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GVCs and the opportunities for development of SMEs in low income
countries
Masato Abe, Ph.D. Economic Affairs Officer
Private Sector and Development Section Trade and Investment Division
United Nations ESCAP Bangkok
abem@un.org
Three major topics
• Characteristics of GVCs – Business points of view
• SME policies – General – Low income countries
• New GVC/SME policies?
GVC Characteristics
GVC characteristics I
• Fragmentation – Separate production nodes in different locations
and connected by distribution links
• Offshoring and outsourcing • Supplier consolidation • Production agglomeration • Logistics consolidation
• A lead firm (a larger enterprise/a multinational) regulates a GVC with specific competences, making a higher profit • Brands & channels, resources, technology, expertise
and/or goodwill • Customer vs production vs natural endowment
driven value chains
• Inviting outside experts on specific functions to manage complicated tasks to maximize the efficiency and effectives of the entire GVC
GVC characteristics II
• Contracting with a selected number of capable SMEs typically as subordinate partners for specific tasks or functional support
• Integration of business process, coordinated behaviours and information sharing among independent firms
• Mutual investment into business process and long-term relationship
GVC characteristics III
Distribution Centre J Supplier L
Cus
tom
ers
600km
Country L Country T
Home Country J
Country V
Distribution Centre V
1 month by ocean
1200km 100km
Supplier T
5 days by air
Automotive GVCs: One Example
Customers
Distribution Centre T
Customers
Products
Ball guide post for small or medium sized press dies
Distribution Centre J Supplier L
Cus
tom
ers
600km
Country L Country T
Home Country J
Country V
Distribution Centre V
1 month by ocean
1200km 100km
Supplier T
5 days by air
Automotive GVCs: One Example
Customers
Distribution Centre T
Customers
Assembling
Auto parts supply
Production nodes
Distribution links
R&D centres
1960s
1990s
2000s
2010s
1970s-80s
Automotive supply chains
GVC drivers • Regional integration
– AEC 2015, ASEAN+6, SAARC, BIMSTEC, TPP, etc – Policy liberalization & free trade agreement – Including investment, capital & finance, HR
• Technological / system innovation – Transportation and ICT – JIT, lean manufacturing, TCM, SCM, etc
• Increasing competition – Pressures for low cost & high quality production – Low labour cost
• Emerging global markets – Global products and services (i.e. iPhone)
Business objectives
• Foreign market penetration • QDC (quality, delivery and cost) enhancement • Speed, effectiveness and flexibility • Local supplier development • Local content requirement • Strategic focus and outsourcing non-core functions • Access to expertise / technology • Long-term security • Customer’s request
Key GVC objectives
GVC
Access to resources
Cost reduction
Market access
Theoretical background School Theory Literature
Factor endowment Flying geese Akamatsu (1962), Ozawa (1995)
Production fragmentation Jones & Kierzkowski (1990), Ando & Kimura (2003)
Efficiency maximization Outsourcing McFarlan & Delacey (2004)
Offshoring Aron & Singh (2005), Gereffi (2006)
Production agglomeration Healey & Ilbery (1990)
Supplier consolidation Swift (1995)
Logistics consolidation Christopher (2011)
SCM Mentzer (2001)
Internationalization International trade Smith (1776), Ricardo (1817)
Entrepreneurship Drucker (1964), Gartner (1985)
International business FDI (& TNCs/MNCs)
Daniels, Ogram & Radebaugh (1976) Moran (1985), UN (1988)
International marketing Czinkota & Ronkainen (1988)
Market access
Cost reduction
Access to resources
Motives of major FDI to auto sector from 2003 to early 2014
Source: Author’s compliance based on the data of Financial Times Ltd., fDi Intelligence (2014).
0
5
10
15
20
25
30
35
40
Market access Factor endowment Business environment
Num
ber o
f pro
ject
s
19
How SMEs fit into global supply chains
Source: UNIDO (2001)
Local (100%)
JV
Foreign (100%)
Source: Compiled from IHS Inc. (2012); Kondo (2012); Tiasiri (2010)
Foreign (50%)
Thai (50%)
Assemblers (16 car assemblers; 100,000 workers)
Tire 1 suppliers (709 firms; 250,000 workers)
Tire 2, 3 & lower suppliers (1,100 firms; 175,000 workers)
TNCs
SMEs
LEs
Structures of the Thai auto sector
Tire 2 Suppliers (181 firms)
JV Foreign (100%)
Tire 1 suppliers (33 firms)
Thailand Viet Nam
Assemblers (17 car assemblers)
Value chain management
Sales
Cost
Profit
Increase sales
Decrease costs
Return on investment (ROI)
ROI = Profit
Investment (e.g. capital employed)
ROI = Sales
Investment
Profit
Sales X
ROI = Sales
Investment
(Sales – Costs)
Sales X
Sales Costs
Value chain mgmt process
Stages in the order-to-collection cycle
Order taking
Order entry
Credit check
Documentation
Order picking
Delivery
Invoicing & collection
Order taking
Order entry
Credit check
Documentation
Order picking
Delivery
Invoicing & collection
2 months 2 weeks
Cost-added vs value added
Cost added
Valu
e ad
ded
Raw materials
Production
Finished stocks
Customers
Customers
Stocks in channels
Production In-transits
Cost reduction
Value addition
SME policies
Typology of interventions • Business enabling environment
– Regulations/legal system – Infrastructure (e.g. utilities, logistics, SEZs) – Corruption
• Entrepreneurship – Women/youth
• Access to financing • Business development services • Technology and innovation • Access to market and resources • Sector/cluster development • PPP
28
Challenges • Fragmentation • Macro vs. micro
– Lack of control on macro issues • Limited budget • Poor institutional/coordination framework • Difficult stakeholder management • Need on low cost delivery and greater
targeting • M&E
– Lack of data – A lot of factors 29
30
Issues • Influencing the macro environment have the greatest
impact on SMEs • SME policy as traditionally practiced is the little
picture; thus, it tends to be small and piecemeal • A lot of players
– Centralized or decentralized – Apex body needed?; little budget
• Few attempts to fully assess the costs of SME policy to the taxpayer – But cost benefit analysis of this sort is difficult because of
the need to measure benefits and many costs are hidden/fragmented
– Lack of funds at low income countries
31
Policy landscape Policy area
Centralization
Competitors in debate
Resources required to participate
SME impact on debate
Policy impact on SMEs
Fiscal Monetary Tax Labour Regulatory Environment Finance Industry Innovation Trade FDI Competition Small Bus.
High High High Med Med Med Med Med Med High Med High-med Low
Insiders Insiders Free-for-all Unions Interests Environ’talists Banks Big business Universities Limited Big business Big business Limited
Large Beyond reach Depends Large Large Large Large Large Medium Depends Depends Large Modest
Marginal No debate Large (parts) Large (parts) Marginal Marginal Marginal Small-med Small-med None-small None-small None-small Large
Large (tails) Large (tails) Large/small Large Dependent Dependent Dependent Dependent Dependent Minimal Indirect Indirect Modest
Source: Modified Dennis, 2012.
32
Net change in employment through the business cycle, United States
Source: SBA
33
The inflation problem: Actual and planned price changes, USA
01020304050607080
76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12
Per
cent
of F
irms
HIGHER PLAN HIGHER
Inflationary Period – Loose Monetary Policy
Source: NFIB Research Foundation
34
Net change in new C&I* Small Business Loans and SBA loan guarantees by year
*Commercial & industrial loans of < $1 million made by private banks. Does not include loans secured by real estate or made by finance companies.
Source: FDIC and SBA
35
Central Government ProgrammeBudgets
Cost (£million) 2003/04
Cost (£million)
2001/2
Arbitration and Conciliation Advisory Service
46 ?
Department of Environment, Food and Rural Affairs (excluding CAP)
297 3,120
Department for Culture, Media and Sport
336 332
Department for Education and Skills
126 138
DepartmentofTrade& Industry 425 275
Department of Work & Pensions/Job Centre Plus
331 71
Home Office 6 ?
Learning and Skills Council (National)
1,672 ?
Office of Science and Technology 49 ?
Office of the Deputy Prime Minister
10 ?
Small Business Service 271 349
UK Trade International 81 44
European Commission (StructuralFunds)
276 227
TOTAL 3,926 ?
UK expenditure on entrepreneurship and SME policy
Source: Smallbone (2012)
36
Regional Development Agencies & Local Authorities
360 ?
Tax Incentives Corporation Tax (20% Rate)
2,300 7
Corporation Tax (Zero Rate)
350 7
SME R&D tax credit 260 7 Enterprise Investment Scheme
180 7
Venture Capital Trusts 15 7 EMI 60 7 VAT small traders 450 7 TOTAL EXPENDITURE ON TAX INCENTIVES
3,615 2590
Common Agricultural Policy production subsidies
2,398 ?
GRAND TOTAL 10,299 7,932
Source: Smallbone (2012)
37
Cost of entrepreneurship and SME policy: The case of UK
• Aggregate expenditure was between £8 and £10 billion • At that time expenditure on both the Police Service and on
the Universities was slightly lower at approximately £7 billion • The expenditure came from the budgets of virtually all
Departments of the Government • Unlike the Police Service and the Universities, expenditure on
Entrepreneurship and SME policy was not the responsibility of a single department of the Government
• At that time the main organization within government responsible for SMEs –the Small Business Service (SBS) –accounted for just over 4% of expenditure in 2001/2 and about 2.5% in 2003/4
• The key “spending” department was the Treasury which provided tax reliefs worth £2.6 billion on 2001/2 and 3.6 billion on entrepreneurship and SME policy
Challenges in low income countries
• SMEs tend to remain as SMEs • Large informal sector remain, lacking access to
services • Many SMEs are service oriented
– Services companies are small and less innovation (e.g. personal services, restaurants) but employ many people
• SMEs normally don’t have financial capabilities
• SMEs lack ability to obtain new information
New GVC/SME policies?
40
Key guidelines • Strengthen judicial/regulatory framework • Reduce entry barriers for new businesses • Reduce transaction costs • Enhance cash flow to small business • Strengthen entrepreneurship through
training and education • Strengthening networking and information
dissemination/sharing • M&E
– Sector-based – Qualitative or quantitative
Some key factors
• Limited budget – Infrastructure – Financing – Skill development
• Weal institutional framework • Development strategies
– Directions – Leadership – Regulations – Policies
41
Policy direction • Continuing the FDI/export driven development strategies
– Need facilitation measures, providing adequate HR input (e.g. education) – Attract GVCs fit for the country.
• Enhance support to the SME sector • Emphasize the development of both up- and down-stream value chains • Design and implement clear sectoral development strategies • Develop GVCs by participating in neighbouring countries’ GVCs. • Classic SME export promotion
– Marketing research, export promotion, product development, export financing, trade fairs and missions
• Create enabling business environment and reduce transaction costs – Laws and regulations and their enforcement, ICT and logistic infrastructure and software
• Enhanced access to SME finance • Capacity and HR development for SMEs and related government agencies • Fostering capacity and quality of business associations • Facilitate SMEs’ adoption of world standards and credible certifications • Foster national lead firms
– Graduates from the SME sector with quality and brand
43
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