1

SMEs and Economic Dynamism in The Republic of China

Chi Schive

Chair Professor of EconomicsShih Hsin University

October l, 2008

2

Outline

• Are SMEs Efficient? A General Framework• An International Comparison of SMEs• Changing Competitiveness of Taiwan’s SMEs• Adaptability and Flexibility of SMEs • SMEs’ Complementarities to large enterprises• SMEs and Innovation

3

I. Are SMEs Efficient? A General Framework

4

“We may read a lesson from the young trees of the

forest as they struggle upwards through the benumbing

shade of their older rivals. Many succumb on the way,

and a few only survive; those few become stronger with

every year, they get a larger share of light and air with

every increase of their height,... Though the taller ones

have a better access to light and air than their rivals,

they gradually lose vitality; and one after another they

give place to others, ... And as with the growth of trees,

so was it with the growth of business as a general rule.”

Alfred Marshall (1920)

5

$

Q

LAC

Long-Term Average Cost Curve

Which one?

0

6

SMEs are as Efficient as the Large ones

• Survivor technique -- Competition of different sizes of firms sifts out the more efficient enterprises.

• Classify the firms in an industry by size, and calculate the share of industry output coming from each class over time. If the share of a given class falls, it is relatively inefficient.

• Finding -- wide range of firm sizes co-exists over a long period of time in many industries, an implication for the bath tub shaped LTAC.

According to George Stigler

7

II. An International Comparison

of SMEs’ Performance

8

Definitions of SME in Taiwan, 1967-2000

Industry 1967 1973 1977 1982 1991 1995 2000

Manufacturing: (1) Capital under NT$ 5 million

(1) Capital the same . Total assets NT$20 million and below

(1) Paid-in capital under NT$ 20 million and total assets amount not exceeds NT$ 60 million

(1) Paid-in capital under NT$ 40 million and total assets amount not exceeds NT$ 120 million

No change, except for extending industry terms into construction

(1) Paid-in capital not exceeds NT$ 60 million

(1) Paid-in capital not exceeds NT$ 80 million

(2) 100 employees and below

(2) Under 300 persons for garments, clothing and electronics industry;

(3) under 200 persons for food products industry;

(4) under 100 persons for others

(2) 300 employees and below

(2) 200 employees and below

(2) 200 employees and below

Source: White Paper of SMEs (Ministry of Economic Affairs 2004).

9

International comparison of Manufacturing SMEs 1970-74

Country Year

Average Number of Employees

Employees between 5-95 as percent of total 1965-1980

Average growth percent in

Manufacturing (%)

Number of Establishments

(%)Employees

(%)

Value Added

(%)

Taiwan 1971 42.6 92.9 33.9 20.2 14.5

U.S. 1972 90.5 82.5 23.7 19.9 2.5

Canada 1973 79.3 83.2 26.9 22.7 3.8

Denmark 1973 63.9 86.9 36.1 --- 3.1

Norway 1973 43.9 91.4 43.6 35.9 2.6

W. Germany 1970 58.6 90.5 27.6 --- 3.3

Belgium 1970 57.8 89.8 32.0 --- 4.7

Finland 1973 86.4 81.0 26.3 23.7 4.9

Japan 1973 30.5 95.6 49.5 35.4 9.4

Italy 1971 40.4 93.5 44.0 --- 5.1

Singapore 1973 62.4 90.0 29.0 22.9 13.2

Source: Bruch, M. and U. Hiemenz (1984), Table 2-1, p. 8-9. Taiwan Statistical Data Book (1989), Table 11-17, p. 336-7.

10

International comparison of Manufacturing SMEs 1970-74 (continue)

Country Year

Average Number of Employees

Employees between 5-95 as percent of total 1965-1980

Average growth percent in

Manufacturing (%)

Number of Establishments

(%)Employees

(%)

Value Added

(%)

Greece 1973 23.0 96.8 53.6 --- 8.4

Venezuela 1974 40.6 92.4 44.6 26.7 5.8

Panama 1973 41.3 90.4 56.8 46.5 4.7

Brazil 1970 38.8 93.0 41.9 30.3 9.6

Mexico 1975 65.7 87.0 29.7 20.2 7.4

Turkey 1970 43.7 93.5 29.1 16.4 7.5

Peru 1973 43.9 91.2 39.9 26.2 3.8

Korea 1973 49.7 91.8 28.8 16.9 18.7

Philippines 1975 33.1 94.5 35.4 14.4 7.5

Thailand 1964 16.5 98.2 66.3 --- 11.2

Indonesia 1974/75 20.1 97.4 54.1 25.7 12.0

Source: Bruch, M. and U. Hiemenz (1984), Table 2-1, p. 8-9. Taiwan Statistical Data Book (1989), Table 11-17, p. 336-7.

11

SME Share of Manufacturing Employment in Taiwan, 1961-2001

57.6

42.735.6 38.6 41.3

47.9

56.5 57.952.2

0

20

40

60

80

1961 1966 1971 1976 1981 1986 1991 1996 2001

%

Source: Directorate-General of Budget, accounting and Statistics, Industrial and Commercial Census, various issues.

1-99 employees

12

SME Share of Exports

Manufacturing Trading Total 1981 71.8 61.1 68.1 1982 73.5 62.5 69.7 1987 70.8 60.2 67.1 1990 60.5 51.4 57.3 1995 53.5 45.4 50.7 1998 49.1 41,7 46.5

Sources:White Paper on Taiwan’s SMEs, various issues.

13

SMEs’ Contribution to Taiwan’s Dynamism

High Start-up Rate

High Exit Rate

Low Entry Barriers

Keen Competition

High Turnover Rate

Efficient Allocation of

Resources

14

Flexibility and Adaptability

Substitution1 Efficiency2

SMEs LEs SMEs LEsGrain mill product 0.79 0.73 0.90 0.89Textile 0.45 0.34 0.82 0.78Plywood 0.50 0.45 0.90 0.75Paper products 1.05 1.05 0.82 0.74Footwear 1.21 1.21 0.78 0.79Pottery, china and earthenware 0.86 0.70 0.84 1.00Iron and steel 1.32 1.29 0.79 0.72Electronics, parts and components 1.00 0.09 0.84 0.80Stationery 1.00 1.00 0.80 0.78

Notes: 1. Elasticity of substitution. 2. Fareel efficiency index. Source: Hu, Ming-Wen, and Chi Schive, “A Study on the Productivity and Efficiency

of SMEs in Taiwan Manufacturers,” Taiwan Economic Review 25(1), 1-26, 1997, in Chinese.

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III. SEMs’ Complementarities to Large Enterprises

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Complementing and Competing with Large Enterprises

• SMEs may form horizontal or vertical networks through division of labor among themselves and with large enterprises, the so called core-satellite grouping.

• Example in Taiwan’s information industry - There is a well-connected fabrication system of up and down streams of manufacturers, providing a complete list of original equipment manufacturers (OEMs).

17

Core

Exporting industry/OED s Car, Steel, IT, Machine Tool

Grape Type (Horizontal) Onion Type (Vertical)

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Core-Satellite Groupings, 1993

No. ofGroupings

No. ofParticipating

Firms

Autos 16 523Machinery 19 203Electric machinery, cables, andhome appliances; electronics;information

38 555

Metal processing 9 183

Chemicals 6 90

Motorbikes 4 88

All Industries 127 1,963

Source: Core-Satellite Development Center, Ministry of Economic Affairs.

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IV. SEMs and Innovation

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SME Share in High-Tech Industries 1993

No. of EnterprisesShare No.

Pharmaceutical 97.3 524Data storage and processing 91.2 785Video and audio electronics 93.7 805Communications equipment 92.6 349Electronic components 93.7 2168Electro-optical and optical

equipment98.3 941

Medical equipment 100.0 113Other precision equipment 100.0 80

100.0

%

Source: Ministry of Economic Affairs, White Paper on Small and Medium Enterprise Administration, 1998, in Chinese.

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SME Share in High-Tech Industries 1993

R&DSpending Personnel

ValueAdded

PatentAppl’n

Pharmaceutical 63.0 66.6 66.8 87.6Data storage and processing 27.7 58.4 33.6 70.8Video and audio electronics 25.1 49.6 34.1 48.6Communications

equipment 53.0 48.3 40.7 86.7

Electronic components 23.7 40.5 27.1 59.2Electro-optical and optical

equipment 56.5 74.3 69.1 91.3

Medical equipment 100.0 100.0 100.0 100.0Other precision equipment 100.0 100.0 100.0 100.0

100.0

%

Source: Ministry of Economic Affairs, White Paper on Small and Medium Enterprise Administration, 1998, in Chinese.

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V. Conclusion

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SME Friendly Environment in Taiwan

• Stable macroeconomic environment--conservative fiscal and monetary policies, well-constrained and balanced not over protective industrial policy leave room and resources for SMEs to grow.

• DFIs were encouraged to introduce “appropriate technology” for creating jobs and setting up new industries, providing an assimilating model for SMEs.

• Strong culture-rooted entrepreneurship with good education system nurtures young entrepreneur.

• Timely financial help to enhance SMEs credit and various talent training programs from the Government also play a role

SMEs die easily, but new ones come out quickly.

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25

Appendix

26

1961 1966 1971 1976 1981 1986 1991 1994

Industry Number

of firms

% Number

of firms

% Number

of firms

% Number

of firms

% Number

of firms

% Number

of firms

% Number

of firms

% Number

of firms

%

Mining and quarrying 881 96.7 --- --- --- --- 1,059 98.3 931 98.6 1,324 98.6 1,391 97.8 1,546 97.4

Manufacturing 51,389 99.7 26,938 97.2 40,739 95.4 68,616 98.7 90,580 98.9 129,690 98.6 154,077 98.1 153,473 97.8

Water, electricity and gas 147 94.2 127 86.4 120 80.5 17 54.8 21 52.5 110 80.3 212 89.1 329 90.1

Construction 4,261 98.9 4,027 84.7 5,018 85.4 7,403 86.0 11,297 90.1 21,838 96.5 31,627 98.6 56,527 98.6

Commerce 91,389 99.6 123,979 99.9 161,734 99.9 264,005 99.7 314,442 99.7 449,005 98.0 496,992 96.6 548,150 95.8

Transportation 1,549 96.3 --- --- --- --- 7,250 91.5 14,412 95.3 44,257 98.7 35,030 96.3 32,207 94.5

Finance, insurance, real

estate, and business

29,122 99.9 --- --- --- --- 69,788 99.3 14,628 97.3 18,471 93.3 31,455 92.6 52,820 90.9

Others 178 90.8 59,514 98.9 66,751 98.3 --- --- 62,473 99.5 72,655 99.7 74,772 99.4 87,800 99.1

Total 178,916 99.6 214,585 98.6 274,362 98.3 418,138 99.1 508,784 99.1 737,350 98.2 825,556 97.1 932,852 96.3

Source: White paper on Taiwan’s SMEs, various issues.

SME Share of Number of Companies

27

International comparison of SMEsShare of SMEs (%) Average

firms size (employees)

Area Year Number of firms Employees

Around 1960s:Industry sector

(share of firms with 1-99 employees)

Taiwan 1966 96.1 38.5 ---

Japan 1966 97.7 54.0 ---

U.S. 1963 90.5 26.2 ---

Sweden 1963 96.3 28.8 ---

Switzerland 1965 96.7 43.7 ---

W. Germany 1966 86.3 20.9 ---

France 1966 98.6 38.8 ---

England 1963 88.3 13.6 ---

Italy 1961 93.0 41.0 ---

Sources:Taiwan Directorate-General of Budget, Accounting and Statistics (1966-86), Taiwan Institute of Economic Research (1992), Aiginer and Tichy (1991), Loveman and Sengenberger (1991), Storey and Johnson (1987), Burch and Hiemenz (1984), and Igigawa and Iwaya (1972).

28

International comparison of SMEs (continue)Share of SMEs (%) Average

firms size (employees)

Area Year Number of firms Employees

Around 1970s: Manufacturing Industry

(share of firms with 5-99 employees)

Taiwan 1971 92.9a 33.9a 42.6

S. Korea 1973 91.8 28.8 49.7

Singapore 1973 90.0 29.0 62.4

Japan 1973 95.6 49.5 30.5

U.S. 1972 82.5 23.7 90.5

Norway 1973 91.4 43.6 43.9

W. Germany 1970 90.5 27.6 58.6

France 1970 90.5 27.6 58.6

Italy 1971 93.5 44.0 40.4

Mexico 1975 87.0 29.7 65.7Notes: a SMES are defined as firms with 4-99 employees; b All sectors, including manufacturers.

Sources:Taiwan Directorate-General of Budget, Accounting and Statistics (1966-86), Taiwan Institute of Economic Research (1992), Aiginer and Tichy (1991), Loveman and Sengenberger (1991), Storey and Johnson (1987), Burch and Hiemenz (1984), and Igigawa and Iwaya (1972).

29

International comparison of SMEs (continue)

Share of SMEs (%) Average firms size

(employees)Area Year Number of firms Employees

Around 1980s: Manufacturing Industry

(share of firms with 1-99 employees)

Taiwan 1981 95.9 41.7 ---

Japan 1983 --- 47.1 ---

Denmark 1983 --- 35.1 ---

Austria 1981 --- 37.0 ---

Netherlands 1982 --- 34.6 ---

W. Germany 1984 --- 15.6b ---

France 1981 --- 27.7 ---

England 1984 --- 22.0 ---

Notes: a SMES are defined as firms with 4-99 employees; b All sectors, including manufacturers.

Sources:Taiwan Directorate-General of Budget, Accounting and Statistics (1966-86), Taiwan Institute of Economic Research (1992), Aiginer and Tichy (1991), Loveman and Sengenberger (1991), Storey and Johnson (1987), Burch and Hiemenz (1984), and Igigawa and Iwaya (1972).

30

Employment Structure of Firms with Different Sizes, by country, 1977-83

Number of Employees

Country Year 1-19 20-99 1-99 100-499 Over 500

Taiwan 1981 22.4d 18.9e 41.3 28.5 30.2

Japan 1983 27.8d 19.3e 47.1 19.6 33.3

Denmark 1983 9.2a 25.9 35.1 29.6 35.3

Austria 1981 17.4 19.6 37.0 24.9 38.2

Netherlands 1982 13.0 21.6 34.6 65.4

Belgium 1983 12.1 20.7 32.8 25.8 41.3

France 1981 8.7 19.0 27.7 22.8 49.4

Australia 1982 12.6 17.4 30.0 21.3 48.6

Sweden 1983 10.2 15.8 26.0 19.8 54.1

Luxemburg 1980 7.7 11.5 19.2 25.8 55.0

Finland 1980 9.1 14.8 23.9 18.5 57.6

W. Germany 1982c --- 5.1 --- 24.7 60.2

England 1981 20.3 20.3 23.4 66.3

U.S. 1977 4.9 --- --- 12.8 71.0

Unit:%

Source: Storey, D.J. and S. Johnson, (1987), Table 2-2, p. 12.Note: a) between 6 and 9 persons. b) 6 persons and above. c) 20 persons and above. d) between 1 and 29 persons. e) between 30 and 99 persons.

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Size Distribution and Employment structure of Firms with Different Sizes, by Country, 1961-66

Number of Employees

Country Year 1-9 10-49 50-99 1-99 100-499 Over 500

Taiwan 1966 68.5 24.1 3.6 96.2 3.3 0.6

Japan 1966 72.9 21.9 2.9 97.7 2.0 0.3

U.S. 1963 52.3 30.7 7.5 90.5 7.9 1.6

England 1963 88.3 88.3 8.9 2.8

W. Germany 1966 43.9 32.2 10.2 86.3 11.1 2.6

France 1966 89.2 8.1 1.3 98.6 1.2 0.2

Italy 1961 93.0 93.0 6.0 1.0

Sweden 1965 73.2 19.8 3.3 96.3 2.9 0.8

Switzerland 1965 73.1 20.5 3.1 96.7 2.8 0.5

Unit:%

32

Number of Employees

Country Year 1-9 10-49 50-99 1-99 100-499 Over 500

Taiwan 1966 9.9 19.2 9.4 38.5 26.1 35.4

Japan 1966 16.6 26.0 11.4 54.0 22.0 24.0

U.S. 1963 3.3 13.1 9.8 26.2 30.9 42.9

England 1963 13.6 13.6 15.5 70.9

W. Germany 1966 2.1 9.8 9.0 20.9 29.6 49.5

France 1966 12.0 17.4 9.4 38.8 22.9 38.3

Italy 1961 41.0 41.0 25.0 34.0

Sweden 1965 6.7 14.2 7.9 28.8 20.2 51.0

Switzerland 1965 13.6 19.9 10.2 43.7 26.7 29.6

Unit:%

Employment Structure

33

Net Private Capital Inflows to Emerging Economies

1984-19893 1990-19963 1996 1997 1998 1999

Total Capital1 12.5 141.7 214.8 117.8 69.5 89.7

FDI

Portfolio

Others

13.1

4.4

-4.9

64.6

64.0

13.0

121.1.

79.9

13.9

145.0

66.6

-93.8

127.3

42.0

-99.8

119.2

25.1

-54.5

Asia &NIEs2 9.9 58.3 108.1 -15.1 -49.5 -38.1

Africa 2.3 3.7 5.1 14.1 7.3 14.2

Middle East & Europe 2.3 22.9 3.9 7.9 24.9 21.9

Latin America -0.2 46.1 81.7 88.3 73.6 75.3

Note: 1. Net private capital flows comprise net direct investment, net portfolio investment, and other long- and short-term net investment flows, including borrowing.2. NIEs = Hong Kong, South Korea, Singapore, Taiwan, and Israel. 3. Annual averages.

Source: IMF, World Economic Outlook, December 1998.

US. $ billion

34

1995 1996 1997 1998

1999

600

400

200

0

-200

-370Source: World Investment Report 1999.

Net Inflows of FDI, Equity and Foreign Bank Lending to Asian Crisis-Afflicted Countries

FDI

Portfolio equity

Foreign bank lending

Unit: billion

35

Approved Taiwanese Outward Direct Foreign Investment in 2000, by Domestic

Firm Size and Area (Major)

Size of Firms

(number of employees)

Major FDI Area

1-99 100-199 More than 200 All size

High Income Countries a 30.89 9.00 7.98 17.66

Low and Middle Income

Countries b

69.15 90.98 92.01 83.36

Share of Number of Firms

According to size

(Number of Firms)

41.39

(800)

17.79

(344)

40.82

(789)

100.00

(1,933)

Note:a) High income countries or areas included the US, Canada, West European Countries, Hong Kong, Japan,

Singapore, Australia, and New Zealand.

b) Among others, middle to low income countries were Mexico and other Central and South America countries,

Eastern Europe, Mainland China, Malaysia, Thailand, Indonesia, Philippines, Viet Nam, South Asia, and Africa.

Sources: The figures were compiled by the authors from the original data prepared by the Bureau of Statistics,

Ministry of Economic Affairs, Survey on Overseas Investment by Manufacturing Industry (2000).