"Small and medium-sized enterprises can be leading entrepreneurial engines for development", Mr. Rubens Ricupero, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), said today, at the launch of a new report. "Actions are needed to develop the enormous potential that these firms have and to stimulate growth and development through foreign direct investment," he added.
In a Handbook on Foreign Direct Investment by Small and Medium-sized Enterprises: Lessons from Asia (1) (202 pages), UNCTAD said the development and internationalization of the small and medium-sized enterprise (SME)(2) sector has been neglected by many governments in developing countries. The Report is based on case studies and a questionnaire survey conducted in selected developing countries in Asia. On this foundation it draws lessons for SME policies in general.
UNCTAD´s Secretary-General said "We want to encourage governments to build healthy SME sectors and cooperate in stimulating the international investment potential of these firms. Actions can be taken through greater exchanges of information on SME experiences, harmonizing regulations and simplifying regulatory provisions."
Reviewing the economic structures and policies of seven Asian countries (Japan, Myanmar, Philippines, Republic of Korea, Singapore, Taiwan Province of China and Viet Nam), the Report stresses that development in some countries has been pushed furthest by large enterprises. One result is that these economies have a ‘missing middle’ in their business structures. The weakness of the SME sector can undermine the strength of the entrepreneurial engine.
Commenting on the new report, Ms. Maria Livanos Cattaui, Secretary-General of the International Chamber of Commerce (ICC) said: "The Asian crisis has underscored the importance of sustaining foreign direct investment. The U.N. is on target in focusing on the largely neglected area of the potential of small and medium-sized firms as foreign investors in the region. These firms can be new entrepreneurial engines of growth for Asia, and for other emerging markets of the world."
SMEs typically make small foreign direct investment (FDI). However, as noted in the Report, if large numbers of these firms invest internationally, then their combined FDI and its impact on growth and development would be formidable.
Current levels of FDI in Asia by SMEs, accounting for barely 10 per cent of total regional FDI, are below their full potential. Survey results showed that, on average, the value of foreign direct investment by SMEs in other SMEs in Asia in 1995 was around US$1 million while larger firms investing in SMEs injected about twice this sum. The average value of technology flows received by SMEs in 1995 from foreign SMEs was about US$507,000 per transaction, which is not far short of the flows received by SMEs from foreign large firms. For training, the expenditure was about US$61,000 compared with around US$185,000 for larger firms investing in SMEs.
In terms of cases, "small-package" FDI (FDI with less than US$1 million regardless of size of investors) makes up a significant proportion of total FDI, ranging from about 15-20 per cent in Myanmar and Viet Nam to over 60 per cent in the Philippines. However, in terms of value, small-package FDI does not loom large in the overall picture, representing as little as half per cent in Viet Nam, and only about two per cent in the Philippines (see annex table 1). When it comes to outward SME FDI, they account, for example, for one fifth of the total value of FDI and 70 per cent of the cases of FDI into the Republic of Korea.
The Report shows that most equity and debt flows (about 70 per cent) by SMEs go into plant and equipment. Relatively little goes into buildings and land. Technology flows are fairly evenly spread across new product and new process technologies, and most training goes to senior staff.
New insights into how FDI by SMEs is financed are provided by UNCTAD. SMEs undertaking FDI are far less likely than large enterprises to use international debt for this purposes. SMEs mostly use a combination of equity and in-kind services, including technology transfers and employee training.
Highlighting Obstacles To Foreign Direct Investment by SMEs
In its Report, UNCTAD encourages governments to establish policies to reduce the impediments faced by SMEs in investing abroad. Responses to UNCTAD’s questionnaire by SMEs in Asia indicated that obstacles include issues of unfair competition, complex business regulations, difficult investment approval systems and corruption.
"International expansion is of mounting importance to medium-sized firms like us; but to maximize returns, we must have easier access to many overseas markets. We want to become bigger foreign investors, but bureaucratic red tape is often in the way," said Wilson C. Wy Tiu, President of Luzel Incorporated, a medium-sized enterprise in the Philippines, replying to the UNCTAD questionnaire.
UNCTAD´s study notes that in Asia: "corruption is a major problem area identified by both small and medium-sized enterprises." Fifty three per cent of small investors and 71 per cent of medium-sized investors regard corruption by minor officials as a problem. The figures are slightly higher for corruption by more senior officials (see also annex table 2).
UNCTAD Stresses New Policy Structures
UNCTAD encourages policy-makers to focus new programmes on the relatively small percentage of all SMEs (perhaps just 10 per cent) that are strongly growth- and internationally-oriented. "FDI by SMEs can be a valuable source of capital, technology and training", said UNCTAD’s Secretary-General Ricupero.
While some governments have formulated explicit policies and have designed explicit programme to strengthen their SME sectors, UNCTAD emphasizes the importance for all countries to take initiatives that deepen and broaden policy structures in this area. Specifically, the mix of policies and programmes should be designed to:
- establish monitoring and performance systems;
- encourage the development of growth-oriented and internationally oriented SMEs in the domestic economy;
- provide accurate information to foreign investors that are SMEs;
- encourage linkages between SMEs across borders;
- provide appropriate incentives to SMEs;
- provide access to support services and infrastructure; and,
- address specific impediments and barriers to foreign direct investment by SMEs.
Why do SMEs Invest Abroad?
The Report explains why SMEs undertake FDI (annex table 3). The main reason, it reveals, is the simplest: chance opportunities. Access to technology is also claimed by SMEs to be a significant influence on their FDI decisions. At the other end of the spectrum, rising domestic costs and other home-market considerations are the least important.
"Foreign direct investment is central to our strategic growth, not just an addition to our operations as may be the case with very large firms," said Mr. Roland Teo, Chief Operating Officer of Kaba Security, a medium-sized construction-related company in Singapore. He added: "Foreign direct investment can be key to finding joint venture partners that can broaden our technological base, strengthen our research, and help us build new markets."
|UNCTAD’s Report highlights why Asian policy makers should focus on strengthening the internationalization of SMEs. Its findings show:
- average growth rates of SMEs are well in excess of GDP growth rates in host countries (SME sales growth rates are typically two to three times above the growth of GDP);
- they are more likely than large investors to regard as very important to their strategic business development the provision of new products and services, improving the quality of those products and services, and adapting technology to local needs;
- they are more likely than large investors to regard the building up of linkages with overseas firms and the creation of an export capability as important to their strategic success; and
- they are likely to see themselves as being well above the market average when it comes to technology, competitiveness, meeting customer needs and innovativeness.
Key Factors For SME Investment
Mr. Chakradhari Agrawal, Secretary-General of the World Association for Small and Medium Enterprises, stressed that "the Asian crisis now makes it more important than ever that there be a rapid expansion of a dynamic, internationally competitive SME sector. We agree with UNCTAD that governments can be most helpful in shaping policies to support international resource flows by SMEs".
The Report notes that SMEs, when undertaking FDI, are more likely than large transnational corporations to:
- transfer appropriate technology to developing countries;
- look for joint-venture partners, rather than to establish wholly owned affiliates;
- have a favourable impact on the trade balance; and,
- have more flexible local arrangements, and contribute more to the local economy by using subcontracting to a greater extent.
While there has been relatively little research into the SMEs’ impact on economic growth, UNCTAD suggests that:
- SMEs have played a major role in the development of all the leading economies in Asia (although their contribution differs among countries);
- SMEs contribute about 40 to 60 per cent of all capital investment and about the same proportions for productivity growth; and,
- about 10 per cent of SMEs are growth-oriented and can make a significant entrepreneurial contribution to development in their home countries and to the host countries through FDI.
The United Nations Industrial Development Organization (UNIDO), which works intensively on SME issues in developing countries, has also been involved in the launching of this Report.