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.