Small businesses in ASEAN – Keys to overcoming the middle-income country trap
Small and medium scale enterprises – or SMEs – play a critically important role in many economies, notably in Asia. Among ASEAN economies for example, SMEs account for more than 90 per cent of all enterprises, employ 50 to 99 per cent of the workforce, and contribute around 32 to 77 per cent to the total domestic economic output in their countries.
By Ronald U. Mendoza, PhD
Asian Institute of Management
In some Asian countries, SMEs have played a strategic role in private sector development, especially in the aftermath of the 1997 Asian financial crisis. Literally millions of entrepreneurs in Asia provide goods and services to fast growing cities, and they also form the backbone of the rural agricultural economy in the region. A small but growing number have successfully connected to large firms and international production chains, serving as part of the impetus for technology transfer and productivity gains.
Despite the large number of small businesses in many Asian economies, the vast majority still use traditional and low-productivity technologies. Evidence also suggests that many of the small and informal enterprises in these countries are female-owned. Many of these firms tend to be characterised by low productivity coupled with meager earnings, even as larger firms benefit from economies of scale, and they engage in innovative activities which offer much higher rates of income to owners and employees.
This productivity gap is likely exacerbated by several factors. The first has to do with the inordinately large role of state-owned or state-supported enterprises that continue to form the spearhead of many Asian economies’ industrialisation policies. While arguably successful in the initial stages, inevitably, these strategies will face trade-offs, in the form of lower inclusiveness (as the vast majority of the population are still engaged in much smaller enterprises) and also possible competition issues (as larger firms may not necessarily continue to expand countries’ competitiveness due to their dominant role in the domestic economy). Developing countries will need to strike a delicate balance as regards these so-called “national champions”, and how far these large firms can fuel industrialisation.
Second, inappropriate or irrelevant regulatory constraints also cause many firms to remain small and informal. The result is a bifurcated industrialisation which sees a few firms reach large size, while many smaller ones are prevented from growing. And while the informal sector provides income opportunities to low income households, particularly for women in the rural and urban areas, the challenges of persistent productivity (hence also wage) differentials, poor working conditions, and the absence of social protection are some of the factors that conspire to marginalise this sector in the economy.
And by recent estimates, this sector is where the large swath of the Asian population is still engaged. Little surprise, then, that even as many Asian economies provide the impetus for global growth today, Asia is also where you can find countries with some of the fastest rising inequality.
SMEs fuel long-run growth
Ushering sustained and more inclusive growth – the kind that would enable many Asian economies to break free of the so-called “middle income country trap” – inevitably requires that SMEs play a much more dynamic role in these countries’ economies. While large firms and conglomerates can play a key role in spurring the “big push”, sustaining industrialisation requires a multitude of entrepreneurs from many more smaller and medium scale upstart firms to innovate and develop new products and services that could continue to spur economic growth. Indeed, one of the main differences between many middle income countries and more fully industrialised economies has to do with the dynamism across a larger number of firms in the latter, including initially small upstart firms fueled by venture capital.
In the new economic growth literature, entrepreneurs provide a very important role by developing products and services that could be competitively produced in a country. This act of “cost discovery” ultimately fuels a more sustained growth process that is not merely dependent on, for examples, extractive industries or migrant remittances. Entrepreneurs and firms of this type are the ones that undertake productivity-enhancing (vs. rent-seeking) investments. When coupled with a competitive economic landscape, and underpinned by the rule of law and a business-friendly environment, these together form the impetus for sustained growth in the long-run.
Leveraging firm-level data for policy making
Unleashing the potential of SMEs in Asia requires more sophisticated policies that draw heavily on context-specific evidence. And as many middle income Asian economies continue to make their big economic push toward industrialisation, this intensifies the need to review the current state of SMEs and the policies designed to support them.
As a contribution to the policy discussion on enterprise development, the Asian Institute of Management Policy Center and the International Development Research Center, in partnership with a broad set of development organisations working on SMEs, are organising an international conference to bring top experts in the field, in order to facilitate evidence-based policy discussions on reforms for SMEs growth.
The international conference on SMEs will try to address the gaps in the enterprise development literature and maximise the use of available enterprise surveys. Both practitioners and researchers will have a chance to engage with policymakers on issues such as the obstacles to firm growth (including corruption and lack of infrastructure), innovation, vulnerability to crises, women entrepreneurs and informality. These are among the themes to be discussed while leveraging the latest empirical research, with the end goal of facilitating genuine reforms to unleash the potential of SMEs as engines of inclusive growth.
The author is an Associate Professor of Economics at the Asian Institute of Management. The views expressed in this article are those of its author, and do not necessarily represent those of AIM and IDRC. The International Conference on Small Enterprises, Good Governance, and Competition: Keys to Growth with Equity in Emerging Asia will be held at Radisson Blu Hotel, Cebu City, Philippines from November 7 – 9, 2013. Click here for more details.
Small and medium scale enterprises - or SMEs - play a critically important role in many economies, notably in Asia. Among ASEAN economies for example, SMEs account for more than 90 per cent of all enterprises, employ 50 to 99 per cent of the workforce, and contribute around 32 to 77 per cent to the total domestic economic output in their countries. By Ronald U. Mendoza, PhD Asian Institute of Management In some Asian countries, SMEs have played a strategic role in private sector development, especially in the aftermath of the 1997 Asian financial crisis. Literally millions of entrepreneurs in...
Small and medium scale enterprises – or SMEs – play a critically important role in many economies, notably in Asia. Among ASEAN economies for example, SMEs account for more than 90 per cent of all enterprises, employ 50 to 99 per cent of the workforce, and contribute around 32 to 77 per cent to the total domestic economic output in their countries.
By Ronald U. Mendoza, PhD
Asian Institute of Management
In some Asian countries, SMEs have played a strategic role in private sector development, especially in the aftermath of the 1997 Asian financial crisis. Literally millions of entrepreneurs in Asia provide goods and services to fast growing cities, and they also form the backbone of the rural agricultural economy in the region. A small but growing number have successfully connected to large firms and international production chains, serving as part of the impetus for technology transfer and productivity gains.
Despite the large number of small businesses in many Asian economies, the vast majority still use traditional and low-productivity technologies. Evidence also suggests that many of the small and informal enterprises in these countries are female-owned. Many of these firms tend to be characterised by low productivity coupled with meager earnings, even as larger firms benefit from economies of scale, and they engage in innovative activities which offer much higher rates of income to owners and employees.
This productivity gap is likely exacerbated by several factors. The first has to do with the inordinately large role of state-owned or state-supported enterprises that continue to form the spearhead of many Asian economies’ industrialisation policies. While arguably successful in the initial stages, inevitably, these strategies will face trade-offs, in the form of lower inclusiveness (as the vast majority of the population are still engaged in much smaller enterprises) and also possible competition issues (as larger firms may not necessarily continue to expand countries’ competitiveness due to their dominant role in the domestic economy). Developing countries will need to strike a delicate balance as regards these so-called “national champions”, and how far these large firms can fuel industrialisation.
Second, inappropriate or irrelevant regulatory constraints also cause many firms to remain small and informal. The result is a bifurcated industrialisation which sees a few firms reach large size, while many smaller ones are prevented from growing. And while the informal sector provides income opportunities to low income households, particularly for women in the rural and urban areas, the challenges of persistent productivity (hence also wage) differentials, poor working conditions, and the absence of social protection are some of the factors that conspire to marginalise this sector in the economy.
And by recent estimates, this sector is where the large swath of the Asian population is still engaged. Little surprise, then, that even as many Asian economies provide the impetus for global growth today, Asia is also where you can find countries with some of the fastest rising inequality.
SMEs fuel long-run growth
Ushering sustained and more inclusive growth – the kind that would enable many Asian economies to break free of the so-called “middle income country trap” – inevitably requires that SMEs play a much more dynamic role in these countries’ economies. While large firms and conglomerates can play a key role in spurring the “big push”, sustaining industrialisation requires a multitude of entrepreneurs from many more smaller and medium scale upstart firms to innovate and develop new products and services that could continue to spur economic growth. Indeed, one of the main differences between many middle income countries and more fully industrialised economies has to do with the dynamism across a larger number of firms in the latter, including initially small upstart firms fueled by venture capital.
In the new economic growth literature, entrepreneurs provide a very important role by developing products and services that could be competitively produced in a country. This act of “cost discovery” ultimately fuels a more sustained growth process that is not merely dependent on, for examples, extractive industries or migrant remittances. Entrepreneurs and firms of this type are the ones that undertake productivity-enhancing (vs. rent-seeking) investments. When coupled with a competitive economic landscape, and underpinned by the rule of law and a business-friendly environment, these together form the impetus for sustained growth in the long-run.
Leveraging firm-level data for policy making
Unleashing the potential of SMEs in Asia requires more sophisticated policies that draw heavily on context-specific evidence. And as many middle income Asian economies continue to make their big economic push toward industrialisation, this intensifies the need to review the current state of SMEs and the policies designed to support them.
As a contribution to the policy discussion on enterprise development, the Asian Institute of Management Policy Center and the International Development Research Center, in partnership with a broad set of development organisations working on SMEs, are organising an international conference to bring top experts in the field, in order to facilitate evidence-based policy discussions on reforms for SMEs growth.
The international conference on SMEs will try to address the gaps in the enterprise development literature and maximise the use of available enterprise surveys. Both practitioners and researchers will have a chance to engage with policymakers on issues such as the obstacles to firm growth (including corruption and lack of infrastructure), innovation, vulnerability to crises, women entrepreneurs and informality. These are among the themes to be discussed while leveraging the latest empirical research, with the end goal of facilitating genuine reforms to unleash the potential of SMEs as engines of inclusive growth.
The author is an Associate Professor of Economics at the Asian Institute of Management. The views expressed in this article are those of its author, and do not necessarily represent those of AIM and IDRC. The International Conference on Small Enterprises, Good Governance, and Competition: Keys to Growth with Equity in Emerging Asia will be held at Radisson Blu Hotel, Cebu City, Philippines from November 7 – 9, 2013. Click here for more details.
