A big opening for Asia’s small firms

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Among the most significant developments in Asian business has been the emergence of global supply chains. Recently, economists, in developing Asian countries, have observed several trends in the development of global supply chains which are particularly relevant to SMEs, according to a report.

First, enterprises from emerging economies—beyond Asia’s traditional economic powerhouses of Japan, South Korea and Taiwan—have expanded their access to the markets of regional trading partners. This is partly due to the development of various free trade and investment agreements at the regional level.

As a result, some enterprises from China, India and Asean economies have been transforming themselves into transnational corporations, in line with the national economic expansion of their home countries. This trend is supported by increasing FDI outflows from those countries to neighbouring developing countries, as with intra-Asean FDI flows.

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This has helped to offset the decline in FDI flows from developed countries after the global financial crisis and has provided new opportunities for local SMEs to engage with global supply chains.

Second, and in parallel, many SME suppliers in Asian developing countries have been moving to higher value added functions within global supply chains.

Third, mainly due to increasing labour costs, some suppliers in emerging economies such as China, Malaysia and Thailand have started transferring traditional labour-intensive operations to less-developed neighbouring countries. This is particularly evident in sectors such as garment and apparel, consumer goods, electronics, food processing and automotive parts.

Fourth, SMEs are acquiring more technology and knowledge through global supply chains from larger or more advanced partners. As they become integrated into global supply chains and gain skills and knowledge about conducting business across borders, SMEs in Asia begin to attract more foreign investment, usually in the form of joint ventures, as with the automotive parts industry in Thailand.

The spread of global supply chains in Asia has opened opportunities for local SMEs, particularly in underdeveloped countries, to tap into larger and more efficient business networks as well as gain access to overseas markets.

In many developing countries in Asia, however, SMEs still play a limited role as they may lack the scale and necessary knowledge for entering and integrating into global supply chains. They often require a more enabling environment to help them improve their capacity.

This involves having stronger policies and regulatory frameworks, supporting infrastructures, access to financing, an entrepreneurial culture, technology incubation and business development services.

SMEs that seek to establish partnerships in global supply chains should understand the structure of a specific supply chain and, more importantly, the specific characteristics of lead firms.

If SMEs are unable initially to enter a supply chain as a supplier of higher value-adding functions, they can join at a lower-value level, where entry barriers are comparatively low, and subsequently position themselves to move up the value-adding ladder.

Policymakers can provide assistance by conducting the type of research which is beyond the resources of individual SMEs. This will help identify which sectors and products to promote and pinpoint which supply chains offer the greatest opportunity for growth.

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