SMEs’ gateway to localisation
During the 11th WIEF in Kuala Lumpur, panellists discusses how SMEs are the vital link to growing economies. Here were some of the shared thoughts on the issue and how relying less on imports could be the key to boosting productivity.
Small and medium enterprises (SMEs) are the largest economic contributors across all economic sectors, especially in ASEAN. As a cornerstone of globalisation and with the formation of the ASEAN Economic Community by the end of 2015, many challenges lie ahead for SMEs, particularly in building capacities to fill growing gaps in the global market.
SMEs a vital link
In the ASEAN region, SMEs are the largest source of domestic employment across all economic sectors. Development of SMEs in ASEAN varies according to size and asset. Moderator Roberto C. Amores, who is director in-charge of Agriculture, Philippines Chamber of Commerce and Industry, began the session by noting that SMEs were vital to the business supply chain, providing parts and services to larger companies.
Datuk Mohd Radzif Mohd Yunus, non-independent non-executive director of CCM Duopharma Biotech Berhad, said that SMEs contributed 50 per cent of global Gross Domestic Product (GDP) and provided 60 per cent of the world’s employment. In the ASEAN context, they contributed USD2.5 trillion in terms of combined GDP and helped make ASEAN the sixth-largest economy with its combined population of 630 million.
Conduit to the world
Mohd Radzif called for SMEs to be viewed in the context of supporting supply chains within an environment dominated by multinational companies (MNCs). In Malaysia, he said, 40 per cent of input from domestic firms was immersed within the MNC context compared to 46 per cent in Vietnam and 82 per cent in China. He added that in Malaysia in 2014, 98 per cent of established SMEs contributed 36 per cent of national GDP. Malaysian SMEs also accounted for 65 per cent of employment and 25 per cent of exports.
Mohd Radzif said it was imperative to nurture and grow SMEs from startup to final harvesting when they moved towards diversification and wealth-creation. For SMEs to remain relevant, business ecosystems must be conducive enough to sustain efficiency levels and competitiveness in productivity.
‘By boosting domestic supply chain capacities, countries will be less reliant on imports, enabling them to boost potential for exports,’ he said, adding that reliance on domestic SMEs could also improve the competitiveness and comparative advantage of MNCs as well as other local export-oriented corporations.
An anchor company and its suppliers would support clusters of activities, with the prosperity of one reinforcing the other, he said, noting that the overall intent should be to increase the emergence of local SMEs in the MNC ecosystem as a conduit towards the world market.
Linking banks and entrepreneurs
Roshika Singh, Financial Institutions Group (FIG) Advisory Services, International Finance Corporation (IFC), and South Asia Advisory Board Member, Fifth Estate, India, observed that SMEs around the world were still struggling to gain access to financing. A recent study, she said, found that 90 per cent of SMEs were obtaining credit from informal sources.
She said that, in India, some 30 million SMEs employed over 70 million people. Yet formal financing sources cater to only 22 per cent of them. Roshika called for more work to be done with banks and entrepreneurs to increase awareness and help create innovative products and services. The IFC, she said, had implemented an SME financing form, established by the G20 in 2012 as ‘an example of bringing together practitioners, donors and technology providers to spur innovation to raise awareness and see how we can collaborate together as well as work on the entrepreneurs themselves.’
According to a study conducted three years ago, local entrepreneurs had said that, other than inadequate financing, access to other resources such as market linkages, technology, managerial competence, business skills and infrastructure had impeded SME growth. One of the measures taken was creating non-financial services for entrepreneurs, and they have done so in as many as 12 countries.
Ideas such as mentoring and networking programmes, portals and SME toolkits were very well received. Besides working with government policymakers, industry players and credit bureaus, work had also begun with large corporations and MNCs such as Walmart and Steptil, she said. These companies have brought local SMEs into their supply chains as they helped build community acceptance and involvement. According to Roshika, large corporations found that SMEs worked better and faster in supplying their needs. SMEs were also more flexible than other traditional suppliers and could be keen innovators. She added that this synergised with what entrepreneurs themselves wanted—to be independent and commercially viable.
Linar Yakupov, representing Russia’s Association of Regional Investment Agencies, said that small local companies in each country must have equal opportunities and that business environments should not cater only to foreign investors. He said that smaller, local companies are often expected to perform well and survive on their own. Meanwhile, favourable conditions are created to attract foreign investors. Yet he cannot deny the importance of foreign investment in helping SMEs grow.
He cited the example of the Republic of Tatarstan—one of the first regions in Russia to establish a special economic zone— which has grown to become one of the most successful and has attracted billions of dollars and around 50 foreign companies operating manufacturing facilities.
SMEs were absorbed into these foreign companies’ supply chains. Although clearly benefitting from foreign investments, insufficient infrastructure and financial support were big hindrances to effective operation of Tatarstan’s SMEs. To remedy this, the Association created a model economic zone by turning the region’s brownfield sites into industrial parks to accommodate small and medium industries.
Also, grants were awarded to the local SMEs to support them in leasing and purchasing equipment, as well as subsidising their interest rates. Supported by regional and federal governments, the Association then implemented the same model in Tatarstan’s 45 municipalities. The most successful of these, he said, were those in which municipal heads were directly involved in promoting, attracting and creating the necessary conditions for businesses to flourish.
Linar added that many entrepreneurs still had to wait for government directives to drive their enterprises as well as to decide on what and how much to produce. He argued that production should be market-driven and stressed that a conducive environment would attract foreign investors who would in turn create demand for SME products.
Panellists raised the key issue of the inability of SMEs to compete on a level playing field. While financial access and government intervention would take them a certain distance, how might they break the mould to gain a competitive advantage?
Mohd Radzif cited Malaysia’s example of the PETRONAS Vendor Development Programme, which enhanced both lateral and vertical integration. The programme added value, deepened and broadened scope, and ensured productivity and competitiveness for both MNCs and SMEs, he said.
Roshika argued that it was imperative not to see SMEs as a homogeneous group: as there were different sectors and each occupied a different stage of the business lifecycle, SMEs had different needs. ‘It is important not to look just at a blanket solution for SMEs—we should really understand the sub-segment of where they work.’
The key lies in helping SMEs achieve better linkages, she said, citing her own experience of helping a local cocoa farmer in Belize obtain fair-trade certification that allowed the sale of products at a premium in both the local and international markets.
Linar observed that forums such as the WIEF could act as platforms for initiating strategies to develop the whole industry. Better sector focus was needed to understand how an SME should integrate into another company’s supply chain, he said, citing the example of large German firms locating their manufacturing facilities in small villages, which created a supporting circle that generated numerous other activities. Linar also observed that the current US and European economic sanctions against Russia had turned out to be a blessing in disguise that transformed the Russian economy. ‘It was one the greatest pushes for import substitution,’ he said, adding that small industrial parks in Russia were perfectly placed to grow the new Government initiatives.
Essentially, said Roshika, the importance of promoting and supporting SMEs is not the issue at hand in terms of becoming a gateway to localisation. Instead, she felt that the many obstacles that prevent SMEs from reaching their full potential need to be addressed. Among them were financing, support, business training and market access. She argued that a holistic review of the entire ecosystem would yield better results than focusing on issues in isolation.
Linar said that what stood out in successful SMEs was their entrepreneurial spirit, which was sadly lacking in the youth of many countries. He argued that governments should promote entrepreneurship as an attractive venture while showcasing business captains who had the potential to grow and become global players.
Mohd Radzif said there was no escaping globalisation. In the advent of the ASEAN Economic Community and the Trans-Pacific Partnership (TPP), the challenge was how best to build capacities to fill gaps in the global market.
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