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5
Competitiveness and Transfer of
Technology
that of imported products because their level of technology is generally low, and SMEs’ management skills are weak due to lack of training and modern management knowledge. Second, Indonesian macroeconomic policies or regulations on trade, inadvertently favor imports more than exports, thus reducing incentives for domestic enterprises, SMEs in particular, to produce better-quality goods, and thereby result in less competitiveness.
It is often said that one effective way not only to maintain but also to improve competitiveness is continuous innovation. Formally, innovation is considered to be the successful development and application of new knowledge. In the literature, the concept of innovation is mostly based on Schumpeter’s definition, that is, a new combination of the factors of pro- duction. However, the expression of innovation varies among scholars. For instance, for Edquist (2004) innovation occurs not only in products (goods and services) but also in processes (technology and organization). For him,
“innovation in process” is about how things are produced, while “innova- tion in product” is about what is produced.1
Many factors are said in the literature to determine the capacity of an SME to innovate, including the talent and creativity of owners/producers. In Shahid (2007, p. ii), for instance, it is stated that talent is the foundation of a creative society, and increasing talent involves not only mobilizing culture and tradition, building institutions to increase the stock of human capital, but also enhanc- ing its quality and instilling values favouring achievements and initiative.
But creativity itself is no guarantee of successful innovation, since translating creativity into innovation is a function of multiple incentives, and sustaining innovation is inseparable from heavy investment in research and develop- ment (R&D) activities. In the further process of bringing innovation into the market, not only engineers or scientists but also, and even more important,
0 1 2 3 4 5 6 7 8 9
Hongkong-China USA Chinese Taipei Australia Canada Singapore Malaysia Japan Thailand Philippines Korea China Indonesia
Figure 5.1 SME competitiveness in selected APEC economies
entrepreneurial skills play a role. In other words, the transition from innovation to commercially viable products also requires entrepreneurial skills.2
Ideally, the number of patent applications is the best indicator to measure product or process innovations. But, since such data hardly exist in devel- oping countries, ISO certificates owned by firms or companies spending on R&D can be used as indicators instead. The first indicator can be seen as a reflection of firms’ ability to innovate, whereas spending on R&D (usually expressed as a percentage of total production expenditure or in other finan- cial ratios) is often used to measure current innovation activities.
As presented in Table 5.1, the Enterprise Survey 2007 by the International Finance Corporation (IFC) and the World Bank provides important infor- mation on these two indicators in many countries, including some in Asia, although no distinction is made between SMEs and LEs. However, if the ratios in this table are also valid for SMEs in general, then it can be assumed that the SMEs’ level of innovativeness, on average, in Malaysia or in Thailand is higher than that in Indonesia.
Among the countries covered in this chapter, only India has data on ISO certificates owned by SMEs, provided by the Office of the Development Commissioner, Ministry of Micro, Small and Medium Enterprises (MSME). In order to enhance the competitive strength of SMEs, the Indian government Table 5.1 Innovation at enterprises level by region, 2006
Country Companies with ISO
certificate ownership (% of total companies)
Spending on R&D (% sales)
East Asia and Pacific Europe and Central Asia Latin America and Caribbean
Middle East and North Africa
Organisation of Economic Cooperation and Development (OECD) South Asia
Sub-Saharan Africa Cambodia Indonesia Lao PDR Malaysia Philippines Thailand Vietnam
23.69 12.98 13.11 12.88 14.53
19.76 11.68 2.78 22.13 3.27 31.43 15.79 44.63 37.84
2.01 0.46 2.40 0.97 0.25
0.58 1.71 5.21 — — 1.38 0.80 0.25 2.21 Sources: International Finance Corporation (IFC) and the World Bank (Enterprise Surveys 2007, World Bank Group, Private Sector Resources).
introduced an incentive scheme for their quality improvement and environ- ment management. The scheme provides incentives (of up to INR 75,000 per unit) to SMEs which acquire ISO 9000/ISO 14001 certificates. The scheme, in operation since March 1994, was enlarged to include reimbursement of expenses for acquiring ISO 14001 certification. Based on the Annual Report for 2006–07 from the Office, Figure 5.2 shows that since the inception of the scheme of ISO-9000 reimbursement, 13,433 SEs have benefited.
The level of productivity in SMEs, although notoriously difficult to measure, interpret, and compare due to data limitations (especially in developing coun- tries), can also be utilized as an alternative measure of SMEs’ competitiveness;
and improved productivity can be used as a proxy of innovation in SMEs as it is an important outcome of innovation. SME innovation is not necessarily at a basic research level, but more at a product and process application level.
Long (2003) tries to examine the productivity of SMEs and to compare it with that of SOEs and MNCs in Vietnam. He uses two ratios, namely, revenue per employee and assets per employee. As shown in Figure 5.3, among three types of ownership, SMEs have the lowest levels of those ratios. The highest ones belong to Foreign Direct Investment (FDI)-based enterprises. With these ratios, it can be said that productivity in SMEs is lower than that in SOEs and FDI-based enterprises. Long explains that, despite their high growth rate in the last decade, SMEs in Vietnam have been very limited in their innovation capabilities and productivity, partly because the private sector in Vietnam has developed only recently under the “market mechanism”-oriented reforms of the government.
3 10 48 54 85 174 361 649 992 1182
917 3314
4101
1543
0 1000 2000 3000 4000 5000
1993- 94
1994- 95
1995- 96
1996- 97
1997- 98
1998- 99
1999- 00
2000- 01
2001- 02
2002- 03
2003- 04
2004- 05
2005- 06
2006- 07
Figure 5.2 Annual number of SEs receiving an ISO 9000 certificate
Figure 5.3 Productivity comparison between ownership categories, 2002 (VND million)
0 50 100 150 200 250 300 350
SOEs SMEs MNCs
Assets/worker Revenue/worker
The level of innovativeness or the potential of SMEs to improve their competitiveness through innovation can also be reflected in the availability or usage of recent or more advanced technologies in the enterprises. The picture of technology availability in Vietnamese SMEs is mixed. Ba et al.
(2006), quoted in Cuong (2008, p. 336), for instance, indicate that in the early 2000s a significant proportion of Vietnam’s SMEs used rather old or outdated machines and equipment. Nevertheless, Rand and Tarp (2007) paint a more optimistic picture of Vietnam’s SMEs innovativeness in general and technol- ogy availability in particular in 2005. The machinery and equipment used by the SMEs were fairly new, that is, some 88 percent was no more than ten years old. Around 4–10 percent of the SMEs used only hand-tools and manually operated machines and equipment, and as many as 25 percent of the firms used power-driven ones. Furthermore, more than 61 percent of the machines used were newly purchased, whereas around 34 percent were second hand. The authors also indicate that around 41 percent of the sampled SMEs had intro- duced a new product during the previous three years (since 2002), while only 30 percent had introduced a new technology into their production process. It should be noted that in Vietnam LEs are more innovative and improve their technological production processes more often than do SMEs (Table 5.2).
According to Rand and Tarp, the lack of technology-creating and hence innovation capability of Vietnamese private firms in general or SMEs in par- ticular stems largely from two sources. First, the education and vocational training system in the country has not been effective. University curricula Table 5.2 Innovation rates of enterprises, 2005
Introduced new product
Introduced new technology
All surveyed enterprises 40.6 29.5
New entry 44.3 33.1
Incumbent 39.1 28
Enterprises by size MIE
SE ME LE
32.6 51.1 62.9 87.5
19.1 42 63.8 81.3 Enterprises by location
Urban Rural
47.2 35.6
36.2 24.4 Enterprises by sex of
entrepreneurs Male Female
43.6 34.0
30.5 27.3 Source: Rand and Tarp (2007, p. 13).
pay too much attention to theoretical aspects at the expense of practical knowledge and skills; and private firms still pay inadequate attention to formal training of human resources. Second, commercialization of technol- ogy products has been very limited due to the weak linkage among research institutions, universities, and enterprises. Additionally, the vast majority of the labor force (70–75 percent) are unskilled, resulting in a low absorp- tive capacity of domestic firms. In tandem with a shortage in labor with vocational training, the poor quality of the labor force has, to a significant extent, created a hindrance to every stage of technology development stated above (Cuong et al., 2008, p. 337).
Another important study is by Nguyen et al. (2007), who investigate the causes of innovation in SMEs’ exports in Vietnam. They use a data-set from the Vietnam SME Survey, conducted in 1991, 1997, 2002, and 2005 by the Ministry of Labor, Invalid and Social Affairs (MOLISA) and the Stockholm School of Economics. Interestingly, this data-set has several important features. First, it allows them to distinguish between (i) product innovation, (ii) process innovation, and (iii) modification/improvement of existing products. Second, with detailed information about the firms, the authors are able to find various instruments to deal with the poten- tial endogeneity problem of innovation. Using both the instrumental approach and the bivariate probit model, they find that all these three measures of innovation are important determinants of the export perfor- mance of Vietnamese SMEs.
For the Philippines case, the most recent information about the current innovativeness of SMEs is provided by Aldaba (2008), who found that many SMEs have difficulties improving their competitiveness. She explains:
Many firms are not knowledgeable on technology with most SMEs employing poor or low level of technology. Most small enterprises are labor-intensive, while the medium-sized ones use relatively more technol- ogy-intensive. With low level of technology, the production methods are generally inefficient which leads to inconsistent product quality, low level of productivity and lack of competitiveness. This is also manifested in high materials wastage, high rates of reworks, and inability to meet deadlines.
Regarding product quality and quality assurance of raw materials … there is a lack of common support facilities like testing centers and standardiza- tion agencies, whether government or private-sector led. With respect to quality management systems standards such as ISO series, SMEs do not invest in these business standards due to the high costs involved along with the high degree of formalization and documentation required.
(2008, p.17) In her study, Aldaba also presents labor productivity in manufacturing SMEs, measured by value added per worker (Table 5.3). Although labor
Table 5.3 Value added per worker in manufacturing by size of enterprises 199419982003 SMEs LEsSMEs LEsSMEs LEs All manufacturing Food processing Food manufacturing Beverages Tobacco Textiles Wearing apparel except footwear Leather and leather products Leather footwear Wood and cork products Furniture except metal Paper and paper products Printing and publishing Industrial chemicals Other chemicals Petroleum refineries Petroleum and coal products Rubber products Plastic products Pottery, china, and earthenware Glass and glass products Cement Other non-metallic mineral products
110,087 205,341 114,350 710,845 44,408 62,812 75,997 29,815 20,991 57,356 42,254 100,044 65,549 319,818 209,208 — 100,414 61,970 124,561 33,906 179,684 — 77,988
195,890 172,843 174,233 493,860 726,851 75,230 57,927 40,490 44,256 62,053 48,412 218,285 203,437 357,757 669,116 4,437,509 — 95,368 96,020 79,086 371,332 446,541 149,469
138,518 301,837 339,534 229,506 29,067 53,632 66,332 49,645 40,179 85,441 47,015 134,667 60,978 213,573 225,641 1,289,142 52,251 59,621 96,814 33,726 100,979 287,307 70,556
227,484 280,387 190,644 572,530 1,026,460 70,259 60,506 32,007 34,858 41,316 65,197 202,266 326,118 363,740 734,192 9,973,321 23,179 45,686 119,414 88,725 258,926 723,737 103,872
96,642 123,584 88,777 302,242 52,366 70,061 39,704 88,294 23,611 41,241 67,225 138,941 41,502 326,891 177,398 — 280,052 55,448 76,437 102,305 131,116 561,857 59,305
210,518 263,167 184,526 534,620 474,949 73,736 45,615 137,220 25,108 43,711 62,127 160,144 184,274 419,592 579,624 28,642,548 — 91,000 85,235 67,890 204,344 933,686 194,730
Iron and steel Nonferrous metal products Fabricated metal products Machinery except electrical Electrical machinery Transport equipment Professional and scientific equipments Miscellaneous manufacture
149,779 73,555 81,755 53,321 123,257 182,039 158,521 43,736
484,692 578,029 109,766 105,174 136,682 238,576 55,890 65,568
137,991 138,169 71,582 75,621 143,939 137,312 98,868 69,400
187,138 308,695 104,123 229,307 215,727 220,591 54,286 88,505
142,431 164,184 108,354 61,009 121,099 153,171 91,245 104,305
133,158 481,084 82,503 198,292 140,728 374,823 110,198 79,516 Source: Aldaba (2008, p. 234).
productivity rose in both SMEs and LEs between the years 1994 and 1998, it fell in 2003. For SMEs, labor productivity dropped from P 139,000 to P 97,000 while for LEs it declined from P 227,000 to P 211,000. In general, the labor productivity of SMEs has remained only about half that of their larger counterparts. Although some narrowing of the gap was evident in 2003, SMEs still suffer from low productivity. According to a World Bank report in 2004 (quoted in Aldaba’s study), the value added per worker relative to all firms was approximately 46 percent in the Philippines as compared with 64 percent in Indonesia, 65 percent in Malaysia, and 84 percent in Thailand.
A closer look at the manufacturing industries would reveal that in 2003 the labor productivity of SMEs was higher than LEs in the following sectors:
furniture; pottery – china, and earthenware; iron and steel; fabricated metal products; and miscellaneous manufactures. Note also that in the garments, electrical machinery, and transportation equipment industries, labor pro- ductivity declined in the three years under study.
For the Thailand case, probably the only information on SMEs’ competi- tiveness or innovation capacity is from the 2006 research on policies pro- moting SMEs in the APEC region conducted by the APEC SME Innovation Centre (APEC, 2006). According to this report, in general, Thai SMEs’
innovation capacity is no better than those of their counterparts in other countries in the ASEAN region, although it may vary by manufacturing sub- sector. However, the Thai government has made serious efforts to improve the competitiveness of Thai SMEs, particularly through innovations. After the 1997/98 economic crisis, promoting innovation has become an impor- tant aim of SME development policy in Thailand. Thailand’s SME innova- tion policy, as stated in the report, is a reflection of problems of economic structure resulting from the strong reliance on foreign capital not involved in indigenous technology development during the last three decades. In addition, the huge foreign debt and high level of non-performing loans (NPLs) of LEs were among the main reasons for the 1997/98 economic crisis in Thailand. Therefore, the government has emphasized innovation on the part of SMEs as an alternative engine for economic recovery and sustainable economic development.
Another recent study is by Kecharananta and Kecharananta (2007, p. 23) who argue that in the past Thai firms depended more on the cost advantages from an abundant labor force and physical resources than on their ability to strengthen their technology and innovation capabilities. But since comparative advantages cannot last for ever, as resources can move across borders conve- niently, smoothly, and freely as a result of technological progress, Thai firms, especially SMEs, lost their ability to compete and to meet significant challenges, namely, the ability to generate their own competitive advantages, especially in technology (including information technology) and in innovation.
To enhance SMEs’ innovative activities, the Thai government has imple- mented several measures, including enacting the SMEs Promotion Act in
2000, and establishing the Office of the SMEs Promotion (OSMEP). OSMEP works as an independent government agency, acting as a central planning office and coordinating the strategic plans and actions of all agencies rele- vant to SMEs’ development. In addition to the establishment of OSMEP, the government proposed the Promotion Plan of SMEs of Thailand (2002–6) in line with the Fourth Social and Economic Development Plan, to emphasize the importance of SME development. An SME bank was established in 2002 as a specialized financial institution, providing financial support to SMEs not only for their working capital needs but also for innovation activities.
The main strategic priority is the development of technological facilities and the innovative development of SMEs.
As a further way of improving SMEs’ capability to innovate, the Thai government has focused on the indigenous technology capability develop- ment of SMEs in specific sectors, such as automotives, food, tourism, and software. One of the main measures to this end is the Industrial Technology Assistance Program (ITAP). The program consists mainly of an industrial consultancy and technology acquisition service that links technology experts and SMEs, and provides enterprises with the opportunity to obtain first-hand information on technological advances and innovations through arranging overseas technology trips. In this way, indigenous technology development has been mainly based on the paradigm shift in the role of government research institutes from a knowledge source to a knowledge intermediary by providing SMEs with indirect services that enable them to enhance technological capability.
In Indonesia there is increasing micro-level empirical evidence of the inno- vatory capacity of SMEs, especially those located in clusters which are in a better position to innovate than their dispersed counterparts,3 for instance, evidence from Sandee’s (1994; 1995; 1996) studies of roof-tile clusters in rural areas in Central Java province. Through the 1980s the demand for roof tiles increasingly shifted toward urban areas, where customers pay more attention to quality. This meant that upgrading was important to retain or increase demand. Although some clusters have stagnated, many have grown through a process of technological change or adaptation that encompasses changes in processes of production, in patterns of interfirm cooperation, in employment conditions, and in the marketing of new output. The range of experience has been wide. The process was demand/buyer-driven in some clusters and producer-driven in others. In the former case, the buyers were mainly traders or agents from urban building-material shops, who largely took care of the financial, technical, and marketing sides of the technology adoption and competed with each other to do so, a reflection of the expand- ing urban demand for press tiles. For instance, in two cases (in Mayong Lor and Klepu villages) urban building-material shops have played a key role not only in assuring demand but also in providing loans for the purchase of presses and renting out mixers. The pioneer adopters of the hand-press
technology were young males who had used it elsewhere in rural Java. Since its introduction in the early 1970s, virtually all the producers in the clusters studied have adopted the technology.
In the case of producer-driven clusters such as in Karanggeneng village, networks of producers were at the heart of the process of technology upgrad- ing. Producers organized themselves to finance new equipment, shared indivisible capital, and gained access to new markets. Pioneer adopters remained the most important actors by stimulating innovation in those producers whom they could trust and control, especially relations. Urban building-material shops become involved through establishing relationships with the pioneer adopters.
In both cases, innovation trickled down among an increasing number of producers. Diffusion was stimulated by the growing involvement of suppliers, while the government principally contributed by improving the environment (Sandee 1995). In the producer-driven clusters, Sandee et al.
(2002) provide a comprehensive review of two important SME clusters of metal-casting industries producing components and spare parts by subcon- tracting metal casting to LEs in Ceper, Klaten, in Central Java, and in Cibatu village in the Sukabumi regency. The first cluster is well known in Indonesia.
It has been an active cluster since the colonial period and has a long history of producing cooking utensils for the local and nearby markets. The cluster encompasses a variety of metal-casting firms ranging from SEs producing basic utensils for the local market to MEs working exclusively to process orders from big national companies such as railway and car-manufacturing firms. Recently, Ceper has concentrated on the production of both final and intermediate products. Final products include household equipment and agricultural tools, while the main intermediate products are components for LEs through subcontracting production linkages. By late 2001 the cluster amounted to 332 production units that together employed 3875 workers.
The cluster is spread over several villages in the Batur district of the Klaten regency. The second cluster can be deemed a typical example of a metal- casting cluster that has gradually expanded its product range. Presently, the cluster manufactures agricultural equipment, household items, and various products for military needs. A few firms make samurai swords and export them via traders to Japan. Besides samurai swords, other handicrafts pro- duced in the clusters are also exported, and Japan is an important export market. An increasing number of firms producing spare parts and intermedi- ate inputs are involved in subcontracting production relationships with LEs outside Sukabumi, mainly in the Jakarta area.
At the macro or national level, since no data are available to measure directly the innovatory capacity of Indonesian SMEs, the labor productivity of the enterprises is an alternative indicator. As shown in Figure 5.4, the value added- labor ratio used in SMEs is much lower than that in LEs. Within the SME group the ratio varies, however, being lower in MIEs and SEs than in MEs.