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 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

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 reduction Quality Control Prompt 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

Export- oriented Industry Export Domestic market High technology Low technology Supporting Industry Cottage Industry Domestic Market- Oriented Industry

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 Vietnam 1.Japanese MNE launched a new cheap model to compete with products made of components imported from China. 2.Japanese and Taiwanese first-tier suppliers to replace imported components with locally sourced ones. 3.The second-tier local supplier were originally manufacturers of replacement parts.