It is of paramount importance for policymakers to realise that creating the path for SMEs, is both financial and non-financial, for them to reach and remain in the global value chain – Pic by Shehan Gunasekara
Asia is making an excessive impact on global economy, as seen over the recent years. Asia also experienced economic growth downturn with the global economic recession in 2008 and 2009. Various studies confirm that SMEs (Small to Medium Enterprises) are having the potential to enhance the productivity and increase the employment both nationally and globally.
Trade and investment liberalisation taking place in the Asian region, through many preferential trade agreements is providing the path for growing their business opportunities across borders, which will in turn ensure improving competitiveness of SMEs and generating more and more jobs, leading to sustainable development of the region. So it is of paramount importance for policymakers to realise that creating the path for SMEs, is both financial and non-financial, for them to reach and remain in the global value chain.
Fragmentation of production
Cross border production based on fragmentation theory is becoming ever popular in the SME’s space. Due to technology advancements, various stages of the manufacturing process of a product could take place in many surrounding countries. As a result intermediate goods may cross national borders many a time.
For these transactions, It is utmost important to have increased efficiency and reduced cost of cross border services. New trade facilitation systems coming up as a result of WTO TFA (World Trade Organization – Trade Facilitation Agreement) such as National Single Windows and Trade Information Portals, implemented in many countries that could add much value in these processes.
Through 1990s the global economy paved the way for the development of international production networks involving both developed and developing economies. As per the ADB study report, east and south-east Asian production lines were determined by cost, quality and delivery. Global business models were visible with key topographies such as global markets and commercialising, global sourcing, knowledge creation and innovation, outsourcing and subcontracting, advancement of information and communication technology, etc.
Good examples were evident from Asian countries such Philippines, Singapore, Malaysia, China and South Korea, establishing machinery parts production lines and having Indonesia, Vietnam, Myanmar, Cambodia and Laos increasingly participating in the international production networks. This background is changing the production locations to a greater extent and has an effect on flow of FDIs (Foreign Direct Investments) as well. Now it is evident that different companies located in different countries have undertaken various stages or value chain of a line of production.
Challenges for SMEs
In developed or developing economies, SMEs are playing a crucial role by contributing to the economy; be it business numbers, export growth, employment generation, output growth and contribution to supply chain, etc. The lack of availability of SME performance related data is making a cloudy situation for policy makers in implementing coherent policy measures.
Rapidly changing market demand, lack of capacity in knowledge, innovation and creativity are directly affecting the progress of the SMEs. Furthermore, when compared with large multinationals, SMEs are going through excessive challenges such as lack of economies of scale, lack of resources such as finance, technology and skilled labour, market access limitations and shortage of R& D (Research and Development) expenses, etc.
In the recent years the trading atmosphere such as global value chains and information technology revolution are offering more and more opportunities for the SMEs to integrate and remain in the global economy.
It is vital to note that, when compared with large organisations, SMEs are having flexibility and capacity to respond innovatively to changes required by the new market conditions. It has paved the way for some SMEs to dominate certain niche markets and stay continuously integrated with large multi nationals as their key partners.
This scenario is evidently visible in the German economy by SMEs having over 75% of global market share of some specialised innovative products whilst contributing to a major share of trade surplus of the country. At the same time there is greater opportunity for SMEs to be benefited on the input side of the production by having access to cost effective raw material and labour, technology and knowhow. It is a proven fact that SMEs will have access to international market opportunities and be a part of Global Value Chain through outward FDIs, made by larger companies and SMEs being suppliers to those entities.
There are enough examples for SMEs participating directly in Global Value Chains as exporters. They export transitional goods or services which can be used as inputs of manufacturing processes of other countries. For example, Thailand SMEs are selling 16% of their exports as value added goods which could be used as inputs of manufacturing processes of other countries. Vietnam SME’s contribution in this aspect counts up to 26% when services are included.
On the other hand there are situations that SMEs are giving higher contribution to exports by being suppliers to large exporters. Mexico is a good example where SMEs contribute only 15% of the total exports and by way of supplying to large export companies their contribution is as big as 30%.
Internal factors Innovation
Innovation is bringing in wider market access for SMEs compared to non-innovative entities. Through innovation SMEs can reach higher productivity, lessening of production costs which will make them much competitive. These innovations may range from production to marketing to branding which they may take the advantage of having clearly distinguished their products from the competitive products and secure larger market share and better access to international markets.
Use of technology
Many SMEs are more inclined not to adapt latest technologies for their production processes, mainly due to the cost factor. It is a known fact that acquiring latest technologies may need upfront investments and additional efforts in reorganising, which may be costly.
Larger firms would have the capability and the capacity to go for emerging technologies that will ensure better returns. Comparatively larger corporations have better access to knowledge based capital and the SMEs would be at a disadvantage in this aspect too.
Management and human capital
SMEs are generally having weaker managerial skills and the human capital also would not be as skilled as larger enterprises, resulting in low level of productivity, wasteful use of labour, damaging production tools very often and wastage of raw material. In markets where skilled labour is scarce or expensive, SMEs may face eternal difficulties in their business process.
External factors Access finance and related services
As discussed above, many internal factors such as innovation, adaption of emerging technologies and human capital issues that are disturbing SMEs, have irrupted from the fact, with lack of access to finance. This situation may lead to productivity and market access issues making the SMEs uncompetitive.
Lending institutions also will have tougher assessing monitoring mechanism on SMEs, making it challenging for them to perform. Further trade financing instruments such as factoring, letter of credit, guarantees, export and credit insurance have become increasingly important to reduce the risk of cross border transaction of SMEs.
Access to information and infrastructure
In order to ensure SME’s existence in the global market, the availability of market information is critical. It is ranging from customer needs, regulatory requirements and standards to be complied, etc.
Furthermore lack of established foreign business contacts also would take the SMEs deep in to the issue. Geographic location of the SME and the distance to the trading partner is also a key criteria. Quality of the physical infrastructures such as roads, seaports, airports, availability facilities provided for cross border transactions namely single window operations and trade information portals will reduce the time taken for importing and exporting and make the SMEs businesses more effective. Availability of information technology and telecommunication based infrastructure for trading activities may increase the market access of SMEs to a great extent.
Intellectual Property Rights of SMEs
Innovations of SMEs should be protected through Intellectual Property Rights. If the products could be easily copied or simulated, SME’s existence in business and continuation could be challenged. In most of the cases it is not viable for SMEs to safeguard their intellectual property interest in the international market due to the facts such as legal overheads, multiple fillings, technical and regulatory differences across different countries. If SMEs are well protected in this aspect, their business value, eligibility to reach external financing sources, ability to attract expert knowledge, sourcing business partnerships would be increased.
Digital transformation of SMEs
The way of doing business keeps on changing with the digital transformation. The cost and hindrance of internationalisation is reduced drastically enabling SMEs to find markets, be connected with international production networks and pay online as well.
Based on information technology developments, the facilities that could be offered not only for business connectivity but also in cross border trading activities will reduce the cost and time taken for the same. The world of e-commerce is taking the lead in trade transactions than ever before, having ever increasing transactions among entities such as, B2B (Business to Business), B2G (Business to Government) and B2C (Business to Consumer).
SME enabling policies
As discussed above, in order to ensure SMEs are well connected with global market opportunities, the authorities always will have to introduce and maintain SME friendly policies. These policies may focus on encouraging innovation, increased competition, easy and cheaper access to inputs, lessening of red tape, reduction of tariff and nontariff barriers through preferential Trade Agreements etc. It is worth citing that regional and bilateral trade agreements should pave the way for SMEs to be meaningfully integrated with global value chains.
Many SME related studies done by experts reveal that SME policies should further encourage service sector entrepreneurship such as transport, logistics, telecommunications and professional sectors, which are instrumental in developing other business sectors.
Upgrading of technology, innovation focused R&D, availability of working capital to finance exports, readiness of stable credit market and other financial instruments are also considered key aspects of policy level support. Further, simpler, efficient and straight forward cross border transaction facilitation system would definitely decrease the cost of import and export, reduce the necessities of holding large input inventories of manufacturing processes, and thereby reduce the working capital. Training and skills development focused policies are also utmost important for the development of SMEs.
Policymakers are expected to support local innovation and encourage investments in innovations, propagate industry and university partnerships with the intension of surfacing best technology for the industries. Further it should promote partnerships among SMEs both local and international with the focus of absorbing more technology, better market opportunities and address economies of scale problems. Enabling SMEs to gain benefits of digital trade revaluation is always advantageous for economies at all times.
(The writer is the Secretary General/CEO of the National Chamber of Commerce of Sri Lanka.)
OECD and ADB information