___________________________________________________________________________
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
2
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.
3
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)
Japan
C ≤ JPY 300 million (manufacturing,
construction, transport, etc.)
C ≤ JPY 100 million (wholesale)
C ≤ JPY 50 million (services & retail)
OR
E ≤ 300 (manufacturing,
construction, transport,
etc.)
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
4
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)
OR
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
5
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)
6
Why are MSMEs important?
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
7
Why are MSMEs important?
98.5 99.6 98.6 99.7 99.0 99.9
66.063.3
79.8
70.165.0
47.5
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Malaysia (2015,2017)
Philippines (2016) Thailand (2014) Japan (2014) Singapore (2017) United States (2015)
Newly Industrialized Countries High Income Countries
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)
8
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)
9
MSMEs and inclusive growth
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.”
10
MSMEs and their importance to the economy
Source: United Nations
• “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.”
11
MSMEs and their importance to the economy
Source: United Nations
• “By 2030, eradicate extreme poverty for
all people everywhere, measured as
people living on less than $1.90 a day.”
12
MSMEs and their importance to the economy
Source: United Nations
13
MSMEs and inclusive growth
• 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)
14
MSMEs and inclusive growth
• 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)
15
MSMEs and inclusive growth
• 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
16
MSMEs and inclusive growth
• A Rags2Riches bag
Source: Rags2Riches website
17
MSMEs and inclusive growth
• 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).
18
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
45.5
51.055.4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Malaysia (2017) Philippines (2016) Thailand (GDP 2014) Japan (2014) Singapore (2017) United States (GDP2010)
Newly Industrialized Countries High Income Countries
Contribution to GVA or GDP by enterprise size and by percentage
MSME Large firm / non-MSME
19
MSMEs vs. large firms
63 63 68 72 63
37 37
3228
37
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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
20
MSMEs and inclusive growth
• 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.
21
MSMEs vs. large firms
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
0.91
1.79 1.75
2.76
1.521.46
1.09
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Malaysia (2015) Philippines (2016) Thailand (GDP 2014) Japan (2014) Singapore (2017) United States (GDP2010)
Newly Industrialized Countries High Income Countries
% G
VA
or
% G
DP
/ %
em
plo
ym
en
t
Labor productivity, MSME vs. large firms
MSME Large firm / non-MSME
Note: Figures are based on GVA unless otherwise stated
22
MSMEs vs. large firms
Source: Statistics Denmark & OECD (2017)
0.971.00
0.93
1.13
0.94
1.061.00
1.19
0.78
1.12
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Denmark Finland Iceland Norway Sweden
% G
VA
/ %
em
plo
ym
en
t
Labor productivity, SME vs. large firms, Nordic countries, 2013
SME Large firm / non-SME
Note: Figures for Nordic countries are approximations
23
Global value chain
• Global value chains (GVCs) present many opportunities to
help MSMEs grow.
Source: ADBI & ADB (2015)
24
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.
Source: ADBI & ADB (2015)
25
Global value chain
Source: Screenshot from ADBI & ADB (2015)
26
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
27
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)
28
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.
Source: ADBI & ADB (2015)
29
Key growth drivers for global value chains
• 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.
Source: ADBI & ADB (2015)
30
Key growth drivers for global value chains
• 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: ADBI & ADB (2015)
31
Source: Screenshot from ADBI & ADB (2015)
Global value chain
32
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)
33
Automotive industry GVC
Source: Screenshot from Sturgeon et al. (2016)
34
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)
35
Apparel industry GVC
Source: Screenshot from Gereffi & Memedovic (2003)
36
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
Source: ADBI & ADB (2015)
37
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.
35.4
64.6
Percentage of SME GVC players and non-GVC players
GVC players Non-GVC players
Source: ADBI & ADB (2015)
38
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)
46.2
30.0
21.420.1
6.3
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Malaysia Thailand Vietnam Philippines Indonesia
Percentage of manufacturing MSMEs that export (direct and indirect), selected ASEAN countries
39
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)
40
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)
1.3
6.7
0.8
0
1
2
3
4
5
6
7
8
All Industry Services
Percentage of respondents with export revenue in the last year, by sector
41
Metro Manila SMEs and GVCs
• 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.
Source: Francisco, Canare & Labios (2018)
7.9
2.8
4.5
2.6
5.9
2.8
0
1
2
3
4
5
6
7
8
9
Subcontractedor outsourced bya large domestic
firm
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
firm
Percentage of respondents that have engaged in selected partnerships with a domestic large business or a foreign firm
42
Metro Manila SMEs and GVCs
• SMEs from the industry
sector are more likely to
participate in partnerships
compared to their
counterparts from the
services sector.
Source: Francisco, Canare & Labios (2018)
20.0
0.0
8.9
4.4
0.0
2.2
6.8
3.14.1
2.5
6.4
2.9
0.0
5.0
10.0
15.0
20.0
25.0
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
43
Metro Manila SMEs and GVCs
• 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
84.9
80.0
85.4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All Industry Services
Share of respondents that is part of a global production network
Part of a GPN Not part of a GPN
44
Metro Manila SMEs and GVCs
Source: Francisco, Canare & Labios (2018)
45
Metro Manila SMEs and GVCs
Source: Francisco, Canare & Labios (2018)
46
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)
47
Challenges to MSME’s successfully integration into GVCs
• 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)
48
Challenges to MSME’s successfully integration into GVCs
• 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)
49
Challenges to MSME’s successfully integration into GVCs
• 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)
50
Challenges to MSME’s successfully integration into GVCs
• 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)
51
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)
52
Enablers for MSMEs successful integration into GVCs
• 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)
53
Enablers for MSMEs successful integration into GVCs
• 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)
54
Enablers for MSMEs successful integration into GVCs
• 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)
55
Enablers for MSMEs successful integration into GVCs
• 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)
56
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)
57
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
58
What the future holds for MSMEs?
• 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
59
What the future holds for MSMEs?
• 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
60
What the future holds for MSMEs?
• 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
61
What the future holds for MSMEs?
• 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
62
What the future holds for MSMEs?
• 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