Fulfilling the Export Potential of Small and Medium Firms PDF
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Fulfilling the Export Potential ofSmall and Medium Firms Fulfilling the Export Potential of Small and Medium Firms by BRIANLEVY World Bank ALBERT BERRY University of Toronto JEFFREY B. NUGENT University of Southern California with JOSE FRANCISCO ESCANDON MOTOSHIGE ITOH UNSUKIM SHUJlRO URATA SPRINGER SCIENCE+BUSINESS MEDIA, LLC Library of Congress Cataloging-in-Publication Data Levy, Brian. Fulfilling the export potential of small and medium firms / by Brian Levy, Albert Berry, Jeffrey B. Nugent ; with Jose Francisco Escandon ... [et al.]. p. cm. Includes bibliographical references and index. ISBN 978-1-4613-7354-4 ISBN 978-1-4615-5169-0 (eBook) DOI 10.1007/978-1-4615-5169-0 1. Exports-Developing countries. 2. Small business-Developing countries. 3. Foreign trade promotion-Developing countries. 4. Developing countries-Commercial policy. 1. Berry, R. Albert. II. Nugent, Jeffrey B. III. Title. HF1413.lA73 1999 382' .6'091724-dc21 98-51684 CIP Copyright c 1999 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1999 Softcover reprint ofthe hardcover lst edition 1999 AII rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC Printed on acid-free paper. TABLE OF CONTENTS List ofContributors vii Acknowledgments ix 1. Supporting the Export Activities ofSmall and Medium Enterprise (SME) BrianLevy, Albert Berry andJeffrey B. Nugent 2. Technical, Marketing and Financial Support for Indonesia's Small and Medium Industrial Exporters 31 AlbertBerry andBrianLevy 3. The Support System for Small and Medium Exporters inJapan 73 Motoshige Itoh and Shujiro Urata 4. Korean SMEs and Their Support Mechanisms 115 Linsu Kim andJeffrey B. Nugent S. Colombia's Small and Medium Exporters and Their Support System 169 Albert Berry andJose Francisco Escandon 6. Comparative Analysis ofSME Support Systems 221 BrianLevy, Albert Berry andJeffrey B. Nugent 7. Implications for Theory, Policy and Future Research 261 Jeffrey B. Nugent, Albert Berry andBrianLevy References 277 Index 289 CONTRIBUTORS ALBERT BERRY ProfessorofEconomics, University ofToronto, Toronto, Ontario, Canada JOSE FRANCISCO ESCANDON Consultant, Bogota, Colombia BRIAN B. LEVY World Bank, Washington, D.c', U.S.A. LINSU KIM School ofBusiness Administration, Korea University, Seoul, Korea JEFFREY B. NUGENT ProfessorofEconomics, UniversityofSouthernCalifornia, Los Angeles, California MOTOSHIGE ITOH Professor ofEconomics, University ofTokyo, Tokyo, Japan SHUJIRO URATA Professor of Economics, School of Social Sciences, Waseda University, Tokyo, Japan ACKNOWLEDGMENTS This study was initiated by the World Bank, which covered the costs of Brian Levy's time and hosted a conference in February 1994 ("Can Intervention Work? The Role of Government in SME Success") and other meetings at which the research methodology and results were discussed. Funding for the consultants and field work was made available by a trust fund sponsored by the Government of Japan. Mary Shirley offeredvaluable support in keeping the work moving forward. We wouldalso like to thankourcollaborators in the four countries studied in depth. In Colombia, David Manrique assisted with the interviews and members of the PlanningCommission (Departamento Nacional de Planeaci6n) collaborated in the processingofthe data. InIndonesiathe Institute for Social and Economic Research at the University of Indonesia, Jakarta, provided a base for our work and Imam Rasyidi and Pribadiundertook the interviewing task. InJapan, research assistance was provided by M. Honma, T. Izumida, T. Konno and J. Shibata. In Korea the interviewswereconductedby MoonGu Huh, Hoo-NamChoi and Sung-Wook Min, materialsonthe sectoral supportsystems were collected by Sang-Ho Song, Kyung Kyu Shin, Myong-Hyun Kim and Chon-in Choi, while Baohong Sun, Victor Gastanaga, Seung-Jae Yhee, Sung-Jin In and Mi-Kyung Pai Kim provided help in data analysisand translation. We benefitted from comments received at the World BankConference and atapresentation ofthe results to policy-makers in Colombia in September, 1995. 1 SUPPORTING THE EXPORT ACTIVITIES OF SMALL AND MEDIUM ENTERPRISE (SME) B. Levy, A. Berry and J.Nugent 1.1 Why is Policy for SMEExporters Important? There is no longerdoubtthat theperfonnanceofsmalland medium enterprises (SMEs) is very importantforboththe economic andthe social development ofmost developing (orlessdeveloped)countries (LDCs). That importance reflects SME's well-recognized advantages in employment generation, income growth, entrepreneurial training, technical and allocative efficiency, lower degree of wage inequality and greater flexibility in the face ofchanging demand patterns, trade policies and macroeconomic conditions. Yet, becauseofthe force ofglobalization, the needsfor debt repayment and the increasing appreciation for the efficiency effects ofinternational competition, the continued success and usefulness ofthe SME sector in LDCs' economic and social development, they will also have to succeedinpenetrating international markets. Large enterprises (LEs) have long enjoyed major advantages over SMEs in export markets, sofinding the secretsto SME successonthat front represents a considerable challenge. The magnitudeofthe challenge is renderedgreaterbyvirtueofthe dearth ofknowledge concerning (a) the problems faced by SMEexporters, (b) how some ofthem do manage to overcome these problems, and (c) the effectiveness ofvarious (governmental and non-governmental) collective support systems in helping SMEs in this objective. Thoughthere maybe aconsiderableoverlapbetween the problems ofSMEs in general and those ofexporting SMEs in particular, given the substantial knowledge that has beenaccumulatedonthe former, we feel it appropriate and important to focus on the latter, Le., theproblemsand meansto successofexportingSMEs. Even ifthere should be agreement that exporting will be essential to future SME success, the knowledge ofhow to make this happenandthe particular role for public policy in this respect are altogetherinsufficient. Asonmanyotherissues, there are great differences ofopinion, even among economists, as to the merits of intervention. In the meantime, activist governments and non-governmental institutions have been practicing SME export supporting interventionsofmany differenttypes but with extremely little in the way of seriousevaluationoftheireffectiveness. Inmanycountrieswhere potentially interesting supportprograms for SMEexportershave beenintroduced, their effects may well have beenswampedbythe continuinglegacyofregulationsandpractices which discriminate against the SMEsectorinmany ways, as inthe taxsystem, access to foreign exchange, 2 access to credit, inappropriate monetary and fiscal policies, and the general weightof red-tape. Moving from this unfortunate legacy to a well designed and implemented support system for SMEs is a largejump. Yet, it is also one which needs to be made withoutdelay. We hope that thisstudy will provide useful evidence on both the needs of SME exporters in the areas of marketing, technology and finance and on the usefulness ofdifferent means ofsatisfying these needs. Why are SME exporters becoming increasingly pivotal in many developing countries?Weseeat leastfour reasons. First, thevirtuaIly universal trend towardfreer trade is raising the ratios of exports and imports to GDP in the great majority of countries, thereby raising the importanceofthe performance ofexporting and import competing firms and activities ingeneral. Indeed, the remarkable way in which, over I the last several decades, one Asian country after another has emerged from relative backwardness and isolationfrom international markets to make its presence felt in the international trade of manufactures accounts in no small way for the rising relative importance of manufactures in LDC exports2 and of LDCs in world exports of manufactures. This experience would seem to suggest that, under the right circumstancesatleast, almostanycountrycansucceedinmanufacturesexportsofsome type by building on its comparative advantage. Second, the trends toward flexible specialization and just-in-time delivery, and to smaller and smaller computers have greatlylowered the disadvantagesofsmallscaleinproductivityortechnicalefficiency. Third, the opportunities for SMEs in export markets, traditionally hampered by informational externalitiesand economiesofscale incommercialization, are improved bythe "informationrevolution" andmoregenerallybythedecliningcostofinformation about international markets and international communications.3 The case studies to follow leave no doubt that SMEs are already playing a significant and sometimes rapidly growing role in the exports ofall four countries surveyed (Indonesia, Japan, Korea and Colombia). Their historically important role in the manufacturing exports of Japan, especially indirectly as subcontractors for large exporters, and the virtual doubling of the SME share in Korea's manufactured exports in less than ten years (from21%in 1982-83to41.3%in 1989-91)showthattheobstaclestoSMEexporting can be overcome. Finally, the employment generating potential of SMEs and their relatedpotentialcontributiontodistributionalequityareincreasinglyattractivebecause of the trend toward increasing inequality witnessed in a majority of countries, both developedand developing, overthe lastdecadeortwo. Thisisespeciallyimportantfor two reasons: (1) growing income gaps constitute an increasing threat to social and political stability, and (2) they are often attributed to increasing integration across countries (Berry and Stewart, 1997). For these reasons, the bulk of this study is devotedtoadetailedattempttoidentifytheconditionsunderwhichSMEexportershave succeeded, and the role of collective technological, marketing and financial support systems in distinguishing success from failure for various types offirms. Many developing countries seeking to encourage exports have embarked on programs ofpolicy reform, commonly termed "structural adjustment". In the face of the seemingly limited and'slow response to these reforms, analysts in many countries are beginning to question whether this standard prescription -- though necessary -- is sufficient to seteconomies on a path ofsustained and healthy economic development. Policies of structural adjustment are designed to provide an environment of strong incentivesfordevelopment,includingmacroeconomicstability,anappropriateexchange rate, and pricing on the basis of market signals and opportunity costs. But such 3 adjustment policies ignore the issue of which economic agents will respond to new opportunitiesforefficientinvestment.Consequently,growingattentionisbeingdirected tothedeterminantsofprivatesectorsupplyresponse. Withinthatsector, SMEswarrant heightened attention as potential agents ofeconomic activity, especially in countries where the role of competitive large enterprise is either not yet very extensive or is deemed to beexcessiveandharmful to financial stabilityandcompetition.4 Putanother way, simple prescriptions like "get the prices right", "deregulate", or "improve the incentives ofsuppliers" are aimed in the right direction and are unlikely per se to be bad advice, but they provide little help to policy makers trying to decide what to do abouta specific institutioninaspecific situationorhowbestto answerquestions like: (1) "Whatexactly needs to be fixed and by howmuch?" (2) "How can the benefitsof theexistingsystemberetainedbutatlowercost?" (3) "Howcantheneedsofaspecific target group (like SME exporters) best be satisfied?" Makingmarkets workbetterisanimportant partofthe task ofimproving the context for SMEs, but it involves more than deregulating or removing policy-based price distortions. Often the challenge is less a matter of eradicating market imperfections than(in the absence of, orat bestexistenceofextremely thin, markets) thanofcreating, extendingand improvingmarkets. Marketsdo notnecessarily appear automatically, and theirevolutionand performancecandepend greatly onthe number and character of the economic agents involved, the controls and monitoring by regulatory agencies and social institutions. Central to market efficiency are low transactioncostswhichcanbetheresultofeitherappropriateformal rulesand/orsocial norms and trust which provide market participants with the assurance that other participantswillnotcheatinmarketrelations. Therelevanceofthesenormsinreducing transaction costs has been widely appreciated (e.g., Landa, 1994) and is again shown in our analysis ofIndonesia in the following chapter. Simultaneouslywiththeimplementationofstructuraladjustmentprograms, the last decade or so has seen an increasing number of countries begin to evolve better thought-out support policies for their SME sector, in recognition of the potentially important role of SMEs in both growth--including export-led growth -- and in employmentcreationanddistributionalequity. Sincebothlogicandaconsiderablebody ofempiricalevidencesuggestthatSMEswillliveuptotheirpotentialbetterwhenthere is active government support ofvarious types for them (World Bank 1997b; UNIDO 1997), the policy trend in favour ofleaving more to the market has sometimes come into conflict with a pro-active approach to SMEs. For example, there has been much criticism of institutions which target subsidized credit to SMEs and in a number of casesthispracticehasbeenterminated. Howfarshouldthisretreatfrom sector-specific supportinstitutionsgo?Whatcriteriashouldguideit? Mostreal-worldinstitutionshave bothstrengthsandweaknessesandgeneratebothbenefitsandcosts. Successfulreforms, therefore, are those which retainas muchofthe benefitsaspossible and increase them where possible, butalso lower the costs. As the old mothers' lamentput it, one thing not to do is "to throw the baby out with the bath water". To accomplish welfare increasing reforms while reducing the size and extent of government intervention, without risking disaster in the process, requires detailed understanding of each institution and correspondingly detailed recommendations as to how it may be improved. Insomeofthecountryexperiencesexaminedinthisstudy,institutionswhose statedresponsibility istoassistSMEsinsomeway butwhichshouldbedispensedwith are identified. Inothercases interventions which would seemworthy ofexpansionare 4 identified. Broadgeneralizationsmustbedrawnverycarefully. Yet, inourconcluding chapters we shall attemptjust that. The potential for the creation and expansion of SME has sometimes been reduced to a matter of entrepreneurship. In particular, does there exist a sufficient numberofindividualswiththeinitiativeanddiscipline tostartandtooperatetheirown enterprise?However, thisSchumpeterianconceptionofentrepreneurshipisincreasingly believed to provide too narrow a framework for an analysis ofthe roots ofeffective business activities inLDCs. Rather, a more subtle and satisfactory approach5 takes as its starting point the bundle ofentrepreneurial functions that must be performed in a successfulenterprise. BesidestheSchumpeteriantalentsofinitiativeanddiscipline, this bundle offunctions includes the ability to gainaccess to finance and other inputs, the ability to market the goodsand services produced by the enterprise, and the ability to continuallyimproveitstechnicalcapabilities. Thepresentresearcheffortfocusesonthe relation between these last, non-Schumpeterian functions and the performance of SMEs.6Itaccepts thathowwell variousmarkets functionmay beas importantormore so than the supply ofentrepreneurial talent (however the latter may be defined), and also the corollary that, where markets leave gaps, public sector involvement may be important. 1.2 The Research Question Thestudies reportedinthis volumedocumentandevaluategovermnentinvolvementin the developmentoffinancial, technological and marketing supportsystems for SMEs. TwobroadpresumptionsunderlietheimportanceweattachtoresearchonSMEsupport systems and on related govermnent policy. The first is that the micro-environment of private, govermnental and NGO (non-govermnental organization) market and institutional supportsexternaltothe firm isanimportantdeterminantofSMEsuccess.? Large firms canuse non-marketmechanisms to internalize withinthe firm manyofthe administrative, technical and marketing skills that they need to conduct business. By contrast, however, SMEs lack the resources and in-house functional diversificationof their larger counterparts, and as a result have to depend more on external sources to acquiretechnologicalandmarketingcapability. Suchaccessinvolvestransactionscosts. It follows that the lessdevelopedare the technical and marketing supportsystems, the higherwillbethetransactionscoststoSMEs, withacorrespondingimpairmentintheir competitiveposition. Soonekeygoaloftheresearchistounderstandthecharacteristics ofwell-functioning support systems and their relation to transactioncost reduction.8 The second presumption is that the social returns to well-functioning SME support systems -- and, more broadly, to SME success -- exceed the private returns to individual firms. This view is supported by several distinct lines ofreasoning. First, and most familiar, is the above-mentioned argument that there are informational and othermarket failures associated with the provisionoftechnical and marketing support to SMEs.9 These failures create the expectation that the SME sector will not only be weak in these areas but will, overall, be smaller than it would be in the absence of those failures. Second, a similar but more general argument holds that imperfections in the key factor markets (labour, capital and materials) constrain the SME sector to be smaller than would be socially optimal. Whereas large firms benefit from under pricedcapital (thoughpaying aboveequilibriumpricesfor somecategoriesoflabour),
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