SMEs’ Participation in Global and Regional

Value Chains: Greater Mekong Subregion

Workshop on International Trade Finance, Logistics and Business Development UMFCCI, Yangon, Myanmar 27-29 November 2015

George Abonyi

Visiting Professor

Department of Public Administration and Executive Education Program

Maxwell School, Syracuse University

28 November 2015

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Overview of “the story”

Challenge

• Expanding GMS SME exports to regional and global markets

• Overcoming barriers to SME internationalization (supply side)

• Exporting in slow-growth global and regional economy (demand side)

Opportunity

• Regional and global export markets for long-term growth – but with a difference

• Growing Asian emerging markets: for now mostly at lower end of income scale

• Slow developed economies: continuing importance, but more difficult markets

Response

• Expanding GMS SME exports to regional and global markets on 3 tracks

• Exporting existing (final) products/services

• Innovating for Asian emerging markets and beyond

• Promoting SME suppliers in global (regional) value chains (GVC)

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CHALLENGE (1)

•Overcoming barriers to SME internationalization

(supply side perspective)

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Benefits of SME

Internationalization

Supports growth in revenues, size, and market share

Exposes firm to international best

practice

Facilitates adding value through

product, process, and business

model innovation

Employment generation

Strengthens productivity

Improves overall competitiveness

Why not: significant barriers to

SME Internationalizatione.g. SME export share of 5 ASEAN economies around 23%Source: Abonyi (ERIA, 2015)

� Internal barriers: relate to

firm-level capability and

resource constraints• Seen as most important, e.g. mind

set, information, finance, skills

� External barriers: relate to

business environment both

national and international• E.g. general domestic SME-related

business environment, logistics,

clustering, trade facilitation

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CHALLENGE (2)

•Internationalization in slow-growth and

uncertain global and regional economies

(demand side perspective)

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Market challenge – where will global demand

for GVCs come from: “New normal” and

“greater divergence” in the global economySource: IMF WEO, October 2015; October 2008

� Slow-growth global economy esp. developed economies; also slowing but

relatively faster growth in Asian emerging economies

• Especially ASEAN, China, India (ACI)

� And political uncertainty of economic management (e.g. EU, China)Note: IMF has continually overestimated growth since 2009

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Developed economies and China markets: slow, uncertain

. For regional (East Asian) value chains:

- Developed economies: primary final market

- China: intermediate market – key role in GVCs

� Developed economies (particularly US)

driving region’s growth as final markets• Intra-ASEAN trade is less than 25% of its total trade

� Developed markets’ slow uncertain growth

Source: Lim and Lim (2012)

• China has imported 50% of all intra-

regional intermediate exports (parts,

components); but for final export to

developed economies economies, e.g.

iPhones to US and EU (source: ADB, 2011)

• China: rebalancing and extended slow growth

• From high (national) savings and related

investment- and export-driven model;

to domestic consumption driven growth

• Challenge of “political economy”

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China’s investment-driven growth:increasing debt, declining efficiency,

most new debt is to service old debt� China’s increasing debt and composition –

mostly SOEs and local government• Nearly 50% related to real estate

China’s Debt to GDP ratio

Source: MGI (2015)

� Growing non-productive overinvestment:

i.e. declining efficiency of investment

(Marginal Product of Capital)Source: Ha Jiming, Goldman Sachs China (2015)

� S

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Key Chinese activity indicators� Nearly every industry is at 30% or more overcapacity

• Average accounts receivable for consumer

electronics retailers/manufacturers:123 days

• Average days of inventory for clothing companies:

174 days (Bloomberg 2015)

Source: Haver Analytics, in Financial Times, 19 Aug. 2015

� China’s import growth (by

volume) has declined

significantly

Source: OECD, 16 Sept. 2015

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China market challenge

� China’s rebalancing from investment to consumption-driven growth even if

smoothly successful, will mean extended slow growth; AND does not

automatically translate into increased imports of final manufactures

� China as market for final goods is shaped not by size or growth of GDP,

but capacity to generate net demand for import of final manufactures

• China has been major importer of (South) East Asia’s exports of parts and components; but for its

final exports to developed economies, e.g. iPhones to US and EU

� To become a growth locomotive for manufactures of the region (e.g. GMS)

China would need to raise not only its domestic consumption as a share of

GDP, but also its imports of final goods from the region

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OPPORTUNITY

•Continuing key role of developed markets, but more difficult and uncertain

•Asian emerging markets present great opportunities for long term growth•But in coming years mostly at lower end of the income scale, with “local constraints”

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The future of the region is brightSource: Australian Government White Paper (2012)

� Asia’s rising share of global GDP � Asia’s rising incomes (Bubble area reflects size of GDP; income per person in PPP)

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Future of ASEAN is brightSource: Euromonitor International (2015)

Economy

Market

Youth

$

• If ASEAN were a single economy it would be the 7th largest in the world; and could be the 3rd largest by 2030

• With 622 million people, ASEAN’s potential market size is larger than EU (502 million) and North America (354 million)

• With median age of 28.8 years in 2014, ASEAN’s population is younger than EU’s (42.1), China’s (40.8) and North America (38)

• Total consumer expenditure is expected to grow by 108% in real terms across ASEAN, 2015 - 2030

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ASEAN consumer expenditure is

increasing…but unevenlySource: Euromonitor International (2015)

� ASEAN’s Real GDP Growth and Total

Consumer Expenditure: 2000 – 2014• Averaged 5.4% p.a.; expanded by 117% in real

terms to reach $1.4 trillion in 2014

� By 2030 ASEAN to be the 3rd largest

economy, after US and China, worth $3.1

trillion in constant 2014 dollars

� Consumer Expenditure per

Household in ASEAN:

2014 and 2030

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Asian emerging markets and

consumers are different� But significantly lower disposable incomes in AEC in coming years as compared with developed

economies, region’s traditional final markets (source: Lawrence, ADBI (2013))

� Fragmented markets,

growing income inequality,

and high proportion of

rural population will condition

consumer spending

� Per Capita Real Annual Gross Income

in China and USA (1990–2030)

Reflects consumers’ purchasing power

In 2030: narrower, but US still 4.6 x China

Source: Euromonitor International (2014)

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Consumer is at the centre of

understanding market potential Source: Euromonitor International (2015)

� Household Income Distribution in

ASEAN: 2014

� Households by Annual

Disposable Income Band in

ASEAN: 2014 and 2030

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Implications

� (1) Continuing dependence on slowing developed markets: Given current

patterns of domestic demand in the region, developed economies (e.g., US, EU)

will continue to play a key role as final markets for manufactures over medium

term, within framework of global value chains and related production networks in

key industries, e.g. electronics, automotives, garments, agro-industry.

� (2) Expanding opportunities in Asian emerging markets over the longer

term – but with a difference: Expanding Asian emerging markets (e.g. AEC +

China + India) will present increasing growth/diversification opportunities

• For SME suppliers in GVC/networks increasingly focusing on regional markets

• For SMEs exporting products/services to final consumers in AEC (emerging Asia)

• But for markets with very different characteristics than developed economies

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RESPONSE

•Promoting more GMS SME internationalization on 3 tracks

•1. Exporting existing (final) products/services

•2. Innovating for Asian emerging markets and beyond*

•3. Suppliers in regional and global value chains (GVC)

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Integrating GMS SMEs into

global and regional value chains

� Around 80 percent of world trade is now through GVCs (UNCTAD 2014)

� Participation in GVCs as key means for SMEs to internationalize as suppliers

(subcontractors) of intermediate inputs (parts, components, services) for

MNEs from within or outside the region

� Benefits of participation in GVCs, e.g.

• Strengthening the technical and managerial capabilities of firms

• Increasing capacity utilization and production efficiency

• Strengthening the reputation and credibility of the firm

• Providing manageable way for SMEs to reach and compete in global markets

� Challenges of participation in GVCs:

• Requirement to deliver right product (product standards), in the right quantity

(production capacity), with the right quality (quality standards), at the right time

(efficient logistics), and produced in the right way (process standards)

• And to upgrade (add value) over time

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GVC examples� Apparel - Garment GVC

� Automotive GVC Source: Cattaneo et al (2013)

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Changing nature of GVCs in a

post-crisis (2008) world

� Consolidation

• Lead firms are reducing number of suppliers; more difficult for new (SME) suppliers to

enter GVCs, who now have to have the required capabilities

� Convergence

• Technology/product synergies: lead firms in different sectors increasingly sourcing

from same suppliers, e.g. Foxconn: Apple, Acer, Cisco

� Re-shoring (to some extent)

• Lead firms re-shore to home market due to cost and risk – extent not clear, but

contributing to decline in orders from Asian SME suppliers

� Trade in services becoming more important and more complex

• Well beyond business process outsourcing, to higher value, knowledge based

services such as R&D and design, increasingly linked to production

� Rise of e-commerce and ICT

• Internet-based business-related services can facilitate SME participation as suppliers

� Emerging economies increasingly important final markets

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SME participation in GVCs:

General stages of internationalizationSourece: Abonyi (ERIA, 2015), Adapted and modified from SPRING Singapore (2011)

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Preparation

• Involves pre-internationalization, getting ready to enter foreign markets directly or as suppliers in global value chains

• e.g. providing adequate working capital, risk sharing for bank borrowing, internationalization workshops, GVC supplier skill development

Preparation

• Involves pre-internationalization, getting ready to enter foreign markets directly or as suppliers in global value chains

• e.g. providing adequate working capital, risk sharing for bank borrowing, internationalization workshops, GVC supplier skill development

Active Engagement• Start and early

implementation of internationalization activities

• e.g. building linkages and alliances, assistance with regulatory requirements

Active Engagement• Start and early

implementation of internationalization activities

• e.g. building linkages and alliances, assistance with regulatory requirements

Growth and Expansion• Strengthening and

enlarging the product market position of the firm in foreign markets, or as supplier in a global value chain

• e.g. strengthening capacity for compliance with international standards, clustering and networks

Growth and Expansion• Strengthening and

enlarging the product market position of the firm in foreign markets, or as supplier in a global value chain

• e.g. strengthening capacity for compliance with international standards, clustering and networks

SME participation in GVCs:

2-level strategy

� Basic constraints, and key differences among value chains

• Differing logistics and skill needs of electronics, automotives, agro-industry:

• Need both “general” and “GVC-specific” policy focus

General policy focus

� Understanding of structure and dynamics of global value chains by policy

makers and SMEs (e.g. Thailand, India)

� Strengthen trade facilitation services -- customs, logistics (e.g. Cambodia)

� Support for general ICT capabilities

� Understanding and meeting general business standards (e.g. ISO)

� Special attention: supply chain financing

• Receivables finance or factoring: sell (large) buyer - approved invoice to bank

• Addresses key SME constraints of lack of collateral and poor financial position

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SME participation in GVCs:

2-level strategy

GVC-specific policy focus

� Understanding structure and dynamics of particular GVCs

� Understanding and meeting GVC-specific standards (product,

process, market, firm)

� Skill development (e.g. PSDC, Penang Malaysia)

� GVC-focused logistics services, particularly for SMEs (e.g. fresh

fruit and vegetables, e.g. Thailand)

� Market/buyer-related information for specific GVCs, (e.g. value

chain specific trade fairs, online platforms, and advisory centres)

� Strengthen GVC-specific clusters, with particular focus on

cluster/business institutions (e.g. Thailand: HDD vs. rubber

manufacture)

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GMS SMES,

BORDER AREA

DEVELOPMENT, AND

CROSS-BORDER

LINKAGESStrengthening mutually beneficial cross

border value chain (GVC) linkagesSource: Abonyi and Zola (ADB, 2015); Abe et al (UNESCAP, 2013/14)

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Strengthening cross-border linkages

in the Greater Mekong Subregion

� Economic rationale

• Relatively less-developed and more advanced economies can provide

complementary inputs for mutual benefit; can be particularly important in

developing border areas, e.g. Thailand and Myanmar

� Business rationale

• Global value chains and related production networks fragment production to

different geographic locations with complementary factor endowments

• E.g. electronics (HDD); garments

� Special role of border areas

� Border areas provide opportunities to leverage cross-border

linkages for local development and as “gateways” to the wider

national economy

� GMS: Thailand and neighbours – opportunities for mutual benefit

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Example: Thailand’s position in the Hard

Disk Drive (HDD) Global Value Chain (GVC)Source: Hiratsuka (2006)

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Example: Using Thailand-Cambodia cross-

border linkages in the HDD GVCSource: UNESCAP (2013/14): “Business for Development: Capacity building of enterprises (SMEs) in the

Greater Mekong Subregion for their effective penetration into regional and global markets”

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Opportunity: Mae Sot (Thailand) – Myawaddy

(Myanmar) garment value chain cross-border linkages

� Mae Sot

• Production base for labour-intensive industries, in particular, garments (e.g. 470

plants (mostly SMEs), 20,000 day/migrant workers

• Introduction of baht 300/day minimum wage

• Challenge: upgrade to higher value, higher tech/skills Thailand’s garment industry

• Priority SEZs for Thailand

� Myawaddy

• Myanmar: reforms for market-oriented, internationally integrated economy

• Challenge: diversification of manufacturing and link to global value chains; and

focus on state/region (local) development, including local employment generation

• Myawaddy: in Kayin State; industrial zone (IZ) being developed

• On “priority national economic corridor”

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Example: GMS Cross-border value

chain in garments and textiles Cross-border linkages to upgrade?Source: Abe et al (UNESCAP 2013/14)

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Mae Sot – Myawaddy

linked Special Economic Zones (SEZ)

[Cross-border Special Economic Zone (CSEZ)]

� Facilitating Mae Sot – Myawaddy garment production linkages through “in-bond

processing” system; supported by infrastructure, trade facilitation, and HRD

development initiatives. (based on Taguchi, 2013)

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Mae Sot – Myawaddy on the GMS East

West Economic Corridor (EWEC)Source: Asian Development Bank

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THANK YOU

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