The Dynamism of SMEs in Developed and Developing Countries

Shuji Uchikawa,

IDE-JETRO

Classification of SMEs

• Small and Medium Enterprises (SMEs) are defined by size of employment and fixed assets.

• The character of SMEs is heterogeneous.

• Cottage industries are important from the social policy and rural development perspectives.

• The target of policies is SMEs with modern production method.

• Entry of SMEs is important for competition and transformation of industrial structure.

Cottage industries and Supporting industries

Why are SME policies necessary?

• Weakness of SMEs

SMEs are weak in financial base and bargaining

power with large firms.• Dynamism of SMEs

SMEs can grow to large firms. From old

viewpoints, growth of SMEs was not expected.• SMEs diversify industrial structure. • SME policies need to be reviewed from the

industrial policy and regional policy standpoints.

SME policies should think much of entrepreneurship of SMEs.

Profitability of SMEs in Japan

Capital share (JPY million)

1953 to 1959

1960 to 1964

1965 to 1969

1970 to 1974

1975 to 1979

1980 to 1984

2 to 5 22.4 32.4 30.7 34.6 22.2 16.15 to 10 20.9 34.1 31.4 35.4 23.0 17.810 to 50 21.2 28.7 31.2 35.5 24.4 20.950 to 100 18.7 25.3 26.7 30.4 23.1 24.4100 to 1000 13.1 20.5 23.3 25.6 22.0 22.3Avobe 1000 16.2 19.8 21.3 17.8 19.5

Source: Toshiro Miwa (ed), Japanese SMEs, 1989

Size-wise Return on Equity (%)

Exit ratio of SMEs is high. But SMEs are more profitable than large firms.

Present Conditions of Japanese SMEs• Number of establishments declined due to recession

and unavailability of successors.• The streamlining of procurement by the large firms

led to the selection of only the efficient subcontractors (SEMs).

Trends of Manufacturing Establishments Employing More Than Tree

Employees, According to Size

Source: Government of Japan, Ministry of Economy, Trade, and Industry, Census of Manufacturers

(%)Size (Number ofemployees)

Number ofestablishment

Number ofemployees

Value added

4 to 29 -3.7 -3.1 -4.130 to 99 -1.2 -1.2 -2.5100 to 299 -0.2 -0.1 -2.0300 and avobe 0.5 0.7 -1.3All -3.2 -2.1 -2.1

Change of SME Policy Concept in Japan

• Amendments of the Small and Medium Enterprises Basic Law in 1999

Before: rectifying gap between large firms and SMEs

Government forced business models like modernization.

After: promoting diverse and vigorous growth of SMEs• Private sector initiatives are being facilitated. • R&D activities are being encouraged. SMEs have a

competitive advantage in niche areas. • Municipal governments can play an important role in

promoting SMEs.

The collaboration among SMEs was effective for the joint development of unit component in machinery industry.

Four Categories of SMEs in Developing Countries

• SMEs in Supporting Industries related with machinery industry: Manufacturing components and parts of electric machinery and automobile etc

• SMEs in export-oriented: Manufacturing labour intensive products like apparel and footwear

• SMEs in domestic market oriented industries: Manufacturing daily necessities such as food, apparel and general merchandise

• Cottage industry: Manufacturing daily necessities on the basis of

traditional production method

Effects of Subcontracting

• Subcontractors acquire relation specific skill through transactions with parent companies.

• Parent companies can save procurement costs

• Improvement of general technological capabilities

Large Enterprises

Subcontractors

Cost reductionQuality ControlPrompt delivery

Relation specific skill

8

Export-oriented Industry

• Apparel and footwear are leading industries

• Exporting to USA and European markets

• Quality• Attractive Design • Low wage • Generalized system of

Preference

Foreign buyers

Local firms

Condition

• Technical assistance• Guidance of management

Cottage industry SME can become exporters

In some countries, large firms dominate export-oriented industry

Domestic Market-oriented Industry

Indigenous SMEs are producing daily necessities such as food, apparel and general merchandise

• Vulnerability of management• Low investment in equipment and low

technological level• Dependence on cheap labour force• Less access to bank loan and dependence on

informal and traditional financial markets

Character

Domestic demand expand, as life standard rises

Cottage Industry

• Cottage industry is producing food processing, cane and bamboo work, ceramics, lacquer ware, embroidery and textiles on the basis of traditional production method.

• Cottage industries may lose the present position due to low productivity.

• Cottage industries can increase exports.

example: Handicrafts

‘One village, One Product’

Chance

Marketing is important

Characters of Four SME Groups

Main player Main Customer

Technology Possibility of

backward linkage

Supporting industry Foreign SMEs Local SMEs MNEs High High

Export-oriented industry

Foreign SMEs Local SMEs

Foreign buyers High Low

Domestic market- Oriented industry

Local SMEs Domestic market

Low Low

Cottage industry. Local SMEs Local

market Low Nil

Export-orientedIndustry

Export

Domestic market

High technology

Lowtechnology

SupportingIndustry

CottageIndustry

Domestic Market-OrientedIndustry

Technological Gap among SMEs

SMEs cannot involve in subcontracting easily.1. Their standard of technology and management skills does not

reach the minimum requirement to reduce production costs constantly, improve quality of products, and keep up with the delivery schedule.

2. Their investment in equipment is too low.

Best Practice: Motorcycle industry in Vietnam2. Japanese MNE launched a new cheap model to compete with

products made of components imported from China.

3. Japanese and Taiwanese first-tier suppliers to replace imported components with locally sourced ones.

4. The second-tier local supplier were originally manufacturers of replacement parts.