Emerging Business Opportunities for SMEs in the Region

MNCs have expanded their production, material, and resource sourcing and markets beyond their domestic economies. Because of the pressures of integration, competition, and JIT production systems, the region is fully connected into a GVC system that churns out output for the global marketplace. As a result, globalization provides new opportunities for developing economies to enter international trade through production sharing and outsourcing. Since the early 1990s, international production networks have developed in ASEAN and East Asia, and gradually spread to India, Australia, and New Zealand, driven by market forces and facilitated by regional, sub-regional, and bilateral FTAs.

Signs of congestion in economic agglomeration in East Asia are beginning to appear, and dispersion forces have started to influence industrial location. There has been a substantial increase in production costs due to agglomeration and the resulting difficulties in securing labor, land, and other factors of production. In particular, labor-intensive and land-intensive production processes tend to shift location. Therefore, regional economic integration has set off dynamic growth impulses through global and regional production networking. In turn, this process has been facilitated by industrial agglomeration and fragmentation in sequential order. Differences in wage levels and land prices between more developed and less developed economies in the region create economic opportunities for narrowing the development gap and effect the spillover effect of growth to other neighboring economies. Their geographical proximity to growth centers would be a drawing point to less developed region but drastic reductions in the set up cost and the service link cost as well as improving policy environments would be required.

5.1 Latest trends in SME Businesses in Asia and Pacific Region

Globalization and regional integration processes are increasing in terms of speed and space. Countries that are able to take advantage of these two underlying fundamental forces have been growing faster and more sustainably. At the same time, economic openness and domestic trade and investment liberalization have dramatically increased competition in the domestic, regional, and global marketplace. Larger and efficient companies are normally able to leverage these new opportunities and challenges in domestic markets as well as across external markets. This challenging new economic environment tends to put SMEs at a disadvantage compared to large and medium-sized enterprises. However, there is empirical evidence to indicate that SMEs continue to develop and prosper in some countries. For example, SMEs in Japan, Korea, Taipei,China, Hong Kong, China, and Singapore are doing well and expanding. SME growth is not restricted to these countries but also increasingly in Thailand (automobile and electronic), Malaysia (electronic), Philippines (electronic, ICT), India (ICT, services), Australia, and New Zealand (ICT, services).

The fact is that large enterprises (LEs) and SMEs are the two important drivers of development in the developing Asia and Pacific region. While MNEs and domestic LEs have been playing an important role in accelerating the industrialization process, SMEs provide the crucial industrial linkages to set off a chain reaction of broad-based and sustainable development. Without SMEs as subcontractors and suppliers of intermediate inputs to MNEs and domestic LEs, industrial growth in developing countries would not be able to realize sustainable increase in domestic value-added, employment, productivity, and industrial linkages. In the globalizing era of the borderless marketplace, buttressed by regionalization and liberalization, SMEs provide an important source of domestic employment creation and resilience against more volatile external economic fluctuations, and serve as a mechanism for local capacity building.

SMEs play a pivotal role in the functioning of international and regional production networks. There are certainly ways to foster local firms and SMEs by utilizing globalizing market forces and regional economic integration; the issue is how to provide a critical linkage between SMEs and the large local companies and MNCs. Successful cases in Singapore and other countries have proven that governments play a vital role in ensuring a competitive market structure, providing relevant and effective technical upgrading, marketing information and management, consortium financing, and clustering (economies of scale) to SMEs.

While trade and investment liberalization and globalization are detrimental to the domestic growth of SMEs, there are counter-policy measures that can be implemented to synergize the negative effects of globalization and regionalization to result in a more dynamic, rapid, and sustainable regional economic development. The development of SMEs in the region is important as success in this effort will go a long way toward reducing regional and domestic income gaps, creating a balance of income and employment, and securing sustainable human and social security. To achieve this, there is a need to improve SMEs' international competitiveness through SME promotion policies, financing, and the tax system. SMEs can be sharpened in their ability to compete through improvement of competitiveness due to research and development, improvement of quality control, and skill. To upgrade the production process and capture a larger share of value-added, the government should promote the development of local parts and supplier industries. This seems an effective avenue to increase the domestic content of MNCs operating in the country. The development of domestic suppliers would require a package of technical assistance, including the provision of training to develop the skills of local suppliers together with access and availability of finance along with increased linkages between SMEs and large enterprises.

As regional production networking becomes more important as a source of economic growth, outsourcing and subcontracting will offer increasing opportunities for SMEs to capitalize on regional economic integration. Alternative and important emerging business opportunities for SMEs are the advent of Internet businesses and the widespread use of electronic and computer business design. Because of the electronic and computer revolution in business management and practices, many SMEs in Singapore and Hong Kong, China are expanding their business operation from homes and other flexible arrangements. Such flexibility in doing business comes about due to the infinite business opportunities offered through the borderless cyberspace world. This new mode of doing business reduces business and transaction costs enormously.

SMEs are also expanding very rapidly in the service sector of tourism and specialized marketing to newly emerging markets beyond the domestic market as the process of regional economic integration. Regional integration is further facilitated through reduction in tariff and non-tariff barriers and the harmonization of standards and customs procedures. In addition, free movement of capital and skilled professionals would facilitate the formation of an integrated single market and production base.

As regional integration is broadened and deepened toward a single market and production base, competition and market size increase at the same time. This is a positive effect of regional integration. Without a corresponding increase in the efficiency of local firms and SMEs, regional integration cannot be sustained as there will be more domestic opposition due to increased economic and social instability and unemployment. This is the crux of regional economic integration that underpins its sustainability, that it must not only increase efficiency but also provide positive and acceptable benefits to every constituent member within the free trade area or economic community.

With the processes of regional cooperation and economic integration, economies tend to experience higher economic growth. However, the higher rate of gross domestic product (GDP) growth may not be accompanied by a higher rate of employment. With globalisation and regional integration, there is a tendency that the rate of increase of output (GDP) and the rate of increase of employment to not be proportionally linked. In other words, a country may have a much higher rate of increase in output than the rate of increase in employment. In addition, regional integration may tend to increase income disparity among members of the preferential trading area, if some countervailing measures are not properly instituted. In this respect, the development of viable and sustainable SMEs provides an effective measure to counter the negative effects of globalisation and regional economic integration.

Therefore, improving the competitiveness and capability of SMEs is vital for the sustainability of regional economic integration. There are manifold elements required to improve the competitiveness of SMEs. Countries at different stages of economic development require different core policy instruments aimed at improving their SMEs' capability development. Experience drawn from successful SME development in Korea, Taipei,China, and Singapore indicates that technology and industry upgrading are the core measures that must be continually implemented in order to stay competitive, in addition to clustering and improved marketing capability.

These countries set up central institutions to monitor and diffuse new technologies and provided technological services that SMEs could not provide for themselves, These included material testing, inspection and certification of quality, instrument calibration, establishment of repositories of technical information, patent registration, research and design and technical training. The Singapore Institute of Standards and Industrial Research has an incubator scheme that allows SMEs and innovators to make use of the Institute's space, equipment and technical advice, and provides common facilities for local firms to do research and development. These services are not given free, but are offered at affordable rates due to economies of scale and clustering effects. These three countries also provided training and management consultancy facilities for SMEs along with subsidized credit, tax incentives, and financial guarantees to capital market imperfections. As for technology upgrading, cost sharing was adopted to ensure that companies take the programs seriously.

Trade facilitation and technical assistance are normally attached with regional and bilateral FTAs. For example, the ASEAN Economic Community (AEC) has the Initiative for ASEAN Integration (IAI) to narrow the development gap between the more developed six ASEAN countries and CLMV countries. Equally, the ASEAN-PRC FTA, ASEAN-Japan FTA, ASEAN-Korea FTA, have preferential treatment and development assistance extended to less developed economies. Asia-Pacific Economic Cooperation (APEC) has an economic and technical (Eco-Tech) program as an integral part of the process of trade and investment liberalisation in the Asia-Pacific region. Regional cooperation and integration among countries with differing stages of economic development must be accompanied with development assistance, technological transfer and enhancing capability schemes in order to be effective and sustainable. International division of labour and specialization has become an important feature of international and regional trade and investment patterns and the development of technological capability of SMEs is an integral policy of liberalising trade and investment regime. Regional economic integration opens up opportunities and challenges for policy makers to provide industrial and technological upgrading to SMEs.

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