 2005 1998/99 2002 1997 2001 2003 2006 2001 2003 2002 2005 1990/91 1993/94 1997/98 2000/01 2003/04 2005/06 2007 2005 2003 2000/01
% of total enterprises (last year) 98
99
99.9 99.4 99.2 96 97.8
99.8 99.5 96.8
90.0–99.7 99.7 90.0 99.0 98
* In manufacturing only for enterprises with ten or more workers. Sources: APEC (2002), RAM Consultancy Services (2005), UNCTAD (2003), Hall (2002), Myint (2000), Regnier (2000), Ministry of Industry, Mines and Energy of the Kingdom of Cambodia, BPS (Indonesia), SMEDA (Pakistan), Shahid (2008), Census 2005 (Malaysia), SMEA (White Paper on SMEs in Taiwan 2005), OSMEP (White Paper on SMEs in Thailand, various years), National SME Development Agenda 2000/2001, Tambunan (2008), Das (2008a), Kyophilavong et al. (2007), Sang (2007), Aldaba (2008), Xiangfeng (2008), Cuong et al. (2007, 2008), Pandey (2007), ICCI Bank and IFC (2002), Upadhyay (2007), Mintoo (2006), Nepal et al. (2006).
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Country
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that in developing countries the productivity of SMEs is much lower than that of LEs, because the first enterprises lack the necessary inputs to support productivity growth such as advanced technologies, sophisticated methods of production, good management and organization, full access to formal sources of finance and information, and high-skilled manpower. Data from individual countries, though limited, show, however, that in some Asian developing countries SMEs do have relatively high GDP shares, on average above 50 percent. For instance, the GDP share of SMEs in Cambodia reached almost 77 percent in 2001; in Indonesia it reached almost 57 percent in 2003; Brunei 66 percent in 1995; and in China about 60 percent (Table 3.2).
3.2
Detailed evidence from selected countries
3.2.1
Indonesia
In Indonesia, SMEs have historically been the main player in domestic economic activities, as they provide a large amount of employment and primary or secondary income generation for many rural poor households. They generally account for more than 90 percent of all firms across sectors (Table 3.3) and they generate the most employment, providing livelihoods for over 90 percent of the country’s workforce, mostly women and the young. The majority of SMEs, especially MIEs, which are dominated by selfemployment enterprises without wage-paid workers, are scattered widely throughout the rural areas, and, therefore, are likely to play an important role in developing the skills of villagers, particularly women, as entrepreneurs (Tambunan, 2006a, p. 12). The structure of enterprises by size category in all sectors indicates that the majority of enterprises are from the SME category, mainly MIEs (Table 3.4). The distribution of total SMEs by sector shows that the majority of Indonesian SMEs are involved in agriculture. The second largest sector is trade, hotels, and restaurants, while the third is manufacturing (Table 3.5). In the latter sector the enterprises are engaged mainly in simple, traditional activities such as manufacturing of wood products, including furniture, textiles, garments, footwear, and food and beverages. Only a small number of SMEs are involved in the production of machinery, production tools, or automotive components. In the automotive industry they operate through subcontracting systems with several multinational car companies in Indonesia such as Toyota and Honda. The output structure by size of enterprise and sector indicates that agriculture is the key sector for MIE and SEs, followed by trade, hotels, and restaurants, as the second largest sector. MEs, on the other hand, make their largest output contribution in finance, rent and services, followed by transportation and communication. In manufacturing industry, based on output contribution, SMEs are traditionally not as strong as LEs (Table 3.6)
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Recent Development: An Overview
Brunei Darussalam Cambodia(2) Indonesia Malaysia Singapore Thailand Philippines China Vietnam Pakistan India Bangladesh Nepal
(1)
1990
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
— — — 20 — — — — — — — — 8.85(3)
66 — — 30 — — 32.2 — — — — — —
— 60 — 27.3 — — — — — — — — —
— 37.5 — — — — — — — — — — —
— 51.2 — — — — — — — — — — —
— 60.5 — — — — — — — — — — 10(4)
— 64.5 54.7 — — 39.5 — — — — — — —
— 76.7 54.8 — — 39.3 — — — 30–40 — — —
— — 57 — 34.7 38.8 — — — 30–40 — — —
— — 56.8 47.3 — 38.1 — — 39 30–40 — 25 —
— — 55.4 — — 37.8 — 59.6 — 30–40 — — —
— — 53.5 38.9 — 38.3 — 60 — 30–40 — — —
— — 53.3 — — 38 — 60 — 30–40 7 — —
(1)
Non-oil and gas GDP; (2) SEs only; (3) 1991/92; (4) 1998/9. Sources: See Table 3.1.
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SMEs in Asian Developing Countries
Country
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Table 3.2 SMEs’ contribution to GDP in selected Asian developing countries (%)
Size category
2000
2001
2003
2004
2005
2006
MIEs and SEs MEs LEs Total
39,705.2 78.8 5.7 39,789.7
39,883.1 80.97 5.9 39,969.97
43,372.9 87.4 6.5 43,466.8
44,684.4 93.04 6.7 44,784.14
47,006.9 95.9 6.8 47,109.6
48,822.9 106.7 7.2 48,936.8
Sources: State Ministry of Cooperative and SME (Menegkop & UKM) and National Agency of Statistics (BPS).
Table 3.4 Structure of enterprises by size category in all economic sectors (%) Sector
2000
2006
ME
LE
Total
SE & MIE
ME
LE
Total
Agriculture* Mining Manufacture Elect, gas and water supply Construction Trade, hotels, and restaurants Transport and communication Finance, rent and service Services
99.99 99.61 99.48 93.19 97.57 99.54
0.01 0.35 0.45 5.59 2.24 0.45
0.00 0.04 0.07 1.22 0.19 0.01
100.0 100.0 100.0 100.0 100.0 100.0
99.99 99.72 99.40 92.50 97.55 99.55
0.01 0.23 0.52 6.14 2.26 0.43
0.00 0.05 0.08 1.36 0.19 0.02
100.0 100.0 100.0 100.0 100.0 100.0
99.87
0.12
0.01
100.0
99.81
0.18
0.01
100.0
83.42 99.60
14.63 0.38
1.95 0.02
100.0 100.0
85.11 99.67
13.37 0.31
1.52 0.02
100.0 100.0
Total
99.79
0.20
0.01
100.0
99.77
0.22
0.01
100.0
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* Including forestry, fishing, and animal husbandry. Source: See Table 3.3.
Recent Development: An Overview
SE & MIE
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Table 3.3 Total enterprises by size category in all economic sectors (000 units)
Agriculture* Mining and quarrying Manufacture Elect., gas, and water supply Construction Trade, hotels, and restaurants Transport and communication Finance, rent, and service Services Total
2000
2006
SE and MIE
ME
LE
Total
SE and MIE
ME
LE
Total
59.23 0.38 6.57 0.03 0.31 24.37 4.70 0.13 4.28
2.22 0.67 14.91 1.02 3.63 55.36 2.89 11.14 8.17
1.20 1.18 33.57 3.08 4.42 24.95 3.88 20.60 7.12
59.11 0.38 6.59 0.04 0.32 24.43 4.70 0.15 4.29
53.68 0.54 6.56 0.03 0.33 27.13 5.52 0.15 6.06
1.57 0.58 15.82 0.90 3.52 54.03 4.46 10.51 8.60
0.74 1.67 35.47 2.96 4.41 24.11 4.47 17.68 8.50
53.56 0.54 6.58 0.03 0.34 27.19 5.52 0.17 6.06
100.0
100.0
100.0
100.0
100.0
100.0
* Note: See Table 3.4. Source: See Table 3.3.
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100.0
100.0
SMEs in Asian Developing Countries
Sector
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Table 3.5 Distribution of SMEs and LEs by economic sector (%)
Sector
2006
SE**
ME
LE
SE
ME
LE
Total
86.5 5.6 13.3 0.6 44.6 74.8 34.8 18.0 36.8 38.9
9.0 2.7 12.6 8.9 21.8 21.5 25.3 47.2 7.6 15.8
4.5 91.8 74.2 90.5 33.7 3.8 39.9 34.8 55.5 45.3
86.8 8.2 12.5 0.5 44.2 76.1 29.8 16.7 40.2 37.7
8.9 3.2 11.3 7.6 21.8 20.3 23.5 46.9 8.0 15.6
4.3 88.6 76.3 91.9 34.0 3.6 46.7 36.4 51.8 46.7
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
* = Code of sector, see Table 3.4; ** Including MIEs. Source: See Table 3.3.
Recent Development: An Overview
Agriculture* Mining and quarrying Manufacture Elect., gas, and water supply Construction Trade, hotels, and restaurants Transport and communication Finance, rent, and service Services GDP
2000
43
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Table 3.6 Structure of GDP by size of enterprise and economic sector (%)
44
SMEs in Asian Developing Countries 2006
Total LE ME SE
2005 2004 2003
2001 0
Figure 3.1
1
2
3
4
5
6
7
8
Output growth rates of SEs, MEs and LEs (%) (2001–2006)
3 2.5 2
2.12 1.88
2.22 1.97
0.78
0.83
2.5 2.24
2.42 2.15
0.94
0.91
1.5 1 0.5 0 2003
2004 SE
2005 ME
2006 LE
Figure 3.2 GDP growth contribution by size of enterprise (%)
With respect to output growth, the performance of SMEs is not so bad as that of LEs (Figure 3.1). The output growth of SEs (including MIEs) and MEs was respectively 3.96 percent and 4.59 percent in 2001, increasing in 2006 to 5.38 percent and 5.44 percent, respectively; compared with LEs’ growth rates of 3.04 percent (2001) and 5.60 percent (2006). SMEs have a higher growth rate not because their productivity is higher than that of LEs, but mainly because their number of units is huge and the increase in total workers in SMEs has always been greater than that in LEs, as the latter in general are more capital-intensive (or less labor-intensive) enterprises. SMEs’ contribution to annual GDP growth is also higher than that of LEs (Figure 3.2). In 2003 the GDP growth rate in Asian developing countries was 4.78 percent, of which 2.66 percent originated with SMEs, compared with 2.12 percent from LEs. In 2005, the SMEs’ share in GDP growth reached the highest level at 3.18 percent before declining slightly to 3.06 percent in 2006. More interestingly, within the SME group SEs’ contribution to GDP growth has always been higher than that of MEs. In 2006, of the GDP growth rate of 5.5 percent, about 2.15 percent was from SEs, compared with 0.91 percent from MEs. Clustering of enterprises is a common form of industrial organization among SMEs, not only in developing economies but also developed economies,
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2002
45
where SMEs producing similar products concentrate in a certain area. In developing countries, clustering of SMEs tends to emerge especially in small towns and villages or in confined segments of large cities. The United Nation Industry and Development Organization (UNIDO) defines a cluster as a local agglomeration of enterprises, producing and selling a range of related or complementary products within a particular industrial group or subsector (Richard, 1996, p. 4). Indonesia has a very long tradition of SME clusters, and clustering of manufacturing SMEs in particular is a highly significant phenomenon. Within SMEs, however, more SEs and MIEs than MEs tend to cluster geographically and by manufacturing subsector. Based on government data, by the end of the 1990s there were about 9800 manufacturing SME clusters, which increased to more than 10,000 in 2003. The clusters are in many industries, including craft, furniture, food processing, refractory bricks, roof tiles, wearing apparel, iron, and steel basic products. Some clusters are export-oriented, although indirectly through production or commercial subcontracting arrangements with LEs. The clusters are scattered in all provinces throughout the country. However, a vast majority of them are in Java island, with 69.05 percent, compared with Sumatera with less than 12 percent, less than 1 percent in Maluku and Papua, and less than 5 percent in Borneo Kalimantan. Sandee and Wingel (2002, p. 7) attempted to classify SME clusters in Indonesia into four types according to their level of development, each with its own characteristics. The first type dominates clusters in Indonesia (roughly speaking more than 90 percent), and consists mainly of MIEs, indicating that the process of clustering in the country is still at an infant stage. Altenburg and Mayer-Stamer (1999, p. 1699) refer to such clusters as “survival” clusters of MIEs. Sandee and Wingel call them artisanal clusters as this type displays many characteristics of MIEs: a low level of productivity per laborer and real wages much lower than those paid in SEs and MEs; stagnant business activities (i.e. no market expansion or increased investment and production volume); no formal management and organization systems; orientation mainly to local markets (with low-income consumers); primitive or obsolete tools and equipment and traditional mode of production; many illiterate and passive producers (who have no idea about their market), making the role of middlemen or traders highly dominant (producers are fully dependent on middlemen or traders for marketing); low degree of interfirm cooperation and specialization (no vertical cooperation among enterprises inside the clusters); and no external networks with supporting organizations outside the clusters such as banks, universities, and government agencies. The second type of cluster is often called active clusters. These clusters developed rapidly in terms of skill improvement, technological upgrading, and successful penetration of national and export markets. Active clusters may still be artisanal in character, facing quality-related problems and serving markets that are mainly local or domestic. However, many producers
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in these clusters are highly active in marketing, and some enterprises even produce goods exclusively for export through middlemen or traders or trading houses from outside the clusters. Also, the number of internal as well as external networks of clusters is relatively high, and some enterprises have started to influence the development trajectory of the clusters. Typical examples of these clusters are roof-tile clusters, metal-casting clusters, shuttlecock clusters, shoe clusters, and brass-handicraft clusters. The third type of cluster is called dynamic cluster. Examples of the third type are textile-weaving clusters in Majalaya and Pekalongan, furniture clusters in Jepara, wig and hair accessories clusters in Purbalingga, and handicraft clusters in Kasongan. Many producers in these clusters have developed extensive trade networks not only domestically but also abroad. The internal heterogeneity within clusters in terms of size, technology, and market is more pronounced. Interfirm specialization and cooperation within clusters are well developed. One of the most striking features of this type (and also to a certain extent of the “active” type) may be the decisive role of leading or pioneering firms, usually larger and faster-growing ones, in managing a large and differentiated set of relationships with firms and institutions within and outside clusters. Some leading firms have utilized cutting-edge technologies in production (Supratikno, 2002a, p. 8). Examples are a clove-cigarette cluster in Kudus, a tea-processing cluster in Slawi, and a tourism cluster in Bali. In the case of the clove-cigarette cluster in Kudus, its products outperform those of Philip Morris and British American Tobacco (BAT). Similarly, the tea-processing cluster in Slawi, led by a big company named Sostro, has grown to become the market leader in the Indonesian soft drinks market, leaving the giant Coca Cola behind (Supratikno, 2002a, p. 9).1 Some other leading firms in active and dynamic clusters are presented in Table 3.7. Interestingly, in some cases, such as in a furniture cluster in Jepara and a handicraft cluster in Kasongan, foreign immigrants have made considerable direct investments, establishing production facilities and contributing significantly to the clusters’ dynamics. These immigrants are Table 3.7 Leading firms in some active and dynamic clusters Cluster
Location
Leading firms*
Wig and hair accessories Handicrafts Textile weaving Furniture
Purbalingga (Central Java)
Brass handicrafts Roof tiles
Juwana (Central Java) Kebumen (Central Java)
PT Royal Korindah, PT Indo Kores PT Out of Asia PT Pismatex Duta Jepara, Grista Mulya, Satin Abadi Krisna, Samarinda Mas Sokka
Kasongan and Sleman (Yogyakarta) Pekalongan (Central Java) Jepara (Central Java)
* PT = a limited corporation. Source: Supratikno (2002a, p. 9).
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clearly in an advantageous position vis-à-vis local producers in the clusters, as they have better access to market, technology, and financing sources (Supratikno, 2002a, p. 9). The fourth type of cluster is called advanced cluster. These are more developed and more complex in structure than those of the third type. Advanced clusters have several characteristics that significantly distinguish them from the third type; the degree of interfirm specialization and cooperation among enterprises is high, and the enterprises have developed business networks with suppliers of raw materials, components, equipment, and other inputs, providers of business services, traders, distributors, banks, and other supporting institutions; and there is good cooperation with local, regional, or even national government, as well as with specialized training and research institutions such as universities. Within this process, the clusters may also expand geographically, for example, by regularly drawing on inputs from a nearby region, or establishing regular cooperation with a university or research institution in another city. Many enterprises in this type of cluster are export-oriented, although most of them export indirectly through trading houses or export companies (ADB, 2001). In Indonesia only a very few clusters can be included in this category. 3.2.2
Vietnam
After two decades of economic reform (Doi moi) that started in 1986, Vietnam has remarkable achievements to its credit in its economic development, expansion of foreign trade, attraction of foreign direct investment (FDI), poverty reduction, and human development. In tandem with the country’s economic reform and development, private enterprises in general and SMEs in particular have emerged and have experienced phenomenal growth, especially since 1990, when the Company Law and the Law on Private Enterprises (PEL) were promulgated. According to Cuong et al. 2007; 20082, private sector reform had created 0.85 million household businesses and 100 private enterprises by 1990. In 2000 the PEL was substantially reformed in favor of private enterprise promotion, and by 2002 the private sector already comprised approximately 100,000 enterprises officially registered under the Enterprise Law. In that year, based on officially registered economic activities, there were also 15,000 cooperatives, 24,000 cooperative groups, and 13,000 farms (if more than 3000 foreign-funded enterprises in agriculture are excluded). However, the incidence of enterprise remains low at one enterprise per 1000 people. In Vietnam, historically SMEs have played a crucial role in the national economy, and since the economic reform, accompanied by the PEL, these enterprises are making up an increasingly vibrant and dynamic sector in the country (Khoa, 2006, cited in Cuong et al., 2007, p. 3). First of all, these enterprises have long been a major source of employment generation.
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Recent Development: An Overview
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In 2004, for instance, they accounted for about 85 percent of the total corporate workforce (Cuong et al., 2007, p. 4). In conjunction with their role in employment generation, SMEs are a main vehicle for poverty alleviation, particularly in rural areas, and for narrowing development gaps among provinces and between urban and rural areas. In addition, SMEs help to maintain high flexibility of the labor market, and they have also contributed significantly to absorbing the shocks associated with the transitional period (Sang, 2007, p. 7). There are not many comprehensive studies of SMEs in Vietnam, other than the most recent ones from Rand and Tarp (2007) and Cuong et al. (2007; 2008). Rand and Tarp’s (2007) research explores the main characteristics of the Vietnamese business environment. Based on an SME survey in 2005, Rand and Tarp are able to examine the dynamic of SMEs in terms of size transition. The sampled enterprises were asked about their size certain years before 2002. The results show that almost 88 percent of total MIEs in the sample survey tended to stay within their size category. Only a few MIEs graduated to the small category, and only very few of these transformed further into MEs. A similar tendency is also revealed by the sampled SEs and MEs. One very interesting finding from this study is that many SEs and some MEs appeared to have a tendency to move downwards instead of upwards in the size distribution over the period 2002–5 (Table 3.8), and this tendency, according to the surveys, was also observed before over the period 1995–2000. The tendency to move downward can be partially explained by the fact that larger enterprises generally appear to face greater scrutiny from tax and licensing officials, which generates higher costs for them than for their smaller counterparts (Hakkala and Kokko, 2007, p. 11). There is also a range of anecdotal evidence that successful entrepreneurs in Vietnam prefer to spread their capital across multiple companies rather than concentrating it on individual company growth, specifically in order to avoid what has been referred to as “the tall poppy syndrome” (Taussig, 2005, p. 5). Moreover,
Table 3.8 Level of firm size transition MIE 2005
MIE 2002 SE 2002 ME 2002 LE 2002 Total
SE 2005
No.
%
No.
%
578 56 1 —
87.8 20.7 2.2 —
76 188 12 1
11.6 69.6 26.1 14.3
635
277
ME 2005 No. 4 26 30 1
LE 2005
Total
%
No.
%
No.
%
0.6 9.6 65.2 14.3
— — 3 5
— 6.5 71.4
658 270 46 7
100.0 100.0 100.0 100.0
61
8
981
Source: Rand and Tarp (2007, p. 10).
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Recent Development: An Overview
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Table 3.9 Distribution of SMEs by size category and corporate form
Total enterprises
Total enterprises
% of total SMEs MIEs
SEs
MEs
SMEs (% of total enterprises)
2002 2005
62,908 112,952
50.5 52.9
34.6 35.6
14.9 11.5
95.1 96.8
2002 2005 Non-SOEs 2002 2005 –Cooperative 2002 2005 –Sole proprietary 2002 2005 –Partnership 2002 2005 –Limited liability 2002 2005 2002 Other forms 2005 FDI 2002 2005
5,364 4,086 55,236 105,169 4,104 6,334 24,794 34,647 24 37 23,485 52,506 2829 11645 2,308 3,697
1.4 1.6 55.1 55.3 36.8 52.5 69.4 68.1 50.0 35.9 46.0 50.4 32.7 43.0 9.4 12.2
26.2 25.4 35.2 35.9 48.7 39.2 26.7 28.1 41.7 53.8 41.3 39.6 42.6 41.8 35.3 36.6
72.4 73 9.7 8.8 14.5 8.3 3.9 3.8 8.3 10.3 12.7 10 24.7 15.2 55.3 51.3
6.1 2.4 90.9 94.9 6.7 5.7 41.3 31.6 0.01 0.01 38.5 47.4 3.12 8,6 3.0 2.6
Corporate form: SOEs
Source: Cuong et al. (2008, p. 330).
many firms stay small in order to receive more tax incentives (Trinh and Sang, 2007, cited in Cuong et al., 2008, p. 335). Cuong et al. (2008) provide the most recent national data on SMEs in Vietnam, which shows, for example, the distribution of enterprises by corporate form, sector, and region within the country. With respect to corporate form, as shown in Table 3.9, Vietnamese SMEs account for an overwhelming proportion of the total corporate sector in terms of both regular workforce and registered capital. This group of enterprises represented for 95 percent and almost 97 percent of the corporate sector by the regular workforce criterion in 2002 and 2005, respectively. Most SMEs are concentrated in the limited liability and sole proprietary categories. LEs, on the other hand, are state-owned enterprises (SOEs) and FDI-based companies (comprising 100 percent of companies with capital owned by foreign firms and of joint ventures between SOEs and foreign companies). In terms of economic activities, SMEs concentrate in trade, repair of motor vehicles, and household goods (i.e. the sectors where the entry and skill requirements are less stringent), followed by manufacturing and construction. Within the manufacturing sector, they concentrate in certain industry groups, including electronic goods, motor vehicles, and machinery (Table 3.10). Unlike in the Indonesian case presented above, Table 3.10 suggests that
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Year
Year
Agriculture, forestry Fishing Mining and quarrying Manufacturing Electricity, gas, and water supply Construction Retail trade and repair of motor vehicles and household goods Sale, maintenance, and repair of cars and motorcycles Wholesale trade Transport, storage, and communications Finance Real estate and consultancy
2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005
% of total SMEs
No. of enterprises 972 1,071 2,407 1,358 879 1,277 14,794 24,018 185 216 7,845 15,252 24,794 46,847 5,007 8,616 24,794 24,927 3,242 6,755 1,043 1,139 3,235 8,674
SMEs (% of total enterprises)
MIEs
SEs
MEs
14.6 25.2 42.5 29.6 20.2 19.9 28.5 30.2 42.5 53.6 24.1 32.1 72.3 70.5 78.9 80.0 72.3 62.3 34.3 34.1 73.8 63.2 57.0 62.7
38.5 38.9 53.4 62.7 49.1 54.2 43.1 44.9 25.1 20.3 51.2 48.8 23.0 26.2 18.5 18.0 23.0 33.3 44.5 31.9 20.8 29.1 31.2 30.6
46.9 35.9 4.1 7.7 30.7 25.9 28.4 24.9 32.4 26.1 24.7 19.1 4.7 3.3 2.6 2.0 4.7 4.5 21.2 34.0 5.4 7.7 11.8 6.7
Source: Cuong et al. (2008, p. 331).
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1.4 1.0 4.0 1.4 1.3 1.2 22.0 22.2 0.3 0.2 12.0 14.9 41.1 47.5 8.3 8.7 41.1 25.2 5.2 8.9 1.7 1.1 5.3 8.8
SMEs in Asian Developing Countries
Sector/subsector
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50
Table 3.10 Distribution of SME by size category and economic sector/subsector
51
in Vietnam agriculture is not the most important sector for SMEs, as this group of enterprises represents only about 1 percent of total enterprises in the sector. By region, the majority of SMEs are found in the Red River Delta and the southeast; by city, they are mostly located in the Ho Chi Minh City (HCMC) and Hanoi (Table 3.11). The concentration of SMEs in HCMC may relate to the characteristic of the industrial structure of HCMC, where large industries are mainly located in special industrial zones in Table 3.11 Distribution of SME by size category and province Year
Whole country Red River Delta Hanoi Hai Phong North East North West North Central Coast South Central Coast Da Nang Central Highlands South East Binh Duong Dong Nai Ho Chi Minh Mekong River Delta Others
2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005 2002 2005
Total enterprises 62,908 112,952 15,998 30,510 9,460 18,214 1,586 3,143 3,682 7,292 607 1,338 3,794 7,212 4,574 7,821 1,397 2,622 2,142 3,564 21,008 40,793 1,704 2,918 1,750 2,820 14,506 31,292 10,900 14,258 203 164
% of total SMEs MIEs
SEs
MEs
50.5 52.9 42.9 47.5 48.7 53.5 33.3 41.1 32.0 42.8 24.4 33.7 40.2 49.4 52.5 50.2 55.3 54.7 49.1 51.4 53.4 56.8 31.5 30.1 47.4 46.9 20.8 60.4 66.6 64.0 1.2 0.0
34.6 35.6 40.9 40.7 38.7 37.8 44.8 44.0 46.0 43.7 45.1 49.4 41.9 38.7 32.3 37.5 31.5 35.5 35.0 36.4 30.5 31.1 35.0 38.6 30.6 33.4 36.1 29.9 27.3 29.7 12.8 7.3
14.9 11.5 16.2 11.8 12.6 8.7 21.9 14.9 22.0 13.5 30.5 16.9 17.9 11.9 15.2 12.3 13.2 9.8 15.9 12.2 16.1 12.1 33.5 31.3 22 19.7 43.1 9.7 6.1 6.3 86 92.7
SMEs (% of total enterprises) 95.1 96.8 25.3 27.0 15.1 16.2 2.4 2.7 5.8 6.5 1.0 1.2 6.1 6.4 7.2 6.9 2.2 2.3 3.4 3.2 33.2 35.9 2.5 2.4 2.7 2.4 22.5 27.8 17.9 12.8 0.1 0.0
Source: Cuong et al. (2008, p. 333).
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Recent Development: An Overview
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SMEs in Asian Developing Countries
3.2.3
Thailand
The literature on the role of SMEs in many developing countries, including Indonesia, is very rich. In Thailand, however, the story is different. Probably because the government in the past neglected the role of SMEs in Thai economic development, local researchers paid little attention to the importance of these enterprises. There were only a few studies on SMEs in Thailand until the half of the 1990s, and they dealt mainly with SMEs in manufacturing. Interest in SMEs then started to appear with their emergence as an important source of semi-finished products for LEs, including MNCs, mainly through subcontracting production linkages. Extensive research of SMEs was then ordered by the Ministry of Industry (MI) in 1996. By the end of the 1990s, numerous research institutions had developed research programs to find effective ways of promoting SMEs (Bakiewicz, 2005, p. 140).4 Based on the White Paper on SMEs in Thailand, published annually by the Thai government through the Office of SMEs Promotion (OSMEP), SMEs constitute a large portion of the Thai economy as they account for the majority of enterprises and employment and almost 50 percent of the country’s total value added. In 2003, there were 2,006,528 enterprises in the country. Of these, the total number of SMEs was 1,995,929, making up 99.5 percent of total enterprises. This number had grown from 1,639,427 in 2001. In 2004 there were 2,161,577, or about 99.8 percent of total enterprises, and by 2006, they increased to 2,274,525, but their employment share declined from 79 percent in 2001 to 76.7 percent in 2006 (Table 3.12). In manufacturing, Thai SMEs are much better than their counterparts in certain other ASEAN countries like Vietnam, Cambodia, and Lao PDR. The enterprises constituted about 98 percent of the total number of industrial enterprises with 76 percent of total employment. However, on average per year, their share in total manufacturing value added has
Table 3.12 Number of SMEs and their employment (persons)
No. of SMEs Employment (share)
2001
2005
2006
1,639,427 6,605,300 (79%)
2,239,280 8,896,164 (75.4%)
2,274,525 8,863,334 (76.7%)
Source: OSMEP, various issues.
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and around the city. In fact, SMEs are gradually moving to HCMC, Hanoi, and certain other cities such as Hai Phong and Da Nang. This may reflect, inter alia, the efforts of the provincial governments in improving business environments, particularly in attracting investment inflows via many kinds of incentives, even by providing facilities beyond their authority to do so.3
Recent Development: An Overview
53
Sector
1994
1999
2004
2006
23 24 53
25 24 51
30 37 34
34 40 26
Manufacturing industry Trade Services Source: OSMEP, various issues. 40 39.5
39.5
39.3
39 38.8 38.5
38.3
38.1
38
38
37.8
37.5 37 36.5 2000
Figure 3.3
2001
2002
2003
2004
2005
2006
SME GDP share (%)
always been lower than in trade and services (Table 3.13). Especially in trade, the value added contribution of SMEs has undergone a significant increase since 1999. During the period 2000–6, the GDP share of SMEs experienced a decline, although it went up slightly in 2005 before falling again in 2006. In 2000, these enterprises contributed to 39.5 percent of GDP and it dropped very slightly with total output value generated of THB 1,945,801 million in 2001. In 2002, their GDP contribution fell to less than 39 percent; the highest major GDP shares came from the service sector (13 percent), followed by the trade (wholesale and retail) sector (12 percent), and manufacturing industry (10 percent). In 2003 SMEs in all sectors generated products worth THB 2,263,574 million (USD 58,040 million) out of total GDP of THB 5,939,062 million bath (USD 152,284 million) or 38.1 percent (compared with 38.8 percent in 2002). The sector with the highest SMEs’ GDP share was still the services sector (10.8 percent). This was followed by the trade sector (13.0 percent) and the manufacturing industry (10.2 percent). After it reached 38.3 percent in 2005, the SMEs’ GDP share started to decline again in 2006 (Figure 3.3). Probably more interesting, however, is that during the same period the annual growth rates of SMEs’ value added were not so different from the country’s GDP growth rates. Even in some particular years, the growth rates of SMEs’ value added were higher than GDP growth rates, and this positive gap in favor of SMEs, which started in 2005, tends to continue (Figure 3.4).
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Table 3.13 Distribution of SMEs’ value added in three main economic sectors (%)
SMEs in Asian Developing Countries 12
8 7 6 5 4 3 2 1 0
10 8 6
GDP growth
4
SME value added growth
2 0
2000
2001
2002
2003
2004
2005
2006
Figure 3.4 SMEs’ value added and GDP growth rates (%) Table 3.14
Distribution of enterprises by size category and economic sector
Sector
Agriculture, hunting, and forestry Fishery
Mining and quarrying
Manufacturing
Electricity, gas, and water Wholesale and retail trade Hotels and restaurants
Transport, storage, and communications Financial intermediation Real estate, renting, and business activities Total in economic and non-economic sectors
Year
2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004
Total enterprises 4,199 4,200 3,547 1,447 1,448 1,131 319 317 321 117,346 117,382 118,127 1,399 1,391 1,258 391,448 391,307 393,842 97,975 98,026 96,306 9,405 9,327 9,696 23,312 23,828 23,875 45,722 45,435 44,409 783,065 782,980 783,923
% of total enterprises MIEs
SEs
MEs
LEs
62.7 59.4 54.8 61.5 57.3 48.6 68.0 65.6 60.1 89.5 88.6 88.0 40.0 38.7 36.5 95.5 94.9 94.8 92.0 91.3 91.1 74.8 72.8 70.4 80.1 79.4 78.8 89.5 89.1 88.2 92.0 91.3 91.0
31.5 34.7 37.9 34.5 38.6 45.6 25.7 28.1 33.6 8.8 9.7 10.3 45.0 46.2 47.1 4.4 4.9 5.0 7.8 8.5 8.7 22.7 24.6 26.7 19.0 19.8 20.2 8.7 9.2 9.9 7.3 8.0 8.2
3.0 3.0 3.5 2.1 2.1 2.6 1.6 1.6 2.8 0.9 0.9 0.8 7.6 7.6 8.4 0.1 0.1 0.1 0.1 0.1 0.1 1.3 1.4 1.6 0.4 0.3 0.5 0.8 0.8 0.8 0.4 0.4 0.4
2.9 3.0 3.7 1.9 2.0 3.2 4.7 4.7 3.4 0.8 0.9 0.9 7.4 7.5 7.9 0.1 0.1 0.1 0.1 0.1 0.0 1.2 1.3 1.4 0.5 0.5 0.4 0.9 1.0 1.1 0.3 0.3 0.4
Source: Department of Trade and Industry Philippines (http://www.dti.gov.ph/dti/index.php?p=321).
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Recent Development: An Overview
The Philippines
The most recent study on SMEs in the Philippines is by Aldaba (2008),5 which shows that in 2003 the Philippines had a little over 839,000 registered firms. As in other Asian developing countries, in the Philippines the total number of MIEs is much larger than those of SEs and MEs, which is no surprise since MIEs’ activities are much easier to conduct than those of SEs and MEs, especially from the perspective of capital, location/site, and human skill needs. Data from the Department of Trade and Industry Philippines (http://www.dti.gov.ph/dti/index.php?p=321) show that on the latest (2006) count there are 783,065 enterprises in economic and non-economic sectors. Of these, 92.0 percent (720,191) are MIEs, 7.3 percent (57,439) are SEs, 0.4 percent (2,839) are MEs, and the remaining 0.3 percent (2,596) are LEs. As shown in Table 3.14, in all economic sectors there are more MIEs than SEs and MEs, although the percentage distribution varies by sector. Of course, the number of SMEs, especially MIEs, presented in this table may underestimate the real number, since – and this is also true for other Asian countries discussed in this book – many MIEs and also some SEs are not registered, and so are not covered by any national data. Almost 50 percent of them are found in only two regions, namely, National Capital Region (NCR) and Calabarzon with 24.93 percent and 14.55 percent, respectively (Figure 3.5), or on average per region above 90 percent of total SMEs and MIEs (Table 3.15). This uneven distribution of enterprises by region, as is also found in many other countries, is strongly related, among other factors, to the concentration of economic activities in certain regions, and this in turn is affected by differences in factors such as population concentration and infrastructure development by region. From the employment perspective, however, LEs are still the biggest employment generator, although the share varies by economic sector. This does not mean that LEs are more labor-intensive than SMEs or MIEs, but because the scale of production in LEs is much larger than in
National Capital Region, 24.93 Others, 38.17
Ilocos Region, 5.65 Visayas, 5.92
Figure 3.5
Calabarzon, 14.55 Central Luzon, 10.79
Location of MIEs and SMEs by region in 2006 (%)
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3.2.4
55
56
SMEs in Asian Developing Countries
Table 3.15 Total enterprises by size category and region
Ilocos Region
Cagayan Valley
Central Luzon
Calabarzon
Mimaropa
Bicol Region
Western Visayas
Central Visayas
Eastern Visayas
Zamboanga Peninsula
Northern Mindanao
Davao Region
Soccsksargen
National Capital Region
Cordillera Administrative Region
Year
2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004
Total enterprises 44,117 44,134 44,055 23,982 23,978 23,351 84,344 84,368 84,179 114,114 114,182 114,387 23.200 23.209 23,286 31,666 31,619 28,565 46,302 46,295 45,558 44,367 44,379 44,352 20,769 20,777 20,784 25,278 25,277 25,261 29,403 29,419 29,637 36,708 36,704 38,078 26,610 26,625 26,705 195,632 195,412 199,395 14,744 14,762 14,743
% of total enterprises MIEs
SEs
MEs
LEs
95.7 95.0 94.9 96.8 96.1 96.0 93.5 92.8 92.6 93.1 92.4 92.3 95.7 94.8 95,1 95.3 94.7 94.1 92.8 92.1 91.9 90.0 89.3 89.0 95.4 94.4 94.3 95.5 94.6 94.5 92.8 92.1 92.2 92.4 91.8 91.9 94.5 93.6 93.8 86.5 85.9 85.4 94.4 93.7 93.5
4.1 4.9 4.9 3.1 3.8 3.8 6.1 6.7 6.9 6.0 6.7 6.9 4.2 5.1 4.8 4.5 5.1 5.6 6.6 7.4 7.5 8.8 9.5 9.8 4.4 5.4 5.4 4.3 5.1 5.2 6.7 7.4 7.3 6.9 7.5 7.4 5.1 5.9 5.7 12.3 12.9 13.3 5.3 6.0 6.2
0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.3 0.4 0.4 0.4 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.3 0.3 0.6 0.6 0.6 0.2 0.2 0.2 0.1 0.1 0.2 0.3 0.3 0.3 0.4 0.4 0.4 0.2 0.2 0.2 0.6 0.6 0.7 0.2 0.2 0.2
0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.3 0.5 0.5 0.5 0.0 0.0 0.0 0.1 0.1 0.1 0.2 0.2 0.2 0.6 0.6 0.6 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.4 0.4 0.4 0.2 0.2 0.2 0.6 0.6 0.6 0.1 0.1 0.1
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Region
Recent Development: An Overview
57
Table 3.15 (Continued) Year
Autonomous Region In Muslim Mindanao Caraga
Philippines
2006 2005 2004 2006 2005 2004 2006 2005 2004
Total enterprises 8,280 8,280 8,360 13,549 13,560 13,227 783,065 782,980 783,923
% of total enterprises MIEs
SEs
MEs
LEs
97.4 96.8 96.7 94.9 94.1 94.1 92.0 91.3 91.0
2.4 3.0 3.1 4.7 5.5 5.6 7.3 8.0 8.2
0.1 0.1 0.1 0.2 0.2 0.2 0.4 0.4 0.4
0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.4
Source: Department of Trade and Industry Philippines (http://www.dti.gov.ph/dti/index.php? p=321).
SMEs or MIEs. Within the group of SMEs and MIEs, in some economic sectors including manufacturing, trade, and hotels and restaurants, the employment shares of MIEs are higher than those of SEs and MEs (Table 3.16). Next, by combining data from the Department of Trade and Industry, Philippines, as presented in Aldaba (2008), and recent data from the same department, Tables 3.17 and 3.18 show time series data on the growth of, respectively, total number of enterprises and employment in them by size in the manufacturing industry. It is obvious that the great bulk of enterprises in the sector are MIEs, but the larger part of manufacturing employment is generated by LEs. Finally, Aldaba (2008) also provides information on the distribution of value added by size of enterprise in the manufacturing industry. As shown in Table 3.19, the share of SMEs increased from 23 percent of total manufacturing value added in 1994 to 28 percent in 1998, but then fell to 21 percent in 2003. LEs contributed 79 percent of the total, an increase from their level of 72 percent contribution in 1998. Table 3.19 also shows the major groups of industries where SMEs contributed at least 50 percent to total value added of the industries. 3.2.5
Cambodia
After the fall of the Khmer Rouge (KR) regime in 1978, Cambodia began to rebuild its economy with financial support from the International Monetary Fund’s (IMF) Enhanced Structural Adjustment Facility. By the early 1980s agro-industry food processing activities, predominantly rice milling, had got under way in the cooperative sector. By the mid-1980s a host of private
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Region
SMEs in Asian Developing Countries
Table 3.16 sector
Total employment generated by size of enterprises and economic
Sector
Agriculture, hunting, and forestry
Fishery
Manufacturing
Electricity, gas, and water
Construction
Wholesale and retail trade
Hotels and restaurants Transport, storage, and communications Real estate, renting and business activities Total in economic and non-economic sectors
Year
Total employment (person)
% of total employment (person) MIEs
SEs
MEs
LEs
2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006 2005 2004 2006
143,592 146,741 148,438 30,978 32,373 33,162 1,372,911 1,463,346 1,535,950 83,536 83,852 83,771 94,101 97,461 101,197 1,283,494 1,527,360 1,602,319 448,747 513,315 514,593 185,184 191,517 213,829 493,609 516,988 507,493 4,984,883
6.9 7.0 5.4 10.6 9.8 6.5 18.9 22.1 21.3 3.3 3.2 2.7 5.9 6.0 6.0 61.6 65.4 63.5 50.8 55.0 54.7 14.0 14.5 13.1 20.2 22.5 22.5 33.5
22.7 23.7 22.4 30.6 32.6 33.1 18.4 18.5 19.5 22.4 22.6 21.2 27.0 27.4 29.7 26.4 24.3 23.6 40.7 37.5 38.3 27.3 27.8 29.2 19.2 18.9 20.2 25.7
12.1 11.8 11.4 13.9 13.4 13.1 9.6 9.4 8.7 18.1 18.1 18.1 12.3 12.0 13.1 4.1 3.4 3.5 3.7 3.3 3.2 9.0 8.9 10.0 9.6 8.6 9.7 7.6
58.2 57.5 60.9 45.0 44.2 47.4 53.0 50.0 50.5 56.2 56.1 58.0 54.9 54.6 51.2 7.9 6.8 9.2 4.8 4.3 3.8 49.8 48.7 47.8 50.9 50.0 47.6 33.2
2005 2004
5,479,297 5,643,187
37.5 36.8
24.9 25.3
7.0 7.1
30.6 30.8
Source: Department of Trade and Industry Philippines (http://www.dti.gov.ph/dti/index.php? p=321).
SEs providing basic manufactured goods, such as fish sauce, had emerged to meet growing domestic demand (Sarthi et al., 2003, p. 12). Nationalized firms (mainly SMEs) were sold or leased to the private sector from late 1989, and in 1991 the government introduced a full-scale privatization program (Bailey, 2008, p. 3).6 Political stability and hence macroeconomic stability had been largely achieved by the late 1990s, and basic infrastructure and
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58
Recent Development: An Overview
59
Year
MIEs
SEs
MEs
LEs
Total
1983 1988 1994 1995 1999 2000 2001 2002 2003 2004 2005 2006
50,313 69,446 81,554 86,900 113,861 108,998 108,986 108,847 112,458 103,926 103,982 105,083
4,512 7,678 9,061 8,928 14,611 14,121 12,627 12,128 14,448 12,116 11,352 10,274
505 683 752 1,027 1,137 1,110 988 1,020 1,256 965 1,040 1,004
717 828 913 982 1,322 1,238 1,194 982 1,687 1,120 1,008 985
56,047 78,635 92,280 97,837 130,931 125,467 123,795 122,977 129,849 118,127 117,382 117,346
Source: Aldaba (2008, p. 232) and Department of Trade and Industry Philippines (http://www.dti. gov.ph/dti/index.php?p=321).
Table 3.18 Manufacturing employment by size of enterprise (persons) Year
MIEs
SEs
MEs
LEs
Total
1983 1988 1994 1995 1999 2000 2001 2002 2003 2004 2005 2006
186,735 247,173 287,630 271,699 366,689 354,025 353,415 353,255 366,210 327,112 323,510 259,664
127,450 201,553 213,979 227,949 361,514 354,328 309,952 294,487 363,756 299,788 270,344 252,931
70,884 95,994 105,464 137,384 154,992 150,734 136,648 143,003 175,212 133,081 137,756 132,332
503,498 545,389 575,809 615,874 791,277 730,127 734,088 676,443 1,053,956 775,969 731,736 727,984
888,567 1,090,109 1,182,882 1,252,906 1,674,472 1,589,214 1,534,103 1,467,188 1,959,134 1,535,950 1,463,346 1,372,911
Source: Aldaba (2008, p. 232) and Department of Trade and Industry Philippines (http://www.dti. gov.ph/dti/index.php?p=321).
Table 3.19 Manufacturing value added contribution by SMEs in major groups of industry (%)* 1994
All industries Food manufacturing Leather footwear Wood and cork products Furniture (wood and metal)
1998
2003
SMEs
LEs
SMEs
LEs
SMEs
LEs
23 28 32 43 49
77 72 68 57 51
28 55 58 77 49
72 45 42 23 51
21 34 62 58 65
79 66 38 42 35
(continued )
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Table 3.17 Total manufacturing enterprises by size category
60
SMEs in Asian Developing Countries
Table 3.19 (Continued)
Printing and publishing Industrial chemicals Petroleum and coal products Plastic products Other nonmetallic mineral products Iron and steel Fabricated metal products Miscellaneous manufacture
1998
2003
SMEs
LEs
SMEs
LEs
SMEs
LEs
49 62 100 66 47 25 50 39
51 38 0 34 53 75 50 61
39 65 82 49 43 47 57 53
61 35 18 51 57 53 43 47
54 65 100 50 56 57 52 62
46 35 0 50 44 43 48 38
* SMEs excluding MIEs. Source: Aldaba (2008, p. 233).
institutions had been rebuilt, all of which led to a rapid increase in economic growth (Chandler, 1998, p. 45). As in other ASEAN countries, obtaining accurate data on SMEs, especially very small ones (i.e. MIEs) in Cambodia is difficult because the majority of them are not registered. In the manufacturing industry, for instance, the number of registered enterprises is estimated to be less than half of all SMEs. Due to barriers in registration and little perceived benefit, many of Cambodia’s enterprises have remained informal (Bailey, 2007, p. 4). According to Development Consulting International (DCI) (2003, p. 10), the informal sector is prevalent in the country, accounting for over 80 percent of GDP and 95 percent of employment (Table 3.20). In the manufacturing industry, the informal sector is composed of over 27,000 SEs, which are not registered with the Ministry of Commerce (MoC). Only half of these enterprises have operating licenses from the Ministry of Industry, Mines and Energy (MIME). The informal industrial sector accounts for almost half of total industrial output and supplies mainly to the domestic market. As explained by Bailey (2008, p. 7), in 2002 the MoC issued a Prakas (No. 078 MOC/M2002) on procedures for monitoring activities related to trade services and commerce, requiring SEs not registered under the Law on Commercial Rules and Registration to obtain a license to operate commercial activities and services through the MoC’s provincialmunicipal departments. Through this process the MoC licensed 30,752 enterprises. However, many enterprises remain unlicensed by the MoC, instead obtaining operating permits from other relevant ministries. The MoC estimates that 21,268 of these enterprises are food processors, while 5634 are manufacturers, 4811 are service providers and 729 are in forestry and fishery.7
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1994
Recent Development: An Overview
61
Table 3.20 Employment and GDP by formal and informal sector
Total sector Formal sector* Informal sector – Agriculture – Industry** – Services***
GDP (USD million)
2000
2001
2000
2001
5,430 260 5,170 4,196 217 757
5,630 275 5,355 4,352 224 779
3,149 596 2,552 928 426 1,198
3,234 660 2,573 919 421 1,233
* Does not include companies in the food and tobacco industry, communications, wholesale, and finance that provide formal jobs because of lack of data. They should provide 5,000–10,000 direct formal jobs; ** Includes mostly handicrafts and small factories; *** Includes mostly trade, transportation, and other informal services. Source: DCI (2003, p. 10).
On the other hand, there were approximately 9000 registered private enterprises in the so-called formal sector. These enterprises acquire legal status as commercial enterprises through registration with the MoC, and are required to pay profit tax based on the real regime calculation method, which relies on the submission of financial statements. Their legal status as commercial enterprises allows them to apply for import and export licenses and improves their access to the formal financial sector. It also gives them access to investment incentives through the Law on Investment. For his research on SMEs in Cambodia, Meas (2006) uses government data from 1993 and 2001 on three variables: number of establishments, number of workers, and value of production by domestic market price. As can be seen in Table 3.21, most enterprises in Cambodia were SMEs. About 20 percent of the 35,112 enterprises reported by the ministries in 2001 were MIEs employing fewer than ten workers, 79 percent were SEs, 0.1 percent were MEs, and 0.8 percent were LEs. From 1993 to 2001, the share of MIEs and MEs declined whereas the share of SEs and LEs increased. As Meas (2006, p. 3) explains, this reveals that since the Cambodian government adopted its privatization policy in the early 1990s more SEs than MIEs or MEs have entered the private sector. However, the table shows that the growth rate of the number of enterprises was the highest for LEs, which grew by 51 percent per year, followed by SEs (39 percent), MIEs (11 percent), and MEs (6 percent). The high growth rate of LEs also reveals the contribution of LEs to the private sector after the government-promoted privatization. Meas therefore believes that the possibilities of future entry of LEs and of the expansion of SEs into LEs as SEs grow are high.
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Employment (000s men)
62
SMEs in Asian Developing Countries
Table 3.21 Growth in number of enterprises by size category 1993
2001
No.
1–9 10–49 50–199 >200
3,024 2,000 28 10
Total
5,062
%
No.
60 39 0.5 0.2
%
7,049 27,743 46 274
100
20 79 0.1 0.8
35,112
100
Growth rate, 1993–2001 (%) 11 39 6 51 27
Source: Meas (2006, p. 9).
Table 3.22 Growth of employment by size of enterprise Size (person)
1993
2001
Workers
%
Workers
%
1–9 10–49 50–199 >200
13,682 24,522 5,000 6,250
27.6 49.6 10.1 12.6
60,000 400,000 8,740 187,260
9.1 61.0 1.3 28.5
Total
49,454
100
656,000
100
Growth rate, 1993–2001 (%) 20.3 41.7 7.2 52.9 38.1
Source: Meas (2006, p. 9).
Next, Table 3.22 shows that SMEs accounted for about 62 percent of total employment, whereas LEs and MIEs accounted for about 28 percent and approximately 9 percent, respectively, in 2001. In 1993, SMEs accounted for 59 percent, MIEs accounted for about 27 percent, and LEs contributed approximately 12 percent of total employment. It shows that the employment shares of SMEs and LEs increased while that of MIEs declined. However, the growth rate of persons employed was the highest for LEs at about 53 percent per year, followed by SEs (41 percent), MIEs (20 percent), and MEs (7 percent). As Meas (2006, p. 3) explains, the high growth rate of LEs indicates that these enterprises have great potential to generate a larger labor force in the future, although SMEs have greater share of employment than their larger counterparts. With respect to domestic market share, based on data for 1996–2001, MIEs and SEs made a greater contribution than MEs and LEs (Table 3.23). In 2001, the former group accounted for about 77 percent compared with 23 percent from the latter. The share of the former increased while that of the latter decreased during that period. Furthermore, the table shows that the highest growth rate of production value for the domestic market was in MIEs and SEs, which have therefore been playing an important role in the domestic market.
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Size (person)
1996
Total
1998 Value
1999
Value
%
Value
%
141,885
100
244,981
100
56,464
40
153,077
62.5
85,259
48.7
67,868
39.5
68,588
85,421
60
91,904
37.5
89,553
51.3
103,755
60.5
124,326
174,812
% 100
Value
2000
171,623
% 100
Value 192,914
2001 % 100 35.5
Value
%
270,852
100
Growth (%) 1996–2001 14
63,150
23.3
2.2
64.5 207,702
76.7
19.4
Source: Meas (2006, p. 10).
Recent Development: An Overview
MEs and LEs MIEs and SEs
1997
63
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Table 3.23 Growth of domestic market value and share by size of enterprise (‘000 USD)
64
SMEs in Asian Developing Countries
Subsector
2000
2001
2002
2003
2004
2005
Food, beverage, and 20,152 tobacco Textile, wearing apparel, 366 and leather Wood products, 869 including furniture Paper products, printing, 24 and publishing Chemicals, petroleum, 297 coal, and plastics Non-metallic mineral 666 products Fabricated metal products 1,824 Other manufacturing 1,208
21,871
21,568
20,869
22,712
23,343
1,382
1,417
1,406
1,672
1,662
141
13
13
16
23
15
21
25
31
277
275
96
120
153
721
757
681
680
718
1,454 1,286
1,899 976
1,850 1,049
2,239 667
2,222 618
Total
27,155
26,920
25,985
28,131
28,747
25,406
—
Source: MIME, as cited in Bailey (2008, p. 3).
For his research on manufacturing SMEs in Cambodia, Bailey (2007; 2008) used MIME data from 1990s to 2005, which show that the total number of manufacturing SMEs doubled between 1993 and 2005, at a compounded growth rate of over 10 percent per annum. As shown in Table 3.24, during the period 2000–5 the total number of registered SMEs in this sector had grown from about 25,000 to nearly 29,000. These enterprises are concentrated in the food, beverages, and tobacco industries, which also increased from about 20,000 units to more than 23,000 units (Table 3.24). The MIME estimated that there were at least 30,000 unregistered industrial enterprises in Cambodia in 2005, whereas the Asian Development Bank (ADB 2004b) estimated the total of informal industrial enterprises in the country with fewer than 50 employees to be about 30,000 in 2003. With these two estimates of informal industrial SMEs both close to 30,000, and MIME data in Table 3.24 showing a further 30,000 registered SMEs in 2005, it is likely that there are at least 60,000 registered and unregistered SMEs in Cambodia today (Bailey, 2007, p. 4). In 2005 over 80 percent of sampled industrial SMEs were involved in the food, beverage, and tobacco industries (Figure 3.6), an increase of 5.2 percent from about 77.2 percent in 1998. Fabricated metal products made up a further 7 percent of the sample. Small-scale textile and garments, leather products, non-metallic mineral producers, chemicals, plastics, and machinery made up the bulk of the remaining 11.3 percent. There is also a small number of Cambodian SMEs involved in traditional handicrafts, paper products, printing, and publishing. The structure, however, varies, and one
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Table 3.24 Registered SMEs in the manufacturing industry by subsector (units)
Recent Development: An Overview
8%
Food, beverage and tobacco
2%
Textile wearing apparel leather
6%
Paper productsprinting publishing Chemicals petroleumcoal plastics Non-metallic mineral products Fabricated metal products 81% Other manufacturing
Figure 3.6
Manufacturing SMEs by subsector, 2005
Table 3.25 MEs and LEs in manufacturing industry by subsector, 2001 (% share) (MIME version) Subsector
MEs
LEs
Food, beverages, and tobacco Textile and wearing apparel Wood and wood products Paper and paper products Chemical, rubber, and plastic products Non-metallic mineral products Manufacture of basic metals Fabricated metal products Other manufacturing industries
10.9 43.5 — 4.3 15.2 6.5 — 17.4 2.2
9.5 80.3 2.6 0.4 3.3 2.9 — 11 —
100.0
100.0
Total Source: MIME, as cited in DCI (2003, p. 10).
interesting fact is that before 2000 furniture was among the key industries of Cambodian SMEs, but no longer after that year. Unfortunately, no investigation has been undertaken to date to discover the main reason behind the declining presence of Cambodian SMEs in that industry. Through its factory licensing process, MIME is able to give a fairly accurate account of total enterprises in the formal industrial sector, consisting of MEs and LEs. As seen in Table 3.25, there were 320 licensed factories in 2001, of which 46 were classified as MEs with 50–200 employees and 274 as LEs with over 200 employees. This represents just over 1 percent of the total number of industrial enterprises in Cambodia. Of the 320 licensed factories 75 percent were in the garment industry, while the next largest sector is food, beverages, and tobacco, representing approximately 10 percent of licensed companies. Although in that year textiles and apparel were predominant,
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2% >1% >1%
65
66
SMEs in Asian Developing Countries Table 3.26 SMEs by main economic sector, 2002 (MoC version) No.
%
Food processors Other industries Services Forestry and fishery
21,268 5,634 4,811 729
65.6 17.4 14.8 2.2
Total
32,442
100.0
Source: MoC, as cited in ADB (2004b, p. 15).
there was more diversity in the types of ME, including food processing, chemicals, rubber, plastic, and fabricated metal (DCI, 2003). Another source of data on SMEs in Cambodia is the Ministry of Commerce (MoC). The ministry estimated the number of SMEs in the informal sector based on its estimated total of the enterprises in both informal and formal sectors minus registered SMEs. As shown in Table 3.26, its estimated figure shows that the bulk of informal SMEs in 2002 were in manufacturing industry, and, consistently with the trends in MIME’s estimates, the bulk of the enterprises were food processors, specifically rice millers, which accounted for 65.6 percent of all small manufacturing enterprises. This informal sector, along with the 9265 enterprises formally registered with MoC in the same year, summed to more than 40,000 SMEs in Cambodia. MoC data from the same year (not shown in the table) indicate that there were only 46 MEs and 274 LEs in the manufacturing industry. Large-sized manufacturers (mostly garment factories with 200 or more employees) are licensed under MIME. This suggests that up to 99 percent of manufacturing industry in Cambodia is made up of SMEs. No national data are available on the geographic distribution of SMEs. However, there is some information from a survey of SMEs operating in the manufacturing sector conducted in 2001 by MIME. As can be seen in Table 3.27, the largest cities for manufacturing SMEs include Kampong Cham, Kampong Thom, and Prey Veng, whereas in Phnom Penh (the capital city) there were only 1562 enterprises with 10,664 workers. Although, according to the official definition of SMEs in Cambodia, SMEs are enterprises with 11–100 employees, Cambodian SMEs are generally very small. According to the 2000 survey, within the manufacturing sector nearly 86 percent of SMEs had fewer than ten employees, and so are defined as MIEs. About 5 percent had 10–19 employees and about 3 percent had 20–99 workers. Less than 7 percent of Cambodian firms surveyed were LEs with more than 100 employees. Only in paper products, printing, and publishing, and nonmetallic mineral products (except petroleum and coal) is the average size of enterprises above 11 workers (Figure 3.7). However, there is some indication that much of the growth of the total number of SMEs in Cambodia as shown above was due to increases in total numbers of SEs as opposed to MIEs. Data from the Ministry of Planning (MoP), cited in Bailey (2007, p. 5), show that
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Sector/subsector
Distribution of SMEs by region, 2001
Province/city
Total
Province/city
No. of enterprises
Total workers
508 803 3,039 977 1,442 3,061 1,772 2,117 88 1,410 76 1,562
1,379 4,308 10,264 1,036 23,344 4,879 5,775 6,385 272 4,399 168 10,664
Preah Vihear Prey Veng Pursat Rattanakiri Siem Reap Sihanouk Ville Stung Treng Svay Rieng Takeo Odormeanchey Kep Pailin
311 2,827 1,590 89 1,228 117 127 1,247 1,393 6 183 12
— 5,462 3,495 — 2,828 805 310 2,630 2,922 29 632 68
25,985
92,054
Source: MIME as cited in UNESCAP (2003, p. 21).
Recent Development: An Overview
Banteay Meanchey Battambang Kampong Cham Kampong Chhnang Kampong Speu Kampong Thom Kampot Kandal Koh Kong Kratie Mondol Kiri Phnom Penh
Total workers
No. of enterprises
67
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Table 3.27
SMEs in Asian Developing Countries 14 12 10 8 6 4 2 0 31
32
33
34
35
36
38
39
Total
Figure 3.7 Average size of labor of enterprises in the manufacturing industry by subsector (ISIC Code 2 digit), 2002*
the number of firms employing 10–49 workers increased as a share of all firms from 39 percent to 79 percent between 1993 and 2001. During the same period the number of MIEs decreased from 60 percent to 20 percent of all firms. 3.2.6
Lao PDR
Lao PDR is probably the youngest country in the region with respect to government support for SMEs: not earlier than 2004, when the government issued Prime Minister’s Decree No. 42/PM on which the SMEs promotion is based. The promotion aims to: (i) improve the regulatory environment; (ii) enhance the competitiveness of business establishments; (iii) expand domestic and international market access; (iv) improve access to finance; (v) encourage the development of business organization; and (vi) enhance entrepreneurial attitudes and characteristics within the society. In addition, the Small and Medium Enterprise Promotion and Development Office (SMEPDO) was established by the Prime Minister’s Decree with the main objective of promoting the establishment and sustainable development of Lao SMEs (Kyophilavong et al., 2007b, p. 5).8 Since then extended research and studies related to SME issues in Lao PDR have been conducted, including Kyophilavong et al. (2007a, b), MIH (2005), and UNIDO (2004). However, there are no official data on the size of SMEs in terms of number and economic contribution. Thus, this section depends entirely on several case studies. For instance, Kyophilavong et al. (2007a) conducted a survey of SMEs with more than 16,000 units. The objective of their study was to discover the factors determining the performance of SMEs in Vientiane and other provinces. They use logit models and multiple regressions as their main method of analysis. Their important findings include the fact that unstable exchange rates, domestic ownership, and learningfrom-school have negative effects on the performance of SMEs, while the availability of capital and labor, and the development of SOEs and private companies have positive effects on the performance of SMEs. The findings, however, could not show how SMEs responded to these effects in different manufacturing subsectors such as handicraft, wood processing, and the like.
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69
According to Kyophilavong et al. (2007a), in 2004 the total number of MEs was 722 establishments, while that of SEs was 25,271. In terms of employment, SMEs offered more than 60,000 job opportunities, and this accounted for 40 percent of total employment. About 10 percent of the establishments had a good business performance in Vientiane Municipality (VTM) and Other Provinces (OTP). In addition, about 20 percent of those located in VTM and 17 percent in OTP expected that their businesses would improve in the future, suggesting a good business trend for SMEs in Laos. Unlike other Asian developing countries, making garments is the key activity of SMEs in Lao PDR. In this country it is hard to find SMEs in significant numbers in other manufacturing subsectors or even in other economic sectors generally except small-scale trade activities. In the beginning of the development of the garment industry in Lao PDR, SMEs were not as important as they are now, because at that time there were only ten large factories. Most of the smaller enterprises in the industry acted as subcontractors of the larger ones. In 2007 the number of SMEs in the industry increased to 59 units, which employed in total more than 1600 workers, or about 7 percent of the total workforce in the industry. Since the government of Lao implemented its FDI promotion policy, the garment industry has attracted a great deal of investment, leading to an increase in the number of LEs and an increase in subcontracting SMEs. But many workers in SMEs have moved to LEs, which provide more secure employment than do SMEs, the demand for whose products from LEs is unstable. However, according to Kyophilavong et al. (2007a, p. 5), the garment industry in Lao PDR faces uncertainty. The termination of the Agreement on Textiles and Clothing (ATC) in December 2004 caused a shift in the global textile and garment industry in terms of trade and investment flows, and it was expected that, as a result, the export value of the Lao garment industry would decline. Nevertheless, the export value of the Lao garment industry (including that of SMEs in the industry) increased after the quota phase-out, and so did employment in the industry, probably for two reasons. First, the Lao government has assisted the sector with improved export procedures to enable faster processing, reduced transportation costs, and an amended investment law which was implemented at the end of 2004 (the law gives foreign investors investing in VTE Capital City, Savannakhet, and Pakse a two-year tax holiday and a fiveyear one for investment outside VTE Capital City.) As a result of this and other developments, some new companies have been established. Second, the garment industry has grown as a consequence of the safeguard policy to China. However, this policy was terminated in 2008, and it is expected that China will pose an even greater obstacle to Lao garment exporters. 3.2.7
Malaysia
SMEs in Malaysia have been considered by a number of analysts as a major driver of economic development. Chee et al. (1981) and Chee (1986a; b) recognized that such enterprises are better allocators of limited domestic
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Recent Development: An Overview
SMEs in Asian Developing Countries
resources, and are less dependent on imported inputs, than are LEs. Annual reports on SME development from the Malaysian government state that especially since the 1997–8 Asian financial crisis SMEs, dominated by Chinese ownership, in Malaysia have become increasingly important. The strong overall performance of the Malaysian economy after the crisis and government’s sound policies provide the environment for the further expansion of SMEs, especially in the manufacturing and service sectors. In the post-crisis years, according to the reports, these enterprises have made important contributions to the growth of output and value added, particularly in the manufacturing sector, and created many employment opportunities, especially in the services sector. They also have contributed to broadening Malaysia’s export base (although the level of involvement of Malaysian SMEs in export activities is still relatively low). SMEs also form a critical segment of the supply chain of the electronics and automobile industries in supporting products such as plastics, automobile parts, and machinery. They supply parts and components to domestic LEs (including foreign enterprises) as well as for replacement markets (DOS, 2001; 2005; 2006; SMIDEC, 1999; 2002; 2004; 2005; 2006). The Census of Establishment and Enterprises in 2000 from the Department of Statistics (DOS) enumerates a total of 20,455 active establishments in the Manufacturing industry, of the 44,185 companies registered with the Companies Commission of Malaysia (CCM) in that year. Of these, 18,271 (89.3 percent) were SMEs. The largest number of establishments was in the textiles and apparel subsector, which accounted for 16.7 percent of the total, followed by food products and beverages (14.4 percent), metals and metal products (14.3 percent), and wood and wood products (13.6 percent). The 2003 Census shows that, in the manufacturing sector, out of 39,219 active companies 37,866 (96.6 percent) were SMEs. The largest number comprised MIEs, at 20,952 or 53.4 percent of total SMEs in this sector (Figure 3.8). This was followed by 14,955 (38.1 percent) SEs and 1,959 (5 percent) MEs. 100 80 60 40 20 0 1981
1994 SME
2000
2003
LE
Figure 3.8 Distribution of manufacturing enterprises by size category (%)
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70
Recent Development: An Overview
80
71
71
73.5 65.1
60 40
29
34.9 26.5
0 SME
LE 1981
Figure 3.9
1994
2003
Distribution of manufacturing output by size of enterprise (%)
Table 3.28 Output and value added of SMEs in three main sectors, 2003 Output (RM billion)
Value added (RM billion)
Total
SMEs
%
Total
SMEs
%
Manufacturing Services Agriculture
549.1 361.7 20.6
191.6 204.9 8.7
34.9 56.7 42.1
128.1 187.6 9.1
47.5 102.7 3.6
37.1 54.7 39.7
Total
931.4
405.2
43.5
342.7
153.7
47.3
Source: DOS (2005).
Although SMEs are large in number, as in the other Asian developing countries discussed, their contributions to manufacturing output and value added are, however, much less than those of LEs. For instance, in 2005 SMEs’ output and value added comprised only 29.6 percent and 25.9 percent of the total, respectively, while DOS data show that the ratios were both larger, though still below 50 percent (Figure 3.9, Table 3.28). DOS data show that although the majority of firms in the manufacturing industry are SMEs, it is not the biggest sector for the enterprises. For instance, in 2003 SMEs accounted for 98.8 percent or 516,855 of total establishments in the three sectors. LEs numbering 6277 accounted for the remaining 1.2 percent. About 96.6 percent or 37,866 of all enterprises in the manufacturing industry were SMEs. However, their share in the total number of enterprises of all sizes in this sector was very low at only 7.5 percent, while the service sector accounted for 86.3 percent. Their presence in the agricultural sector was even smaller at 6.2 percent. In 2005, in the services sector there were over 449,004 SMEs (or 86.5 percent of total SMEs), and the bulk of them were MIEs (80.4 percent), followed by SEs (17.6 percent) and MEs (2.1 percent). Only 37,866 SMEs (7.3 percent) were in the manufacturing industry, mostly in textile and apparel, metal and mineral products, and food and beverages production. About half
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SMEs in Asian Developing Countries
Table 3.29
Distribution of SMEs by three main sectors
Sector
2003
2005
No.
% of total SMEs
No.
% of total SMEs
Manufacturing Services Agriculture
37,866 449,004 29,985
7.5 86.3 6.2
37,866 449,004 32,126
7.3 86.5 6.2
Total
516,855
100.0
518,996
100.0
Source: DOS (2005; 2006).
Table 3.30
Distribution of SMEs in the manufacturing industry by subsector 2000
Subsector
Textiles and apparel Food and beverages Metal and metal products Wood and wood products Paper, printing, publishing Machinery and engineering Plastic products Electrical and electronics Non-metallic mineral products Others (jewelry) Petro-chemicals and chemicals Transport equipment Rubber and rubber products Palm oil and its products Leather Furniture Total
2003
No. of SMEs
% of SMEs
No. of SMEs
% of SMEs
3,319 2,749 2,709 2,582 1,195 1,135 988 543 803
18.2 15.2 14.8 14.1 6.5 6.2 5.4 3.0 4.4
8,779 5,664 4,686 2,052 3,483 1,390 2,166 1,077 1,650
23.2 15.0 12.4 5.4 9.2 3.7 5.7 2.8 4.4
666 526
3.6 2.9
2,887 1,047
7.6 2.8
433 366 155 65 —
2.4 2.0 0.8 0.4 —
699 — — — 2,286
1.8 — — — 6.0
18,271
100.0
37,866
100.0
* Includes leather products, tobacco products, medical, precision and optical instruments, recycling and petroleum products. ** Includes rubber. Source: DOS (2001; 2005).
of the SMEs in the sector were MIEs, followed by SEs (39.5 percent) and MEs (5.2 percent). Meanwhile, there were 32,126 SMEs (6.2 percent) in the agricultural sector, primarily in food crops and market produce, horticulture, and livestock. Around 93.3 percent of the SMEs in this sector were MIEs (Table 3.29).
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73
As in Indonesia and other Asian developing countries, SMEs in the Malaysian manufacturing sector are mainly in traditional industries, such as textiles and apparel. In 2000, this manufacturing subsector accounted for 18.2 percent of the total number of SMEs. This was followed by food products and beverages (15.2 percent), metals and metal products (14.8 percent), and wood and wood products (14.1 percent). In 2003, the distribution by industry was not significantly different: the textile and apparel industry accounted for 23.3 percent of the SMEs, followed by food and beverages (15 percent), metal and metal products (12.4 percent), and paper, printing, and publishing (9.2 percent) (Table 3.30). Jajri and Ismail (2007) identify sources of growth of Malaysian manufacturing SMEs. Their study also paints a more comprehensive picture of the distribution of SMEs by industry group based on the Manufacturing Survey 2003. Three subsectors – namely, food products; textiles, wearing apparel, and footwear; and wood-based products – accounted for more than two-thirds of the number of establishments surveyed. The textiles, wearing apparel, and footwear industry is the single largest subsector, accounting for almost one-fourth of the total number of firms surveyed (Table 3.31). Jajri and Ismail (2007) also show that during 1982–2003 SMEs in more capital-intensive industries like transport equipment, metal products, and chemical products had experienced a higher rate of output growth. In SMEs in these industries, capital stock grew at a tremendously high rate. In the metal-products industry, for example, SMEs achieved average annual output growth at 9.38 percent, and the capital grew at 14.26 percent. In the chemical products, the annual output growth of SMEs was 11.71 percent and the growth of capital in the enterprises was 17.94 percent; while the annual output growth of SMEs in the transport equipment industry was 15.4 percent and the growth of their capital was 13.0 percent. A tremendously high annual growth rate of SMEs’ output was also observed in the plastic products industry, at 10.24 percent; and their capital grew at 11.83 percent (Table 3.32). According to Jajri and Ismail, there is no doubt that the introduction of heavy industry has contributed to faster output growth of SMEs in the metal-products and transport equipment industries. Diversity in the manufacturing sector can also be attributed to a large capital flow into the chemical and plastic industry as well as into the textile industry. From the employment creation perspective, based on 2003 data, Malaysian SMEs employed approximately three million workers (65.1 percent) out of total employment of 4.6 million engaged in the three main sectors. The services sector employed the largest number, 2.2 million, followed by manufacturing, 740,438, and agriculture, 131,130 (DOS, 2005). Meanwhile Census 2005 (DOS, 2006) shows that the 518,996 SMEs that responded to the census employed over three million workers, accounting for 65.1 percent of total employment of 4.6 million of those business establishments.
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Recent Development: An Overview
Food Beverages and tobacco Textiles, apparel, and footwear Wood products Plastic products Rubber products Chemicals Metal products Non-metallic mineral products Electrical and electronics Transport equipment
No. (%)
Output (RM million)
Value added (RM million)
Employment
Fixed Assets (RM million)
Capital-Labor ratio (RM million)
22.9 2.9 24.9 18.4 7.4 3.0 5.5 0.5 6.5 4.2 3.9
38,177.2 751.3 2,126.2 6,479.6 9,133.2 5,903.3 12,522.8 1,720.9 4,200.2 13,170.0 3,072.3
4,992.0 202.2 774.6 1,941.5 3,145.9 929.1 3,595.6 341.6 1,605.2 2,057.7 840.2
79,744 10,427 32,692 36,151 43,732 19,208 23,499 3,358 21,536 27,846 15,272
6,157.7 249.6 861,8 2,368.9 4,227.6 1,294.2 5,493.1 690.9 2,591.6 2,060.5 1,121.1
0.077 0.024 0.026 0.066 0.097 0.067 0.234 0.206 0.120 0.074 0.073
Source: Jajri and Ismail (2007, p. 20).
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SMEs in Asian Developing Countries
Industry
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74 Table 3.31 Percentage of manufacturing SMEs and their output, value added, employment, fixed assets and capital–labor ratio, 2003
Recent Development: An Overview
75
Industry
Output
Food Beverages and tobacco Textiles, apparel, and footwear Wood products Plastic products Rubber products Chemicals Metal products Non-metallic mineral products Electrical and electronics Transport equipment
4.56 3.25 7.62 4.26 8.62 5.08 8.65 17.00 7.80 7.92 11.10
Capital
Labor
0.37 1.41 8.62 7.53 11.52 1.95 10.19 17.77 5.04 3.84 10.96
4.45 3.09 1.21 0.87 0.89 0.05 0.64 4.91 2.15 1.60 1.18
Source: Jajri and Ismail (2007, p. 21).
80 70 60 50 40 30 20 10 0
72.8
28.2
1981
31.5
26.9
1994
2003 SME
Figure 3.10
74.2
73.1
68.5
25.8
2005
LE
Distribution of manufacturing employment by size of enterprise (%)
Of these, 2.2 million workers were employed in the services sector, while 740,000 and 131,000 were employed in the manufacturing and agricultural sectors respectively. However, the employment share of SMEs in the manufacturing industry is always lower than 50 percent (Figure 3.10). As shown above, among the three main sectors the services sector is the largest for SMEs. Total SMEs in this sector, together with those in the manufacturing sector, accounted for 204,699 enterprises or 96.1 percent of total establishments in 2000. Most of the SMEs in the services sector were in the retail, restaurant, wholesale, transportation and communication, and professional services subsectors. In 2000, of a total of 192,527 establishments in the sector, 186,428 were SMEs (96.8 percent), and in 2003, of 451,516 establishments, 449,004 (99.4 percent) were SMEs (Table 3.33). About 88 percent of the SMEs in the sector were in the distributive trade subsector (retail, wholesale, and restaurants), followed by education and health (4.4 percent), professional services (2.9 percent), and selected
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Table 3.32 Average annual growth rate of output and main inputs in manufacturing SMEs, 1982–2003 (%)
76
SMEs in Asian Developing Countries
Table 3.33 Distribution of SMEs in the service sector by subsector 2000
2003
Total enterprises
SMEs (%)
Total enterprises
SMEs (%)
Educational and health* Professional services Selected services** Transportation and communication Computer industry services Wholesale and retail trade Restaurants Telecommunications Financial intermediaries Business and management consultancy services
8,558 5,548 4,146 3,908 283 170,046 — 38 — —
98.6 87.2 92.7 88.9 65.7 97.4 — 18.4 — —
15,576 11,245 55,254 28,231 1,182 249,178 63,067 88 19,291 8,404
98.7 98.9 98.96 99.1 92.6 99.6 99.9 65.9 99.1 99.4
Total
192,527
96.8
451,516
99.4
* Includes hospital, medical, dental and veterinary services, homeopathy and foot reflexology. ** Includes hotels and other lodging places, travel agencies and tour operator services, share, commodity, and foreign exchange brokers, bureau de change, real estate agents, videotape and rental services, research and development, advertising agencies, motion picture projection services, recreation, and cultural and sport activities. Source: DOS (2001, 2005).
Table 3.34
SMEs and LE in the retail trade subsector, 2000
Size
By number of workers
No.
%
By sales turnover (RM)
No.
%
MIE SE ME LE
<5 5–19 20–50 >50
130,773 21,655 816 416
85.1 14.1 0.5 0.3
<199,999 200,000– < 1m 1 m– <5m >5m
102,852 40,459 8,520 1,829
66.9 26.3 5.6 1.2
153,660
100.0
153,660
100.0
Total Source: DOS (2001).
services (2.1 percent). In 2003, SMEs were still mostly in the distributive trade subsector (69.3 percent), followed by transport and communication (6.2 percent), financial intermediaries (4.3 percent) and professional services (2.5 percent). SMEs in retail trade were mostly within the services sector, accounting for 153,244 firms (79.6 percent) out of a total of 192,527 (Table 3.34); the enterprises were dominated by MIEs with sales turnovers on average of less than RM 200,000. Meanwhile, the SMEs in the wholesale trade subsector accounted for 15,988 (8.3 percent). Unlike the retail subsector, MIEs formed only a small proportion of the wholesale trade subsector (Table 3.35).
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Subsector
Recent Development: An Overview SMEs and LE in the wholesale trade subsector, 2000
Size
By number of workers
No.
%
By sales turnover (RM)
No.
%
MIE SE ME LE
<5 5–19 20–50 >50
6,508 8,386 1,094 398
39.7 51.2 6.7 2.4
<199,999 200,000– < 1 m 1 m– <5 m >5 m
2,396 5,566 5,847 2,577
14.6 34.0 35.7 15.7
16,386
100.0
16,386
100.0
Total Source: DOS (2001).
Table 3.36 Distribution of SMEs in agriculture by subsector, 2003 Subsector
SMEs
Total enterprises No.
%
Planting, market plantation, and horticulture Fisheries Poultry farming Agricultural and animal husbandry Forestry, logging, and other related services Mixed agriculture* Hunting, trapping, and game propagation**
21,333
21,146
65.8
6,701 2,249 1,571 283
6,699 2,208 1,558 258
20.9 6.9 4.8 0.8
230 30
227 30
0.7 0.1
Total
32,397
32,126
100.0
* Agricultural and animal husbandry; ** Includes related services. Source: DOS (2005).
In the agricultural sector, in 2003 SMEs accounted for 99.2 percent of a total of 32,397 establishments covered. Approximately 93.4 percent (or 29,985 units) of the SMEs were from the micro category. Around 65.8 percent of the SMEs were in planting, market plantation and horticulture, followed by fisheries (20.9 percent), poultry farming (6.9 percent), and agricultural and animal husbandry services (4.8 percent) (Table 3.36). The SMEs contributed 42.1 percent (RM 8.7 billion) to the sector’s total output, with the largest share contributed by the growing of crops, market gardening, horticulture, and livestock farming (72.2 percent). The total number of people employed by the SMEs was 131,130 or 57.5 percent of total workers in the agricultural sector. MIEs were characterized by a high proportion (97.5 percent) of working proprietors and active business partners. In states where agriculture was the main economic activity, the concentration of SMEs was also high. Kedah has the highest number, 8803 (27.4 percent), followed by the east coast states with 26.6 percent.
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Table 3.35
77
78
SMEs in Asian Developing Countries Table 3.37 Distribution of manufacturing SMEs by region, 1999 No.
Johor Kedah Kelantan Malacca Negeri Sembilan Pahang Perak Perlis Penang Selangor Terengganu Kuala Lumpur Sabah Sarawak Others Total
%
268 112 19 67 64 89 133 4 263 806 43 54 31 3 309
11.8 4.9 0.8 3.0 2.8 3.9 5.9 0.2 11.6 35.6 1.9 2.4 1.4 0.1 13.6
2,265
100.0
Source: SMIDEC (1999, p. 12).
With respect to SMEs’ distribution by region, a substantial proportion of manufacturing SMEs operated in the state of Selangor with 806 firms, or almost 36 percent of the total. This was no surprise, since the state has been the center of economic activities in the country. Moreover, since the majority of SMEs supply only the domestic market, naturally SMEs tend to concentrate in growing or crowded markets. In second place was the state of Johor (11.8 percent), followed by the states of Penang (11.6 percent) and Perak (5.9 percent) (Table 3.37). Finally, in terms of SMEs’ legal status, Census 2005 shows that sole proprietorships formed the largest group, accounting for 68.5 percent of the total, followed by private limited companies (21.2 percent) and partnerships (9.7 percent). Most MIEs were sole proprietorships, while most of SEs and MEs were private limited companies (DOS, 2006). 3.2.8
Brunei Darussalam
In Brunei Darussalam, SMEs have always been the focus of national development programs with the objective of improving their level of productivity, quality, and management capability. They have been identified as an important player in the government’s industrial development and economic diversification programs. However, unlike in the other countries discussed above (except Lao PDR), there are no government data; and literature studies, academic papers, and official reports on Brunei SMEs are very sparse. So the real situation of SMEs in this country is unknown.
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One article that may give some information about SMEs in Brunei is from ASEAN-EU Partenariat ’97 (http://aeup.brel.com), although it covers the situation in the 1990s. According to this article, Brunei SMEs have grown tremendously, from traditional traders to professional businesses in engineering and consultancy services. The number of SMEs attaining International Organization for Standardization (ISO) certification was also increasing. In that period, they were particularly strong in the areas of property and estate development, contracting services, tender supplies, and general trade. The relatively safe and lucrative returns from these opportunities created by government projects and Brunei Shell Petroleum Company Limited have attracted new entrepreneurs to start ventures in such activities. The tender contracts have often become a stepping-stone for most companies to venture into other areas of business activity. Successful companies in Brunei were often seen to have diversified business activities. The manufacturing SMEs were mostly joint ventures in the production of a wide range of goods from food and garments to construction-related products. Garment products, in which some SMEs were involved, were Brunei’s leading export other than oil and gas products, while others catered for the increasing demands of the construction industry and domestic market. Brunei’s SMEs were also responding to the increasing opportunities in the tourism and hospitality industries. Although SMEs in this country are defined as businesses with 1–100 employees (see Chapter 1), according to APEC (2003b) the vast majority of businesses in Brunei are MIEs and SEs. MIEs, those with 1–5 employees, accounted for 43 percent of SMEs, while SEs (6–50 employees) accounted for 53 percent of SMEs. MEs (51–100 employees) accounted for only 4 percent of SMEs. According to the Department of Economic Planning and Development, SMEs accounted for 98 percent of all active business enterprises in Brunei in 1994. They contributed 92 percent of total employment in the private sector and a little over 66 percent of GDP in the non-oil sector. Approximately 39 percent of the SMEs were in manufacturing and construction, 32 percent in services, including 23.5 percent in trading and wholesale activities, while the rest were in primary production activities. Based on data from the Ministry of Industry and Primary Resources used by Anwar (2000) for his research, Table 3.39 shows the breakdown of SMEs and the distribution of the workforce by sector. Unfortunately, the data in Table 3.38 are outdated and incomplete. Unregistered MIEs and SEs (MEs are usually registered) are not shown in the table. Nevertheless, some interesting broad currents are revealed. For instance, these enterprises accounted for nearly 90 percent of all non-oil/gas private sector employment. As explained in Anwar’s study, over the years expatriates working in sectors such as agriculture, forestry, fishing, oil and gas, construction, transport and communications, finance, insurance, business services, and social services have outnumbered the Bruneians.
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Table 3.38 SMEs by economic sector Total SMEs
Wholesale and retail Social services Mining and manufacturing Restaurants and hotels Transport and storage Financial insurance and business services Agriculture* Construction
Sub-size (workers) 1–5
6–10
11–20
21–50 51–100
702 427 367 166 158 154
395 221 155 44 76 64
182 116 99 41 31 29
82 57 49 55 25 26
28 25 45 20 15 30
12 1 15 4 8 3
147 508
93 158
33 89
16 107
4 85
— 32
* Includes forestry and fishing. Source: Anwar (2000, p. 5).
3.2.9
China
According to Wang and Yao (2002), the total combined number of SEs and MIEs in industry in China increased from 344,000 in 1978 to 7,963,000 in 1996. From 1985 to 1995 the number of these enterprises in industry increased by 2,164 million, accounting for 99.33 percent of all the newly established enterprises during that period. During that same period, their output value increased by 4429.5 billion Renminbi (RMB), accounting for 62.31 percent of the total new output created, and their employment increased by 32.87 percent, amounting to 66.12 percent of all the new jobs created. In 1995, 78.5 percent of all the SEs and MIEs were private, and their share of national industrial output amounted to 36.1 percent. Based on the recent study by Xiangfeng (2008),9 in 2007 there are 2,327,969 SEs accounting for 98 percent of total registered enterprises; 42291 MEs (1.78 percent), and 4459 LEs (0.19 percent). From the employment perspective, LEs employed 20,877.8 people or about 18.11 percent of total employment; MEs, 35,464.3 (30.76 percent); and SEs, 58,947.8 (51.13 percent) (Table 3.39). This feature has made SMEs the most vibrant element in China’s economy. They have contributed the lion’s share to the rapid economic growth in China, which has been maintained since the late 1980s. According Xiangfeng (2008), these enterprises account for at least 60 percent of the country’s GDP, and, indeed, this contribution is larger than the GDP shares of SMEs in many other Asian developing countries. As argued by Wang and Yao (2002, p. 197), the rapid growth of SMEs in China has been made possible especially by the opening of China to the international economy in the 1980s as part of the market-oriented reforms initiated by Chinese leader Deng Xiaoping. The reforms have
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Recent Development: An Overview
81
Table 3.39 The share of SEs and MIEs in the manufacturing industry (%) Number of enterprises
1980 1985 1995 1996 2007
98.93 99.85 99.69 99.70 99.78
Output value
Employment
56.82 57.70 62.45 65.59 66.28*
— 76.51 73.59 — —
* Based on the industrial incomes of SMEs reported by Xiangfeng (2008). Sources: Wang and Yao (2002) (for the period 1980–96) and Xiangfeng (2008) (for 2007).
Table 3.40
Regional distribution of incorporated SMEs, 2007
Area
No. of enterprises
China Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jinlin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hubei Hunan Guangdong Guangxi Hainan Chongqing Sichuan Guizhou Yunnan Tibet Shanxi Gansu Qinghai Ningxia Xinjiang
2,327,969 98,674 55,807 87,605 49,637 22,053 110,081 32,418 40,790 207,535 270,669 241,220 59,902 77,230 43,605 177,407 110,182 51,682 57,720 230,474 33,473 7,836 34,683 75,330 19,134 29,160 851 45,906 23,879 4,693 4,693 18,648
Employment (person) 58,947,778 1,470,505 1,024,926 2,696,972 1,477,966 606,530 2,323,698 816,716 1,027,397 2,892,309 6,563,781 5,705,517 1,758,246 2,151,462 1,424,390 5,001,380 3,566,630 1,621,358 2,004,921 6,376,904 957,281 147,402 1,143,975 2,138,436 647,977 837,651 37,834 1,173,463 677,594 141,599 141,599 340,509
Source: Xiangfeng (2008, p. 41).
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resulted in many state-owned companies (SOEs) in the country becoming private SMEs. Since then urban collective, town and village enterprises (TVE), alongside the private and self-employment establishments, have grown rapidly (Xiangfeng, 2008, p. 38). Xiangfeng (2008) provides information on the distribution of registered SMEs by region and sector. About 68.58 percent of SMEs are located in the eastern area (Table 3.40). The biggest economic sector for incorporated SMEs is manufacturing, especially in the machinery, metal products, textile, and food industries, followed by the wholesale and retail sectors, construction, and transportation and storage (Table 3.41).
Table 3.41 Distribution of incorporated SMEs by economic sector/subsector, 2007 Sector/subsector Agriculture Mining Manufacturing –food products –textiles –textile products –raw chemical material- and chemical-based products –plastics –metal products –general purpose machinery –special purpose machinery –transport equipment –electrical machinery and equipment Production and distribution of electricity, gas, and heat power Construction Transport, storage, and post Information transmission, computer services, and software Wholesale and retail trade Hotels and restaurants Financial intermediation Leasing and business services Scientific research, technical services, and geological prospecting Management of water conservancy, environment, and public facilities Service to households and other services
No. of enterprises
Employment (person)
4 77,891 1,228,354 68,154 77,944 47,569 72,459
76 3,024,762 38,325,314 1,553,258 3,191,356 2,532,159 1,961,833
69,400 82,028 112,752 54,713 51,576 56,889 34,041
1,826,806 2,210,821 3,011,552 1,497,445 1,512,932 1,746,124 666,073
107,186 59,702 1,703
7,157,427 2,089,113 59,190
819,054 3 4 15
7,625,545 12 118 47
5
28
2
58
1
—
Source: Xiangfeng (2008, p. 42).
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Recent Development: An Overview
India
India has had a long tradition of classifying manufacturing and service activities under the generic name of “industries”, that is, large-scale industries, heavy industries, capital goods industries, consumer goods industries, small-scale industries (SSIs), Khadi industries, cottage industries, agro-based industries, and so on. Of late, a paradigm shift has occurred. The Micro, Small and Medium Enterprises Development Act (MSMED) 2006 introduced the concept of “enterprises” in place of the previous concept of “industries”. These “enterprises” are classified under two major heads that relate to manufacturing and services. In each of these categories, enterprises have further been classified on the criterion of investment as micro, small, and medium. The Act defines an ME for the first time in India. Previously, “industries” were in the “small-scale” category or the “large-scale” category (Mishra, 2007, p. 21). Thus, SSIs are equivalent to SEs, and cottage industries are equivalent to MIEs in the manufacturing industry. SMEs in India have such characteristics as low capitalization and limited assets, geographical diversity, and high mortality (ICICI Bank and IFC, 2002). Unlike most other countries covered in this chapter, in India the SME focus is primarily on the manufacturing sector, in which enterprises concentrate on traditional industries, that is, textile, engineering, jute, and auto ancillary. The growth of SMEs in the manufacturing sector has been striking. According to Sandesara (1993, p. 235), in 1980–1, their number was 8.74 lakhs whereas at the end of 1995–6 the number had gone up to 28 lakhs. The total value of output in 1993–4 at current prices was INR 241,648 crores12 and exports were to the order of INR 24,000crores. To compare the increase, figures from the two All India Censuses in 1972 and 1988 depict the production increase from INR 2,603 crores to INR 13,528 crores, both at 1972–3 prices, thus representing an increase of 420 percent during that period. Unlike the other countries discussed, in India SMEs are also strong in the information technology (IT) industry. According to Upadhyay (2007, p. 10), over 80 percent of IT companies in India are SMEs. A typical Indian software SME would have a turnover of less than INR 1000 million with a staff strength of fewer than 500. India’s IT industry’s contribution to GDP is about 5.4 percent a year and it increases annually. Also, the industry’s export contribution has increased significantly in recent years, but SMEs’ share in total IT exports is only 30 percent. With respect to the importance of SMEs in the Indian economy, the enterprises alone contribute 7 percent of India’s GDP (Srinivasan and Joseph, 2008, p. 4). According to the recent Third All India Census of SSIs conducted in 2004, these enterprises have increased from about 80,000 units in the 1940s to about 10.52 million units (both registered and unregistered in manufacturing and services). Their total employment is about 25 million and they produce about 7500 traditional as well as modern products, including high-tech products such
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as software. It is estimated that SMEs account for 90 percent (Pandey, 2007, p. 10), or 95 percent (ICCI Bank and IFC, 2002, p. 7), or 99.7 percent (Upadhyay, 2007, p. 8) of all industry establishments in the country, and 40 percent of value added in the manufacturing sector (Pandey, 2007, p. 10). According to Das (2008a, pp.70–1),10 who focuses on the enterprises in the manufacturing sector, about 99.5 percent of the total number of SMEs in the sector are very small or tiny units (which can be categorized as MIEs). Since even before the country gained independence from Britain in 1947, MIEs have continued to contribute an immense number of job opportunities across India and, in the process, helped reduce inter-regional and rural–urban growth disparities. The remarkably diverse range of products manufactured by these enterprises (estimated to exceed a staggering 8000 distinct products), often available at affordable prices, has successfully catered to a calibrated yet vast domestic market. Certain products of SEs have also consistently figured in the export basket during recent decades, although SE export performance in the global market has been unimpressive.11 The most comprehensive data on SMEs in India are provided by the Office of the Development Commissioner, Ministry of Micro, Small and Medium Enterprises (MSME), and the most recent data are presented in its Annual Report for 2006–7 (MSME, 2007). As shown in Table 3.42, the overall industrial growth rate of the SSIs in terms of the Index of Industrial Production (IIP) (base: 2001–2 = 100) rose to 12.32 percent during the year 2005–6 as compared with 10.88 percent during the year 2004–5. These manufacturing enterprises have also consistently registered a higher growth rate than that of the overall manufacturing sector. The Office also provides estimates on various performance parameters, including total number of enterprises, relating to the growth of SSIs or SEs in the manufacturing sector from 1990–1 to 2005–6. Total SSI units are estimated at around 6.79 million in 1990–1 and 10.11 million units in 2000–1, increasing to 12.34 million units in 2005–6. Total employment generated by SSIs also increased annually (not shown here) from more than 15 million people in 1990–1 to almost 29.5 million people by 2005–6 (Figure 3.11). Table 3.42 Growth rates of SSIs (%) Year
2002–3 2003–4 2004–5 2005–6
Growth rates of 1970 base IIP
Growth rates of 2001–2 base IIP
Growth rates of manufacturing industry with base year 1993–4
7.68 8.59 9.96 10.40
8.68 9.94 10.88 12.32
6.0 7.4 9.2 9.1
Source: MSME (2007, p. 49).
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Recent Development: An Overview 35 30 25 20 15 10 5
Unit 27.14
29.49
26.02
28.26
24.93
22.06
23.91
21.32
22.91
20.59
10.11
10.52
10.95
12.34
9.72
11.86
8.97
9.34
11.4
8.62
Worker 16.6
18.26
19.14
15.83
17.48
19.79
6.79
7.06
7.35
7.65
7.96
8.28
85
1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 200591 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Figure 3.11
14
Total number of units of SSIs and workers in them
12
SSI Manufacturing
10
8.68
8
12.32 10.88
9.64
8.1
8.4 6.9 5.7
6 4 2 0 2002 — 03
Figure 3.12
2003 — 04
2004 — 05
2005 — 06
Growth rates of output in SSIs and manufacturing industry
Two other important performance parameters are the growth rate of output and output contributions. With respect to the first parameter, data provided by the Office show that this category of manufacturing enterprises has maintained a rate of growth higher than the overall growth rate of the sector. The comparative growth rates of output for both the SSIs and the sector for the period from 2000–3 to 2005–6 are presented in Figure 3.12. With regard to the second parameter, as shown in Figure 3.13, the shares of SSIs in total output in manufacturing industry as well as in GDP for the same period are more or less stable, around 38–39 percent and 5–6 percent, respectively. As in Indonesia or other countries, many SMEs in India, especially in the manufacturing industry, form clusters. Based on information provided by, among others, the Ministry of Industry in India (http://www.moi.go.in) and UNIDO (http://www.ifmr.ac.in/sefc/UNIDO%20Review.pdf), it has been estimated that there exist more than 300 SME clusters and 2000 artisan clusters in the country. These clusters are overwhelmingly formed by SEs, and the shares of MEs and LEs in sales turnover, production, and employment are nominal. Cluster size in terms of number of units and quantum of output may vary significantly. Some of them are so big that they account for up to 70 or 80 percent of the total volume of their particular product produced in India. For example, the township of Panipat accounts for 75 percent of the total blankets produced in the country. Similarly, Tirupur, a small township
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0
SMEs in Asian Developing Countries
2003 —4
5.82
2002—3
5.91
2001—2
5.77
2000—1
6.04
1999—0
5.86 0
5
38.8 38.89 39.12 39.71 39.74 10
15
20 GDP
25
30
35
40
45
Industry
Figure 3.13 Contribution of SSIs to total industrial production and GDP (based on 1999–2000 prices) (%) Table 3.43 Classification of SME clusters by industry group Industry Group Machinery and parts except electrical Cotton textiles Chemical and chemical products Metal products Hosiery and garments Food products Non-metallic mineral products Electrical machinery and parts Wool, silk, and synthetic fiber textiles Transport equipment and parts Other categories Total
No. of clusters 20 15 14 13 10 9 9 8 8 7 25 138
Sources: Ministry of Industry, GOI (http://www.moi.go.in) and UNIDO (http:// www.ifmr.ac.in/sefc/UNIDO%20Review.pdf).
in the Coimbatore district of Tamil Nadu, contributes 80 percent of the country’s cotton hosiery exports. Yet another example is the city of Agra, virtually a footwear city, with 800 registered and 6,000 unregistered small and cottage footwear production units, making 1.5 lakh pairs of shoes per day with a production value of USD 1.3 million per day and exporting shoes worth USD 57.14 million per year. Similarly, Ludhiana in Punjab produces 95 percent of the country’s woolen knitwear, 85 percent of the country’s sewing machines, and 60 percent of the nation’s bicycle and bicycle parts. Some clusters are very small, with only a few enterprises, but they specialize in certain products with around 100 workers each. Based upon two-digit National Industry Category (NIC) classification, the distribution of selected clusters among important industry groups is presented in Table 3.43. The table covers only selected clusters with a minimum of 100 registered enterprises.
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Recent Development: An Overview
Pakistan
The development of SMEs has long been debated in public and private forums in Pakistan, but until recently the motivation behind the debates was more socio-political than economic. For a long time the mainstay of Pakistan’s industrialization strategy was large-scale manufacturing, which recorded an 8.78 percent annual growth rate between the early 1950s and 2003 (Tables 3.44 and 3.45) as it was consistently supported by a set of macroeconomic policy measures. During that time, the main focus of economic policies, budgetary measures, and regulatory regime was on LEs. As a result, structural imbalances were created in Pakistan’s business environment, which was skewed unhealthily toward promoting LEs. Coined by economists during the 1990s, “SME” is a relatively new term in Pakistan’s development jargon. In 1998, the government of former Prime Minister Nawaz Sharif, becoming cognizant of SMEs’ economic importance, formed the Small and Medium Enterprise Development Authority (SMEDA) as the flagship organization intended to provide support to SMEs in Pakistan through many programs (Mustafa and Khan, 2005). This development was encouraged by the fact that SMEs, too, registered an impressive annual growth rate of 5.06 percent during 1950–2003 (see Tables 3.44 and 3.45) without benefiting directly from policy support. The annual growth rate was 14.7 percent during 1987/8–1996/7, when the estimated value of their output increased from PR 19,683 million to PR 67,541 million. Meanwhile, the number
Table 3.44 GDP share of manufacturing industry by size of enterprise (%) Year
Total
LEs
SMEs
1949–50 1959–60 1969–70 1979–80 1989–90 1999–00 2000–01 2001–02 2003–04
6.39 9.91 13.44 14.51 17.59 16.66 17.66 17.94 18.39
1.83 5.67 10.46 10.55 12.70 11.65 12.48 12.66 13.09
4.56 4.23 2.98 3.95 4.89 5.03 5.18 5.28 5.30
8.78 12.41 13.99 16.65 17.68 13.37
4.38 8.85 10.42 12.26 12.32 9.27
4.41 3.56 3.57 4.38 5.36 4.09
Period averages 1950s 1960s 1970s 1980s 1990s 1950–2003 Source: GOP (2003; 2004).
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3.2.11
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SMEs in Asian Developing Countries
Year
Total
LEs
SMEs
1950–51 1959–60 1969–70 1979–80 1989–90 1999–00 2000–01 2001–02 2002–03
8.39 2.53 11.32 10.25 5.72 1.53 8.21 5.00 7.67
23.42 2.75 13.95 10.96 4.73 -1.01 9.46 4.87 8.65
2.34 2.25 2.98 8.40 8.40 5.31 5.31 5.31 5.31
7.73 9.91 5.50 8.21 3.88 6.78
15.75 13.39 4.84 8.16 3.54 8.79
2.30 2.91 7.63 8.40 5.06 5.06
Period averages 1950s 1960s 1970s 1980s 1990s 1950–2003 Source: GOP (2003; 2004).
of MIEs and SEs in the manufacturing industry recorded annual growth of 5.8 percent in that period (GOP, 2005a; c). According to the Economic Census of Pakistan conducted by the Federal Bureau of Statistics (GOP, 2005c) there are about 3.2 million economic establishments in Pakistan. Of these, SMEs (with an employment base up to 99) constitute about 90 percent of all private enterprises, or 2.880 million units, employing approximately 78 percent of the non-agricultural labor force, or 99 percent of total employment in the country. Of the total of SMEs, about 93.9 percent are SEs and MEs, and 6.1 percent are MIEs or household units (including all activities of producing goods and services for sale or barter in the market). Distribution by state/region shows that Punjab had the largest share of 65.26 percent of total establishments in 2005, followed by Sindh (17.82 percent), North-West Frontier Province (NWFP) (14.21 percent) and Balouchistan (2.09 percent). SMEDA (2001) survey data revealed that 72 percent of all SME enterprises were sole proprietorships, 12 percent partnerships (registered), 9 percent partnerships (unregistered), 6 percent private companies and 1 percent other. It is equally interesting to note that sole proprietorship was also the most favored form of business organization for micro, small, and even medium-sized firms. Sole proprietorships and unregistered partnerships are not legally required to register or to seek prior approval from any government department or agency. Of the total of SMEs, about 53 percent were in wholesale and retail trade and hotels and restaurants, followed by community, social, and personal
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Table 3.45 Growth rates of manufacturing industry by size of enterprise (%)
89
services (22.3 percent). Manufacturing industry is the third largest group, with a 19.72 percent share of the total of SMEs (excluding MIEs). With respect to MIEs, most are in the manufacturing sector (66.5 percent), followed by community, social, and personal services (20.5 percent), agriculture, poultry farming, fishing and so on (8.7 percent), and wholesale and retail trade and so on (about 4 percent) (Table 3.46). According to the Economic Survey 2003–4 (GOP, 2004), approximately half of the total of SMEs in manufacturing industry was concentrated in five groups of industries: grain milling, cotton weaving, wood and furniture, metal products, and silk and art silk. Grain milling was the largest subsector (16 percent) of the group (Table 3.47). Table 3.46 Distribution of SMEs by major sector, 2005 (%)** Sector Agriculture, forestry, hunting, mining, and fishing Mining and quarrying Manufacturing Electricity, gas, and water Construction Trade, restaurants, and hotels Transport, storage, and communication Financing, insurance, real estate, and business services Community, social, and personal services Total
Total
SEs and MEs
MIEs
1.57
1.11
8.73
0.02 19.72 0.00* 0.05 52.96 1.74
0.03 16.76 0.00* 0.05 56.05 1.85
0.00 66.48 0.00* 0.00* 4.23
1.64
1.74
0.04
22.3
22.4
20.53
100.00
100.00
100.00
* The number is very small; **No unit. Source: GOP (2005c).
Table 3.47 Share of key SME subsectors in the manufacturing industry, 2004 Subsector
%
Cotton weaving Other textiles Metal products Carpets Silk and art silk Grain milling Jewelry Wood and furniture Others
13 6 7 4 5 16 4 10 35
Source: GOP (2004).
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Table 3.48 Contribution of the dominant subsectors in manufacturing value added by size of enterprise (%) LEs
Industry
SMEs
1995–6
1987–8
All industries 100 Textiles 22.31 Food and beverages 15.19 Electrical 7.67 machinery and supplies Industrial 8.53 chemicals Non-metallic 7.15 Tobacco 6.18
100 17.35 15.95 3.27
All industries Cotton weaving Silk and art silk Jewelry products
100 11.16 6.96 5.95
100 13.19 5.11 7.65
6.98
Wooden furniture Leather footwear Structural products
6.18
5.96
3.65 5.08
4.11 3.26
Total contributions
38.98
39.00
Total contributions
67.03
7.69 10.08 61.32
1996–7
1987–8
Source: Bari et al. (2003, p.11).
Bari et al. (2003, p. 11) show that in the manufacturing industry SMEs contribute 35 percent of total value added of the industry. The distribution of SMEs’ value added in the sector indicates that the largest share is in the cotton weaving industry, although it declined from almost 13.2 percent in 1987–8 to almost 11.2 percent in 1996–7. The second industry where SMEs have the largest value added contribution in 1987–8 was jewelry products, and in 1996–7 silk and art silk (Table 3.48). Manufacturing firms’ data from the 2005 Economic Census (GOP, 2005c) reveal that, of the total of 583,329 units in the census, 117,176 were MIEs (20 percent) and 466,153 SMEs (80 percent). The majority of the SMEs (43.2 percent) were in textile wearing, apparel, and leather industries, followed by food, beverages, and tobacco (20.9 percent), wood and its products (10.8 percent), fabricated metal products, machinery, and equipment (10 percent), other manufacturing industries and handicrafts (8.9 percent), while the remaining subsectors had an 11.1 percent share. In the largest industrial group of textile wearing, apparel, and leather, 31.5 percent were MIEs and 68.5 percent SMEs. The other important group of industries for MIEs was non-metallic mineral products (28 percent). Another distinct feature identified by the Census is that about 85 percent of the manufacturing MIEs were located in rural areas. Further, the textile, apparel, and leather segment had the largest share (54 percent) among rural MIEs. For other manufacturing industries and handicrafts in rural areas, MIEs had a share of 18 percent. In urban areas, the largest share of the MIEs was that in the textile, apparel, and leather industries (78.7 percent), followed by other manufacturing
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Industry
Recent Development: An Overview
91
Table 3.49 Distribution of SMEs’ shares of GDP by sector (%)
Services Manufacturing Trade and hotels
GDP share 17 30 53
Source: ILO/SMEDA (2002).
and handicrafts (9.3 percent), wood products including furniture manufacturing (3.3 percent), and remaining industries (8.6 percent). Overall, in urban areas the share of manufacturing SMEs (other than MIEs) was the largest (93.8 percent). Within this category, the share of textile, apparel, and leather was 43 percent, fabricated metal products 15.8 percent, food and beverages 12.8 percent, wood and wood products 11.6 percent, and other sectors 16.8 percent. With respect to GDP contribution, based on a study conducted by ILO and SMEDA (2002), SMEs (including MIEs) contribute around 7 percent of GDP and 9 percent of agricultural GDP. This low share is due to the dominant presence of MIEs in the three subsectors of services, manufacturing, and trade and hotels. Although the contribution of SMEs to total GDP is not very high, it still represents almost 13 percent for the manufacturing sector and 11 percent for the trade and services sector (Table 3.49). Some studies have estimated the shares of SMEs in GDP at a much higher level. For instance, according to Chaudhry (2004) and Shahid (2008, p. 14), their share in annual GDP is over 30 percent, while according to Mustafa and Khan’s (2005) estimate informal businesses account for 55 percent of the GDP of Pakistan. Depending on the methodology, the size of enterprises covered, and the varying results obtained in surveys, the share of SMEs in GDP in Pakistan may be either underestimated or overestimated. Clustering is also a common form of industrial organization among SMEs in Pakistan. Prominent SME clusters include power loom upgrade, autopart vendors, carpet-weaving program lending, agro-mall, leather CFC at Sialkot, support services for agricultural credit (SSAC), gem clusters, ginning upgrade, and the engineering college at Gujranwala (Chaudhry, 2004). 3.2.12
Bangladesh
Bangladesh is not only a poor developing country but also among the poorest countries in Asia. It is experiencing a vicious circle of poverty and overpopulation. It is thus a logical consequence that SMEs in Bangladesh are very important, functioning as the “last resort” for the poor. Based on data from BSCIC (1994, p. 5), SMEs accounted for 89 percent of total industrial establishments in 1989/90. About 87 percent of total employment and more than 50 percent of total manufacturing value added originated in SMEs. The most common figure for the 1990s relating to the value added contributions of SMEs given
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Sector
SMEs in Asian Developing Countries
by different sources (ADB, World Bank, Planning Commission and BIDS), as cited in Ahmed (2004, p. 7), varies from 45 percent to 50 percent of the total manufacturing-value added and from 20 percent to 25 percent of GDP (according to estimates in Daniels, 2003, cited in Ahmed, 2004, p. 8). According to another estimate, there are 55,916 SEs and 511,612 MIEs, excluding handlooms, which provide employment to nearly three million people. When handlooms are added, the number of MIEs alone shoots up above 600,000, indicating the superabundance of these enterprises in Bangladesh. Informal Planning Commission estimates show that the number of MEs (undefined) is around 20,000 and that of MIEs and SEs is between 100,000 and 150,000 units. Whatever the correct magnitude, according to Ahmed (2004, p. 8) SMEs are undoubtedly quite dominant in the industrial structure of Bangladesh, comprising over 90 percent of all industrial units, and, based on SEDF data, contributing between 80 percent and 85 percent of industrial employment and 23 percent of total private employment (SEDF, 2003, p. 3). While the SMEs are characteristically highly diverse and heterogeneous, their traditional dominance is in a few industrial subsectors such as food, textiles, light engineering, wood, cane, and bamboo products. According to some sources cited by ADB (2002a, p. 12), food and textile units including garments account for over 60 percent of registered SMEs. However, as identified by various recent studies,13 the SMEs have undergone significant structural changes in terms of product composition and degree of capitalization and market penetration in order to adjust to changes in technology, market demand, and market access brought by globalization and market liberalization. As presented in Table 3.50, during the late 1970s more than 50 percent of SME activities were related to rice milling and 30 percent were in Table 3.50
Changes in distribution of manufacturing SMEs by selected subsector
Subsector
1978
1991
No.
% of total SMEs
No.
% of total SMEs
Rice mills Bakery Flour mills Light engineering works Printing and publishing RMG Sawmills Soap Plastic products Automotive servicing and repairing
12,242 2167 1315 1120 995 757 713 143 74 296
51.0 9.02 5.42 4.66 4.14 3.15 2.97 0.59 0.31 1.23
13,482 2765 1718 2252 1775 2365 1023 351 725 550
35.2 7.2 4.45 5.88 4.64 6.18 2.67 0.92 1.89 1.44
Total
19,822
82.59
27,006
70.52
Source: BSCIC (1982 and 1994) as cited in Ahmed (2001b).
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Recent Development: An Overview
93
Table 3.51 Growth of SEs and MIEs
SEs
MIEs
1981 24,590 1991 38,294 2001 (end of June) 55,916 Average annual 6.36 growth rate (%)
321,743 405,476 511,621 2.95
Employment (person) SEs 322,110 523,472 808,959 7.55
MIEs
Value added (TK m) of SEs and MIEs combined
855,200 1,331,032 166,724 4.73
17,987 21,154 29,323 3.15
Source: Ahmed (2001b, p. 10).
9 8 7 6 5 4 3 2 1 0
SM Es LEs
1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00
Figure 3.14
Yearly compound real rate of growth of SMEs and LEs (%)
traditional manufacturing, with insignificant service-related activities; by 1991, the share of agro-based SME activities had declined to 35 percent, while the share of traditional manufacturing activities was more or less the same, but other, non-traditional manufacturing and services were achieving greater share in SMEs. According to BSCIC data, as cited in Ahmed (2001b), average annual growth of the numbers of SEs and MIEs from 1981 to 2001 was, respectively, 6.4 percent and almost 3 percent; while growth of employment in these enterprises was, respectively, 7.6 and 3.7 percent (Table 3.51). In a number of sectors, the growth of SMEs is found to be closely associated with the growth of their larger counterparts; in some instances it has even surpassed the growth of the latter. During the 1990s, SMEs grew faster than LEs (Figure 3.14). In 2003, as discussed in Mintoo (2006), the International Consultancy Group (ICG) of the United Kingdom (UK), in collaboration with Micro Industries Development Assistance and Services (MIDAS), has conducted the National Private Sector Survey of Enterprises in Bangladesh with funding from the Department of International Development (DFID) of the UK government, the United States Agency for International Development (USAID), the Swiss Agency for Development and Cooperation (SDC), and the Swedish International Development Cooperation Agency (SIDA). The
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No. of enterprises
SMEs in Asian Developing Countries
survey reports a number of vital findings. First, there were approximately six million SMEs (including MIEs), which included enterprises with up to 100 workers employing a total of 31 million people, equivalent to 40 percent of the population of the country of age 15 years and above. Second, at least three quarters of household income in both urban and rural areas is provided by these enterprises. Third, SMEs were distributed across sectors in the following proportions: wholesale and retail trade and repairs – 40 percent, production and sale of agricultural goods – 22 percent, services – 15 percent, and manufacturing industry – 14 percent. Fourth, SMEs contributed TK 741 billion (USD 12.5 billion) or nearly 25 percent of the GDP (BDT 2,996 billion) in 2003. Fifth MIEs and SEs employing 2–5 workers contributed a 51 percent share of the total SME contribution to the economy, followed by 26 percent by those with only one worker and 10 percent by those having 6–10 workers (Figure 3.15). Sixth, the sectoral contributions of SMEs to GDP were as follows: manufacturing 38 percent, agriculture 24 percent, and wholesale and retail trade and repairs 23 percent (Figure 3.16). 51 to 100 2 21 to 50 5 11 to 20
6
6 to 10 10 2 to 5 51 1 26 0
10
20
30
40
50
60
Figure 3.15 GDP contribution by size of enterprise (based on number of workers), 2003 (%) Real estate, renting & business services
2
Transportation & communication
1
Construction
1
Hotel & restaurants
4
Trade * repair
23 36
Manufacturing Agriculture
24 0
5
10
15
20
25
30
35
40
Figure 3.16 GDP share of SMEs by main economic sectors, 2003 (%)
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Recent Development: An Overview
95
Table 3.52 Contribution of manufacturing LEs and SEs to GDP (%) 2000–1
2001–2
2002–3
2003–4
LEs SEs
11.01 4.39
11.13 4.46
11.16 4.60
11.29 4.68
11.47 4.78
Total
15.40
15.59
15.76
15.97
16.25
Source: Economic Review, Ministry of Finance, GOB, 2004 (Mintoo, 2006).
Two other important sources of information on SMEs in Bangladesh are the annual economic review from the Ministry of Finance and data from the Bangladesh Bureau of Statistics (BBS) The coverage of the annual economic review is, however, restricted to LEs and SEs in manufacturing industry, whatever might be the definitions of these two categories. The relative contributions of these two groups of industrial enterprises during the period 1990–2004 are shown in Table 3.52. Finally, as shown in Moazzem (2006, p. 21) using BBS data, total production in LEs and MEs increased by about 13.5 percent in 2006 compared with the preceding year. These enterprises in all major industries experienced considerable growth in that year, for example as wood products (23 percent), jute, cotton, and apparels (19 percent), food and beverages (13 percent), and fabricated metals (11 percent). In other industries, growth is hardly observed because of growing import pressure, such as non-metallic products (8.8 percent), basic metals (6.5 percent), chemical and petroleum products (4.4 percent), and so on. On the other hand, total production of SEs during October–December 2005 grew by 9.7 percent. These enterprises in all major industries have achieved moderately high levels of growth, such as non-metallic, mineral production (22 percent), paper, printing, and publishing (14 percent), food and beverages (13 percent), and chemicals, rubber, and plastic (10 percent), because of the increasing demand for them in the domestic market.
3.2.13
Nepal
SMEs, especially in manufacturing industry, have been an important factor in industrial development in Nepal. Even before the initiation of the process of industrialization in 1936, SMEs, especially SEs and MIEs, were the basis of the supply of the country’s processed products. The advent of democracy in 1951 introduced the planned development process, even though the actual practice started from 1956. The plans and policies developed since then placed an emphasis on MIEs and SEs (Nepal et al., 2006). As mentioned in a report on strategic alliances in the SME sector in Nepal from The Asia Foundation (TAF, 2000, p. 12), MIEs and SEs account for 96 percent of the total of industrial establishments, producing 59 percent of total industrial output, creating opportunities for 83 percent of total industrial
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1999–00
96
SMEs in Asian Developing Countries
Table 3.53 Registered manufacturing MIEs and SEs
1997/8 1998/9 1999/2000 2000/1
No. of enterprises 9,650 9,990 10,127 6,587
Total investment Annual production Total (lakhs) (lakhs) employment 8,960 9,620 10,340 4,820
20,800 19,290 — —
93,081 89,164 — —
Source: Central Bureau of Statistics, 2002, Kathmandu (Nepal et al., 2006).
employment, and making up 9.22 percent of GDP. The report also mentions that 73 percent of the enterprises employed fewer than 50 workers and 92 percent of the total of manufacturing industries had fewer than ten employees, contributing 19 percent of output, 39 percent of employment, and 20 percent of fixed assets. Based on the Census of Manufacturing Industry 1996–7 and the Survey of Small Manufacturing Industries 1999–2000 conducted by the Central Bureau of Statistics, Shrestha (2005) estimates that enterprises with fewer than ten employees (which include MIEs with at least one hired laborer and those without hired labor, but the enterprises are sole-income sources for households) represent 92 percent, or 43,571 units, of a total of 47,228 units. This category of smaller enterprises has 121,270 workers or 38 percent of total employment of 217,978 workers, and contributes about 32 percent and 23 percent, respectively, of total output value and value added. Out of a total of 3557 enterprises with ten or more employees, 3485 (89 percent) are enterprises with fewer than NR 50 million of fixed-asset investment, and they contribute 63 percent of the total manufacturing value added. As these enterprises are labor-intensive in nature, they constitute about 40 percent of total gross fixed assets, compared with 60 percent for LEs. Unfortunately, there are no data available of establishments by size in other sectors. Nevertheless according to Shrestha (2005) the number of SMEs, especially MIEs and SEs in trade and services, is extremely high. Therefore, such enterprises, which mostly operate in the informal sector, represent the majority of enterprises in Nepal. Finally, based on Central Bureau of Statistics in 2002, Nepal et al. (2006) show that SMEs in the country account for more than 90 percent of all manufacturing enterprises, employ 95 percent of the workforce in the sector, and contribute 50 percent of the industrial GDP. As presented in Table 3.53, the number of manufacturing MIEs and SEs registered from the year 1997/8 to 1999/2000 is in increasing trend. However, the pace of increment is quite slow. In the year 2000/1 it is in decreasing trend. Similar trend can be observed in total capital investment. However, in the case of employment and annual production, the trend is slightly in the negative side despite the increased number of registration.
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Period
4
4.1
Overall export performance
In some Asian developing countries – for example, India, Pakistan, China, Chinese Taipei (Taiwan), South Korea, Thailand, and Indonesia – SMEs in the manufacturing industry have also been playing an important role in exports, directly or indirectly (through, for example, subcontracting arrangements with LEs or MNCs), although the level of export involvement varies by country. As can be seen in Table 4.1, China’s SMEs play the leading role, making the greatest export contribution of 40–60 percent of the country’s total merchandize exports, followed by Chinese Taipei with 56 percent. In South Asia, the export share of Indian SMEs tends to approximate to 40 percent. In the sports goods and garments sector their contribution to exports is as high as 90–100 percent (Pandey, 2007, p. 7). In Pakistan for the past three decades the fastest-growing export industries have been dominated by SMEs. Important export contributions from the enterprises emanate from subsectors like cotton weaving and other textiles and surgical equipment. In total, they generated 25 percent of manufacturing export earnings, or about USD 2.5 billion in 2005. In Southeast Asia, the shares are much lower, from the lowest in Indonesia (11 percent) to the highest in Vietnam (20 percent). In Thailand, SMEs’ share reached 45.5 percent in 2003, according to Mephokee (2004a, p. 7), but then declined to 26.5 percent in 2004, as stated in the White Paper on SMEs published by the Thai government in that year (OSMEP, 2004, p. 12). Based on Wattanapruttipaisan’s (2005, p. 9) study, the direct contribution made by SMEs to total export earnings in Southeast Asian countries, however, is not more than 20 percent. This estimate is supported by APEC’s (2002, p. 14) report on SMEs in the region. According to this report, SMEs contributed less than 30 percent of direct exports on average. SMEs in Southeast Asia were thus under-represented in the international economy relative to their role in the domestic economy. If indirect exports are also taken into account, according to the report SMEs’ contribution could be much larger than this 97
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Export Performance and Effects of Trade Liberalization
98
SMEs in Asian Developing Countries
Table 4.1 Share of SME exports in total exports in selected Asian developing countries, 1990s and beyond Country
40–60 38–40(7) 56(1) 20(1) 16(1) 15(1) 11(1)/17.72 (2006)(5) 10(1)/38.22 (2002)–45.5% (2003)(2) /29.10 (2006)(3) 22.16 (1994)–16.81 (1998)(4) 25 (2005)(6)
Sources: (1) UNCTAD (2003) for manufactured exports only; (2) Mephokee (2004): for manufactured exports only; (3) Office of Small and Medium Enterprises Promotion (OSMEP) in 2007; (4) Aldaba (2008): for manufactured exports only; (5) Menegkop & UKM; (6) SMEDA; (7) UNCTAD (2003), ICCI Bank & IFC (2002), and Das (2008a), for manufactured exports only.
30 percent. In the manufacturing industry SMEs in the region often make up a significant part of the value chain, or supply chain, and may thus not be included in direct exports.
4.2 Detailed evidence from selected countries 4.2.1
Indonesia
As presented in Table 4.2, in 2000 total exports of SMEs amounted to Rp 75,448.6 billion and increased by more than 50 percent to Rp 122,199.5 billion in 2006. However, the share of SMEs in the country’s total exports was much smaller than that of their larger counterparts. In 1990, the SMEs’ contribution to the total exports (including oil and gas) was 11.1 percent, and increased to 15.7 percent in 2006. Within the group, MEs were much stronger than SEs, as in 1990 their share in total exports was 8.9 percent compared with 2.2 percent for SEs, and in 2006 the ratio was 11.81 percent to 3.89 percent (Figure 4.1). Table 4.2 shows that majority of SMEs’ exports came from manufacturing industry. Interestingly, within SMEs, the share of MEs in manufacturing exports as a percentage of their total exports in three sectors (agriculture, manufacturing, and mining) is much higher than that of SEs, suggesting that MEs exported manufactured goods more than their smaller counterparts did (Figures 4.2 and 4.3). This significant gap may suggest that in the manufacturing industry the ability of MEs to export is greater than that of SEs. The disparities can be explained by the differences in several factors such as access to capital and market information, skills, promotion facilities, and external networks. MEs are in a better position than SEs vis-à-vis all these factors, which are crucial in determining whether a firm can be successful in the export business.
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China India Chinese Taipei Vietnam Singapore Malaysia Indonesia Thailand Philippines Pakistan
Share (%) (1)
Sector*
2000 SME
2001 LE
SME
2002 LE
SME
2003 LE
SME
2004 LE
SME
2005 LE
SME
2006 LE
SME
LE
(1) (2) (3)
8396.3 427.5 9013.6 552.7 9771.6 962.2 8479.7 536.6 8715.3 881.8 657.0 74,490.8 980.9 89,811.2 684.7 79,541.5 583.9 77,829.2 638.7 92,822.5 66,395.3 3,57,135.5 70,852.1 377,040.4 76,833.8 339,086.3 68,033.1 337,773.4 86,194.2 414,953.7
11,535.4 1037.9 12662.7 1078.8 1139.9 132107.3 1621.3 153874.3 97,662.7 471249.3 107915.5 501170.5
Total
75,448.6 43,2053.8 80,846.6 467,404.3 87,290.1 419,590.0 77,096.7 416,139.2 95,548.2 508,658.0
110,338.0 604394.5 122199.5 656123.6
Export and Trade Liberalization
* (1) Agriculture. (2) Mining. (3) Manufacturing. Source: Menegkop and UKM.
99
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Table 4.2 Exports of SMEs and LEs, 2000–6 (Rp billion)
100
SMEs in Asian Developing Countries 100 90 80 70 60 50 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
SE
ME
LE
Figure 4.1 SMEs’ contribution to total export value (%)*
120 100 80 60 40 20 0 2000
2001
2002
2003
Manufacturing
2004
Mining
2005
2006
Agriculture
Figure 4.2 Distribution of SEs’ export value by sector (%)*
120 100 80 60 40 20 0 2000
2001
2002 Manufacturing
2003 Mining
2004
2005
2006
Agriculture
Figure 4.3 Distribution of MEs’ export value by sector (%)
However, the share of SMEs in the total exports of manufacturing industry is much smaller than that of their larger counterparts. Within the group, MEs performed much better than their smaller counterparts. The share of SEs has not yet reached 10 percent. It was only 3.15 percent in 2000 and then slightly decreased to 3 percent in 2006. During the same period, the export share
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40
Export and Trade Liberalization 90 80 70 60 50 40 30 20 10 0 2001
2002
2003
2004
2005
2006
Share of SMEs in total export value in manufacturing industry (%)*
of MEs was 12.53 percent and later increased to 14.72 percent (Figure 4.4). Authors such as Hill (1996; 2001b, p. 251) and Tambunan (2006b, p. 107) argue that, although the yearly average of SMEs’ contribution to Indonesia’s total manufacturing exports is smaller than that of their larger counterparts, they played an important role in the manufacturing export boom in the 1980s and 1990s. Others, such as Thee (1993, p. 12) and ADB (2002b, p. 5), conclude that, from the point of view of technology and adaptability, SME exports in manufacturing industry have grown substantially by finding niche markets and adapting costs and quality to market demand. There are nine industrial groups at two-digit level within the manufacturing industry, that is, (1) food, beverages and tobacco; (2) textile, leather, and footwear; (3) wood products; (4) paper and publication; (5) fertilizer, chemicals, and rubber products; (6) cement and non-metal mining; (7) basic metal, steel, and iron; (8) transportation means, machinery, and its equipment; and (9) others. Within these groups, MIE and SE exports are concentrated in wood products, including furniture, although recently their share in this market declined and was overtaken by growth in the export of food, beverages, and tobacco and fertilizers, chemicals, and goods made from rubber. In contrast, MEs’ exports are more or less equally distributed among the industrial groups; their share in wood products decreases at a constant rate. Most of Indonesia’s non-oil-and-gas exports are products with some degree of processing or manufacturing. For those produced on a contract basis for internationally known brand names, such as electronics and footwear, trade promotion may be limited because the international marketing of these products is already managed from outside Indonesia. Products with a niche market could offer more results for trade promotion, including promotion of SME exports, since many of these exports are undertaken in industries that have (or are expected to have) a large number of SMEs, and even MIEs. ADB (2002b, p. 10) made an assessment of the presence of SMEs in the manufacturing industry by subsector to examine the relationship between the level of export orientation of an industry group (measured by its percentage share of total exports of manufacturing industry) and the degree of SMEs’ presence in that particular industry group. With this method, they wanted to establish whether
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SE ME LE
2000
Figure 4.4
101
102
SMEs in Asian Developing Countries
Sector/subsector Agricultural sector Mining sector Industrial sector – Fiber, yarn, textile, and textile products – Electronics – Wood products – Steel, machinery, and automotive parts – Pulp and paper products – Leather, leather products, and footwear – Basic chemicals – Palm oil and products – Rubber and rubber products – Foods and beverages – Electrical equipment – Copper and tin products – Ceramic, marble, and glass products – Plastic products – Silver, gold, precious metal, and jewelry – Sport goods and musical instruments – Aluminium products – Rattan products – Fertilizer – Camera and optical products – Cement and products – Cigarettes – Other chemical products – Handicraft – Molasses and products – Other products – Medicaments – Animal feeds – Essential oils – Cosmetics – Wood tar, gum, and gambier products
Exports (USDm)
Potential presence of SMEs
2,728.60 3,040.80 41,983.40 8,182.40 7,899.10 4,729.50 3,249.20 3,001.90 2,075.40 1,957.90 2,044.80 1,320.00 851.7 931.6 936.2 596 570.9 500,6 482,2 455.6 352.9 347.4 246.9 189.8 157.4 184.6 142.6 128.7 126.9 87.1 95.4 56.0 64.5 18.2
high low low low high low low high low high low high low high high low high high low high low low low low low high high high low high high low high
Source: ADB (2002b, p. 10).
industries dominated by SMEs (in terms of number) have higher degrees of export orientation than industries where SMEs are only a small fraction of total firms. The finding, summarized in Table 4.3, was reported to the Indonesian government to help improve its SME development policies after the crisis period. The table shows the SME presence in certain major industries or manufactured products by indicating whether there is a “low” or “high” potential presence of SMEs according to many sources, which suggest that SME exports
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Table 4.3 Export share and potential presence of SMEs in the manufacturing industry by subsector, 2002
Export and Trade Liberalization
103
Table 4.4 Export-oriented manufacturing SEs and MIEs by percentage of total production for export No. of unit
Period
Percentage of total production for export <15
15–39
40–64
65–79
>80
SEs and MIEs MIEs SEs
9,124 1,956 7,168
1999
268 62 206
2,470 518 1,952
1,899 379 1,520
183 45 138
4,304 952 3,352
SEs and MIEs MIEs SEs
21,104 15,472 5,632
2004
1,472 1,157 315
2,013 1,055 958
2,786 2,082 704
513 378 135
14,320 10,800 3,520
Source: BPS.
tend to concentrate in products such as the wood products and textiles, and garments and footwear subsectors. Some authors, such as Diermen (1997, p. 25) and Urata (2000, p. 30), estimate that these subsectors are responsible for some 50 percent of SME exports from Indonesia. In addition, basic machinery contributes another 16 percent of SME exports. Smallholders are important in growing food and cash crops, and there is potential for further SME involvement. However, much of the processing and exporting takes place through LEs (ADB, 2002b). Also, many exported products which have more niche markets are undertaken in industries that have (or are expected to have) a high presence of SMEs (and even MIEs) (Tambunan, 2006a, p. 51). However, not all of those enterprises involved in export activities are fully export-oriented, as many of them export only small portions of their total production. As an example, Table 4.4 shows that in 1999 SEs and MIEs that exported 80 percent or more of their total production represented less than 50 percent of total exporting firms. The number increased to about 68 percent in 2004. The percentage increase, however, varies between SEs and MIEs. In SEs, the ratio increased slightly, whereas in MIEs the growth was very significant. Another important feature of Indonesian export-oriented SMEs is that the majority of them do not export directly, but indirectly via intermediaries such as traders, exporting companies, or trading houses, or through subcontracting arrangements with LEs in which SMEs’ manufactured semi-final products are then finalized by LEs (for instance, in food industries, processing raw materials into ready-made foods takes place in SMEs and packaging in LEs).1 It is also stated in the ADB’s (2002b, p. 11) report discussed above that the relatively low representation of Indonesian SMEs compared with their large counterparts in exports reflects the fact that a significant part of SME exports simply go unrecorded because they take place indirectly through international trade networks or subcontracting arrangements with intermediaries. These agencies usually collect products from or give orders to, regularly or irregularly, many SMEs. They play an important role in
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Category
SMEs in Asian Developing Countries
deciding designs, prices, technologies, and timing of production. Such SMEs are involved in so-called buyer-driven commodity chains. Intermediaries link the enterprises to international markets and provide a range of bundled services that include pre-financing of production, market access, technology and skills upgrading, advice on designs, advice on patent rights, and so forth. In such networks, SMEs and their workers receive compensation mainly for their skills and hours worked. The enterprises have very limited involvement in activities outside direct production; and much of input provision, marketing of output, and also their involvement in upgrading their enterprises is limited, with many of the decisions on their development being taken by buyers. In the case of food exports, for instance, smallholders and fishermen who grow food crops or collect seafood and fish depend on the processing and exporting capacity of larger firms. This explains in part why the Indonesian data indicate that the export share of SMEs is low. As an empirical example, BPS data from Census of Small and Cottage Industry 1996 show that, with respect to the number of enterprise, the share of small exporters exporting directly was only 0.19 percent, while the share of those exporting indirectly was 99.81 percent. In terms of export value, the shares of those exporting directly and those exporting indirectly were 0.98 and 99.02 percent, respectively. Based on his own field survey on SMEs in a variety of industrial groups, Urata (2000, p. 33) arrives at a rather different figure. As shown in Table 4.5, the majority of his respondents did export by themselves, while only a few of them used intermediaries. There are at least two main reasons why many export-oriented SMEs in Indonesia could not conduct export activities directly. First, there are institutional and business constraints that SMEs cannot solve because (i) they do not have strong direct access to export markets nor to information on export market opportunities and requirements; (ii) they are not able to adjust to rapid changes in export markets; (iii) there is high risk in payments and shipment; (iv) payment is delayed, which small exporters/ producers cannot endure as they need daily cash flow very badly; and (v) there is high cost involved in direct export activities. Second, there is financial problem because (i) the capital owned by SMEs is limited, especially in investment capital and (ii) SMEs do not receive enough support from financing and credit guarantee institutions.2 Of SMEs which export directly, however, not all do so through shipments to overseas markets, but sell their products to foreign tourists who visit their villages or workshops. They are called “buyers’ market”-oriented SMEs. Dierman (1997), Knorringa (1998), Cole (1998a, b) and Sandee et al. (2000) show that in certain subsectors most export-oriented SMEs in clusters operate in buyerdriven commodity chains. Their studies show how SMEs penetrate global markets via buyer-driven trade networks with cases of furniture and garments in Jakarta, garments in Bali, and carved wooden furniture in Jepara (Central Java). The studies also show clearly that foreigners who came to
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104
No. of respondents
SE
ME
Industry
522
205
317
Textile
Food
Wood
Electronic
Automotive
63
62
64
52
56
80
60
55
24 8 2 1 1 1
31 4 1 — 1 —
19 11 2 2 1 1
32 14 — 2 1 —
31 10 — 1 2 1
15 3 — 1 — —
13 7 15 — 4 —
23 13 — 3 — 6
* The marketing activities of Japanese subsidiaries are controlled by the head office. Source: Urata (2000, p. 33).
Export and Trade Liberalization
Direct export Not direct export, but via: – sales agent – export trading house – assembly manufacturer – import trading house – buying agency – managed by head office*
Total
105
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Table 4.5 Export channels of SMEs: findings from a 1999 survey (%)
SMEs in Asian Developing Countries
Indonesia as tourists and visited the furniture cluster in Jepara or clusters of garments SMEs in Bali have played an important role in modernizing the production method and quality of products in these clusters and linking them to international markets. To sum up, a closer look at Indonesian SME exports reveals the following main characteristics: (1) SME exports are concentrated in middle to low technology-embodied products; (2) SME exports are concentrated in labor-intensive industries where low wages are important in enhancing SMEs’ competitive position in foreign markets; (3) most exporting SMEs are not fully export-oriented as they export only a small part of their product; (4) many exporting SMEs do export indirectly through intermediaries; and (5) SME exports are concentrated in clusters. With respect to this last characteristic, it is well documented that SMEs in many industries such as furniture, garments, and basic machinery are primarily located in agglomerations of producers. This feature of SMEs clustering offers interesting opportunities for government agencies. Programs do not have to be focused on individual firms but can be effectively focused on clusters of SMEs (ADB, 2002b, p. 15). 4.2.2
Thailand
Annual data from the Thai government (OSMEP) show that export value in 2004 was THB 3,881 billion, a 16.7 percent increase on the previous year. In the same year, Thai SME exports were valued at THB 1,029 billion, expanding by 19.1 percent on the previous year, slightly higher than the country’s export growth rate. As a result, the SMEs’ contribution to Thailand’s total exports increased from 26.0 percent in 2003 to 30.20 percent in 2004. But since 2005 the export share of SMEs has tended to decline (Figure 4.5). Table 4.6 presents data on the most important exports of Thai SMEs. The data were obtained from two sources, namely, Mephokee’s (2004) country report, showing the top five exported products of Thai SMEs for the period 2000–2, and recent official data from OSMEP regarding the top ten exports of Thai SMEs for the period 2003–4. The first source shows that the five products in total covered 53.85 percent of the SMEs’ total exports. In terms 80 70 60 50 40 30 SMEs
20 10
LEs
0 2001
2002
2003
2004
2005
2006
Figure 4.5 Export share of SMEs (%)
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106
2000
2001
2002
2003
2004
Growth 2003–04 (%)
Electrical machinery and equipment and parts Machinery and mechanical appliances and parts Motor vehicles and parts Rubber and its products Plastic and its products Mineral fuels, mineral oils, their products Prepared or preserved fish and crustaceans Cereals Precious stones, pearls, jewelry Wearing apparel and accessories, knitted or crocheted
19.86 — — 7.04 7.53 — — — 5.95 14.36
16.54 — — 6.42 7.53 — — — 7.10 14.86
17.29 — — 7.23 7.90 — — — 7.64 13.78
15.6 8.7 31.9 27.5 28.9 54.2 12.5 52.7 42.7 26.0
17.6 9.1 27.5 25.9 29.5 45.6 12.8 58.5 42.2 24.9
29.8 25.2 17.2 13.2 32.3 31.5 8.1 63.0 0.5 5.5
Sources: Mephokee (2004a, p. 12) and OSMEP (recent issues, see Figure 4.5).
Export and Trade Liberalization
Product
107
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Table 4.6 SMEs contribution in top ten exports (%)
SMEs in Asian Developing Countries
of growth rate, the products with the highest export growth were machinery (5,633.3 percent), automobiles and parts (131.2 percent), and electronics and electronic appliances (13.8 percent). The latter still has the highest export value of USD 6100 million. In contrast, jewelry and stones showed the highest rate of decline in export value of ⫺36.8 percent, followed by weaving products with ⫺22.5 percent. For the period 2003–4, among the top ten products, cereals posted the highest growth, increasing in value by as much as 63.0 percent. Its share in total export receipts also rose from 52.7 percent in 2003 to 58.5 percent in 2004. Plastics and plastic articles was the second top contributor to export growth. Its export value grew by 32.3 percent, increasing its contribution to export earnings from 28.9 percent in 2003 to 29.5 percent in 2004. In terms of value, the highest is always in electrical machinery and equipment and parts, which reached THB 143,876.9 million in 2004. In many export items, SEs held a remarkably larger share than MEs, except in rubber and rubber articles as well as plastics and plastic articles. Electrical machinery and equipment and parts remained the top export of SEs. This was followed by motor vehicles and parts, and mineral fuels, mineral oils, and their products. The export value of MEs, on the other hand, for the first group of products was much lower. These enterprises were better in export of rubber and rubber articles, followed by plastic and its derived products. In 2004 the top five Thai SME export destinations were the same as the country’s top five, namely, Japan, Singapore, the US, Hong Kong, and Malaysia. SMEs’ share, however, was much smaller than that of LEs. Within SMEs, in almost all of the top five markets, SEs had a larger share than their medium counterparts. The smaller market list was also the same as the country’s list, with some difference in order, and more exports went to neighboring countries such as Cambodia, Myanmar, and Laos, which, by value of exports, were listed in the country’s top ten export markets (Table 4.7). Electrical machinery and equipment and parts make the greatest contributions to Thai SMEs’ exports. Official data also show that for this group of exported goods exports by SEs surpassed those of MEs in every market. Major goods in this group comprised air conditioners, reception apparatus for television, and computer equipment and accessories. The SMEs’ exports grew by 29.8 percent in 2004, with a rather significant increase in the proportion of goods manufactured by SEs. The top ten markets for SME exports of electrical machinery and equipment and parts, by order of export value, were the US, Japan, Singapore, Malaysia, Ireland, China, the UK, Canada, Hong Kong, and Indonesia. The list remained unchanged from the 2003 SMEs export market list. These ten major markets accounted for 87.4 percent of SMEs’ exports of this group of goods; the majority of them exported to the top three markets, namely, the US, Japan, and Singapore (Table 4.8).
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108
Export and Trade Liberalization
109
Table 4.7 Leading markets for SMEs exports, 2004 (THB billion) MEs
SMEs
Japan Singapore US Hong Kong Malaysia United Kingdom China Netherlands Taiwan Australia Indonesia Germany Vietnam Cambodia France United Arab Emirates Myanmar South Korea Switzerland Lao PDR
110.2 95.2 88.5 45.7 24.8 36.0 30.9 26.8 11.6 13.1 11.5 11.1 11.7 11.5 10.9 9.3 11.1 5.7 6.3 10.7
67.2 38.8 40.8 23.7 20.8 9.6 13.4 4.3 11.5 7.9 7.0 5.7 4.7 2.9 3.6 4.0 2.1 7.3 6.6 1.3
177.5 134.0 129.3 69.4 45.6 45.6 44.2 31.1 23.0 20.9 18.5 16.8 16.3 14.4 14.4 13.3 13.2 12.0 12.8 12.0
Total of leading markets Total exports by SMEs
582.4 699.6
283.1 329.9
865.6 1,029.5
Source: OSMEP (2005, p. 10).
For cereals, another important Thai SMEs export, the top markets in 2004 were the same as those of 2003, while changes occurred in lower-ranking markets. Japan moved down from 10 to 19, while Indonesia, Switzerland, the Philippines, and Italy were no longer in the top 20. New markets entering the top 20 in 2004 included the British Virgin Islands, Russia, Yemen, and Brunei. SMEs’ exports of cereals expanded rapidly in many of the top ten markets, namely, Iran, the UK, China, and Singapore. Exports to Hong Kong registered a slight fall, while a larger decrease was recorded for Japan and Taiwan. Cereals tended to have a wide and well-balanced distribution. Cereal exports to the top ten markets accounted for 70.7 percent of total SMEs exports, about the same proportion as in the previous year (Table 4.9). For motorcycles and cars and parts, as in some other ASEAN countries, Thai SMEs play a greater role as suppliers of parts, accessories, and spare parts for mainly FDI-based companies/MNCs. Major markets for Thai SMEs’ exports in this group of goods included the Netherlands, Japan, Singapore, Australia, Indonesia, Sweden, Cambodia, Myanmar, the US, and Laos. About 89.0 percent of SMEs’ exports of motor vehicles and parts went to these markets. Countries with higher growth in
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SEs
2003 (THB million)
2004 (THB million)
SMEs % change 2003–04
SE
ME
SME
SE
ME
SME
United States (US) Japan Singapore Malaysia Ireland China United Kingdom (UK) Canada Hong Kong Indonesia Germany Denmark Lao PDR Czech Republic Sweden Netherlands Cambodia Vietnam Belgium Taiwan
32,559.2 17,282.1 14,677.1 1,684.8 3.203.8 1,821.9 949.1 2,653.3 2,175.0 1,510.1 547.6 1,049.4 1,024.0 118.7 310.2 1,054.5 445.1 432.3 933.9 298.0
12,312.9 4,271.3 538.0 321.3 40.4 197.4 76.6 12.6 841.4 115.5 322.0 119.5 34.3 0.3 4.6 124.3 158.7 158.2 16.2 379.0
44,872.1 21,553.4 15,215.1 2,006.1 3,244.2 2,019.3 1,025.7 2,665.9 3,016.4 1,625.6 869.6 1,169.9 1,056.3 119.0 314.8 1,178.8 603.8 590.5 950.1 677.0
39,530.3 21,645.7 21,317.7 4,835.1 3,814.6 3,441.0 3,207.6 3,181.8 2,535.2 2,019.1 1,097.3 1,105.0 1,160.2 1,134.6 971.9 752.5 791.3 767.8 863.3 482.1
11,012.1 7,101.1 649.8 465.8 96.1 135.8 97.2 64.5 344.3 190.6 385.0 253.6 42.4 1.1 10.1 228.5 177.4 200.5 69.3 380.4
60,542.4 28,746.8 21,967.5 5,300.9 3,910.7 3,576.8 3,304.8 3,246.4 2,879.5 2,209.7 1,482.3 1,358.6 1,202.6 1,135.7 982.0 981.0 968.7 968.3 932.6 862.5
12.6 33.4 44.4 164.2 20.5 77.1 222.2 21.8 –4.5 35.9 70.5 16.2 13.6 854.5 212.0 –16.8 60.4 64.0 –1.9 27.4
Total of electrical machinery export to top ten markets
78,516.3
18,727.3
97,243.6
105,582.2
20,157.2
125,685.4
29.3
Source: OSMEP (2005, p. 10).
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SMEs in Asian Developing Countries
Export markets
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110
Table 4.8 Export of electrical machinery and equipment and parts by SMEs to different markets
Export markets
2003 (THB million)
Total of cereals export to 10 top markets
SMEs % change 2003–04
SE
ME
SME
SE
ME
SME
3,075.7 1,568.8 2,178.4 1,734.6 686.3 2,561.0 3,564.7 960.6 273.1 70.0 310.7 404.4 254.3 42.2 194.3 179.6 243.3 367.7 706.4 367.0
2,088.9 1,106.6 1,756.9 2,750.2 2,890.3 206.3 1,128.3 141.9 — 1.5 540.9 37.7 305.1 1.8 15.9 — 108.1 371.6 206.9 12.6
5,164.6 2,675.4 3,935.3 4,484.8 3,576.6 2,767.3 4,693.0 1,102.5 273.1 71.5 851.6 442.1 559.4 44.0 210.2 179.6 342.4 739.3 912.3 379.6
3,355.5 4,817.7 3,919.9 1,989.5 1,733.0 4,350.7 3,540.1 2,229.2 1,673.2 1,056.8 416.0 801.5 509.5 652.8 478.6 643.5 455.0 492.6 447.8 457.6
6,444.1 1,436.6 2,097.1 3,147.3 3,183.2 323.6 1,093.3 450.9 344.1 93.1 711.1 47.1 310.3 124.4 181.9 — 182.5 139.9 66.2 55.9
9,799.6 6,254.3 6,017.0 5,136.8 4,916.2 4,674.3 4,633.4 2,680.1 2,017.3 1,149.9 1,127.1 848.6 819.8 777.2 660.5 643.5 637.5 632.5 514.0 513.5
89.8 133.8 52.9 14.5 37.5 68.9 –1.3 143.1 638.5 1509.7 32.4 91.9 46.6 1665.6 214.3 258.4 86.2 –14.4 –43.7 35.3
16,673.1
12,070.7
28,743.8
28,665.3
18,613.0
47,278.3
64.5
Source: OSMEP (2005, p. 10).
Export and Trade Liberalization
Singapore China Malaysia US Iraq France Hong Kong UK Iran Virgin Islands Canada South Africa Australia Russian Fed. Yemen Brunei Saudi Arabia Taiwan Japan United Arab Emirates (UAE)
2004 (THB million)
111
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Table 4.9 Export of cereals by SMEs to different markets
112
SMEs in Asian Developing Countries 70 60 50 40
SMEs Export/SMEs Output Total Export/GDP
30
10 0 2004
Figure 4.6
2005
2006
Share of SMEs’ exports in their total output
this group of exported goods included Myanmar, Indonesia, and the US (Table 4.10). As in the Indonesian case, many SMEs in Thailand operate as subcontractors; their products are exported by LEs, including MNCs, usually on the initiative of big exporters. Bakiewicz (2005, p. 140) notes a significant growth of SMEs’ production for big exporters from the end of the 1980s to 1997, especially in garments, furniture, and jewelry. Also as in the Indonesian case, not all of Thai SMEs involved in export activities are fully export-oriented, as many of them only exported small portions of their total products. As cited in Bakiewicz (2005, p. 141), among exporters of different sizes the share of production sold abroad was almost the same: 52 percent of companies exported less than half of their production, 42 percent more than half, and 6 percent produced only for foreign markets. Using an unpublished database from the National Statistical Office (NSO) in 1999, Wiboonchutikula’s (2001, p. 12) study shows that LEs exported proportionately more than SMEs. About 70 percent of LEs had some exports whereas only around 40 percent and 9 percent of MEs and SEs, respectively, exported some of their production (Table 4.11 and 4.12). Of all exporting firms, 52 percent exported less than 50 percent of their total production; 42 percent exported more than 50 percent; and about 6 percent produced solely for the export market. This distribution of export– output ratios did not vary much across firm size groups. This means that, although LEs were more likely to export than SMEs, exporting firms of any size were equally likely to have any export–output ratio. At the national level, OSMEP data indicate that SMEs’ exports have always been less than 50 percent of their total output (Figure 4.6). 4.2.3
Malaysia
In Aris’s (2006) study, using the baseline Census of Establishment and Enterprises, it is shown that in 2003 SMEs in the manufacturing, agricultural, and services sectors that could be qualified as exporting enterprises
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20
Export of motor vehicle and parts by SMEs to different markets
Export markets
2003 (THB million)
2004 (THB million)
SMEs % change 2003–04
ME
SME
SE
ME
SME
Netherlands Japan Singapore Australia Indonesia Sweden Cambodia Myanmar US Lao PDR UK Philippines Malaysia China Pakistan UAE South Africa Hong Kong Taiwan Italy
21,115.3 12,392.5 2,848.6 2,754.7 1,478.9 1,610.1 1,390.2 680.9 302.2 1,009.1 546.4 965.7 380.1 474.9 118.9 177.4 29.9 36.9 79.0 57.6
19.1 1,869.6 423.6 215.3 334.2 2.9 55.3 67.4 537.0 14.4 139.7 28.2 243.4 35.9 20.9 95.8 12.6 47.4 64.6 55.5
21,134.4 14,262.1 3,272.2 2,970.0 1,813.1 1,613.0 1,445.5 748.3 839.2 1,023.5 686.1 993.9 623.5 510.8 139.8 273.2 42.5 84.3 143.6 113.1
20,933.5 16,354.3 3,683.8 3,056.5 2,417.1 1,733.8 1,485.8 1,325.8 391.9 1,089.5 919.5 790.6 377.4 436.3 285.7 170.3 189.6 182.5 95.9 127.8
12.1 2,139.9 425.6 273.4 717.3 1.5 5.2 106.8 975.5 33.5 155.0 40.7 282.8 44.5 28.0 102.6 26.5 22.9 104.6 67.9
20,945.6 18,494.2 4,109.4 3,329.9 3,134.4 1,735.3 1,491.0 1,432.3 1,367.4 1,123.0 1,074.5 831.3 660.2 480.8 313.7 272.9 216.1 205.4 200.5 195.7
–0.9 29.7 25.6 12.1 72.9 7.6 3.2 91.4 62.9 9.7 56.6 –16.4 5.9 –5.9 124.5 –0.5 408.9 143.7 39.7 73.0
Total of motor vehicle and parts export to top ten markets
45,582.3
3,538.7
49,121.0
52,471.7
4,690.8
57,162.5
16.4
113
Source: OSMEP (2005, p. 11).
Export and Trade Liberalization
SE
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Table 4.10
114
SMEs in Asian Developing Countries
Table 4.11 Percentage distribution of enterprises by export percentage and size category, 1999 Export as % of total production
Enterprises which
100%
> 50%
50%
< 50%
Export
Do not export
SEs MEs LEs
1.92 10.28 17.90
2.22 11.81 26.08
0.69 1.86 1.57
4.33 15.47 24.63
9.16 39.42 70.18
90.84 60.58 29.82
Total
5.38
6.78
1.03
8.84
22.03
77.97
Source: Wiboonchutikula (2001, p. 12).
Table 4.12 Contribution of export-oriented SMEs, 2003 (%) Sector
No of SMEs (%)
Output (%)
Value added (%)
Employment (%)
Manufacturing Services Agriculture
3.0 0.2 0.2
18.5 0.7 0.2
21.5 0.7 1.3
11.1 0.3 1.7
Total
0.4
8.5
6.4
2.7
Source: Aris (2006, p. 18).
constituted only 0.4 percent of total SMEs in all sectors, while they generated 8.5 percent of total output and 6.4 percent of total value added, and provided 2.7 percent of total employment in all sectors. In the manufacturing industry, the exporting SMEs contributed 18.5 percent, 21.5 percent, and 11.1 percent, respectively, to total output, value added, and employment, although the number involved was only 3 percent of total SMEs in the sector. In the agricultural and service sectors, exporting SMEs were only about 0.2 percent of total SMEs in all sectors. In his study, an establishment is taken to be an export-oriented unit if 50 percent or more of its total output is exported. As experienced by SMEs in other Asian developing countries, Malaysian SMEs face many global market constraints, including low product quality arising from low technological capabilities and lack of research and development activities, which affects their competitiveness. As such, they produce mainly for the domestic market as they are unable to comply with international technical specifications and market requirements. As indicated in Table 4.13, SMEs directly exported only 26.5 percent of their total production in 2003 compared with 25 percent in 2002 (or 20.8 percent in 1996, not shown here); according to recent data from Census of Establishments and Enterprises 2005 and from Department of Statistics, in 2004, SMEs exported only 25.6 percent of their total output. However, this figure understates the
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Size
2002
Sector
2003 Export
Domestic market
Export
Electrical and electronics (incl. telecommunication) Machinery and engineering Metal and its products Petrochemical, chemical, and pharmaceutical Plastics products Oleo-chemicals Transport Automotive Wood and its products Textile and apparels Rubber and its products Palm oil and its products Inedible-palm oil and its products Manufacturing-related services Others
62.5
37.5
61.3
38.7
76.0 78.0 80.3 79.8 87.3 55.0 80.7 68.4 27.4 60.4 56.4 64.7 77.5 83.8
24.0 22.0 19.7 20.2 12.7 45.0 19.3 31.6 72.6 39.6 43.6 35.3 22.5 16.2
76.0 74.5 79.1 77.0 85.3 55.0 82.6 72.6 20.3 54.0 56.3 66.3 75.1 80.9
24.0 25.5 20.9 23.0 14.7 45.0 17.4 27.4 79.7 46.0 43.8 33.7 24.9 19.1
Total
75.0
25.0
73.5
26.5
Source: SMIDEC/NPC Survey, 2003.
Export and Trade Liberalization
Domestic market
115
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Table 4.13 Proportion of SMEs’ products exported
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4.2.4
Vietnam
As in many other countries, in Vietnam SMEs export either directly or indirectly. The literature on SMEs’ export activities in Vietnam is, however, very limited. One among the available studies is by Long (2003), who used data from a large survey in 2003, which covers SME activities in 2002, as part of a long-term collaboration project between the Institute of Labor Sciences and Social Affairs at the Ministry of Labor, Invalids, and Social Affairs, Hanoi, and the Stockholm School of Economics.3 The survey covers seven provinces (among a total of 61 provinces). The notable observations from the survey are perhaps that (1) the average SME exported only 16 percent of its output; (2) the importance of export differs between enterprises, with relatively higher export ratios in modern SMEs, mainly in the urban areas, for example, Hanoi, Haiphong, and Ho Chi Minh City; and (3) only 3 percent of exporting SMEs were involved in direct exports. Overall, the study suggests that, despite the high growth rate of Vietnamese exports, which on average reached nearly 25 percent during 1996–2003, the ratio of SMEs’ export volume out of the country’s total export was relatively low. Another important study is from Kokko (2004). He also used data from the 2003 survey mentioned above in addition to other data on the activities of a large sample of Vietnamese SMEs in 1990 and 1996. Information on the export activities of SMEs from these data is, however, only for direct, not indirect, exports. Thus, these sources may underestimate the actual exports of Vietnamese SMEs if many of the enterprises are involved in indirect exports, as suppliers and subcontractors to LEs, including state-owned trading companies that do export (Table 4.14). It is indeed impossible to make a precise assessment of the importance of indirect exports by SMEs. However, an upper limit may be given by the presence of formalized long-term relations with other firms (Kokko, 2004, p. 16). As explained by Kokko (2004, p. 16), one reason for the low level of exports (at least of direct exports) by Vietnamese SMEs could be the rapid development of domestic market. With an average annual growth rate of the country’s economy of over 7 percent during the past decade, it is safe to say that domestic market opportunities have been expanding. This means that only a few SMEs have been forced to search for export market opportunities because of weak domestic demand. Given the high fixed cost of acquiring the necessary information about foreign markets, it is not surprising that
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actual share of Malaysian SMEs’ exported goods. As in the cases of Indonesia and Thailand, many Malaysian SMEs also export their products indirectly through MNCs and local export-oriented LEs, since a sizeable number of Malaysian SMEs are involved as suppliers of parts and components to these big companies.
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Table 4.14 Main customers of SMEs (unweighted averages, % of total sales)
Individual consumers Private companies SOEs (including trading companies) Local authorities Tourists Export MNCs Other customer groups
1990
1996
2002
44 27 25 1 — 2 — —
42 31 16 0 0 3 — 0
65 20 10 2 0 1 1 1
Source: Kokko (2004, p. 16).
Table 4.15 Distribution of all SMEs and exporting SMEs by manufacturing subsector, 2002 (% share) Subsector Food Crude materials Mineral fuels Chemicals Non-metal products Machinery Other manufactured goods Building materials Furniture Travel goods Clothes Footwear Professional goods Optical goods Miscellaneous Others
All SMEs
Exporting SMEs
19 6 1 7 26 17 19 7 2 0 5 1 0 0 4 6
16 2 0 5 20 8 43 0 11 0 14 0 2 0 16 5
Source: Kokko (2004, p. 16).
few SMEs are export-oriented. In fact, it appears that the export intensity of the sampled SMEs is diminishing. Kokko (2004) in his study also explores some of the characteristics of the exporting SMEs, including the products that they export. As can be seen in Table 4.15, the exporting SMEs are mainly found in labor-intensive products which largely fall within the broad areas of Vietnam’s comparative advantages, such as food products, non-metallic manufactures, and other manufacturing. Others are furniture, garments, and handicrafts.
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4.2.5
Philippines
As in other Asian developing countries covered in this chapter, exports produced in the Philippines are concentrated among LEs. Based on data from the Department of Industry and Trade Philippines (http://www.dti.gov. ph/dti/index.php?p=321), MIEs and SMEs together in 2006 accounted for 25 percent of the country’s total export revenue. It is also estimated that 60 percent of all exporters in the country belong to this category of enterprise. These enterprises are able to contribute to exports mainly through subcontracting arrangement with LEs, or as suppliers to exporting companies. A recent study on SMEs’ exports in the Philippines is from Aldaba (2008). Although she uses rather old data, the study gives some idea about the structure of SMEs’ exports in the manufacturing industry (Table 4.16). It shows that SMEs exported only about 22 percent and almost 17 percent of total industry export values in 1994 and 1998, respectively. However, across manufacturing subsectors there are major variations in this pattern. In many industries, SMEs’ exports are greater than those of their larger counterparts. On the other hand, LEs in such subsectors as machinery, including electrical machinery, and transport equipment export much more than do SMEs. Berry and Rodriguez (2001) show that a number of export-oriented industries exhibit a higher than average share of subcontracting between SMEs and LEs. Industries with a high reliance on components allow more room for LEs to subcontract activities to SMEs. Where such orientation is present, exporting tends to enhance the possibilities for subcontracting, which brings cost advantages and flexibility that are often crucial to success in highly competitive export markets. A good example, which the authors cite in their paper is electrical and non-electrical machinery and transport equipment with a high export-orientation and a higher-than-average degree of subcontracting activity for SMEs, where these enterprises produced 11 percent of the output of LEs. The same production pattern or degree of subcontracting between SMEs and LEs is also found in apparel. The UPISSI (1998, p. 15) report reveals that furniture was the largest single traditional manufacturing industry with more than USD 300 million of exports in 1997. The Philippines has carved out a niche in the international market for furniture; some consider it the “Milan of Asia”, an allusion to the fine woodwork of the Italian city. A wide variety of available materials and the presence of native artisans with high levels of craftsmanship have combined to give the industry a foothold in international markets for rattan, wood, bamboo, and metal furniture. Footwear is the second-largest traditional manufactured export from the Philippines. Most of the 3000 enterprises, mainly SMEs, in the business have been handed down from generation to generation. In 1996 they exported leather and non-leather shoes, slippers, and sandals worth USD 170 million. The report also shows that the entrepreneurs realize that they have to modernize their equipment to face competition in international markets. Despite its relatively good export
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Table 4.16 Export-oriented SMEs in manufacturing industry
Manufacturing – Food processing – Food manufacturing – Beverages – Tobacco – Textiles – Wearing apparel except footwear – Leather and its products – Leather footwear – Wood and cork products – Furniture except metal – Paper and its products – Printing and publishing – Industrial chemicals – Other chemicals – Petroleum refineries – Rubber products – Plastic products – Earthenware – Glass and its products – Other non-metallic mineral products – Iron and steel – Nonferrous metal products – Fabricated metal products – Machinery except electrical – Electrical machinery – Transport equipment – Professional and scientific equipment – Metal and wood furniture – Miscellaneous manufacture
% of SMEs’ total output value
% of total value of manufactured exports
1994
1998
1994
1998
18.49 32.71 3.21 0.28 25.81 27.50 55.20 12.14 3.97 40.81 53.73 16.50 2.08 16.38 4.09 — 11.79 7.60 63.83 16.42 14.53 4.70 28.16 3.77 9.71 23.01 5.10 25.57 39.53 54.99
19.08 27.50 1.27 1.83 — 54.22 29.27 30.47 12.55 47.88 47.47 9.53 — 19.36 6.11 13.16 38.41 4.22 20.93 71.44 20.42 10.53 26.55 10.65 23.46 43.82 12.83 38.93 — 43.62
22.16 52.07 21.83 93.39 18.73 25.03 31.02 7.27 6.02 55.57 46.45 64.14 24.68 33.67 40.40 — 11.53 60.81 21.70 33.71 60.00 34.52 62.43 12.50 2.82 3,20 14.90 13.59 18.38 32.64
16.81 65.58 17.90 46.14 — 35.49 25.60 18.65 18.05 87.35 44.58 35.27 — 41.95 53.17 21.12 19.65 18.09 18.73 69.94 89.98 56.32 3.17 57.92 2.81 4.67 26.23 14.61 — 49.96
Source: Aldaba (2008, p. 245).
record, the industry depends heavily on imported raw materials, especially leather and other accessories. The most developed export-oriented SMEs in the country are found in Cebu, which is an international business center in the Central Visayas Islands. The two Mactan Export Processing Zones (MEPZ I and II) have developed into clusters of exporting manufacturers (Beerepoot and Van Westen 2001). In addition to its foreign establishments, Metro Cebu is also home to various traditional, home-grown manufacturing activities that produce and export commodities such as furniture, fashion accessories, housewares and
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other handicrafts. The urban economy is characterized by a large concentration of local manufacturers, mainly SMEs, which have been able to take advantage of Cebu’s direct access to world markets and its considerable supply of cheap but relatively skilled labor (Rodriguez, 1989). Another piece of research is from Van Helvoirt and van Westen (2008), who found that the most important foreign market for SMEs in Cebu is the United States, as 59 percent of the 54 firms they surveyed states that their main buyers were from this country. Other important international markets are Europe and Asia (both 11 percent). In Europe, the Netherlands is an important trading partner, while Hong Kong serves as a large furniture buyer and Singapore as an important market for gifts, toys, and housewares. 4.2.6
India
Compared with other Asian developing countries, the literature on SMEs in India, especially from local sources, is enormous. However, relatively few studies focus on the export performance of Indian SMEs. According to most recent studies, that is Pandey (2007) and Das (2008a), the important export sectors of SEs include sports goods, ready garments, engineering goods, processed foods, basic chemicals, pharmaceuticals, cosmetics, electronic and computer software, leather products, and marine products. In some of these sectors the contribution of SEs is overwhelming, contributing about 90 percent of the total value of SEs’ exports in manufacturing industry during 1988–2003. The only additional product group in the latter period was that of electronics and computer software (Das, 2008a, p. 74). According to Pandey (2007, p. 7), 100 percent of sport goods exports are produced by SEs, as are about 90 percent of ready garment exports (Figure 4.7). It comes as no surprise that Indian SEs produce the highest export share, after sports goods, in ready garments. India has indeed a long tradition of textiles, and the garment industry has emerged as one of the most dynamic and forward-looking businesses in the SME domain. The enterprises began entering the export market, with the specific advantage of low labor costs, around the turn of the twenty-first century. According to Das (2008a, p. 74), the garment industry had begun to emerge as a prominent activity by the early 1980s, in response to growing urbanization and a fast-rising middle class that derived a major part of its income from the boost in the services sector. An additional factor was a gradual exposure to fashion trends (as promoted through fast advances in the mass media, including television and films). Moreover, there was a growing demand for traditional Indian garments, mostly from upper-class consumers both in India and among people of South Asian descent in the US, Europe, and Canada, in particular. Based on information from the Ministry of Industry in India (http://business.gov.in/Industry_services/small_ medium_enterprises.php), India has over 300 SMEs clusters and about 2000 artisanal clusters. These clusters contribute 60 percent of manufactured exports from the country. Almost all
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Engineering goods
55
Cosmetics, basic chemicals & pharmaceutical products
45
Plastic products
89
Leather products
29
Marine products
35 90
Ready garments
100
Sport goods
0
140000 120000 100000 80000 60000 40000 20000 0
20
40
60
80
100
120
Percentage of SEs in total manufacturing exports 124417 86013
97644
69797 71244
9664
25307 29068 13883 17784
44442 48979 36470 39248
54200
1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200491 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Figure 4.8
Growth of manufacturing SMEs exports (Rs 10m.)
gem and jewelry exports are from the clusters of Surat and Mumbai. Some of the SME clusters, like those of Chennai, Agra, and Kolkota which are wellknown for leather and leather products, are so big that they account for 90 percent of India’s total output and exports in their respective sectors. Comprehensive data on SE export in India are provided by the Office of the Development Commissioner, Ministry of Micro, Small and Medium Enterprises (MSME). Based on its Annual Report for 2006–7 (MSME, 2007), Figure 4.8 reveals the sustained increase in SEs’ export value, although the annual growth rates fluctuated. In 1990–1, their export value was about INR 9664 crore (one crore = 10 million) and increased in 1991–2 to INR 13.883 crore, a growth rate of almost 43.7 percent. In 2004–5, the export value was INR 124.417 crore or an increase of about 27.4 percent on 2003–4. 4.2.7
China
In China, SMEs also appear to be a very important source of the country’s total export growth. Their contribution to China’s total exports accounted for 60 percent of the total in 2006 (Yang et al., 2006, p. 14). However, the degree of export orientation within this group of enterprises varied between SEs and MEs. The SEs and MIEs contributed only 5–10 percent to exports, according to official data (China Private Economy Year Book for 2004–6).4 Based on Fu and Balasubramanyam (2004), using data on township and village enterprises (TVEs), exports from China’s SMEs are mainly apparel, leather products, textile and clothing, and knitted products.
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Processed foods Woollen garments, knitwear
Figure 4.7
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Table 4.17 Number of exporting SMEs, MEs, SEs, 2007
26.72
ME*
38.76
SE*
18.16
Exporting SMEs as % of total SMEs in Eastern area
Middle area
Western area
31.54
24.68
16.85
* = % of total enterprises in particular size group. Source: Xiangfeng (2008, p. 48).
A recent study by Xiangfeng (2008) on the export activities of China’s SMEs is based on a survey in 29 provinces. As presented in Table 4.17, her findings show that exporting SMEs are only about 26.7 percent of total sampled SMEs, though not all of them export directly. Within the group, the ratio of the external market varies between SEs and MEs, that is, around 18 percent for SEs versus almost 38.8 percent for MEs, suggesting that SEs mainly focus on the domestic market. The ratio also varies by region, as the percentage of exporting SMEs is higher in the eastern area than in the rest of the country.
4.3 Trade liberalization and its effect on SMEs International trade policy has undergone fundamental change in many Asian countries, especially in Southeast Asia, over the past two decades. In Indonesia, for instance, trade liberalization began significantly in the mid-1980s, and since 1994 the country has significantly reduced its applied most-favored-nation (MNF) tariffs from an unweighted average of about 20 percent in 1994 to 9.5 percent in 1998. In 1998, tariffs on food items were reduced to a maximum of 5 percent. Besides tariffs, Indonesia has undertaken to remove all non-tariff barriers and export restrictions. Since the 1997/8 Asian financial crisis, Indonesia has also deregulated its trade regime in the main agricultural commodities (except rice, for social reasons), terminated production and trade monopolies in certain intermediate industries (cement, plywood, rattan) and reduced export taxes on wood. The Asian region thus provides considerable evidence of the benefits of international trade (export and import) liberalization, since its impact on the economy of the countries undertaking such policy reforms (such as South Korea, Indonesia, China, Thailand) has been studied extensively.5 In the last few years, with the continued growth in external trade, the region has generated the highest rate of economic growth in the world, which saw an average reduction in poverty of about 12.5 percent in early 2000 as compared with the early 1990s. Through expanding external trade, the region is expected to be further integrated into the global economy and will gain more benefits from it (Bonapace, 2005, p. 20). However, the main focus of existing studies is on economic growth and the development of domestic manufacturing industry. The implication
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123
of liberalization on SMEs in these countries remains an under-researched area of the literature on SMEs in developing countries in general and in Asian developing countries in particular. Probably the only comprehensive study ever undertaken of this particular issue in Asia is that by Nugent and Yee (2002) on SMEs in South Korea. They show that the successful SMEs’ development in this country was directly related to trade policies, of which export-oriented strategies formed the cornerstone. It is generally believed that trade liberalization should be beneficial to the domestic economy as well as to the world as a whole. At the macro level, the channels through which trade reform could bring benefits are broadly the following: improved resource allocation; access to better technologies, inputs, and intermediate goods; economies of scale and scope; greater domestic competition; and availability of favorable growth externalities like transfer of know-how (Falvey and Kim, 1992). At the micro level, theoretically trade reform could affect (positively or negatively) individual local firms in four major ways: • by increasing competition: lower import tariffs, quotas, and other nontariff barriers have the effect of increasing foreign competition in the domestic market, and this is expected to prompt inefficient or unproductive local firms to try to improve their productivity by eliminating waste, exploiting external economies of scale and scope, and adopting more innovative technologies, or to shut down. Openness of an economy to international trade is also seen as increasing plant size (that is, scale efficiency), as local firms adopt efficient technologies, management, organization, and methods of production;6 • by lowering production costs due to cheaper imported inputs: local firms benefit from lower input costs, thereby allowing them to compete more effectively both in domestic markets against imports and in export markets; • by increasing export opportunities: opening up to international competition will not only induce increased efficiency in domestic firms but will also stimulate their exports;7 • by reducing the availability of local inputs: eliminating export restrictions on unprocessed raw materials will increase exports of the items at the cost of local industries. In the case of SMEs, it can be expected that international trade liberalization that increase foreign competition in domestic markets will hurt some inefficient or uncompetitive SMEs, while benefiting efficient or competitive SMEs. The efficiency effects of foreign trade liberalization may be observed in an increase in average plant size among SMEs and (presumably) lower average costs. The international literature on the effect of foreign trade policy on SMEs presents some surprising and quite important findings.
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The seminal work of Tybout (2000) on the micro dynamic effects of international trade liberalization on manufacturing firms in developing countries, for instance, consistently shows just the opposite: that increases in import penetration as well as reductions in protection are associated with reductions, not increases, in plant size. Thus, rather than improve efficiency immediately, an important finding of this study is that liberalization may work against the (scale) efficiency of SMEs in the short run (or, if there are gains of efficiency, they are quite small).8 Tybout’s findings are supported by those of Tewari’s (2001) from Tamil Nadu (in southern India) since the early 1990s. After the government removed restrictions on entry into many industries and simultaneously liberalized trade, there was a spate of entry by relatively small firms into the industries, notably textiles. Firms with 400–500 spindles set up shop, in contrast to the 10,000–20,000-spindle plants that larger firms operated. By the mid-1990s, the average plant size in the spinning industry had fallen significantly. Another study in the same region was conducted in 2002 by Tewari and Goebel and produced two interesting findings. First, SMEs in some industries are doing better than those in other industries, just as some industries are doing better than others. Second, SMEs tied to low-end market segments in large urban or metro areas appear to be the most vulnerable to cheap import competition from overseas. Ironically, SMEs serving similar niches in rural areas or in small towns do not face the same pressures. Their access to intricate, socially embedded distribution networks linking them to rural markets appears to be a source of strength that non-local competitors find too costly to replicate (Tewari and Goebel, 2002). In China, Wang and Yao (2002) found that trade liberalization since the late 1970s has led to much dynamism among SMEs. Such firms have grown rapidly and increased their value addition to the Chinese economy, with gains in total factor productivity. However, from firm-level data in Ghana, Steel and Webster (1992) found profits being squeezed in SMEs on account of rising input costs, weak domestic demand, and competing imports. Similarly, after assessing firm-level data for 1993–6 in Chad and Gabon, Navaretti et al. (2003) found that the trade reform process along with a currency devaluation failed to generate growth for local SMEs. On the contrary, many of these enterprises were found to suffer from high input costs. Other important studies on the effect of trade reform on SMEs include Valodia and Velia (2004), Kaplinskly et al. (2002), Roberts and Tybout (1996), and Roberts (2000). The first study investigated the relationship between foreign trade liberalization at the macro level and its micro or firm-level adjustment effects in South African manufacturing industry. Its findings suggest that there is a strong relationship between firm size and international trade. More than half of the firms not engaged in international trade are small firms. At the opposite extreme, almost half of the firms that
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are involved in both importing and exporting are large firms employing more than 200 workers. It seems that larger firms have been more successful at integrating their manufacturing activities into global chains of production. The other studies conclude that the path to growth for SMEs in a trade-liberalized world lies in their ability to compete with imported goods and services, and this depends greatly on their ability to upgrade their production capacities, to access human resource and new technology, and to improve the quality of their products. In Indonesia, among many existing studies on SMEs in the country, perhaps the only one supplying evidence on the effects of the trade reforms before the 1997/98 economic crisis on SMEs’ exports is from a field study conducted by Berry and Levy (1994). They surveyed 91 SME exporters in three subsectors of manufacturing, and conducted intensive interviews with 30–40 public and non-profit agencies active in SMEs issues between January and June 1992. The three subsectors were garments in Jakarta and Bandung (both are in West Java), rattan furniture in Jakarta and Surabaya (East Java), and carved wooden furniture in Jepara (Central Java). From a total of 33 rattan-product exporters who were interviewed, they found that all but one of the firms sampled exported 90 percent or more of their output, and 26 of 33 firms began exporting the same year they entered into production. Most of them started to export or increased the export share of their total production since the Indonesian government imposed bans on the export of unprocessed and semi-processed rattan in 1986 and 1988–89 respectively. So it seems that the ban has been a key factor leading to a major expansion in rattan furniture exports of Indonesia’s SMEs.9 There are indeed many cases showing that export liberalization of raw materials had created difficulties for SMEs. For example, several times during the 1980s and also in the 1990s many SMEs in the three largest metalworkingindustry clusters in the country, that is, Tegal and Ceper, both in Central Java, and Pasuruan in East Java, had to close their business due to lack of scrap which was their main raw material. This material was exported mainly to China, leading to a scarcity in local markets for SMEs. Another case is from PT Panasonic Manufacturing Indonesia, the leading electronic company in Indonesia, which has subcontracting linkages with many SMEs manufacturing a variety of electronic products, including water pumps. For this latter item, recently its subcontractors are facing difficulties due to the lack of brass which is one of their main raw materials as this one has also become free to be exported.10 Shortly after the economic crisis in 1997/8, Dierman et al. (1998) attempted to assess the impact of foreign trade and investment policy reforms related to the IMF-sponsored overall economic reforms under the Letter of Intent (LOI) on SMEs in the manufacturing industry in Indonesia. It shows that the likely impact varies by subsector or group of industry. SMEs in the pre-crisis most-protected industries were expected to be more adversely affected than those in the less-protected ones. However, the
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assessment has some serious limitations. The most important is the fact that it was based on secondary data and a survey of literature on SME development in various industry groups during the crisis period. No field surveys or in-depth interviews were conducted. Thus, the increased production costs due to the huge depreciation of the rupiah, not the import tariffs reduction, could be the reason for the shutdown of many SMEs in several industries which was observed during that period. Other studies of SMEs in Indonesia may indicate, though not explicitly, the important effects of macroeconomic policies versus special designed programs on SMEs, as they conclude that most SME development programs (such as subsidized credit, various training programs, external trade promotions, and subcontracting schemes) have not been very successful.11 They argue that friendly macroeconomic policies, including trade policies (for example, import and export regulations) are very important for SME growth. For instance, Hine and Kelly (1997, p. 11) state explicitly that many factors, including the level of protection (i.e. tariff as well as non-tariff barrier policies), exchange rate policies, red tape and other unnecessary administrative procedures, and multilateral, regional, and bilateral trade policies are key macro issues that indirectly or directly affect the ability of SMEs to enter global markets. Based on his analysis of the effects of macro- and micro-policy environments on rural industries in Indonesia, Dierman (2004, p. 100) states that a significant number of macro policies such as trade (protection) policies placed additional costs and burdens on rural SMEs. He argues, therefore, that macroeconomic policies (including in trade area) that created a favorable economic environment, as reflected in consistently high growth rates in GDP, and not biased in favor LEs, provided the best stimulus for SME growth. In Indonesia, especially after the 1997/8 economic crisis, the public debate on the need for trade (and investment) liberalization and its effects on domestic industries raised not only the question whether domestic SMEs would survive against imports and incoming MNCs and whether they could face challenges and opportunities in the world market created by trade liberalization, but also the question whether the participation of SMEs in the global economy would lead to their sustainable growth. This is also true for SMEs in other Asian developing countries. Some authors such as Kaplinsky et al. (2002) and Humphrey (2003) are rather skeptical. Perhaps the wood furniture industry cluster in Jepara (Central Java) is a good test case, as underlined by a number of studies on this industry, including Sulandjari and Rupidara (2002) and Loebis and Schmitz (2005). For instance, based on their assessment on whether enterprises and workers in this cluster have gained from producing for the global market and whether the gains are sustainable, they find that the cluster has made gains by participating in export activities; the growth in the number of enterprises and in the number of jobs is undeniable, and the earnings of workers have also increased
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substantially. However, the industry’s prospects for further growth are questionable. On the input side, the industry is suffering from the increasing scarcity and rising costs of raw materials. On the output side, it is suffering from intensifying competition from China, Vietnam, and other countries. More specifically, the authors conclude that these gains are not sustainable for a number of reasons, one of which is the viability of exports that are dependent on wood, which is logged illegally and is being depleted. Halting this process is, however, difficult because intensifying price competition in the international market makes enterprises prefer to use the cheaper illegal wood. However, generalizing these findings to other clusters may not be valid since different clusters may have different problems.
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Export and Trade Liberalization
5
5.1 Competitiveness No doubt the contribution of SMEs to exports to some extent relates to their capacity for internationalization. It is also a critical factor measuring their global competitiveness (Long, 2003). SMEs’ low level of global competitiveness can be a serious obstacle to enterprises accessing not only the international market but domestic markets as well, since their products cannot compete with imported goods. Not many attempts have been made so far to assess the global competitiveness of SMEs in Asian developing countries. Thus, not much can be said about this topic for SMEs in these countries, although Chapter 4 on export performance may give some clues about the relative competitiveness of SMEs in the countries discussed. The only initiative so far has come from the APEC SME Innovation Center, which has conducted a study on SME global competitiveness in 13member economies of Asia-Pacific Economic Cooperation (APEC) in 2006 (APEC, 2006), which covered also some developing countries in Southeast Asia (Figure 5.1). In this study, competitiveness is measured through the score index from 1 (the least competitive) to 10 (the most competitive) and is developed based on a number of factors which include types of technology used, adopted methods of production, and types of product made with respect to degree of technology embodied (i.e. low/traditional, medium, high/advanced). It reveals that Indonesia has the least competitive SMEs, with the score below 4. Moreover, according to this study, Indonesia has also recorded the least funding for technological development, which is below 3.5 on a ten-scale index, while technological upgrading is an important determinant of competitiveness. The low competitiveness of Indonesian SMEs may also explain why their export intensity is found to be relatively low, as presented in Chapter 4. Even in domestic markets many SMEs’ products cannot compete with a large inflow of smuggled as well as legally imported goods with cheaper prices. The reasons for this are twofold. First, the quality of SMEs’ products is often lower than 128
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Indonesia China Korea Philippines Thailand
Singapore Canada Australia Chinese Taipei USA Hongkong-China
0
Figure 5.1
1
2
3
4
5
6
7
8
9
SME competitiveness in selected APEC economies
that of imported products because their level of technology is generally low, and SMEs’ management skills are weak due to lack of training and modern management knowledge. Second, Indonesian macroeconomic policies or regulations on trade, inadvertently favor imports more than exports, thus reducing incentives for domestic enterprises, SMEs in particular, to produce better-quality goods, and thereby result in less competitiveness. It is often said that one effective way not only to maintain but also to improve competitiveness is continuous innovation. Formally, innovation is considered to be the successful development and application of new knowledge. In the literature, the concept of innovation is mostly based on Schumpeter’s definition, that is, a new combination of the factors of production. However, the expression of innovation varies among scholars. For instance, for Edquist (2004) innovation occurs not only in products (goods and services) but also in processes (technology and organization). For him, “innovation in process” is about how things are produced, while “innovation in product” is about what is produced.1 Many factors are said in the literature to determine the capacity of an SME to innovate, including the talent and creativity of owners/producers. In Shahid (2007, p. ii), for instance, it is stated that talent is the foundation of a creative society, and increasing talent involves not only mobilizing culture and tradition, building institutions to increase the stock of human capital, but also enhancing its quality and instilling values favouring achievements and initiative. But creativity itself is no guarantee of successful innovation, since translating creativity into innovation is a function of multiple incentives, and sustaining innovation is inseparable from heavy investment in research and development (R&D) activities. In the further process of bringing innovation into the market, not only engineers or scientists but also, and even more important,
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Japan Malaysia
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entrepreneurial skills play a role. In other words, the transition from innovation to commercially viable products also requires entrepreneurial skills.2 Ideally, the number of patent applications is the best indicator to measure product or process innovations. But, since such data hardly exist in developing countries, ISO certificates owned by firms or companies spending on R&D can be used as indicators instead. The first indicator can be seen as a reflection of firms’ ability to innovate, whereas spending on R&D (usually expressed as a percentage of total production expenditure or in other financial ratios) is often used to measure current innovation activities. As presented in Table 5.1, the Enterprise Survey 2007 by the International Finance Corporation (IFC) and the World Bank provides important information on these two indicators in many countries, including some in Asia, although no distinction is made between SMEs and LEs. However, if the ratios in this table are also valid for SMEs in general, then it can be assumed that the SMEs’ level of innovativeness, on average, in Malaysia or in Thailand is higher than that in Indonesia. Among the countries covered in this chapter, only India has data on ISO certificates owned by SMEs, provided by the Office of the Development Commissioner, Ministry of Micro, Small and Medium Enterprises (MSME). In order to enhance the competitive strength of SMEs, the Indian government Table 5.1 Innovation at enterprises level by region, 2006 Country
East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa Organisation of Economic Cooperation and Development (OECD) South Asia Sub-Saharan Africa Cambodia Indonesia Lao PDR Malaysia Philippines Thailand Vietnam
Companies with ISO certificate ownership (% of total companies)
Spending on R&D (% sales)
23.69 12.98
2.01 0.46
13.11
2.40
12.88 14.53
0.97 0.25
19.76 11.68 2.78 22.13 3.27 31.43 15.79 44.63 37.84
0.58 1.71 5.21 — — 1.38 0.80 0.25 2.21
Sources: International Finance Corporation (IFC) and the World Bank (Enterprise Surveys 2007, World Bank Group, Private Sector Resources).
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5000
131
4101
4000
3314
3000 1000 0
Figure 5.2
3
48
10
54
85
174
361
649
992
1543
1182
917
1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 200694 95 96 97 98 99 00 01 02 03 04 05 06 07
Annual number of SEs receiving an ISO 9000 certificate
MNCs Assets/worker Revenue/worker
SMEs SOEs 0
50
100
150
200
250
300
350
Figure 5.3 Productivity comparison between ownership categories, 2002 (VND million)
introduced an incentive scheme for their quality improvement and environment management. The scheme provides incentives (of up to INR 75,000 per unit) to SMEs which acquire ISO 9000/ISO 14001 certificates. The scheme, in operation since March 1994, was enlarged to include reimbursement of expenses for acquiring ISO 14001 certification. Based on the Annual Report for 2006–07 from the Office, Figure 5.2 shows that since the inception of the scheme of ISO-9000 reimbursement, 13,433 SEs have benefited. The level of productivity in SMEs, although notoriously difficult to measure, interpret, and compare due to data limitations (especially in developing countries), can also be utilized as an alternative measure of SMEs’ competitiveness; and improved productivity can be used as a proxy of innovation in SMEs as it is an important outcome of innovation. SME innovation is not necessarily at a basic research level, but more at a product and process application level. Long (2003) tries to examine the productivity of SMEs and to compare it with that of SOEs and MNCs in Vietnam. He uses two ratios, namely, revenue per employee and assets per employee. As shown in Figure 5.3, among three types of ownership, SMEs have the lowest levels of those ratios. The highest ones belong to Foreign Direct Investment (FDI)-based enterprises. With these ratios, it can be said that productivity in SMEs is lower than that in SOEs and FDI-based enterprises. Long explains that, despite their high growth rate in the last decade, SMEs in Vietnam have been very limited in their innovation capabilities and productivity, partly because the private sector in Vietnam has developed only recently under the “market mechanism”-oriented reforms of the government.
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The level of innovativeness or the potential of SMEs to improve their competitiveness through innovation can also be reflected in the availability or usage of recent or more advanced technologies in the enterprises. The picture of technology availability in Vietnamese SMEs is mixed. Ba et al. (2006), quoted in Cuong (2008, p. 336), for instance, indicate that in the early 2000s a significant proportion of Vietnam’s SMEs used rather old or outdated machines and equipment. Nevertheless, Rand and Tarp (2007) paint a more optimistic picture of Vietnam’s SMEs innovativeness in general and technology availability in particular in 2005. The machinery and equipment used by the SMEs were fairly new, that is, some 88 percent was no more than ten years old. Around 4–10 percent of the SMEs used only hand-tools and manually operated machines and equipment, and as many as 25 percent of the firms used power-driven ones. Furthermore, more than 61 percent of the machines used were newly purchased, whereas around 34 percent were second hand. The authors also indicate that around 41 percent of the sampled SMEs had introduced a new product during the previous three years (since 2002), while only 30 percent had introduced a new technology into their production process. It should be noted that in Vietnam LEs are more innovative and improve their technological production processes more often than do SMEs (Table 5.2). According to Rand and Tarp, the lack of technology-creating and hence innovation capability of Vietnamese private firms in general or SMEs in particular stems largely from two sources. First, the education and vocational training system in the country has not been effective. University curricula Table 5.2 Innovation rates of enterprises, 2005 Introduced new product
Introduced new technology
All surveyed enterprises New entry Incumbent
40.6 44.3 39.1
29.5 33.1 28
Enterprises by size MIE SE ME LE
32.6 51.1 62.9 87.5
19.1 42 63.8 81.3
Enterprises by location Urban Rural
47.2 35.6
36.2 24.4
Enterprises by sex of entrepreneurs Male Female
43.6 34.0
30.5 27.3
Source: Rand and Tarp (2007, p. 13).
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pay too much attention to theoretical aspects at the expense of practical knowledge and skills; and private firms still pay inadequate attention to formal training of human resources. Second, commercialization of technology products has been very limited due to the weak linkage among research institutions, universities, and enterprises. Additionally, the vast majority of the labor force (70–75 percent) are unskilled, resulting in a low absorptive capacity of domestic firms. In tandem with a shortage in labor with vocational training, the poor quality of the labor force has, to a significant extent, created a hindrance to every stage of technology development stated above (Cuong et al., 2008, p. 337). Another important study is by Nguyen et al. (2007), who investigate the causes of innovation in SMEs’ exports in Vietnam. They use a data-set from the Vietnam SME Survey, conducted in 1991, 1997, 2002, and 2005 by the Ministry of Labor, Invalid and Social Affairs (MOLISA) and the Stockholm School of Economics. Interestingly, this data-set has several important features. First, it allows them to distinguish between (i) product innovation, (ii) process innovation, and (iii) modification/improvement of existing products. Second, with detailed information about the firms, the authors are able to find various instruments to deal with the potential endogeneity problem of innovation. Using both the instrumental approach and the bivariate probit model, they find that all these three measures of innovation are important determinants of the export performance of Vietnamese SMEs. For the Philippines case, the most recent information about the current innovativeness of SMEs is provided by Aldaba (2008), who found that many SMEs have difficulties improving their competitiveness. She explains: Many firms are not knowledgeable on technology with most SMEs employing poor or low level of technology. Most small enterprises are labor-intensive, while the medium-sized ones use relatively more technology-intensive. With low level of technology, the production methods are generally inefficient which leads to inconsistent product quality, low level of productivity and lack of competitiveness. This is also manifested in high materials wastage, high rates of reworks, and inability to meet deadlines. Regarding product quality and quality assurance of raw materials … there is a lack of common support facilities like testing centers and standardization agencies, whether government or private-sector led. With respect to quality management systems standards such as ISO series, SMEs do not invest in these business standards due to the high costs involved along with the high degree of formalization and documentation required. (2008, p.17) In her study, Aldaba also presents labor productivity in manufacturing SMEs, measured by value added per worker (Table 5.3). Although labor
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All manufacturing Food processing Food manufacturing Beverages Tobacco Textiles Wearing apparel except footwear Leather and leather products Leather footwear Wood and cork products Furniture except metal Paper and paper products Printing and publishing Industrial chemicals Other chemicals Petroleum refineries Petroleum and coal products Rubber products Plastic products Pottery, china, and earthenware Glass and glass products Cement Other non-metallic mineral products
1998
SMEs
LEs
110,087 205,341 114,350 710,845 44,408 62,812 75,997 29,815 20,991 57,356 42,254 100,044 65,549 319,818 209,208 — 100,414 61,970 124,561 33,906 179,684 — 77,988
195,890 172,843 174,233 493,860 726,851 75,230 57,927 40,490 44,256 62,053 48,412 218,285 203,437 357,757 669,116 4,437,509 — 95,368 96,020 79,086 371,332 446,541 149,469
SMEs 138,518 301,837 339,534 229,506 29,067 53,632 66,332 49,645 40,179 85,441 47,015 134,667 60,978 213,573 225,641 1,289,142 52,251 59,621 96,814 33,726 100,979 287,307 70,556
2003 LEs 227,484 280,387 190,644 572,530 1,026,460 70,259 60,506 32,007 34,858 41,316 65,197 202,266 326,118 363,740 734,192 9,973,321 23,179 45,686 119,414 88,725 258,926 723,737 103,872
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SMEs 96,642 123,584 88,777 302,242 52,366 70,061 39,704 88,294 23,611 41,241 67,225 138,941 41,502 326,891 177,398 — 280,052 55,448 76,437 102,305 131,116 561,857 59,305
LEs 210,518 263,167 184,526 534,620 474,949 73,736 45,615 137,220 25,108 43,711 62,127 160,144 184,274 419,592 579,624 28,642,548 — 91,000 85,235 67,890 204,344 933,686 194,730
SMEs in Asian Developing Countries
1994
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Table 5.3 Value added per worker in manufacturing by size of enterprises
149,779 73,555 81,755 53,321 123,257 182,039 158,521 43,736
484,692 578,029 109,766 105,174 136,682 238,576 55,890 65,568
137,991 138,169 71,582 75,621 143,939 137,312 98,868 69,400
187,138 308,695 104,123 229,307 215,727 220,591 54,286 88,505
142,431 164,184 108,354 61,009 121,099 153,171 91,245 104,305
133,158 481,084 82,503 198,292 140,728 374,823 110,198 79,516
Source: Aldaba (2008, p. 234).
Competitiveness and Transfer of Technology 135
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Iron and steel Nonferrous metal products Fabricated metal products Machinery except electrical Electrical machinery Transport equipment Professional and scientific equipments Miscellaneous manufacture
SMEs in Asian Developing Countries
productivity rose in both SMEs and LEs between the years 1994 and 1998, it fell in 2003. For SMEs, labor productivity dropped from P 139,000 to P 97,000 while for LEs it declined from P 227,000 to P 211,000. In general, the labor productivity of SMEs has remained only about half that of their larger counterparts. Although some narrowing of the gap was evident in 2003, SMEs still suffer from low productivity. According to a World Bank report in 2004 (quoted in Aldaba’s study), the value added per worker relative to all firms was approximately 46 percent in the Philippines as compared with 64 percent in Indonesia, 65 percent in Malaysia, and 84 percent in Thailand. A closer look at the manufacturing industries would reveal that in 2003 the labor productivity of SMEs was higher than LEs in the following sectors: furniture; pottery – china, and earthenware; iron and steel; fabricated metal products; and miscellaneous manufactures. Note also that in the garments, electrical machinery, and transportation equipment industries, labor productivity declined in the three years under study. For the Thailand case, probably the only information on SMEs’ competitiveness or innovation capacity is from the 2006 research on policies promoting SMEs in the APEC region conducted by the APEC SME Innovation Centre (APEC, 2006). According to this report, in general, Thai SMEs’ innovation capacity is no better than those of their counterparts in other countries in the ASEAN region, although it may vary by manufacturing subsector. However, the Thai government has made serious efforts to improve the competitiveness of Thai SMEs, particularly through innovations. After the 1997/98 economic crisis, promoting innovation has become an important aim of SME development policy in Thailand. Thailand’s SME innovation policy, as stated in the report, is a reflection of problems of economic structure resulting from the strong reliance on foreign capital not involved in indigenous technology development during the last three decades. In addition, the huge foreign debt and high level of non-performing loans (NPLs) of LEs were among the main reasons for the 1997/98 economic crisis in Thailand. Therefore, the government has emphasized innovation on the part of SMEs as an alternative engine for economic recovery and sustainable economic development. Another recent study is by Kecharananta and Kecharananta (2007, p. 23) who argue that in the past Thai firms depended more on the cost advantages from an abundant labor force and physical resources than on their ability to strengthen their technology and innovation capabilities. But since comparative advantages cannot last for ever, as resources can move across borders conveniently, smoothly, and freely as a result of technological progress, Thai firms, especially SMEs, lost their ability to compete and to meet significant challenges, namely, the ability to generate their own competitive advantages, especially in technology (including information technology) and in innovation. To enhance SMEs’ innovative activities, the Thai government has implemented several measures, including enacting the SMEs Promotion Act in
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2000, and establishing the Office of the SMEs Promotion (OSMEP). OSMEP works as an independent government agency, acting as a central planning office and coordinating the strategic plans and actions of all agencies relevant to SMEs’ development. In addition to the establishment of OSMEP, the government proposed the Promotion Plan of SMEs of Thailand (2002–6) in line with the Fourth Social and Economic Development Plan, to emphasize the importance of SME development. An SME bank was established in 2002 as a specialized financial institution, providing financial support to SMEs not only for their working capital needs but also for innovation activities. The main strategic priority is the development of technological facilities and the innovative development of SMEs. As a further way of improving SMEs’ capability to innovate, the Thai government has focused on the indigenous technology capability development of SMEs in specific sectors, such as automotives, food, tourism, and software. One of the main measures to this end is the Industrial Technology Assistance Program (ITAP). The program consists mainly of an industrial consultancy and technology acquisition service that links technology experts and SMEs, and provides enterprises with the opportunity to obtain first-hand information on technological advances and innovations through arranging overseas technology trips. In this way, indigenous technology development has been mainly based on the paradigm shift in the role of government research institutes from a knowledge source to a knowledge intermediary by providing SMEs with indirect services that enable them to enhance technological capability. In Indonesia there is increasing micro-level empirical evidence of the innovatory capacity of SMEs, especially those located in clusters which are in a better position to innovate than their dispersed counterparts,3 for instance, evidence from Sandee’s (1994; 1995; 1996) studies of roof-tile clusters in rural areas in Central Java province. Through the 1980s the demand for roof tiles increasingly shifted toward urban areas, where customers pay more attention to quality. This meant that upgrading was important to retain or increase demand. Although some clusters have stagnated, many have grown through a process of technological change or adaptation that encompasses changes in processes of production, in patterns of interfirm cooperation, in employment conditions, and in the marketing of new output. The range of experience has been wide. The process was demand/buyer-driven in some clusters and producer-driven in others. In the former case, the buyers were mainly traders or agents from urban building-material shops, who largely took care of the financial, technical, and marketing sides of the technology adoption and competed with each other to do so, a reflection of the expanding urban demand for press tiles. For instance, in two cases (in Mayong Lor and Klepu villages) urban building-material shops have played a key role not only in assuring demand but also in providing loans for the purchase of presses and renting out mixers. The pioneer adopters of the hand-press
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technology were young males who had used it elsewhere in rural Java. Since its introduction in the early 1970s, virtually all the producers in the clusters studied have adopted the technology. In the case of producer-driven clusters such as in Karanggeneng village, networks of producers were at the heart of the process of technology upgrading. Producers organized themselves to finance new equipment, shared indivisible capital, and gained access to new markets. Pioneer adopters remained the most important actors by stimulating innovation in those producers whom they could trust and control, especially relations. Urban building-material shops become involved through establishing relationships with the pioneer adopters. In both cases, innovation trickled down among an increasing number of producers. Diffusion was stimulated by the growing involvement of suppliers, while the government principally contributed by improving the environment (Sandee 1995). In the producer-driven clusters, Sandee et al. (2002) provide a comprehensive review of two important SME clusters of metal-casting industries producing components and spare parts by subcontracting metal casting to LEs in Ceper, Klaten, in Central Java, and in Cibatu village in the Sukabumi regency. The first cluster is well known in Indonesia. It has been an active cluster since the colonial period and has a long history of producing cooking utensils for the local and nearby markets. The cluster encompasses a variety of metal-casting firms ranging from SEs producing basic utensils for the local market to MEs working exclusively to process orders from big national companies such as railway and car-manufacturing firms. Recently, Ceper has concentrated on the production of both final and intermediate products. Final products include household equipment and agricultural tools, while the main intermediate products are components for LEs through subcontracting production linkages. By late 2001 the cluster amounted to 332 production units that together employed 3875 workers. The cluster is spread over several villages in the Batur district of the Klaten regency. The second cluster can be deemed a typical example of a metalcasting cluster that has gradually expanded its product range. Presently, the cluster manufactures agricultural equipment, household items, and various products for military needs. A few firms make samurai swords and export them via traders to Japan. Besides samurai swords, other handicrafts produced in the clusters are also exported, and Japan is an important export market. An increasing number of firms producing spare parts and intermediate inputs are involved in subcontracting production relationships with LEs outside Sukabumi, mainly in the Jakarta area. At the macro or national level, since no data are available to measure directly the innovatory capacity of Indonesian SMEs, the labor productivity of the enterprises is an alternative indicator. As shown in Figure 5.4, the value addedlabor ratio used in SMEs is much lower than that in LEs. Within the SME group the ratio varies, however, being lower in MIEs and SEs than in MEs.
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Competitiveness and Transfer of Technology 422987 MIE&SE ME LE
240000
68400 2606
8678 2003
9000 2006
Figure 5.4 Labor productivity of MIEs, SEs, and MEs in Indonesia (Rp/worker)
This low labor productivity of SMEs is, of course, not only an Indonesian problem, as the labor productivity gap between SMEs and LEs is evident also in Vietnam and the Philippines (as shown above) and is one of the largest of such gaps observed in developing countries.4 It comes as no surprise, given that SMEs, especially SEs or MIEs in developing countries, are traditional enterprises adopting a manual mode of production (i.e. with a low degree of mechanization). They also lack the necessary inputs to increase productivity with skilled workers, new machines and modern tools, and know-how to improve methods of production. Without such inputs it is hard for these enterprises to innovate. In Malaysia, the National Productivity Corporation (SMIDEC) has data on SME productivity for selected years. In 2002, SMEs registered a 2.7 percent increase in productivity with a value added per employee of RM 35,043, up from RM 34,112 in 2001. The highest productivity growth was recorded by SMEs in medical products, precision and optical instruments, furniture and fixtures, and rubber and plastic products. This trend continued in 2003 and is reaffirmed by other productivity indicators in Table 5.4. Meanwhile, data from Department of Statistics (DOS) show that, generally, SME productivity was very much lower than that of LEs in 2001–3. SMEs generated RM 0.3 million of value added and RM 0.8 million of output per establishment, compared with RM 41 million of value added and RM 127 million of output per establishment for LEs. Similarly, in terms of labor productivity, SMEs generated RM 0.05 million value added and RM 0.13 million output per employee, compared with RM 0.1 million of value added and RM 0.32 million output per employee for LEs. Overall, SMEs recorded value added per employee of RM 50,419 with MEs enterprises generating the highest level at RM 76,911, followed by SEs (RM 48,528) and MIEs (RM 38,162). The values recorded by SMEs are in contrast to the LEs, which registered value added per employee of RM 104,579. Among the sectors, SMEs in the manufacturing sector registered the highest value added per employee at RM 64,089, followed by SMEs in the services (RM 47,151) and agriculture (RM 27,526) sectors.
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450000 400000 350000 300000 250000 200000 150000 100000 50000 0
139
140
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Table 5.4 SME productivity indicators, 2003
Labor productivity – Output per employee (RM) 183,222 – Value added per employee (RM) 37,675 – Labor cost per employee (RM) 18,762 – Value added per labor cost (pure number) 2.0 – Unit labor cost (pure number) 0.1 Capital productivity – Fixed assets per employee (RM) 35,792 – Value added per fixed assets (pure number) 1.1
Growth rate, 2001–03 (%) 5.6 7.8 7.3 0.4 1.6 4.0 3.6
Source: SMIDEC (2004).
Labor cost per employee can also be used for competitiveness measurement since employee labor cost per unit determines labor cost per unit of output and hence the (price) competitiveness of that output. Based on DOS data, overall, each employee in the SMEs received average remuneration and benefits amounting to RM 13,104 per year in 2003. The MEs recorded the highest level at RM 19,276, followed by SEs at RM 15,449 and MIEs at RM 7,199. On the other hand, this indicator was higher for LEs at an average of RM 23,698. The highest remuneration was received by employees in the manufacturing sector at RM 14,774, followed by the services sector (RM 12,966), while employees in the agricultural sector received the lowest remuneration at RM 5951. In terms of capital productivity represented by fixed assets per employee, overall SMEs registered a value of RM 61,296. The MEs registered the highest level at RM 102,764, followed by SEs (RM 54,891) and MIEs (RM 45,878). LEs, on the other hand, recorded the higher figure of RM 150,162. The agricultural sector recorded the highest level of fixed assets per employee at RM 125,095, followed by the manufacturing sector at RM 76,535 and the services sector at RM 52,274. The high ratio of fixed assets per employee in SMEs was particularly found in the agriculture sector, reflecting a shift toward capital intensity on the part of the sector with increased investments in infrastructure, new machinery, and equipment. In addition, some academic studies deal, implicitly or explicitly, with this particular issue, including those by Abdullah and Beal (2002), Jajri and Ismail (2007), and Ibrahim (2008). Abdullah and Beal researched the current development of PROTON, the national carmaker in Malaysia, and found that the company has about 91 vendors that are SMEs. They argue that, although there is no accurate information on SMEs as a source of innovation in Malaysia, their involvement in economically diverse activities, including as vendors or supporting firms for LEs (including MNCs), appears to
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Value
141
suggest that Malaysian SMEs are not only able to innovate but also contribute greatly to innovation in the country. Jajri and Ismail’s (2007) research on the total factor productivity (TFP) of Malaysian manufacturing SMEs may also give some idea about the enterprises’ competitiveness. It is generally accepted that the benefits of technological advances and other institutional arrangements like human resource development (HRD) and management, which all are important for improving competitiveness, can be viewed from the value of the residual. From Table 5.5 it is apparent that SMEs in all industrial groups are experiencing very high TFP growth. TFP growth in the transport equipment, electrical and electronics, and rubber products industries accounted for more than 80 percent of total growth of output. Other industries with more than 50 percent contribution from TFP growth are food, plastic products, rubber products, and non-metallic mineral products. TFP growth in industries manufacturing textiles and metal products is about 38.8 percent and 36.5 percent, respectively.5 Ibrahim (2008) analyses competitiveness in the Malaysian microelectronics sector, which is one of the key engines of growth in Malaysia. He estimates a translog stochastic production frontier and obtains overall and input-specific (that is, human capital and capital) technical efficiency measures from firm-level data collected from a survey undertaken in 2006. The survey produced 70 responses, from 30 firms from the Klang Valley and 40 in Penang. These two regions are the most heavily populated with firms in the electronic industry. The sample included 22 SMEs defined as those employing fewer than 300 workers. The sample reveals that the average Table 5.5 TFP of SMEs in manufacturing industry (%) Industry
Food Beverages and tobacco Textiles, wearing apparel, and footwear Wood-based products Plastic products Rubber products Chemical Metal products Non-metallic products Electrical and electronics Transport equipment
Output growth contribution of
TFP
Capital
Labor
8.09 54.05 48.87
33.57 2.88 12.31
58.34 43.07 38.82
31.78 22.18 28.09 55.25 17.88 23.26 14.54 3.06
22.23 10.41 1.08 0.64 45.58 21.78 0.47 11.38
45.99 67.41 70.83 44.11 36.54 54.96 84.99 85.56
Source: Jajri and Ismail (2007, p. 14).
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value added (in logarithmic value) per firm in the SME category is lower than that in the LE category. One average over the entire sample, namely, a firm’s overall efficiency (not accounting for size and ownership), was about 84 percent, indicating some potential to increase output by the more efficient use of resources and technology. It shows that SMEs’ overall efficiency was the lowest at 75.6 percent, compared with that of LEs at 83.4 percent (or of MNCs at 85.1 percent). The input-efficiency levels in SMEs were also lower than those in LEs, in which the gap in capital efficiency was larger than that in labor efficiency (74.4 percent versus 81.8 percent, and 72.7 percent versus 73.1 percent).
5.2 Transfer of technology It is often argued that a key to increasing the competitiveness of SMEs in developing countries is to build the capacities of these enterprises through improved technology. This technology development can take place internally (within the firm) or can be fostered through access to outside sources, that is, transfer of technology from, for example, MNCs, technical licensing agreements, and imported capital goods. Technology here is defined broadly to include product, process, and management skills.6 The importance of technology transfer can be best shown by South Korea’s and Taiwan’s success in developing their technology. In their early phase of development, they acquired technologies entirely from abroad. But now, with their success in mastering and assimilating foreign technology, they are not only the most advanced countries among the developing world, but also major world suppliers of high-tech goods.7 There is a large body of literature on technology transfer. However, very little work, especially in the form of empirical studies, has been done on technology transfer to SMEs in developing countries, especially in Asia. So this subsection argues that, while the literature has done a decent job of outlining the various potential channels through which international technology transfer occurs, not enough is known, in either theory or practice, about technology transfer or the relative importance of each of these channels to SMEs in developing countries. 5.2.1
Main channels
There is a large body of literature on channels through which technology is transferred internationally. The channels include FDI/MNCs; technical licensing agreements between foreign and local firms; imports of intermediate and capital goods; education and training in technologically advanced countries; turnkey plants and project contracts; technical consultancies by foreign companies/consultancy firms; and simply through participation in world trade (exports).8 However, little is known about the relative importance of each of those channels as mechanisms of technology transfer,
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especially technology transfer to SMEs in developing countries. Indeed, the importance of these channels cannot be established precisely, since it varies according to different stages of development, as does developing countries’ ability to take advantage of them. The literature as a whole reveals the three most important features of technology transfer to developing countries. First, given that foreign firms opt to produce in a developing country, FDI seems to be the preferred route and is therefore a prominent channel of technology transfer. Moreover, for many developing countries FDI is a more attractive means of developing technology in their industries than is using technical licenses or other sources because whereas with licenses technology is provided, with FDI technology is locally developed. FDI is also different from other channels (except the import of capital and intermediate goods and export) since technology transfer through FDI involves continuous interaction between the acquirer and the supplier of technology. The main reason for this is that tacit knowledge is a component of virtually all technologies, but at the same time it is the most difficult to transmit between different agents (UNCTAD, 2007). Soesastro (1998, p. 312) presents a story of technology flows in the socalled newly industrializing countries (NICs), such as South Korea, Taiwan, Hong Kong, and Singapore, which has centered on the dramatic surge in FDI. Soesastro supports the general view that FDI has an important role to play in cross-border transfers of technology, since FDI brings in more advanced technologies than alternative channels such as imports of capital and intermediate goods, project contract, and so on. This is particularly the case with MNCs, because they play a dominant role in the generation of technology which is usually associated with new or technologically complex products in the host countries. The second and perhaps most robust finding of the literature is that an absorptive capacity in the host country is essential for deriving significant benefits from FDI. Without adequate human capital or investment in research and development, spillover from FDI fails to materialize. Thus, FDI policies in developing countries may need to be complemented by appropriate policy and institutional changes with respect to education, R&D, and human capital accumulation, if these countries are to take full advantage of increased FDI (Saggi, 2002). Third, although governments in many developing countries have been trying in many ways to encourage the inflow of FDI, there is not so much evidence of governments in the recipient countries playing a role in supporting the capacity of domestic enterprises, especially SMEs, to absorb technology. As global production is becoming more fragmented through trade and investment liberalization, more companies are choosing to spread their production around the world. The driver of this trend is FDI, and the opening up of domestic markets and a reduction of trade and investment barriers are a precondition (though not the only one) for attracting FDI inflows.9 In Asian
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SMEs in Asian Developing Countries 30 25
Developing countries LDCs
20 15
5 0 1980
1990
2000
2005
Figure 5.5 FDI stock/GDP in developing and LDCs in Asia (%)
developing countries where policy changes toward trade and investment liberalization have been enacted since the 1980s, FDI penetration has grown substantially since the 1990s. However, the rate of penetration varies between developing countries and less developed countries (LDCs) in the region such as Afghanistan, Bangladesh, Bhutan, Cambodia, Lao PDR, Bangladesh, Myanmar, and Nepal (Figure 5.5). Southeast Asian countries and China have been especially active in utilizing incoming FDI not only in export-oriented industries but also in some major import-substituting industries (Kimura, 2006). Probably Indonesia is among a very few Asian developing countries where empirical studies have been undertaken on the importance of FDI for transfer of technology, though mostly at national level using aggregate data. For instance, by using cross-sectional data, both Sjöholm (1999a, b) and Blomström and Sjöholm (1999) found positive spillovers from FDI in Indonesian manufacturing industry. Their results show that both the level and growth of labor productivity is higher for locally owned plants in subsectors with a high foreign share of output. The transfer of technology from foreign companies to local enterprises can happen in two main forms, namely, through subcontracting arrangements between foreign and local enterprises and labor movement from the former to the latter. Thee and Pangestu (1994) tried to find some evidence at micro level. They assessed the technological capability of the Indonesian textile, garment, and electronics industries. They found that, in efforts to increase technological capability, Indonesian textile and garment manufacturers established strategic alliances (SA) with their Japanese counterparts, and that this has been the most important channel of technology transfer. Similarly, business linkages with foreign companies have been a very important channel for the transfer of technology to electronics firms, especially in consumer electronics and electronic components. However, technology transfer in the textile industry was limited to improvements in production capability. Japanese counterparts conducted more sophisticated activities that helped local firms upgrade their technological capabilities, including activities related to pre-investment, project implementation, and technical changes in production or product.
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However, in general there is still little evidence of a significant contribution of FDI to technological capability accumulation through transfer of technology to domestic firms, especially SMEs, in Indonesia as well as in other Asian developing countries. Possible reasons include the following. First is the lack of integration of MNC-induced FDI into host economies. This is especially true for MNCs in mineral extraction, which are highly concentrated geographically and have high import content. Most of those operations are wholly owned by foreigners rather than joint ventures with local firms. They tend to operate as enclaves, such as the case of an American gold mining, PT. Free Port, in Papua, Indonesia, since they are weakly integrated into domestic economies as they have few forward and backward linkages in host economies. With this type of operation, important technology transfer channels from MNCs to domestic firms, namely, production linkages through, for example, subcontracting, joint ventures, and labor turnover, are largely absent. On the contrary, MNCs in the manufacturing industry have potentially greater technology-transfer effects since the industry is not geographically concentrated and is relatively laborintensive, and it is easier for foreign firms to establish subcontracting links with domestic firms in manufacturing than in the mineral extraction. Thus, sectoral composition of FDI is indeed crucial. Second, the priorities of the policies enacted by host countries are important. Only in a few Asian developing countries, for example Indonesia and Thailand, have governments been very active in encouraging production links between MNCs and domestic firms. Third, the absorptive capacities of Asian developing countries is low. Many studies conclude that the presence of FDI is likely to have a positive impact on local firms through transfer of technology only when the local firms have enough absorptive capacity, that is, they must have human resources with adequate skills and basic technical knowledge. Without these factors, spillover fails to materialize, and MNCs can crowd out domestic firms with a technological gap that is too wide to bridge. From his analysis of the amount of technology transferred through the development of Indonesia’s automotive manufacturing industry, Tarmidi (2001, p. 10) concludes that the main constraints on technology transfer in the automotive component industry were not lack of trade and investment liberalization, which is important for attracting FDI, but, among other things, a lack of basic technological know-how and an insufficient number of skilled workers.10 In other words, the intensification of FDI will not on its own guarantee that it will work effectively in channelling technology transfer, unless policies encouraging FDI are accompanied by active policies at the national level as part of broader development strategies geared toward the development of productive capacities. The most important policy action required, as the necessary precondition, is the maximization of the technological learning and adaptive innovation capabilities in recipient countries. Important
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lessons can be learned from the East Asian successes (i.e. South Korea and Taiwan). These countries show that, in order to realize the benefit of technology transfer, policies to attract FDI as part of trade and investment liberalization should be accompanied with science and technology and human resource development policies. Those policies should be considered as part of structural adjustment programs in the process of trade and investment liberalization. Reinforcing key institutions, development of science and technology infrastructure and an information network/center, and incentives for industrial and agricultural development should be part of a development or adjustment plan. Otherwise, the inflow of FDI will not only fail to generate technology transfer but Asian developing countries will be marginalized within the global economy. In addition to science and technology and human development policies, the success stories of South Korea and Taiwan suggest that FDI policies in Asian developing countries must be accompanied by policy actions: to allocate incoming FDI to high-value-added manufacturing activities, instead of concentrating in natural-resource extraction and low-value-added or traditional manufacturing industries such as textiles and apparel, and footwear (although these industries are labor-intensive and so have higher employment effects, but involve few skills); to encourage close links between FDI and domestic firms through, for example, subcontracting arrangements or joint ventures; to encourage movement of workers to domestic firms/SMEs after they have acquired sufficient experience as workers in foreign companies; and to promote collaboration in R&D between FDI and local firms, including SMEs, by many measures such as easier procedures, removal of restrictions on royalty or technical fee payments, and a good patent system. The People’s Republic of China (PRC) is a good example of a country that has been very serious about acquiring technology from advanced countries by encouraging foreign R&D investment in China, particularly in information technology related industries. The government offers a range of preferential policies that include tax rebates, construction loans, access to modern facilities, and other incentives. As a result, most of the world’s leading computer and telecom companies have R&D investments in China (Walsh, 2003). Thailand is probably a good example of a developing country in the region that has exploited FDI to acquire technology from advanced countries in its quest to industrialize by encouraging partnerships, especially in the form of subcontracting between domestic firms and TNCs since 1960s. The government has used fiscal and other incentives, training programs, and other support measures (such as incubators and science parks) to facilitate partnerships (UNCTAD, 2005). The second most-preferred channel for technology transfer by developing countries is the import of intermediate and capital goods embodying advanced technological know-how. By far the most important source of technological innovation in developing countries as perceived by firms,
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Competitiveness and Transfer of Technology 50 40
147
Developing countries LDCs
30
10 0
1980-89
1990-99
2000-05
Figure 5.6 Capital goods import intensity of developing and least developed countries in the Asian region (as a percentage in total merchandize imports)
according to a large survey of firms conducted for UNCTAD (2007), is new machinery or equipment. It is likely that most of the machinery and equipment operated in Asian developing countries is imported, since the countries have very little capital and intermediate goods manufacturing capacity. However, in Asia, the intensity of capital goods imports, measured by the ratio of total capital goods imports to total merchandize imports, varies between developing countries and LDCs (Figure 5.6). The former countries (including Indonesia, Thailand, Malaysia, India, and China) import more capital goods than the latter countries (such as Afghanistan, Bangladesh, Bhutan, Cambodia, Lao PDR, Bangladesh, Myanmar, Nepal, and Yemen). This difference is associated with the fact that the former are more liberal in their trade and investment than are the latter, and their level of industrialization is higher. As with the case of FDI discussed above, empirical studies of the importance of this particular channel for technology transfer in Asian developing countries are very scarce. Also the importance of this channel for technology transfer cannot be established precisely, since it depends on the level of development in the importing countries and on their ability to learn, master, and adapt foreign technologies derived from imported capital goods. It can only be assumed that since human resources, technology capability, institution, infrastructure, and so on are more developed in developing countries than in LDCs within the region, the former benefit more than the latter from international technology diffusion through imported intermediate and capital goods. The only evidence is from national data on imports by types of goods. For Indonesia, national data show a sustained increasing share of imported intermediate and capital goods in the country’s total imports. Although no case studies at firm level have ever been undertaken that can give detailed evidence, at least it can be assumed that such continued rise in imports of the goods must have had some effects on technological development in Indonesian firms in the last, say, 30 years. This view is supported by Jacob
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and Meister (2005). Their study is based on an assessment of the contribution of foreign technologies to manufacturing performance in Indonesia at the subsectoral level, in which they combined Indonesian data-sets on production and input–output transactions with the R&D, export-to-Indonesia and output data of ten major OECD countries that trade with Indonesia. They conclude that the transfer of foreign technologies to Indonesia through imports of intermediate and capital goods does indeed make a significant contribution to the performance of Indonesian manufacturing, especially after liberalization and reforms started in the mid-1980s. Thee (2003), who has been actively studying industrialization in Indonesia, also stresses the important role of imports of intermediate and capital goods, particularly given the weakness of domestic industries producing such goods. Another important channel is participation in world trade through exports. This method has been used intensively by local firms, including SMEs, in some Asian developing countries. For example, local electronics firms in South Korea, Taiwan, and Hong Kong were able to build up production capabilities through simple assembly of mature products for export, often developed through technical assistance provided by foreign buyers.11 This process of coupling exports with technology development has been called “export-led technology development” (Hobday, 1994, p. 350). In the Indonesian case, this can be best represented by the success of Bali’s garment industry. It shows the importance of foreign buyers (i.e. foreign firms, businessmen, and tourists) as an important source of innovation, as they are able to act as marketing intermediaries, connecting local producers with retail outlets abroad. In the process, these intermediaries dispense important information on design and production techniques. Foreign buyers provide information and technical and managerial assistance on plant layout, the purchase of the most appropriate machines, and quality control methods, and also often act as technical consultants to SMEs in the industry, enabling them to achieve higher levels of efficiency and accuracy (Cole, 1998a, b). Foreign buyers also provided vital information and technical, managerial, and marketing assistance during the development of the export-oriented furniture industry in Jepara, Central Java, which is another important success in Indonesia. As a result, the quality of Jepara furniture has been steadily upgraded. Foreign buyers have also played a crucial role in providing guidance to SMEs on the furniture designs popular in export markets and the quality standards required to penetrate these markets.12 5.2.2
Tegal metal working industry: A story from Indonesia13
Although the literature on the importance of FDI as a source of technology transfer to developing countries, including those in Asia, is huge, research on this issue with respect to SMEs is almost non-existent. This is also probably why Berry and Rodriguez state in their 2001 World Bank paper that, whereas LEs in developing countries achieve productivity increases to a
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considerable extent simply by borrowing technologies available off-theshelf throughout the world, for SMEs as a group it is not so evident that processes such as FDI, technology licensing, joint ventures, and access to engineering and other advances will provide the gains needed. Even in the existing literature on SMEs in developing countries, only very few authors have paid attention to technology transfer. Islam (1992, p. 7) is one of those who provide an overview of the process of transfer, dissemination, and adoption of technology from FDI for SMEs in the manufacturing industry in the Asian developing region. According to Islam, technology can be transferred to such enterprises through subcontracting production linkages with MNCs, although in many cases MNCs have such linkages only with MEs or LEs. Through subcontracting, MNCs provide subcontractors with designs of products and training. Also, by creating a learning effect in the receiving country, MNCs can help the emergence of a class of entrepreneurs and skilled workers who in turn can initiate similar industries at smaller scales. Thus, as he argues, even in the absence of a conscious policy of transferring technology to SMEs, the sustained operations of multinationals may create conditions conducive to such a process. It is generally known that technology transfer from FDI to local firms often takes place through subcontracting arrangements. This section uses the definition of subcontracting framed by the United Nations Industrial Development Organization (UNIDO), namely, a long-term and stable transaction or agreement between two parties (firms), or in this case between an SME as a subcontractor and an LE as a contractor which hires that SME to produce all or certain parts, components, subassemblies or assemblies, the products of which are marketed by the contractor. This is called industrial subcontracting. The subcontracting can be done at different stages in the production process; it can be in the processing, transformation, or finishing of materials and parts. This type of subcontracting can be done only when the production process can be broken down into separate units in terms of products, place, and time. This system of production differs from other types of production arrangements and orders in that in the subcontracting system the contractor specifies the characteristics of the products and is thus totally responsible to the customer for the quality of the product, whereas the subcontractor has no direct responsibility to the customer. Another type of subcontracting is called commercial or marketing subcontracting: the contractor is entirely responsible for production and then delivers the product to the subcontractor to market it. This type of subcontracting arises mainly when the contractor lacks financial or marketing capability (Thongyou, 2001, p. 15). However, it mainly takes place between LEs or at least between LEs as contractors and MEs (not so much with SEs or MIEs) as subcontractors. In most cases, SMEs, as subcontractors, produce the whole product and LEs, as marketing contractors, give the “final touch” to the product (such as the packaging) before selling or exporting it.
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Subcontracting can also be classified according to type of subcontractor, which could be a factory, villagers, or individuals who do the work at home. In the literature, this latter type is often called the putting-out system. This factory–villager subcontracting system was used in Europe and the United States in the early stages of the industrial revolution (Thongyou, 2001).14 In the literature on SMEs’ development in developing countries, it is often stated that subcontracting is important not only for providing some kind of market security for SMEs but also as a direct channel for transfer of technology from LEs to the enterprises. For instance, Morcos (2003, p. 11) argues that subcontracting arrangements act as very efficient mechanisms and tools for the technological enhancement of SMEs. By engaging in an active collaborative agreement with specific customers, suppliers and subcontractors benefit from a large amount of technology transfer. In Dunning’s (1993) book on MNCs, technology refers to all forms of physical assets, knowledge and human learning, and capabilities that enable the efficient organization of goods and services. Thus, in order to ensure that the inputs required to complete the production of goods meet some standard level, contractors, including MNCs, can provide suppliers or subcontractors not just with specifications but sometimes also with assistance in raising their technological capacities. In many Asian developing countries such as Thailand, Malaysia, Indonesia, the Philippines, and China, within their manufacturing industry, due to the industrial characteristics such as the divisibility of production processes and the products for use as intermediate inputs, SMEs and LEs in the machinery, electronic, and automotive industries tend to establish subcontracting linkages more frequently than their counterparts in other industries. However, currently in general there is a great shortage of a core of dynamic and networked SMEs as leading subcontractors or joint-venture firms in their own right in these countries. Most potential SME subcontractors in these countries (as is generally evident in the developing world) initially do not have the minimum base of skills and know-how required to absorb new and innovative technologies and management practices. Meanwhile, self-improvement and self-upgrading are severely constrained by inefficient and inadequate infrastructure, limited information and contacts, and insufficient financing resources Thus, MNCs and domestic LEs may find it too costly, time consuming, or risky to bring these SMEs up to the expected standards and criteria. Yet a good deal of evidence in the Asian developing region, especially in Southeast Asia, shows that a very large number of SMEs are involved as subcontractors and suppliers particularly in textiles and apparel manufacture, consumer electronics, hardware production, and the production of automotive parts and components.15 Successful subcontracting relationships have often culminated in the sourcing of 75–100 percent of the local subcontractors’ output (Wattanapruttipaisan, 2002a, p. 72).
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This Tegal case can bee seen as an effort to fill the gap in information about the importance and the process of technology transfer from FDI to local SMEs. This case study is a concrete example of subcontracting production linkages between FDI/MNCs and local SMEs in a developing country. The district of Tegal (Kabupaten Tegal), here after Tegal, is part of the provincial government of Central Java located on the northern shore near the border of West Java. Tegal is among a few areas in Indonesia with a long history of development in the metalworking industry. It has been a metalworking center since the mid-1800s when it became the locus of several sugar processing factories and related enterprises including locomotive repair shops and metal processing factories. The industry continued, thriving particularly under the New Order’s massive infrastructure and development agenda. At the beginning of the 1980s, the first subcontracting activity started in the district, sparking government activity to develop the metalworking industry. Although metalworking involves a range of processes, the sector is dominated by the plate-forming business. Its comparative advantage has been in filling small orders for simple metal products or components, mostly for household appliances and handicrafts, but also for furniture and, to a lesser extent, for parts and components for the general machinery and automotive industries. The small size of workshops gives them greater flexibility, and Tegal’s abundant cheap labor can outweigh the productivity advantages of more capital-intensive production. There is often intense price competition between workshops. In terms of size of production and level of production sophistication, there are two types of workshops in the Tegal metalworking industry: MEs and LEs form one type, called inti, and SEs and MIEs form another type, called plasma. Inti workshops receive orders for metal components from firms outside the district. Especially large inti workshops with total employees up to 100 men derive a majority of their income from subcontracting. During the survey in 2005, several companies (mostly LEs) subcontracted work to Tegal metal workshops, including PT. Komatsu Indonesia Tbk, PT. Daihatsu, and some divisions of the Astra Group such as PT. Sanwa, PT. Kubota, and PT. Katshusiro. These companies often source metal components from several parts of the country, mostly in West Java. Among these companies, the most prominent is PT. Komatsu Indonesia Tbk (KI), which is a subsidiary of a Japanese company. It has established subcontracting production linkages with Tegal metal workshops since 1998.16 This company produces various equipment for construction and mining activities under the global trademark of Komatsu, such as hydraulic excavators, bulldozers, motor graders, frames and related components, steel cast products, as well as off-highway dump tracks. This case study focuses only on KI and its local subcontractors. Plasma workshops usually hire cheap, unskilled labor or use family members (mainly men) as unpaid workers (helpers); the owner passes basic
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metalworking skills on to his employees, leaving the technical capacity of the workshop highly dependent on the technical capacity of the owner. Inti workshops often subcontract part of their production to plasma workshops. Local workshops which have no subcontracting businesses with other firms manufacture entirely for wholesalers and retailers or sell their products directly to local consumers. Many wholesalers and retailers purchase goods from Tegal metal workshops for resale in stores in the country’s cities. In general, the technical capability of the Tegal metal industry derives from a long history of family experience in metalworking or similar industries. With accumulated technical knowledge of over 20 years, since the first subcontracting activity started in the district, sparking government activity to develop the metalworking industry, the Tegal industry is now capable of producing various kinds of agricultural and industrial machinery as well as automotive and ship components. However, the quality of most of its products is low. Only in a few firms whose core businesses cater to customers such as KI does the need for consistent product quality become a concern. In such firms, the ability to translate technical drawings and to manufacture products according to listed or drawn specifications is actively developed (Iman and Nagata 2002). Tegal metal industry’s main external technology providers are LEs, mostly foreign affiliate companies such as KI that transfer technology to their subcontractors (i.e. inti workshops), and to a lesser extent local government. Inti subcontractors supply heavy equipment components to KI. Some domestic retail market suppliers also act as knowledge providers by informing metal workshops about consumer preferences, demand, and innovations. One workshop owner who was interviewed stated that the retailers created new products and commissioned them from the local small workshops. While for KI quality is the first priority, retailers generally emphasize low cost over quality. For many small workshop owners (mostly from the MIE category) who were rejected by KI as their inti subcontractors because they did not have the capacity to produce high-quality components (they did not have the required machinery, manpower, facilities), the wholesale/retail market is their only source of business linkages. They sell to this market a limited range of simple final products, that is, pulleys and ship windows. While these retailers may demand a sample product, there is much less emphasis on precision. Or, if they are lucky, they can become plasma for KI’s existing inti subcontractors. To access technology from KI, however, a workshop must have attained a certain level of technical and managerial capacity. Larger workshops are more likely to adopt new technologies in their bid to become subcontracting inti to KI. By building upon existing technical and managerial capacity, they are able to enter a virtuous circle where quality output leads to subcontracts which lead to private training provided by KI.
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To become subcontractors, local firms must prove that they have the capacity to produce high-quality components and meet the stringent delivery times. An audit determines whether they have the required machinery, manpower (i.e. they must have enough manpower to have two shifts for higher productivity), production facilities and legal standing,17 and whether they observe ISO standards.18 After that, they are requested to produce a sample component from technical drawings provided. According to KI’s inti workshop owners interviewed, before an agreement is signed KI often asks for a trial run of the mass production process, subjecting the output to quality-control tests. If they could produce a certain product item to a regular schedule and consistent quality, they would then be granted a license for manufacturing different product items, thereby expanding their productlines. In the last two years (2003–4), many suppliers have been tried through a few initial batch orders, but in the end only four local enterprises were able to meet KI’s requirements; two of them were included in the sample.19 During the survey conducted in 2005, it was found that MEs and to a lesser extent SEs are more able than MIEs to meet such requirements. Only some MIEs have indirect subcontracting with LEs through plasma relationships with inti subcontractors. From interviews with owners of MIEs, lack of capital, limited skill, and lack of access to information appeared to be the three most important constraints. They did not have enough money to purchase the required machinery or to hire many workers (generally, MIEs are self-employment units without helpers or hired workers). They often use second-hand or homemade equipment. Any workers hired are often lowskilled with little or no experience and rely on the shop-owner’s technical knowledge.20 Since many MIE owners built by their expertise working in small shops and rarely have formal academic training, they have difficulties reading technical drawings and instead rely on copying samples, leading to less accurate output. So they lack the technical ability to produce complicated components with the precision required by LEs. Also, due to a lack of information and skill, they do not now how to meet ISO standards. They said that they could not expect too much from the government. The government did give some information, but they needed direct assistance, too. After winning a contract, an inti subcontractor has access to a significant level of technical training. According to a subcontractor of KI, training directly addresses the technical needs of the workshop in meeting the production requirements of KI. Indonesian experts from the Jakarta KI office conducting the training use a teaching style that clearly delivers the necessary knowledge and emphasizes practical application, with 90 percent of training time spent in hands-on experience. Trainers also help the workshop identify problems and troubleshoot. However, according to the owners of these two inti workshops subcontracting to KI, the training does not seek to develop their capabilities beyond those of low-cost production centers for selected components. Moreover,
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KI does help them gain the capacity to manufacture component parts, but there has been little interest in upgrading from specialized parts manufacture to the manufacture and assemblage of finished products. For workshops that were rejected by KI (or other LEs) as inti subcontractors, the only source of technology or knowledge is from retail suppliers, or from inti subcontractors if they have subcontracting linkages as plasma, or they depend largely on untargeted, irregularly publicized government programs, which may not suit their needs. Some interviewed MIE owners who sell their products only to retail markets said that strong competition among retail suppliers inhibits knowledge transfer and, instead, encourages the production of low-quality, inexpensive products. Plasma subcontractors gain from the incentive to produce higher-quality goods for a higher price with technical coaching from their inti clients in their own virtuous circle. Inti respondents for auto components, for instance, turn to plasma workshops to produce 10–15 percent of their orders from their clients, usually components of components or basic parts made more cheaply in small workshops while still passing the quality control test. Often soft loans are provided to plasma to help them acquire new machines capable of higher-quality output. Inti and plasma involved in subcontracting are more likely to use the Unit Pelayanan Teknis (UPT) Lab, especially to test the quality of materials. They are more likely to offset laboratory usage costs through the higher prices paid by their clients for quality parts. Learning takes place through quality control as inti often build a procedure for troubleshooting mistakes into their subcontracting relationships. Inti workshops engage in coaching plasma on quality-control standards and in some cases support former employees already familiar with these standards in starting up plasma.21 Notably, producers in the Tegal metalworking industry have a tradition of collaboration, as indicated by the important role of the recently initiated Takaru cooperative. This activity has a strong flavor of business and technology which is based on market requirements, and it has produced a hand tractor for the domestic market. “[T]he manufacturing of customized hand tractor is considered as a ‘bonding agent’ for this collaboration” (Pantjadarma, 2004, p. 20). The production of this hand tractor involves 17 firms producing different parts. The Takaru cooperative organizes, assembles, and performs quality-control checks. The latter requires a certification process, and this has to be conducted by other institutions including a government research laboratory (Pantjadarma, 2004). However, from the interviews and focus group discussions it appears that in general knowledge transfer among small workshops is often contingent on personal networks and conditioned by competition. Especially among workshops producing for the retail market, competition sometimes becomes “unhealthy”, which has the opposite effect, inhibiting knowledge diffusion among them. For example, a competing firm bought off a shop-owner’s
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driver after a marketing trip and followed up with lower bids to the same potential clients. Many workshop owners were worried about firms’ tactics to reduce production costs, often at the expense of quality. Some workshops find the right combination of cheap scrap metal to get their products to pass buyers’ inspection standards, but these lower-quality items wear out more quickly and do little to strengthen the reputation of the Tegal metalworking industry as a whole. This cost cutting in turn creates price pressure forcing competing workshops into a race to the bottom in terms of quality. It also appears from the interviews that training provided by KI has proven to be the most successful method of efficiently transferring knowledge to its inti workshops. While government-led initiatives attempt to cover a broader range of workshops, and with more topics, they did not result in the efficient transfer of high-quality, usable knowledge to inti workshops. According to respondents who participated in government training, this activity was poorly targeted, often exceeding respondents’ skills or not suitable for the machinery available or, conversely, focusing on skills respondents had already mastered. Those who received training initiated by LEs state that private training materials are very suitable for improving their business. Focus group discussions and interviews with local government representatives and some local non-government organizations (NGO) reveal that the lack of sufficient funds, a small number of skilled staff dedicated to the effort, and weak feedback mechanisms between government and metalworking shops are other important factors that made government training not very successful in systemically improving the skills of local firms. This case study reveals two most important facts. First, despite some limitations, MNCs such as KI are indeed very important as a source of technology transfer to local SMEs. KI is able to increase the technology and hence production capability of its inti subcontractors, and indirectly, plasma workshops that have subcontracting links with the inti. This finding is supported by Blomström and Sjöholm (1999) from their analysis of statistical data of Indonesia showing that industries with a large presence of MNCs are able to increase the production capabilities of local companies. However, MIEs in particular are largely excluded from direct transfer of technology, as MNCs are more likely to subcontract parts of their production to local firms which already have a certain level of technology capability, and these are mostly MEs and to a lesser extent SEs. This supports the general view in the literature that the more absorptive capacity local firms have, the more they benefit from the transfer of technology. The two most successful local inti subcontractors to KI are PT. Prima Karya (Box 5.1) and PT. Karya Paduyasa (Box 5.2). Second, although local SMEs’ technical capabilities in the cluster are generally low, many of them, mostly SEs and MEs, have the capability to innovate, as they were able to progress from making relatively simple products to supplying metal components with higher grades of precision on a consistent basis. Such at least was demonstrated by the KI’s inti suppliers.
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Box 5.1
Profiles and histories of PT. Prima Karya
PT. Prima Karya specializes in making parts and components for heavy equipment. It was formally incorporated in 1983, beginning operations with the manufacture of spray cans and agriculture machinery such as hand tractors. Currently, the company has 50 employees, of whom more than 50 percent are high-school graduates or under, and two are university graduates. The company’s first experience as a subcontractor started in 1985, as it won a contract with a large local conglomerate to manufacture large quantities of “coffee peeler” machines (the contract was later terminated due to the economic crisis in 1997/8). Currently, the company is one of the inti suppliers for KI, and has also succeeded in becoming one of the prime local suppliers for Natra Raya (NR), an affiliate of U.S. Caterpillar, which came to Tegal in search of potential suppliers. It has managed to expand its product lines to more than 100 items supplied to KI and to NR on a regular basis. Total turnover in 1999 was Rp 650 million; it has increased continuously though only slightly in recent years. The company virtually was a manufacturer of heavy equipment parts, including engine tools, dashboards, and forklift parts. It expanded its operations to include the manufacture of pumps, agricultural equipment, parts for scales, and door railings for sale to the general market. These jobs were merely incidental orders received along with the routine work the company does for KI and NR. Prospects for growth are extremely favourable. However, the company is chronically short of working capital because payments are made only after the final products are manufactured and delivered. The company has great innovative capability. The fact that the company was able to progress from making relatively simple products to supplying metal components with higher grades of precision on a consistent basis demonstrates its ability to learn and to increase its skills. This ability is largely attributable to the owner, who has been vigilant in solving on-site technical problems. According to the owner, being accepted as a prime KI supplier was his company’s first milestone, a role which requires in advance the ability to translate technical drawings and to work toward the final product. Another prerequisite fulfilled by PK as a prime KI supplier was a level of quality that ensured that no rejects were classified as fatal; the company was able to correct defects easily and ship the products back to KI. The company reached the second milestone when it was presented with the challenge of supplying a large complex piece associated with engine hoods. Making the first sample proved to be quite difficult, since the inappropriate machinery available at the time had to be used.
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(Continued)
Even with several days’ help by an expert from KI, the company was still unable to produce a satisfactory sample according to specifications. After several trials driven by the persistence of the owner, PK finally sent the finished sample to KI at the end of the week. Approval was achieved not long afterwards. All jigs and fixtures that allow assemblage and welding on a consistent basis are built by the company itself. Much of the machinery is developed in-house, such as large bending and pressing machines, with up to 70 percent local content. This level of accomplishment demonstrates the experience and skills the company has acquired, largely in tacit form, as it has overcome each major challenge. One of the benefits obtained by working with KI is the opportunity to send employees for training at KI’s facility in Jakarta.
Box 5.2
Profiles and histories of PT. Karya Paduyasa
PT. Karya Paduyasa has three plants, each with a specific production objective, namely: (i) casting, principally hydrants and fire monitors; (ii) incidental job orders, usually in small lots; and (iii) a stamping process especially for large parts and automotive components. It began by making textile equipment and parts in Jakarta in the 1950s. After the company moved to Tegal, it diversified into making agricultural tools and machinery. While rapidly diversifying its product base, it improved its productive capability. Among the important achievements of the company was the development of the casting capability to produce hydrants. Hydrant manufacturing was driven by government contract. At the peak of production, the company made around 200 units per month. One major milestone for the company was to be selected as one of the few local prime suppliers of heavy equipment for KI and NR. Furthermore, because of its ability to deliver the products in timely fashion with consistent acceptable quality, KP’s base of product lines in the heavy equipment business expanded rapidly. However, the company manufactures fewer items than PT. Prima Karya for both KI and NR. Recently, a sign of positive growth emerged as hydrant orders began to increase to 10–20 per month, with a similar increase in orders from KI and NR. However, because of the arrangement under which payments are sent only after the final products are manufactured and delivered, the company suffers from shortages of working capital, especially after the substantial layoff of workers. (continued )
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Box 5.2
(Continued)
The company has ample facilities for metalworking operations, which range from casting to welding to finishing. More impressive, however, is the company’s ability to make an increasingly complex range of products as it acquires experience over time. As noted previously, this ability was a key factor in PT. Karya Paduyasa being chosen as one of the regular suppliers of KI and NR. The company’s most recent accomplishment was its expansion into the manufacture of automobile components for an auto manufacturer. This move was soon followed by the construction of a plant dedicated to the stamping process. The company equipped the plant with its own dyes and fixtures, and also set up a small crane to make a large heavy bottom piece for a tractor. It manufactures many of the machines and tools it uses in this plant. Its dedication to efficiency is also demonstrated by its efforts to minimize waste from paint spraying by constructing six large fans directed at a pool of water to capture paint droplets. The stamping plant’s overall facilities are well organized and maintained. Finally, the company devotes considerable attention to skill development. It provides incentives to employees to participate in various training activities at other locations by covering their travel and accommodation expenses.
So the findings may suggest that currently, within SMEs, MEs will gain more from the presence of FDI than their smaller counterparts, as they are better able to meet the requirements for becoming subcontractors. An optimal spillover effect thus depends on cooperation between MEs (as the first technology recipients) and SEs.
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6
6.1
The regional picture
The development of viable and efficient SMEs is hampered by several constraints. These constraints may differ from region to region, between rural and urban areas, between sectors, or between individual enterprises within a sector. However, certain constraints are common to all SMEs, including the lack of capital, human resources, technology, and information; difficulties in procuring raw materials, marketing, and distribution; high transportation costs; problems caused by cumbersome and costly bureaucratic procedures, especially in obtaining the necessary licenses; and policies and regulations that generate market distortions. Based on recent, though limited, information, such as government reports, national surveys, and case studies, Table 6.1 shows that there are a number of constraints common to SMEs in Asian developing (with sign ), although the degree of importance of each constraint varies by country, depending on differences in many respects including level of SMEs’ development, nature and degree of economic development, public policies and facilities, and of course the nature and intensity of government interventions toward SMEs. The constraints include lack of capital. With limited working capital as well as investment capital, it is hard for these enterprises to expand their production or to innovate and hence to improve their competitiveness. The lack of capital is mainly due to the lack of access to banks or other formal financial institutions. In many Asian developing countries, this problem is experienced mainly by SMEs located in rural or backward areas. In Indonesia, for instance, most rural SMEs never received any credit from banks or from existing government-sponsored SME credit schemes. They depend fully on their own savings, money from relatives, and credit from informal lenders for financing their daily business operations. Other common constraints are lack of technology or skilled workers, and difficulties in marketing. The former is the most important reason for SMEs lagging behind their larger counterparts in GDP contribution or productivity 159
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Development Constraints
Indonesia Philippines Vietnam Cambodia Lao PDR Thailand Malaysia Brunei China India Pakistan Bangladesh Nepal
Raw Marketing Capital Energy* Information Tech. & Infrastructure Tax Inflation Market Labor materials and skill environment** issues
* Includes electricity. ** Includes regulations, restrictions, legal framework, law and order, and discrimination policies in favor of LEs/MNCs. Sources: Indonesian BPS, ADB (2002a, 2005), Tambunan (2007c, d, e), Aldaba (2008), Cuong et al. (2007, 2008), Rand and Tarp (2007), Long (2007), Bailey (2008), United Nations Industry and Development Organisation (UNIDO) (2004), Kyophilavong et al. (2007a, b), Wiboonchutikula (2001), Leopairote (1999), Kecharananta and Kecharananta (2007), BNM (2003), DOS (2005), Ministry of Industry, Mines and Energy of the Kingdom of Cambodia, Jajri and Ismail (2007), National SME Development Agenda 2000/2001, Census 2005 (Malaysia), OSMEP (White Paper on SMEs in Thailand, various years), Anwar (2000), Xiangfeng (2008), Islam et al. (2001), Das (2008a), and Mustafa and Khan (2005), Hossain (1998), Ahmad et al. (1998), Bakht (1998), Moazzem (2006), Maskey (2001), Maskey and Manadhar (2001), International Labour Organization (2002; 2003; 2005), Khanal and Dahal (2008).
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Country
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Table 6.1 Four most important constraints facing SMEs in Asian developing countries
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and competitiveness. The lack of technology and skilled workers means lack of innovation necessary required for quality improvement and higher productivity, and hence output growth. This problem also affects SMEs’ ability to market their products, since it becomes more difficult for them to compete in domestic markets against similar imported products or in export markets against suppliers from other countries. In marketing, many SMEs do not have the resources to explore their own markets. Instead, they depend heavily on their trading partners to market their products, within the framework of either local production networks and subcontracting relationships or orders from customers.
6.2
Detailed evidence from selected countries
6.2.1
Indonesia
In 2003, BPS published its results on SMEs in the manufacturing industry. With respect to their main constraints, as presented in Table 6.2, it reveals that not all of the surveyed producers consider lack of capital as a serious business constraint. Those who faced capital constraint were mainly MIEs located in rural or backward areas, and they never received any credit from banks or from various existing government-sponsored SME credit schemes. They depend fully on their own savings, money from relatives, and credit from informal lenders for financing their daily business operations. “Others” include cumbersome and onerous business regulations and restrictions. Basically, these problems which hamper business activities in Indonesia reflect the poor governance in the country. One of the most egregious restrictive regulations which hampered bona fide business in Indonesia, Table 6.2 Number of SEs and MIEs in manufacturing industry by main problem, 2003 SEs
MIEs
Total SEs and MIEs
Have no serious problem Have serious problems – lack of or high prices of raw material – marketing difficulties – lack of capital – transportation/distribution difficulties – high price of or short supply of energy – high labor costs – Others
46,485 192,097
627,650 1,862,468
674,135 2,054,565
20,362 77,175 71,001
400,915 552,231 643,628
421,277 629,406 714,629
5,027
49,918
54,945
4,605 2,335 11,592
50,815 14,315 150,646
55,420 16,650 162,238
Total SEs and MIEs
238,582
2,490,118
2,728,700
Source: BPS.
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Development Constraints
SMEs in Asian Developing Countries
including SMEs, was the policy-generated barrier to domestic competition and trade. These policy-generated barriers included barriers to inter-regional and inter-island trade and the proliferation of state and private monopolies during the late New Order era. These barriers to domestic competition and trade included barriers to entry in certain economic activities, officially sanctioned cartels and monopolies, price controls, the dominance of SOEs in certain sectors, and preferential treatment for selected favored LEs. However, shortly after the 1997/98 economic crisis, with the help of the International Monetary Fund (IMF), Indonesia started to implement major economic reforms in almost all sectors and in almost all aspects of daily business, which reduced the dominance of SOEs in the economy. From its assessment of SMEs, especially their export performance in Indonesia, ADB (2002b, p. 34) concludes that Indonesian SMEs have substantial growth potential. However, these enterprises have to face many obstacles. On the supply side, the obstacles include (i) strengthening of the rupiah exchange rate, (ii) lack of security and unreliable law enforcement, (iii) high transaction costs due to corruption, (iv) frequent industrial action in support of demands for wage increases, and (v) lack of access to formal credit. With respect to the latter, the report argues that although several government departments and agencies are involved in promoting SME exports, including the National Agency for Export Development (NAFED), the Indonesian Export Training Centre (IETC), and the Export Promotion Board (all belonging to the Ministry of Industry and Trade), a majority of export-oriented SMEs in Indonesia have no easy access to formal credits, and this situation makes it difficult for them to expand their production and hence export or to improve the quality of their exported products. On the demand side, increasing competition is emerging from other countries, especially in footwear, fish and shrimps, chemical products, spices, coffee, tea, and jewelry, which involve mostly SME suppliers. These Indonesian products are losing against similar competitive products from emerging economies such as the People’s Republic of China, India, Thailand, and Vietnam. 6.2.2
The Philippines
In his study of SMEs in Laguna, Sugiyama (2000, p. 20) finds that SMEs in the Philippines are not performing to their full potential, because they face four main problems, namely, a weak financial foundation, weak market positioning, a low level of product development, and an insufficient support system. These problems are not separate but are interrelated. As a result, it is difficult for SMEs to expand business. These findings are supported by the most recent study from Aldaba (2008). With respect to the financial problem, she argues that it seems not to lie in the supply of funds potentially available for lending to SMEs but in the difficulty of access to these funds. In theory, as she explains, there should be
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sufficient funds for SME finance since banks in the Philippines are required by law to allocate 8 percent of their loan portfolios to SME financing. At the same time, government financial institutions have their own financing programs. Nevertheless, private banks are reluctant to lend to SMEs because of their general aversion to dealing with a large number of small accounts. Moreover, many banks are still not aware of lending to small businesses and still rely on collateral. Many SMEs cannot access available funds due to their limited track record, limited acceptable collateral, and inadequate financial statements and business plans. Aldaba’s study provides time-series data on the compliance of banks with mandatory credit allocation to SMEs in the Philippines, which are presented in Table 6.3. It shows that banks appeared to be generally complying (directly or indirectly) with the mandatory lending to SMEs, the total compliance rate reaching almost 29 percent in 2002. However, as she states in her study, based on anecdotal evidence, many of these funds did not actually go to SMEs but to certain LEs that deliberately understated their assets and in order to be classified as MEs. These loan funds, particularly from large banks and financial institutions, hardly benefited SMEs. Aldaba also deals briefly with other SMEs’ problem areas, including technology and raw materials. With respect to the former, she observes that many SMEs are not knowledgeable about technology, and most of them used poor or a low level of technology. With a low level of technology, production methods are generally inefficient, which leads to inconsistent product quality, a low level of productivity, and lack of competitiveness. The problem is also manifested in high wastage of materials, high rates of reworking, and inability to meet deadlines. However, the condition differs within the group, with SEs, as more labor-intensive units, having more difficulties with technology, while MEs, as more technology-intensive units, have fewer difficulties.1 Table 6.3 Compliance of banks with mandatory allocation of credit to SMEs (in P billion) Year
Total net loan portfolio
Compliance Direct
2000 2001 2002 2003 2004 2005 2006*
0.99 0.99 0.94 1.05 1.07 1.10 1.23
0.21 0.23 0.23 0.22 0.22 0.23 0.23
Indirect
0.02 0.02 0.04 0.01 0.01 0.01 0.01
Total Value
%
0.23 0.25 0.27 0.23 0.24 0.24 0.24
23.48 25.05 28.82 22.39 22.32 21.99 19.63
*As of September 2006 Source: Aldaba (2008, p. 237).
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Development Constraints
SMEs in Asian Developing Countries
Raw materials raise two issues. The first issue concerns the low quality of raw materials used by SMEs, which in turn leads to low-quality products. On this matter, Aldaba argues that the problem is caused partly by a lack of common support facilities like testing centers and standardization agencies, whether supplied by the government or by the private sector. With respect to quality management system standards such as the ISO series, SMEs do not invest in them because of the high costs involved along with the high degree of formalization and documentation required. The second issue relates to the supply-chain management problems confronted by many Philippines SMEs, from the sourcing of their raw materials to problems in processing, packaging, and distribution. Many SMEs find it hard and costly to access raw materials and other inputs, primarily due to the general problem of sourcing and transporting raw materials which, according to Aldaba, can be attributed to infrastructure and communication problems in the country. Government tariff policy also raises the costs of key intermediate inputs. 6.2.3
Vietnam
With their brief history, SMEs in Vietnam are still in their infancy of development, and, as a consequence, they have more difficulties, including political ones, than are currently experienced by SMEs in other countries such as Indonesia, Thailand, Malaysia, and the Philippines, in further development. Indeed, the SMEs in Vietnam have long been depressed and have enjoyed the de jure freedom to conduct business only since 2000 (Cuong et al., 2007; 2008). According to research by Cuong et al. (2008, pp. 362, 358–9), SMEs in Vietnam currently face a number of constraints. First of all, a long-lasting constraint for SMEs’ development in Vietnam lies in the very philosophy or advocacy of retaining the leading role of inefficient and ailing SOEs announced explicitly in many Communist Party documents and national economic policies. For example, the Strategy for Socio-Economic Development 2001–2010 proposed that the leading role of the state economic sector, governing key domains of the economy, be enhanced; SOEs are to be renewed and developed, ensuring production and business efficiency. More specifically, SOE development is to take place in a range of domestic and international markets, such as petroleum, electricity, coal, aviation, railways, and highways. Since SOEs still play the “de jure” leading role in the national economy, the private sector in general and SMEs in particular still suffer from discrimination and their development is thus hindered (Cuong et al., 2008, pp. 362, 358). Additionally, SMEs have often been crowded out from government procurement biddings. For instance, ADB (2005, p. 23) reveals that only about 10 percent of private enterprises in Vietnam were able to participate in publicly funded projects in the 2000–2 period. Second, the poor rule of law and unfavorable business climate hinder the development of SMEs. According to Cuong et al. (2008) research, despite
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improvements since 2000, the legal framework still suffers from overlapping, complexity, contradictions, slow implementation, and an absence of effective reliable mechanisms for resolution of commercial disputes. Additionally, Vietnam’s overall business environment is still low in international rankings, and serves as an impediment to the development of higher value-added domestic industries. The cumbersome administrative procedures and poor rule of law have made the business environment unattractive despite improvements in recent years.2 Third, there are still three bottlenecks in SMEs’ development, namely, underdeveloped infrastructure, poor quality and insufficient human resources, and lack of solid supporting industries. The first two bottlenecks have resulted in high costs of doing business, low competitiveness, and poor capacity to absorb technology on the part of SMEs, while the third hinders SMEs from subcontracting with LEs, especially foreign firms. Fourth, SMEs in Vietnam suffer from what they call ‘traditional’ constraints of development such as limited or unequal access to production factors including capital, an absence of effective, reliable dispute-resolution mechanisms, and underdevelopment of business development services (BDS). Unlike in Indonesia, for instance, BDS in Vietnam is still in its embryonic stage of development (equivalent to 1–2 percent of GDP). Many researchers agree that the most pressing common constraints on Vietnam’s SMEs are the limited or unequal access to credit and to suitable land or business premises. In the survey by Rand and Tarp (2007, p. 20) about 26 percent of total respondents stated that the government should provide easier access to credit, and 22 percent said that they needed assistance in obtaining premises or land. As for the main constraint when new businesses are starting up, almost 30 percent of the sampled firms cited lack of capital and almost 14 percent cited difficulties in finding premises. Notably, the limited or unequal access to credit is caused by other persistent constraints such as (i) crowding out by SOEs (especially access to credit); (ii) weak credit evaluation systems (few mechanisms for evaluating the creditworthiness of borrowers); (iii) a weak creditor rights regime (the cumbersome procedure to foreclose on assets pledged against a loan have made banks reluctant to lend or severely discount the value of assets pledged); and (iv) cumbersome collateral requirements (land-use right certificates).3 Another important study which also provides a good account of the current constraints facing Vietnamese SMEs is by Long (2007). He, too, found that the lack of access to credit affected most SMEs. Obviously, as is also evident in other Asian developing countries, loans from informal sources play a more important role than formal loans (from banks, for example) in financing SMEs’ activities in Vietnam. Long cites two surveys, from the Vietnam Ministry of Labors, War Invalids and Social Affairs in 1999 and from Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) in 2005. The first survey indicates that a majority of the total firms surveyed were facing capital shortages, and
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Development Constraints
SMEs in Asian Developing Countries
so they depended heavily on their own savings or borrowed from friends or other informal sources to finance their business activities. A similar picture is provided by the 2005 survey by GTZ in seven provinces. It shows that finance from family and friends accounts for 63 percent of total informal sources, followed by funds from state-owned commercial banks (49 percent). This financial structure implies that access to formal credit is difficult for SMEs, and it is indeed a major obstacle to the operation and business expansion of the enterprises. However, the situation has improved in the last few years, as the GTZ survey shows that only 37 percent of the sampled SMEs face difficulties in obtaining credit. Of these, 62 percent complained about the high interest rate or fees, 38 percent about the troublesome procedure, 18 percent about lack of collateral acceptable to the banks, and 15 percent about the unfair treatment in comparison with SOEs. SMEs are unfairly treated in comparison with SOEs when trying to access credit. As explained in Long (2007), although the Vietnamese government has made some changes in the SOE sector, they are insufficient to promote innovation. Without continued reform of the SOEs to reduce the privileges enjoyed by the leading SOEs, and without thorough reform of the state-owned financial system to raise the share of long-term credits going to the private sector, it will be very difficult for Vietnam’s dynamic SMEs to fulfill their potential as innovators for the economy. According to Long, the complaint about high interest rates expressed by the majority of the surveyed firms contrasts with the fact that the commercial interest rate in Vietnam is not very high. As Long explains, it could be that SMEs are not familiar with the habit to getting loans from bank. This is also suggested by the large number of surveyed SMEs complaining about banking troublesome procedures. Moreover, the much lower share of loans to SMEs from private joint stock banks than from state-owned banks (15 percent versus 49 percent) show that the role of private banks is still very limited. Another serious obstacle experienced by many Vietnamese SMEs cited in Long’s study relates to land and land-use rights. Land for SME activities is lacking. Long found that obtaining land-use allocations or leases for SME offices and factories is fraught with many difficulties and, in many cases, is impossible because the means of acquiring and exercising land-use rights are not clear and often not recognized for SMEs. Above all, the rights to sell, buy, transfer, and mortgage land-use rights for collateral are still not recognized for industrial land. In a survey of 452 new investment projects in 2001, cited by Long, it was found that only 17 of the projects were from the private sector. Although applications for land-use allocations or land lease were submitted by all 17 projects, only one of these projects was provided with land. Although it is widely accepted that land-use rights are very important for business activities in general and SMEs in particular, in Vietnam their legal status is a serious problem, resulting in higher land usage costs for SMEs. Land-use rights are a convenient form of collateral and so this problem results in higher fund procurement costs for SMEs. The
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land-use rights held by the SOEs were either allocated by the government or leased under long-term contracts, while non-state-owned SMEs have very limited access to land-use rights. It is very rare for them to have such rights allocated to them by the government. The most common cases are (i) the director’s house also serves as the office or production site, (ii) land is leased from an individual, (iii) land is leased from an SOE, and (iv) land is leased from provincial People’s Committee. Long’s (2007) study argues that the main problems for non-state-owned SMEs involving land-use rights in Vietnam are (i) lack of information about properties, (ii) a comparatively higher cost of land, and (iii) increased fund procurement costs. The first problem means that the SMEs have to shoulder additional costs in searching for adequate properties for their production sites, while SOEs are allowed to use wide swathes of land in the cities which in many cases are not put to effective use. The second major problem is that SMEs frequently have to lease their land-use rights from individuals or SOEs, which means that the costs are higher than those paid by the SOEs. There are three types of levy on land-use rights: land use fees, land use tax, and land lease fees. The taxes on land-use rights allocated by the government are generally the lowest as payments are made based on the fixed rates. On the other hand, as explained further by Long, costs are higher when landuse rights are leased from individuals or SOEs as the payments are based on prevailing market prices. Moreover, the leasing periods are usually short and so SMEs have the risk of being forced off the land when the lease expires. The third problem is that the land-use rights are the most effective means of collateral for receiving loans from a bank. Accordingly, whether or not a company holds land-use rights will have a big impact on its ability to procure funds. Legally, land-use rights leased from the government can be used as collateral. However, in the case of leases, the collateral value is based on the lease period paid in advance, and so if the lease period is long, the SMEs will need to have plenty of capital to make the advance payment for it.4 6.2.4
Cambodia
A recent study by Bailey (2008) indicates that the still uncertain business climate in Cambodia, despite government’s efforts to reform the economy and to support the development of private sector, exacerbates the problems of SMEs, especially in respect of the physical and human capital available to them. Corruption, poor governance, weak courts, and poor infrastructure impose excessive costs and uncertainties on the Cambodian private sector. As Bailey shows, up until 2004 there was no single department controlling SME promotion policies. As many as 25 different ministries and organizations have developed their own SME promotion strategies, regulations, and policies focusing on achieving various outcomes. This increases the compliance cost for SMEs. For example, an SME garment manufacturer headed by a female entrepreneur will be subject to regulations and policies from, at a minimum,
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Development Constraints
SMEs in Asian Developing Countries
the Ministry of Commerce (MOC), the Ministry of Women’s Affairs, and the Ministry of Environment. These policies address many barriers hampering commerce and therefore SME development. But it is only within the last few years that the government has focused on removing barriers specific to the development of SMEs (Bailey, 2008, p. 12.) Bailey examined a number of surveys conducted by various organizations, including the World Bank (WB), the Asian Development Bank (ADB), and the Cambodian SME Sub-Committee (CSMESC), which have all identified a similar set of barriers impeding the development of Cambodian SMEs. For instance, the CSMESC survey has identified the three most important issues and their associated problems specific to the development of Cambodian SMEs (Table 6.4). The same three issues have been acknowledged as important by the WB and the ADB for the country’s commerce and SME development. Regarding regulatory and legal framework, Cambodian firms are exposed to burdensome and often unnecessary regulations with uncertain interpretations. Most firms surveyed by the WB in 2004 (cited in Bailey, 2008, p. 14) claimed that tax, customs, and other regulations were at least a moderate constraint on their operations. Cambodian enterprises are inspected by various government departments on average 16 times per year. This compares with India (five inspections per year) and Bangladesh (seven inspections per year). Each inspection imposes opportunity costs on the business manager, with inspections lasting for up to two days. Inspections also provide officials with opportunities to demand bribes. Almost half of Cambodian firms claimed that regulatory interpretations were inconsistent and unpredictable. Frequently officials would charge an informal “facilitation fee” for processing documents necessary for trading. Table 6.4 Barriers to SMEs doing business Main issues Regulatory and legal framework
Access to banks and other formal financial institutions
SME development support activities
Associated problems – – – – – – – – – – –
Company registration Licensing requirements Commercial legal framework Smuggling Collateral and land titling Leasing Lack of credit information SME accounting Business development services (BDS) Access to input and output markets Technology and human resource upgrading – Improving business linkages
Source: Bailey (2008, p. 15).
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As cited by Bailey (2008, p. 16), the CSMESC has identified four areas as being the most damaging to SME development in the regulatory and legal framework category, namely (i) company registration; (ii) business regulations; (iii) a weak legal commercial framework; and (iv) a high incidence of smuggling. With respect to the first area, the CSMESC has identified the financial and time constraints of registering a company as a significant issue facing SMEs. Up to 2004, registering firms were required to have a minimum amount of capital of USD 5,000. It took on average 94 days, 11 procedures and a cost of over five times per capita GDP for a Cambodian firm to register. This is among the highest cost in the region in terms of both time and financial burden. By comparison, in Vietnam it took 63 days and 30 percent of per capita GDP; in Thailand it took 42 days and 7 percent of per capita GDP. In Singapore it took only eight days to start a business in 2003. These constraints have motivated many firms to remain informal, which has negative implications for SME development, since unregistered firms have more difficulty than registered ones in accessing all formal supporting agencies, including banks and other financial institutes. Also, unregistered firms are quite often not aware of, and therefore unable to take full advantage of, the policies designed to benefit SMEs. But, as in Indonesia and probably also in other developing countries, many unregistered firms find more benefit or less cost in staying informal rather than transforming themselves into formal entities. Access to finance is also a primary issue identified by a number of institutes, including the ADB and the Cambodian Development Resource Institute (cited in Bailey, 2008, p. 22). In 2004, Cambodian firms received over 98 percent of their capital from informal sources. Only about 1 percent of investment capital and slightly more than 1 percent of working capital was provided by commercial banks. This problem is reflected in the increase in the cost of borrowing money from banks, the limited size of loans, and the short period for which SMEs can borrow money. All these have restricted the ability of SMEs to purchase machines, production tools, and other inputs needed to increase and to improve their production. Data show that loans are more common in the manufacturing sector, but, according to Bailey, this is likely the result of borrowing by LEs rather than SMEs. Generally, SMEs’ access to finance in Cambodia is currently constrained by four main factors: (i) a lack of collateral; (ii) an inadequate legal framework and poor contract enforcement; (iii) a limited number of financial products on offer; and (iv) an inability of SMEs to prepare basic financial statements.5 Banks are typically reluctant to extend credit unless the borrower can provide property as collateral for the loan. The weak legal system and a lack of traceability make banks unwilling to accept anything other than immobile property as collateral. Unless the land has legal title, transaction costs are increased by the banks’ efforts to verify ownership. These costs are passed on to the borrower in the form of higher interest rates (Bailey, 2008, p. 23).
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Development Constraints
SMEs in Asian Developing Countries
Regarding SME support activities, services offered to SMEs by the private sector are currently still inadequate. In particular there is a lack of adequately trained private sector providers connecting buyers with sellers or providing employment-specific training. The SME Sub-Committee identifies four main areas where SMEs do not have appropriate support: (i) business development services (BDS); (ii) access to markets; (iii) linkages to value chains, government, and other businesses; and (iv) competitive technology and quality human resources (Bailey, 2008, p. 27).6 6.2.5
Lao PDR
Studies on constraints facing Lao SMEs are also limited. The available information is from the Ministry of Industry and Handicraft (MIH, 2005), UNIDO (2004), and, most recently, Kyophilavong et al. (2007a, b). The MIH (2005) and UNIDO (2004) conducted separate surveys on SMEs in Vientiane and other provinces. They paint the same picture of SMEs facing many constraints such as lack of access to finance, skills, and technology, which all lead to inefficient production and uncompetitive enterprises. To be able to grow and in order to increase Lao SMEs’ competitiveness, the surveys recommend that the enterprises should have full access, like their larger counterparts, to finance and education in order to improve their management skills, labor skills, and technology. Meanwhile, according to Kyophilavong et al. (2007a, b), the top four obstacles confronting SMEs in Laos are high inflation, a high tax rate, lack Table 6.5
Main problem areas of SMEs Vientiane municipality Number
Other Skilled labor Substitute production/ import Raw materials and other inputs Strict regulations Marketing Competition Exchange rate Capital Tax Inflation Total
%
Other provinces Count
%
Whole country
Count
%
379 2751 1674
0.71 5.16 3.14
172 1884 1090
0.46 5.06 2.93
551 4635 2764
0.61 5.12 3.05
7458
13.98
4499
12.08
11957
13.20
2084 5990 9770 5572 5564 5946 6165
3.91 11.23 18.31 10.44 10.43 11.14 11.56
1804 4974 6625 3747 4198 4222 4017
4.85 13.36 17.79 10.06 11.28 11.34 10.79
3888 10864 16495 9319 9762 10168 10182
4.29 11.99 18.20 10.29 10.78 11.23 11.24
53353
100.00
37232
100.00
90585
100.00
Source: Kyophilavong et al. (2007b, p. 6).
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of funds, and an unstable exchange rate (Table 6.5). Around 11 percent of surveyed SMEs owners said that high inflation is always a serious problem for their businesses. Approximately the same proportion of surveyed SMEs complained that the tax collection system is not transparent and that the current rate is too high, creating a serious burden for them. With respect to the third obstacle, until now there have been no banks or financial institutions dedicated to providing credit support to SMEs. Moreover, the banking sector does not have incentives to provide credit to SMEs. Therefore, SMEs mainly depend on informal moneylenders. Regarding the fourth obstacle, Laos had also suffered in the Asian Financial Crisis during 1997–8, as its national currency (the kip) was highly depreciated and remains unstable today, which leads to high-cost imported materials. 6.2.6
Thailand
Using national survey data in 1999, Wiboonchutikula (2001, p. 10) lists the main problems faced by firms of different sizes in Thailand (Table 6.6). About 65 percent of firms of all sizes admitted having problems in the areas of raw materials, labor, capital, market demand/marketing, and government policies. However, the importance of each of the problem areas varies by size group. The greatest problem for SEs is insufficient capital (including high interest rates), followed by labor shortages (including increased real Table 6.6
Distribution of number of firms by size and problems (%) Problems Ranking
%
Area
SEs
1 2 3 4 5 6
27.58 26.72 16.32 12.43 11.43 5.53
Capital Labor Marketing Government policies Raw materials Others
MEs
1 2 3 4 5 6
22.15 21.82 21.32 15.82 14.35 7.41
Capital Labor Government policies Marketing Raw Materials Others
LEs
1 2 3 4 5 6
22.97 18.46 17.89 17.48 11.45 9.09
Labor Government policies Capital Raw Materials Marketing Others
Source: Wiboonchutikula (2001, p. 10).
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Development Constraints
SMEs in Asian Developing Countries
wage) and marketing. Similarly, MEs ranked insufficient capital and labor shortages as their first and second most important problems, followed by uncertain government policies as their third most important problem. LEs, on the other hand, mentioned labor shortages (high wages) as the most important constraint, followed by uncertain government policies, lack of capital, and raw material shortages (availability or high prices). This evidence may suggest that the problems of insufficient capital and marketing tend to decrease with size, as Table 6.6 indicates that these problems are more serious for SMEs than for LEs. Indeed, in general LEs are able to raise funds from commercial banks and financial institutions much more easily than their smaller counterparts. The problems of raw material shortages and adverse effects of government policies, on the other hand, tend to increase with size. Only labor shortage seems to be considered as the first or second most important problem by firms of all sizes. It means that the labor problem, especially the increase in real wages, is a concern for firms in all industries and of all sizes. Leopairote (1999) has generalized the typical problems of Thai SMEs which made it difficult for them to expand or to reach their full potential, namely, lack of access to finance, markets, skilled workers (or poor access to government-sponsored skill development programs for their workers), better technology and equipment, vital business information, and business management skills. This list is based on a 1997 comprehensive survey commissioned by the director-general of the Department of Industrial Promotion (DIP), which focuses on SMEs (including MIEs) in the manufacturing industry. These problems were found to affect most of the surveyed enterprises. For instance, with respect to limited access to finance, most of the respondents that did not have substantial assets which could be used for collateral had no access to credit financing at all. Some respondents did have access to credit financing, but the amount of funding was strictly limited to the value of their assets as collateral, which is often very low. Regarding access to (wider) markets, as entrepreneurs in SMEs usually must perform all the tasks, including all of the management functions, they usually do not have the time or resources to reach out or to develop access to markets beyond their immediate location. Given the absence of BDS, they generally do not have knowledge or information about other markets. This has limited their ability to market their products to larger groups of customers and expand their business. This problem was found to be more serious in MIEs than in SEs, and much less serious in MEs. But this is not only a problem for Thai SMEs; the problem is obviously evident in other Asian developing countries, too. That is why most SE and MIEs depend fully on traders or collectors for marketing their products. They are powerless to make their own decisions as to the markets in which their products should be sold (Leopairote, 1999, p. 12).
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Recently, in their study of the directions of Thai SMEs’ development promotion policy and challenges in the future, Kecharananta and Kecharananta (2007, p. 15) have identified four main barriers confronting SMEs in Thailand. First is loss of ability in competition. They argue that Thai firms, especially SMEs, used to depend greatly on cost advantages such as low wages, but were very weak in technology. Second, access to capital is limited. Besides capital accessibility, the opportunity to obtain financial support from the government is also a problem, which they summarized as follows: (i) Thai SME entrepreneurs cannot raise funds from the equity market efficiently, thoroughly, and equally; and (ii) raising a loan from a financial institution is not easy for SME entrepreneurs because they lack the information, knowledge, and management standard which must be transparent and universal in both image and performance. Third, there are limitations on good governance. SMEs in Thailand mostly limit their good governance to, transparency, information disclosure, responsibility for society and environment, and equality. Thai-style SME operations focused on surviving and problem solving from time to time. Because of their short-term outlook, the SMEs’ performance is weak and disadvantaged compared with large enterprises or standardized businesses. Fourth, the Thai government’s management system in SME promotion programs is poor. Although, in the past the attempts to promote SMEs were continuous and serious, they lacked appropriate, systematic, clear, and coordinated planning and management. Insufficient integration and coordination between government agencies involved in the SME promotion programs is a significant obstacle to SME promotion. In addition, there was no efficient or tangible promotion plan for SMEs’ entrepreneurs integrating all systems into one plan called the Master Plan. 6.2.7
Malaysia
The principal problems confronting Malaysian SMEs are similar to those confronting their counterparts in other Asian developing countries discussed above, including lack of finance, especially from formal sources. DOS data from 2003 show that only 13.7 percent of SMEs treat financial institutions and government loans as the first choice of source of finance for their business operations. Own contribution or internally generated funds and borrowing from friends or family was the prime source of financing for 57.6 percent of Malaysian SMEs. Of MEs, 43.9 percent use financial institutions as their prime source of finance. Only 13.4 percent of MIEs, on the other hand, use financial institutions, preferring to rely on own contributions or internally generated funds. As SMEs grow in size, they tend to rely more on financial and commercial institutions as sources of finance. In an effort to assess the current state of SMEs and their requirements, and to identify the issues and problems faced by SMEs, Bank Negara Malaysia initiated a survey on SMEs in November 2001. The survey was conducted through the financial institutions and Chambers of Commerce. Many of the surveyed 7700 SMEs indicated a number of issues that they faced.
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Development Constraints
SMEs in Asian Developing Countries
Government support in the areas of information technology and access to information and training programs were also needed. The problems highlighted by the surveyed SMEs are the following: competition from LEs, inability to obtain loans, inability to source skilled labor, competition from new entrants, and lack of government support (BNM, 2003). The main reason why most Malaysian SMEs have no access to formal sources of credit is, as is generally found in developing countries, due to a lack of collateral. Census data (DOS, 2005) highlight this as the main obstacle faced by SMEs when seeking finance from banks and other financial institutions (FIs). This is followed by insufficient loan documentation and lack of a financial track record, as well as business viability. Almost 10 percent of respondents indicated long processing times as a problem. 6.2.8
Brunei Darussalam
Although SMEs in Brunei Darussalam have always been the focus of national development programs, and have been identified as an especially important player in the government’s industrial development and economic diversification programs, very little exists in the way of literature, studies, academic papers, or official reports on Brunei’s SMEs. Probably the most important studies are by Anwar (2000) and Islam et al. (2001). The first study presents the findings of two government surveys of SMEs in Brunei Darussalam conducted by the Ministry of Industry and Primary Resources (MIPR) in 1994 and 1997, which explicitly suggest that these enterprises are characterized by inadequate financial resources, outdated technology, labor-intensive work processes, lack of professionally trained workforce, low productivity, and lack of marketing strategy. According to this study, the MIPR has the responsibility to address the problems faced by SMEs in Brunei Darussalam. Ever since its establishment in 1989, it has been making efforts to support the small and medium-sized business sector in the country. The Industrial Development Plan for Brunei Darussalam prepared by the Manchester Business School, UK, in 1996 under the sponsorship of MIPR gave high priority to the promotion of SMEs. Various agencies in Brunei Darussalam have been coordinating their strategies to facilitate the development of SMEs. For instance, the Development Bank of Brunei provides credit facilities to small enterprises in line with the policy of the MIPR. The Business and Trade Development Council set up at the ministerial level has the authority to oversee policy and development of businesses, including small enterprises, in the country. The second study is based on the authors’ survey of SMEs in Brunei Darussalam, focusing on the importance of, and the major constraints facing, the enterprises in the economic development of the country. They have attempted to find out through their survey and interviews the constraints faced by SMEs in Brunei Darussalam. For that purpose, structured questionnaires were sent out to 110 SMEs on a random basis. The interviewers
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6.2.9
China
According to Yang et al. (2006, pp. 16–17), the problems facing SMEs in China are many and varied. The enterprises are constrained from achieving economies of scale in the purchase of such inputs as equipment, raw materials, finance, and consulting services; they are often unable to access global markets; and they are also limited in their performance in increasingly open and competitive domestic markets. Because of their size, it is difficult for SMEs to access such functions as training, market intelligence, logistics, and technology. As such, they are unable to take advantage of markets. In financial matters most SMEs, especially the smaller ones, have difficulties accessing bank credits, since they generally have shorter banking relationships and face greater asymmetries of information. Based on a large survey of SEs, Xiangfeng (2008) reports that the majority of the respondents cited the lack of a credit guarantee system as the main reason for their difficulties in obtaining loans from banks. Many respondents also considered the lack of professional information on obtaining bank loans as an important reason. Other reasons for poor access to bank finance include poor profitability, the scarcity of bank capital, poor bank valuation ability, lack of credit history, and inadequate credit institutions. The respondents were also asked what the government should do to improve their access to bank finance (Table 6.7). Besides the lack of finance, Xiangfeng also finds that marketing difficulties, lack of skilled workers, and inadequate infrastructure are also serious problems for many Chinese SMEs, especially in rural or backward areas. Since most SEs in particular are operated by poor households with no knowledge about market opportunities and requirements, and with insufficient working capital, they are usually fully dependent on traders to market their products. In rather isolated rural areas with no good connections with market centers in urban areas, due to lack of roads and transportation facilities, SEs serve only local markets with little or no prospects for revenue growth. 6.2.10
India
As has been pointed out in many studies on SME performance in India, some of the most persistent constraints facing these enterprises include poor availability or non-availability of loan finance from formal sources (banks and other financial institutions, including the capital market), low levels of
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collected the questionnaires duly filled by the respondents. The sample included the manufacturing, service, and primary sectors and was limited to SMEs in Brunei Muara district. The results show that the surveyed SMEs tend to suffer from obstacles in, among other areas, financing, marketing, management, location of the enterprise, high rent of private premises, competition, and access to information sources.
Reason
Lack of guarantee system Cannot offer the information that bank needs Poor profitability Scarcity of bank or financial institution capital Poor valuation ability of bank or financial institution Lack of credit history Lack of credit institution Excess credit history
Number of respondents
Share of total respondents (%)
695 234
36.0 12.0
223 219
Measure
Number of Share of total respondents respondents (%) 726 413
28.90 16.40
11.50 11.40
Increase loan policy Non-estate assets can be used as collateral Need government support fund Develop guarantee institution
320 301
12.70 12
198
10.20
Develop SME bank
201
8.00
170 136 53
8.90 7.10 2.70
Promote business credit development Improve legal environment Develop venture capital Develop non-bank institutions Develop second board market
197 151 83 74 50
7.80 6.0 3.30 2.90 2.00
Source: Xiangfeng (2008, p. 50).
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SMEs in Asian Developing Countries
Measure to improve SME financing
Main reason for loan difficulties
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176
Table 6.7 Difficulties of SE financing
177
technology and skills, inadequate physical and economic infrastructure, and a truncated policy of product reservation (see below).7 For decades, among the constraints mentioned, the dominant one facing the enterprises has remained lack of adequate and timely access to loan finance. This problem is more acute for SEs and MIEs, as MEs and LEs appear to have relatively fewer problems accessing bank finance. The problem still exists despite clear instructions from the Reserve Bank of India (RBI) and the Ministry of Finance to encourage the flow of funds from the commercial banks to these enterprises through what is called achieving “priority sector” lending targets (Das, 2008, p. 75). A related serious issue is the growing number of non-performing loans (inability of enterprises to repay loans) in SEs and MIEs. A study from ICICI Bank and IFC (2002, p. 16) shows that about 9.5 percent of SMEs have been categorized as sick, largely in the manufacturing sector. This has led to a high-risk perception of SMEs on the part of banks and other formal loan providers, and hence led to high borrowing costs for SMEs. Meanwhile, according to Das’s (2008, p. 77.) study, at least since 1991 the proportion of sick SMEs typically has steadily increased and the loan amount outstanding has risen from about INR 28 million in 1991 to INR 57 million in 2003. The amount has risen fast despite an effort to grossly underestimate the number of sick units by adopting a “different” definition of sickness in 2001. While every possible reason could be cited as a factor causing sickness, the future of these “sick” enterprises is often not clear, that is, if these revived at all through policy efforts. Morris and Basant (2006, p. 11) argue that structural distortions in the regulation of banks and the incentive structure within banks and other formal financial institutions have also been responsible for accentuating the credit difficulties of SMEs in India. Under tight credit conditions there is a triple squeeze on SMEs: the restrictions are imposed asymmetrically more on this category of enterprises, and the enterprises are also subject to a credit squeeze through delayed payments and extensions of credit lines in purchases. Lack of infrastructure – such as transportation and communication, availability of power, water supply, market for inputs and outputs, banks and other financial institutions, training and R&D institutes, and so on – is also mentioned in some studies as a serious constraint on the development of SMEs in India. However, the degree of this problem varies by states. In some parts of the country, infrastructure is much less developed than in other parts. For instance, Mishra’s (2007, p. 25) study on recent trends in the development of SMEs in the northeastern region of India shows that this region has a less developed transportation system, largely due to its topographical features. Transportation bottlenecks increase the time and pecuniary costs of production, leading to cost disadvantages for local SMEs. The local markets for material, labor, and products are less developed, less connected, and less competitive. For their part, Morris and Basant (2006) find that this problem
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is more acute for MIEs and SEs, as the majority of these enterprises are located in backward rural areas which are generally isolated from urban areas. Lack of technology and of skilled manpower is also a serious constraint for many SMEs in India, which has led to lower productivity and competitiveness in these enterprises. In his book Prasad (2004) writes that the constraints facing Indian SMEs include not only lack of access to formal credit and less developed infrastructure but also problems related to technology and skills. He emphasizes, therefore, that the development of technology and skills is crucial for enhancing the competitiveness of Indian SMEs. According to Mishra (2007, p. 26), the reasons for the lack of technology are numerous, and include the absence of awareness of the need to review the possibilities of cost reduction and product development, of non-traditional attitudes to one’s own trade, of financial soundness needed for the adoption of new techniques, and of willingness to learn new skills. From its case study of the northeastern region, the study shows that SMEs in the region employ about 3.12 percent of workers, but produce barely 1.77 percent of output in the nation. Thus the labor productivity of SMEs in the region is only 57 percent of that in the nation. Capital investment in SMEs in the region is only 1.54 percent of that of the country as a whole. Adoption of improved methods would necessarily be more capital-intensive, but would increase labor productivity and the profitability of enterprises. Chakrabarty (2006, p. 12) provides a list of constraints facing SMEs in India and explains specific issues related to each constraint. The constraints are in the areas of technology (old/obsolete technology, inability to adopt and obtain new technology, low R&D), marketing (dependence on very few consumers, lack of effective marketing efforts, inability to identify suitable products and their acceptability and sustainability in the market in preference to branded products, delayed realization of receivables, and so on), human resources (inability to create a second line of management, total concentration on promoter, and so forth), and finance (low capital base, delayed payment by consumers, low profit margins, improper or even in some cases non-maintenance of financial records, delayed submission of audited financial records to banks, and so on). Another constraint which is often discussed in the literature on SMEs in India is related to the long-standing and unusual government policy of reserving over 800 products for exclusive production by SMEs. Das (2008a, pp. 78, 80), for instance, finds a number of practical problems in the implementation of this reservation policy. First, the list is revised frequently (by March 2007 it consisted of a much reduced number of 114 products), often in response to political considerations, as it is strongly influenced by political vested interests, and not based on an economic rationale. Such frequent changes (adding or deleting) to the products listed, which are not always justified, have not only led to market uncertainty for SMEs, but have also created a serious bottleneck for the enterprises in making their long-term
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business plan, or for new potential producers in deciding in which products they should specialize. Das argues that the list seems to have lost its original purpose of creating local employment using locally available resources within a “protective” policy framework. Second, the list is not consistent, as certain products continue to be produced by MEs and LEs as they had been before the specific products were reserved, and this means that SMEs in the same industry groups are not fully protected in the way they are supposed to be by this reservation policy. Third, many SMEs engaged in manufacturing “reserved” products have no understanding of the policy, which makes it less effective than generally expected as a strategy to support the development of SMEs. Other studies also question the practicality or the relevance of the highly controversial product reservation policy.8 The studies stress the issue of the technical inefficiency of products manufactured under the reserved category as compared with non-reserved products. Morris and Basant (2006, p. 14), for instance, argue that, because of this reservation policy, reserved SMEs show little dynamism and growth, and greater dependence on government purchases for survival. The resultant inefficiency or lack of production growth can be considered as a ”natural” consequence of a market protection policy which becomes a disincentive for producers in the protected market to improve their productive efficiency. The studies find that the quality of reserved products is often not satisfactory, and this is also another consequence of this kind of policy. 6.2.11
Pakistan
Studies by, for example, Roomi and Hussain (1998) and Mustafa and Khan (2005) show many constraints facing SMEs in Pakistan, such as labor issues, market constraints, law and order, shortage of skilled personnel, technological constraints, inadequate infrastructure, and financing barriers and disincentives. Some of these problems are discussed briefly here. First, labor issues. Labor laws and regulations in Pakistan are considered to be among the most complicated matters with which a business enterprise has to deal. Based on concerns related to the rights of labor, there are 56 labor laws, compliance with which is literally impossible for SMEs. These laws are not only inherently inconsistent but also entail numerous labor inspections that further impede the growth of small and medium enterprises. Other issues are related to reforms of local labor offices, and active measures of labor market policy still remain outside the scope of the reform agenda being undertaken by the government. Limited training options for middle management, low workforce skills, and inadequate vocational training facilities are weaknesses that need immediate attention. Second, market constraints. As in other countries discussed, a typical SME in Pakistan caters to the domestic private sector, and its activities are mostly concentrated in a specific region. Mustafa and Khan (2005) cited the
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findings of the World Bank Survey for SME Policy Note 2001, which shows that only about 8 percent of the sampled SMEs are exporters and fewer than 4 percent are suppliers to the government sector. Some of the issues are related to the inability of SMEs to enter export markets; they include tough bargaining price (36 percent) and supplies on credit (34 percent). Others are related to the absence of public sector programs aiming at the internationalization of SMEs and obliging the public sector to source procurements from SMEs. High market transaction costs, inefficient contract repudiation, and distorted competition are some of the key obstacles to the growth of SMEs in Pakistan. Competition from smuggled goods and unregistered companies is also acting as a severe constraint on SMEs, especially in manufacturing industry. For growth-oriented SMEs, the sourcing of quality inputs is a major problem due to the lack of networks of reliable suppliers, which adds to transaction costs. SMEs are not large enough to furnish sufficient demand to be an incentive for high-quality input suppliers. Another serious problem is the absence of diverse sources of credit. In this situation, SMEs have to rely on suppliers’ credit to procure high-quality raw materials, which prevents them from investing in manufacturing high-quality products. Third, law and order. According to a survey conducted by Gallup, Pakistan, in 2002, also cited by Mustafa and Khan (2005), one in five businesses interviewed had been a target of at least one crime during the survey year. One in four SMEs considered law and order to be a severe problem. Law and order problems weaken property rights and as a result weaken the investors’ incentive to invest. These problems are clearly linked to the manner in which the law enforcement and criminal justice systems function. Fourth, skills constraint. Mustafa and Khan (2005, p. 10) show that most SMEs in Pakistan consider skill development to be one of the major challenges that they have to face in their efforts to improve their competitiveness. As in other countries discussed, the government as well as existing universities and R&D institutions are unable to act as the main sources of transfer of technology and knowledge to SMEs. Fifth, infrastructure. According to the Investment Climate Assessment of Pakistan conducted by the World Bank, also cited in Mustafa and Khan (2005), issues related to power supply, that is, unscheduled power shutdowns and lack of access to connections are irritants which significantly affect the productivity of firms in Pakistan. The survey estimated that a typical business in Pakistan loses 5.6 percent in annual sales revenue due just to this single factor. Differences associated with firm size indicate that SMEs are relatively harder hit than their larger counterparts because of their inability to arrange alternative power sources in the form of private power generators. Regarding power supply, high rates of power, poor quality of delivery, and unreliability are serious concerns for SMEs in Pakistan.
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Similarly, lack of access to telecommunication facilities and transport also proves detrimental to the smooth growth of SMEs in the country. Mustafa and Khan (2005, p. 11) note that the chief problem in the provision of telecom services is the shortage of new fixed-line connections, which stand at a mere 50.6 million a year for the whole country. Many SMEs have difficulties applying for new line connections and have to pay high prices for them. Finally, finance constraints. Credit rationing in Pakistan’s formal credit market also emerges as a major constraint on SMEs’ growth in the country. However, credit rationing is an SME-specific constraint that is not binding on LEs. As in other countries discussed, credit rationing, in turn, is a consequence of constraints on both supply and demand (Bari et al., 2005, p. xvii). Supply-side constraints arise for many reasons: weak and poorly enforced creditor rights, high per unit costs of lending to SMEs, and SMEs’ weak reputation and financial systems. Demand-side constraints, on the other hand, arise because loan disbursement procedures are excessively time-consuming, collateral requirements are not easy to meet, and the cost of access to formal credit for SME owners/producers is high. By citing data from the Investment Climate Survey conducted by SMEDA in collaboration with the World Bank, Bari et al. (2003, p. 7) show that 57 percent of new investment for SMEs and 67 percent of working capital finance comes from internal finance or retained earnings; only about 7 percent of funds for investment or working capital come from banks or other financial institutions. MIEs with ten or fewer employees included in the sample have never had access to formal financial institutions (Table 6.8). 6.2.12
Bangladesh
Historically Bangladesh followed a development strategy in which private business activities were controlled through a host of regulations involving investment sanctioning, credit disbursement, import licensing, foreign exchange allocation, and so forth. While these regulatory barriers thwarted private business development in general, the impact fell unevenly on SMEs. This was because SMEs were less able to cope with the regulations than were Table 6.8 Firms’ access by size to formal source of finance, 2002 Firm size (employees)
% of total in the size category
0–10 11–49 50–99 100 or more
0 29 50 80
All sizes
59
Source: Bari et al. (2003, p. 10).
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their large-scale counterparts. Thus, the policy regime was largely biased against the SMEs, although, paradoxically, promoting SME development was a stated objective of successive governments (Hossain, 1998, p. 2). Over the years, various studies have been conducted to identify the problems facing SMEs.9 For instance, Jahangir (2001), based on a small sample of 19 entrepreneurs, identified the following (as perceived by the respondents) as the major difficulties they faced: lack of adequate investment, lack of modern technology, irregular/inadequate supply of power, the high rate of interest on bank loans, inadequate availability of raw materials, absence of clear-cut government policies, fierce competition, lack of skilled technicians and workers, and lack of research and development facilities. These are very commonly perceived and also perhaps generally encountered difficulties of operation for the SMEs. However, as Ahmed (2004, p. 16) argues, close scrutiny and careful interpretation tends to reveal that lack of institutional credit, non-availability of working capital, low levels of technology, low productivity, lack of marketing facilities, and market access problems are the major bottlenecks to SME growth in Bangladesh. Earlier, Hossain (1998), based on a much larger sample survey of SMEs conducted under the Job Opportunities and Business Support (JOBS) Program (Institutional Reform and the Informal Sector: University of Maryland), ranked the top eight problems facing the enterprises in eight manufacturing subsectors, which include steel furniture, metalwork and light engineering, electrical goods, plastic products, specialized handloom, bakeries, textile dyeing and printing, and footwear. It shows that lack of electricity supply is ranked number one, followed by lack of credit from formal sources and working capital shortage, poor law and order, legal barriers, excess competition, dearth of technical assistance, and marketing problems; the high price of raw materials occupies the lowest rank. Hossain (1998, p. 10) also provides a relative ranking under selected past studies of the top eight problems, identified under JOBS. In doing so, points are awarded only if a problem was ranked as one of the top five under each of the respective studies (5 ⫽ most serious). A summation of the scores from the various studies reveals that lack of credit and lack of working capital have consistently remained as the major bottlenecks to industrial growth in Bangladesh. Electricity supply problems are ranked close to credit as a serious problem in the present and in the past. Unavailability and/or the high price of raw materials, poor law and order conditions, and legal barriers are cited as serious problems, but not as serious as credit and power. With respect to the credit problem, according to Hossain (1998) SMEs encounter great difficulties raising fixed and working capital because of the reluctance of banks to provide loans to SMEs. Banks are reluctant to lend to SMEs because of the high processing and monitoring costs of doing so. The loan application forms for investment financing from banks are long, tedious, and redundant. Since the removal of the interest rate subsidy
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without the removal of the interest band, financial institutions have little incentive to lend to SMEs. SMEs find it difficult to use non-real estate assets as collateral to obtain loans from the banks. In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a government directive to the effect that 5 percent of a bank’s loan portfolio should be set aside for small and cottage industry finance. Notwithstanding all these arrangements for financing SMEs, the actual delivery of institutional credit to this sector has been grossly inadequate. The key factors apparently inhibiting the flow of institutional finance to the sector are set out in what follows. As also evidenced in other countries discussed, the most constraint facing SMEs in seeking institutional finance is preparation of the project proposal. In spite of directives from the central bank to follow standardized procedures, the loan application process remains lengthy and cumbersome. As explained in Hossain (1998, p. 6), the entrepreneur often lacks the ability to formulate a proper project proposal. Even when he prepares the proposal drawing on outside expert services, there is no guarantee that the proposal will be evaluated properly as the financial institutions themselves lack adequate capability of proper project evaluation. Two further serious constraints that entrepreneurs face in applying for loans from formal financial institutes, as found by Hossain (1998, p. 6), are banks’ preoccupation with collateral-based lending, and bureaucracy and corruption. With respect to collateral-based lending, traditionally banks have used fixed-asset ownership, particularly land ownership, as the basis for judging creditworthiness. This puts SMEs at a relative disadvantage, as entrepreneurs in LEs are often able to get around the problem because of their influence and contacts by putting up collateral of dubious valuation. With respect to bureaucracy and corruption, because of lack of proper autonomy and accountability, the public sector financial institutions are beset with inflexibility, inefficiency, political interventions and corruption. Since the performance of bank officials is not properly evaluated, they lack the incentive to bring a large number of suitable borrowers, particularly those in SMEs, within the fold of institutional financing. They adopt a passive and inflexible attitude toward the borrowers, either to avoid the risk of making an inappropriate lending or to force the borrower to make side payments for more favorable handling of the loan application. Another important source of information on the main constraints facing SMEs in Bangladesh is from the National Private Sector Survey of Enterprises in Bangladesh 2003 of ICGT/MIDAS (Mintoo, 2006). It identified the main SMEs constraints. The response showed that nearly a third of them considered electricity supply, road conditions and access to finance to be serious problems. The ICGT/MIDAS Survey also found start-up problems faced by SMEs and the reasons for enterprise closure of SMEs in Bangladesh.
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6.2.13
Nepal
In Nepal, too, SMEs, especially MIEs and SEs consider the finance problem to be their main business development constraint.10 For instance, a study of small agro-enterprises showed that the financial constraints facing enterprises consisted of the unavailability of bank loans, the high hidden cost of borrowing, and high interest rates (Food and Agriculture Organisation (FAO), 1997). The study found that even though the enterprises were tax-exempt, the income-tax registration requirement, the discretionary tax-assessment procedure, and the clumsy tax-return process discouraged agro-enterprises from expansion. International Labour Organization (ILO) (2003), in a review of policies on SMEs in Nepal, shows that there is a lack of financial and marketing support services for these enterprises in the country. It points out that the impact of interest rates, access to credit, and taxes on these enterprises are not adequately considered when policies for SMEs are framed in Nepal. According to the review, although the direct costs of registration and renewal are not so high, the indirect costs like the permission fee, the recommendation fee, and other fees and costs (transportation, telephone) are too high in Nepal. The tax system is not systematic and there are several types of taxes – for example, local tax, income tax, salvage tax – with tough procedural requirements and indirect costs. Moreover, the SMEs, especially MIEs and SEs, seldom receive any training in skill enhancement, marketing, and so on from government agencies. In addition, these enterprises are fighting tooth and nail to compete on account of a heavy influx of cheaper, inferiorquality products from neighboring countries, particularly from China (Paudel, 2001). Nepal et al. (2006) studied problems and issues faced by Nepalese SMEs, especially with respect to technology transfer. They found a number of problems that hinder technology transfer and development in Nepalese SMEs. Particularly important problems are the following: (i) lack of information about different technologies available or knowledge about the trends of technological change; (ii) lack of technology infrastructure, including R&D facilities; (iii) lack of skill in absorbing new technologies or conducting R&D activities indoors; and (4) a lack of finance either to buy new technologies or to develop own technologies.
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7.1
Development of women’s entrepreneurships
As in other parts of the world, women’s entrepreneurship development in Asian developing countries has a great potential in empowering not only women but also the wider society in the region. Yet in many countries, especially where the level of economic development, as reflected in the level of income per capita and the degree of industrialization, is still low, this potential remains largely untapped. Sinha (2005, p. 1), for instance, observed that fewer than 10 percent of the entrepreneurs in South Asia, comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka, were women.1 Women’s entrepreneurship in Asian developing countries is affected by many factors. These factors can be direct or indirect. The direct factors include economic pressures and socio-cultural background. The indirect factors include government policies and stable domestic socio-economic and political conditions. These two groups of factors are related to each other in shaping women’s entrepreneurship (Firdausy, 1999, p. 137). The direct factors are often discussed in the literature on women’s entrepreneurship development in the developing world, especially socio-cultural background. Among the many social and cultural backgrounds that affect women’s entrepreneurship are religion, educational attainment and skills, age, ethnicity and customs, marital status, and geographical location (Creevey, 1996). It is generally argued that religion affects women entrepreneurs in selecting their type of economic activities (Carswell and Rolland, 2004, p. 283). However, no one religion can be said to be more or less supportive of women’s access to economic participation. It depends on the context in which religion is placed. In a given group of women in the same setting, however, the type of religious belief may affect why one set of women responds in a certain way and another does not. Moslem women, for instance, tend to select economic activities which are not forbidden by their religious teaching (for example, working in pig raising or in alcoholic factories is 185
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forbidden). For non-Moslem women, the type of business activity does not matter very much (Firdausy, 1999, p. 137). Educational attainment and skills also influence women’s selection of their economic activities. These factors also affect women’s behavior in utilizing their time and income. Better-educated women, for instance, can select higher-value economic activities than women with a lower educational level. This was confirmed by Darwin et al. (1999), quoted by Firdausy (1999, p. 137), who found that women entrepreneurs with higher educational levels in household industries in West Java and Central Java in Indonesia can earn more income and save their income. They can also send their children to school. Age also affects women’s entrepreneurship in determining what they should or can do and what they should not or cannot do in their enterprises. Older women are likely to be freer than younger women in managing their businesses as the latter are usually bearing and raising children. However, this does not necessarily imply that older women are more flexible or adaptable to change than younger women in the decision-making process of their enterprises (Creevey, 1996). With regard to ethnicity and customs, Firdausy (1999, p. 138) has observed in Indonesia, for instance, that women entrepreneurs who are ethnic Javanese work harder than their ethnic Sundanese counterparts from West Java. Similarly, women from Bali and North Sumatra worked harder than women from South Sulawesi. Besides ethnicity, women’s entrepreneurship is influenced by the habits or customs in the society. For Javanese women, for instance, selling traditional medicine known locally as bakul jamu is customary.. This type of economic activity is more likely to be undertaken by Javanese women than women from other ethnics group. Marital status also plays an important role in women’s choice of job. Older and married women in Indonesia, for instance, are more likely to be found in informal enterprises such as trade or other activities which enable them to combine household work and paid work. On the other hand, young single women who migrated from rural areas are more likely to be found working as wage employees in services and trading enterprises. In addition, being single may mean a greater degree of independence for women, but it may also mean fewer resources. This is another factor affecting women’s entrepreneurship. Geographical location can also affect women’s entrepreneurship. Women in rural areas find it relatively difficult to improve their entrepreneurship, partly because women in rural areas face certain structural, cultural, and institutional constraints. For instance, they have difficulties improving their educational attainments as many parents or husbands still subscribe to the traditional belief that education belongs to men only. However, although this traditional thinking still exists in rural areas, it depends on the economic condition of the family. In other words, it can be hypothesized that the better the economic condition of the family, the
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less traditional will be its attitudes toward women having jobs and education (Firdausy, 1999, p. 138). All the above-mentioned factors strongly influence women entrepreneurs in many respects, including their motivation, decision-making, and management style. The motivation of women to work or to start their own businesses, however, is influenced not only by their socio-cultural background but also by transaction motives (the need for cash income to support the family’s daily expenditures), precautionary motives (in anticipation of the husband being laid off or unemployed, and other emergency needs) and speculation motives. Among these three motives, transaction motives are often seen to play the dominant role. Thus, the greater the economic pressure faced by the women in their living conditions, the greater the likelihood that they will work (Syahrir, 1986, p. 7). In addition, to be recognized by society (self-esteem), hobby, career, and use of spare time also influence the motivation of women to undertake business activities (Rusdillah, 1987, p. 9), although these motives are usually confined to women who have high educational attainments or are from wealthy backgrounds. Firdausy (1999, p. 139), for instance, cited a study in Central Java and West Java in Indonesia which shows that of the women who worked in trading enterprises 73 percent did so largely because they needed cash income, while the rest stated that they worked because they were afraid that they might be deserted by their husbands or because they wanted to enhance their self-esteem. Studies from Asian developing countries2 suggest that there are three categories of women entrepreneurs, that is, “chance”, “forced/pushed”, and “created/pulled” entrepreneurs. These different categories are based on how their businesses were started, or on their main reasons or motivations. Chance entrepreneurs are those who start a business without any clear goals or plans. Their businesses probably evolved from hobbies into economic enterprises over time. They are mainly educated persons from wealthy families. Forced or pushed entrepreneurs are those who were driven by circumstances (such as death of a spouse, the family facing financial difficulties) to start a business, and hence their primary motivation tends to be financial. They are mainly women with little education and from poor families. Created entrepreneurs are those who are located, motivated, encouraged, and developed through, for instance, entrepreneurship development programs. They are mainly educated women from wealthy families (Table 7.1). According to one study by Das (2000) on women entrepreneurs in India, the most common reasons given were financial (“pushed” entrepreneurs) or to keep busy. Only about one-fifth of women were drawn to entrepreneurship by “pull” factors, such as the need for a challenge, the urge to try something on their own, and to be independent and to show others that they were capable of doing well in business. In fact, those who enter business just to keep busy can also be considered as “pulled” entrepreneurs, since they can choose whether or not to do so.
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Table 7.1 Categories of women entrepreneurs (by reasons/motivations for starting the business) in Asian developing countries
Chance entrepreneurs
Forced/pushed entrepreneurs Created/pulled entrepreneurs
Main reason/motivation
Profile of women entrepreneurs Level of education
Family financial condition
– to keep busy – hobby/special interest – because family/spouse had business – financial reason
High
Wealthy
Low
Poor
– control over time/flexibility – challenge, try something on one’s own – show others I could do it – to be independent – self-satisfaction – set an example to children – give employment to others/ do something worthwhile
High
wealthy
Source: Das (2000), Raju (2000), Sasikumar (2000), Seymour (2001), and others (see note 2 of this chapter).
Tiong-Aguino (1999, p. 243) has surveyed women entrepreneurs in the Philippines to discover their main motivations for going into business. The survey shows that the desire to augment family income appeared to be the most important reason as 59 (42 percent) of the 139 women entrepreneurs surveyed cited it. The second most important reason, as given by 53 (38 percent) respondents, was to seize an opportunity they had detected in the business environment. This reason was followed by the desire to be one’s own boss (47 respondents, 34 percent), desire of income for oneself in spite of husband’s high earnings (30 respondents, 22 percent), and inheritance of a firm (12 respondents, 9 percent). Only two respondents opened their own businesses because they could not find jobs. The other nine respondents gave the following reasons for going into business: providing employment to rural workers, wanting to revive a vanishing craft, and/or proving their capability in starting and managing their own business With respect to the decision-making process, there are at least three categories of women: (i) those who make the decision themselves; (ii) those who make the decision after consulting with their husband, parents, or relatives; and (iii) women who do not make the decision themselves but their husbands do. However, these types of decision-making processes vary, depending on the
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problems faced by women entrepreneurs and their level of educational attainment. If the problems faced by women affect them and their families significantly, they tend to consult with the family or their parents before making any decision. Conversely, if the problems do not affect the family, then, depending on their level of educational attainment, women will either take their own decisions or consult their husband or relatives (Firdausy, 1999, p. 139). According to Tiong-Aguino (1999, p. 245), since many women in developing countries (or probably in the world?) are not seeking the trappings of power and success when they start their own companies, it is common to see a woman award the husband the top position such as manager or director even though she has worked hard to establish the company. She is often happy to be relegated to the position of treasurer or vice-president once the business has taken off and stabilized, but remains as a partner in decisionmaking. Tiong-Aguino argues that this behavior makes for a more effective leadership style in women-led businesses. In his own survey of 130 women entrepreneurs in the Philippines, however, the majority of respondents make the major decisions in their businesses, especially those decisions that involve large investments. Also, most of them are involved in the day-to-day operations of the business. Very few of these women had delegated responsibilities to their general manager or department heads. Regarding management style, Szanton (1997) states, as cited by TiongAguino (1999, p. 245) that, regardless of nationality and gender, entrepreneurs exhibit certain personal characteristics and competencies. However, women are viewed as being less entrepreneurial than men, largely because of gender stereotypes. Their typical “feminine” characteristics such as sympathy for the unfortunate, the service ideal, and a people-oriented rather than task-oriented style of management are often considered to be obstacles to business success. Meanwhile, the stereotyped image of men as being selfconfident, aggressive, competitive, independent, and task-oriented rather than people-oriented is seen to be associated with entrepreneurial success. This is probably why most people believe that companies managed by men are more likely to grow than those led by women. It is often stated in the literature that the degree of women’s entrepreneurship development is closely related to the degree of gender equity, which in developing countries is generally lower than that in developed countries. However, among developing countries the degree of women’s entrepreneurship varies by country, depending on many factors, including level of economic development as reflected in the level of income per capita, and social, cultural, and political factors. Gender equity has many dimensions and is not easy to measure, due to the lack of accurate, gender-discriminated social indicators in many countries, especially in the developing world. Two indices often used to measure gender equity are the Gender Development Index (GDI) and the Gender Empowerment Measure (GEM) constructed by the United Nations Development Programme (UNDP). GDI is adjusted for gender
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inequality by the Human Development Index (HDI), which measures the average achievements of a country in terms of the extent to which people lead long and healthy lives, are educated and knowledgeable, and enjoy a decent standard of living. GDI measures achievements in the same basic dimensions as HDI but in addition captures inequalities between women and men. The GEM is concerned with the opportunities available to women vis-à-vis men as regards participation in the economic and political life of a country. GDI and GEM together attempt to capture women’s level of development and the extent to which women are free from discrimination in building their capabilities and in gaining access to resources and opportunities. Based on the UNDP’s Human Development Report 2007/2008, Table 7.2 shows these two indices for several Asian developing countries. In the category of high human development (based on HDI rank), there are only three Asian developing countries, led by South Korea with the highest GDI rank (no data are available for Singapore). Other important Asian developing countries are found in the middle of the human development category, with three countries from South Asia in the lowest rank. In the GEM ranking, Singapore is the highest and Nepal the lowest. With these indices, it can Table 7.2 Gender Development Index (GDI) and Gender Empowerment Measure (GEM) in selected Asian developing countries, 2007/2008 Country* High human development – Singapore – South Korea – Brunei Darussalam – Malaysia Middle human development – Thailand – China – Philippines – Sri Lanka – Vietnam – Indonesia – India – Lao PDR – Cambodia – Pakistan – Bangladesh – Nepal
GDI rank
HDI rank-GDI rank**
GEM rank
— 26 31 58
— ⫺1 ⫺2 1
16 64 — 65
71 73 77 89 91 94 113 115 114 125 121 126
0 1 4 ⫺1 3 1 0 ⫺1 1 ⫺7 1 4
73 57 45 85 52 — — — 83 82 81 86
* Based on HDI rank. ** The HDI ranks used in this calculation are recalculated for the 157 countries covered by the survey for the Human Development Report 2007/2008 with a GDI value. A positive figure indicates that the GDI rank is higher than the HDI rank, a negative the opposite. Source: UNDP (2008).
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thus be expected that in Singapore women have more freedom than their counterparts in Nepal and other Asian developing countries to become entrepreneurs. Similarly, in South Korea, for instance, more women entrepreneurs can be found in modern businesses than in Nepal, since women’s education in South Korea is better than that in Nepal. In order to contribute to the understanding of gender-based inequity and to monitor its status and its evolution, Social Watch3 has developed an index, called the Gender Equity Index (GEI). This index is based on internationally available comparable data which make it possible to place and classify countries according to a selection of indicators relevant to gender inequity in three different dimensions: education (literacy rate gap, primary school enrolment rate gap, secondary school enrolment rate gap, tertiary education enrolment rate gap), participation in economic activity (income gap, activity rate gap), and empowerment (the percentage of women in technical positions, in management and government positions, in parliaments, and in ministerial posts). The index has a maximum possible value of 100, which would indicate no gender gap at all in each of the three dimensions. The GEI measures the gap between women and men, not their welfare.4 The GEI for 2008 ranks the present situation of 157 countries, based on the most recent statistics available, and is able to determine evolutionary trends in 133 countries by comparing their present index with that of five years before. Table 7.3 presents the GEI for selected Asian developing countries. Table 7.3 Gender Equity Index 2008 for selected Asian developing countries Country/Economy
Philippines Hong Kong Vietnam Thailand China Singapore Brunei Darussalam Cambodia Malaysia Korea, Rep. Sri Lanka Indonesia Bangladesh Nepal Pakistan India
GEI 2008
Dimensions Education
Economic activity
Empowerment
100.0 98.5 88.6 98.7 95.1 89.6 98.7 76.3 98.1 84.2 83.7 91.7 82.3 61.1 73.2 77.5
63.5 66.0 81.2 71.7 73.3 58.6 48.4 83.5 46.6 53.9 42.9 52.8 53.5 57.0 34.2 36.6
65.5 51.8 44.0 39.7 38.2 48.7 41.2 21.0 29.1 23.5 32.1 12.4 17.6 15.3 17.5 6.3
76 72 71 70 69 66 63 60 58 54 53 52 51 44 42 40
Source: Social Watch (www.socialwatch.org).
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Women Entrepreneurs in SMEs
SMEs in Asian Developing Countries
In addition, World Economic Forum (WEF) also produces an annual report on global gender-gap ranking, based on a Gender Gap Index (GGI). The index is based on four critical areas of inequality between men and women: (i) economic participation and opportunity: outcomes on salaries, participation levels, and access to high-skilled employment; (ii) educational attainment: outcomes on access to basic and higher education; (iii) political empowerment: outcomes on representation in decision-making structures; and (iv) health and survival: outcomes on life expectancy and sex ratio. The index scores are on a 0–1 scale (0.00 = inequality, 1.00 = equality), but can be interpreted as the percentage of the gap between women and men that has been closed. Table 7.4 shows the ranking of several developing countries in Asia. It shows that, generally in Southeast Asia, with the Philippines as the highest-ranking country, gender equality is much greater than that in South Asia, with the exception of Sri Lanka. The 2008 report on Global Employment Trends for Women from International Labour Office (ILO) shows clearly that most regions in the world are making progress in increasing the number of women in decent employment, but that full gender equality in terms of labor-market access and conditions of employment has not yet been attained. According to the report, economic empowerment for women has a lot to do with their ability or inability to participate in labor markets and with the conditions of employment that the women who do manage to find work face. As shown in the report, of the nine regions covered, within Asia the most successful region in terms of economic growth over the last decade, namely, East Asia, is also the region with the highest regional labor-force participation rate for women, low unemployment rates for both women and men, and relatively small gender gaps in sectoral as well as status distribution. In this region, the gender gap in economically active females per 100 males continues to be among the smallest in the world. For every 100 active men there are 79 women participating in labor markets. Between 1997 and 2007, the shares of women as own-account workers (i.e. self-employed without employees) and as employers (that is, self-employed with employees), respectively increased by 11.1 percent and declined by 0.9 percent. Women as paid workers and unpaid family workers, on the other hand, increased and declined, respectively, by 10.5 percent and 20.7 percent (ILO, 2008, p. 14). In Southeast Asia, as stated above, women continue to be an untapped potential. Overall labor-force participation rates within the region have traditionally been low due to the low rates for women. For every 100 men active in labor markets only 42 women participate by either working or looking for work. The low participation is also reflected in the employmentto-population ratios: in 2007, only 3.4 out of ten women of working age actually worked (34.1 percent), and over the last ten years the female employment-to-population ratio slightly decreased. For the same period, the share of women as own-account workers increased by 7.9 percent and the
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Country
Gender Gap Index 2007 rank (out of 128 countries)
6 15 42 52 73 77 81 92 97 98 100 114 125 126
6 13 — 40 63 65 68 72 92 89 91 98 111 112
Economic participation and opportunity
Educational attainment
Health and survival sub-index
Political empowerment
rank
rank
rank
Rank
2 94 11 21 60 55 82 93 90 52 116 122 114 126
1 56 103 81 91 98 93 71 94 112 105 116 122 123
1 1 91 1 124 115 81 97 106 1 122 126 117 121
Source: WEF (2007; 2006).
14 7 42 110 59 71 70 101 95 105 17 21 83 43
Women Entrepreneurs in SMEs
Philippines Sri Lanka Vietnam Thailand China Singapore Indonesia Malaysia Korea, Rep. Cambodia Bangladesh India Nepal Pakistan
2006 rank (out of 115 countries)
Sub-indexes
193
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Table 7.4 The Global Gender Gap Index 2007 ranking and 2006 comparisons in selected Asian developing countries
SMEs in Asian Developing Countries
share of women as employers declined by 0.2 percent. Women as paid workers and unpaid family workers, on the other hand, increased and declined, respectively, by 4.1 percent and 11.8 percent (ILO, 2008, p. 18). Positive changes in shares of women as own-account workers or employers can be seen as evidence of the development of women entrepreneurship. However, as explained above, the growth of women owning their own businesses because of “pushed” factors might not be considered as a good sign of women’s entrepreneurship development, but as a direct reflection of poverty. In manufacturing industry, based on individual country data or world data provided by, for example, ILO, at least two main characteristics of the development of women’s entrepreneurship can be clearly observed in developing countries. First, SMEs are more important than LEs for women entrepreneurs. Second, within SMEs, the female–male entrepreneur ratio is generally higher in MIEs than in larger-sized and more modern enterprises. This is because women in developing countries are more likely than men to be involved in informal activities, which consist predominantly of MIEs, either as self-employed or employers or as paid/unpaid workers. The ILO database indicates that almost 95 percent of MIEs in developing countries are managed by self-employed women, though the percentage varies between countries or regions.
7.2 Evidence from selected countries 7.2.1
India
India is probably the only Asian developing country with numerous studies or publications on women entrepreneurs. Sinha (2005), Das (2000), and many others5 provide the profile of women entrepreneurs in SMEs in this country, which shows that a majority of them are relatively young, within the age group of 25– 40 years, married, and with good educational backgrounds (most of them have university diplomas), and with an above-average record in education and participation in extra-curricular activities. Most women owning SMEs have an urban background and have lived in small nuclear families, both before and after marriage. A majority of them are from Hindu progressive communities, with Brahmins being the largest proportion. In the northern part of the country, it is mainly women belonging to communities which have traditionally been in business, for example, Bania or Punjabi Khatri communities. Among the states within India, Gujarat, Maharashtra, and Karnataka have more women entrepreneurs than others. These women are from families which either are already in business or have service backgrounds, and they have highly educated fathers or husbands. Such characteristics suggest that they are from the category of “pulled” entrepreneurs. With respect to corporate form, according to some studies,6 SMEs owned by women entrepreneurs in India mostly are sole proprietorships. In India, as also probably in other Asian developing countries, proprietorship
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ventures are popular among women entrepreneurs not only because it is the simplest form of business organization, requiring few legal formalities, but also because fewer initial investments are needed, and tax incentives are available. However, some women-led private limited companies also exist, as do a very small number of partnerships, mainly with relatives of the women entrepreneurs (Sinha, 2005, p. 12). Sharma and Dhameja (2002, p. 84) explain that in the last 30 years, with an increased level of women’s education, women’s entrepreneurial mobility has increased between sectors in the country. About 30 years ago, at the start-off stage, most women-led enterprises were clustered in the service/trade sector, and after gaining experience for many years, their owners shifted into manufacturing. This suggests that the service/trade sector plays an important role as the training place for women entrepreneurs before they move to more complicated business activities such as in manufacturing production. Within the manufacturing industry, Sharma and Dhameja (2002, p. 84) also observed a clear structural change from the 1990s and onwards in the orientation of women-led manufacturing activities, from enterprises traditionally called “feminine”, such as food, garments, and beauty care, toward more sophisticated, though still light, manufacturing processes such as plastics, electronics, and leather products. Now, according to their study, a majority of women entrepreneurs in India are concentrated in light manufacturing industries such as leather, food, garments, engineering goods, and beauty products. The second most common category is that of services like interior design, management and placement, consultancy, and nursery schools. This is followed by the retail trade sector including boutiques, home furnishing, and automobile dealing. The ease of setting up an enterprise and availability of technical know-how are considered as priorities by women in trading and manufacturing enterprises, whereas women entrepreneurs in the service sector are influenced by the profession or occupation taken up earlier (Rani, 1996, p. 74). Although the degree may vary by country, in general women entrepreneurs in Asian developing countries gravitate toward ventures with low investment and lower technological barriers, and the groups of industries mentioned above are indeed very popular among women entrepreneurs in the developing world.7 Rani (1996) produces interesting findings about the profile of women entrepreneurs in India. More women entrepreneurs in the service sector, were employed prior to setting up their own enterprises than their counterparts in the manufacturing and trading sectors. Moreover, women entrepreneurs in the service sector are more educated than those in the trading sector. In the service sector, enterprises owned by women are generally not inherited and are entirely started by the women entrepreneurs themselves. Manufacturing and service-sector women entrepreneurs prefer to expand their present enterprises, while trading-sector entrepreneurs aspire more to set up new enterprises as they are easier to set up. Women entrepreneurs
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prefer enterprises with lesser gestation periods, and a majority of the units earn a profit before the second year of operation. It is shown in Sinha (2005) and others such as Rajivan (1997) and Walokar (2001) that most women-owned SMEs are “single products/service” enterprises and no diversification has occurred. Diversification has been adopted in a few cases as a survival strategy. Women-owned SMEs have only one mainline activity, with low ambitions for growth. 7.2.2
Indonesia
Recently interest in women’s entrepreneurship development has increased among policymakers, academics, and practitioners in Indonesia. This interest comes from the recognition that the women’s entrepreneurship, especially in rural areas, will contribute to the creation of many new rural enterprises that will increase local capabilities to generate rural economic growth. It is generally believed that women entrepreneurs can play an important role in promoting growth and development, and hence in reducing poverty. In this respect, SMEs provide a good starting point for the mobilization of women’s talent, especially in rural areas, as entrepreneurs, while, at the same time, SMEs can provide an avenue for the testing and development of women’s entrepreneurial ability. Statistics (BPS) from various years indicate that women entrepreneurs in Indonesia, especially in SMEs, increased since the 1980s during the New Order era (1966–98), when the country achieved rapid economic growth leading to a rapid increase in per capita income. The reason for this is partly the rapid increase in women’s educational level and the economic pressure women faced in their households. Data from the National Labor Survey on the self-employed category by gender confirm this (Table 7.5), although, there are more males than females who are self-employed in businesses with or without employees, and the share of females engaged in businesses is lower than that of males. According to a number of studies (for example, Manning, 1998; Oey, 1998), the reason for the increasing number of women-owned enterprises is partly the increase in women’s educational level, and the economic pressure women face in their households. Data on owners of SMEs by gender are available only for the manufacturing industry. They show two interesting facts (Figure 7.1). First, only about 29 percent of total SMEs in the sector are operated by women. Second, the rate of women entrepreneurs tends to decline by size: in SEs the rate is higher than that in MEs. If the total number of enterprises by gender of entrepreneurs or owners can be used as an indicator of the current state of the art of women’s entrepreneurship development, then the table may suggest that becoming an entrepreneur, especially in larger, modern, and more complex businesses in Indonesia, is still predominantly a male preserve. With regard to sectoral distribution within the manufacturing industry, most women entrepreneurs are in the food, beverages, and tobacco industry,
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1995
1996
1997
1998
1999
2002
2006
Male Wage and salaried workers, or employees Self-employed with employees (employers) Self-employed without employees (own-account workers) Contributing family workers
31.9 1.1 53.6 13.5
39.1 2.1 50.1 8.7
38.4 1.8 52.1 7.7
39.4 2.2 50.3 8.0
36.1 2.3 52.7 8.8
36.2 3.4 51.9 8.5
29.4 4.1 59.4 7.0
35.2 4.0 53.2 7.7
Female Wage and salaried workers, or employees Self-employed with employees (employers) Self-employed without employees (own-account workers) Contributing family workers
22.8 0.3 30.2 46.6
29.2 0.7 36.8 33.3
27.4 0.8 38.5 33.4
29 0.8 34.5 35.7
27.7 0.8 34.9 36.6
28.1 2.0 35.8 34.2
37.3 1.1 25.4 36.2
31.5 1.1 33.2 34.1
Male + female Wage and salaried workers, or employees Self-employed with employees Self-employed without employees Contributing family workers
28.4 0.8 44.5 26.3
35.6 1.6 45.4 17.4
34.2 1.4 46.9 17.5
35.5 1.7 44.3 18.5
32.9 1.7 45.9 19.5
33.1 2.9 45.7 18.3
32.3 3.0 47.2 17.6
33.9 3.0 46.2 16.9
Source: BPS.
Women Entrepreneurs in SMEs
1990
197
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Table 7.5 Status in employment, by gender in Indonesia, 1990–2006 (%)
198
SMEs in Asian Developing Countries
100 80
83.75
77.33
71.01
Male Female
60 28.99
22.67
16.25
20 0
SE
ME
SME
Figure 7.1 SMEs in manufacturing industry by gender of entrepreneur/owner in Indonesia, 2006 (%)
followed by textiles, garments, and leather, and non-metallic mineral products. In basic metal and fabricated metal products, the proportion of women entrepreneurs is always very small, not more than 1 percent. This indicates that women entrepreneurs in manufacturing industry tend to have businesses that do not require high skills and expertise. Within SMEs, a majority of women entrepreneurs are found in MIEs, employing five or fewer people (and in many cases are non-employing). They choose MIEs simply because this economic activity is characterized by easy entry and exit, low capital and skill requirements, and simple technology. In non-manufacturing sectors, though data are limited, the percentage of female entrepreneurs is higher than that of their male counterparts in trade, hotels, and restaurants. Indeed, in Indonesia, beyond manufacturing industry, women are more likely than men to be involved in these sectors, mostly as own-account traders having small shops or as owners of small restaurants or hotels. In the previous decade or so, many case studies have been conducted on women entrepreneurs in Indonesia. These studies include Sandee (1995), who investigated the process of innovation in roof tile industries in rural Java, which are dominated by MIEs and SEs. His aim was not to study explicitly women entrepreneurship, but to find out whether there is a difference in innovation activities between female and male producers. He found that female producers had very little chance to innovate. Their firms were usually taken over by men as the technological shift proceeded. Access to credit was a general constraint on adoption and was felt especially acutely by female producers. The fact that innovation adoption requires a more intensive involvement of both producers and workers may also militate against women, given their other (household) responsibilities. Purwandari (2002) undertook research on the handmade bags craft industry in Kulon Progo District in the Province of Yogyakarta (Central Java). The objective of the study was to understand the roles of the handmade bag industry on women’s working opportunities, as either paid or unpaid workers or as entrepreneurs, and the social factors influencing its roles. The profile of women entrepreneurs in this industry shows that the
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age of the majority of them is in the range 28–55 years; about 60 percent of them have only attended elementary school (finished and unfinished); 7.5 percent of them finished high school; and most of them are married. The study reveals that most women entrepreneurs in this industry have been “pushed” to conduct such activities as a means to survive, rather than being a reflection of entrepreneurship development, that is, showing that they can achieve a kind of distinction as being able to live independently within their families. In his research for the APEC working group on SMEs, Firdausy (1999, p. 140) has identified certain important characteristics of women’s entrepreneurship in SMEs in Indonesia. SMEs’ business organization is simpler than that of LEs, simply because enterprises run by women are small in terms of production volume, capital, and number of workers employed. In addition, women entrepreneurs in SMEs, depending on sector, usually run their businesses as parttime activities so that they can meet their other obligations. However, this type of business organization run by women is mostly found in rural areas. This is because women entrepreneurs in rural areas have more time to deal with domestic work and childcare, whereas in urban areas most households have housekeepers to carry out all domestic work and babysitters to perform child care. With regard to employees, women entrepreneurs tend to have women workers as their employees or child labor, partly for the sake of simplicity and ease of working together. However, this type of organization is very much subject to the size of the enterprise as well as the type of business. Management style is relatively uncomplicated, since enterprises run by women are mainly small. According to Oey (1998, p. 85), the management style of women enterprises in Indonesia is largely determined by the level of women’s educational attainment. However, she observed that, although the level of women’s educational attainment of women entrepreneurs affects their management style, it varies depending on women’s position in the family. In female-headed households, women devote a great deal of time to managing their enterprises on their own, while female entrepreneurs who have husbands and children in the family tend to devote much less time to their enterprises and manage the enterprise collectively. Furthermore, as said above, women entrepreneurs tend to employ women workers and children in their enterprises. This might because women employees and children are relatively easy to manage. However, this again is subject to the size and type of the enterprise. Most women entrepreneurs in SMEs lack formal education or skills, especially in MIEs and SEs and in rural areas. A majority of them have attended only primary school, and many of them have never even completed their primary education. So it is no surprise, that, as explained above, women entrepreneurs in manufacturing industry in Indonesia tend to undertake businesses that do not require high skills and expertise, such as food and beverages, textiles and garments, and leather products.
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Women Entrepreneurs in SMEs
SMEs in Asian Developing Countries
Women’s business networks (of, for example, trading companies or traders, banks, LEs, and government agencies, or among themselves) are very limited as compared with those of their male counterparts. The reason for this is simply that women entrepreneurs have multiple obligations to their own families or their relatives, so that their part-time business activities do not need such networks However, this also very much depends on the type and size of economic activity. 7.2.3
Philippines
In the Philippines women are believed to be more empowered than most of their counterparts in other Asian developing countries. This perception is not without foundation. Women in the country are no longer regarded as second to males. Gone are the days when they were expected to stay at home, bear children, look after the needs of their family, and perform household chores. Enjoying the same equal opportunities to education as their male counterparts, women in the Philippines are now able to pursue rewarding careers, exploit their talents to the full, gain recognition in their chosen fields, and render their own contributions to society (Tiong-Aguino, 1999). As in other countries, entrepreneurship poses an especially good option for women in the Philippines who see the need to augment their family income or want to exploit their creativity. But, as argued by Tiong-Aguino (1999, p. 247), although female entrepreneurs are in control of their businesses, they remain bound by society’s gender-related biases. As the female entrepreneur takes on her roles as wife and mother, her share of domestic and reproductive responsibilities prevents her from engaging fully in economic activities. Furthermore, lack of access to resources, lack of credibility, implicit policy biases, and innate reluctance to grow in business complicates the female entrepreneur’s predicament. National data (NSO) reveal that, of a total of 10,343 thousand entrepreneurs in the country in 1998, almost 34 percent were women (Table 7.6). Most of these women entrepreneurs, whether employers or self-employed without paid laborers, usually operate small businesses with members of their families and with very low levels of technology. They work for 16 hours a day on both household and business tasks. Tiong-Aguino (1999, Table 7.6 Entrepreneurs by gender in the Philippines (‘000 persons) Description
Male
Female
Total
% Female
Employer Self-employed
607 6,264
237 3,235
844 9,499
28.1 34.1
Total
6,871
3,472
10,343
33.6
Source: NSO, April 1998.
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Women Entrepreneurs in SMEs
201
67
70 60
49
50 40
28
28
18 15
20
6
10 0 Agriculture* Transport**
Manufacturing Financing***
Construction
Trade
Community****
Figure 7.2 Women entrepreneurs by sector in the Philippines (% total entrepreneurs)
p. 241) estimates that only about 30 percent of these entrepreneurs have earnings that place them above the poverty threshold. Distribution by sector shows that women entrepreneurs were concentrated in wholesale and retail businesses, followed by agriculture, forestry and fishery, and community, personal, and social services. No women entrepreneurs were found in electricity, gas, and water, or mining and quarrying. Women entrepreneurs form the larger share of total entrepreneurs above all in community, personal, and social services reveals (67 percent) Figure 7.2. Tiong-Aguino (1999, p. 241) has found that, among the women who have graduated to sustainable businesses, the majority are in traditionally “female” businesses, such as gifts, toys, housewares, food processing, herbal medicine, garment manufacturing, jewelry, and handicraft production. Many women are also engaged as entrepreneurs in food service businesses (for example, as restaurant owners and/or caterers). In the wholesale trade sector, women tend to be engaged in the retailing of processed meat products, dry goods, feeds, and other grocery items. In the retail trade, they concentrate on ready-to-wear clothing, home decoration, and textiles. Many female producers of handicrafts have been successful in penetrating export markets and thus they made a great contribution to the country’s foreign-exchange earnings. The Association of Negros Producers, organized by women in the upper echelon of Negros society, is comprised largely of women entrepreneurs who have parlayed their capital resources and creativity into producing handicrafts that have been very successful in export markets. They tend to remain small or micro and informal, as they tend to lack managerial and technical skills. Only 6 percent of women entrepreneurs sampled by Tiong-Aguino have prospered sufficiently to become successful employers and full-fledged entrepreneurs. However, much of their success is predicated on a middle-income family background. Most of these women have access to capital.
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SMEs in Asian Developing Countries
Tiong-Aguino (1999, p. 242) has reviewed two important studies of women’s entrepreneurship development in the Philippines. The first, entitled Women in Business: A Casebook by the Small Enterprises Research and Development Foundation (1991), looks at the personal background of successful women entrepreneurs in SMEs in Metro Manila and in nearby provinces. Of the 15 entrepreneurs featured, ten were the eldest members of families having more than two children. Most of them were exposed to and participated in the businesses either of their immediate families or those of close relatives. In terms of family discipline, there is an almost even distribution between liberal and authoritarian parental upbringing. All respondents had formal schooling, and 13 of them were college graduates. Most of them had non-formal training in addition to their formal education. The majority had jobs before starting their own businesses, and some continued to work during the initial stage of developing their business. This employment provided business ideas and important information and networks for the businesses they later started up. In many instances, it also allowed the accumulation of capital for their future businesses. At the time of the study, most of the surveyed women had been engaged in their current businesses for more than ten years. Not all of the women succeeded in their first entrepreneurial attempt, which confirms that successful businesspersons often have owned businesses previously. The second study, entitled Women in Southeast Asia, by Victoria Licuanan of the Asian Institute of Management (1992), is a survey of 106 successful women entrepreneurs. The Filipino women surveyed in this study were married with three children. They had a domestic support system, such as household help. The respondents were most likely to be sole proprietors and heads of their own corporations, and were seldom in partnerships. They considered a happy family life as a reward for having a successful business. These women entrepreneurs identified hard work, perseverance, and determination as vital reasons for their success in business. Other success factors they identified were personal values, natural talent, intellectual capabilities, and good interpersonal relations. In addition, Tiong-Aguino (1999, p. 243) conducted his own survey. Its findings show that the businesses of the majority of his sample of 139 women entrepreneurs are formally organized. Most of the entrepreneurs are heads of their own businesses. As for the remainder, the prevailing reason for their not being able to formally organize their businesses is that they do not know which structure to adopt. This is especially true for those who employ family members and those with fewer than five employees. As expected, the sole proprietors tend to have a flat organizational structure. The enterprises have a steeper structure, which is an indication of delineated functions. Most respondents identify financial management as the kind of training which they most need. In particular, they wish to gain more knowledge on simple bookkeeping, financial management, and sources of credit.
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203
For marketing, respondents are especially interested in the rudiments of exporting, customer relations, and the euro currency. In production, respondents (particularly those in manufacturing) would like to know more about product design and development, total quality management, and technology management. Very few women signify an interest in the International Organization for Standardization (ISO). This is an indication that awareness of quality standards for products and the environment is low. With regard to organizational aspects, women entrepreneurs are very interested in training programs that focus on human resources development and industrial relations. Other training programs to which the women entrepreneurs would like to be exposed are those on self-motivation, importation, and cost-cutting measures (Tiong-Aguino, 1999, p. 243). The majority of the women entrepreneurs have availed themselves of support programs from both government and private institutions for assistance in marketing, training, finance, and support for machinery and equipment. Some respondents tend to seek financial support (mostly working capital) more from the private sector, while for training they tend to prefer government programs. In marketing, government programs are mostly subsidies for participation in trade fairs and exhibitions, referrals, and market linkages. Training programs from both private and government sectors which were utilized by the respondents include those in product design and development, packaging, total quality management, livelihood, enterprise development, bookkeeping, and financial and business management (Tiong-Aguino, 1999, p. 246). Tiong-Aguino (1999, p. 245) identifies these additional characteristics of women entrepreneurs in the Philippines: (i) they are more patient in handling business problems; (ii) they are more personal when it comes to dealing with customers, and are tactful and careful with words; (ii) their feminine charm has its place with clients, suppliers, and bankers, who tend to be more patient, friendly, open, and accommodating when dealing with women; (iv) they tend to handle finances more carefully than men, observe better budgetary controls than men, and are considered to be conscious of their financial obligations to banks and sources of credit; (v) they have better ways and are subtler than men in their approaches to information gathering, are good at networking, and are able to obtain assistance and to cut through bureaucratic red tape with grace; and (vi) women entrepreneurs from the upper-income levels of the society enjoy more flexibility; if their business fails, they still have their husband’s (or at times their immediate family’s) income to fall back on. 7.2.4
Malaysia
In Malaysia, over the years women have come to assume increasingly prominent roles in the business world. With changing business trends and the increasing importance of the services industry, Malaysia is witnessing more
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women entrepreneurs venturing into commercial businesses within niche markets. According to UNDP (2007, p. 7), a proxy for women entrepreneurs obtained from Population Census 2000 results, indicates that 30.3 percent of women participating in SMEs are working proprietors and active business partners. According to Aris (2006, p. 8), women entrepreneurs in Malaysian SMEs increased from 18.0 percent of the total number of entrepreneurs in 2000 to 27.8 percent in 2003. Recognizing their potential contribution, an aspect that the Malaysian government has been focusing on in recent years is to increase women’s participation in business and entrepreneurship. To further facilitate the development of women entrepreneurs and to enhance their capability and capacity, a special assistance scheme for women entrepreneurs was introduced in 1999 to provide greater access to the various matching grant schemes and soft loans for women entrepreneurs. Recognizing that most women are in the services sector, the scheme has special coverage in the sector, including manufacturing-related services, professional management services, IT-related services, education services, software development, designing and packaging, R&D, marketing, tourism, and other business services (UNDP, 2007, p. 10). During the Eighth Malaysia Plan (8MP), specific programs were implemented by the government to enhance women’s involvement in business. The emphasis is on equipping women with skills and knowledge to enable them to be competitive and versatile in their performance in a more challenging knowledge-based economy. A specific focus is therefore on training and promoting literacy in information and communication technologies. The women’s development agenda continues to feature in the Ninth Malaysia Plan (9MP). The government will intensify efforts to provide an enabling environment to allow more effective participation of women in national development. Efforts will be made to enhance women’s participation in business and entrepreneurial activities through improved consolidation of financial assistance and training programs. More opportunities will be provided for women to undertake agro-based business, to leverage on the potentials of biotechnology, and to improve networking. Special windows will be created in the existing financial programs to enhance access to finance for women entrepreneurs (UNDP, 2007, p. 11). 7.2.5
Bangladesh
According to the labor force survey in Bangladesh in 2005, women make up 15.9 percent, of entrepreneurs, a smaller share than their 50 percent share of total entrepreneurs in the self-employed category. However, the rate varies between urban and rural areas, namely nearly 29.9 and 1.6 percent, respectively. Distribution by sector indicates that agriculture is the most important sector for women entrepreneurs, followed by the manufacturing sector, mainly in traditional industries such as food and beverages, textiles and garments, and handicrafts (LFS, 2005, p. 10).
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A study by Saleh (1995, p. 25) observes that 75 percent of women entrepreneurs in the sample were degree-holders, and, according to a study undertaken by the Asian Development Bank (ADB) in 2001, a large number of women’s enterprises are operating on an informal basis and are not identified in the economy of Bangladesh (ADB, 2001d, p. 10). As in other Asian developing countries, most women entrepreneurs in Bangladesh are engaged in MIEs and SEs, where they can also apply traditional types of technology (Lakshmi, 1998, p. 6). Shamim (2008) has undertaken an explorative study to obtain an overview of the situation of women entrepreneurs in Bangladesh. The main thematic issues covered by this study are the socio-demographic profile of women entrepreneurs, types of women-owned enterprises, regulatory procedures including tax, company registration, training and capacity building, and human resources. The study also focused on women’s access to finance, business management, product and design development, and marketing, and issues related to business promotion. The study tried to explore the social perspectives of women entrepreneurs, their conditions and position in the family, and also tried to discover women entrepreneurs’ overall perception of the existing business environment.. Both qualitative and quantitative research methods adopting participatory data collection processes were applied to explore information from 130 women entrepreneurs of 11 districts in Bangladesh. The findings may illustrate the salient characteristics of women entrepreneurs in Bangladesh. First, most of them are young, have a low level of education, are married, and live in nuclear families. Second, educated women are gradually becoming interested in being involved in business. In this respect, family background was found to be one of the determining factors inspiring women to become entrepreneurs. Existing alternative socialization processes, including continuous discussion and debate on women’s economic empowerment, also played vital roles in encouraging women to enter into business. Third, individual ownership is their dominant type of business organization. Fourth, most of them cater to local markets, and their trade is related to the local and national markets. Only a few respondents were found to be involved in export–import activities. 7.2.6
Nepal
Women’s entrepreneurship, in a formalized sense, is a relatively new phenomenon in Nepal. However, certain ethnic communities in the country, especially the Newars and Tibeto-Burman highland groups such as the Sherpas, Curungs, and Thakalis, are known to have a long tradition of women being involved in small business enterprises. Women from the Tibeto-Burman communities are socially less constrained than those belonging to the Indo-Aryan communities in terms of entrepreneurial tendencies (ADB, 1999a, p. 4). It is only within the last ten years that women’s entrepreneurship has progressively gained some acceptance in the overall
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dominant majority within Nepalese society. With the growing recognition that women have unique talents that could be harnessed for development and for creating employment opportunities for others who are not suited to an entrepreneurial career, developing women as entrepreneurs has become an important part of national development planning and strategy (Tuladhar, 1996, p. 15). Over the past 15 years, women’s participation in economic activities has moved beyond agriculture. In search for better income, rural women are increasingly migrating to urban areas, and moving into wage-paid employment or self-employment ventures. Based on National Census on Employment 1991, as cited in Tuladhar (1996, p. 10), some 82 percent of working women are self-employed and 12 percent are wage-employed, as compared with 69 percent and 27 percent, respectively, in the case of men. Less than 1 percent of the working women hold the status of employer. Women’s participation in the informal sectors has increased significantly in both urban and rural areas. Vending, petty trade, liquor making, and vegetable selling are some of the more common businesses undertaken by women. According to ADB (1999a, p. 7), as social custom restricts women’s role to the household, women entrepreneurs in Nepal are mostly involved in home-based industries, such as food processing, garments, hosiery, and crafts. However, these industries are gradually closing due to competition from imported products or are being replaced by organized formal units, and as many women entrepreneurs lose their own businesses, they become transformed into wage laborers in sectors such as the carpet industry. 7.2.7
Pakistan
In Pakistan, studies on women entrepreneurs are rather limited. Two among them are by Goheer (2003) and Sinha (2005). The former is based on a survey of women entrepreneurs in the formal sector in 2002. It shows that most entrepreneurs were in the age group 20–39 years. It also shows that the likelihood of a Pakistani woman being in business was greater if she lived in a nuclear family structure, while the predominant mode in Pakistan is the extended family structure. Living in a nuclear-family structure would mean that women have relatively less interaction with the older generation and are less constrained by its social or cultural influence. With respect to the level of education, the study indicates that the literacy rate of women entrepreneurs and their close relatives was well above the national average. While the female literacy rate in Pakistan is 32.6 percent overall, 97 percent of the survey respondents were literate. The majority of women entrepreneurs belonged to the upper tiers of graduates and postgraduates. Most of the surveyed women entrepreneurs had supportive husbands and families. The study also found that an educated woman from an educated family background is much more likely than an average Pakistani woman to start or run a business (Goheer, 2003, p. 10).
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Table 7.7 Distribution of informal sector workers by employment status in Pakistan (%)
Employers Self-employed Unpaid family workers Paid workers Total
Male 2001–02 1.1 44.8 10.1
Female
2003–04 1.6 44.7 10.9
Total
2001–02
2003–04
2001–02
2003–04
0.2 31.0 19.1
0.2 34.0 19.5
1.0 43.6 10.9
1.5 43.7 11.7
44.0
42.8
49.7
46.3
44.5
43.1
100.0
100.0
100.0
100.0
100.0
100.0
Source: Labor Force Survey 2003–4, (Government of Pakistan, Islamabad).
The second study, by Sinha (2005), shows that in Pakistan, in accordance with the trend that is evident in India and other South Asian countries, most femaleowned SMEs have the legal status of sole proprietorship. More interestingly, the proportion of partnerships in the businesses owned by women in Pakistan is twice the national average. They are mainly found in simple manufacturing activities and, beyond that, in trade and services (Sinha, 2005, p. 12). In addition, certain other studies such as Aftab (1991) and GCU (2004), based on surveys of urban and rural SMEs in Pakistan, provide useful information on women entrepreneurs. First, large numbers of female-owned MIEs and SEs are concentrated in highly volatile, household-based, low-return urban activities where growth prospects are bleak. Second, their activities are concentrated in selected subsectors such as dress making, knitting, and retail trading. Third, they operate as almost invisible entrepreneurs. Fourth, the closure rate of female-owned MIEs and SEs is also higher than that of maleowned enterprises. This is for personal rather than business reasons. Fifth, the higher closure rate of female-owned enterprises is to be interpreted in the light of the motivation behind starting up a business: women entrepreneurs are mostly motivated to be self-employed and don’t take long to close their businesses if this suits their economic or personal circumstances. Data from Labor Force Survey 2003–4 may give some clue about the development of women entrepreneurs in SMEs in Pakistan. As can be seen in Table 7.7, the rate of women as employers during the reviewed period does not change, while that of self-employed women increases slightly. One important indication from this survey is that the proportion of women working as entrepreneurs are still lower than that of their male counterparts.
7.3
Main barriers to women’s entrepreneurship
Many studies throw light on the challenges and constraints faced by women entrepreneurs in developing countries. Although the entrepreneurial
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process is the same for men and women, in practice women face many problems, of different dimensions and magnitudes, which prevent them from realizing their full potential as entrepreneurs, with which they could make significant contributions to society, especially in relation to poverty reduction. Entrepreneurship by definition implies being in control of one’s life and activities. It is precisely this independence, according to Seymour (2001), that many societies, especially in the developing world, have denied women. Women’s family obligations often bar them from becoming successful entrepreneurs. Having primary responsibility for children, home and older dependent family members, few women can devote all their time and energies to their business (Seymour, 2001, p. 11). Traditional gender role expectations and patriarchal attitudes in many developing countries make it even more difficult for women to relieve themselves of family responsibilities, or to do what they want, including running a business. The familial and social conditioning in many developing countries inhibits the confidence, independence, and mobility of women. This translates into poor access to information, credit, education/training, technology, markets, and so forth, and prevents women from starting a business or women entrepreneurs from growing beyond a particular level (Sinha, 2005, p. 21). The situation is more critical in many South Asian countries than in other parts of Asia. Sinha (2005, p. 14) mentions that the business environment for women, which reflects the complex interplay of different factors (including psychological, social/cultural, religion, economic, and educational) in this region ultimately results in the disadvantaged status of women in society. ADB (2001d, p. 4) reveals that a large number of women’s enterprises in Bangladesh are operating on an informal basis and are not identified in the economy of the country. These enterprises lack the basic forms and information, marketing opportunities, and regulatory and social supports. Other studies also conclude that women in this region remain far behind men in enjoying freedom and other basic human rights, let alone participating with men on an equal footing in economic activities. A study by Sinha (2005) is among very few comprehensive studies which are available on women entrepreneurs and their current constraints in South Asia. Based on a review of articles on this issue in the 1990s up to 2004, Sinha provides a range of important information. First, women in South Asia are almost invisible to formal financial institutions. They receive less than 10 percent of commercial credits. In the area of guarantees, several discouraging habits have become ingrained in financial institutions and banks, such as requiring male members to accompany women entrepreneurs for finalizing projects proposed by women, as well as almost invariably insisting on guarantees from males in the family. In some countries, credit may be available for women through several schemes, but there are bottlenecks and gaps, and the multiplicity of schemes is often not adequately
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listed nor is there networking among agencies. In Nepal, for instance, all formal credit institutions seek tangible collateral for loans, and women are effectively sidelined from institutional credit since they have little access to inherited property. Sinha (2005) also points out that institutional sources of credit account for only 15.4 percent of women’s borrowing, whereas noninstitutional sources, for example, from friends and family, account for 84.6 percent. Meanwhile, in Pakistan most middle-level women entrepreneurs were financed from their own savings or borrowings from their relatives. Many other studies support the view that lack of access to formal credit, particularly for starting an enterprise, is one of the major constraints faced by women entrepreneurs in Asian developing countries. First, they often have fewer opportunities than their male counterparts to obtain access to formal credit, for various reasons including lack of collateral (for example, an unwillingness to accept household assets as collateral, reflecting the rigidity of collateral requirements) and negative perceptions of female entrepreneurs by formal loan providers. High transaction costs and heavy paperwork are further impediments to women entrepreneurs. When they do have access to credit it is often in much smaller amounts than they really need. In particular, less educated women entrepreneurs find it more difficult to obtain finance from banks because they lack information on how to go about securing a loan. Moreover, bank managers are often more reluctant to lend to women than to men.8 Second, lack of market access is a serious constraint for many women entrepreneurs. They often lack access to training and experience in how to participate in the marketplace, and are therefore unable to market goods and services strategically. Consequently, they are often unable to sell their goods, especially to broader markets. In addition, women entrepreneurs have often not been exposed to the international market, and therefore lack knowledge about what is internationally acceptable. The high cost of developing new business contacts and relationships in a new country or market is a big deterrent and obstacle for many female-owned SMEs. Women entrepreneurs may also fear or face prejudice or sexual harassment, and may be restricted in their ability to travel to make contacts. Third, in the area of networks and organization, women entrepreneurs have fewer business contacts, less knowledge of how to deal with the government bureaucracy, and less bargaining power, all of which further limit their businesses’ growth. Since most women entrepreneurs operate on a small scale, and are generally not members of professional organizations or part of other networks, they often find it difficult to access information. Most existing networks are male-dominated and sometimes not particularly welcoming to women but prefer to be exclusive. Even when a woman entrepreneur does venture into these networks, her task is often difficult because most network activities take place after regular working hours. There are hardly any women-only or women-majority networks which a woman
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could enter and in which she could gain confidence and progress. Lack of networks also deprives women of awareness and exposure to good role models. Few women are invited to join trade missions or delegations, due to the combined invisibility of women-dominated sectors or subsectors and of women as individuals within any given sector.9 According to Sinha (2005, p. 17), one reason for women’s organizational invisibility is the difficulty they face in finding sufficient time to attend meetings as well as manage their families. However, business associations rarely consider such needs when scheduling meetings, and few business conferences or trade fairs provide childcare or children’s programs in order to facilitate the participation of businesswomen. It is interesting to note, on the other hand, that many business conferences, particularly in developed countries, do provide “spouse” programs in order to accommodate the needs of businessmen to bring along their “non-working” wives. Fourth, in the area of culture, traditional views on the role of women in society are an important impediment to women’s entrepreneurship in Asian developing countries. The added responsibility society often places upon women in their roles as mothers and wives clearly distinguishes most businesswomen from their male counterparts The time taken up and the emotional burden created by these dual role responsibilities often interfere directly with the conduct of business for women in ways that do not apply to the majority of men in the region. The general behavioral pattern of women, which is marked by modesty and lack of articulation, is often misinterpreted by society as incompetence and lack of professionalism. Due to prevailing social norms, women entrepreneurs are prevented from managing their businesses independently. More importantly, because of patriarchal bias and role prescriptions, women with great ambition, self-confidence, innovativeness, achievement motivation, and risk-taking ability, qualities that are essential for an entrepreneurial career, are also inhibited. As explained by Sinha (2005, p. 21), in this kind of social culture, the transition itself from a “non-professional” approach to a “professional” one demands extra effort from women, and only very few women want or dare to face that challenge. In addition, women by themselves find it difficult to interact and discuss issues as equals, because they have been trained to listen, obey, and leave decisions to the men in the family. The condescending views of others do little to support them. Interestingly, in south India, Sinha (2005, p. 21) finds that many women entrepreneurs, most of whom have been married for a fairly long time and are satisfied with their marital lives, do not feel that having their own business very much affected their roles as spouse, parent, or homemaker. These women experience very low levels of work–family conflict in their spousal or parental roles. However, as emphasized by Sinha, all these women had someone to help them with their household chores – either a part-time or a full-time maid. Another reason for a lower level of role conflict may be the
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considerable support that these women receive from their spouses. Many of them said that their spouse was either happy or very happy that they owned their own business. Another factor that may contribute to this high degree of spousal support could be the stable, satisfactory nature of their marriages. The severity of this problem, however, varies, not only between countries but also between rural and urban areas within a country, and it is more critical in many South Asian countries than in other parts of Asia. This variety is relating to differences not only in prevailing social norms but also in social and economic development. It can be expected that in open regions with higher income per capita and better human development, this problem is less significant than in isolated and poor regions with backwardness in education. Fifth, women entrepreneurs face restrictions hampering their mobility and thereby affecting their interaction with others. Many women entrepreneurs complain that government clerks and private dealers harass them. As a result, many of them tend to operate only among clients whom they know. Products are sold to relatives and friends, and suppliers tend to be people already known to them. Thus, a more extensive network is lacking, and expansion into a larger scale is not viewed with enthusiasm. Another problem faced by women entrepreneurs, as identified by Sinha (2005, p. 22), is occupational mobility glitches. Women entrepreneurs consider occupational mobility, that is, shifting from one product line to another, to be disadvantageous. Taking a chance with a venture on her own is considered a risky proposition which can be indulged by the family members once, but not again if a woman entrepreneur wants to be more adventurous. Women are also financially at a disadvantage with innovating into a second product line. Many women have to borrow from the men in their lives to start up the first venture. However, money for a second venture is often not as likely to be forthcoming from the same source. Many women entrepreneurs have to experience the troubling “assistance” of support agencies. Harassment in government departments and the indifferent and discriminatory attitude of officials in all SME-related departments, such as taxation, labor, and power, are some of the problems that women entrepreneurs have to deal with. Other relatively good studies on the constraints facing women entrepreneurs in South Asia are available.10 In Nepal, Acharya (2001) presents the familiar story that women entrepreneurs in this country suffer seriously from bias against them because of the traditional cultural values. This has made it very difficult for them to create or to expand their own business. ADB (1999a) reveals that the problems that women entrepreneurs in Nepal face are mainly poor access to credit and marketing networks, lack of access to land and property, reduced risk-taking capacity, lack of access to modern technology, lack of personal security and risk of sexual harassment, severe competition from
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organized units in the domestic market as well as in international markets, a low level of self-confidence, and social and cultural barriers such as exclusive responsibility for household work and restrictions on mobility. In India, Charumathi (1998) observed that women’s enterprises are taking second place to home, and this is one of the main weaknesses of women’s entrepreneurship in India. Married women also have to strike a fine balance between home and business. Thus, despite modernization, tradition and family hold women back. Moreover, “interfacing and interacting” with women as professionals is still an awkward experience for many men due to the deep-rooted traditional perception of male–female relationships. Using secondary data, Das (2000) finds that about half of all women entrepreneurs in India used their own funds or funds borrowed from their spouse or family to set up their business. Although 43 percent had taken loans from a financial institution, for a significant proportion (38 percent) this was only a small part of their original investment and not the primary source of funds. In Bangladesh, Matiur-Rahman et al. (1998) find that women entrepreneurs suffer from the myth that women are ineffective organizers, are too soft in making decisions, and so on, as a result of which the society strongly believes that men are much better at running businesses than women. In other words, women are believed to be best suited for housekeeping. This has made it difficult for women to become successful entrepreneurs. Nilufer (2001, p. 12) finds that women entrepreneurs in this country suffer from two distinct disadvantages, namely, the initial lack of confidence in their own abilities, and society’s lack of confidence in women’s abilities. Such an unbalanced reality results in families’ reluctance to finance women’s ventures, bankers’ reluctance to take risks on projects set up by women, and a general unwillingness to accept women as decision-makers or to stand as guarantors for loans to them. From a survey of 130 women entrepreneurs of 11 districts in the country, Shamim (2008, p. 13) finds that lack of access to capital was another among the serious problems they faced. Most of them have no access to formal banks. The family was the main source of starter capital. Commercial banks, both public and private, did not play significant roles in promoting women entrepreneurs. It is also observed that 65 percent of the respondents did not know anything about the circular of Bangladesh Bank on a refinancing scheme for female-owned SMEs. Among the 35 percent of the respondents who had been informed about this circular, 79 percent obtained information from sources like seminars, training, and so on. Although 35 percent of the total respondents had heard about the circular, 59 percent of them did not know about all the provisions in the circular. Neither Bangladesh Bank nor any other bank employed any effective mechanism to disseminate information of this circular to women entrepreneurs or other stakeholders. Even bankers working at the local level were not informed about this circular. A poor information dissemination process contributed to the poor implementation of the refinancing scheme set out in this circular.11
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In Pakistan, Roomi and Parrot (2008) find that women entrepreneurs do not enjoy the same opportunities as men due to a number of deep-rooted discriminatory socio-cultural values and traditions. Furthermore, these restrictions can be observed within the support mechanisms that exist for such fledgling businesswomen. The economic potential of female entrepreneurs is not being realized as they suffer from lack of access to capital, land, business premises, information technology, training, and agency assistance. The inherent attitudes of a patriarchal society, which hold that men are superior to women and that women are best suited to be homemakers, create formidable challenges. Women also receive little encouragement from some male family members, resulting in limited spatial mobility and a dearth of social capital. The research by Roomi and Parrot (2008) suggests that, in order to foster development, multi-agency cooperation is required. The media, educational policymakers and government agencies could combine to provide women with improved access to business development services and to facilitate local, regional, and national networks. This would help integrate women entrepreneurs into the mainstream economy. Roomi’s research (2006, p. 7.) suggests that most of the problems or challenges faced by Pakistani women entrepreneurs are a result of the inferior status of women in society, their being underestimated as economic agents, and the gender bias embedded in the regional, tribal, and/or feudal culture in the name of Islam. Previous studies such as Shabbir and Di Gregorio (1996), Shah (1986), and Hibri (1982) state that the main reasons for the challenges they face are the notions of “purdah” and “Izzat”, which place severe restrictions on their mobility and forbid them to go out and work with men, which might cast doubts on their good reputation and impair their marriage prospects. According to Roomi (2006, p. 8), inadequate public transport plays a major role in the immobility of women in Pakistan, and this is related to religious and cultural factors, mainly purdah: public transport facilities such as buses and vans have separate seating arrangements for men and women. Only the first two or three rows of seats are available women; all the remaining seats are reserved for men (Shabbir, 1995). According to Goheer (2003), the dominant source of start-up capital for women entrepreneurs in Pakistan was reported to be personal savings (73 percent), while informal sources were secondary. Only 4 percent of respondents had access to formal sources of credit. The recent study by Roomi (2006) also paints the same picture of women generally having less access to external funding than men; hence women’s businesses tend to be concentrated in the service sectors, which usually require little initial capital outlay and less technical knowledge. Limited access to vocational and technical training, including on managing a modern business, is also often cited as an important constraint facing women entrepreneurs in Asian developing countries. This is consistent with the fact that women in the region have less access to education
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than men, and technical and vocational skills can be developed only on a strong foundation of basic primary and secondary education. Gaining relevant skills and knowledge can also be more difficult for women than for men since women frequently have a double work burden and childcare responsibilities, thus making them less able than men to undertake formal and informal training. In addition, gender stereotypes, prejudices of teachers, and the gender-based preferences of parents and girls themselves tend to channel girls and women into the more general and social areas of education rather than the scientific or technical.12 When training is available, women may be unable to access it because it is held at a time when they are meeting family responsibilities, or the content and method of delivery may not be appropriate. This lack of access to education and training opportunities means that women entrepreneurs start their businesses without adequate skills. Besides, most technical training offered to girls at the post-school levels, in the women’s polytechnics for instance, are limited to traditional careers, such as secretarial skills and dress design. Thus, the exclusivity of training itself acts as a limiting factor (Sinha, 2005, p. 16). Although they vary, Asian developing countries in general are characterized by a low enrolment among women in education, high drop-out rates, and poor-quality education. National data in these countries showing female literacy levels as a percentage of male literacy, or average years of schooling of women and men, testify to the existence of gender discrimination that works against building the capacities of women and providing them with equal opportunities in the region (Table 7.8).13 To sum up, based on all the studies reviewed above and others cited in endnotes, the main constraints related to access to finance, markets, training, infrastructure, and technology facing female-owned SMEs in South Asia can be summarized as follows. With respect to (i) access to formal financial sources: the main constraints are discriminatory national laws, prejudice against women and female-owned businesses, difficulty in providing collateral (women do not own assets in their own right), lack of credit/banking history (due to the past informal nature of businesses), and need for credit plus business planning and advisory services; (ii) access to markets: prejudice against women, difficulty in traveling to make contacts, and sexual harassment; (iii) access to training: training needs are often overlooked, and when identified women’s needs may not be met (for example, time of training, content, method of delivery); (iv) access to infrastructure: bias against women’s businesses and few or no contacts in the bureaucracy; and finally (v), with respect to access to technology, the main constraints are older women and women with low levels of education and literacy (who are particularly disadvantaged), lack of English-language skills, and bias against women’s involvement in technical matters.
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Country*
Adult literacy rate (% aged 15 and older), 1995–2005
Combined gross enrolment ratio for primary, secondary, and tertiary education (%), 2005
Estimated earned income (PPP USD), 2005
Female
85 — 89 79 77
87 — 102 76 72
17,802 20,044 12,531 15,658 5,751
40,000 39,150 31,476 37,506 15,861
72 69 83 64 62 67 60 56 56 51 34 56 54
71 70 79 63 66 70 68 67 64 48 45 56 62
6,695 5,220 3,883 2,647 2,540 2,410 1,620 1,385 2,332 — 1,059 1,282 1,038
10,732 8,213 6,375 6,479 3,604 5,280 5,194 2,692 3,149 — 3,607 2,792 2,072
Male
Female
High human development – Japan – Singapore – South Korea – Brunei Darussalam – Malaysia
99.0 88.6 99.0 90.2 85.4
99.0 96.6 99.0 95.2 92.0
Middle human development – Thailand – China – Philippines – Sri Lanka – Vietnam – Indonesia – India – Lao PDR – Cambodia – Myanmar – Pakistan – Bangladesh – Nepal
90.5 86.5 93.6 89.1 86.9 86.8 47.8 60.9 64.1 86.4 35.4 40.8 34.9
94.9 95.1 91.6 92.3 93.9 94.0 73.4 77.0 84.7 93.9 64.1 53.9 62.7
215
* Based on HDI rank. Source: UNDP (2008).
Male
Women Entrepreneurs in SMEs
Male
Female
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Table 7.8 Main indices of women’s education in selected Asian countries, 2007/2008
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SMEs in Asian Developing Countries
Region
Women entrepreneurs with university degrees
Total women entrepreneurs
Western and more developed regions – Sumatera – Java and Bali
10,402 58,240
740,724 4,030,236
Eastern and less developed regions – Nusa Tenggara – Kalimantan – Sulawesi – Maluku and Papua – National
909 4,196 2,365 88 76,200
276,300 266,756 233,686 42,936 5,590,638
Source: BPS.
In Indonesia, although women entrepreneurs in SMEs have been increasing since the 1980s, their representation is still relatively low (see again Figure 7.1). This can be attributed to at least four main factors. First, a low level of education and lack of training opportunities that make Indonesian women severely disadvantaged in both economy and society may play an important role. It is especially true for women living in rural areas or in relatively backward provinces. This can be seen clearly from national data on women entrepreneurs in SMEs in the manufacturing industry by province and university degree. The majority of women entrepreneurs in SMEs with university degrees are found in Java and Sumatera, the western and more developed part of the country (Table 7.9). This is consistent with a report on gender mainstreaming in the education system in Indonesia cited in Suharyo (2005), which shows that the illiteracy rate for women is still higher than that for men, and the gap between men and women in rural areas is much higher than that in urban areas. Many rural women speak only their native language and never read newspapers, and so they are very restricted in communications with the outside world. Particularly in rural areas, there are still many social, cultural, and religious taboos that prevent those women who can and should be accessing higher education from doing so. Many parents living in rural areas still have the traditional thinking that (higher) education belongs to men only, especially since after marriage women leave to join their husbands’ families and, hence, are not regarded as being useful to their own families in the long run.14 Second, heavy household chores hold women’s entrepreneurship back. Especially in rural areas, women have more children, are more burdened by their traditional role as being responsible for housework and childcare, and therefore have fewer hours of free time than men, both during weekends and on weekdays.
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Table 7.9 Women entrepreneurs in SMEs by university degree and region in Indonesia, 2004 (person)
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Third, there may be legal, traditional, customary, cultural, or religious constraints on the extent to which women can open their own businesses. Especially in rural areas where the majority of population are Moslem and rather isolated from big cities like Jakarta, Islamic-based norms have a stronger influence on women’s daily lives. This makes female behavior or attitudes in rural areas less open than their male (or urban women’s) equivalent to the “modern business” culture. In such a society, women must fully perform their primary duties as their husband’s partner and housewife, they are not allowed to start their own businesses or to do jobs that involve contact with or managing men, or simply are not allowed to leave the home alone. Even if women do have their own business, in many cases they defer to husbands or other family members in key business decisions, and many turn over more power to these other family members as the business grows. All these constraints lead to an exclusion of women from entrepreneurial activities. However, in rural areas relatively close to urban areas with good transportation and communication links, changes have been observable in the last 30 years in local society’s attitudes about the traditional role of women as being responsible for housework and childcare and men for income. Fourth, lack of access to formal credit and financial institutions is indeed a key concern of female business owners in Indonesia. This is found to be more problematic for women in rural areas or outside major metropolitan areas such as Jakarta and Surabaya. This constraint is related to ownership rights, which deprive women of property ownership and, consequently, of the ability to offer the type of collateral normally required for access to bank loans. In Indonesia, men are still perceived as the head of the family, and thus, in general, men are still perceived as the owners or inheritors of family assets such as land, company, and house. Probably for the above reasons, especially the cultural or religious constraints, it is found that in Indonesia, particularly in rural areas, economic necessity or wanting to improve family income is a predominant factor promoting entrepreneurship among women. As stated in studies such as Syahrir (1986) and Rusdillah (1987), economic pressures have resulted in women being permitted to take up paid employment outside the home or to run income-earning activities beyond their traditional role. Meanwhile in more developed economies such as the United States, or even in Korea, for instance, non-economic motives such as a desire for more fulfillment, or to test a winning idea, or to take the first step toward independence, selfesteem, and freedom of choice, are more important for women embarking on business ownership (APEC, 1999). Fifth, the participation rate of women as entrepreneurs varies by region. Interestingly, although a larger proportion of MIEs and SEs are located in Java, just as the majority of the population, non-primary economic activities, and educated people in the country are found in this island, the fact that Nusa Tenggara (NT) in the eastern part of the country has the
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Women Entrepreneurs in SMEs
SMEs in Asian Developing Countries
highest ratio of women entrepreneurs means that there are more female than male entrepreneurs in NT. However, this does not necessarily reflect a greater spirit of female entrepreneurship in NT than in the rest of the country. NT is a region with a very high unemployment rate. Economic activities such as mining, manufacturing, construction, agriculture, and banking are more or less stagnant on this island. Most mature or married men are working in low income-generating activities such as transportation, motorcycle repair workshops, or in agriculture as marginal or subsistent farmers owning less than 0.5 ha of land, or as civil servants. So, as a family survival strategy, in the household the wife is “pushed” to do something outside the home to earn some income. Therefore, the high participation rate of females as entrepreneurs in NT is most likely to be a reflection of a family survival strategy rather than of a spirit of entrepreneurship. In other words, female entrepreneurship development in NT is more a “push” than a “pull” phenomenon. Arifin (2004) undertook research to discover the obstacles faced by women entrepreneurs in SMEs in Indonesia. The focus of the study was general problems derived not only from their business’s marginality and informality, but also from gender stereotyping. It proposes a systematic way of understanding women entrepreneurs’ vulnerabilities that militate against their effective empowerment and organizing activity. The study’s important findings are as follows. First, the general problems usually faced by women entrepreneurs are risks in economic activity outside the law, which are: (i) discrimination, which includes removal of their business places; (ii) exploitation such as illegal charge by preman or even by authoritative agents such as the police or security officers; (iii) vulnerability to price rises, particularly of raw materials; and (iv) the use of business capital to pay for household consumption. Second, the risks of exploitation and discrimination are also often based on gender, mainly because women are weak economy players, operate outside the law and have a lower status as women in the gender-relations structure. Third, adequate resources can actually be used to prevent the negative impacts of these risks; however, most women have only limited resources. This is the reason why these women need “coping mechanisms”. Fourth, the sources of vulnerability of women micro-entrepreneurs are (i) gender relations in the family and society’s economic activities, such as the collective norms that regulate roles, status, interaction, and work division, and the images of women and men; and (ii) the intervention of external agents in their economic activities and community and family life. The study concludes that: (i) attention to the vulnerable groups’ ability to face and handle risks is a way inn which this analysis can strategically side with this group; (ii) attention to the way women organize their life and business risks has made us understand their ability to cope with their sources of vulnerability and could be used to create an empowerment initiative; and (iii) a critical approach to the processes that has led a group of people into vulnerable conditions is indeed important to initiate a development strategy.
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Another important study is by Dewayanti and Chotim (2004), who focus on women’s marginalization and exploitation in micro businesses (MIEs) in rural Java. It shows that MIEs in commerce/trade and low technology-based industry (such as the food and garment industries) and services are business types which many women run either independently or as part of a family production system. The majority of micro businesses that engage woman have a subsystem character, with the income mostly used for everyday family consumption. The authors argue that women’s marginalization and exploitation are factors causing the underdevelopment of micro business, which implicitly add to women’s burdens. This marginalization process generates spreading poverty because most women work in rural micro businesses. The authors find that the marginalization issue is more urgent for women than for men because the pattern of labor division in a household imposes on women a greater burden of domestic duties. Women’s work selection and effort cannot be separated from the family’s need fulfillment patterns. Economically, the division of labor can be explained by the phenomenon of poverty, in the sense that poor families can make women work to help meet the family needs. For the sake of efficiency, women’s productive work in business, of course, more positioned in domestic area in order to be able to finish their domestic duties. Facing this difficult condition, women play an important role with their additional work, like opening stalls, looking after cattle and gardens, to develop natural saving like productive crops and jewelry, and an alternative finance industry like “artisan” and micro finance institution which can give fast credit. Dewayanti and Chotim (2004) also found that most women, supported by non-government organizations, feel confident that they can prove to society and family that they can contribute to the family’s economy. When political and gender issues are introduced, only local cadres who are capable of balancing non-government organization activity with politics. Most other women are not able to follow this activity because they still have to struggle with their family’s economic needs. In Malaysia, Ming-Yen et al. (2007) find that women entrepreneurs face a shortage of peer support networks as compared with men even though various women entrepreneurs and industry associations have been formed (such as FEM, NAWEM, USAHANITA), which generally serve as a platform for women entrepreneurs to establish networks and exchange information and experience as well as to conduct training programs, seminars, and workshops on motivation, leadership, and entrepreneurial development and to provide other means of support. According to their study, this is because women may not join these associations as they might be overloaded with business and family responsibilities. This limits women entrepreneurs’ ability to seek informal advice and peer financing or to access the information networks needed for survival and growth. This might pose a challenge to women entrepreneurs in establishing networks which are helpful to the survival of their businesses.
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Women Entrepreneurs in SMEs
Notes Introduction
1. For more discussions on this, see for example, Tambunan (1994), Liedholm and Mead (1999), and Berry et al. (2001). 2. MIEs are the smallest size categories of firms, mainly self-employment units, and they are the most traditional units within the group of SMEs. That is why in many literature and official reports, MIEs are discussed/presented separately, not included in defining SMEs.
2
SME Development Pattern: A Theoretical Consideration
1. A number of authors used these categories of conditions in analyzing SMEs, such as Tambunan (1994) and van Dierman (1995). 2. Anderson and Khambata (1981) also point out the importance of growing cash markets generated by the growth of agriculture or rural incomes for the high rates of growth of small and larger sized establishments of industry. 3. In addition, see also other countries’ studies from Banerji (1978), and Liedholm and Parker (1989). Banerji’s study indicates that at a higher level of economic development the larger sized enterprises become more important than the smaller ones. Liedholm and Parker’s study shows that in some African countries total employment in MIEs and SEs, especially in the one person size category, has been increased over time, though the increase was less rapid than that in MLEs, which tended to shift the relative balance of manufacturing employment from MIEs and SEs toward MLEs. 4. See also classical works from Chenery (1986), Chenery et al. (1986), and Syrquin (1989) for their studies and their provided evidence of this “structural transformation” of production within the manufacturing sector in many countries. 5. See Tambunan (2006a) for literature discussion. 6. It is also discussed in Chuta and Liedholm (1985), Mead et al. (1990), and Tambunan (1994). 7. For literature discussion, see Tambunan (2006c). 8. Authors such as Anderson and Khambata (1981), Page and Steel (1984), and Suarez-Villa (1989) argued that it is rather the urban SMEs than the rural ones that may have more opportunities to grow. In other words, in urban areas or cities SMEs may be growing while their rural counterparts are declining or stagnating. 9. See, for instance, Piore and Sabel (1983; 1984) and Harvey (1990). 10. In their interpretation, the first industrial divide occurred during the nineteenth century with the emergence of mass production, and the second industrial divide has occurred in the late twentieth century with the reemergence of craft industries (Piore and Sabel, 1984). 11. See Tambunan (2006a) for literature survey on this matter. 12. All classical studies on economic development patterns from works such as Chenery (1979), Chenery and Syrquin (1975) and Chenery et al. (1986) provide a wealth of evidence to support this proposition. It can be said that there are also “inferior intermediate goods”, which means that the higher the level of development the 220
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lesser industrial demand exists for these goods, for example, bamboo versus stone for buildings or houses. 13. Ho (1980; 1986), Sandesara (1988), Uribe-Echevarria (1991a; b), and Tambunan (1994; 2006a) also discus the possible negative effects of the growing integration between rural and urban economies on rural SMEs. This theory can also be used in analyzing the likely effects of trade and investment liberalization, which closely integrates domestic with the global economies, on domestic SMEs. 14. The effects of increase in income in rural areas or in agriculture in particular on the dynamic of SMEs in rural non-farm sectors are also discussed in studies such as Mellor (1976), Bell et al. (1982), Siamwalla (1982), Hazell and Roell (1983), Mellor and Johnston (1984), Harriss (1991), and Tambunan (1994; 2000; 2006a).
3 Recent Development: An Overview 1. Schmitz and Nadvi (1999) provide some good examples of advanced exportoriented clusters in other developing countries including shoe manufacturing in Brazil, India, and Mexico, surgical instruments in Pakistan, and garments in Peru. 2. Their work, among other material used for the Vietnam case in this chapter, is part of a report for the ERIA Related Joint Research of SME Project, IDE-JETRO, 2007–8, in which the author of this book was also member of the team for the Indonesian case. The report has been published internally and is edited by Hank Lim (2008). 3. According to the Department of Industry in 2005, as explained in Cuong et al. (2008), most SMEs are located in residential areas and they formed about 97 percent of all manufacturing enterprises in HCMC. Together their employees counted for 931,000 people, or around 35.8 percent of total labor force in HCMC. In all, manufacturing SMEs form an important economic category in HCMC. 4. See, for instance, Wiboonchutikula (1989; 1990; 2000; 2001), Chirathivat and Chantrasawang (2000), Bakiewicz (2005), Allal (1999), Akrasanee et al. (1986), Berry and Mazumdar (1991), Chiemprapha (1993), ILO (1993), Muller (1993), Wattanapruttipaisan (2002a; b), Tambunlertchai et al. (1986), TDRI (1990), OSMEP (2002), and Kecharananta and Kecharananta (2007). 5. Her work, the only material used for the Philippines case (since there are no other good and recent literature available and no national data which can be publicly accessed) in this chapter, is part of a report for the ERIA Related Joint Research of SME Project, IDE-JETRO, 2007–8. The report has been published internally and is edited by Hank Lim (2008). 6. His work, used for Cambodian case in this chapter, is part of a report for the ERIA Related Joint Research of SME Project, IDE-JETRO, 2007–8. The report has been published internally and is edited by Hank Lim (2008). 7. The MoC is unable to provide a detailed breakdown by industry or comprehensive data on employment and output of these locally licensed enterprises. Such information would be very useful to policymakers in order to understand better the informal sector, which comprises such a large portion of Cambodia’s economic activity and employment (DCI, 2003). 8. His work, among other material used for the Lao case in this chapter, is part of a report for the ERIA Related Joint Research of SME Project, IDE-JETRO, 2007–8. The report has been published internally and is edited by Hank Lim (2008). 9. Her work, the only material used for the Chinese case in this chapter (as no other written literature in English are available), is part of an internal report for the ERIA Related Joint Research of SME Project, IDE-JETRO, 2007–8, which has been published internally and is edited by Hank Lim (2008).
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Notes
Notes
10. His work, among other material used for the Indian case in this chapter, is part of a report for the ERIA Related Joint Research of SME Project, IDE-JETRO, 2007–8. The report has been published internally and edited by Hank Lim (2008). 11. As a logical consequence, SE promotion has continued to remain an important and integral part of Indian development strategy since much before the First Five-Year Plan, dating back to 1938 when the National Planning Committee documents were being prepared. The concerted policy emphasis upon small firms as a vital vehicle of progress draws upon this sector’s crucial historical role in generating substantial employment and income at the regional level and acting as a shock absorber during periods of economic crisis (Das, 2008a). 12. One lakh = 100,000 (0.1 million), and one crore = 10 million = one hundred lakhs. 13. For example, Ahmed (2001b; 2004), ADB (2001b), and USAID (2001).
4
Export Performance and Effects of Trade Liberalization
1. It is widely accepted that for SMEs (as for LEs too) to succeed on the export front they must have some way to lower production or to increase efficiency and quality of their products. Berry et al. (2001) suggested that subcontracting with either LEs or trading companies is one route. Berry and Levy (1999) reported that in Indonesia subcontracting arrangements were common among SME exporters in rattan, furniture and garments. They argue that the growth of export of SMEs in these manufacturing subsectors no doubt reflects a rapidly increasing importance of subcontracting arrangements, mainly with commercial intermediaries. 2. For more discussion on this issue, see Urata (2000) and Tambunan (2006b). 3. The institutions have jointly undertaken three surveys of Vietnamese SMEs since the early 1990s. The first of these surveys, undertaken in cooperation with International Labour Organization (ILO) in 1991 and focusing on SME operations in 1990, covered the operations of about 900 non-agricultural enterprises in Hanoi, Ho Chi Minh City, Haiphong, and five rural provinces, including Ha Tay and Long An. In 1997, a new survey was undertaken, covering the three major cities and two of the rural provinces, Ha Tay and Long An. This time the survey covered about 750 enterprises including all the surviving enterprises from the five provinces. The survival rate between 1990/2 and 1996/7 was only 36 percent, so additional enterprises were drawn from the relevant populations to create a sufficiently large sample in the new survey. The third survey, conducted in 2003 with the active participation of the Institute of Economics, Copenhagen University, included the five provinces from 1996/7, as well as two additional rural provinces, Phu Tho and Quang Nam. Data from this third survey were used by Long (2003) mentioned in the text before. 4. According to this yearbook, among SEs private economy in China is nearly about 70 percent. The contribution of private economy to total export of the country was about 3.6 percent in 2005. Total SE contribution to total export is estimated at nearly 5 percent (Xiangfeng, 2008). 5. Some of the best known are Krueger (1978), Dollar (1992), and Kruger et al. (2000). 6. This is in line with general theory in which size is predicted to affect 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 economy provides costs advantages in production, Research and Development (R&D) and marketing efforts. See, for instance, Tybout (1992) and Bonaccorsi
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7. 8. 9.
10. 11.
5
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(1992) for a survey. The literature associated with export marketing, on the other hand, suggests that LEs have greater resources to gather information on markets in foreign countries and to cover uncertainties of a foreign market (see, e.g., Wakelin, 1997). It is, therefore, as a general hypothesis, that LEs, not SMEs, are likely to be more export-oriented. This is generally supported by the econometric results. See, for example, Aggarwal (2001) and Tybout et al. (1991). See further, Tybout’s review. (2000). Indonesia has long been a major supplier of raw rattan to the major rattan furniture exporting countries of Taiwan and the Philippines. In an effort to “jumpstart” the rattan products industry in the country, the Indonesian government imposed this restriction policy (Berry and Levy, 1994). Interview with Mr. Daniel Suhardiman, Group Manager from PT Panasonic Manufacturing, Indonesia. For discussion on the government programs to support SMEs in Indonesia, see, for instance, Sandee (1995), Hine and Kelly (1997), Sato (2000a), Sandee et al. (2002), and Dierman (2004).
Competitiveness and Transfer of Technology
1. According to Jang (2007), in the present knowledge based economy, Schumpeter’s definition can be rephrased as a new combination of knowledge. So, he argues that there must be some relationship between the types of knowledge, that is, codified and tacit knowledge (both analytical and synthetic) and types of innovation, that is, product and process. As stated in Fagerberg et al. (2004), another way to classify innovation is to focus on its process. In this manner, he classifies innovation as “radical” or “incremental”. In the European Community Innovation Survey (ECIS), innovation is defined as the successful introduction of a new or significantly improved product and process. The ECIS also distinguishes “true” innovations and imitations. A “true” innovation is the introduction of a product which is new both to the enterprise and to the market. Imitation refers to the introduction of products which are new only to the enterprise, not to the market (Florence and Pain, 2005). Innovations, however, can also be non-technological such as organizational change, marketing-related changes and financial innovations (OECD, 1997a; b). In manufacturing industry, innovations are mainly technological ones actually commercialized or implemented by firms. In Florence and Pain (2005) it is stated that innovation is distinct from invention. This strict definition emphasizes that innovation requires much more than greater inputs into the research process. Fixed capital investments are often necessary to be able to produce and utilize new products and processes, as are workforce training and organizational restructuring. Because of these required different activities, Romer (2005) argues that an innovation process is rarely linear. 2. See also, among others, Feinstein (2006), Fleming and Marx (2006), Florida (2002; 2005), Jones (2005), Phelps (2007), and Yusuf et al. (2003). 3. More empirical studies shown in Knorringa and Weijland (1993), Sandee et al. (1994), Sandee (1994; 1995), Dierman (1997), Tambunan (1994; 2000; 2006a; b, 2007a; b), Sandee and ter Wingel (2002), Supratikno (1998; 2001; 2002a; b). 4. See for example, Liedholm and Mead (1999), and Berry and Mazumdar (1991). 5. The analysis is based on data from the Manufacturing Industries Survey conducted by DOS covering 22 years, 1982–2003. SMEs in 11 manufacturing subsectors were chosen for the purpose of analysis, which include (a) food, (b) beverage and tobacco,
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Notes
6.
7. 8. 9. 10. 11. 12. 13. 14.
15. 16.
17.
Notes (c) textiles, wearing apparel and footwear, (d) wood-based, (e) plastic products, (f) rubber-based, (g) chemical industry, (h) metal products, (i) non-metallic mineral products, (j) electrical and electronics, (k) transport equipment. The most common approaches define technology as a collection of physical processes that transform inputs into outputs and the knowledge and skills that structure the activities involved in carrying out these transformations (Kim 1997, p. 4), or as stated in Rosenberg and Frischtak (1985) that technology is a quantum of knowledge resulting from the accumulated experience in design, production and investment activities that is retained by individual teams of specialized personnel. This knowledge is mostly tacit and often (is) not made explicit in blueprints or manuals. See, for example, Cohen and Levinthal (1989), Kim (1995), Nelson and Pack (1999), Yusuf (2003), and Hsueh (2006). See, for example, Kim (1997), Thee (2005), Yusuf (2003), Iman and Nagata (2002) and Saggi (2002) for a survey of literature. See, for example, Banga (2003), Bende-Nabende et al. (2000), and, recently, a review of the empirical literature on FDI determinants by Blonigen (2005). See also, for example, Rajan (2005), Palit (2006), and Palit and Nawani (2007). See, for example, Hobday (1994), Mans (1996), and World Bank (1996). See, for example, Berry and Levys (1994), Schiller and Martin-Schiller (1997), and Sandee et al. 2000). This is the author’s own case study, part of a research series on SME in Indonesia, Center for Industry and SME Studies, University of Trisakti. This type of subcontracting system has also been widely used, especially in rural areas, in some Asian developing countries such as Indonesia, Lao PDR, Cambodia, the Philippines and Thailand. There are, however, no clear statistics of the number of subcontracted home-based workers in these countries. Probably because it is not always easy to observe or simply because it is more interesting to speak about or to study subcontracting between factories. In Thailand, for instance, according to Thongyou (2001), the Department of Labor Welfare and Protection estimated that in 1995 there were approximately 11.2 million homebased workers in Thailand. This accounted for almost 33 percent of the total labor force which was 43.2 million. The type of the industry which employed homebased workers differed by region, thought the system seems to be most popular in textile, garment and wood-product industries. According to a study by Koedpon and Jearanaipriprem in 1995, cited in Thongyou (2001), in Bangkok, home-based subcontracting system was most popularly used in wood-product industry. Foodprocessing was ranked first in the southern part of the country, and textile was ranked first in the northeastern region. See also, among others, UNCTAD (1998; 2000; 2001), Regnier (2000), Tambunan (2000), and Altenburg (1999). As stated by Iman and Nagata (2002), in the current domestic Indonesian market, KI occupies the first rank with a 40 percent share of sales and plays an indispensable role in the localization of production. KI also fulfils a crucial role in Komatsu’s international business strategy, it serves as a construction machinery production base along with Komatsu’s facilities in the US, Brazil, Germany, and the UK, and conducting global sourcing with other production bases. KI, as many other LEs, requires its subcontractors to be a PT (Limited Liability Company) not a CV (a Limited Partnership not involving a legal person and personal assets are liable for obligations).
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18. KI, as many other LEs, requires the use of ISO standards even if the workshop is not officially certified. 19. The two interviewed inti subcontractors, PT Prima Karya (PK) and PT Karya Padu Yasa (KPY), said that past reputation and personal network were also critical factors for their successful bid to become subcontractors. However, they have insisted that the opportunity to become KI subcontractors was open for every workshop in the cluster as long as they can prove themselves capable of meeting the quality requirements required by KI. KI has periodically opened competition for new inti. 20. Cheap labor and relatively small, shifting job orders reduce incentives for them to specialize or acquire expensive machinery to increase productivity. As one seasoned metal worker explained, the strength of the plasma workshop is the flexibility to cater to smaller orders. However this flexibility becomes a liability to capacity development when workshops have to address many small orders and do not develop specialization that leads to expanded command of technology. 21. Owner of a plasma subcontractor for KPY, one of KI’s inti, explained that his company received useful technical coaching as part of a quality control process conducted upon delivery of his product to KPY. In a case of knowledge spillover, his firm applied some of these technical lessons not only to his subcontracting operations, but also to the production of retail market goods.
6
Development Constraints
1. The Financial Executives Institute of the Philippines (FINEX) and Ateneo Center for Research and Development (ACERD) study, cited by Aldaba, identified the following factors that prevent SMEs from acquiring the necessary technology or engage in their research and development: (1) lack of funds: technology including the machinery embodying the technology is expensive and many SMEs do not have the equity to acquire them. Lacking in flexibility, loans are not viable. Financial institutions rarely offer long-term financing for SMEs. There are no available loans for R&D; (2) insufficient information: the access of SMEs to information such as developments in product standards and scanning technology (assessing, quantifying, testing technology) is very limited due to their inadequate e-readiness; ICT is not optimally utilized, particularly e-commerce. Another reason is that government institutions are not regarded as reliable sources of information and lack of information sharing among SMEs, (3) lack of skills in evaluating alternative technologies: weak technical skill competencies of production people due to the overall low-level quality of education and inability of the educational system to respond to the needs of the economy; (4) difficulty in meeting government requirements for availing assistance: government procedures and requirements for incentives like tax exemptions for R&D equipment and availing of loans for technology commercialization are found to be too complicated and tedious. Government institutions providing support for business and technology are also poorly staffed and their knowledge well below the required level. 2. The World Bank’s report on doing business in 2006 (cited in Cuong et al., 2008) ranked Vietnam 104 out of 175 countries in terms of ease of doing business. This is discussed more detail in ADB (2005). 3. As a result of these difficulties in obtaining land, residences are also used for the production and business purposes. Also as a result of the difficulties in obtaining land legally, there is a significant land market operating unofficially and illegally (Long, 2007).
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4. Bailey (2008) identified two main problems leading to poor SME financial reporting. First, managers often lack skills to prepare even basic financial statements. Second, the financial reporting required by legislation is complex and provides little incentive for SME owner/managers to develop or improve their financial reporting abilities. According to Bailey, many SME owners do not know how to keep records of accounts. This is related to the fact that very few Cambodians receive more than a basic education, seldom including rudimentary bookkeeping skills. As cited in his study, a survey of 300 Cambodian SMEs conducted by the SME Sub-Committee shows that almost no SME has access to accounting or bookkeeping training. Few SMEs have access to, or know how to use computers with accounting software. Hiring an accountant is close to impossible for an SME, partially due to the lack of trained accountants in Cambodia, but mainly because of affordability. 5. According to Bailey (2008), this latter area is very serious, as the state of human and physical capital is considered a major constraint to Cambodian SMEs’ abilities to compete with their counterparts in neighboring countries. Many Cambodian companies use old and inefficient machines, increasing their production costs. This also constrains SMEs’ abilities to upgrade the quality of their output. The typically low quality of goods produced by Cambodian SMEs is also due to low quality inputs and limited production knowledge. Many SME owners are unaware of current technology, how to use it, or how to access it. Standard education is rudimentary and there is little in the way of formal training. On-the-job training is very limited and typically very basic in Cambodia. The World Bank reports, cited in Bailey (2008), that in 2003 nearly 97 percent of the country’s manufacturing workers were unskilled and less than a quarter of Cambodian firms provided formal training to workers. There is also no diffusion of production technology to SMEs via market channels and government assistance is not extensive enough to compensate for the lack of SME production knowledge. 6. For example, Balasubrahmanya (1995), Das (2001; 2003; 2005a; b; c; 2006, 2008a; b), Das et al. (2007), Goyal et al. (2004), Mohan (2003), Sahu (2005), and SIDBI (2000). 7. See, for example, Sandesara (1993), Balasubrahmanya (1995), and Morris and Basant (2006). 8. Hossain (1991, 1998), Ahmad et al. (1998), Ahmed (2001a; b), Bakht (1998), Jahangir (2001), and Moazzem (2006). 9. See, for example, FAO (1997), Maskey (2001), Maskey and Manandhar (2001), ILO (2002; 2003; 2005), and Khanal and Dahal (2008). 10. See also, among others, UNCTAD (1998; 2000; 2001), Regnier (2000), Tambunan (2000), and Altenburg (1999).
7
Women Entrepreneurs in SMEs
1. See also, for example, Patel (1987), Vinze (1987), Saleh (1995), Lalitha (1996), Finnegan and Danielsen (1997), Charumathi (1998), Dhillon (1998), Lakshmi (1998), Matiur-Rahman et al. (1998), Prasad (1998), Taylor (1998), Tiwary et al. (1998), Shayamalan (1999), Soundarapandian (1999), Finnegan (2000), Das (2000), Raju (2000), Sasikumar (2000), Kantor (2001), Seymour (2001), Walokar (2001), Dhameja et al. (2002), Goheer (2003), Sharma and Dhameja (2002), Ganesan (2003), Giovannelli et al. (2003), and Sinha (2003). 2. See, among others, Patel (1987), Das (2000), Lalitha (1996), Rajivan (1997), Matiur-Rahman et al. (1998), Prasad (1998), Taylor (1998), Tiwary et al. (1998),
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3.
4.
5. 6. 7. 8. 9.
10.
11. 12.
13.
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Shayamalan (1999), Soundarapandian (1999), Raju (2000), Sasikumar (2000), Seymour (2001), Walokar (2001), Sharma and Dhameja (2002), and Sinha (2003). Social Watch is an international network informed by national citizens groups aiming at following up the fulfilment of internationally agreed commitments on poverty eradication and equality. Thus, for example, a country where both boys and girls have equal access to university studies would rank 100 in this aspect, and a country where both boys and girls are equally unable to complete primary school would also rank 100. This is not to imply that the quality of the education should not be improved. It just says that boys and girls suffer from the same lack of quality. Education is the only component in the index where many countries have actually reached parity level. When parity is achieved no further progress is possible. But beyond the fact that many countries do not progress, the GEI education component reveals that too many of them are regressing. In the two other dimensions, related to women’s integration into economic and political life, no country shows complete parity yet. See also other studies, for example, Lalitha Rani (1996), Walokar (2001), Gillani (2004), Sharma and Dhameja (2002), and Ganesan (2003). Including Walokar (2001), Goheer (2003), Sinha (2005), Sharma and Dhameja (2002), and Ganesan (2003). See, for example, Rani (1996), Lakshmi (1998), Sharma and Dhameja (2002), and Sinha (2005). See, for example, Finnegan and Danielsen (1997), Charumathi (1998), Tiwary et al. (1998), Shayamalan (1999), and Dhaliwal (1998). As observed by Sinha (2005), women’s businesses are not well represented in industry, trade or business associations. Both the leadership and the membership of chambers of commerce, business, traders and industry associations tend to be dominated by male entrepreneurs, and few women entrepreneurs join or reach leadership positions in the mainstream business organizations. Although partly a reflection of the low number of women entrepreneurs, it means that the different needs of women entrepreneurs do not feed into policymaking through the lobbying and other activities of these organizations. Many specialist organizations of businesswomen often do not counter this situation because their activities tend to be oriented toward charity and social work, in contrast to the business networking and policy lobbying orientation of the “mainstream” but more male-dominated organizations. See also other studies on women entrepreneurs in the region, for example, Lalitha (1996), Dhillon (1998), Lakshmi (1998), Prasad (1998), Soundarapandian (1999), Das (2000), Sasikumar (2000), Dhameja et al. (2002), Goheer (2003), and Ganesan (2003). See other studies, for example, Planning Commission (1990), Begum (1992), ILO (1995), Quddus et al. (1996), DCCI (2000), and ADB (2001d). As a result, women entrepreneurs are educationally less equipped to manage their businesses, which makes them potentially less capable of success. Such disadvantages affect their capacity to access formal sources of credit, technical support as well as government small business programs (Sinha, 2005). Data presented in the table refer to national literacy estimates from censuses or surveys conducted between 1995 and 2005, unless otherwise specified. Due to differences in methodology and timeliness of underlying data, comparisons across countries and over time should be made with caution. For more details
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about methodology, data used and other technical specifications, see UNDP (2008). 14. However, although this traditional thinking still exists in rural society, it depends on the economic condition of the family as well as education level of the parents or husbands. The better the economic condition of the family or the better the education of the parents/husbands, the less influence traditional thinking has on their attitudes toward women.
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Afghanistan 144, 147 Africa 21, 24, 25 Agglomeration 18, 106 Agra 86, 121 Agrarian economies 19 Agreement on Textiles and Clothing (ATC) 69 Agriculture 1, 2, 20, 31, 32, 33, 34, 35, 36, 39, 47, 52, 72, 75, 77, 79, 89, 91, 94, 98, 112, 114, 122, 13 139, 146, 152, 156, 201, 204, 206, 218 Agro-processing activities 24 Agro-based industries 83 America 21 APEC SME Innovation Centre 128, 136 Arisan 219 Artisans 19, 85, 118 Artisanal 45, 120 ASEAN 37, 52, 60, 79, 109, 136 Asia 21, 91, 120, 123, 130, 142, 147, 148, 192, 208, 211 Asia Pacific Economic Cooperation (APEC) 128 Asian countries 55, 122 Asian developing countries 1, 5, 14, 15, 16, 20, 36, 37, 38, 39, 40, 44, 55, 69, 71, 73, 80, 97, 98, 100, 114, 118, 120, 123, 126, 128, 143, 144, 145, 146, 147, 148, 149, 150, 159, 165, 172, 173, 185, 187, 188, 190, 191, 194, 195, 200, 209, 210, 213, 214 Asian Development Bank 64, 168, 169, 205 Asian financial crisis 11, 37, 70, 122, 171 Asian Institute of Management 202 Asian region 122 Association of Negros Producers 201 Astra Group 151 Australia 109 Austria 26 Bakul Jamu 186 Bali 104, 106, 148, 186
Balouchistan 88 Bandung 125 Bangladesh 14, 91, 92, 93, 95, 144, 147, 168, 181, 182, 183, 185, 204, 205, 208, 212 Bania 194 Bank 159, 161, 163, 165, 166, 167, 169, 171, 172, 174, 175, 177, 178, 182, 183, 184, 200, 203, 209, 212, 217 Bank Negara Malaysia 173 Batur 138 Belarus 21 Bhutan 144, 147, 185 Borneo 45 British Virgin Islands 109 Brunei Darussalam 5, 14, 37, 39, 78, 79, 109, 174 Brunei Muara district 175 Burundi 21 Business and Trade Development Council 174 Business development services (BDS) 165, 170, 172 Buyer-market oriented SMEs 104 Buyer-driven community chain 104 Buyer-driven trade network 104 Calabarzon 55 Cambodia 5, 37, 39, 52, 57, 60, 61, 64, 65, 66, 108, 109, 144, 147, 167, 168, 169 Cambodian Development Resource Institute 169 Cambodian SME Sub-committee (CSMESC) 168, 169, 170 Canada 108, 120 Cash market 20 Cebu 119, 120 Central Java 125, 126, 137, 138, 148, 151, 186, 187, 198 Central Visayas Islands 119 Ceper 125, 138 Chad 124
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Index
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Chambers of Commerce 173 Chance entrepreneurs 187 Chennai 121 Child labour 199 China 4, 14, 37, 39, 69, 80, 97, 108, 109, 121, 122, 124, 125, 127, 144, 146, 147, 150, 162, 175, 184 Chinese Taipei 97 Cibatu 138 Classical literature 30 Classical theories 18, 26, 27 Clothing 3 Cluster 45, 46, 47, 85, 86, 91, 104, 106, 119, 120, 121, 125, 126, 127, 137, 138, 155 Clustering 18, 44, 45, 91, 106 Collateral 163, 165, 166, 167, 169, 172, 174, 183, 209, 214, 217 Communist Party 164 Companies Commission of Malaysia (CCM) 70 Company Law 47 Competitiveness 14, 16, 68, 114, 128, 129, 131, 132, 133, 136, 140, 141, 142, 159, 161, 163, 165, 170, 178, 180 Constraints 14, 16, 104, 114, 145, 153, 159, 160, 161, 164, 165, 168, 169, 170, 172, 174, 175, 177, 178, 179, 180, 181, 183, 184, 186, 198, 207, 208, 209, 211, 213, 214, 217 Cooperative 47, 57 Coping mechanism 218 Created/ulled entrepreneurs 187 Credit scheme 159, 161 Curungs 205 Custom 185, 186, 206, 217 Da Nang 52 Daihatsu, PT 151 Demand factors 35 Demand side 30, 34, 35, 162, 181 Deng Xiaoping 80 Department of Industrial Promotion (DIP) 172 Department of International Development (DFID) 93 Depreciation 126 Developed countries/economies 18, 28, 30, 37, 44, 189, 210, 217
Developing countries/economies 1, 2, 3, 17, 18, 19, 20, 24, 28, 31, 37, 39, 44, 45, 52, 91, 123, 124, 128, 130, 131, 139, 142, 143, 144, 146, 147, 148, 149, 150, 151, 169, 174, 188, 189, 192, 194, 207, 208 Development 18, 19, 21, 24, 25, 26, 28, 30, 31, 32, 36, 37, 46, 47, 48, 55, 68, 69, 78, 87, 95, 102, 104, 114, 116, 122, 123, 126, 128, 133, 136, 137, 141, 142, 143, 145, 146, 147, 148, 150, 151, 159, 162, 164, 165, 167, 168, 169, 172, 173, 174, 177, 178, 179, 181, 182, 184, 185, 187, 189, 190, 194, 196, 199, 202, 203, 204, 205, 206, 207, 211, 213 Diffusion 138, 147, 154 Diversification 36, 78 Diverticalization 17 Doi Moi 12, 47 East Asia 18, 37, 146, 192 East Java 125 Economic crisis 125, 126, 136, 156, 162 Economic development 3, 14, 17, 19, 20, 21, 22, 24, 26, 28, 47, 52, 69 Economic growth 21, 37, 60, 80, 122 Economic integration 32 Economic pressures 185, 187, 196, 217 Economic reform 125, 162 Economic share 26, 28 Economies of scale 18, 21, 123, 175 Educational attainment 185, 186, 187, 189, 192, 199 Eighth Malaysia Plan 204 Electronic industries 18 Employment 1, 20, 21, 23, 24, 25, 28, 33, 34, 35, 36, 37, 39, 47, 48, 52, 55, 57, 61, 62, 69, 70, 73, 75, 80, 83, 84, 85, 88, 91, 92, 93, 96, 114, 137, 146, 170, 179, 192, 197, 202, 206, 217 Engel’s Law 30 Enterprise Law 12 Ethnic 185 , 186, 205 Export 16, 25, 37, 45, 46, 47, 61, 69, 70, 79, 83, 86, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 118, 119, 120, 121, 122,
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123, 125, 126, 127, 128, 129, 133, 138, 144, 148, 161, 162, 180, 201 Export-led technology development 148 Export Promotion Board 162 Europe 21, 26, 28, 120, 150 Family workers 19, 31, 151, 192, 194 Female businesses 201 Feminine 189, 195 Filipino women 202 Financial institution 159, 163, 169, 172, 173, 174, 175, 177, 181, 183, 208, 212, 217, 219 Flexible specialization 18, 26, 28, 30, 31 “Forced/Pushed” entrepreneurs 187 Foreign direct investment (FDI) 3, 12, 47, 49, 69, 109, 131, 142, 143, 144, 145, 147, 148, 149, 151, 158 Foreign tourists 104, 148 Free Port, PT 145 Gabon 124 Gender Development Index (GDI) 189, 190 Gender Empowerment Measure (GEM) 189, 190 Gender Equity Index (GEI) 191 Gender Gap Index (GGI) 192, 193 Germany 19, 24, 26 Ghana 124 Globalization 26, 92 Government policies 3 Growth phase 19 Gujarat 194 Hai Phong 52, 116 Handicrafts 3, 17, 20, 64, 68, 90, 91, 117, 120, 138, 151, 201, 204 Hanoi 51, 52, 116 Heavy manufacturing 23, 24 Ho Chi Minh City (HCMC) 51, 52, 116 Hong Kong 108, 109, 120, 143, 148 Human Development Index (HDI) 190 Import-substituting industries 144 Income 1, 17, 20, 23, 24, 25, 26, 28, 30, 31, 32, 33, 34, 35, 36, 94, 96,
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120, 185, 186, 187, 188, 189, 196, 200, 201, 203, 206, 211, 217, 218 Index of Industrial Production (IIP) 84 India 4, 14, 83, 84, 85, 97, 120, 121, 130, 147, 162, 168, 175, 177, 178, 185, 187, 194, 195, 207, 210, 212 Indo-Aryan community 205 Indonesia 3, 12, 14, 34, 37, 39, 45, 47, 49, 52, 73, 85, 97, 98, 101, 102, 103, 104, 106, 108, 109, 112, 116, 122, 125, 126, 128, 130, 136, 137, 138, 139, 144, 145, 147, 148, 150, 151, 153, 155, 159, 161, 162, 164, 165, 169, 186, 187, 196, 198, 199, 216, 217, 218 Indonesian Export Training Center 162 Industrial Development Plan 174 Industrial districts 28 Industrial goods 17 Industrial organization 26, 28, 44, 91 Industrial restructuring 26 Industrial revolution 150 Industrial system 18 Industrial Technology Assistance Program (ITAP) 137 Industrialized countries 18, 19 Industrialization 19, 20, 21, 30, 87, 95, 148, 185 Inferior goods 24, 30 Informal lender 160, 161, 171 Information technology (IT) industry 83 Innovation 14, 18, 28, 129, 130, 131, 132, 133, 136, 137, 138, 139, 140, 141, 145, 146, 148, 152, 155, 161, 198 Interfacing and interacting 212 Inter-firm linkages/cooperation 37, 137 Inter-island trade 162 Inter-regional trade 162 Intermediaries 103, 104, 106, 148 International Organization for Standardization (ISO) 130, 131, 133, 153, 164, 203 International Consultancy Group (ICG) 93 International Financial Corporation (IFC) 130 International Labour Office (ILO) 192 International marketing 101
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Index
Index
International Monetary Fund (IMF) 57, 125, 162 International Organisation for Standarisation (ISO) 79 International trade 103, 122, 123, 124 Inti 151, 152, 153, 154, 155 Invention 28 Invisible entrepreneur 207 Involutionary 36 Iran 109 Ireland 108 Islam 213, 217 Italy 26, 109 Izzat 213 Japan 28, 108, 109, 138, 144, 151 Jakarta 104, 125, 138, 153, 157, 217 Java 45, 216, 217 Javanese 186 Jepara 104, 106, 125, 126, 148 Job Opportunities and Business Supports (JOBS) Program 182 Joint venture 145, 146, 149, 150 Just in time 18 Kampong Cham 66 Kampong Thom 66 Karanggeneng 138 Karnataka 194 Karya Paduyasa, PT 155, 157, 158 Katshusiro, PT 151 Khadi industry 83 Khmer Rouge (KR) 57 Kip 171 Klang Valley 141 Klaten 138 Klepu 137 Knowledge-based economy 204 Kolkota 121 Komatsu Indonesia (KI), PT 151, 152, 153, 154, 155, 156, 157, 158 Korea 217 Kubota, PT 151 Kulon Progo District 198 Labour market 28, 33, 34, 48, 179, 192 Labour productivity 2 Lack of capital 159, 161, 182 Laguna 162 Lao PDR 37, 52, 68, 69, 78, 108, 109, 144, 147, 170, 171
Last resort 36, 91 Law on Commercial Rules and Registration 60 Law on Investment 61 Leading firm 46 Less developed countries (LDCs) 144, 147 Light manufacturing 21 Local significant 1 Ludhiana 86 Luxembourg 21 Macroeconomic stability 58, 87 Mactan Export Processing Zone (MEPZ) 119 Magna Carta 5 Maharashtra 194 Malaysia 4, 14, 37, 69, 73, 108, 112, 114, 116, 130, 136, 139, 140, 141, 147, 150, 164, 173, 174, 203, 204, 219 Maldives 185 Maluku 45 Manchester Business School 174 Manufacturing 4, 14, 17, 18, 19, 20, 21, 23, 24, 25, 30, 37, 39, 45, 49, 52, 53, 57, 59, 60, 64, 65, 66, 68, 69, 70, 71, 72, 73, 74, 75, 78, 79, 81, 82, 83, 84, 85, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 100, 101, 102, 103, 112, 114, 117, 118, 119, 120, 122, 124, 125, 133, 134, 136, 138, 140, 141, 144, 145, 146, 147, 148, 149, 150, 153, 154, 161, 169, 172 , 174, 177, 180, 182, 194, 195, 196, 198, 199, 201, 203, 204, 207, 216, 218 Market 17, 18, 19, 25, 31, 32, 47, 61, 62, 68, 78, 80, 84, 88, 92, 95, 98, 103, 104, 106, 108, 109, 112, 114, 116, 118, 120, 122, 123, 124, 126, 127, 128 130, 131, 138, 143, 148, 150, 152, 154, 159, 161, 162, 167, 170, 171, 172, 175, 177, 178, 179, 180, 181, 201, 204, 205, 208, 209, 212, 214 Master plan 173 Mayong Lor 137 Metro Manila 202 Micro Industries Development Assistance and Services (MIDAS) 93 Middlemen 45, 46
10.1057/9780230250949 - SMEs in Asian Developing Countries, Tulus Tahi Hamonangan Tambunan
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National Agency for Export Development (NAFED) 162 National Capital Region (NCR) 55 National Productivity Corporation 139 National SME Development Council (NSDC) 4 Natra Raya (NR) 156, 157, 158 Natural barriers 32 Nawaz Sharif 87 Nepal 14, 95, 96, 144, 147, 184, 185, 190, 191, 205, 206, 206, 209, 211 Netherlands 109, 120 New Order 151, 162, 196 Newly industrializing countries (NICs) 143 New industrializing countries 18 New roles 28 Ninth Malaysia Plan 204 Non-farm activities 1, 25, 33, 36 Non-farm employment 35, 36 Non-Fordist production 26 Non-professional approach 210 Non-tariff barriers (NTBs) 122, 123, 126
Non-working wives 210 North Sumatra 186 Nusa Tenggara (NT) 217, 218 Office of SME Promotion (OSMEP) 52, 137 Organisation of Economic Cooperation and Development (OECD) 148 Pakistan 4, 14, 87, 91, 97, 179, 180, 181, 185, 206, 207, 209, 213 Panasonic 125 Panipat 85 Papua 45, 145 Pasuruan 125 Penang 141 Philippines 5, 37, 55, 109, 118, 133, 136, 139, 150, 162, 163, 164, 188, 189, 192, 200, 202, 203 Phnom Penh 66 Plasma 151, 152, 153, 154, 155 Policy 1, 28, 70, 87, 102, 122, 123, 125, 126, 129, 136, 143, 144, 145, 146, 149, 159, 162, 164, 165, 168, 169, 171, 172, 173, 174, 177, 178, 179, 182, 184, 185, 200 Political stability 58 Poor 2, 20, 32, 34, 36, 39, 91, 133, 161, 165, 167, 169, 172, 173, 175, 180, 182, 187, 208, 211, 212, 214, 219 Population 1, 3, 17, 25, 35, 36, 91, 94 Poverty 1, 26, 34, 36, 37, 47, 48, 91, 194, 196, 201, 208, 219 Preman 218 Prey Veng 66 Prima Karya, PT 155, 156, 157 Prime Ministry Decree no 42, 68 Priority sector 177 Private Enterprise Law (PEL) 47 Privatization 58, 61 Production linkages 3, 18, 52, 138, 145, 149, 151 PROTON 140 Punjab 86, 88 Punjabi Khatri 194 Push/pull factors 34, 35, 187, 194, 218 Pulled entrepreneurs 194 Purdah 213 Putting-out system 150
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Milan of Asia 118 Ministry of Commerce 60, 66, 168 Ministry of Environment 168 Ministry of Finance 95, 177 Ministry of Industry 52, 60, 85, 120 Ministry of Industry and Handicraft 170 Ministry of Industry and Primary Resources 79, 174 Ministry of International Trade and Industry 4 Ministry of Labor, Invalids and Social Affairs 116, 133, 165 Ministry of Micro, Small and Medium Enterprises (MSME) 84, 121, 130 Ministry of Planning 66 Ministry of Women Affairs 168 Modern goods 24, 32 Modern theories 18, 28, 29 Modern business 217 Moslem 185, 186, 217 Most-favored nations (MNF) tariffs 122 Multinational companies (MNC) 3, 14, 52, 97, 109, 112, 116, 126, 131, 140, 142, 143, 145, 149, 150, 151, 155 Myanmar 37, 108, 109, 112, 144, 147
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Red River Delta 51 Religion 185, 213, 216, 217 Research and development (R&D) 129, 130, 143, 146, 148, 177, 178, 180, 182, 184, 204 Reserve Bank of India 177 Reserved products 179 Rupiah 126, 162 Rural areas 1, 2, 19, 24, 25, 31, 32, 34, 35, 39, 48, 90, 94, 124, 137, 159, 161, 175, 178, 186, 196, 199, 204, 206, 211, 216, 217 Rural industries 1, 18, 32, 33, 34 Rural Java 3, 138, 198, 219 Rural market 31, 32 Rural people 31 Rural population 20 Rural producers 32 Russia 109 Sanwa, PT 151 Schumpeter 129 Second industrial divide 26 Seedbed LEs 2 Self employment 3, 20, 24, 36, 37, 39, 82, 153, 192, 194, 196, 200, 204, 206, 207 Sherpas 205 Sindh 88 Singapore 3, 37, 108, 109, 120, 143, 169, 190, 191 Single product/service enterprises 196 Small Enterprises Research and Development Foundation 202 Small scale industries (SSI) 83, 84, 85, 86 Small and Medium Enterprise Promotion and Development Office (SMEPDO), 68 Small and Medium Enterprise Development Authority (SMEDA) 87, 181 Small and Medium Industries Development Corporation (SMIDEC) 4 SME Development (SMED) Council 11 SME Promotion Act 136 Social-cultural background/value 185, 187, 213 Social Watch 191 South Africa 124
South Asia 97, 120, 185, 190, 207, 208, 211, 214 South Korea 18, 37, 97, 122, 123, 142, 143, 146, 148, 190, 191 South Sulawesi 186 Southeast Asia 37, 97, 122, 128, 144, 150, 192 Specialization 24, 45, 46, 47 Spillover 143, 144 Spouse program 210 Sri Lanka 185, 192 Subcontracting 4, 18, 25, 45, 52, 69, 97, 103, 118, 125, 126, 138, 144, 145, 146, 149, 150, 151, 152, 153, 154, 155, 161, 165 Sukabumi 138 Sumatera 45, 216 Sundanese counterparts 186 Supporting firms/industries 140, 165 Supply factors 35 Supply side 25, 30, 33, 34, 35, 162, 181 Surabaya 125, 217 Survival strategy 196, 218 State-owned enterprises (SOEs) 49, 68, 82, 131, 162 , 164, 165, 166, 167 State-owned trading companies 116 Stockholm School of Economics 116, 133 Strategic alliance 95, 144 Structural change 19, 21, 92, 195 Structural shift 30 Sweden 28, 109 Swedish International Development Cooperation Agency (SIDA) 93 Swiss Agency for Development and Cooperation (SDC) 93 Switzerland 109 Taiwan 18, 109, 142, 143, 146, 148 Takaru cooperative 154 Tall poppy syndrome 48 Tamil Nadu 86, 124 Technology 2, 3, 14, 17, 18, 26, 28, 39, 46, 47, 92, 104, 106, 114, 123, 125, 128, 129, 132, 133, 136, 137, 138, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 154, 155, 159, 161, 163, 165, 170, 172, 173, 174, 175, 177, 178, 179, 180, 182, 184, 195, 198, 200, 203, 204, 205, 208, 211, 213, 214, 219
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Transfer of… 14, 128, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 155, 180, 184 Technical license 142, 143, 149 Tegal 125, 148, 151, 152, 154, 155, 156, 157 Thailand 4, 11, 12, 14, 21, 37, 52, 97, 101, 106, 109, 112, 116, 122, 130, 136, 137, 145, 146, 147, 150, 162, 164, 169, 171, 172, 173 Thakalis 205 Tibeto-Burman community 205 Tirupur 85 Town and village enterprises (TVE) 82, 121 Trade liberalization 14, 97, 122, 123, 124, 126, 143, 144, 145, 146 Trade policy 126 Trade promotion 101, 126 Trade monopoly 122 Trade reform 123, 124, 125 Trade regime 122 Trading houses 103 Traditional 24, 30, 31, 32, 39, 83, 204, 211, 212, 216, 217 Transfer of technology 14, 16 Transformation process 28 Unit Pelayanan Teknis (UPT) 154 United Kingdom (UK) 108, 109 United States (US) 28, 108, 109, 120, 150, 217 United Nations Development Programme (UNDP) 189, 204 United Nations Industrial Development Organisation (UNIDO) 45, 149
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United States Agency for International Development (USAID) 93 Urban areas 20, 24, 25, 32, 90, 91, 94, 124, 137, 159, 175, 178, 199, 204, 206, 211, 216, 217 Urban centers 32 Urban enterprises 25 Urban goods 31 Urban industries 31 Urban market 32 Urbanization 20, 120 Vendor 140 Vientiane 68, 69, 170 Viet Nam 4, 12, 13, 14, 37, 47, 48, 49, 51, 52, 116, 117, 127, 131, 132, 133, 139, 162, 164, 165, 166, 167, 169 West Java 125, 151, 186, 187 White Paper on SME 52 Women entrepreneur 14, 16, 185, 186, 187, 188, 189, 194, 195, 196, 198, 199, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 213, 214, 216, 218, 219 Women entrepreneurship 185, 186, 189, 194, 196, 198, 199, 202, 205, 210, 212, 216, 218 Women’s marginalization 219 World Bank 130, 136, 168, 180, 181 World Economic Forum (WEF) 192 World Trade Organisation (WTO) 13 Yemen 109, 147 Yogyakarta 198
10.1057/9780230250949 - SMEs in Asian Developing Countries, Tulus Tahi Hamonangan Tambunan
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Index
