Transcript Book Review of “Manufacturing Enterprise in Asia”

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 and Supporting industries
• 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.
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
Size-wise Return on Equity
Capital share
(JPY million)
2 to 5
5 to 10
10 to 50
50 to 100
100 to 1000
Avobe 1000
(%)
1953 to 1960 to 1965 to 1970 to 1975 to 1980 to
1959
1964
1969
1974
1979
1984
22.4
32.4
30.7
34.6
22.2
16.1
20.9
34.1
31.4
35.4
23.0
17.8
21.2
28.7
31.2
35.5
24.4
20.9
18.7
25.3
26.7
30.4
23.1
24.4
13.1
20.5
23.3
25.6
22.0
22.3
16.2
19.8
21.3
17.8
19.5
Source: Toshiro Miwa (ed), Japanese SMEs, 1989
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
Size (Number of
employees)
4 to 29
30 to 99
100 to 299
300 and avobe
All
Number of
establishment
-3.7
-1.2
-0.2
0.5
-3.2
(%)
Number of Value added
employees
-3.1
-1.2
-0.1
0.7
-2.1
-4.1
-2.5
-2.0
-1.3
-2.1
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
Cost reduction
Quality Control
Prompt delivery
Subcontractors
Relation specific skill
8
Export-oriented Industry
• Apparel and footwear are
leading industries
• Exporting to USA and
European markets
Foreign buyers
• Technical assistance
• Guidance of
management
Condition
•
•
•
•
Quality
Attractive Design
Low wage
Generalized system of
Preference
Local firms
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
Domestic demand expand, as life standard
rises
Character
• 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
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.
Chance
• Cottage industries can increase exports.
example: Handicrafts
‘One village, One Product’
Marketing is important
Characters of Four SME Groups
Possibility of
Technology backward
linkage
Main player
Main
Customer
Foreign SMEs
Local SMEs
MNEs
High
High
Export-oriented
industry
Domestic marketOriented industry
Foreign SMEs
Local SMEs
Foreign
buyers
High
Low
Local SMEs
Domestic
market
Low
Low
Cottage industry.
Local SMEs
Local
market
Low
Nil
Supporting industry
Export
Exportoriented
Industry
Cottage
Industry
Low
technology
High
technology
Domestic
MarketOriented
Industry
Supporting
Industry
Domestic
market
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.