SME Development in the GMS

1. SME Development in the GMS Masato Abe, Ph.D. Economic Affairs Officer United Nations ESCAP Bangkok abem@un.org

2. Challenges for SME development • Scattered targets leading to high transaction costs • Lack of economies of scale • Limited public resources • Limited understanding about the targets, i.e., SMEs • Limited communication channels • Limited knowledge and skills

3. Objectives of SME development • Increase the number of startups • Increase their survival rate • Encourage incorporation or formalization • Foster SME graduates (to be large enterprises) • Facilitate the smooth exit of failed firms, with leniency for bankruptcy • Enhance access to markets (e.g., increased exports and exporting to wider markets) • Sustainable and inclusive enterprise development (e.g., environment, gender, youth, and minorities)

4. International SME definition Sources: European Union (2003); Gibson and van der Vaart (2008)

5. GMS SME definition

6. Startups by sector in Japan; SMEs by sector in Thailand (%) Sources: Japan Finance Corporation (2009); Office of SMEs Promotion (2011).

7. SMEs’ net income in Japan Source: National Life Finance Corporation (2007).

8. GDP contribution of the SME and informal sector based on income levels Source: Ayyagari, Beck, and Demirgüç-Kunt (2003). Note: ‘Residual’ includes large enterprises and public sector.

9. Profit Grow to a large firm Maturity Decline Growth Startup Exit 0 Years Pick-up Loss Simplified SME life cycle

10. SME typology

11. Another SME typologyby market and technology Source: Modified from Uchikawa and Keola (2009).

12. Startup profiles in Japan • Entrepreneurs • Average age was 41.4 years old • 84.5 per cent were men; 15.5 per cent women • 33.1 per cent held a college degree or higher • Enterprises • 3.9 employees • Startup funds: US$ 100K • Own capital: 35 per cent • Support of family, relatives and friends: 15 per cent: • Public grants and commercial loans, with collaterals and/or partially covered by public loan guarantee schemes: 50 per cent • 60 per cent of startups achieved break-even within 15 months. • Source: National Life Finance Corporation (2008)

13. Characteristics of SMEs • Born out of individual initiatives, knowledge, and skills • Greater operational flexibility • Low cost of production • Specialization to niche markets • High propensity to adopt technology • High capacity to innovate • High employment orientation • Utilization of locally available human and material resources • Reduction of geographical imbalances

14. Disadvantages of SMEs • Low bargaining power for both sales and procurement • Weak market access • Low technology adaptation • Lack of brand development • High debt structure • Weak management with less training • Weak human resource base with low level of compensation • Inadequate institutional support

15. Constitutions of enterprises Source: IFC (2009)

16. Share of SMEs to SMEs’ contributions, various sources & years

17. The number of SMEs per 1,000 people, 2001-2006 Source: ESCAP (2009b).

18. Entry and exit rates between Japan and USA Source: The authors, developed based on data from JSBRI (2011).

19. National culture and entrepreneurship: Japan & USA Sources: GEM (2011); Hofstede (1991).

20. Productivity differentials by enterprise size Source: ADB (2009).

21. Competitiveness framework for SMEs

22. Six key areas • Business environment, including policy and regulatory framework and infrastructure development • Entrepreneurship • Financing • Business development services • Innovation and technology • Market access

23. Business enabling environment • A transparent, open, fair, and competitive business framework • Clear, independent rule of law for all firms • Easy establishment and dissolution of businesses • Equal and stable legal treatment for national and cross-border transactions

24. Business regulatory compliance costs by firm size, Lao PDR Source: ADB (2009).

25. BEE components

26. BEE survey • Ease of Doing Business • Economic Freedom of the World Exercise • Corruption Perception Index • Sub-national survey

27. Ease of doing business in Asia and the Pacific Source: World Bank (2012).

28. Ease of doing business in Asia and the Pacific, 2012 Source: World Bank (2012).

29. Economic freedom Source: Gwartney, Hall and Lawson (2011).

30. Corruption ratings in Asia and the Pacific Source: Transparency International (2011).

31. Subnational surveys • Most SMEs have relatively limited relationships with national agencies, interfacing with municipal or provincial bodies and conduct their activities largely or entirely within that sphere • Provincial competitiveness index in Viet Nam • 64 provinces of Viet Nam • (a) costs of market entry; (b) access to land and security of tenure; (c) issues relating to the transparency of regulations and their enactment by provincial bodies; (d) the time required to comply with regulations; (e) informal charges imposed; (f) bias towards state-owned enterprises; (g) the pro-activity of provincial authorities to assist firms; (h) the provision of business development services (BDS); (i) the availability of training for employees; and (j) the quality of legal institutions • Provincial business environment scorecard in Cambodia • 10 most economically active provinces • 10 sub-indices such as tax administration, crime prevention, and dispute resolution.

32. Monthly enterprise registration, Cambodia, 2004 Source: Baily (2007).

33. BEE reforms

34. Key success factors of entrepreneurs

35. Entry barriers to entrepreneurship • The ‘fear of failure’ • Mindset • Lack of confidence due to inadequate skills and knowledge • Low aspirations • socioeconomic and cultural factors: • Negative peer pressures (e.g., parents, relatives, and friends) • No respectable exit route without economic punishment • Social stigma

36. Relationships among culture, policy, and entrepreneurship Source: Dennis (2005).

37. SME financing gaps, OECD and non-OECD countries Source: OECD (2006)

38. Collateral, interest rate and nonperforming loans Source: IFC (2009).

39. Business growth stages and cash flows

40. The biggest reason of SME failure

41. Forms of finance for SMEs

42. Financial sources for Malaysia SMEs, 2004 (%) Source: Rozali et al. (2006)

43. Financial gap in SME financing Source: Modified from JFC (2011).

44. SME financing through public-private partnership in Japan

45. Types of BDS • Market access and development • Supporting infrastructure • Supplies • Technical assistance and training • Technology and product development

46. Three core segments of BDS

47. BDS actors and their roles Source: Modified from AAMO (2007).

48. Traditional BDS approach Source: Modified from DCED (2001).

49. Market-oriented BDS approach Source: Modified from McVay and Miehlbradt (2001).

50. An overview of innovation