Re-igniting Asia's SME growth engine by international trade

After COVID-19, enable small and medium-sized businesses to enter global value chains in order to revitalise economies and foster sustainable growth.

Due to the COVID-19 pandemic, the Asia-Pacific (APAC) region suffered a significant recession in 2020, with APAC GDP contracting by an estimated 1.5 percent year-on-year (y/y). During the first half of 2020, pandemic-related lockdowns and travel bans had a major negative effect on the economies of most APAC countries. However, several Asia-Pacific economies showed a strong rebound in economic momentum in the second half of 2020. The strengthening of global export demand, as well as a recovery in domestic consumer spending as a result of the lifting of pandemic-related restrictions in many countries, fueled this upturn. 

Based on expectations that the progressive introduction of COVID-19 vaccines during 2021 will aid the gradual recovery of economic activity in many OECD and APAC economies, a good economic recovery is anticipated in 2021, with APAC GDP growth projected at 5.7 percent y/y. 

GVCs are a prominent aspect of the Asia-Pacific economic landscape. The iPhone, for example, was developed and conceived in California, but its high-tech parts are sourced from Japan, Korea, Taiwan, Germany, and other countries, and it is manufactured in China by two Chinese Taipei firms, Foxconn and Pegatron.

However, there are numerous other examples, such as clothing modelled in European capitals but cut, sewn, and trimmed in China, Bangladesh, Cambodia, and Vietnam. The Philippines is a major player in business process outsourcing GVCs, especially for call centres, in the services sector.

Multinational enterprises (MNEs) that have invested and developed manufacturing facilities in Asia's emerging economies, especially China, Malaysia, and Thailand, drive GVCs. Participation in these GVCs has accelerated economic growth, poverty reduction, and stability in these economies, putting them on the fast track to development.

In Asia and the Pacific's emerging economies, small and medium-sized enterprises (SMEs) account for the majority of businesses and employment. In the face of the coronavirus disease (COVID-19) pandemic, re-igniting the region's SME growth engine through trade would be critical to advancing sustainable economic recovery and resilience.

Rising SMEs' participation in global value chains is particularly difficult during the COVID-19 crisis. SMEs, on the other hand, have major cross-border manufacturing and supply chain opportunities, such as the ability to help meet demand for face masks.

Why is SME growth and international trade participation still so relevant for the region's economies?

In Asia and the Pacific, SMEs play a critical role in boosting economic activity. In many countries, they account for more than 90% of businesses, 60% to 70% of jobs, and more than half of all production.

Succeeding in the production of SMEs leads to a country's economic growth in a variety of ways. SMEs, for example, assist major corporations by providing parts and materials. Small and medium-sized enterprises (SMEs) that are innovative are an important source of economic dynamism.

Internationalization supports SMEs in a variety of ways, according to numerous reports. SMEs, for example, can procure not only advanced technologies but also high-quality parts and components from foreign countries by internationalising their operations. In addition, internationalisation allows SMEs to extend their operations into large foreign markets.

What are global value chains, and how do they help small businesses succeed?

International output sharing is referred to as global value chains, or GVCs. This is a phenomenon in which development is divided into activities and tasks that are carried out in various countries. Using an example can make GVCs easier to comprehend.

Consider the construction of an automobile, which necessitates over 20,000 parts and components, including motors, steering wheels, air conditioning systems, and electrical components. GVCs manufacture parts and components in various countries where they can be assembled at the lowest cost. After that, the parts and components are shipped to a location or country for final assembly. The manufactured cars are either sold locally or exported to other countries.

Multinational companies have developed and run GVCs (MNCs). These include not only MNC international affiliates, but also local businesses. GVC-related international trade accounts for about 80% of global trade, according to estimates. GVCs make it easier for SMEs to participate in foreign trade. SMEs only need to participate in one activity or phase in the GVC; they do not need to be involved in the entire manufacturing process.

What is the effect of the COVID-19 crisis on SMEs' ability to participate in GVCs?

Because of the recession, SMEs have been experiencing supply and demand shocks. The lack of materials and parts causes supply shock, while the decrease in demand for their goods causes demand shock. SMEs have found it difficult to stay in GVCs due to a shortage of imported materials and parts on the one hand, and a fall in export demand on the other. Their ability to survive and continue participating in GVCs is largely dependent on financial support.

Although the pandemic has made it difficult for SMEs to do business, MNCs' diversification of GVCs has opened up new opportunities for SMEs to participate in GVCs for a variety of products. Health items, such as face masks, are a good example. MNCs have become very interested in looking for firms, like SMEs, that can supply face masks in response to a rapid rise in demand.

For SMEs, there are two big roadblocks to participating in GVCs for face masks. One issue is the difficulty in making masks that are safe and healthy. The other issue is a shortage of financial capital to purchase and build new machinery and equipment. Help from policymakers may be extremely beneficial to SMEs in overcoming these challenges.

What are the other major roadblocks to increasing their GVC involvement during the pandemic?

The key obstacles to SME involvement in GVCs are a lack of technological competence and a lack of human and financial capital. MNCs search for suppliers of high-quality parts and components that have a high level of technological capability. SME's need qualified human resources as well as adequate financial resources in order to provide high technological capabilities.

Another significant impediment for SMEs is a lack of knowledge about potential GVC participation opportunities. This issue arises as a result of SMEs' lack of comprehensive networks.

What has been the status of policy initiatives to resolve these issues?

Governments in Asia and the Pacific recognise the importance of SMEs and their involvement in GVCs not only for SMEs but also for their countries' growth. As a result, several governments have developed and implemented policies to assist SMEs. SMEs have received professional and financial assistance in the form of technical training and low-interest loans, among other things.

One serious issue is that these measures are ineffective. This may be attributed to at least two factors: one, ineffective legislation, and the other, a lack of effective policy implementation. To devise effective policies, the government must communicate with SMEs to gain a better understanding of their issues. The government must track and review policy implementation in order to address the problem of policy implementation.

How will the industry make new trade breakthroughs?

Government policies can boost the market climate, in addition to policies to increase participation in GVCs by addressing the challenges that SMEs face. Liberalize trade and investment policies to create a free and open environment that allows SMEs to engage in GVCs to their full potential. Free trade deals can be used to do this (FTAs).

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) are two mega free trade agreements that have been enacted and signed in the region. It is recommended that you join these FTAs. All countries and economies in Asia and the Pacific should be invited to join.

How will SMEs improve their trade in the face of the pandemic?

With the possibility of a long-term COVID-19 pandemic, the emergence of new infectious diseases, and the development of digital transformation, electronic commerce (e-commerce) will likely become more important in industry, particularly for GVC participation. To expand their business prospects, SMEs can learn how to use e-commerce.