Introduction

During the course of development, small and medium-sized enterprises (SMEs) are seen as the cornerstone of a national economy and significant contributors to the prosperity of a country. SMEs play an important role in a wide spectrum of industries in a country. The number of SMEs dominates that of large and very large enterprises. They contribute significantly to a country's economic growth and employment creation of most countries. Most governments view the SME sector as a key engine of the economy and a source of employment creation (Harvie 2010).

The role of SMEs, however, was not recognized until the mid-1970s. Before that concentration and centralization of economic activities were seen as the main evidence of a firm's competitiveness and large firms received much attention. SMEs’ contributions to economic activity only began to be a priority after the Bolton Report in the UK (1971) and the Wiltshire Report in Australia (1971) on the role of SMEs in the economies of the UK and Australia, respectively were published (Al-Qirim 2004).

In Europe, two-thirds of all new jobs are created by SMEs and more than 99 per cent of all enterprises are SMEs. In the United States, more than 99 per cent of all independent enterprises employ fewer than 500 employees, which is the definition of an SME in the United States. These SMEs employ 52 per cent of all U.S. workers (Devos et al. 2014).

In Australia, SMEs is a substantial sector, making up 95 per cent of all enterprises (Chau and Turner 2004). These enterprises contribute A$530 billion to the economy in 2010–11, more than half of private sector economic activities, and employed over 7 million people, generating more than two thirds of private sector employment (Deloitte 2013).

In East Asia, SMEs account for about 98 per cent of all enterprises, equivalent to between 20 and 30 million businesses. In the three largest economies of East Asia — Japan, China and Korea — SMEs account for 70 per cent of enterprises in the region (China: 8 million; Japan: 5 million; and Korea: 2.6 million). The intensity ratio of SMEs is only 20 people per SME in developed countries.

Introduction

Recently, multinational enterprises (MNEs) actively use regional trade agreements (RTAs) all over the world. In particular, there is a growing number of MNEs of which the overseas affiliates trade with third countries (i.e., neither home country nor host country) under RTA preferential schemes. For example, the White Paper on International Economy and Trade 2014 by the Japanese government introduces several case studies on Japanese affiliates in Southeast Asia using preferential schemes when trading with China, India, or Korea. Their use in trading with China or Korea is especially important since Japan has not yet concluded any RTA schemes with China and Korea. Namely, through trading via their overseas affiliates, MNEs enjoy preferential trade with countries with which their home country does not have preferential access.

In the academic literature, such export to third countries by MNEs is called the export platform foreign direct investment (FDI). This branch of research is motivated by the growing importance of platform-FDI activities. For instance, export sales accounted for over 40 per cent of total sales by foreign affiliates of Japanese MNEs in 2009, and export sales to third markets represented over 30 per cent of the export sales. Despite its empirical importance, there have been only a few studies on export platform FDI. Ekholm et al. (2007) is one of the pioneering studies and considers various types of export platform FDI according to the destination market of the overseas plant. The above-mentioned feature indicates that overseas affiliates by such export platform FDI enjoy preferential trade in their export.

In this study, we empirically identify significant firm characteristics in the use of preferences in export platform FDI. Specifically, we investigate the correlation of preference use with the share of “originating inputs”, intensity of exports to the third country, and experience of preference use in exporting to other third countries. For example, if the export intensity is highly and positively correlated with preference use, the absolute magnitude of preferential exports will play a significant role in that use. We can also decompose “originating inputs” into labour inputs, originating material inputs, and other originating inputs. As a result, in order to directly find the bottleneck in preference use in export platform FDI, we just examine the correlation of preference use with firm performance indicators rather than its determinants, such as more fundamental firm characteristics including firm productivity.

Introduction

The economic rise of China has generated substantial impact on the globe. Its economic influence following market reforms has had wide ranging ramifications as Chinese firms have become integrated into global production networks as suppliers initially, and since the beginning of 2000, Chinese multi-national corporations (MNCs) have gradually expanded to initiate regional and global production networks (Zhang and Rasiah 2015; Rasiah, Zhang and Kong 2013). While China's miraculous growth has been largely stimulated by economic reforms since 1978 and its insertion into the World Trade Organization (WTO) in 2001, economic slowdown from the global financial crisis (that was triggered by the implosion of the United States economy) drove the government not only to invest domestically on infrastructure but also to encourage national firms to invest abroad. Following the launch of the “Going-out” policy, Chinese MNCs started to strategize by seeking market opportunities abroad. While the acquisition of the computer division of International Business Machines (IBM) preceded the global financial crisis of 2007–8, acquisitions accelerated after the crisis. The previously Swedish-owned Volvo was among the acquisitions that took place since the crisis. Also, China's outward investment has shown an evolving pathway shifting from capital and resource-intensive industries (including resource-seeking and infrastructure), to market-seeking and technologyintensive industries (especially in transport and telecommunication equipment manufacturing).

Despite forays into Africa and Central Asia, China's FDI has expanded most in the Association of Southeast Asian Nations (ASEAN). Home to around 600 million people in 2015, ASEAN has attracted global attention as an important frontier for growth. ASEAN's US$2,460 billion economy, coupled with its fairly good infrastructure, stability and business-friendly environment, has attracted global MNCs to locate in the region. The implementation of ASEAN–China Free Trade Agreement (ACFTA) and the ASEAN Economic Community (AEC) by 2015 has further added to prospects of cross-border flows of investment between China and ASEAN.

While China–ASEAN economic relations is becoming increasingly integrated, a major focus of researchers and policymakers has been on understanding the motives for Chinese investment in Malaysia, and how such investment is impacting on host-site economies. While the extant literature has extensively discussed the bilateral trade and investment activities (including the importance of MNCs as a mechanism to organize cross-border economic exchanges and activities), little analytical work exists on the specific motives of Chinese investment and its impact abroad.

The economic importance of small and medium-sized enterprises (SMEs) is widely recognized and acknowledged by researchers and policymakers in Southeast Asia. This is not surprising as SMEs typically account for about 97–99 per cent of total enterprises and 60–80 per cent of total employment in Southeast Asian countries (Lee and Zhang 2016). Such statistics notwithstanding, SMEs are often viewed as being disadvantaged compared to large firms because they lack economies of scale and face resource constraints (Harvie 2015). In the theoretical and empirical trade literature on heterogeneous firms, these disadvantages translate into low productivity which affects SMEs’ exporting behaviour. For countries in Southeast Asia, this is a serious problem given the fact that many, if not all, countries in the region are committed to achieving greater intra- and inter-regional economic integration. This is to be achieved via the formation of the ASEAN Economic Community (AEC) as well as participation in bilateral and regional free trade agreements (FTAs). The question that follows then is this — can manufacturing SMEs participate effectively in economic integration given the disadvantages they experienced? It was with this question in mind that the Economic Research Institute for ASEAN and East Asia (ERIA) and ISEAS – Yusof Ishak Institute (ISEAS) collaborated to undertake a research project to better understand the current state of manufacturing SMEs’ participation in economic integration. This book is a collection of the research papers from the project.

The chapters in this book are organized into two sections. The first part covers country papers. The countries included are Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam. These are based on primary data collected in the research project. The second part covers linkages between multinational enterprises (MNEs) and SMEs in Southeast Asia. Chapters in this category rely on secondary data and fieldwork interviews with MNEs operating in the region.

For the country studies, several methodological challenges were encountered right from the inception of the project. These affected the sampling approach to be adopted for the surveys. First, due to financial constraints, the project could only cover 200–300 firms per country. Due to this relatively small sample size, it made sense to focus mainly on a few key industries. The main criteria for the choice of these industries was the importance of these industries to the country (see Table 1.1).

Introduction

Thailand's small and medium-sized enterprises (SMEs) have played a pivotal role in the country's economic and social development (OSMEP 2014). They constituted 99 per cent of all enterprises in the country and contributed 73 per cent of total employment during the period 2007 to 2012. During this period, they contributed 33 per cent of total exports on average and approximately 38.8 per cent of total GDP at current prices on average (OSMEP 2013). Of the total SMEs over the period 2007 to 2012, almost one-third were in the manufacturing sector. Manufacturing SMEs employed around 27.1 per cent of the private sector workforce on average over the period 2007 to 2012 and their contribution to total SME GDP was 28.7 per cent over the same period.

The contribution of SMEs, especially manufacturing SMEs, is indicated in Table 8.1. While the contribution of SMEs to total business numbers remained stable, accounting for approximately 99.5 per cent of total enterprises over the period 2007–12, the contribution of manufacturing SMEs to total SMEs and the contribution of manufacturing SMEs to total enterprises declined from around 28.2 per cent and 28.2 per cent in 2007 respectively to around 17.7 per cent and 17.4 per cent in 2012, respectively.The contribution of SMEs to employment has gained a high level of importance due to their employment of more than 78.8 per cent of total workers over the period 2007–12. In terms of the contribution of manufacturing SMEs to the economy, around one-third of total workers employed by SMEs are in manufacturing SMEs which was equivalent to 26 per cent of total employment in 2012 (OSMEP 2007–13).

From Table 8.1 it can also be observed that SMEs accounted for around 37.5 per cent of GDP, at current prices, over the period 2007–12. These figures imply that large enterprises accounted for only 0.5 per cent of business establishments in the country over the period 2007–12, but contributed around 62.5 per cent of GDP over the same period. Punyasavatsut (2008, p. 294) pointed out that the contribution of SMEs to GDP remained restricted due to numerous common limitations on their operations, such as a lack of management capabilities, limited access to market information and promotional support from government agencies, a shortage of financial support or working capital, inadequate access to skilled labour, and uncertainties in government support programmes.

Introduction

The importance of small and medium-sized enterprises (SMEs) in economic development is now widely acknowledged (Acs and Audretsch 1988). However, despite the significant role they play, SMEs have historically been vulnerable to competition owing to their size disadvantage, especially in industries characterized by economies of scale. Although the evolution of science parks and university-industry research linkages have enabled SMEs to participate in intensive research and development activities, minimum scale efficiencies are still important in scale-based industries, such as automobile assembly, wafer fabrication, and integrated circuits and printed circuit board assemblies (Rasiah 2003). SMEs are also prone to market failures because of information asymmetries, especially when faced with weak institutions. There are also other impediments, such as limited access to finance, legal constraints, lack of skills and technological capabilities that limit the capacity of SMEs to compete with large firms. Despite these shortcomings, governments continue to promote SME development as they are not only competitive in scope-oriented activities, but also act as a conduit to stimulate entrepreneurship. The focus on SMEs has taken on a new dimension in Malaysia following the streamlining of trade and investment policies in the ASEAN Economic Community (AEC) that came into effect in 2015.

Hence, this chapter seeks to examine government policies to promote SMEs in Malaysia in general, and the influence of regional trading agreements (RTAs) on the export performance of national electronic components firms in particular. The in-depth analysis is confined to the electronics industry to obtain an informed industryspecific assessment of SMEs. National firms were preferred for this exercise because their participation in export markets is far less than foreign multinational companies (MNCs) that primarily engaged in export-oriented assemblies. Also, there is already considerable work on foreign electronics firms in Malaysia (Rasiah 1988, 1994, 1995, 1998, 2010; Narayanan and Lai 2000). Therefore, this chapter focuses for the first time on a large set of data on national firms. The rest of the chapter is organized as follows. Section 2 discusses the significance of SMEs in Malaysia's economy. Section 3 discusses government policies targeted at promoting SME development. Section 4 presents the methodology and data used in the chapter. Section 5 analyses the results. Section 6 finishes with the conclusions.

Introduction

Background and Objective

Small and medium-sized enterprises (SMEs) are important in the economic development of ASEAN countries. In Pillar 3 (establishing an equitable economic development) of the ASEAN Economic Community (AEC) Blueprint, SME development is one of the important components. ASEAN established the 2004–2014 SME Blueprint, which set the policies to develop competitive ASEAN SMEs. The blueprint was followed by the 2010–2015 ASEAN Strategic Action Plan SME Development, which outlined specific activities to implement ASEAN SME policies.

SMEs should take advantage of the establishment of the AEC. Easy access to ASEAN markets generates wider selling potential and more options to outsource production inputs. The latter encourages bigger firms to get input materials from SMEs. In more advanced settings inter-connected production stages that are shared among firms will create mutual benefits among related parties. This will accelerate economic growth.

This chapter aims to examine the extent and nature of SME participation in ASEAN economic integration. More specifically, it attempts to provide a description of the current state of SMEs in Indonesia and survey SMEs on their perceptions on the ways in which they can benefit from this integration.

This chapter is based on a survey of 200 SMEs in Indonesia. The survey gathered information on the perceptions of SMEs on the impacts of ASEAN regionalism on their business activities. The field survey covered firms in the manufacturing sector with more than 10 employees/workers in 9 out of 22 main industries in which SMEs have significant presence. These industries include: (1) manufacturing of food products; (2) manufacturing of beverages; (3) manufacturing of wearing apparel; (4) manufacturing of leather and related products (focus on footwear); (5) manufacturing of wood and products of wood and cork; (6) manufacturing of furniture; (7) manufacturing of electrical products; (8) manufacturing of computers, electronics, and optical; and (9) manufacturing of motor vehicles, trailers, and semi-trailers. Some of the interviewed firms have trading activities with firms from other ASEAN countries while some do not. The survey provides some insights on the trading activities of Indonesian SMEs in ASEAN. It also provides information on factors that enhance their trading activities in ASEAN as well as their engagement in the emerging production networks around the region.

Introduction

During the last decade, Asian countries, especially East and Southeast Asia countries, have witnessed an ever increasing trend of regional integration with the dramatic proliferation of regional free trade agreements (FTAs), both concluded and still in the process of negotiation. This process of regional economic integration has been driven by the mutually reinforcing market forces and trade agreements (regional and preferential). According to data from the Asian Development Bank (ADB), the number of FTAs involving at least one Asian country has almost doubled, from 124 in 2005 to 220 in 2016. In addition, there are 67 FTAs being proposed and pending negotiation. This phenomenon is referred to as the “Asian noodle bowl” with the economies of ASEAN and East Asia becoming increasingly integrated. According to data from ADB, the 16 ASEAN+6 countries (10 ASEAN members plus Australia, PRC, India, Japan, the Republic of Korea and New Zealand) account disproportionately for over 62 per cent of total FTAs (being in effect and in negotiation) of the total 48 ADB member countries/economies in Asia.

The most important market force that drives international trade in recent years is the rise of global production networks operated by multinationals in which firms slice up a production chain into small production stages and then assigning them each to the most cost effective location across borders (ADB 2010; Helpman 2011). Globally operating firms have been taking advantage of these factors to exploit differences in factor prices (i.e. inputs and low-skilled labour) around the world (Blinder 2006; Baldwin-Edwards 2011) and multinationals are at the forefront of global production networks taking advantage of reductions of trade barriers, rapid advancements in production technology, and a decrease in transport and communication costs as explained by Athukorala (2013). He explains that firstly “rapid advancements in production technology have enabled the industry to slice up the value chain into finer, ‘portable’, components” (i.e. modular production technology with “standard fragments”); secondly “technological innovations in communication and transportation have shrunk the distance that once separated the world's nations, and improved speed, efficiency and economy of coordinating geographically dispersed production process”, and thirdly the “liberalization policy reforms across the world over the past four decades have considerably removed barriers to trade and foreign direct investment (FDI)”.

Myanmar's Historical and Macroeconomic Context

For decades, Myanmar's economic system has been characterized by central planning and economic isolation, the latter partly self-imposed and partly due to international sanctions that were put in place in response to military rule. Today, however, Myanmar is leaving this past behind and things are changing rapidly. The shift towards a market-oriented economic system actually started in 1988. Back then, a number of reforms were initialized, aiming at liberalizing the economic system, encouraging private sector development, and promoting external trade as well as foreign direct investment. These developments have gained momentum with changes in the political sphere where a transition towards democracy was initiated in the late 2000s with a constitutional referendum in 2008 and multi-party elections in 2010. The international community welcomed these reforms and gradually re-integrated Myanmar.

As a result, today there is widespread agreement that the country has great potential for rapid development in the future, in particular thanks to its vast natural resources, its abundance of (especially young) labour, and its geostrategic location (being a member state of the Association of Southeast Asian Nations (ASEAN) and bordering the two most important and dynamic emerging economies, i.e. China and India). In fact, since Myanmar's leadership adopted a market-oriented system in 1988, the number of private manufacturing firms has increased threefold. At the same time, numerous challenges remain. Neither the economic nor the political transition can be expected to be easy and without hiccups. Myanmar is still one of the poorest country in the region. Its economy is dominated by agriculture, characterized by low levels of productivity, and hamstrung by underdeveloped infrastructural and financial systems. Moreover, despite the lifting of sanctions there is still a long way to go for the country in terms of integrating into regional and international economic systems.

Tables 6.1–6.3 report a number of different macroeconomic statistics that reflect both the positive developments that Myanmar has achieved but also the challenges that were encountered. Table 6.1, for example, shows that Myanmar has seen impressive economic growth. While more recent GDP growth rates did not quite match the two-digit growth rates recorded at the beginning of the millennium, they still remained at high levels and, in fact, accelerated again since 2010 (from about 5 per cent to around 8 per cent per year).

Introduction

As neighbouring countries, economic relationships between ASEAN and Taiwan have been intensified primarily through de facto economic integration of trade and investment, instead of de jure integration, such as free trade agreements (FTAs). Not until in 2013 when Taiwan signed its FTA with Singapore (known as ASTEP) — its very first trade agreement ever with an ASEAN member. However, long before that, trade and direct investment between the two sides have intertwined to enhance mutual economic relationships. Particularly, it was direct investment in ASEAN made by numerous Taiwanese SMEs starting from the mid-1980s that triggered and pushed forward this economic integration (CIER 1995). In Taiwan, many tend to refer to this integration as the “investment-induced trade”. However, it can involve a process of “deep integration” (WTO 2011; Baldwin 2013a, p. 26) in a crossborder manner.

In addition, global value chains (GVCs) (Gereffi and Frederick 2010; Gereffi, Humphrey and Sturgeon 2005; Gereffi and Memedovic 2003) and otherwise known as global production networks (GPNs) (Chen 2002; Coe et al. 2004; Ernst 2005, 2006; Sturgeon and Lee 2005; UNCTAD 2005) are keys to such integration. It is well-documented that in East Asia, SMEs have made significant contribution to de facto regional economic integration via their participation in GVCs and/ or GPNs (ESCAP 2009; Lim and Kimura 2009; Harvie 2010; Chen 2002; OECD 2007), which in turn has become an important source of national economic growth. A typical example at issue refers to the GPNs, led by a few brand marketers in ICT (information and communications technology) hardware and software (Chen 2002; Yang and Coe 2009), involving such countries as Taiwan, Malaysia, Thailand, China, India and the Philippines. Furthermore, the WTO (2011) and a few scholars (Baldwin 2013a, 2013b; Low 2013) have suggested that GVCs/GPNs and FTAs often lead to “deep integration”, through intertwining relationships among trade, investment, service and intellectual property; a phenomenon termed the “trade-investmentservice- intellectual property (IP) nexus” (Baldwin 2013a, p. 26).

Set against the above context, this study sets out to examine the evolution of Taiwan's economic links with ASEAN. Indeed, GVCs/ GPNs are major elements underlying the economic links between ASEAN and Taiwan. To discuss this issue, we examine the macro data of direct investment and bilateral trade, from the Taiwanese perspective.

Introduction

Small and medium-sized enterprises (SMEs) are expected to benefit from the opportunities arising from increasing globalization and regional economic integration through greater participation in global value chains (GVCs) and global and regional production networks.1 The ASEAN Economic Community was established not only to create a single market but also to serve as a regional production base that will attract more foreign direct investment (FDI). Regional production networks are at the heart of intraregional trade and investment and are the key drivers of economic growth in ASEAN and East Asia. This phenomenon is characterized by the exports of parts, components, capital equipment and other industrial inputs to be assembled into finished goods for export.

MNCs have established these production networks with domestic firms, particularly SMEs, serving as potential suppliers of outsourced parts or services that have increasingly grown in sectors such as automotive, machineries, electronics, and garments. Participation in regional and global production networks provides SMEs with access not only to export markets but also to newer technologies. To increase their overall competitiveness in international markets, lead multinational firms provide their local affiliates and local suppliers with more rapid technological upgrading and greater attention to quality control, cost control, and human resource development.

However, participation in these production networks is not easy and there are many challenges that SMEs need to overcome in order to participate in GVCs and production networks. SMEs must be financially strong to carry out the necessary upfront investment, have the ability to comply with stringent standards and other international business practices, and are able to constantly upgrade and innovate in order to maintain their competitiveness. Given their small size and age, government support for SMEs is crucial to facilitate their productive participation in GVCs.

It is important to note that SMEs participating in production networks are different from non-participants and are often characterized by substantially higher growth and higher productivity (Aldaba et al. 2010). Given the large number of barriers that SMEs must face, making small and medium manufacturers internationally competitive is a major challenge that would require government support particularly by addressing financing, market information, business linkages, technology development, training and counselling and advice.

EXECUTIVE SUMMARY