MSMEs and Global Value Chains - Asia-Pacific Economic...

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2018/SMEWG/DIA/005

MSMEs and Global Value Chains

Submitted by: Asian Institute of Management

Policy Dialogue on Micro, Small and Medium Enterprises Internationalization

Port Moresby, Papua New Guinea10-11 September 2018

Jamil Paolo Francisco, Ph.D.

Executive Director, AIM Rizalino S. Navarro Policy Center for Competitiveness

APEC Policy Dialogue | Port Moresby, Papua New Guinea | 10 September 2018

MSMEs and Global Value Chains

What are MSMEs?

• The definition of micro, small and medium enterprises

(MSMEs) differs from country to country and even from

sector to sector due to the different laws, rules and

regulations that define them.

Micro, small-and medium enterprises (MSMEs)

Sources: METI (Japan), SPRING (Singapore), USSBA (United States)

CountryAsset size (A) / capital (C) / sales

turnover (S)Number of employees (E)

C ≤ JPY 300 million (manufacturing,

construction, transport, etc.)

C ≤ JPY 100 million (wholesale)

C ≤ JPY 50 million (services & retail)

E ≤ 300 (manufacturing,

construction, transport,

E ≤ 100 (wholesale &

services)

E ≤ 50 (retail)

Singapore S ≤ SGD 100 million OR E ≤ 200

United States Depends on industry ORDepends on industry but most

common standard is E < 500

Definition of MSME, selected high income countries

CountryAsset size (A) / capital (C) / sales

turnover (S)Number of employees (E)

MalaysiaS ≤ MYR 50 million (manufacturing)

S ≤ MYR 20 million (other sectors)OR

E ≤ 200 (manufacturing)

E ≤ 75 (other sectors)

Philippines A ≤ PHP 100 million AND E < 200

Thailand

A ≤ THB 200 million (manufacturing &

services)

A ≤ THB 100 million (wholesale)

A ≤ THB 60 million (retail)

E ≤ 200 (manufacturing &

services)

E ≤ 50 (wholesale)

E ≤ 30 (retail)

Micro, small-and medium enterprises (MSMEs)

Sources: ASEAN, SME Corp Malaysia, Philippine Senate

Definition of MSME, selected Newly Industrialized Countries

Why are MSMEs important?

• The overwhelming number of enterprises across the world

are MSMEs.

• MSMEs contribute greatly to their respective economies in

terms of employment.

Sources: ADBI & ADB (2015) & DTI (Philippines)

Sources: DOSM (Malaysia), DOSS (Singapore), DTI (Philippines), METI (Japan), OSMEP (Thailand), USSBA (United States)

*Figures for Singapore are approximations

907,065 911,768 2,704,430 3,809,228 217,899 30,212,6700

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Malaysia (2015) Philippines (2016) Thailand (2014) Japan (2014) Singapore (2017) United States(2015)

Newly Industrialized Countries High Income Countries

Number of MSMEs

30,000,000

98.5 99.6 98.6 99.7 99.0 99.9

66.063.3

70.165.0

Malaysia (2015,2017)

Philippines (2016) Thailand (2014) Japan (2014) Singapore (2017) United States (2015)

Contribution of MSMEs to establishments and employment

Share of enterprises (%) Share of employment (%)

Sources: DOSM (Malaysia), DOSS (Singapore), DTI (Philippines), METI (Japan), OSMEP (Thailand), SME Corp (Malaysia), USSBA (United States)

MSMEs and inclusive growth

• MSMEs also have the potential of promoting sustainable

economic growth, shared prosperity and poverty

reduction; and helping attain the Sustainable Development

Goals (SDGs) set by the United Nations.

Sources: Kamal-Chaoui (2017) & Liu (2018)

Source: United Nations

• “Small and medium-sized enterprises

that engage in industrial processing and

manufacturing are the most critical for

the early stages of industrialization and

are typically the largest job creators.”

• “Increase the access of small-scale

industrial and other enterprises, in

particular in developing countries, to

financial services, including affordable

credit, and their integration into value

chains and markets.”

MSMEs and their importance to the economy

• “Promote development-oriented policies

that support productive activities,

decent job creation, entrepreneurship,

creativity and innovation, and

encourage the formalization and growth

of micro-, small- and medium-sized

enterprises, including through access to

financial services.”

• “By 2030, eradicate extreme poverty for

all people everywhere, measured as

people living on less than $1.90 a day.”

• MSME ownership allows wealth creation and allow

entrepreneurs to climb up the income ladder.

• MSMEs can provide livelihood to rural communities and

encourage them to stay rather than migrate to urban areas,

and prevent rural depopulation.

• MSMEs can also empower low income, women and elderly

people by providing them jobs and additional income.

Sources: Natsuda et al. (2012) & Samans et al.(2015)

• One Tambon, One Product (OTOP)

↘ The Thai government established the OTOP program in 2001 to stimulate rural economic

development.

↘ Under OTOP, the government encourages the creation of MSMEs and community-based

enterprises to provide livelihood to locals, and prevent rural flight.

↘ While the program is not perfect, it led to firm and employment creation in rural areas across

Thailand, provided additional earnings among employees, and allowed women to be more

financial independent.

Source: Natsuda et al. (2012)

• Rags2Riches

↘ Rags2Riches is a fashion social enterprise employing people living in Payatas, Quezon City to

manufacture bags.

↘ Before being employed by Rags2Riches, employees originally made rugs out of excess cloths

and earned about PHP12 to PHP16 (US$0.22 – 0.30) a day.

↘ After joining Rags2Riches, they started earning PHP350 to PHP500 (US$6.55 – 9.36) a day,

enough to feed their families and send their children to school.

↘ The company has its own brick-and-mortar stores and online store, and exports its products to

the US and Europe.

Sources: Entrepreneur Philippines (2015), Philippine Daily Inquirer (2013) & Rags2Riches

• A Rags2Riches bag

Source: Rags2Riches website

• MSMEs contribute about 35 to 40 percent of GVA or GDP in

of Malaysia, the Philippines and Thailand.

• However, they are lower compared to high income

countries. This is especially the case in Nordic countries

(e.g. Denmark, Sweden).

MSMEs vs. large firms

Sources: DOSM (Malaysia), DOSS (Singapore), DTI (Philippines), METI (Japan), OSMEP (Thailand), USCB (United States), USSBA (United States)

Note: Figures are based on GVA unless otherwise stated

37.1 35.7 39.6 54.5 49.0 44.6

62.9 64.360.4

51.055.4

Malaysia (2017) Philippines (2016) Thailand (GDP 2014) Japan (2014) Singapore (2017) United States (GDP2010)

Contribution to GVA or GDP by enterprise size and by percentage

MSME Large firm / non-MSME

63 63 68 72 63

Denmark Finland Iceland Norway Sweden

Contribution to GVA by enterprise size and by percentage, Nordic countries, 2013

SME Large firm / non-SME

Source: Statistics Denmark & OECD (2017)

Note: Figures for Nordic countries are approximations

• Low income countries also tend to have lower MSME labor

productivity, and have wider gaps between MSME labor

productivity and large firm labor productivity compared to

high income countries.

Sources: DOSM (Malaysia), DOSS (Singapore), DTI (Philippines), METI (Japan), OSMEP (Thailand), USCB (United States), USSBA (United States)

0.56 0.56 0.55

0.78 0.75

1.79 1.75

1.521.46

Malaysia (2015) Philippines (2016) Thailand (GDP 2014) Japan (2014) Singapore (2017) United States (GDP2010)

Labor productivity, MSME vs. large firms

MSME Large firm / non-MSME

Note: Figures are based on GVA unless otherwise stated

Source: Statistics Denmark & OECD (2017)

0.971.00

1.061.00

Denmark Finland Iceland Norway Sweden

Labor productivity, SME vs. large firms, Nordic countries, 2013

SME Large firm / non-SME

Note: Figures for Nordic countries are approximations

Global value chain

• Global value chains (GVCs) present many opportunities to

help MSMEs grow.

Source: ADBI & ADB (2015)

Global value chain

• GVCs involve production processes that have become

fragmented—i.e. one part of the process occurs in one

country and another part occurs in another country.

• Globalization, further regional economic integration, and

low-cost transportation and communications technologies

have led to the rise of GVCs.

Global value chain

Source: Screenshot from ADBI & ADB (2015)

Global value chain

• Investments have spread to low- and middle-income

countries instead of concentrating in high-income

countries.

• Countries not only trade products and services with each

other but also technological know-how.

• GVCs enable countries to develop faster, climb up the

value chain, and produce high-value products.

Sources: ADBI & ADB (2015) & World Bank

Global value chain

• The rise of Asian economies

↘ As MSMEs in economies such as Hong Kong, China, Korea and Chinese Taipei rose through the

global value chain (GVC), they experienced increasing firm efficiency and invested more in human

capital development, which, in turn, helped increase workers’ incomes.

Sources: ADBI & ADB (2015), Harvie & Lee (2005) & World Bank (1993)

Key growth drivers for global value chains

• Resource endowment – Firms seek resources at lower

costs.

↘ Firms from high-income countries moved or outsourced parts of their production process to

lower income countries to take advantage of lower labor and production costs.

• Efficiency maximization – Firms seek to reduce financial

and time costs within the firm or the value chain.

↘ Firms may share or consolidate their logistics operations to achieve economies of scale.

• Market access – Firms want to enter into new markets.

↘ Firms expand into new markets when local markets are already saturated.

↘ They enter into new markets when the latter has enabling factors such as business-friendly

regulations and well-developed infrastructure.

Source: Screenshot from ADBI & ADB (2015)

Global value chain

Global value chains

• There are two types:

↘ Producer-driven value chains – Large firms play a central role in coordinating all backward and

forward linkages in the manufacturing process (e.g. automotive manufacturing).

Source: Gereffi & Memedovic (2003)

Automotive industry GVC

Source: Screenshot from Sturgeon et al. (2016)

Global value chains

• There are two types:

↘ Buyer-driven value chains – Different firms set up a decentralized manufacturing process—this

may involve having centers of productions spread across the world (e.g. apparel

manufacturing).

Source: Gereffi & Memedovic (2003)

Apparel industry GVC

Source: Screenshot from Gereffi & Memedovic (2003)

MSME participation in GVCs

• Why should MSMEs participate in GVCs?

↘ Exposure to a larger clientele

↘ Technology transfer / opportunities to learn from large firms

↘ Learning to compete with other firms

MSME participation in GVCs

• How many MSMEs do

participate in GVCs?

↘ GVC players in selected Asian

countries account for 35.4 percent of

sampled firms.

Percentage of SME GVC players and non-GVC players

GVC players Non-GVC players

ASEAN MSME participation in GVCs

• Almost half of Malaysian

MSME manufacturers are

exporting their goods

compared to only about six

percent of Indonesian MSME

manufacturers.

Source: Wignaraja (2012)

21.420.1

Malaysia Thailand Vietnam Philippines Indonesia

Percentage of manufacturing MSMEs that export (direct and indirect), selected ASEAN countries

Philippine MSMEs and GVCs

• DTI estimates that:

↘ 25 percent of Philippine export revenues come from MSMEs.

↘ 60 percent of exporters are MSMEs.

• Large firms in the Philippines are more connected to GVCs

than MSMEs.

Sources: DTI (Philippines) & Francisco, Canare & Labios (2018)

Metro Manila SMEs and GVCs

• How many SMEs do

participate in GVCs?

↘ Only 1.3 percent of SME

respondents in Metro Manila have

exported in the previous fiscal year.

↘ Industrial SMEs are more likely to

export than services SMEs.

Source: Francisco, Canare & Labios (2018)

All Industry Services

Percentage of respondents with export revenue in the last year, by sector

• Few respondents have

engaged in partnerships

with either domestic large

firms or foreign firms.

• Fewer respondents have

partnered with foreign

firms than domestic large

firms.

Subcontractedor outsourced bya large domestic

Subcontractedor outsourced by

a foreign firm

Licensed by alarge domestic

firm tomanufacture a

product

Licensed by aforeign firm tomanufacture a

product

Engaged in ajoint venture,

strategic allianceor consortiumwith a large

domestic firm

Engaged in ajoint venture,

strategic allianceor consortiumwith a foreign

Percentage of respondents that have engaged in selected partnerships with a domestic large business or a foreign firm

• SMEs from the industry

sector are more likely to

participate in partnerships

compared to their

counterparts from the

services sector.

3.14.1

Subcontracted oroutsourced by a

large domestic firm

Subcontracted oroutsourced by a

foreign firm

Licensed by alarge domestic firmto manufacture a

product

Licensed by aforeign firm tomanufacture a

product

Engaged in a jointventure, strategic

alliance orconsortium with a

large domestic firm

Engaged in a jointventure, strategic

alliance orconsortium with a

foreign firm

Percentage of respondents that have engaged in selected partnerships with a domestic large business or a foreign firm, by sector

Industry Services

• Few respondents have also

become part of a global

production network (GPN).

• Industrial SMEs are more

likely to be part of a GPN.

Sources: Francisco, Canare & Labios (2018)

15.1 20.0 14.6

All Industry Services

Share of respondents that is part of a global production network

Part of a GPN Not part of a GPN

Challenges to MSME’s successfully integration into GVCs

• Inadequate access to finance

↘ Information asymmetry discourages lenders from lending funding to MSMEs.

↘ Lenders impose requirements such as business plans, collaterals and financial statements from

businesses to minimize risks of debt defaults.

↘ However, MSMEs find it challenging to meet these requirements. This leads them to either get

inadequate or no financing at all especially if they cannot sufficiently meet the lenders’

requirements.

Sources: ADBI & ADB (2015), Brewer (2007), Mambula (2002) & Tagoe, Nyarko & Anuwa-Amarh (2005)

• Meeting international quality standards

↘ MSMEs have to procure specific equipment or have to follow certain processes to meet

international standards. However, many MSMEs are cash-strapped and are not able to do so.

↘ ADB Survey: MSMEs in Kazakhstan have negative perception about meeting international

standards to enter into GVC.

Sources: ADBI & ADB (2015) & Francisco, Canare & Labios (2018)

• Lack of knowledge and expertise about overseas markets

and how to enter into them

↘ MSMEs may become risk averse and decide not to integrate into GVCs due to lack of

knowledge about overseas markets.

↘ Acquiring knowledge may also involve hiring consultants and experts on overseas markets,

which MSMEs may find costly.

Sources: ADBI & ADB (2015), Francisco, Canare & Labios (2018), Janjuha-Jivraj et al. (2012), Liu (2012) & Musteen et al. (2013)

• Inadequate infrastructure

↘ Inadequate physical (e.g. roads, railways) and communications (e.g. internet) infrastructures

increase the cost of doing business, which may discourage MSMEs from entering into GVCs.

↘ MSMEs in places with weak infrastructure networks find it more challenging to meet delivery

targets set by their MNEs partners.

↘ Businesses in remote areas tend to have limited internet connection access, discouraging them

to partake in e-commerce.

Source: ADBI & ADB (2015), Camara (2006) & Siemens (2010)

• Unfriendly business environment (inc. corruption, and

tariff and non-tariff barriers to trade)

↘ MSMEs may have to jump through bureaucratic hoops to do business (e.g. meeting local

quality standards set by the government).

↘ Garments exporters in Bangladesh are discouraged to export due to bureaucratic procedures

and corruption (e.g. paying of bribes to speed up bureaucratic procedures) (Rahman, Uddin &

Lodorfos 2017).

↘ Tariff and non-tariff barriers, and diversity of product regulation per country also heavily affect

MSMEs and their propensity of export.

Sources: ADBI & ADB (2015), Francisco, Canare & Labios (2018), Leonidou (2004), OECD (2018) & Rahman, Uddin & Lodorfos (2017)

Enablers for MSMEs successful integration into GVCs

• Access to finance

↘ MSMEs must strive to improve recordkeeping and information management, and improve

investor relations skills to reduce risk perception of lenders and investors.

↘ Governments and business organizations must establish credit guarantee schemes for MSMEs

for them to have collateral, which would help reduce risks for lenders.

Source: Tagoe, Nyarko & Anuwa-Amarh (2005)

• Knowledge and expertise about overseas markets and

how to enter into them

↘ MSMEs need to have knowledge about laws and regulations (e.g. trade and customs

regulations) of the foreign markets where they want to enter into.

↘ CEOs of MSMEs with strong ties to different international networks have greater knowledge

about overseas markets and are more likely to succeed when entering into foreign ventures.

↘ This is especially true to MSMEs in transition economies.

Sources: ADBI & ADB (2015), Francisco, Canare & Labios (2018), Janjuha-Jivraj et al. (2012), Liu (2012) & Musteen et al. (2013)

• Establish and maintain networks

↘ Having strong formal (e.g. business association partnership) and informal (e.g. guanxi) network

ties mitigates risks of entering into new markets, and allow MSMEs to obtain knowledge and

resources more easily and meet and connect with other firms.

Firms wanting to do business in China either use existing guanxi (personal connections) or build one

from scratch (e.g. giving favors to potential suppliers) to make it easier to set up shop.

Sources: Ahlstrom & Bruton (2002), Boehe (2013), Camara (2006) & Johanson & Vahlne (2009)

• Physical and communications infrastructure

↘ Firms in export zones and industrial areas must have adequate access to modern and efficient

roads, railways, airports and seaports to ensure smooth flow of goods and minimize costs.

↘ In light of Fourth Industrial Revolution, investments should be made in improving ICT

infrastructure and education.

↘ Governments should play an important role in building up infrastructure with the help of the

private sector.

Source: ADBI & ADB (2015), Aldaba (2017) & Schwab (2016)

• Creating business-friendly environments

↘ Countries across the world should strive to reduce or eliminate not only tariff barriers but also

non-tariff barriers such as signing of free trade agreements, and harmonizing trade and product

standards.

↘ Countries should also create effective anti-corruption, anti-red tape, and anti-trust policies.

Sources: ADBI & ADB (2015) & OECD (2018)

Enablers for MSMEs’ successful integration into GVCs

• Improve the quality of products and services

↘ Potato farmers in Chiang Mai, Thailand have been selling potatoes to PepsiCo (makers of

Lay’s) since the 1980s. However, they could not sell huge quantities of potatoes to PepsiCo

because of huge quantities of rejected potatoes.

↘ The Ministry of Agriculture encouraged the potato farmers to establish a community-based

enterprise (under OTOP) for them to manufacture their own-brand potato chips using the

rejected potatoes.

↘ When the potato farmers participated in OTOP road shows and showcased their chips, several

Bangkok-based potato chips manufacturers expressed their interest in buying the farmers’

products, expanding their markets.

Source: Natsuda et al. (2012)

What the future holds for MSMEs?

• Economic protectionism on the rise

↘ US President Donald Trump has slapped a 25 percent tariff on USD 34 billion worth of Chinese

imports and is about to impose that tariff on other goods worth USD 16 billion.

↘ The EU, Mexico and Canada were not spared as the US also imposed tariffs on steel and

aluminum imports from the former three economies.

↘ China retaliates by imposing 25 percent on USD 16 billion worth of US imports.

↘ The EU, Mexico and Canada have also imposed tariffs on different US-made goods such as

steel, bourbon, motorcycles and orange juice.

Sources: BBC, Bloomberg, CNBC, Entrepreneur & Washington Post

• Economic protectionism on the rise

↘ The US’ decision to impose tariffs is to make American-made good competitive relative to

imported goods. However,

↘ Soybean farmers in the US will be affected by Chinese tariffs on soybeans as the crop account

for 60 percent of US agricultural exports to China.

Sources: BBC, Bloomberg, CNBC, Entrepreneur & Washington Post

• Fourth Industrial Revolution

↘ The rise of the Fourth Industrial Revolution is set to combine the digital world with the physical

and biological worlds.

↘ MSMEs can more easily adopt new technologies (e.g. artificial intelligence [AI]) than their larger

counterparts due to their flexibility and smaller size.

↘ Automation and other technologies can lower overhead costs as routine tasks can be

automated.

Sources: Entrepreneur, European Commission & Morgan McKinley

• Fourth Industrial Revolution

↘ Big Data will allow businesses, including MSMEs to get real-time sales performance and allow

them to spot easily market trends and explore new markets.

↘ However, as MSMEs and their staff may not be familiar with these new technologies, lifelong

learning, and financial and other assistance from governments and the private sector must be

promoted.

Sources: Entrepreneur, European Commission & Morgan McKinley

• Belt and Road Initiative

↘ China’s Belt and Road Initiative or the “New Silk Road” will reopen trade corridors between

China and its neighbors, and the West.

↘ MSMEs will have quicker access to markets.

Sources: BBC, Deutsche Welle & World Economic Forum

• Belt and Road Initiative

↘ China aims to fund USD 900 billion on infrastructure projects (e.g. roads, ports, railways,

airports).

↘ The China-Europe Railway, opened in 2017, allows freight to be shipped faster than sea

transport and cheaper than air transport.

↘ Nevertheless, China’s lending to fund infrastructure projects has caused concerns about the

cost of repayments and has been labeled as ‘debt traps’.

Sources: BBC, Deutsche Welle, The Guardian & World Economic Forum

policycenter@aim.edu

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