Introduction
1. SMEs and their Importance in the APEC Region
1.1 What is an SME
1.2 Why SMEs are important to the region
1.3 Key issues facing SMEs
2. APEC and SMEs
2.1 The Structure and Processes APEC
2.2 APEC SME Activity
2.3 Problems and Limitations in the APEC Processes
2.4 What APEC can do to Develop SMEs
3. Suggestions for an APEC SME Action Agenda
3.1 Action Agenda: General Initiatives
3.2 Action Agenda: Domestic at-risk SMEs
3.3 Action Agenda: International SMEs
4. Conclusion
SMEs have been recognised as a priority item for APEC since the 1993 Leaders' meeting in Seattle. Despite being a priority item, and despite a considerable amount of discussion over the last two years, there is still a lack of a clear APEC agenda and program of action for SMEs in the region. What specific actions can APEC take to encourage the development of SMEs in an environment of increased economic interdependence and open regionalism?
This paper looks first at the importance of SMEs to the APEC region, and examines the issues facing SMEs. It then looks at the structure and processes of APEC, the limitations of APEC, what APEC can do in general terms, and finally makes some specific suggestions for an APEC SME action agenda.
1 SMEs and Their Importance in the APEC Region
1.1 What is an SME?
Over 95% of SMEs employ less than 100 people, and most employ less than 50 people. How an SME is defined differs widely in the APEC economies. A summary of definitions is set out in table 1.
Table 1: Summary of Main Definitions of SMEs in selected APEC Economies
Country Definition of SME measure
Australia Manufacturing - less than 100 employees employment
Services - less than 20 employees
Canada Manufacturing less than 500 employees employment
Services less than 50 employees
PRC Varies with industry, usually less than 100 employment
employees
Indonesia Less than 100 employees employment
Japan Less than 300 employees, or ¥10 million employment
assets assets
Wholesaling - less than 50 employees, ¥30
million assets
Retailing - less than 50 employees, ¥10
million assets
Korea Manufacturing - less than 300 employees employment
Services - less than 20 employees
Malaysia Varies. Less than RM 2.5 million and less shareholders
than 75 employees. Definitions are for SMI. funds
Different for Bumiputera enterprises employees
Philippine Less than 200 employees, P 40 million assets
s employment
Singapore Manufacturing - less than S$12 million fixed fixed assets
assets employment
Services - less than 100 employees
Chinese Manufacturing - less than NT$ 40 m paid up paid up capital,
Taipei capital, and less than total assets of NT$ assets and sales
120 m. In business, transport, and other
services - sales of less than NT$ 40 m.
Thailand Less than 200 employees for labour intensive employment
Less than 100m Baht for capital intensive capital
USA Less than 500 employees employment
In practice, the definitions adopted do not fundamentally affect the issues pertinent to SMEs. Although the definitions differ, they have one thing in common; the vast majority of SMEs are relatively small and over 95% of SMEs in the region employ less than 100 people. Although ideally it would be desirable to have all statistics based on a common definition, this is simply not possible. Because most SMEs employ less than 100 people, broad comparisons of the role of SMEs are still possible with differing definitions.
1.2 Why SMEs are important to the region
SMEs are an important part of the national economies in APEC, and an important part of the international or regional APEC economy. SMEs make up about 99% of enterprises. Estimates of SME contribution to GDP are difficult to obtain for the Asian region, but typically the contribution is somewhere between 30% and 60% of GDP. They employ between 40% and 80% of the workforce. The contribution of SMEs to employment growth is even higher, if contentious; figures for Asia are not available, but in more mature economies and where reasonably reliable studies are available, as much as 70% or more of net employment creation is attributable to SMEs. In Asia, SMEs contribute as much as 35% of direct exports, and the indirect contribution is even higher. The weighted contribution of SME exports to GDP is about 12%, almost double the contribution in OECD economies.
Table 2: The Relative Importance of SMEs in Selected APEC Economies
Country Growth Exports Number SMEs % employed
GDP pa as % GDP of SMEs as % all by SMEs
1994 1994 thousand enterprises
USA 4.0% 8% 4,311 98% 53%
Japan 1.0% 15% 6,450 99% 74%
Canada 4.1% 26% 800 98% 66%
PRC 11.4% 4% m # 500 98% # 70%
Australia 4.6% 15% 530 97% 46%
Korea 7.7% 27% m 68 96% 63%
Chinese Taipei 6.1% 44% m 155 96% 79%
Indonesia 6.7% 23% 105 97% 42%
Thailand 7.4% 29% 102 98% na
Malaysia 8.9% 72% m 20 96% 40%
Singapore 10.2% 138% 69 89% 42%
Philippines 5.1% 19% 78 99% 50%
Vietnam ^ 7.0% 19% 14 83% 67%
Sources: Country statistics, Far Eastern Economic Review, IMF, Asiaweek
Note: # estimate only m manufacturing only
figures for GDP and % exports are for 1994 year or last available year
^ Vietnam is not a member of APEC
Although SMEs are important across the region, there are considerable differences in the role of SMEs in the various economies. For example, SMEs play a larger structural role in Chinese Taipei, where they make up some 80% of employment, than they do in Indonesia or Malaysia where they contribute only around 40%. Similarly, the dynamic role that SMEs play varies widely. For example in Singapore, even though SMEs are not as significant in terms of numbers and employment, SMEs are important in providing a flexible skilled production base which attracts larger MNCs. The dynamics are different in China, where entrepreneurial SMEs and TVEs are important in creating new jobs, and in Chinese Taipei where SMEs have played a pivotal role in economic development, but where the traditional base of low cost SMEs is rapidly being eroded.
Table 3 also shows the diversity of SME intensity, measured in terms of the number of non agricultural SMEs per 1,000 people, and people per SME. Even allowing for the difficulties in getting reasonably accurate figures for the numbers of SMEs in some economies, it is clear that there is a very wide gap.
Table 3: SME Intensity in Selected APEC Economies
Economy Population SMEs SMEs per 1000 People per
million '000 people SME
USA 260 14,800 56.9 17.6
Japan 122 6,500 53.3 18.7
Australia 17 840 49.4 20.2
Taiwan 20 743 37.1 26.9
Singapore 3 69 23.0 43.5
Thailand 58 102 1.7 568.0
Indonesia 189 105 0.6 1800.0
Reliable estimates of the proportion of exports generated by SMEs are difficult to obtain. The proportion of exports produced by SMEs in Asia is large by OECD and world standards. Table 4 shows that SMEs generally contribute about 35% of the exports of the region. Export growth rates are generally higher than GDP growth rates, and, where figures are available, the rate of growth of SME exports is higher than the growth of exports. This points to SMEs in Asia already being significantly internationalised, and becoming more so. It is difficult to gauge the importance of SMEs in this sense because few countries keep export statistics broken down by size of firm. Further, many SME exports are made indirectly via a larger firm or an agent, and are difficult to attribute to SMEs even when statistics are kept. Despite these difficulties it is clear from the following table that SMEs make an important contribution to exports, although this varies widely between countries.
Weighted by GDP, SMEs make up around 25% of direct manufactured exports from the OECD countries where statistics and estimates are available, and about 35% from the non OECD Asian economies. The indirect contribution is larger, and is probably closer to 50% per cent for APEC Asian economies. The contribution by international SMEs to the national income of those economies for which export figures are available is about 4% for the OECD countries (6% if indirect exports are included), and about 12% for the Asian economies. These figures are indicative only. They assume, for example, that where only manufacturing SME export figures are available that these are representative of exports generally in that economy. Similarly the estimates use the indirect export figure for SMEs where this is available but for most economies it is not, so the overall contribution of SMEs to exports is probably understated.
Table 4: Structural Contribution of SMEs to Exports
GDP $ US Exports as per Share of SMEs
millions cent of GDP in total Exports
%
OECD
Denmark 121,695 27 M ~46
Finland 121,982 19 M 23
France 1,167,749 18 M 26
Greece 65,504 12 19
Italy 1,072,198 15 53
Japan 3,337,191 12 13.5
Netherlands 278,839 47 26
Sweden 280,000 25 30
weighted 4.3% 26.1%
contribution
Non OECD
PRC 435,000 21 40 - 60
Korea 285,000 27 40
Indonesia 128,000 23 10.6
Taiwan 210,000 44 56
Thailand 108,000 29 10
Malaysia 60,000 72 15
Singapore 46,000 138 16
Vietnam 14,000 7 20
weighted 11.7% 35.2%
contribution
Source: SME export contribution - OECD Country studies.
Exports as per cent of GDP - UN Country Statistics
Note: ~ indicate estimate only. M = manufacturing only. Exports are direct exports by SMEs. This understates the true contribution of SMEs to exports.
Weighted contribution. For exports is the sum of GDP multiplied by the percentage of exports multiplied by the percentage of direct SME exports expressed as a percentage of total exports. For GDP is the same figure expressed as a percentage of total GDP.
This international role for SMEs in the region is quite volatile, for three reasons. First is that export markets are inherently subject to volatility via currency and exchange rate movements. Second, export markets are affected by general economic conditions in both the exporting and the destination economies. Third, structural competitive shifts take place which render SMEs in one economy uncompetitive with those in another in supplying global markets. These variations can lead to shifts in demand of + 50% at least over two to three years, and more in the longer term as structural changes flow through. This volatility has important implications for the stability of the SME sectors and for the continued growth of the economies.
There are many issues facing SMEs in the region; technology transfer, human resource development, finance, regulatory red tape, access to markets, to name but a few. These issues are not unique to SMEs; they affect large firms as well, although to differing degrees. From an APEC perspective, the main driving issue is the move toward increasing economic interdependence, open regionalism and the liberalisation of flows of goods, services, resources and capital. The enormous potential for SMEs to contribute to the economic development of the region will be underutilised if SMEs are not able to take advantage of the opportunities created, or able to adapt to the competitive pressures that open regionalism brings. The impact of open regionalism does not fall equally on all SMEs. It is useful to divide SMEs into three main groups depending on the effect.
1. Those SMEs which are internationally competitive, or able to become internationally competitive. Those SMEs able to adapt and compete internationally are likely to be advantaged by the trend to increased open regionalism. This is more likely to be the case in the more advanced economies with open borders, such as Chinese Taipei, USA, Canada, Australia and Singapore.
2. Those SMEs less likely to be able to adapt and thus at risk. A significant proportion of SMEs are at risk as a result of international pressures; they are unlikely to survive in their present form without relocating their activities or making significant changes to improve such factors as output quality, cost competitiveness, and management practices. This problem is especially apparent in Japan, but it will also affect SMEs in all the other economies of the region.
3. Those SMEs which are insulated from the effects of globalisation. The residual proportion of SMEs are still largely insulated or quarantined from the effects of open regionalism because of government protection or natural barriers. This proportion differs by industry and economy, and is difficult to estimate. Typically these SMEs are agricultural or services oriented or producing niche products, and tend to supply directly to customers (rather than feeding inputs into a longer value chain). Numerically there are many such SMEs, so at present they may make up over 40% of SMEs in some economies. Technological and regulatory changes are reducing both the natural and artificial barriers that protect them.
Figure 1: The Likely Effect of Open Regionalism on SMEs 1995 - 2005
1995 international at risk insulated
25% 20% - 30% 40%
2005 international at risk insulated
33% 40%+ 20%
Based on OECD research in Europe, North America and Asia, it appears that about 25% of manufacturing SMEs are in the first category, that is alredy active internationally. The effect of open regionalism and general trends toward increased globalisation means that this is likely to increase to about 33% by the year 2005. About 20% to 30% are in the second category; that is, exposed to global competition and at risk of being unable to adapt. This proportion is likely to increase in the future, although some of these firms will adapt and become internationally competitive. Finally, about 40% to 50% are at present reasonably insulated from the effects of globalisation, but this is likely to decrease to around only 20% or less in the next ten years. It is stressed that these figures are only broad schematic estimates, based on a mosaic of statistical and other evidence from country studies and are only for manufacturing. Services SMEs have a lower proportion of international and at risk firms. None of the economies in the APEC region has undertaken any schematic statistical study of the dimensions of the problem.
The main challenge to policy makers is to ensure that:
From a policy viewpoint it is useful to have more specific targets within the above categories; there are four different types of SME which face rather different issues and problems. The first subgroup is essentially in the domestic at-risk category. The other three subgroups are all internationalised or have the potential to be internationalised.
1. Low growth domestic SMEs. Over 70% of SMEs are either not oriented to growth or do not succeed in growing, and have no international activity. In aggregate they make a rather static contribution to the economy; although they employ a significant proportion of people, they do not contribute a lot to employment growth. Many only have a relatively short life expectancy, perhaps of 3 - 5 years, although this depends on the economy. Most of these SMEs are presently in the 'at risk' or 'insulated' categories, and the main issue that they face is how to best adapt to the increasing competitive pressures occasioned by open regionalism. The main issue that governments face is how to assist them to do this, because failure to do so is likely to lead to significant protectionist forces which resist moves toward open regionalism. Both OECD and APEC have identified four broad areas where governments have the potential to assist domestic SMEs to become more competitive:
2. Entrepreneurial fast growth SMEs. Evidence suggests that as much as 70% of net job creation and much longer term economic dynamism is attributable to a small proportion (perhaps only 5% to 25%) of SMEs that are growth oriented and entrepreneurial. These SMEs are especially important in restructuring existing industries (eg finding better ways to provide services) and generating new industries (eg software, multimedia services etc). Many of these fast growth SMEs are internationalised. Opportunities for new industries, or for the restructuring of services and manufacturing to be more efficient, are accessible to quite small firms, and increasingly can be accessed by firms in what might be regarded as less-developed economies. Providing these SMEs with international opportunities is important to the APEC region because they are potentially a major source of longer term sustainable economic growth as the region matures. At present most of the international entrepreneurial SMEs are in the more advanced economies, but this is likely to change over the next ten years. In many cases, the nature of the product means that it has a strong services element, and so internationalisation requires some form of physical presence, whether it be via direct foreign investment, or by alliances and franchises. In Asia, access to international markets is important for these firms because the size and state of development of their domestic economies otherwise tends to limit their potential market, and disadvantages them unnecessarily when competing with US or European firms. The main issue for the firms is how to overcome the impediments to international entrepreneurship, including overcoming outdated regulations, getting access to markets, acquiring suitable managerial skills, and finding finance. For governments, the key issue is how to ensure that this important regional 'entrepreneurial engine' works as well as possible. International entrepreneurial SMEs face many problems, which are only compounded by their internationalisation. The main problems and issues which are of relevance to these SMEs are:
3. Internationalised subcontracting or supply industry SMEs. Subcontracting SMEs are those which have integral links with a larger foreign firm, or to a domestic firm which is exporting. There are relatively few SMEs that are international subcontractors, probably less than 2% of non agricultural SMEs, but they are economically significant because they tend to be larger on average, employ more people, and use more sophisticated technology than other SMEs. They are also an important driver of economic integration, technology and skill transfer, and make a major contribution to economic and industrial development in the region. Subcontractors in the main supply industries (automobiles and auto parts, electrical goods, machinery, chemicals, clothing, textiles, footwear, computer hardware etc) have been subject to increased international pressure for over a decade. Large Japanese firms have been particularly active in internationalising their subcontracting networks through Asia in recent years. This has had the effect of increasingly integrating the traditional manufacturing part of the Japanese economy with its Asian suppliers. This process is not static; as each economy becomes more developed and as costs rise, subcontractors need to move on to another lower cost base, or to move upmarket to higher quality, higher technology subcontracting. This brings forth a raft of issues. International subcontracting is also going through a structural shift worldwide, so that large firms deal with a relative few major subcontractors in an upper tier, who in turn deal with a next tier, and so on. The main issue facing the firms is how to remain competitive. The main issues facing governments are how to ensure a reliable and efficient subcontractor industry, and how to help their subcontracting SMEs adjust and remain competitive. The main policy issues and areas which are of particular relevance to these SMEs are, for example:
4. Trading SMEs. About 20% to 25% of manufacturing SMEs are engaged in international activity. Economically they are important because they make a significant contribution to exports, and thus to GDP. Apart from indirect SME exports which pass through subcontracting networks, about 35% of exports are directly sourced from SMEs in the Asian region, although some of these may be directed through trading companies or other intermediaries. In theory, open regionalism will open further opportunities for increased trade, and thus for even more contribution to economic growth. In practice, there is a long way between a Leaders' meeting declaration of freer trade, and actually seeing the reduction of trade impediments to these SMEs. The main issue for the SMEs is how to identify and take advantage of opportunities, and how to resolve or avoid impediments quickly and cheaply. The main issue for governments is how to best implement APEC initiatives while allowing their trading SMEs to benefit from the opportunities. The main policy issues which are of relevance to these SMEs are:
APEC was established in 1989. It now has 18 member economies. The objectives of APEC are to:
2.1 The structure and processes of APEC
The structure of APEC is summarised in figure 2. There are two levels, the APEC level, and the member economy level.
First, at the APEC level, member economies are represented through five official channels:
1. Leaders' meetings, now held yearly, which agree initiatives and set broad directions for APEC based on input from Senior Officials Meetings, Ministerial Meetings, The Eminent Persons Group and the Pacific Business Forum.
2. Senior Officials Meetings, held at least twice a year to consider input from Working Groups and Committees as well as Ministerial Meetings, The Eminent Persons Group and the Pacific Business Forum. In their own right, the SOMs arrive at important agreements on policy issues and initiatives to be implemented.
3. The Eminent Persons Group, comprised of one eminent person per economy, which has an ad hoc status and seeks to provide a strategic view of the future of APEC and the region.
4. The Pacific Business Forum, which has two business representatives nominated from each economy, one for small business and one for large. It provides input to the SOM and to the Leaders' meetings.
5. The Working Groups and Committees. There are 13 such Committees or Working Groups, which deal with specific issues. There is no group specifically concerned with SMEs.
These activities are supported administratively by the APEC Secretariat, which by international standards is quite small, less than 50 people, and based in Singapore. Each member economy supplies staff to the secretariat.
Second at member economy level the governmental structures are reasonably straightforward. Each member sends representatives to SOM and to the various Committees and Working Groups. These activities are usually coordinated through a designated secretariat, even though jurisdictional battles between different government departments are not uncommon in some members. The non government or quasi government APEC structures pose more of a problem. These non government experts and institutions are usually nominated by member governments to carry out activities (meetings, conferences, research, data base upkeep etc) which support the activities of specific APEC level Working Groups. They have grown so quickly as to rival the growth of the Internet, and also its complexity. Consequently it is almost impossible to document and list the institutions, contacts and structures being used at member economy level to feed into the APEC level activities. As they evolve they are tending to form extended networks, both within economies, and across borders. These overlap, compete with, and complement each other at different times.
Apart from its administrative function to support meetings and other activities, APEC has two main functions:
1. A policy-political function. This function is mostly about arriving at political agreements between members as to future directions and initiatives in the region. In this functional area APEC has so far excelled most expectations, but it faces real challenges in implementing the wide ranging declarations made so far at Leaders' meetings.
2. A supporting research and implementation function. This function is about providing a coordinated regional perspective (as opposed to a more narrow perspective of individual members) on matters of APEC concern. It is this function that APEC has not performed particularly well, and it lacks a structure to really achieve it at present. The present structure is very much driven by individual members, and by the extant Working Groups. It often lacks coordination on regional issues, especially where there is a lack of consensus amongst members, and on issues which reach across multiple Working Groups (as is the case with some issues like SMEs, and the environment). In the past international organisations (OECD, World Bank) have fulfilled this function by means of institutionalised research secretariats physically located in one place. Technology means that this is no longer necessary. For example, this function might invlove the following, all of which can now be done by means of more flexible organisational structures:
Since the Blake Island Leaders' meeting in Seattle in 1993 SMEs have been a priority item for APEC. To date the main SME related initiatives of APEC are to have:
Figure 2: The APEC Structure
APEC Level
Leaders' meetings
Senior Official Meetings Eminent Persons
APEC SOM Group (EPG)
Secretariat
Ministerial Meetings Pacific Business
Forum (PBF)
Members Committees and Working Groups Observers
Australia ^ Trade and Investment (CTI) Pacific Economic
Brunei Economic Committee (EC) Cooperation
Canada ^ Telecommunications (TEL) Council (PECC)
Chile Human Resource Development Association for
PRC (HRD) South East Asian
Hong Kong Regional Energy Cooperation Nations (ASEAN)
Indonesia (REC) South Pacific
Japan ^ Fisheries (FWG) Forum (SPF)
Malaysia Transportation (TPT)
Mexico ^ Trade Promotion (TP)
New Zealand ^ Trade and Investment Data
PNG Review (TID)
Philippines Tourism (TWG)
Singapore Industrial Science and
Chinese Taipei Technology (IST)
Thailand Marine Resources (MRC)
USA ^ Budget and Administrative
Ad Hoc Groups
^ OECD members Member Economy Level
The structure of APEC organisations at economy level depends on the
economy.
Government
Governments are represented by officials at SOM and at Working Groups or
Committees. This is usually coordinated through a central point (such as
an APEC unit in a department of foreign affairs or equivalent).
Non Government
Each Working Group or Committee has input from organisations and experts
nominated by member economies. This has led to emergence of networks of
supporting organisations within economies. These are sometimes loosely
coordinated by 'lead institutions' at economy level and at APEC level.
There is no single working group responsible for SME matters. Activities are thus spread over a wide range of groups, and this raises problems of coordination and comparability. Most activities have been carried out by, or under the general auspices of, the Human Resource Development Group (HRD), or the Committee on Trade and Investment (CTI). Within HRD there are four different networks, three of which have had varying roles on SME matters; the Economic Development Management Network (NEDM), HRD in Industrial Technology Network (HURDIT), and the Business Management Network (BMN). The Telecommunications (TEL), Transport (TPT), Fisheries (FWG), and Trade Promotion (TP) groups have all had minor inputs. It remains to be see what role the Ad Hoc Policy Level Group on SMEs will take, and in particular whether it will be effective in coordinating APEC activities and maintaining a more focussed implementation agenda. As it is primarily a policy level group meeting only on an ad hoc basis, it is difficult to see how it will play any significant role in operational coordination, though it may be helpful in setting priorities.
2.3 Problems and limitations in the APEC processes
APEC is a young institution, it has grown quickly, and it carries great responsibilities. Inevitably it faces problems and limitations in what it can do. The following comments relate specifically to the problems faced by APEC SME processes, but they have some general relevance to the broader range of APEC processes as well. Understanding them is important, so that they can be reduced or avoided where possible, and where this is not possible, so as to recognise the limitations and set realistic agendas.
1. The consensual country based approach. To initiate any activity or to implement agendas under APEC requires a member, or group of members, to champion the activity, and for other members to agree to it. If any member delegate objects to any aspect of a proposal, then the proposal must be modified accordingly or it cannot proceed. Domestic political concerns, or even jurisdictional disputes between representatives from different government departments within a delegation, can thus set a lowest common denominator for any activity. This breeds a degree of conservatism that makes it difficult to address some of the radical changes that APEC, at Leaders' meeting level, is itself proposing to implement in the region.
2. Funding of research projects and implementation activities. APEC has very limited centralised funding. It generally relies upon members to fund initiatives that are put up. This understandably leads to members being more willing to fund initiatives if they are of direct and immediate political or economic benefit to their own economy. The problem however is that APEC covers a very diverse group of economies, ranging from the most developed, to some much less developed. Although it is clear that programs and projects to assist SMEs in the less developed regions will be critical to the longer term success of a free trade regime, it is also clear that this is often not politically attractive to the more advanced economies. It also puts a disproportionate burden on smaller and less wealthy economies when the main form of communication activity is through attendance at expensive international meetings.
3. The emphasis on, and lack of continuity in meetings. At present much of the APEC activity on SMEs relies on meetings of experts and officials, convened to discuss specific issues. Usually only a minority of the experts and delegates at these meetings have been involved in other APEC SME meetings, and consequently there is a lack of continuity in the people involved. This leads to waste and duplication because time is spent reinventing the wheel at each new meeting. Because the APEC secretariat plays only an administrative role, it usually has difficulty providing the continuity which allows research results to be built into a coherent and evolving framework which would be useful to policy makers.
4. Lack of independent coordinated research activity. To date there has been little by way of systematic research (apart from the Chinese Taipei survey), so there has been little need to coordinate it. What research has been done has either been the output of expert delegates, or carried out by the member economy to support a specific initiative. Relatively little research takes an independent regional perspective. The EPG has sought to adopt a strategic regional perspective, but both it and the senior officials will be increasingly hindered by the lack of a coordinated and independent approach to the researching of SME issues.
5. Communication processes. The dominant form of communication in APEC is by meetings. There is usually relatively little use made of pre-circulated papers, or of electronic or other communications processes. The common language for meetings, and indeed all communications, is English. English is not the native tongue of the majority of SME officials and experts in the region, although many are familiar with English, and it is the most common language. However, even though member delegates may understand the discussion, some may be reticent to directly participate in it. There is then a tendency for the English speakers to dominate in discussions.
6. Business participation and representation channels. APEC is sometimes seen as a government officials 'club' because automatic access to APEC processes is limited to government officials. At present APEC does not have established participatory channels which allow the democratic representation of interest groups, such as SME organisations, environmental groups, unions, or community groups. If APEC agendas for change are to be accepted by the broader community, the community will need to be involved. If they are not, then the community will resist the changes, and APEC initiatives, no matter how commendable, will be fruitless. This is especially the case in the business community, and some other international communities, such as the environmental community. Some efforts have been made to allow ad hoc access of business people to APEC, for example at Ministerial Meetings and as experts and delegates on working parties. However, at present the only established business channel outside of government is via the Pacific Business Forum, which is not always representative; delegates are nominees of the member governments, and do not necessarily represent the complex web of business groups which are present in most economies and internationally. APB Net may go some way to resolving the problem, but it is not clear how it could do this in the present APEC process.
2.4 What APEC can do to develop SMEs
APEC has relatively little actual economic or political power. It is not like the European Parliament and Commission, with its own political power, and its own budgets. It is not like the World Bank or Asian Development Bank with centralised loan funds for implementing projects. APEC's power lies with consensual politics and agreement between sovereign member governments. APEC is essentially an international organisation, and it is likely to have most impact in areas where there is potential for international coordination and cooperation. It is less likely to be effective in areas which are essentially of domestic policy concern. SMEs are still predominantly a domestic concern, although about 25% or more of manufacturing SMEs are internationally active. In most member economies, SMEs are the responsibility of relatively junior ministries and departments, and most of these have little international experience or credentials.
In the light of this reality, what can APEC do for the economic development of SMEs in the region? In general terms there are seven main areas where APEC has a strong existing role or potential role:
1. Provide a forum for policy makers and bureaucrats to exchange views and knowledge. Because most Government SME organisations tend to be domestically oriented, this has been a major role for APEC to date, and will continue to be so. The next step is to take this down the bureaucracy ladder to officials at lower levels, so that they too understand the importance of changes taking place, and how to adopt 'best practice' in dealing with them.
2. Provide a coordinated independent regional viewpoint on issues and strategic developments. The Eminent Persons Group has played an important role in providing a strategic longer term perspective at a regional level, distinct from the perspectives of specific members. Equally, and subject to available funding, an independent ongoing strategic outlook at regional level specific to SMEs could be coordinated by APEC, rather in the nature of the European SME Observatory activity.
3. Identify specific impediments to the progress of open regionalism and economic liberalisation so that they can be better addressed by APEC and by members. An ongoing and independent review of the extent of impediments and progress and reducing them would help in achieving the liberalisation objectives. APEC could play a central role in such an approach.
4. Provide a neutral and informed forum for multilateral and bilateral investigation of ways to best address impediments. Inevitably there will be impediments to the Leaders' initiative for a more liberal and interdependent economic system in the region. In the case of SMEs, these impediments are sometimes complex and it is difficult to sort out the cultural factors from regulatory ones. Impediment reduction is not simply a matter of changing regulations and setting targets. Even if the officials of the 'offending' government want to reduce impediments it is often difficult for them to do so, but in a confrontationist negotiating environment it is nearly impossible for them to do so. It will usually be easier to arrive at resolutions to impediments at the research function level of APEC than at the policy level of APEC.
5. Assist bureaucrats in member economies by encouraging and endorsing programs of action. APEC's role is not to provide prescriptive guidance on specific issues, but in many cases bureaucrats and politicians find it easier to implement change if they can cite best practice examples, and cite the endorsement of their proposals for change by an international body such as APEC.
6. Act as a crystallising point for major projects and initiatives. APEC could sometimes take the lead in the coordination and implementation of regional projects and action agendas. APEC's budget limits it in implementation of major projects and programs, but it has the potential to provide leverage and act as a crystallising point for funds from governments, the private sector, and other international organisations.
7. Coordinate with other international agencies and organisations concerned with SMEs to share experience and reduce waste and duplication. A number of other international organisations also have an interest in SMEs, for example: the Asian Development Bank, World Bank, UNCTAD, PECC, PBEC, ASEAN, ESCAP, OECD, and DG XXIII of the EC. Many of these organisations hold conferences and seminars, publish findings and manuals, and execute research and work programs relevant to SMEs. It does not make sense for a low budget organisation such as APEC to duplicate knowledge and its dissemination unnecessarily.
How can APEC best use its position to assist in the development of SMEs and thus the region? The answer is by means of a general action agenda which addresses the issues confronting different groups of SMEs.
3 Suggestions for an APEC SME Action Agenda
There are many issues facing SMEs, and APEC cannot address all of them. APEC has a limited budget, and its actions are limited in other ways, outlined in section 3.3 above. It is thus necessary for APEC to focus its efforts on those areas which will have the greatest effect in providing results and 'point-outables' in the short to medium term, while also providing a solid foundation for longer term development. Suggestions for fourteen action agenda items are set out in Table 5 and described briefly below. These are in addition to APEC existing agendas and priorities, although in all cases the suggestions are intended to extend and complement the existing and planned program of SME activity. In all cases, under the APEC processes, an item would have to be championed by a member or group of members, and most likely it would require some preliminary investigation and testing before it was recommended for wider adoption by other members.
Because SMEs are not homogenous, these items are divided into three main groups so that they can be better targeted; general initiatives applying to all SMEs, those applying to domestic SMEs, and those applying to international SMEs or those with significant potential to internationalise. The international group is further divided into entrepreneurial SMEs, subcontractor SMEs, and trading SMEs The focus column indicates the main emphasis or focus of each agenda item.
The point is that initiatives targeted at domestic SMEs must address a very large target. There are over 10 million non agricultural SMEs in the APEC economies, and well over a million non agricultural SMEs in the Asian region alone, of which 75% are domestic. For example, programs designed to further the HRD of domestic SMEs may be very expensive, and it is likely to be more cost effective for APEC to target its agenda in areas where it can have more impact per unit of expenditure. By contrast, there are probably only about 250,000 SMEs that are internationally active and less than 50,000 SMEs which have activities across borders. It is likely that APEC can have more impact on directly addressing the issues that these SMEs face. The cost column is only intended to give some rough idea of the likely magnitude of the costs necessary to implement the item:
L = low, implies below about $US 50,000;
M = medium, below about $US 200,000; and
H = high, is above $US 200,000.
3.1 Action agenda: - general initiatives
These are general action agenda initiatives intended to improve the way the APEC SME process operates, by making it more administratively efficient, and by providing policy makers and bureaucrats with a more useful, focussed and coherent flow of information and research.
1. SME Research Network
A proposal for an SME research network is already in embryonic form. Such a network could help to provide a much needed coordinated, independent, regional viewpoint on issues and strategic developments. The real question is the shape and structure of such a network. The most advanced SME network in the world, the ENSR, is made up of lead institutions in 18 European countries, but this does not necessarily provide a useful model for the APEC region, if only because its success is largely attributable to a funding of around ECU 1.2 million per annum ($US 1.6 million) provided by the EC; this level of funding is simply unlikely to be countenanced in APEC.
2. Trial common electronic protocols for APEC documents
APEC generates a lot of paper, and exchanging views is usually done by meetings. International meetings and travel are expensive, especially for SME organisations. A common protocol established for documents and for electronic communications would allow easier and cheaper transmission of documents, including complex documents, and allow greater dissemination of information. This may make it possible to both reduce the number of meetings, and to actually improve the communication processes.
3. Common reference, registration system for documents and publications
APEC SME meetings and activities have generated a large number of documents and papers, many of which may be useful to bureaucrats, SME managers, advisers (accountants, financiers and the like), and researchers. However, few of these documents are published, and because of the complex structure of SME activities in APEC it is often hard to find them. It would be relatively simple to develop a common APEC system for registration of such documents. This would, for example, note the date, source/author, working group (eg HRD - NEDM), and status (eg official APEC declaration, submission, endorsed APEC paper or view etc). This would allow a central register to be established and maintained, and possibly, in conjunction with agenda item 3, above, would facilitate dissemination of information via electronic channels such as World Wide Web.
4. Identification of key indicators for SMEs activity
With the exception of a few APEC members, the simple lack of SME statistics, and the lack of comparability of those statistics that do exist in the region often makes it difficult to make any informed policy assessments. The Eurostat approach of a more coordinated, standardised statistical collection framework is unlikely to be feasible in the Asian region for some time because of its cost. The identification of a set of key APEC indicators of SME activity would be a feasible, reasonably cost-effective way of improving statistical information in the short to medium term.
3.2 Action agenda: - domestic at-risk SMEs
Over 75% of SMEs in the region are essentially domestically oriented. About 40% or more may be at risk as a result of general trends toward open regionalism and APEC initiatives. Many of these firms are small and lack the necessary technology or management skills to successfully adapt and survive in the new, open economic environment. Realistically, the role that APEC can play in addressing these issues is relatively limited.
5. APEC SME information package/outlook to help explain the changes taking place
Most SME administrations in the region tend to be oriented to domestic clients. One of the major challenges facing officials in these SME administrations is finding out about the changes taking place in the region, understanding the significance of the changes for their client SMEs, explaining to their client groups why the changes are taking place, and what is being done to help them. A central APEC outlook and regularly updated information package on SMEs and the trends and policies of relevance to them would assist in the dissemination of accurate information about APEC, and would be more efficient than individual member economies producing their own packages in isolation.
6 Best practice examples to assist in adapting domestic policies
APEC cannot hope to play a major role in the design or implementation of policies designed to assist domestic SMEs. These are matters of domestic policy concern, and the economies of the region vary so widely that it is very hard to develop any prescriptive guidelines anyway. What APEC can assist with is in identifying examples of best policy practice, for example in terms of HRD, management training, technology transfer, finance provision, market access, regulatory reform etc. This could be done in collaboration with the OECD SME Working Party Program on Best Practice Policies. By identifying examples, and the underlying factors which lead to best practice in some cases, it is possible for other SME administrations to learn and to borrow selectively and appropriately from the experience of others. The main role of APEC is to act as a central point which can synthesise information from a wide variety of domestic and international sources.
3.3 Action agenda: - international SMEs
These agenda items apply to the 25% or so of manufacturing SMEs, and a smaller percentage of service SMEs, that are already international in their activities, or have the potential to internationalise.
7. Trial common standards for supply of government and private sector information
Access to information is critical for many internationalised SMEs. This information is of two main types: first information about government regulations, requirements and assistance; and second, information about markets, business opportunities, and business practices. Governments, have traditionally played a major role in providing information to SMEs; JETRO is the leading example in the region. Information is also increasingly being supplied by private sector providers. This suggests two main roles for APEC. First, information from governments about their regulations, requirements and procedures are often unnecessarily difficult and expensive to obtain. Some governments are providing fast track, one stop shop access for SMEs as well as large firms, and this should be encouraged. Further, APEC standards on what government information should be accessible, and in what ways, would greatly assist SMEs in the region. It would also reduce opportunities for corruption where it exists. Second, there is a case for the development of APEC standards on the provision of information by private sector providers. It is certain that the role of private sector providers will increase in future, and this makes it more difficult for SMEs to assess the reliability of any given provider. Standards, and a complaints system for providers who do not meet standards, could be developed in conjunction with APB Net, PBEC and other international industry bodies.
Table 5: Suggested APEC Action Agendas for SMEs
Group/Issues Possible Action Agendas Focus Cost
General
1. Research coordination Research network A L-M
2. Electronic communication Trial common protocols for A L-M
documents
3. APEC documents A L
Common reference,
4. Statistical registration system A, I M
comparability, monitoring of
trends Identification of key
indicators for SMEs activity
Domestic - at risk
5. Resistance to structural APEC Information D M
changes from liberalisation package/outlook to explain
changes taking place
6. Adaptation of domestic D M-H
policies to assist SMEs to Best practice HRD, to assist
adjust and become more in adapting domestic
internationally competitive policies
International
7. Access to information on Trial common standards for I M
regulations and government supply of government
requirements information
I, D L-M
8. Help SMEs with potential APEC Business Angels program
to adjust and take advantage
of international
opportunities I, E M-H
Simplified notification
9. Impediments procedure in conjunction
with industry associations I, E L-H
10. Dispute avoidance, Trial simplified dispute
resolution resolution in conjunction
with APEC Angels and APB Net E, T L-M
Encourage networking of
11. Venture capital, trade finance providers to allow
finance, credit guarantee joint pooling of risks and E, S L
sharing of credit
information
12. SME - large firm T, S, I M-H
relations Extend APEC OECD FDI code
specifically to SMEs
I, E, S, L-M
13. Access to export Database of export promotion T
promotion and assistance and assistance packages
14. Best practice Research and synthesis on
specific issues
See Table 6
Note: A = all; I = international; D = domestic; E = entrepreneurial; S = subcontractors; T = Trading
8. APEC Business Angels program
Many smaller domestic SMEs will need assistance in adjusting to increased competitive pressures, and the increased international opportunities opened up by APEC liberalisation will pose challenges for many growth-oriented SMEs seeking to further internationalise their activities. APEC via a Thai initiative has already explored the concept of Business Volunteers in a 1993 seminar. Business Angels are used in a number of economies (eg Canada) to provide advice, and sometimes finance, to emerging SMEs or to SMEs having difficulty adjusting. This usually works by older, more experienced (and often retired) managers from large and small firms being put in contact with SMEs that are seeking advice. The main role of APEC would be to design standards and procedures for Angels, act as a focal point for international Angels, and provide an imprimatur so that such a program could attract sponsorship from major financial institutions or other large companies with an interest in reducing the failure rates in SMEs.
9. Simplified notification procedure for impediments
Major issues facing international entrepreneurial SMEs and trading SMEs are the impediments to their international activity. In addition to tariff barriers and customs regulations a host of factors may limit market access intentionally or unintentionally. For example, approval procedures, the costs of establishing a legal entity, the difficulties in using flexible organisational arrangements (such as alliances or franchises), immigration restrictions on the use of skilled staff, protection of brand names or techniques or innovative processes or products, cultural impediments to distribution channels or resources, corrupt local officials and so on. Although it is not always possible for governments to do anything about such impediments, it is useful to know of their existence. At present there is no way of knowing how significant they are or what problems they cause, and what opportunities lost because of them. WTO notification procedures are more complex and restricted to trade impediments, rather than some of the more general issues that SMEs throw up. If there was some channel by which SMEs could report difficulties without necessarily being seen to raise a dispute with a host government, then it would be much easier for APEC to identify key issues as they emerge, and try to do something non-confrontationist to address the issues. This could be done via APB Net, supplemented by other industry associations (Chambers of Commerce, PBEC, bilateral business associations etc) who could channel submissions to a central APEC register, which could in turn be reviewed regularly by an APEC nominated international panel of experts and officials.
10. Trial simplified dispute avoidance and resolution
WTO has already established a dispute resolution process, however this tends to be oriented to larger firms as it is usually time-consuming and expensive to address a dispute. For many SMEs the issue is more how to avoid getting into disputes in the first place. The APEC Angels (item 8) and the impediment identification process (item 9) could be of substantial assistance in this regard, as also would be cooperation with APB Net initiatives, and PBEC. Once a dispute has arisen, either with government or with a trading partner, dispute resolution is of little use to most SMEs unless it can be handled expeditiously, relatively cheaply, and preferably without loss of face. APEC could act as a crystallising point to design and trial a trial dispute resolution process more specifically for SMEs, in parallel with WTO procedures.
11. Encourage networking of finance providers
There are many private sector or quasi government financial organisations which provide credit, and sometimes equity, to SMEs in the region. Most of these are still domestically oriented, but a proportion of their client base is rapidly becoming more internationalised. APEC, possibly in coordination with other international organisations such as MIGA (the World Bank Multilateral Investment Guarantee Agency), could act as a crystallising point for a forum of such financial providers. This would allow a progressive move towards encouraging joint pooling of risks and sharing of credit information.
12. Extend APEC OECD PECC voluntary investment code to SMEs
The present APEC Voluntary Investment code provides a solid foundation for a more specific annexure which addresses the issue of SME foreign direct investment. UNCTAD and OECD research in the region suggest that the level and importance of SME investment is increasing rapidly, Similarly, UNCTAD research points to SMEs being an effective means of transferring suitable technology to recipient economies. SMEs investing across borders face some special problems. For example, they are more likely than large firms to have difficulty getting information, incorporating as a legal entity, finding suitable partners and protecting their intellectual property.
13. Database of export promotion and assistance packages
There are many direct and indirect forms of assistance available to exporters in the region. While these increase the competitiveness of the recipient SMEs, they can finish up as a zero or negative sum game which simply distorts trade and overall competitiveness. Because of the increasing international mobility of SMEs these assistance measures are also likely to distort the flow of SME investment, as SMEs move their base to host economies which provide the greatest competitive advantage in exporting. A data base, in the nature of the Guide to Investment Regimes in APEC Member Economies, would increase the transparency of these measures.
14. Best practices for SME policy at international levels
APEC has had a best practices program on the lists for some time, but is only now beginning to initiate some practical activity. There are two main ways that APEC can make a significant contribution. One is to carry out, support, and encourage research on specific issues in a coordinated way within a general framework related to best practice, as opposed to the fairly ad hoc approach used to date in dealing with SME issues. The second is to synthesise the findings of that research, and of other APEC activities (such as existing research, seminars and policy discussion), into documents which can be given an APEC imprimatur, and used by officials and politicians to assist in improving SME policies in the region. In both cases APEC could cooperate with other international organisations with an interest in best practice issues, such as PECC, OECD and UNCTAD, as well as with ADB and World Bank. It is not intended that these papers be seen as guidelines, but rather that they initially take the form of information papers. If there is sufficient agreement, they may be endorsed by individual members in the same way as has the non binding investment code.
What areas should be given priority for best practice research and synthesis? It is ultimately up to APEC to determine priorities for the allocation of its resources, but there is a question of where it is most likely to have most impact per unit of expenditure, and where it should focus its work. In section 2.3 the key issues facing different types of SMEs were identified. These are summarised in table 6, along with a suggested priority for each, and the focus of each in terms of where the activity is most likely to have most impact (ie in entrepreneurial, subcontracting or trading SMEs). Clearly these priorities will differ for different economies; for example technology transfer or HRD may be more important for developing economies than for developed. The main criterion used in establishing the priorities in Table 6 is the potential to contribute directly to APEC's stated aims of open regionalism by 2020. The best practice priority areas in Table 6 should be seen in conjunction with the other thirteen initiatives suggested above.
Table 6: Suggested Best Practice Priority Areas
Policy Issue suggested Focus Entrepreneuria Subcontracting Trading priority Access to markets 1 *** ** *** Registration and legal 2 *** * incorporation Identification of 2 *** ** ** opportunities Networking and partners 2 *** * * Protection of intellectual 2 *** ** property Management and staff skill 2 *** *** Start up assistance 3 *** ** Exit and bankruptcy 4 *** * * arrangements Entrepreneurship support 3 *** Finance, credit guarantee 1 *** ** *** etc Telecommunications 3 *** *** ** EDI standardisation 2 * *** * Quality improvement, 3 ** *** ** accreditation Technology transfer 3 ** *** HRD and skilled local staff 2 ** *** Competition policy 2 * *** * Access to foreign 3 *** contractor firms SME Foreign direct 1 *** *** investment Data bases for matching 2 ** *** ** Intra firm trade and 4 * ** * taxation Industrial planning 4 * *** Simplified customs 1 * * *** procedures HRD - export management 2 ** ** *** Dispute resolution 2 *** ** *** Trade facilitators 1 *** *** *** Export promotion and 1 *** *** *** assistance
Note: 1 is highest suggested priority, 5 is lowest. *** = major focus, * = minor focus
The potential contribution of SMEs to the sustainable growth of the APEC region is large. Equally, the potential disruptive effect on SMEs of the adoption of open regionalism is also large. Not all SMEs are the same. For an APEC SME Action Agenda to have most effect, it needs to reflect the differences in SMEs, and the inherent capabilities and limits of APEC. Most SMEs in the region are domestically oriented, low growth firms, which do not contribute much to longer term growth, but which are important politically and which make a major contribution to the employment stock. About half of these are at risk as a result of open regionalism initiatives. By contrast, a small proportion of SMEs are internationally oriented high growth SMEs. These can make a significant contribution to sustainable growth in the region if they can take advantage of open regionalism. Although APEC is limited in what it can do, especially in areas of domestic policy for SMEs, it does have some special capabilities which an SME action agenda could pursue, by for example (the figures in parentheses refer to the agenda items summarised in table 5):
Coordinating and liaising better with other international agencies to share experience and reduce duplication, by the best practices program (6 and 14), the extended investment code (12), dispute avoidance and resolution procedures (10), and standards for electronic registration and communication of documents (2 and 3).
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