1 export-led sme development & entrepreneurship in the gms asean sme regional gateway forum...
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Export-led SME Development &
Entrepreneurshipin the GMS
Export-led SME Development &
Entrepreneurshipin the GMS
ASEAN SME Regional Gateway Forum
Mekong Institute
Khon Kaen, 6 September 2010
Masato AbeTrade & Investment Division
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About ESCAPAbout ESCAP
• United Nations Economic and Social Commission for Asia and the Pacific
• Asia & Pacific– 58 regional members & associated
members
• Policy advocacy, analytical work & technical assistance for regional development
• Headquarters in Bangkok– Nine branches
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Development Strategies in the GMSDevelopment Strategies in the GMS
• Export & FDI driven development• Agro industry development • Gradual industrialization toward products
with high value added• Infrastructure development• Technology transfer & adaptation• Subregional cooperation (ASEAN, GMS;
BIMST-EC)• SME development• Eco-industry
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SMEs’ RoleSMEs’ Role
• Consisting of more than 95% of total enterprises– 99% for China; 98% for Thailand (2003); 99%
for Viet Nam (2002)
• Creating about 60% of private sector jobs– 75% for China; 65% for Thailand (2003); 77%
for Viet Nam (2002)
• Contributing about 20-30% of GDP– 65% of industrial output (China); 47% of GDP
& 55% of exports (Thailand); 20% of exports (Viet Nam) (2003)
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SMEs’ Role (cont.)SMEs’ Role (cont.)
• Innovation & dynamism
• Graduating to large enterprises (& multinationals)
• Many in the informal sector
• Critical part of the social safety net
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SME TypologySME Typology
Export
Domestic/LocalMarket
HighTech
LowTech
CottageEnterprises
SupportingEnterprises
DomesticMarket-oriented
Enterprises
Export-orientedEnterprises
(Uchikawa & Keola 2009)
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Definition of SMEsDefinition of SMEs• In Asia-Pacific (& GMS), typically less than
100-300 employees for manufacturing sectorCountry Number of Employees
Cambodia Micro
Small
Medium
< 10
11- 50
51- 100
China MSME < 100
Lao PDR Small
Medium
≤ 19
≤ 99
Myanmar Micro
Small
Medium
< 10
10-50
51-100
Thailand
(4 people per firm)
Small
Medium
< 50
≤ 200
Vietnam SME ≤ 300
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SMEs per 1,000 peopleSMEs per 1,000 people
Source: ESCAP (2009), developed based on data from World Bank (2000-2006)
61.8
29.6
14.9
63.2
27.0
9.06.3
13.7
1.10
10
20
30
40
50
60
70
DevelopedCountries
Developingcountries
LeastDevelopedCountries
China(2000)
Thailand(2002)
Viet Nam(2004)
Global Asia-Pacific
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SME Life ModelSME Life Model
Profit
Years0
Start-up
Growth
Maturity
Decline
Discontinuation?
Grow to a large firm
Different supports needed at the different stagesLoss
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Start-ups in JapanStart-ups in Japan
• 41.4 years old (Entrepreneurs)• 3.9 employees• 100K US$ of start-up funds
– 35%: Own capital– 15%: Support of family, relatives and friends– 50%: Public grants & commercial loans, including
public loan guarantees
• Man: 84.5%; Women: 15.5%• College degree or above: 33.1%• 60% of start-ups achieve break-even within 15
months Data: National Life Finance Corporation (2007)
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Start-up: Difficult TimeStart-up: Difficult Time
• 2/3 discontinued within 5 years (USA)
• 40% discontinued within 2 years (UK)
• Approx. 40% in red after 1 year (Japan)
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Sector CompositionSector Composition
Services 26% 22%
Wholesale/retailer 20% 33%
Restaurants/hotels 17% N/A
Medical/health care 16% N/A
Construction 8% 14%
Manufacturing 5% 11%
Others 8% 20%
Total 100% 100%
Japan(2006)
Thailand(2005)
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SMEs’ Net Income in JapanSMEs’ Net Income in Japan
0.0
0.5
1.0
1.5
2.0
2.5
3.0
01 02 03 04 05 06 (Year)
(%)
Manufacturing
Construction
AverageServices
Retail
Transportation
Wholesales
Income before Tax / Total Sales
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Policy ObjectivesPolicy Objectives
• Increase the number of start-ups• Facilitate their growth• Increase their survival rate• Foster SME graduates (to be large
enterprises)• Facilitate the smooth exist of losers,
providing second (& more) chance• Encourage to be incorporated• Foster SME exporters & supporters
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ChallengesChallenges
• Scattered targets (high transaction costs)
• Lack of the economies of scale• Limited public resources• Limited understanding about the
targets, i.e. SMEs• Limited communication channels• Limited knowledge & skills• Limited information on global &
regional markets
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Six Areas for InterventionsSix Areas for Interventions
• Pro-business legal & regulatory framework
• Supporting infrastructure (e.g. ind. zones)
• Enhanced access to finance
• Entrepreneurship development
• Technology transfer & adaptation (plus R&D and product standards)
• Business development services
Entrepreneur centred development strategy
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SME Development ApproachesSME Development Approaches
ADB(2000)
APO(2007)
DFID(2008)
GTZ(2010)
ILO(2009)
JICA(2006)
OECD(2005)
SDC(2010)
UNCTAD(2010)
UNDP(2007)
UNIDO(2010)
USAID(2010)
World Bank(2002)
Policy and regulatory framework
Infrastructure
Access to finance
Entrepreneurship / human resource development
Technology transfer and adaptation
Business development services
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Entrepreneur Centred DevelopmentEntrepreneur Centred Development
Export-mindedEntrepreneurs
Access toFinance
BusinessDevelopment
ServicesTechnology
Infrastructures
BusinessEnvironment
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SME Business NetworkSME Business Network
Export-mindedEntrepreneurs
Launching of New Export Businesses
LinkagePolicy dialogInformationConsultingTraining
TechnologyStandardsCertificates
Training
TrainingInformation
InformationIncubationConsultingTraining
FinanceInformation
Success Case Replication
BusinessAssociations
SMEDevelopment
Agencies
SMETraining
Institutions
FinancialInstitutions
TechnicalCenters
Export-mindedEntrepreneurs
Export-mindedEntrepreneurs
Export-mindedEntrepreneurs
Export-mindedEntrepreneurs
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Global Value ChainsGlobal Value Chains
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In the era of globalization…
Can SMEs compete in the international market?
Will SMEs benefit from the globalization? Can SMEs survive in the
global competition?
Can SMEs learn to be competitive?
What can we do to bring the benefit of the globalization to the poor?
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Selling products directly to the international consumers with “Brand Presence” & “Pricing Power”- Have information related to - Have information related to market/process/product market/process/product
- Have capabilities over the full Value Chain: - Have capabilities over the full Value Chain: design, design,
production, marketing, distribution, etc.production, marketing, distribution, etc.
- Respond effectively to the changing market - Respond effectively to the changing market conditionsconditions
Very difficult for SMEs in developing countries
Alternate option: Reaching global market through global value chains
The ideal is…
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Global Value Chain (GVC)?
Full range of value-added activities involved in conception, design, procurement, production, marketing, distribution, after service, etc.
Firm can focus on one or more activities in a VC.
When activities are geographically dispersed across borders to multiple countries the value chain becomes global or regional
Garment/Apparel Value Chain
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Characteristics of GVCs
A lead firm (a larger enterprise/a multinational) regulates a GVC with specific competences, making a higher profit Brands, resources, technology, expertise and/or goodwill Customer vs. Production vs. Natural Endowment driven value chains
Inviting outside experts on specific functions to manage complicated tasks to maximize the efficiency and effectives of the entire GVC
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Characteristics of GVCs (cont.)Characteristics of GVCs (cont.)
• Contracting with a selected number of capable SMEs typically as subordinate partners for specific tasks or functional support
• Integration of business process, coordinated behaviours and information sharing among independent firms
• Mutual investment into business process and long-term relationship
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Emergence of GVCs: Drivers
Multilateral and regional free trade agreements
Policy Liberalization Trade, investment, capital & finance, HR
Compliance with local content requirements
Technological innovation Transportation and ICT
Increasing competition (pressures for lower cost, higher efficiency/ quality etc.)
New management strategies JIT, e-commerce, ERP, supply chain management
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Shift in the GVC governance during the past three decades
TNCs controlling all production
Ownership of overseas subsidiaries/ franchises
Outsourcing to suppliers (no legal ownership)TNCs focus on core
values
Opportunity for SMEs in developing countries: Specialize in a limited set of activities or Specialize in a limited set of activities or
components in the GVCcomponents in the GVC
Source: UNIDO, Integrating SMEs in Global Value Chains
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Levis Case
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Smaller number of dominant lead firms Emergence of large/strong suppliers Intensified competition toward high-value added
activities Competition on continuous skill development
and knowledge enhancement Economic disparities at the region, country, community and firm levels
Emergence of GVCs: Consequences
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Lead Firm’s Objectives with SME Suppliers
Cost down / quality up; QDC (Quality, Delivery and Cost) improvement
Strategic focus and outsourcing non-core functions
Speed, effectiveness and flexibility
Access to expertise / technology
Long-term security
Control over supply chain networks
Local content requirements and local supplier development
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Opportunities for SMEs in developing countries
Access to international markets
Support from TNC (training/investment in business process/information sharing etc.)
Technology and knowledge transfer
Long term buyer-supplier relationship; secured orders
Reputation and brand development
Opportunity to up-grade and move up to the next tier
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Challenges for SMEs in developing countries
Lack of awareness, capacity and resources
Infrastructure Capital Skilled labour Managerial expertise Knowledge and technology Contacts / networks
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Challenges for SMEs in developing countries (cont.)
High entry barriers -- International Standards
Have to deliver specified product, required quantity and right quality at competitive price and agreed leadtime
Competition is not solely based on cost but also based on product and process related standards, such as quality, safety, environmental preservation and respect for labour
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Challenges for SMEs in developing countries (cont.)
Unfavorable national business environment
Rules and regulations
Red tape/corruption
Political instability
Insufficient business development services
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Regional average of ease of doing business rank
Regional average of ease of doing business rank
0 20 40 60 80 100 120
Developed ESCAP economies
East and North-East Asia
North and Central Asia
South-East Asia
Pacific island economies
South and South-West Asia
Average Rank
Source: ESCAP (2009), calculated by ESCAP based on Doing Business 2009, World Bank (2008)
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Increasing amount of FDI in the region
- Growth of south-south investment- Increasing investment in China can stimulate greater
FDI throughout the region (FDI is not a zero sum game)
- TNCs from developed companies (Intel: Vietnam, GM: Thailand- spill over effect possible in neighboring countries)
The GMS
Centre of 3 rapidly growing subregions
Export & FDI driven development strategy
NortheastAsia
South Asia GMS
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Population by SubregionPopulation by Subregion
260
310
1,350
1,500
Northeast
ASEAN - GMSSouth
GMS
(Million)
China (90%)
India (75%)
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Purchasing Power ParityPurchasing Power Parity
670
1,300
3,300
11,000
Northeast
ASEAN - GMS
South
GMS
(US$ Billion)
China (55%)Japan(33%)
India (80%)
USA10,000
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GMS Markets (GNP, US$ Billion)GMS Markets (GNP, US$ Billion)
$50
$140
$20
$204
3$20
Myanmar
Thailand
Yunnan& Guangxi
Lao PDR
Cambodia
Viet Nam
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Thailand: various GVCs in auto, electronics, high-tech, agri-business, consumer-goods sectors.
Yunnan: VCs mainly serves other provincial markets
Viet Nam: GVCs under development in garment, consumer goods, auto and electronics sectors
Cambodia, Lao PDR and Myanmar: Agro-business and garments; need promotion to attract GVCs although some FDI have been observed advanced manufacturing sectors recently (underdeveloped domestic markets)
GVCs in GMS
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Example: Thailand Automotive Part industry
Thailand invested in cluster development, particularly in Rayong and Samutprakan, south of Bangkok
Cost competitiveness is based less on productivity, and more on low factor input costs, which are now rising (e.g. costs of labour and land)
Key challenge to Thai auto parts suppliers is to improve productivity and lower costs or move up to the next tier within the GVC
Subregional coordinated strategy could provide opportunities for neighboring lower cost countries such as Cambodia (which also has rubber) to become lower tier suppliers of selected components to the Thai auto parts cluster
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Opportunities for SMEs Opportunities for SMEs • Geographical advantage
– Centre of 3 rapidly growing subregions
• Export & FDI driven development strategy• More donor assistance expected
– The combined resources of donors, governments, the private sector currently provides 20% of needs
• Underdeveloped intra-regional trade & investment– Potential home markets– Yunnan & Guangxi’s integration
• Flexibility & specialization
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SMEs’ Corporate Strategies
Improve quality and develop brand
Reach the global market through existing GVCs that are most likely dominated by lead firms
Enter into lower tiers with a low-value role in GVCs
Move up GVCs to high-value added activities over time
Find adequate financing for the investments and accessing quality workforce
Collaborate with other SME players vertically and horizontally in a GVC
Establish joint ventures with foreign investors
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SME actions needed
Improvement of quality Performance Reliability Durability Serviceability Perceived quality
Aggressive marketing (networking and branding)
Catalogues Trade journals & directories Sales representatives Trade missions / fairs / exhibitions Internet
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SME actions needed (cont.)
R&D and technology adaptation in cooperation with public/private research/technological institutions
Seek finance and credit opportunity with governments and banks
Seek services from business associations Develop and involve in producers’
associations Seek aggressively investment opportunity
in cooperation with both domestic and foreign investors
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Change of FDI strategy: Attract GVCs fit for the country.
Develop GVCs by participating in neighbouring countries’ GVCs.
Classic SME export promotion Marketing research, export promotion,
product development, export financing, trade fairs and missions
Create enabling business environment Laws and regulations and their enforcement,
ICT and logistic infrastructure and software
Enhanced access to SME finance
Government actions needed
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Capacity and HR development for SMEs and related government agencies
Fostering capacity and quality of business associations
Training on working relationship in a multicultural environment
Focus on agri-business value chains
Foster stronger backward linkages with SMEs through intra-regional South-South investment
Government actions needed (cont.)
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Facilitate SMEs’ adoption of world standards and credible certifications
Productivity improvement through infrastructure development and logistical improvement
Improving the cross-border flow of goods
Sector based value chain studies
Foster national lead firms – Graduates from the SME sector with quality and brand
Government actions needed (cont.)
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Government Strategies (cont.)
Supply side capacity building
Training/ counseling and advice/ micro financing/ market intelligence etc.
Develop opportunities through cooperation (i.e. SME clusters)
Economies of scale/ joint action/ information sharing/ enhancing attractiveness to global buyers by reducing transaction costs etc.
Promote the GVC mindset
Additional GVC strategies:
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GMS Subregional Cooperation
Develop ‘GVC mindset’ in cross-border cooperation among GMS countries
Strengthen cross-border (GMS/subregional) logistics systems
Focus trade facilitation cooperation (e.g. in GMS Programme) on particular GVCs
Facilitate GMS supplier development, including development of SME clusters across borders (and share information/ best practices etc.)
Facilitate cross-border linkages of domestic business institutions (e.g. GMS-BF)
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Two in-depth studies on SME development in Asia & the Pacific are available at ESCAP website (www.unescap.org)
Further reading
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For further inquiry, contact:
Masato Abe, Ph.D.Economic Affairs OfficerPrivate Sector and Development SectionTrade and Investment DivisionUnited Nations ESCAPBangkok, [email protected]