The Internal Environment and Input Conditions

Problems facing the PRC's SMEs are many and varied. The SMEs are primarily located in the coastal areas and are mostly limited to the production of standardized consumer or lowtechnology goods made for mass markets (such as furniture, consumer electronics, and textiles and garments). There is usually little innovation; R&D activity, if present at all, tends to be negligible. A subset of these firms may be integrated into global supply chains, but such integration is minimal, and the relatively homogeneous nature of their products makes the firms vulnerable to changes in demand from abroad. To the extent to which firms seek to be more competitive, the strategy is often through cost-cutting measures. Overall, complacency pervades the conduct of business, which is usually based on the copying or licensing of products, using imported machinery.

Lower prices are not enough to allow a firm to succeed in international markets: improvements in product, process, technology, and organizational functions such as design, logistics, and marketing have become the critical success factors in firm competitiveness. The PRC's SMEs are thus under pressure to innovate, to upgrade their operations in order to do business on the international level. Hence, as a late-industrializing economy, the PRC tends to be restricted by a gap in technology. This technology gap can be decomposed into three types of lags: (i) innovation lag (involves the levels of capability for creation and development in science and technology); (ii) process capability lag (refers to the infrastructure and “infostructure” that supports human capital and the firm's ability to make multiple copies of a product or to deliver repeatedly a service once the product or service performance specification is given); and (iii) customer lag (refers to such disadvantages as difficulty in attracting consumers, due in part to lack of brand recognition, and the high cost of switching to a new provider, due in part to large up-front costs).

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