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Study advises small units to go global

The United Nations Conference on Trade and Development has advocated the internationalisation of small- and medium-size enterprises and SME policies of both developed and developing countries to help such units face global competition in the post-liberalisation era.

"Although SME policy is traditionally formulated as a domestic issue, it is becoming impossible to have an effective SME policy that ignores international considerations," the world body says in a handbook released today on 'Foreign Direct Investment by SME: Lessons from Asia'.

Most of the developed countries today could develop their domestic SMEs and SME policies without having to pay much attention to international issues.

However, countries -- both developed and developing -- now need to adapt their SME policies to reflect the realities of trade and investment liberalisation and the more general trends towards globalisation.

"The internationalisation of SMEs and SME policy is unavoidable," says the Unctad book, released in New Delhi by K Dharmarajan, director general of Indian Institute of Foreign Trade.

Citing examples, it says that in Asia and Japan, in recent years, the Republic of Korea have used SMEs as a well-integrated part of their development strategies, but have not relied much on inward FDI, including that from SMEs.

Singapore and Taiwan, on the other hand, have successfully developed their SME sectors to be internationally competitive, and have used inward FDI as a means of doing so.

Dr Chakradhari Agrawal, secretary general of World Association for Small and Medium Enterprises, while making an intervention on the occasion of the release of the book, regretted that the Unctad study does not cover India, though its suggestions are relevent to the country.

According to the report, Indonesia and the Philippines have relied on large firms, and now have a missing middle that leaves their SME sectors relatively underdeveloped and less internationally competitive than might be desired.

Internationalisation of SMEs is necessary to realise their potential in a changing international environment, it says.

In order to make better use of SME FDI as an engine of development and growth, the report suggests:
-- adoption of policies that are generally conducive to the development of growth-orientated, internationally competitive SMEs. This requires policies aimed generally at improving and internalising the business environment and policies aimed at releasing the potential of SMEs; and,
-- formulation of policies that are more specifically designed to help encourage FDI, and to reduce the barriers faced by transnational SMEs, especially those that would invest, transfer technology, and provide training. This requires policies encouraging both inward FDI and the international movement of SMEs, including outward FDI.

It also calls for improvement in the general business environment, including a clear and transparent political commitment to SMEs.

The best-practice solution appears to be that adopted by Japan, Republic of Korea, Singapore, and Taiwan. All of these economies have a clear statement of political commitment to SMEs. This takes the form either of a basic law, which sets out the obligations of the government to SMEs and SME policy. Alternatively, these countries have a strategy document, which sets out the broad directions and aspirations of the government policy in relation to the SMEs.

Other suggestions include definable and transferable property rights, transparent legal and regulatory systems, appropriate tangible and intangible infrastructure, focus on areas where governments can provide additionality, provision of diagnostic services and single-window clearance.

If there is a lesson that is clear from the experience of the economies that are in the forefront of economic development in Asia, it is that a country's development and international competitiveness are closely linked to the capabilities of its SMEs, the Unctad report says.

SMEs' accounts for only a fraction of FDI. However, the potential is there to increase it quite significantly. For developing countries facing the need to expand and internationalise their SME sectors rapidly, SME FDI can be an attractive policy option.

The best-practice policies involve provision of accurate information and appropriate incentives and access to support services and infrastructure and encouraging linkages between SMEs across borders, it says.

UNI