Small business development in the Asia Pacific region

Small business development in the Asia Pacific region

By Chris Hall

SYDNEY (JP): Twenty years ago, it was widely assumed that
the importance of smaller firms would progressively decline;
larger, multinational firms would take advantage of economies of
scale and improved technology, and smaller firms would not be
able to compete. However, in reality the Small and Medium
Enterprises (SMEs) have not only remained an important economic
force, but the importance of SMEs has actually increased in most
economies. Not only that, but SMEs are now playing a more
important international role. This is especially so in the Asian
segment of the Asia Pacific Economic Cooperation (APEC) forum and
Pacific Economic Cooperation Council economies. What has
happened, and what is going on?

An SME is a business which is "not large". For statistical
purposes an SME is defined in a variety of different ways. For
example 300 employees in manufacturing and 50 in services (Japan)
or 100 in manufacturing and 20 in services (Australia). No matter
how they are defined, SMEs play an important economic and social
role.

Some key points to note are:

SMEs make up over 96 percent of firms in the APEC and PECC
regional economy, and employ between 40 percent and 80 percent of
the workforce depending on the economy (see table 1).

SMEs also already contribute significantly to international
activity in the region, although this also differs according to
the economy. SMEs in Chinese Taipei generate some 60 percent of
exports, while in Japan SMEs generate about 14 percent of direct
exports, and about 35 percent of indirect exports (table 2).

SMEs are increasingly seeking opportunities across borders,
and are being affected by global and regional changes. For
example, many SMEs in Japan, Chinese Taipei, and Korea are moving
across borders to set up operations and joint ventures in the
economies of China, Vietnam, Thailand, Malaysia and Indonesia.

There are now over 50,000 mini-multinationals in the Asian
region. UNCTAD research indicates these SMEs multinationals tend
to transfer more appropriate technology than do larger
multinational corporations (MNCs).

SMEs play a fundamental role in making an economy dynamic by
increasing the ability to adapt to economic and technological
change. SMEs provide a significant "entrepreneurial engine" which
is important for sustainable economic development. All large
firms today began at some stages as an SME, and many large firms
rely on a symbiotic relation with SMEs for much of their growth.
Evidence from Organization for Economic Cooperation and
Development studies now indicates that SMEs are now contributing
around 70 percent of net new jobs.

A number of strategic structural, institutional and
technical changes are affecting SMEs in the region. For example:
Structurally, the main factors are the rising value of the yen,
the emerging market economies in China and Vietnam, the growing
importance of middle class consumers, and changes in financial
markets.
Institutionally, the main factors are changes taking place in
subcontracting arrangements between large firms and SMEs, the
emergence of new organizational forms (such as networking and
alliances) and the emergence of international institutional
changes brought about by APEC, Association of Southeast Asian
Nations (ASEAN), ASEAN Free Trade Area (AFTA) and growth
triangles.
Technologically, SMEs are being affected by changes in
telecommunications and computing, and in the internationalization
of standards.

These are not affecting all SMEs or all economies in the
same way, but generally they are:
* increasing the level of SME internationalization and
interdependence between economies;
* changing the relation between large firms and small firms;
* opening up new opportunities and posing new problems for SMEs;
and
* making SMEs even more important to the region.

Between 1 and 5 percent of SMEs in the region can be
considered as global, in the sense that they are extensively
internationalized and can compete globally. Another 20 percent of
SMEs in the region are internationally active; they are already
engaged in trade or other cross border activity. A further 20
percent to 40 percent of SMEs may be regarded as having the
potential to compete internationally. The remainder of SMEs are
essentially small, domestically oriented firms. These
domestically oriented firms are increasingly subject to
international competitive pressures, either directly or
indirectly.

The developments taking place in the region affect different
SMEs in different ways. Very few SMEs in the region will remain
unaffected by the developments taking place, but they are
probably of most relevance to about 10 percent of SMEs that are
globalized or extensively international in their activity. For
these firms new opportunities have opened up. It is this small
proportion of SMEs that generates most of the dynamism and new
economic growth. The main implications of these developments for
these high value added SMEs are that they will increasingly
operate across borders in an internationalized economy.

There are thus two main implications for SMEs and for
economies in the region.

First, the SME sector of economies will become more
internationalized. The bulk of the SME sector will remain
domestically oriented, but firms in the high growth SME sector
are likely to become more international in outlook and operation.
There will also be increasing pressure on domestic SMEs to become
more efficient relative to international standards.

Second, the technologies and techniques used by fast growing
international SMEs are just as accessible to SMEs in the
developing as in the developed economies. The entrepreneurial
growth engine will depend less on traditional basic industries
(steel, chemicals, etc.) and more on new industries which are
more accessible to SMEs. To be competitive these SMEs are less
reliant on the traditional physical infrastructure (roads,
cities, etc.) and more on intangible infrastructure (knowledge,
information highways, etc.)

The progressive internationalization of SMEs poses important
policy issues, because it means that SME policy must increasingly
recognize and coordinate with the policies adopted in other
economies. Failure to do so risks disadvantaging those SMEs which
are likely to contribute most to economic development. These
developments pose some key policy issues for APEC and PECC
members, especially in Asia. For example:
* The increased internationalization and interdependency in the
region mean there is an increased need for "best practices"
policies. "Best practices" in this context does not mean adopting
prescriptive guidelines; instead it means more seeking to improve
the effectiveness of policies by learning from others, and
adapting policy initiatives to the changing strategic context
facing SMEs.
* Most governments have programs designed to facilitate exports
by SMEs. These programs will remain important, but they only
apply to about 20 percent or 30 percent of SMEs at most (Chinese
Taipei is an exception). Even in traditionally protected service
industries SMEs will face more competition to improve their
efficiency to international standards, and to adapt to change
forced on them from outside the domestic economy. Again, there is
a need for best practice policies.
* The benefits associated with this SME growth engine are much
the same as those from trade. Artificial barriers to mobility
reduce those benefits. The barriers to the international movement
of SMEs tend to be less transparent than those affecting
commodity trade, and thus pose some special problems.

The objective of the PECC SME Best Policy Practices Project
is to provide useful advice to policy makers as to the options
for improving SME policies and programs. In doing this, PECC
recognizes the need to cooperate closely with APEC and its SME
initiatives.