Export led sme development entrepreneurship in the gms
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Export-led SME Development & Entrepreneurship in the GMS. ASEAN SME Regional Gateway Forum Mekong Institute Khon Kaen, 6 September 2010. Masato Abe Trade & Investment Division. About ESCAP. United Nations Economic and Social Commission for Asia and the Pacific Asia & Pacific

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Export-led SME Development & Entrepreneurship in the GMS

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Export led sme development entrepreneurship in the gms

Export-led SME Development & Entrepreneurshipin the GMS

ASEAN SME Regional Gateway Forum

Mekong Institute

Khon Kaen, 6 September 2010

Masato Abe

Trade & Investment Division


About escap

About ESCAP

  • United Nations Economic and Social Commission for Asia and the Pacific

  • Asia & Pacific

    • 58 regional members & associated members

  • Policy advocacy, analytical work & technical assistance for regional development

  • Headquarters in Bangkok

    • Nine branches


Development strategies in the gms

Development Strategies in the GMS

  • Export & FDI driven development

  • Agro industry development

  • Gradual industrialization toward products with high value added

  • Infrastructure development

  • Technology transfer & adaptation

  • Subregional cooperation (ASEAN, GMS; BIMST-EC)

  • SME development

  • Eco-industry


Smes role

SMEs’ Role

  • Consisting of more than 95% of total enterprises

    • 99% for China; 98% for Thailand (2003); 99% for Viet Nam (2002)

  • Creating about 60% of private sector jobs

    • 75% for China; 65% for Thailand (2003); 77% for Viet Nam (2002)

  • Contributing about 20-30% of GDP

    • 65% of industrial output (China); 47% of GDP & 55% of exports (Thailand); 20% of exports (Viet Nam) (2003)


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


Sme typology

SME Typology

Export

Cottage

Enterprises

Export-oriented

Enterprises

Low

Tech

High

Tech

Domestic

Market-oriented

Enterprises

Supporting

Enterprises

Domestic/Local

Market

(Uchikawa & Keola 2009)


Definition of smes

Definition of SMEs

  • In Asia-Pacific (& GMS), typically less than 100-300 employees for manufacturing sector


Smes per 1 000 people

SMEs per 1,000 people

Source: ESCAP (2009), developed based on data from World Bank (2000-2006)


Sme life model

SME Life Model

Grow to a large firm

Profit

Maturity

Decline

Growth

Discontinuation?

0

Years

Start-up

Different supports needed at the different stages

Loss


Start ups in japan

Start-ups in Japan

  • 41.4 years old (Entrepreneurs)

  • 3.9 employees

  • 100K US$ of start-up funds

    • 35%: Own capital

    • 15%: Support of family, relatives and friends

    • 50%: Public grants & commercial loans, including public loan guarantees

  • Man: 84.5%; Women: 15.5%

  • College degree or above: 33.1%

  • 60% of start-ups achieve break-even within 15 months

    Data: National Life Finance Corporation (2007)


Start up difficult time

Start-up: Difficult Time

  • 2/3 discontinued within 5 years (USA)

  • 40% discontinued within 2 years (UK)

  • Approx. 40% in red after 1 year (Japan)


Sector composition

Sector Composition

Japan

(2006)

Thailand

(2005)

Services

26%

22%

Wholesale/retailer

20%

33%

Restaurants/hotels

17%

N/A

Medical/health care

16%

N/A

Construction

8%

14%

Manufacturing

5%

11%

Others

8%

20%

Total

100%

100%


Smes net income in japan

SMEs’ Net Income in Japan

Income before Tax / Total Sales


Policy objectives

Policy Objectives

  • Increase the number of start-ups

  • Facilitate their growth

  • Increase their survival rate

  • Foster SME graduates (to be large enterprises)

  • Facilitate the smooth exist of losers, providing second (& more) chance

  • Encourage to be incorporated

  • Foster SME exporters & supporters


Challenges

Challenges

  • Scattered targets (high transaction costs)

  • Lack of the economies of scale

  • Limited public resources

  • Limited understanding about the targets, i.e. SMEs

  • Limited communication channels

  • Limited knowledge & skills

  • Limited information on global & regional markets


Six areas for interventions

Six Areas for Interventions

  • Pro-business legal & regulatory framework

  • Supporting infrastructure (e.g. ind. zones)

  • Enhanced access to finance

  • Entrepreneurship development

  • Technology transfer & adaptation (plus R&D and product standards)

  • Business development services

Entrepreneur centred development strategy


Sme development approaches

SME Development Approaches


Entrepreneur centred development

Entrepreneur Centred Development

Business

Environment

Access to

Finance

Infrastructures

Export-minded

Entrepreneurs

Business

Development

Services

Technology


Sme business network

SME Business Network

Information

Incubation

Consulting

Training

Linkage

Policy dialog

Information

Consulting

Training

Training

Information

SME

Development

Agencies

SME

Training

Institutions

Business

Associations

Export-minded

Entrepreneurs

Export-minded

Entrepreneurs

Export-minded

Entrepreneurs

Export-minded

Entrepreneurs

Export-minded

Entrepreneurs

Financial

Institutions

Technical

Centers

Technology

Standards

Certificates

Training

Finance

Information

Launching of New Export Businesses

Success Case Replication


Global value chains

Global Value Chains


Export led sme development entrepreneurship in the gms

In the era of globalization…

Can SMEs compete in the international market?

Can SMEs learn to be competitive?

Will SMEs benefit from the globalization?

Can SMEs survive in the global competition?

What can we do to bring the benefit of the globalization to the poor?


Export led sme development entrepreneurship in the gms

The ideal is…

  • Selling products directly to the international consumers with “Brand Presence” & “Pricing Power”

- Have information related to market/process/product

  • - Have capabilities over the full Value Chain: design,

  • production, marketing, distribution, etc.

    - Respond effectively to the changing market conditions

Very difficult for SMEs in developing countries

  • Alternate option: Reaching global market through global value chains


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

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


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


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

Shift in the GVC governance during the past three decades

TNCs controlling all production

Ownership of overseas

subsidiaries/ franchises

Outsourcing to suppliers

(no legal ownership)

TNCs focus on core values

Source: UNIDO, Integrating SMEs in Global Value Chains

Opportunity for SMEs in developing countries:

Specialize in a limited set of activities or components in the GVC


Export led sme development entrepreneurship in the gms

Levis Case


Export led sme development entrepreneurship in the gms

Emergence of GVCs: Consequences

  • Smaller number of dominant lead firms

  • Emergence of large/strong suppliers

  • Intensified competition toward high-value added activities

  • Competition on continuous skill development and knowledge enhancement

    • Economic disparities at the region, country, community and firm levels


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

Challenges for SMEs in developing countries

  • Lack of awareness, capacity and resources

    • Infrastructure

    • Capital

    • Skilled labour

    • Managerial expertise

    • Knowledge and technology

    • Contacts / networks


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

Challenges for SMEs in developing countries (cont.)

  • Unfavorable national business environment

    • Rules and regulations

    • Red tape/corruption

    • Political instability

    • Insufficient business development services


Regional average of ease of doing business rank

Regional average of ease of doing business rank

Source: ESCAP (2009), calculated by ESCAP based on Doing Business 2009, World Bank (2008)


Export led sme development entrepreneurship in the gms

The GMS

  • Centre of 3 rapidly growing subregions

Northeast

Asia

  • Export & FDI driven development strategy

South Asia

GMS

  • Increasing amount of FDI in

    the region

  • Growth of south-south investment

  • Increasing investment in China can stimulate greater FDI throughout the region (FDI is not a zero sum game)

  • TNCs from developed companies (Intel: Vietnam, GM: Thailand- spill over effect possible in neighboring countries)


Population by subregion

Population by Subregion

1,500

China (90%)

(Million)

India (75%)

1,350

260

Northeast

GMS

310

South

ASEAN - GMS


Purchasing power parity

Purchasing Power Parity

USA

10,000

11,000

China (55%)

Japan

(33%)

3,300

India (80%)

670

Northeast

GMS

1,300

(US$ Billion)

South

ASEAN - GMS


Gms markets gnp us billion

GMS Markets (GNP, US$ Billion)

$50

Yunnan

& Guangxi

$20

$20

3

Lao PDR

Viet Nam

Myanmar

$140

$20

4

Thailand

Cambodia


Export led sme development entrepreneurship in the gms

GVCs in GMS

  • Thailand: various GVCs in auto, electronics, high-tech, agri-business, consumer-goods sectors.

  • Yunnan: VCs mainly serves other provincial markets

  • Viet Nam: GVCs under development in garment, consumer goods, auto and electronics sectors

  • Cambodia, Lao PDR and Myanmar: Agro-business and garments; need promotion to attract GVCs although some FDI have been observed advanced manufacturing sectors recently (underdeveloped domestic markets)


Export led sme development entrepreneurship in the gms

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


Opportunities for smes

Opportunitiesfor 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


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

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


Export led sme development entrepreneurship in the gms

Government actions needed

  • Change of FDI strategy: Attract GVCs fit for the country.

  • Develop GVCs by participating in neighbouring countries’ GVCs.

  • Classic SME export promotion

    • Marketing research, export promotion, product development, export financing, trade fairs and missions

  • Create enabling business environment

    • Laws and regulations and their enforcement, ICT and logistic infrastructure and software

  • Enhanced access to SME finance


Export led sme development entrepreneurship in the gms

Government actions needed (cont.)

  • Capacity and HR development for SMEs and related government agencies

  • Fostering capacity and quality of business associations

  • Training on working relationship in a multicultural environment

  • Focus on agri-business value chains

  • Foster stronger backward linkages with SMEs through intra-regional South-South investment


Export led sme development entrepreneurship in the gms

Government actions needed (cont.)

  • Facilitate SMEs’ adoption of world standards and credible certifications

  • Productivity improvement through infrastructure development and logistical improvement

  • Improving the cross-border flow of goods

  • Sector based value chain studies

  • Foster national lead firms – Graduates from the SME sector with quality and brand 


Export led sme development entrepreneurship in the gms

Government Strategies (cont.)

Additional GVC strategies:

  • Supply side capacity building

    • Training/ counseling and advice/ micro financing/ market intelligence etc.

  • Develop opportunities through cooperation (i.e. SME clusters)

    • Economies of scale/ joint action/ information sharing/ enhancing attractiveness to global buyers by reducing transaction costs etc.

  • Promote the GVC mindset


Export led sme development entrepreneurship in the gms

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)


Export led sme development entrepreneurship in the gms

Further reading

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


Export led sme development entrepreneurship in the gms

For further inquiry, contact:

Masato Abe, Ph.D.

Economic Affairs Officer

Private Sector and Development Section

Trade and Investment Division

United Nations ESCAP

Bangkok, Thailand

[email protected]

www.unescap.org


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