Development of SME in ASEAN with Reference to Indonesia and Vietnam1
Tulus Tambunan
Kadin Indonesia and Center for Industry and SME Studies, University of Trisakti, Jakarta, Indonesia
Tran Tien Cuong, Le Xuan Sang, Nguyen Kim Anh Central Institute for Economic Management (CIEM), Hanoi, Vietnam
1. Background
From a worldwide perspective, it has been recognized that small and medium enterprises (SMEs) play a vital role in economic development, as they have been the primary source of job/employment creation and output growth, not only in developing but also in developed countries. In Piper’s (1997) dissertation, for instance, it states that 12 million or about 63.2% of total labor force in the United States (US) work in 350,000 firms employing less than 500 employees, which considered as SMEs. According to Aharoni (1994), SMEs make up more than 99% of all business entities and employ more than 80% of total workforce in this country. These enterprises, often called the foundation enterprises, are the core of the US industrial base (Piper, 1997). SMEs are also important in many European countries. In the Netherlands, for instance, they account for 95% or more of total business establishments (Bijmolt and Zwart, 1994). As in the US, also in other industrialized/OECD countries such as Japan, Australia, Germany, French and Canada, SMEs are an important engine of economic growth and technological progress (Thornburg, 1993).
In developing countries, SMEs have also a crucial role to play because of their potential contributions to improvement of income distribution, employment creation, poverty reduction, export growth and development of entrepreneurship, industry and rural economy. According to Levy et al (1999), there is no doubt that the performance of SMEs is extremely important for the economic development of most less-developed countries. For this reason, the governments in these countries have been supporting their SMEs extensively through many programs, with subsidized credit schemes as the most important component. International institutes such as the World Bank and the United Nation Industry and Development Organisation (UNIDO) and many donor countries through bilateral co-operations have also done a lot, financially as well as technically, in empowering SMEs in developing countries. .
In developing Asia (including ASEAN), SMEs have made significant contributions over the years measured in terms of their share in: (a) number of enterprises; (b) employment; (c) production and value added; (d) GDP; (e) enterprises set up by women entrepreneurs; and (f) regional dispersal of industry, among others. The contribution of SMEs is vital in as much as they, by and large: (a) make up 80-90% of all enterprises; (b) provide over 60% of the private sector jobs; (c) generate 50-80% of total employment; (d) contribute about 50% of sales or value added; (e) share about 30% of direct total exports (Narain, 2003).
1
With this background, the main aim of this paper is to discuss recent development of SMEs in ASEAN countries. By focusing on SMEs in Indonesia and Vietnam, this paper addresses three issues: their contributions to the economy, their main constraints, and SME development policies
2. The Role of SMEs in the Economy
It is widely suggested in the literature that the importance of SMEs in developing countries is because of their characteristics, which include the following ones2
1) Their number is huge, and especially small enterprises (SEs) and microenterprises (MIEs) are scattered widely throughout the rural areas and therefore they may have a special "local" significance for the rural economy. 2) As being populated largely by firms that have considerable employment growth potential, their development or
growth can be included as an important element of policy to create employment and to generate income. This awareness may also explain the growing emphasis on the role of these enterprises in rural development in developing countries. The agricultural sector has shown not to be able to absorb the increasing population in the rural areas. As a result, rural migration increased dramatically, causing high unemployment rates and its related socio-economic problems in the urban areas. Therefore, non-farm activities in rural areas, especially rural industries being a potentially quite dynamic part of the rural economy have often been looked at their potential to create rural employment, and in this respect, SMEs can play an important role.
3) Not only that the majority of SMEs in developing countries are located in rural areas, they are also mainly agriculturally based activities. Therefore, government efforts to support SMEs are also an indirect way to support development in agriculture.
4) SMEs use technologies that are in a general sense more "appropriate" as compared to modern technologies used by large enterprises (LEs) to factor proportions and local conditions in developing countries, i.e. many raw materials are locally available but capital, including human capital, is very limited.
5) Many SMEs may expand significantly, while the great majority of micro enterprises3 tend to grow little and hence do not graduate from that size category. Therefore, SMEs are regarded enterprises having the “seedbed LEs” function.
6) Although in general people in rural areas are poor, existing evidence shows the ability of poor villagers to save a small amount of capital and invest it; they are willing to take risks by doing so. In this respect, SMEs provide thus a good starting point for the mobilization of both the villagers' talents as entrepreneurs and their capital; while, at the same time, rural SMEs can function as an important sector providing an avenue for the testing and development of entrepreneurial ability.
7) SEs and MIEs finance their operations overwhelmingly by personal savings of the owners, supplemented by gifts or loans from relatives or from local informal moneylenders, traders, input suppliers, and payments in advance from consumers. These enterprises can therefore play another important role, namely as a means to allocate rural savings that otherwise would be used for unproductive purposes. In other words, if productive
2
More discussions on this, see for example, Tambunan (1994), Liedholm and Mead (1999), and Berry et al. (2001). 3
activities are not available locally (in the rural areas), rural or farm households having money surplus might keep or save their money without any interest revenue inside their home because in most rural areas there is a lack of banking system. Or, they use their wealth to buy lands, cars, motorcycles or houses and other unnecessary luxury consumption goods which these items are often considered by the villagers as a matter of prestige.
8) Although many goods produced by SMEs are also bought by consumers from the middle and high-income groups, it is generally evident that the primary market for SMEs' products is overwhelmingly simple consumer goods, such as clothing, furniture and other articles from wood, leather products, including footwear, household items made from bamboo and rattan, and metal products. These goods cater to the needs of local low income consumers. SMEs are also important for securing the basic needs goods for this group of the population. However, there are also many SMEs engaged in the production of simple tools, equipments, and machines for the demands of farmers and producers in the industrial, trade, construction, and transport sectors.
9) As part of their dynamism, SMEs often achieve rising productivity over time through both investment and technological change; although different countries within the group of developing countries may have different experiences with this, depending on various factors. The factors may include the level of economic development in general and that of related sectors in particular; accessibility to main important determinant factors of productivity, particularly capital, technology and skilled manpower; and government policies that support development of production linkages between SMEs and LEs as well as with foreign direct investment (FDI). 4 10)As often stated in the literature, one advantage of SMEs is their flexibility, relative to their larger competitors. In
Berry et al. (2001), there enterprises are construed as being especially important in industries or economies that face rapidly changing market conditions, such as the sharp macroeconomic downturns that have bedeviled many developing countries over the past few years.
3. SMEs in ASEAN
3.1 Definition
The definition and concept of SMEs vary widely among member countries. There is no common agreement on what distinguishes a microenterprise (MIE) from a small enterprise (SE), a SE from a medium enterprise (ME), and a ME from a large enterprise (LE). In general, however, a MIE employs less than five (5) full time equivalent employees; a SE is a firm with 5 to 19 workers in Indonesia and more than that in many other member countries; and a ME may range from 20 to 50 employees or more. Moreover, definitions and concepts used for statistical purposes can vary from those used for policy or program purposes (for example, to determine eligibility for special assistance). All but a few member countries have a definition for SMEs for statistical purposes. Many member countries have also definitions for policy purposes, and to complicate matters further, these definitions often differ from the definition used for statistical purposes, as also differ by industry and by policy program.
4
As shown in Table 1 the number of employees is the most common measure. However, many member countries also use a monetary measure such as initial investment, including or excluding land and building, annual sales or turnover, or production capacity to define SMEs.5Even with the number employed, there is considerable diversity between the member countries.
Table 1: Main Elements of SMEs’ Definitions in the ASEAN Member Countries
Country/Economy Employee1) Capital Fixed assets Sales Production capacity Brunei Darussalam
Indonesia Malaysia Philippines Singapore Thailand Viet Nam Myanmar Cambodia Lao PDR
99 100 150 199 199 200 200 <2004)
<200 99
- - - - - + + + - -
- +2)
- - + + - - - +
- + + + - - - - - -
- - - - - - - +3)
- -
Notes: 1: figures indicate the maximum number of employees in a firm defined as an MSME; 2) : “+”as an element of the definition; 3) production value; 4) depends on sector.
Source: APEC (2003); except Myanmar, Cambodia, and Lao PDR: UNESCAP (2004?).
What constitutes an SME also varies widely between member countries. SMEs may range from a part time business with no hired workers or a non-employing unincorporated business, often called self-employed units, such as traditional business units making and selling handicrafts in rural Java in Indonesia, to a small-scale semiconductor manufacturers employing more than 10 people in Singapore. They may range from fast growing firms, to private family firms that have not changed much for decades or stagnated. They range from enterprises, which are independent businesses, to those, which are inextricably part of a large company, such as those, which are part of an international subcontracting network. The only true common characteristic of SMEs is that they are “not-large”; that is whether a firm is really a SME or not is relative.
Most enterprises form this SME category are actually very small and about 70% to 80% of them employ less than five (5) people. There are only a very small percentage of firms, typically ranging from about 1% to 4%, which have more than 100 employees. Unfortunately, there is no consistent definition of a MIE among countries.
As presented in Table 2, some member countries have definitions on MIEs, and most of these use 5 employees as a cut off. In practice, most MIEs are likely to be non-employing; they do not actually employ anyone, but they do create jobs and some incomes, even if only part time jobs, for the entrepreneurs. These MIEs make up the great majority of enterprises, usually comprising around 60% to 80% of all business establishments. Their contribution to employment is usually disproportionately small, and they typically contribute only about 10% to 40% of available jobs. However, as stated in the report, the role of MIEs in creating jobs tends to be greater in the future in some countries, where they provide a higher proportion of jobs, or where they create job opportunities that would not otherwise be available.
5
Table 2: Full Definitions of SME in ASEAN Member Countries
Member country Employee Annual Sales/turnover Fixed assets Invested Capitala)
Brunei Darussalam 1)
MIE SE ME
Indonesia 2)
a) MIE -manufacturing, trade & service SE - -,,-
ME - -,,-
b) SE - -,,- ME - -,,-
Malaysia 3)
MIE -manufacturing & its related services SE - -,,-
ME - -,,-
MIE - service, incl. ICT, & primary agriculture SE - -,,-
ME - -,,-
Philippines5)
MIE - manufacturing SE - -,,- ME - -,,-
Singapore
SME -manufacturing -services
Thailand4)
MIE - manufacturing
SE - manufacturing & services - trading: - wholesaling - retailing ME - manufacturing & services - trading: - wholesaling - retailing
Vietnam MIE SE ME Myanmar6) SMEs MIEs Cambodia6) SMEs
Lao PDR6) SMEs 0-5 6-50 51-100 0-4 5-19 20-99 100 <5 5-50 51-500 <5 5-19 20-50 ≤9 10-99 100-199 199 ≤4 ≤50 ≤25 ≤15 51-200 26-50 16-30 <10 10-49 50-299 <200/100e) <9b) <200f) 5-99 <US$5m <US$100,000 US$100,000-US$5m.
≤ RM250,000 RM 250,000 - <RM 10 m.
RM 10 m.-RM 25 m.
≤ RM 200,000 RM 200,000 -< RM1m
RM 1m – RM 5m
<10m kyatd) -,,-
< US$ 1m
<US$200,000 (3) US$200,000-US$1m.
≤3m above P3m. – P15 m. above P15m. – P100 m.
<S$15m. -,,-
≤50 m. bath -,,-
≤30 m. bath 50-200 m. bath 50-100m. bath 30-60m. bath
1,200 m kip
<500,000 bath <20m. bath 1-9m. bath -,,- 20-100m. bath 1-9m. bath -,,-
<D 1 bill. D 1 – D 10 bill.
<5m kyatc)
-,,-
Note: a) not including fixed assets; b) not limits for handicrafts; c) capital outlay; d) production value; e) depends on sector; f) industrial sector.
In Indonesia, there are several definitions of SMEs, depending on which agency provides the definition. The State Ministry of Cooperative and Small and Medium Enterprises (Menegkop & UKM) promulgated the Law on Small Enterprises Number 9 of 1995, which defines a SE as a business unit with total initial assets of up to Rp 200 million (about US$ 20,000 at current exchange rates), not including land and buildings, or with an annual value of sales of a maximum of Rp 1 billion (US$ 100,000), and a ME as a business unit with an annual value of sales of more than Rp 1 billion but less than Rp 50 billion. Although the Law does not explicitly define MIEs, Menegkop & UKM data on SEs include MIEs. The National Agency for Statistics (BPS), which regularly conducted surveys of SMEs, uses the number of workers as the basis for determining the size of an enterprise. In its definition, MIEs, SEs and MEs are business units with, respectively, 1-4, 5-19, and 20-99 workers, and LEs are units with 100 or more workers. The Ministry of Industry (MoI) defines enterprises by size in its sector also according to number of workers as the BPS definition.
In Vietnam, the official definition of an SME was stipulated relatively late in comparison with the time span of more-than 20 years of private sector reform. Just in November 2001, the Government Decree 90/2001/ND-CP provided for the first time an official definition of an SME as “a business establishment with registered capital of no more than VND 10 billion (equivalent to USD 630,000) or with an workforce of no more than 300 regular employees”. Before 1998, some provinces had stipulated their own SME criteria such as number of regular laborers of less than 500, (fixed) assets less than 10 billion Vietnam dong (VND), mobilized capital of less than and monthly revenue less than 20 billion VND. In June 1998, the Government stipulated Public Letter 681/CP-KCN on directions of strategy and policy on developing SMEs, according to which, SMEs are establishments with registered capital less than VND 5 billion or regular labor force less than 200 laborers. This law document had laid an initial legal ground for implementing supporting measures to SMEs’ development.
Recognizing that the SME grouping by Decree 90/2001/ND-CP is too general to provide useful data for policy formulation, the Agency for SME Development (ASMED) recently (in June 2005) introduced a further size segmentation in its SME Development Plan for the period 2006-10. According to the new segmentation, SME is categorized into: MIEs (less than 10 persons), SEs (10 to 49 persons) and MEs (50 to 299 persons).6
3.2 Performance
ASEAN countries have touted SMEs as the engine of economic growth and development, the backbone of national economies, the highest employment-generating sector, and a potential tool of poverty alleviation by
6 It is important noting that the current SME categorization still suffers some limitations.
creating self-employment avenues. Notwithstanding various definitional issues and data problems, by combining all sources which are available, there is an (rough) estimated total of some 21 million non-agricultural SME in ASEAN, or about more than 90% of all non-agriculture firms in the region (Table 3). These enterprises play a strategic role in private sector development, especially in the aftermath of the 1997/98 Asian Financial Crisis. In some member countries, as their economies modernise or industrialise, SME provide the much-needed inter-firm linkages required to support LEs to ensure that they remain competitive in the world markets. SMEs generally account for between 20%-40% of total domestic output and they employ an overwhelming proportion (mostly in the 75%-90% cent range) of the domestic workforce, especially adult persons and women.7
[image:7.612.56.514.434.665.2]On the other hand, in spite of the significance of these indicators, the SMEs’ value added (VA) contribution to the economy for most ASEAN countries has yet to commensurate with the sector’s size and socioeconomic potential. Wattanapruttipaisan’s (2004) own calculation shows that SME in ASEAN contribute a disproportionately limited share of 20% to 40% to gross sales value or manufacturing VA8In Singapore, for instance, the VA of SME is only 34.7% of the economy’s total VA, while their productivity is half that of LEs. Malaysian SME contributed only about 26% to manufacturing VA. In Thailand, commonly cited as a successful model for SME development in ASEAN, its SME contribution is only 47% of total VA. Comparatively, SMEs in the developed nations contribute about 50% of total VA in the European Union (EU), or, individually, for instance, SMEs in Germany are responsible for approximately 57% of the country’s Gross National Product (GNP); between 40% and 50% of manufacturing output in Japan, Republic of Korea and Taipei, China; and in the United States (US) it is about 30% to total sales value.
Table 3: Non-agricultural SMEs in ASEAN and selected countries in East Asia
SMEs as a % of Country No. of non-agricultural
SME in 2002 or later or best quess (‘000)
Percentage of GDP, or
VA or output value All Firms Workforce
Brunei Darussalam Cambodia
Indonesia Lao PDR Malaysia
Myanmar Singapore
Thailand Philippines Viet Nam
East Asia1
China
302 26 21,895.9963
224 205
344 60-725
1,640 686 2,7007
8,000
- - 57 (total VA)
-
15 (total gross output) 47.3 (total VA) 26 (manufacturing VA)
-
41 (manufacturing output) 34.7 (total VA)
47 (total VA) 32 (total VA) 42 (total VA)
60 (industrial output)
98 99 99.9
- 99.2
96 97.8
99.8 99.6 96
99
92 45 99.6
- 65.1 32.58
78 58
768 99 85
78.8
7
. A study conducted by the Asia-Pacific Economic Cooperation (APEC) shows that women entrepreneurs own and operate up to 30% of SMEs in such as Indonesia, Philippines and the Republic of Korea (APEC 1999).
8
Chinese Taipei Hong Kong, China Japan
South Korea
1,050 292 6,140
2,700
- -
52 (manufacturing output) 55.3 (total VA) 47.5 (total gross output)
50 (total VA)
98.1 99.3 99.7
99.8
78.4 60.7 77.6
86.7
Notes: 1: best guess for 2000; 2: est. active (2004); 3: includes MIEs (2006); 4: 1998/9; 5: estimated active; 6: excludes 744,000 MIEs (2001); 7: excludes 10 million MIEs; 8: manufacturing industry only.
Sources: APEC (2002), RAM Consultancy Services (2005), UNCTAD (2003), Hall (2002), Myint (2000), Regnier (2000), Ministry of Industry, Mines and Energy of the Kingdom of Cambodia, BPS (Indonesia), Census 2005 (Malaysia), JASME Annual Report 2004-2005 (Japan); SMEA (White Paper on SMEs in Taiwan 2005), OSMEP (White Paper on SMEs in Thailand, 2002), National SME Development Agenda 2000/2001 (Philippines).
With respect to export, it reveals from Table 4 that in general ASEAN SMEs are not yet so strong in export as their counterparts in such as China, India, Chinese Taipei or South Korea; although the export intensity of ASEAN SMEs is different by country. For instance, in Indonesia the SMEs’ contribution to the country’s total export of non-oil and gas by the end of 1990s was only 11%, compared to Vietnam at 20%, or almost 27% in Thailand in 2003. Featuring prominently in SME exports from Indonesia, Philippines, Thailand and Viet Nam are food products, textiles and garments, leather and plastic goods (including toys), furniture items, handicrafts, jewelry and, to a less extent, mature-technology automotive and consumer electronics parts.9Wattanapruttipaisan (2005) argues, however, that direct export of ASEAN SMEs might be low, but, if indirect contributions are taken into account, then their overall share in export earnings is certainly much larger because SMEs feature prominently as subcontractors to export-oriented local LEs and multinational companies (MNCs)10.
Table 4: Share of SME exports in selected Asian countries, 1990s
Country Share (%)
China India
Chinese Taipei South Korea Vietnam Singapore Malaysia Indonesia Thailand
40-601) 381)
56 401) 201) 161) 151) 111)
101) (38.22%)2)(26.5%)3)
Sources: 1) UNCTAD (2003); 2) Mephokee (2004): 38.22% in 2002 and 45.5% in 2003 of the country’s total export for industrial products; 3) White Paper on SMEs 2004 (Government of Thailand, website)
4. Indonesia
4.1 Economic Contribution
SMEs have historically been the main player in the Indonesian economy, especially as a large provider of employment opportunities, and hence a generator of primary or secondary sources of income for many households (Tambunan, 2006). Typically, Indonesian SMEs account for more than 90% of all firms (Table 5), and thus they are
9
For further details, see Hill (1995, 2001, 2002), Rodriguez and Berry (2002), Steer and Taussig (2002); Regnier (2000), Tambunan (2000, 2006) and Tecson (2001).
10
the biggest source of employment, providing livelihood for over 90% of the country’s workforce, especially women and the young. The majority of SMEs, especially the smallest units, i.e. MIEs are scattered widely throughout the rural area and therefore they may play an important role as a starting point for development of villagers' talents as entrepreneurs, especially those of women. MIEs are dominated by self-employment enterprises without hired paid workers. They are the most traditional enterprises, generally with low levels of productivity, poor quality products, and serving small, localized markets. There is little or no technological dynamism in this group. The majority of these enterprises are subsistence activities. Some of them are economically viable over the long-term, but a large portion is not. Many MIEs face closure or very difficult upgrading especially with import liberalization, changing technology and the growing demand for higher quality modern products. However, the existence or growth of this type of enterprise can be seen as an early phase of entrepreneurship development.
Table 5: Total Units of Enterprises by Size Category: 1997-2006 (000 units)
Size Category 1997 1998 1999 2000 2001 2003 2004 2005 2006
SEs 39,704.7 36,761.7 37,804.5 39705.2 39,883.1 43,372.9 44,684.4 47,006.9 48,822.9
MEs 60.5 51.9 51.8 78.8 80.97 87.4 93.04 95.9 106.7
LEs 2.1 1.8 1.8 5.7 5.9 6.5 6.7 6.8 7.2
Total 39,767.3 36,815.4 37,858.1 39789.7 39,969.995 43,466.8 44,784.14 47,109.6 48,936.8
Source: Menegkop & UKM (various issues).
The unit structure of SMEs by sector indicates that the majority of enterprises in all sectors are from the category of SME with almost 100 percent in agriculture (Table 6). Whereas, the distribution of SMEs by sector shows that Indonesian SMEs are concentrated in agriculture, followed by trade, hotel and restaurants as the second and manufacturing industry as the third largest sector (Table 7). In this latter sector, they are involved mainly in simple traditional manufacturing activities such as wood products, including furniture, textiles, garments, footwear, and food and beverages. Only a small portion of total SMEs are engaged in production of machinery, production tools and automotive components. This is generally carried out through subcontracting systems with several multinational car companies such as Toyota and Honda. This structure of industry reflects the current technological capability of Indonesian SMEs, which are not yet as strong in producing sophisticated technology-embodied products as their counterparts in other countries such as South Korea, Japan, and Taiwan.
Table 6: Unit Structure of SMEs by Sector in Indonesia, 2000, 2005 and 2006 (%)
2000 2005 2006 Sector
SE ME LE ∑ SE ME LE ∑ SE ME LE ∑
1.Agriculture 2.Mining 3.Manufacture 4. Elect, gas & water supply
5.Construction
6.Trade, hotel & restaurant 7.Transport & comm.. 8.Finance, rent & service 9.Services Total 99.99 99.61 99.48 93.19 97.57 99.54 99.87 83.42 99.60 99.79 0.01 0.35 0.45 5.59 2.24 0.45 0.12 14.63 0.38 0.20 0.00 0.04 0.07 1.22 0.19 0.01 0.01 1.95 0.02 0.01 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.99 99.67 99.42 92.47 97.43 99.57 99.82 83.65 99.66 99.78 0.01 0.28 0.49 6.18 2.40 0.42 0.16 14.67 0.32 0.20 0.00. 0.05 0.09 1.35 0.17 0.01 0.02 1.68 0.02 0.02 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.99 99.72 99.40 92.50 97.55 99.55 99.81 85.11 99.67 99.77 0.01 0.23 0.52 6.14 2.26 0.43 0.18 13.37 0.31 0.22 0.00 0.05 0.08 1.36 0.19 0.02 0.01 1.52 0.02 0.01 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
[image:10.612.42.578.196.339.2]Source: Menegkop & UKM (various issues).
Table 7: Unit Distribution of SMEs by Sector in Indonesia, 2000, 2005 and 2006 (%)
2000 2005 2006
Sector
SE ME LE ∑ SE ME LE ∑ SE ME LE ∑
1. Agriculture 2. Mining 3. Manufacture
4. Elect., gas & water supply 5. Construction
6. Trade, hotel & restaurant 7. Transport & communic. 8. Finance, rent & service 9. Services Total 59.23 0.38 6.57 0.03 0.31 24.37 4.70 0.13 4.28 100.0 2.22 0.67 14.91 1.02 3.63 55.36 2.89 11.14 8.17 100.0 1.20 1.18 33.57 3.08 4.42 24.95 3.88 20.60 7.12 100.0 59.11 0.38 6.59 0.04 0.32 24.43 4.70 0.15 4.29 100.0 55.86 0.50 5.95 0.03 0.34 25.89 5.54 0.13 5.76 100.0 1.74 0.69 14.30 0.97 4.08 53.38 4.48 11.22 9.13 100.0 0.85 1.60 36.98 2.98 4.30 21.83 4.67 18.06 8.72 100.0 55.75 0.50 5.97 0.03 0.35 25.95 5.53 0.16 5.77 100.0 53.68 0.54 6.56 0.03 0.33 27.13 5.52 0.15 6.06 100.0 1.57 0.58 15.82 0.90 3.52 54.03 4.46 10.51 8.60 100.0 0.74 1.67 35.47 2.96 4.41 24.11 4.47 17.68 8.50 100.0 53.56 0.54 6.58 0.03 0.34 27.19 5.52 0.17 6.06 100.0
Source: Menegkop & UKM (various issues).
Table 8: Structure of GDP by size of enterprises and sector, 2000-2006 (%)
2000 2001 2002 2003 2004 2005 2006 Sec*
SE ME LE SE ME LE SE ME LE SE ME LE SE ME LE SE ME LE SE ME LE ∑
1 2 3 4 5 6 7 8 9 GDP 86.5 5.6 13.3 0.6 44.6 74.8 34.8 18.0 36.8 38.9 9.0 2.7 12.6 8.9 21.8 21.5 25.3 47.2 7.6 15.8 4.5 91.8 74.2 90.5 33.7 3.8 39.9 34.8 55.5 45.3 87.1 6.2 15.6 0.6 44.8 74.4 35.2 18.1 36.7 39.0 8.7 2.8 12.4 8.1 21.8 21.8 26.2 46.7 7.6 15.8 4.2 90.9 73.9 91.4 33.4 3.9 38.6 35.3 55.8 45.2 87.6 8.3 13.7 0.6 44.3 75.8 32.8 17.9 39.4 40.8 8.4 3.2 12.6 9.1 21.8 20.5 24.9 47.3 7.9 16.2 4.1 88.4 73.7 90.3 33.9 3.7 42.3 34.8 52.7 43.1 87.5 9.2 13.9 0.6 44.6 75.2 32.0 17.2 38.9 40.5 8.5 3.5 12.6 8.4 21.8 21.0 24.9 46.7 7.8 16.3 4.0 87.3 73.6 91.1 33.6 3.8 43.1 36.1 53.3 43.2 87.4 8.5 13.3 0.5 44.0 74.9 29.1 17.2 38.9 39.2 8.6 3.3 12.2 7.4 21.7 21.2 24.4 47.0 7.8 16.2 4.1 88.3 74.5 92.0 34.3 3.9 46.5 35.8 53.3 44.6 87.3 7.0 12.7 0.5 44.3 75.7 28.8 17.0 40.8 37.8 8.6 3.0 11.6 7.6 21.8 20.7 24.0 47.0 8.2 15.7 4.1 90.0 75.8 91.9 33.9 3.7 47.2 36.1 51.1 46.5 86.8 8.2 12.5 0.5 44.2 76.1 29.8 16.7 40.2 37.7 8.9 3.2 11.3 7.6 21.8 20.3 23.5 46.9 8.0 15.6 4.3 88.6 76.3 91.9 34.0 3.6 46.7 36.4 51.8 46.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Note: * = code of sector, see Table 7. Source: National Agency for Statistics (BPS)
With respect to output growth, the performance of SMEs is relatively good as compared to that of LEs. The output growth of SEs and MEs was respectively 3.96 per cent and 4.59 per cent in 2001 and increased to 5.38 percent and 5.44 percent, respectively in 2006. LEs experienced, on the other hand, a growth rate of 3.04 percent and ended up at 5.60 percent during the same period (Figure 1).
[image:10.612.32.596.364.509.2]2006, from the GDP growth rate at 5.5 percent, about 2.15 percent is from SEs as compared to 0.91 per cent from MEs (Figure 2).
Figure 1: Output Growth Rates of SEs, MEs and LEs, 2001-2006 (%)
0 1 2 3 4 5 6 7 8
2001 2002 2003 2004 2005 2006
SE ME LE Total
Source: Menegkop & UKM (various issues).
Figure 2: GDP growth contribution by size of firms, 2003-2006 (%)
1.88 1.97 2.24 2.15
0.78 0.83 0.94 0.91
2.12 2.22
2.5 2.42
0 1 2 3 4 5 6
2003 2004 2005 2006
LE ME SE
Source: National Agency for Statistics (BPS)
Table 9: Exports of SMEs and LEs, 2000-2006 (billion rupiah)
2000 2001 2002 2003 2004 2005 2006 Sector*
SME LE SME LE SME LE SME LE SME LE SME LE SME LE (1)
(2) (3)
Total
8396.3 657.0 66395.3
75448.6
427.5 74490.8 357135.5
432053.8
9013.6 980.9 70852.1
80846.6
552.7 89811.2 377040.4
467404.3
9771.6 684.7 76833.8
87290.1
962.2 79541.5 339086.3
419590.0
8479.7 583.9 68033.1
77096.7
536.6 77829.2 337773.4
416139.2
8715.3 638.7 86194.2
95548.2
881.8 92822.5 414953.7
508658.0
11535.4 1139.9 97662.7
110338.0
1037.9 132107.3 471249.3
604394.5
12662.7 1621.3 107915.5
122199.5
1078.8 153874.3 501170.5
656123.6
Note: * = code of sector, see Table 2.
[image:12.792.186.666.159.333.2]Source: Menegkop & UKM
Figure 3: SMEs’ Contribution to Total Export Value, 2000-2006 (%)
0 10 20 30 40 50 60 70 80 90 100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 SE ME
LE
[image:12.792.186.674.374.495.2]Source: Menegkop & UKM
Figure 4A: Distribution of SEs’ Export Value by Sector, 2000-2006 (%)
0 20 40 60 80 100 120
2000 2001 2002 2003 2004 2005 2006
Manufacturing Mining Agriculture
Figure 4B: Distribution of MEs’ Export Value by Sector, 2000-2006 (%)
0 20 40 60 80 100 120
2000 2001 2002 2003 2004 2005 2006
Manufacturing Mining Agriculture
Source: Menegkop & UKM
However, the share of SMEs in total export of manufacturing industry is much smaller than that of their larger counterparts. Within the group, MEs performed much better than their smaller counterparts. As can be seen in Figure 5, the share of SEs never reached 10 percent. In 2000 it was only 3.15 percent and slightly decreased to 3 percent in 2006. While during the same period, the export share of MEs was 12.53 percent and improved to 14.72 percent. Previously, such as Hill (1997, 2001), Tambunan (2006b), and Thee (1993) argue that, although on average per year the export contribution of SMEs in Indonesia’s total manufacturing export is relatively small as compared to that of their larger counterparts, they seem to have shared nicely in the manufactured export boom in the 1980s and 1990s. Thee (1993) concludes that from the point of view of technology and adaptability, export growth of SMEs in manufacturing industry has been achieved substantially by finding niche markets and adapting costs and quality to market demand.
Figure 5: Share of SMEs in Total Export Value in Manufacturing Industry, 2000-2006 (%)
0 20 40 60 80 100
2000 2001 2002 2003 2004 2005 2006
SE ME LE
Source: Menegkop & UKM
4.2 Constraints
[image:13.612.49.541.432.558.2]high transportation costs; communication problems; problems caused by cumbersome and costly bureaucratic procedures, especially in getting the required licenses; and policies and regulations that generate market distortions.
RAM Consultancy Services’ (2005) report states that various impediments prevent SME in ASEAN from developing to their full potential. One of constraints faced by these enterprises is the lack of access to formal credit to finance their needed working capitals.11With limited working capital, it is hard for them to expand their production and hence to increase their share in total output. However, main constraints and the degree of importance of each constraints faced by ASEAN SMEs vary by member country, depending on differences in many aspects including level of SMEs development, nature and degree of economic development, public policies and facilities, and of course also nature and intensity of government interventions towards SMEs.
In Indonesia, for instance, in 2003 BPS published the results of its survey on SMEs in manufacturing industry with some questions dealing with the main constraints facing the enterprises. As presented in Table 10, it reveals that not all of the producers surveyed see lack of capital as their serious business constraints. For those who face capital constraint are mainly MIEs located in rural/backward areas and they never received any credit from banks or from various existing government sponsored SME credit schemes. They depend fully on their own savings, money from relatives and credit from informal lenders for financing their daily business operations.
Table 10: Main Problems faced by SEs and MIEs in Manufacturing Industry, 2003
Note: * = % Source: BPS
11
Another main constraint is difficulty in marketing. SMEs facing this problem are those which usually do not have the resources to explore their own markets. Instead, they depend heavily on their trading partners for marketing of their products, either within the framework of local production networks and subcontracting relationships or orders from customers.
‘Others’ include cumbersome and onerous business regulations and restrictions. Basically, these problems which hamper business activities in Indonesia reflect the poor governance in Indonesia. One of the most egregious restrictive regulations which hampered bona fide business in Indonesia, including SMEs, was the policy-generated barriers to domestic competition and trade. These policy-generated barriers included the barriers to inter-regional and inter-island trade and proliferation of several state and private monopolies which proliferated during the late New Order era. The policy-generated barriers to domestic competition and trade included barriers to entry in certain economic activities, officially sanctioned cartels and monopolies, price controls, dominance of state-owned enterprises in certain sectors and preferential treatment for selected favoured LEs.
5. Vietnam
5.1 Economic Contribution
SMEs have played an important role in the national economy. First of all, the sector has long been a major source of employment generation, for instance, accounting for about 85% of total corporate workforce in 2004 (Ba et al, 2006). In conjunction with their very important role in employment generation, SMEs are a main vehicle for poverty alleviation, particularly in rural areas and for narrowing development gaps among provinces, urban and rural areas of the country. In addition, SMEs help to maintaining the high flexibility of the labor market. Lastly, SMEs have also contributed significantly to absorb the “shocks” associating with the transitional period from a centrally planned economy to a market one and especially the collapse of the socialist bloc in Eastern Europe (Sang, 1997).
The contribution of the SMEs to economic growth is also important. They contributed to 39% of GDP in 2006 (Hung, 2007). The precise trend of their contribution to GDP over recent years, however, is hardly defined due to the lack of systematic and reliable data. While SMEs accounts for an overwhelming proportion in total number of non-state owned enterprises (SOE), the share of the latter in overall GDP tended to decrease steadily over the last six years (i.e. from 48% in 2001 to 46% of GDP in 2006) unless the increasing tendency of GDP growth rate (from 6.4% in 2001 to 8.7% in 2006) (CIEM, 2007). Vietnam’s SMEs have likely played a minor role in comparison with SOE as the former account for only 32% of total investment outlays, much less than that of the later (more than 50%). In addition, the SMEs have very limited export capability (will be discussed later on).
criterion (Table 11) and 86%, 87% by registered capital criterion in 2002, 2005. Almost all of LEs in Vietnam are SOEs and FDI based companies (comprising 100%-capital foreign firms and joint venture between SOEs and foreign firms). Notably, the increase of SMEs share in recent years in the context of substantial growth in the number of registered firms implies that the newcomers are mostly SMEs.
Table 11: SMEs distribution by size of employees and by type of enterprise (2002, 2005)
MEs
MIEs SEs
50-199 employees 200-299 employees SMEs
Corporate form Year Total number of enterprises
by corporate
form
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of SMEs
2002 62908 30218 50.5 20718 34.6 7541 12.6 1354 2.3 59831 95.1* TOTAL 2005 112952 57822 52.9 38957 35.6 10933 10.0 1626 1.5 109338 96.8*
2002 5364 52 1.4 953 26.2 2026 55.8 600 16.5 3631 6.1 SOEs 2005 4086 42 1.6 679 25.4 1507 56.3 447 16.7 2675 2.4 2002 55236 29997 55.1 19130 35.2 4735 8.7 538 1.0 54400 90.9 Non-SOEs, 2005 105169 57430 55.3 37228 35.9 8254 8.0 882 0.8 103794 94.9 2002 4104 1482 36.8 1960 48.7 524 13.0 59 1.5 4025 6.7
of which
cooperative 2005 6334 3292 52.5 2459 39.2 462 7.4 53 0.8 6266 5.7 2002 24794 17155 69.4 6600 26.7 889 3.6 72 0.3 24716 41.3 Sole Proprietary 2005 34647 23506 68.1 9708 28.1 1249 3.6 74 0.2 34537 31.6
2002 24 12 50.0 10 41.7 2 8.3 0.0 24 0.01
Partnership 2005 37 14 35.9 21 53.8 2 5.1 2 5.1 39 0.01
2002 23485 10590 46.0 9499 41.3 2632 11.4 299 1.3 23020 38.5 Limited Liability 2005 52506 26133 50.4 20500 39.6 4671 9.0 511 1.0 51815 47.4
2002 557 8 1.9 113 26.6 252 59.3 52 12.2 425 0.7
Joint- stock company having
state capital 2005 1096 25 3.0 227 27.1 484 57.7 103 12.3 839 0.8 2002 2272 750 34.2 948 43.3 436 19.9 56 2.6 2190 3.7 Joint- stock
company having
no state capital 2005 10549 4460 43.3 4313 41.9 1386 13.5 141 1.4 10300 9.4 FDIs 2002 2308 169 9.4 635 35.3 780 43.3 216 12.0 1800 3.0
Of which 2005 3697 350 12.2 1050 36.6 1172 40.9 297 10.4 2869 2.6 2002 1561 110 9.3 419 35.3 501 42.2 157 13.2 1187 2.0 100% foreign
capital 2005 2852 282 12.9 799 36.5 883 40.3 227 10.4 2191 2.0 2002 747 59 9.6 216 35.2 279 45.5 59 9.6 613 1.0 Joint venture 2005 845 68 10.0 251 37.0 289 42.6 70 10.3 678 0.6 Note: * - as % of total number of enterprises.
Source: General Statistical Office (GSO) (2007).
proportions MEs and SEs and the increasing proportion of MIEs (Table 11) imply that the increased number of SMEs is mostly contributed by the MIEs from non-SOEs. Another feature is that mostly SMEs are concentrated in the forms of limited liability and sole proprietary companies, accounting for 47% and 32% in 2005 by workforce criterion respectively (Table 11).
By registered capital, almost firms (90%) have registered capital less than VND 5 billion (about USD 330,000). Most types of SMEs fall well into the range of VND 1-5 billion.
By average size, as said before the majority of SMEs are MIEs and SEs. The labor force in 2005 is averaged at 32 laborers per enterprise, increased slightly as compared with that in 2000 with 30 employees per firm. During the same period, averaged capital of SMEs increased from VND 3 billion to VND 7 billion.
[image:17.612.56.569.368.709.2]By economic activities, SMEs are concentrated in trade, repair of motor vehicles and household goods (42%-44%), manufacturing industry (19%-21%), and construction (12%-13%) during 2002-2005. Within manufacturing sector, production of food and beverage attracts more SMEs, with the largest proportion of more than 4% in 2005 (Table 12). There are new shifts of SMEs “employers” in the corresponding period. SMEs’ proportions in manufacturing, construction sectors tended to decline, meanwhile, that in trade, repair of motor vehicles and household goods increases. One possible reason explaining for that situation is that in the third sub-sectors the entry and skill requirements are less stringent.
Table 12: SME distribution by size of employees and by kind of economic activity (2002, 2005)
MEs
MIEs SEs
50-199 employees 200-299 employees SMEs
Corporate form Year
Total number of enterprises by corporate
form Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of SMEs
2002 62908 30218 50.5 20718 34.6 7541 12.6 1354 2.3 59831 95.1* Total
2005 112952 26688 27.2 20434 20.8 41856 42.6 9255 9.4 98233 87.0* 2002 972 120 14.6 316 38.5 329 40.1 56 6.8 821 1.4 Agriculture and
forestry 2005 1071 236 25.2 364 38.9 284 30.4 51 5.5 935 1.0 2002 2407 1022 42.5 1282 53.4 97 4.0 1 0.0 2402 4.0 Fishing
2005 1358 401 29.6 849 62.7 99 7.3 5 0.4 1354 1.4
2002 879 162 20.2 393 49.1 209 26.1 37 4.6 801 1.3 Mining and quarrying
2005 1277 241 19.9 656 54.2 284 23.5 30 2.5 1211 1.2 2002 14794 3742 28.5 5659 43.1 3106 23.6 636 4.8 13143 22.0 2005 24018 6593 30.2 9811 44.9 4570 20.9 867 4.0 21841 22.2 Manufacturing
2005 690 176 27.0 324 49.6 133 20.4 20 3.1 653 0.7
2002 12 4 40.0 5 50.0 1 10.0 0.0 10 0.1
Manufacture of office accounting and
computing machinery 2005 26 7 31.8 9 40.9 5 22.7 1 4.5 22 0.1 2002 243 33 15.6 107 50.5 62 29.2 10 4.7 212 0.4 Manufacture of
engines and other
electrical equipment 2005 421 101 26.9 165 44.0 90 24.0 19 5.1 375 0.4 Manufacture of radio,
communicative
equipment 2005 212 49 26.8 75 41.0 45 24.6 14 7.7 183 0.2 2002 273 50 20.5 126 51.6 55 22.5 13 5.3 244 0.4 Manufacture of motor
vehicles and trailers 2005 377 90 26.7 173 51.3 60 17.8 14 4.2 337 0.3 2002 185 71 42.5 42 25.1 40 24.0 14 8.4 167 0.3 Electricity, gas and
water supply 2005 216 103 53.6 39 20.3 35 18.2 15 7.8 192 0.2 2002 7845 1731 24.1 3683 51.2 1527 21.2 248 3.4 7189 12.0 Construction
2005 15252 4695 32.1 7142 48.8 2489 17.0 312 2.1 14638 14.9 2002 24794 17775 72.3 5658 23.0 982 4.0 163 0.7 24578 41.1 Trade, repair of motor
vehicles and
household goods 2005 46847 32884 70.5 12238 26.2 1395 3.0 127 0.3 46644 47.5 2002 5007 3931 78.9 921 18.5 119 2.4 9 0.2 4980 8.3 Sale, maintenance and
repair of motor vehicles and
motorcycles 2005 8616 6874 80.0 1543 18.0 165 1.9 12 0.1 8594 8.7 2002 24794 17775 72.3 5658 23.0 982 4.0 163 0.7 24578 41.1 2005 24927 15428 62.3 8244 33.3 1012 4.1 93 0.4 24777 25.2 Whole sale trade and
contract basic (Except of motor vehicles)
2005 13304 10582 79.7 2451 18.5 218 1.6 22 0.2 13273 13.5 2002 3242 1058 34.3 1373 44.5 564 18.3 93 3.0 3088 5.2 Transport, storage and
communications 2005 6755 2993 34.1 2804 31.9 998 11.4 1995 22.7 8790 8.9
2002 1043 756 73.8 213 20.8 47 4.6 9 0.9 1025 1.7
Financial
intermediation 2005 1139 698 63.2 322 29.1 77 7.0 8 0.7 1105 1.1
2002 3235 1816 57.0 994 31.2 332 10.4 43 1.4 3185 5.3 Activities related to
real estate business
and consultancy 2005 8674 5393 62.7 2629 30.6 508 5.9 70 0.8 8600 8.8 Note and source, see Table 11
[image:18.612.47.574.482.717.2]By region, SMEs are mostly located in HCMC (23%-28%), Ha Noi (15%-16%) during 2002-2005. Other provinces or cities account, individually, for less than 4% (Table 13). It is important noting that SMEs are gradually ‘moving’ to HCMC, Ha Noi and some other provinces such as Hai Phong, Da Nang. This may reflect, inter alia, the efforts of the provincial governments in improving business environment, particular in attracting investment inflows via many kinds of incentive, even that are beyond their authority to provide.
Table 13: SME distribution by size of employees and by province (2002, 2005)
MEs
MIEs SEs
50-199 employees 200-299 employees SMEs
Corporate form Year
Total number of enterprises by corporate
form Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of enterprises
Total number
% of total number of SMEs
2002 62908 30218 50.5 20718 34.6 7541 12.6 1354 2.3 59831 95.1a
WHOLE COUNTRY
2005 112952 57822 52.9 38957 35.6 10933 10.0 1626 1.5 109338 96.8a
2002 15998 6508 42.9 6204 40.9 2082 13.7 362 2.4 15156 25.3 Red river Delta
2005 30510 14012 47.5 12011 40.7 3103 10.5 404 1.4 29530 27.0 2002 9460 4394 48.7 3495 38.7 947 10.5 187 2.1 9023 15.1 Hanoi
2005 18214 9461 53.5 6693 37.8 1357 7.7 185 1.0 17696 16.2 2002 1586 485 33.3 653 44.8 257 17.6 63 4.3 1458 2.4 Hai Phong
2005 7292 3031 42.8 3100 43.7 833 11.8 122 1.7 7086 6.5
2002 607 141 24.4 261 45.1 160 27.6 17 2.9 579 1.0
North West
2005 1338 440 33.7 645 49.4 206 15.8 15 1.1 1306 1.2 2002 3794 1457 40.2 1519 41.9 551 15.2 95 2.6 3622 6.1 North Central Coast
2005 7212 3481 49.4 2724 38.7 749 10.6 91 1.3 7045 6.4 2002 4574 2273 52.5 1401 32.3 544 12.6 114 2.6 4332 7.2 South Central Coast
2005 7821 3795 50.2 2831 37.5 789 10.4 139 1.8 7554 6.9 2002 1397 730 55.3 415 31.5 143 10.8 31 2.4 1319 2.2 Da Nang
2005 2622 1390 54.7 904 35.5 217 8.5 32 1.3 2543 2.3 2002 2142 1000 49.1 712 35.0 276 13.6 47 2.3 2035 3.4 Central Highlands
2005 3564 1777 51.4 1260 36.4 365 10.6 56 1.6 3458 3.2 2002 21008 10599 53.4 6060 30.5 2698 13.6 485 2.4 19842 33.2 South East
2005 40793 22303 56.8 12211 31.1 4097 10.4 678 1.7 39289 35.9 2002 1704 481 31.5 534 35.0 420 27.5 90 5.9 1525 2.5 Binh Duong
2005 2918 788 30.1 1011 38.6 693 26.4 130 5.0 2622 2.4 2002 1750 755 47.4 487 30.6 297 18.7 53 3.3 1592 2.7 Dong Nai
2005 2820 1225 46.9 873 33.4 439 16.8 73 2.8 2610 2.4 2002 14506 2802 20.8 4873 36.1 4121 30.6 1684 12.5 13480 22.5 Tp.Ho Chi Minh
2005 31292 18369 60.4 9085 29.9 2560 8.4 408 1.3 30422 27.8 2002 10900 7132 66.6 2923 27.3 568 5.3 82 0.8 10705 17.9 Mekong River Delta
2005 14258 8983 64.0 4172 29.7 768 5.5 106 0.8 14029 12.8
2002 203 1 1.2 11 12.8 37 43.0 37 43.0 86 0.1
Others
2005 164 0.0 3 7.3 23 56.1 15 36.6 41 0.0
Note and source, see Table 11
[image:19.612.46.573.19.356.2] [image:19.612.85.527.498.650.2]Nevertheless, the dynamics of SMEs in terms of employment transition have been not high. According to surveys conducted by Rand and Tarp (2007), majority of MIEs (88%) have tended to stay within their size category (micro), with some in this category (12%) in 2002 remaining there in 2005 and graduated to the small category only. A similar tendency can be observed regarding to SEs and MEs. Vice versa, enterprises in these categories appear to have a stronger tendency to move downwards in the size distribution over the period 2002-2005 (Table 14) and this tendency is also observed over the period 1995-2000.12
Table 14: Employment transition matrix
Micro 05 Small 05 Medium 05 Large 05 Total Percent
Micro 02 578 76 4 0 658 (67.1)
(87.8) (11.6) (0.6) (0.0) (100.0)
Small 02 56 188 26 0 270 (27.5)
(20.7) (69.6) (9.6) (0.0) (100.0)
Medium 02 1 12 30 3 46 (4.7)
(2.2) (26.1) (65.2) (6.5) (100.0)
Large 02 0 1 1 5 7 (0.7)
(0.0) (14.3) (14.3) (71.4) (100.0)
12
Total 635 277 61 8 981 (100.0)
Percent (64.7) (28.2) (6.2) (0.8) (100.0)
Note: Percentage in parenthesis. One missing observation in the size category in the 2002 data. Source: Rand and Tarp (2007).
With respect to export, as in the Indonesian case, the proportion of SMEs engaged directly in export activities is still limited. Actually, SMEs have exported indirectly via LEs (especially SOEs). Normally, direct exports are largely made for handicraft, and according to studies such as by Kokko and Sjöholm (2004), Ba et al (2006), and Rand and Tarp (2007), their proportion in direct exports ranged from 3% to 6% in 2002-2005. Moreover, Rand and Tarp (2007) found out a clear enterprise size effect, that means the larger enterprises’ size, the higher probability of exporting they have. Additionally, exporting enterprises are primarily located in urban areas (around 10%) as compared to their counterparts in rural areas (4%).
[image:20.612.76.543.448.706.2]Interviewed 176 exporting enterprises, Rand and Tarp (2007) discovered their noticeable characteristics. On average, the enterprises did export a relatively high share (over 60 %) of sales. Exporting enterprises have relatively few foreign trading partners (the average number of foreign customers is five and the median three) when engaging in direct exports. Furthermore, a bulk of exporting enterprises are still much dependent on their foreign trading partners receiving product specifications, designs or materials (about 72%), and technology or expertise (76%) from the latter that the former otherwise would not have had access and could hardly improved efficiency. It is commonly agreed that Vietnam’s SMEs lack international legal knowledge and expertise, nevertheless, only one-third of them on average use legal advisors when entering direct export contracts. Surprisingly, majority (two-thirds) of rural exporters seek legal advice before committing to an export contract (Table 15).
Table 15: Details on exporting enterprises
All New
Entrants Incumbents Urban Rural
Observations (119) (44) (75) (87) (32)
How many foreign customers does the
enterprise have 5.1 5.1 5.1 4.8 5.9
What percentage of sales did the
enterprise export 63.5 61.3 64.8 61.3 69.6
Receive product specifications, designs
or materials from customer 71.7 78.1 68.1 69.5 77.4
Have long-term relations with your main
foreign customer 86.6 84.1 88.0 86.2 87.5
Use legal advisors when entering direct
export contracts 33.6 34.1 33.3 21.8 65.6
Foreign customers requested certification
Cooperation with foreign partners
provided technology or expertise directly 76.5 77.3 76 75.9 78.1
Notes: Figures in percentages (Observations in parenthesis). Out of the 176 exporting enterprise only 119 enterprises provided information to the above questions.
Source: Rand and Tarp (2007).
Vietnam is a WTO member for one year. Nevertheless, even in the eve of the WTO accession (2006), SMEs’ perception, knowledge of economic integration has been vague; and thus their experiences of and readiness to internationalization are still limited. Consequently, few enterprises are preparing actively for deeper internationalization. A 2002 survey results (see Kokko and Sjöholm, 2004)13 on SMEs perception on internationalization revealed that many SMEs claim not to know what further liberalization will mean, or that they do not expect any notable changes. In particular, majority of rural household enterprises (over 70%) reply that they do not know what further liberalization will mean. A 2005 survey results14 have shown a seemingly ‘brighter’ panorama on enterprise perception and knowledge: 72% of enterprises “have information on economic integration”; however, there were 15% managers do not know the challenges they are facing in the future and 31% of firms do not know WTO issues.
5.2. Constraints
Despite the surge in number of registered enterprises and capital, Vietnam’s SMEs still have many shortcomings and constraints to develop further. Before analyzing constraints for the SMEs development, it should be noted that, with their short historical background, the SMEs are still in their infant stage of development. Indeed, the SMEs have long been depressed and got de jure freedom of doing business just since 2000. Furthermore, as Vietnam is a developing, low-income country, the underdevelopment of the SMEs is understandable.
First of all, a long-lasting constraint for SMEs development lays on the very philosophy of/advocacy for retaining the leading role of (inefficient and ailing) SOEs that have been announced explicitly in many Party’s documents and national economic policies.15Since SOEs still plays the ‘de-jure’ leading role in national economy, private sector in general and the SMEs in particular are still discriminated and thus hindered to develop. In reality, continued subsidization of and preferences to the SOEs in different forms has not only misallocated the state
13
The total number of firms in the 2003 survey is about 1,600. The practical selection criterion for identifying SMEs has been total employment below 100 jobs.
14
“Enterprises need more in information on economic integration” (http://www.saigontimes.com.vn/ tbktsg/ detail.asp? SoTT= 11 & Sobao=805&muc=88).
15
resources, but also erodes competition, which could stimulate and catalyze the business innovation. Additionally, the SMEs have been often crowded out from the government procurement biddings.16
Second, poor rule of law and unfavorable business climate have imposed also a hindrance for SMEs’ development. Despite improvements since 2000, the legal framework still suffer overlapping, complexity, contradictions, implementation lagging, and absence of effective reliable mechanisms for resolution of commercial disputes. Additionally, Vietnam’s overall business environment still ranks low in international rankings, and serves as an impediment to the development of higher value-added domestic industries. The cumbersome administrative procedures and poor rule of law have made the business environment less attractive despite being improved in recent years.17Together, these constraints create incentives for the SMEs to operate informally, placing themselves outside the formal credit and business networks (ADB, 2007) and weakening the efficacy of the government’s instruments for improving the business environment (Hakkala and Kokko, 2007).
Third, there are still three “bottlenecks” of the SMEs development, namely underdeveloped infrastructure, poor quality and insufficient human resource, and lack of solid supporting industries. The first two ‘bottlenecks’ have resulted in high costs of doing business, low competitiveness and poor absorptive technology capability of the SMEs. The third bottleneck hinders SMEs from doing subcontracts from the LEs, especially foreign firms.
Fourth, Vietnam’s SMEs, like many countries, suffer ‘traditional” constraints of development such as limited/unequal access to production factors, absence of effective, reliable dispute resolution mechanisms and underdevelopment of BDS market. A consensus can be seen in large number of researches that the most pressing common constraints for Vietnam’s SMEs are the limited/unequal access to credit and capital and to suitable land/business premises.18Notably, thelimited/unequal access to credit and capital are caused by another persistent constraints such as (1) crowding out by SOEs (especially access to credit); (2) weak credit evaluation systems (few mechanisms of evaluation of the creditworthiness of borrowers); (3) weak creditor rights regime (the cumbersome procedure to foreclose on assets pledged against a loan have made banks reluctant to lend, or severely discount the value of assets pledged); and (4) cumbersome collateral requirements (land use right certificates).19
Fifth, absence of effective and reliable dispute resolution mechanisms raises the risks of doing businessi and drives foreign investors to limit contracting with most SMEs, or working with SOEs, where the formers have
16 For instance, ADB (2005) reveals that only about 10% of private enterprises were able to participate in publicly funded projects in the 2000-2002 periods.
17
The World Bank’s “Doing Business” survey (Doing Business, 2006) ranked Vietnam 104 out of 175 countries in terms of ease of doing business.
18 See, for instance, Rand and Tarp (2007) and ADB (2005). The surveys by Rand and Tarp (2007) reveal that on the question of How can authorities best assist enterprises?, 26% of respondents stated that the State should provide easier access to credit and 22% needs in assistance with obtaining premises/land; similarly, most severe constraint when starting up new projects for 29.8% firms are lack of capital and 13.9% are difficulty in finding premises.
19
more confidence that commitments made in the absence of contracts will be honored, thereby, restricting the development of domestic business networks.
Last but not least, BDS market is still in its embryonic stage of development (equivalent to 1-2% GDP). It tended to be very highly fragmented and informal, in part because of individuals suppliers reluctance to move beyond small circles of familiar buyers (Taussig, 2005). A developed BDS market is believed to help SMEs reduce production – business costs, improve efficiency and competitiveness, and strengthen access to new markets.
Vietnam has made first steps into global market after the WTO accession. Apart from having huge opportunities brought about by WTO accession, Vietnam SMEs likely face tougher challenges. Given their infant development and poor competitiveness, the SMEs certainly confront with many difficulties, particularly those in access to credit as Josef Stiglitz pointed out in his visits to Vietnam. This calls for urgent needs in building proper pro-SMEs policies and effective programs.
6. Policy Implications
Although in general the performance of as well as constraints facing SMEs in Indonesia and Vietnam are more or less the same, due to different specific conditions of the two countries, SMEs in Indonesia may need different policy focus and development approach than their counterparts in Vietnam require.
For the Indonesian case, the government has advocated the importance of SMEs in many official statements. It has formulated and implemented various types of policies and measures aimed at the development of the SME sector. Almost all known types of government intervention to promote the development of SMEs have been tried at one time or another. These include subsidized credit, such as credit for small farmers and village cooperatives (KUD), small-scale credit (KIK, KMKP, KUK), and credit for village units (KUPEDES); development of small rural development banks (BKD); human resource development trainings such as in production technique, general management (MS/MUK), management quality systems ISO-9000, and entrepreneurship (CEFE, AMT); providing total quality control advice, technology and especially internet access (WARSI) and advisory extension workers, subsidized inputs, facilitation, setting up of Cooperatives of Small-Scale Industries (KOPINKRA) in clusters, development of infrastructure, building special small-scale industrial estates (LIK), partnership program (the Foster Parent scheme), Small Business Consultancy Clinics (KKB); establishment of the Export Support Board of Indonesia (DPE), establishment of common service facilities (UPT) in clusters, and implementation an incubator system for promoting the development of new entrepreneurs.
1) The government indeed has a key role to play by facilitating or supporting capacity building in SMEs, especially SEs and MIEs so these enterprises can become subcontractors. The technological and managerial gaps between LEs (including foreign firms) and their SME subcontractors or, within SMEs, between MEs, on one hand, and SEs and MIEs, on the other, can be bridged through capacity building. Within SMEs, MEs are more developed and better organized or managed than SEs and MIEs. So, MEs are more ready as subcontractors than SEs and MIEs. Consequently, without government support for SE and MIEs, the subcontracting opportunities from the presence of foreign firms or provided by domestic LEs will only open to MEs.
2) As said before, the government supports for SMEs have been in various forms, ranging from a variety of special credit schemes to technical assistance and various types of training and skill upgrading. The emphasis, however, has been given too much on financial aspect; much less attention has been given on technology development, innovation capability and skills development. This paradigm should change. The focus should be on the “hardware” of the capacity building, namely skills and technology upgrading. Capital or credit is indeed important, but, it is not the hardcore of the problem facing many SMEs in Indonesia: i.e. low competitiveness due to their low technology and skill capability. They need to be trained and assisted technically, and when they already have the knowledge and they are going to buy computers or new machines or production tools, then the government can help them by providing funds through a special scheme.
3) The existing paradigm of SME development should change, from “the successful SMEs development strategy is marked by the annual increase in number of units” and “SMEs are important because they create employment”, to “the successful SMEs development strategy is marked by the annual increase in number of innovated and productive enterprises”, and “SMEs are important because they generate high value added, export, and they form domestic competitive supporting industries”.
4) Networks between SMEs and R&D institutes or universities are still less important compared to networks with LEs through subcontracting. This may indicate that in Indonesia R&D institutes or universities are not yet so important as a source of technology development, skill upgrading or innovation activities in SMEs. So, in efforts to support capacity building in SMEs, the government should promote closer integration between R&D institutes and universities and SMEs by facilitating their effort to build strong networks. The government can encourage the involvement of R&D institutes and universities in local SMEs’ capacity building in their own district by providing a variety of facilities, ranging from a special fund scheme to finance R&D activities carry out by SMEs together with R&D institutes or universities, tax facilities and “attractive” awards to the most active R&D institutes in supporting SMEs.
5) Globalization and trade and investment liberalization should also give opportunities to local SMEs to integrate into global production network. Subcontracting is one thing to facilitate this. To develop into highly competitive supporting
important role to play to support this development, not only through special designed schemes but also indirectly
through creating “easy doing business” environment.
Whereas, in Vietnam, for sustainable development of SME, comprehensive, synchronized policy measures are needed, as given the followings:
1) As Vietnam’s market economy and SMEs are still in their infant stage of development, further promoting market-oriented, implementing WTO-driven reforms and improving business environment are vital for SMEs development. To implement this efficiently and effectively, first and foremost, Vietnam should abandon the advocacy for retaining the leading role of SOEs in the national economy. It is equally important to level the playing field by ensuring actual, equal access to production factors (especially to credit and land), information on public investment plans, and procurement opportunities; and strengthening the public administration reform, with the emphasis on enhancing transparency, accountability and wider adoption of one-stop shop model.
2) Developing internal and external SMEs’ networks. To strengthen the internal networking it is important to foster the industrial clusters and wider establish (technology) business incubators. Closer linkages between domestic SMEs and foreign firms can be achieved through the following ways:
- enhancing SMEs absorptive capability and creditworthiness by raising quality of human resource (with emphasis on strengthening practical engineering education, supporting and encouraging training programs, particularly collaborative training programs), developing credit valuation agencies, and improving SMEs financial and accounting standards;
- building up solid supporting industries and dealing with the industrial dualism efficiently (through lowering effective protection of highly protected sectors and inviting more foreign producers of intermediate inputs); - encouraging long-term subcontracting system (between SMEs and LEs) and building up an effective
framework of/mechanism for business contracting and dispute resolution; and
- overcoming the information and perception gaps between SMEs and FIEs by establishing database on supporting industries, suppliers and business broker services.
(3) Implementing current SMEs’ promotion policies and programs efficiently and effectively avoiding possible misuse and corruption; evaluating effectiveness, efficacy of the programs/policies; and enhancing business associations’ role in sharing information, providing feedback to the effectiveness and efficacy of the government policies and offering solution to the problems that are possibly emerged.
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