Promoting the growth of domestic small and medium-sized enterprises (SMEs) represents an important development objective in most countries for both economic and socio-political reasons.
Domestic SME development can increase employment, create local value-added, improve domestic innovation and entrepreneurial capabilities and generate economic growth. Although there are obvious benefits from SME growth, many developing countries lack the resource base or a sufficient market size to foster further internal expansion.
Some specific obstacles to SME growth in these situations may also include the following:
- Limited access to fund and credit. SME funding is essential not only to cover the start-up, expansion and working capital requirements of SMEs, but also for research and development purposes, as SMEs too often lack assistance for developing new ideas and turning them into marketable products. Yet, the cost of capital is often high-priced for SMEs, particularly in times of economic uncertainty, when lenders tend to be more risk averse.
- Deficiencies in human capital and difficulties in establishing the required programmes, both in terms of the overall education system and on-the-job training. For instance, universities and vocational institutions may face challenges to supplying the managerial and technical training programmes needed to support local business operations.
- Weak infrastructure with respect to information and communication technologies, transportation and energy, can limit access to markets and erode business revenues. Evidence shows that such constraints, including the digital divide, present particular challenges for SMEs across many business sectors.
- Limited access to information on prospective markets and clients. Many SMEs have little experience, particularly in becoming suppliers to foreign affiliates or exporting to foreign markets.
- The extent of government regulation and compliance costs. These cover many issues ranging from taxation and reporting requirements to laws that promote occupational health and safety. The cost of complying with national and international standards can be very expensive for SMEs.
- SMEs are often most vulnerable to economic slowdowns due to higher risk of business failure.
This Report assesses both public and private sector factors, including the manner in which they interrelate. Within the context of host country conditions to attract FDI, government objectives, policies and programmes constitute the main public sector elements. International or regional factors as well as actions by the FDI home-country or third countries also play a role. The primary private sector actors are the foreign affiliates themselves and their TNC network along with domestic SMEs. Other significant actors include business associations, universities, research centres and mixed private-public partnerships that can facilitate linkages.
By analyzing the interactive effects of both government and private sector factors in Malaysia and Singapore, useful insights can be derived regarding the circumstances under which different policy and programmatic options can yield the best results. This report identifies strategic policy choices for government and business which could generate the most effective outcomes to benefit domestic SMEs, TNCs, and the host country economy.