ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

Investment Promotion and

Enterprise Development Bulletin
for Asia and the Pacific
No. 1

UNITED NATIONS
ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

Investment Promotion and

Enterprise Development Bulletin
for Asia and the Pacific
No. 1

ESCAP works towards reducing poverty

and managing globalization

UNITED NATIONS
New York, 2003
 ST/ESCAP/2259

UNITED NATIONS PUBLICATION

Sales No. E.03.II.F.36

Copyright © United Nations 2003

ISBN: 92-1-120176-4 ISSN: 0252-4481

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United Nations Building, Rajdamnern Nok Avenue
Bangkok 10200, Thailand

ii
 CONTENTS

Page

Abbreviations ....................................................................................................................................... vi

Explanatory notes .............................................................................................................................. viii

I. STRENGTHENING THE COMPETITIVENESS OF SMALL AND

MEDIUM ENTERPRISES IN THE GLOBALIZATION PROCESS:
PROSPECTS AND CHALLENGES .................................................................................... 1
– Bhavani P. Dhungana

A. Globalization: challenges and prospects for small and medium enterprises

in Asia and the Pacific ............................................................................................................ 1

B. Industrial dynamism, economic prosperity and economic crisis: liberalization,

globalization and private sector-led industrial growth ........................................................... 4

C. Role of SMEs in the development process: some country experiences ................................. 11

D. Promoting the competitiveness of SMEs within the ongoing process

of globalization ........................................................................................................................ 16

E. Conclusions and recommendations ......................................................................................... 22

II. PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs

IN ASIA AND THE PACIFIC ............................................................................................... 33
– Tarun Das

A. Introduction ............................................................................................................................. 33

B. Resource-based and agro-based industries: sector’s main characteristics .............................. 33

C. Rationale for development and contribution of agro-based and resource-based

industries to poverty alleviation .............................................................................................. 39

D. Economic policies and strategies for development of agro-based and

resource-based industries ........................................................................................................ 49

E. Role of the World Trade Organization for the development of agro-based and
resource-based industries ........................................................................................................ 60

F. Conclusions and recommendations ......................................................................................... 63

iii
 CONTENTS (continued)

Page

III. ISSUES AND STRATEGIES FOR THE TRANSFER AND ADOPTION OF

PROSPECTIVE TECHNOLOGIES BY SMEs AND SMALL GROWERS
FOR PROCESSING OF HORTICULTURAL PRODUCE IN
DEVELOPING ASIAN COUNTRIES ................................................................................. 77
– K. Lakshminarayanan

A. Introduction ............................................................................................................................. 77
B. Technology gaps ...................................................................................................................... 82
C. Problems and prospects in technology transfer ...................................................................... 85
D. Technology management issues .............................................................................................. 87
E. Conclusions ............................................................................................................................. 90

IV. REPORT OF THE EXPERT GROUP MEETING ON PROMOTING

RESOURCE-BASED EXPORT-ORIENTED SMEs FOR POVERTY
ALLEVIATION IN ASIA AND THE PACIFIC ............................................................... 93
– ESCAP secretariat

A. Regional overview of the status of the resource-based export-oriented SMEs

and their impacts on poverty alleviation in Asia and the Pacific .......................................... 93
B. Evolving model of programmes for enhancing the competitiveness of SMEs,
and issues and strategies for the transfer and adoption of prospective technologies
for processing horticultural produce ....................................................................................... 95
C. Country experiences ................................................................................................................ 95
D. Recommendations ................................................................................................................... 97

V. FOREIGN DIRECT INVESTMENT: DETERMINANTS, TRENDS

IN FLOWS AND PROMOTION POLICIES .................................................................... 99
– Joong-Wan Cho

A. Globalization and foreign direct investment ........................................................................... 99

B. Foreign direct investment flows: determinants and recent trends .......................................... 100
C. Host country FDI promotion policy trends ............................................................................. 104
D. FDI by small and medium enterprises .................................................................................... 108
E. Conclusions and implications for regional action and cooperation ....................................... 110

iv
 LIST OF TABLES

Page

I.1. Real GDP of selected Asian and Pacific economies ...................................................................... 5

I.2. Selected economies of the ESCAP region: rates of economic growth and inflation,
2000-2004 ........................................................................................................................................ 6

II.1. Growth rate and share of MVA in selected Asian countries, 1980-2000 ...................................... 34

II.2. Employment by economic activity in selected Asian economies ................................................... 35

II.3. Share of females in total employment by branches in selected Asian countries ........................... 36

II.4. Value added per employee in selected Asian countries .................................................................. 37

II.5. Average annual growth of manufacturing in selected Asian economies, 1990-1999 .................... 41

II.6. Distribution of employment and value added among the manufacturing sectors .......................... 43

II.7. Tax policies in selected Asian economies in 1990 and 2000 ........................................................ 53

II.8. Science and technology development in selected Asian economies .............................................. 56

V.1. Host country determinants of FDI .................................................................................................. 100

V.2. FDI inflows by region, 1997-2001 .................................................................................................. 102

V.3. FDI inflows to the Asian and Pacific region, 1997-2001 ............................................................... 103

LIST OF BOXES

II.1. WTO and market access ................................................................................................................. 61

II.2. Uruguay Round: principal commitment on agriculture .................................................................. 62

II.3. Agreement on Textiles and Clothing (ATC) ................................................................................... 63

v
 ABBREVIATIONS

ADB Asian Development Bank

AFTA ASEAN Free Trade Area
APCAEM Asian and Pacific Centre for Agricultural Engineering and Machinery
APCTT Asian and Pacific Centre for Transfer of Technology
APEC Asia Pacific Economic Cooperation (currently comprises 21 countries/areas including
Australia; Brunei Darussalam; Canada; Chile; China; Hong Kong, China; Indonesia;
Japan; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; the Philippines; the
Republic of Korea; the Russian Federation; Singapore; Taiwan Province of China;
Thailand; and the United States of America).
ASEAN Association of Southeast Asian Nations (comprises Brunei Darussalam, Indonesia,
Malaysia, the Philippines, Singapore, Thailand, Viet Nam, the Lao People’s Democratic
Republic, Myanmar and Cambodia).
ASEAN-4 Comprises Indonesia, Malaysia, the Philippines and Thailand
ATC Agreement on Textiles and Clothing
BITs bilateral investment treaties
CGPRT Regional Coordination Centre for Research and Development of Coarse Grains, Pulses,
Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific
DLC letter of credit
ECDC economic cooperation among developing countries
ESCAP Economic and Social Commission for Asia and the Pacific
ESTs environmentally sound technologies
EU European Union
FAO Food and Agriculture Organization of the United Nations
FDI foreign direct investment
FIAS Foreign Investment Advisory Service
FTZ free trade zone
GATT General Agreement on Tariffs and Trade
ICT information and communication technology
IPR intellectual property rights
ISO International Organization for Standardization
ISO 9000 international standards for quality management systems
ISO 14000 international standards for environmental management systems

vi
 ABBREVIATIONS (continued)

IT information technology
LDCs least developed countries
M&As mergers and acquisitions
MFA Multifibre Arrangement
MFIs microfinance institutions
MFN most-favoured nation
MNCs multinational corporations
MNEs multinational enterprises
MVA manufacturing value added
n.e.c. not elsewhere classified
NGOs non-governmental organizations
NIEs newly industrializing economies
NIPAs national investment promotion agencies
NTEs new technology enterprises
NTMs non-tariff measures
OECD Organisation for Economic Cooperation and Development (comprises Australia, Austria,
Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New
Zealand, Norway, Poland, Portugal, the Republic of Korea, Spain, Sweden, Switzerland,
Turkey, the United Kingdom of Great Britain and Northern Ireland, and the United
States of America).
ODA official development assistance
QRs quantitative restrictions
R&D research and development
S&T science and technology
SAARC South Asian Association for Regional Cooperation (comprises Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri Lanka)
SBA Small Business Administration
SCMs subsidies and countervailing measures
SIDBI Small Industries Development Bank of India
SMBA Small and Medium Business Administration
SMEs small and medium-sized enterprises

vii
 ABBREVIATIONS (continued)

SMIPC Small and Medium Industry Promotion Corporation

SSI small-scale industry
SSTC State Science and Technology Commission
T&C textiles and clothing
TBT technical barriers to trade
TCDC technical cooperation among developing countries
TNCs transnational corporations
TRIMs trade-related investment measures
TRIPs trade-related intellectual property rights
UNCTAD United Nations Conference on Trade and Development
UNIDO United Nations Industrial Development Organization
USSR Union of Soviet Socialist Republics (also known as the Soviet Union for short, consisted
of Russia and surrounding countries that today make up Armenia, Azerbaijan, Belarus,
Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, the Republic of Moldova,
the Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan)
VERs voluntary export restraints
WTO World Trade Organization

EXPLANATORY NOTES

M$ = ringgit
Rs = Indian rupee
US$ = United States dollars

viii
 I. STRENGTHENING THE COMPETITIVENESS OF SMALL AND
MEDIUM ENTERPRISES IN THE GLOBALIZATION PROCESS:
PROSPECTS AND CHALLENGES
Bhavani P. Dhungana*
A. Globalization: challenges
and prospects for small and medium
enterprises in Asia and the Pacific
The Asian and Pacific region – a fast-
growing, dynamic part of the developing world –
has sustained its vibrancy and impressive growth,
despite the unexpected setbacks during the latter
half of the 1990s. The dynamism and vibrancy of
the economies and the economic crisis of 1997-
1998 are both cited as the results of the fast pace
of liberalization and the globalization process.
Opinions are divided and experts have different
views on these issues. However, globalization,
which is generally defined as the “shrinkage of
economic distances (i.e., the costs of doing busi-
ness) between nations”, when one analyses the
trends in production and trade or finance and
capital flows among countries in the region as well
as global terms,1 has ushered in new opportunities
and challenges especially for small and medium-
sized enterprises (SMEs). Globalization has also
resulted in the integration of economies and has
prompted a rapid increase in the movement of
products, capital and labour across borders. It is
increasingly realized that globalization offers clear
advantages as it contributes to the maximization
of economic efficiencies, including the efficient
utilization and allocation of resources, such as
natural resources, labour and capital on a global
scale, resulting in a sharp increase in global output
and growth.
* Governments of Asia and the Pacific, the United Nations
Chief, Investment and Enterprise Development Section,
Trade and Investment Division, Economic and Social
Commission for Asia and the Pacific.
1 Ramkishen S. Rajan, “Economic globalization and Asia:
trade, finance and taxation”, ASEAN Economic Bulletin,
vol. 18, No. 1 (January 2001), pp. 1-11.
It is becoming increasingly clear that the
globalization of production and trade has led to a
rising trade-GDP (gross domestic product) ratio
and has also resulted in the fragmentation of the
production process into its subcomponent parts,
which in turn are distributed across countries on
the basis of comparative and competitive advan-
tages. Developing countries have also benefited
significantly from increased flows of capital and
other forms of finance. However, globalization
also has disadvantages, particularly as national
Governments in many countries display a lack
of political will and/or competence to adjust
accordingly to the process of globalization. It is
also observed by some people that globalization
is a process mainly pushed by the developed world
to unsustainable levels, and has placed many
developing countries in rather unstable situations,
disregarding the nature and appropriateness of
developing countries’ national policy frameworks
and other limitations. This is the subject of further
analysis requiring concerted efforts by national
Governments to seek new policy options. Never-
theless, the international community has a
responsibility to institute mechanisms to manage
globalization2 well to the advantage of all coun-
tries while as mentioned earlier national Govern-
ments would have a responsibility to formulate and
implement policies to adjust their economies
smoothly and efficiently to benefit from the
2 In view of the needs and priorities expressed by the
Economic and Social Commission for Asia and the
Pacific adopted a new programme structure with
“Managing globalization” as one of the main themes at its
fifty-eighth session, held in May 2002. The Commission
has also established a Subcommittee on International
Trade and Investment to focus on globalization issues.
1
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
globalization process, especially if SMEs are to
be promoted and sustained in this new economic
environment.
As pointed out earlier, it is becoming obvi-
ous that globalization is driven by a variety of
factors, such as the accelerated growth of interna-
tional trade and foreign direct investment (FDI),
and rapid development in information technology,
further facilitated by the global flow of information
as a result of the rapid spread of Internet use,
which have far-reaching implications for SMEs.
In particular, the advances in information and
communication technology have driven down the
costs of international transactions and exchanges
and enabled the creation of the global financial
system. In turn, these interdependent and mutually
reinforcing global flows of products, technology,
information and capital are pushing globalization
further, making the whole process evolve at an
accelerated pace. However, with the advent of
globalization, growth has become somewhat vola-
tile, as recently demonstrated in Asian countries,
imposing additional costs in terms of reconciling
growth and social development on the one
hand and sustainability of development on the
other.3 This aspect is to be especially noted when
examining the implications of globalization for
SMEs.
Nevertheless, globalization will lead to a
more liberalized and market-oriented economic
process. As past experience has demonstrated,
it will expedite growth and spread technology
more rapidly, especially information technology.
3 Several international organizations have focused their
activities on assisting countries in dealing with various
issues of globalization processes. See World Bank, World
Development Report 2001/2002; ESCAP, Economic and
Social Survey of Asia and the Pacific 2002: Economic
Prospects: Preparing for Recovery (ST/ESCAP/2144);
and Asian Development Bank, Asian Development
Outlook 2002. Also refer Byron G. Auguste, “What’s so
new about globalization?”, New Perspectives Quarterly,
1 January 1998; to illustrate the decline in costs of inter-
national transactions, he notes that since 1945 average
ocean freight charges have fallen by 50 per cent, air
transport costs by 90 per cent and trans-atlantic telephone
charges by 99 per cent. See also International Monetary
Fund, World Economic Outlook, May 1997.
2
A recent study by the World Bank has also
analysed the critical effect of globalization on
inequality and poverty. The study identified a
group of developing countries that are participating
effectively in the globalization process and found a
positive relationship between globalization and
poverty reduction. For example, China, India and
several other large countries are part of this group
and well over half of the population of the deve-
loping world lives in these globalizing economies.
The post-1980 globalizers have seen large
increases in trade with significant declines in
tariffs over the past 20 years. Their growth rates
have accelerated from the 1970s to the 1980s and
further accelerated in the 1990s. The post-1980
globalizers are catching up with the rich countries,
while the rest of the developing world, which
has not been part of the globalization process, is
falling farther behind. The study also analyses
how general these patterns are and finds a strong
positive effect of trade on growth after controlling
for changes in other policies and addressing
endogeneity with internal instruments. Finally, the
study examines the effects of trade on the poor.
Since there is little systematic evidence of a
relationship between changes in trade volumes (or
any other globalization measure considered) and
changes in the income share of the poorest, the
increase in growth rates that accompanies
expanded trade leads to proportionate increases
in the incomes of the poor. The evidence from
individual cases and from cross-country analysis
supports the view that globalization leads to faster
growth and poverty reduction in poor countries.4
As mentioned earlier, the globalization process will
also bring various volatilities in the economy with
greater risks in the areas of capital and financial
flows as well as in currency exchange arrange-
ments. It is therefore urgent that certain concrete
measures be taken to safeguard SMEs and make
them sustainable. Furthermore, it should be noted
4 For further details see, David Dollar and Aart Kraay,
“Trade growth and poverty”, World Bank Policy Research
Working Paper 2615. See also United Kingdom of Great
Britain and Northern Ireland, “Eliminating world poverty:
making globalisation work for the poor”, White Paper
on International Development (available at <http://www.
globalisation.gov.uk>).
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
that smaller firms have traditionally focused on
domestic markets and many will continue to rely
heavily on local assets and markets. At the same
time, SMEs will be increasingly globalized. About
25 per cent of manufacturing SMEs are now
internationally competitive but this share should
increase rapidly. At present, SMEs contribute
between 25 and 35 per cent of world manufactured
exports and account for a smaller but growing
share of FDI. They are becoming more involved
in international strategic alliances and joint
ventures both among themselves and together with
the larger multinationals. More generally, network-
ing allows SMEs to combine the advantages of
small scale, e.g., flexibility, and the economies of
scale and scope provided by firm groups.5 It is
also essential that some new and innovative
measures be taken to improve their competitive-
ness in the globally integrated and highly competi-
tive economy. Furthermore, since SMEs account
for the majority of the firms in a country and have
the largest share in employment and since the 2
billion urban population throughout the world will
increase in the next decade, it is therefore essential
that urban SMEs be promoted as major providers
of employment. SMEs are also important to grow
out of a stage-dominated economy characterized
by government subsidy and control and, because
of their independence and sheer numbers, SMEs
represent a constituency of good policy and
governance in many developing countries of the
Asian and Pacific region.
In a recent United Nations Industrial Deve-
lopment Organization (UNIDO) forum on “Fight-
ing marginalization through sustainable industrial
development: challenges and opportunities in a
globalizing world”, the experts, while addressing
the role of investment, technology and trade in
promoting industrial and economic development in
a globalizing world, emphasized that technology
and liberalization were the prime forces driving
globalization. Technological innovation rather
than capital accumulation was seen as the main
source of long-term sustainable growth and it was
5 consistent policy issues for SME development and
Organisation for Economic Cooperation and Develop-
ment, OECD Small and Medium Enterprise Outlook
(Paris, OECD, 2000).
urged that in order to overcome the threat of
marginalization, developing countries be enabled
to mobilize the key ingredients of productivity-
based growth, namely, information, knowledge,
skills and technology, by drawing on international
trade, capital/investment and technology flows. On
the subject of global norms and standards in
the context of development, it was agreed that
developing countries were to be provided with the
capacity to participate more fully in international
trade agreements and environmental conventions.
The forum had also highlighted the critical role of
development agencies in guiding productivity-
based growth in the developing world and promot-
ing “workable” globalization. These necessities
are even more forcefully reinforced when one tries
to strengthen the role of SMEs in developing coun-
tries to enable them to be the forceful agents in
promoting the integration of industrial activities at
the regional and global levels.
Therefore, this paper has tried to analyse
and suggest measures as to what strategies can
be adopted to enhance the development of SMEs
in the context of the ongoing process of globali-
zation. There are many ways to approach the
development of SMEs, but the paper has focused
on the various ways and means to enhance the
export capabilities of SMEs, in promoting coopera-
tion and networking of SMEs to play important
roles in regional/global markets, in improving
various measures for the provision of business
services for SME competitiveness and in promot-
ing good management and efficient overall govern-
ance, including the provision of a legal framework
to manage globalization for the benefit and
efficiency of SMEs. At the end, a set of urgent
measures to promote the competitiveness of SMEs
is presented.
Before the analysis actually focuses on the
specific issues of SMEs and competitiveness, it is
relevant to present some analysis of the recent
economic and industrial trends and situation of
Asian and Pacific developing countries, followed
by a section on the role of SMEs in selected
countries of the region, so that coherent and
ways to improve their competitiveness can be
analysed.
3
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
B. Industrial dynamism,
economic prosperity and economic
crisis: liberalization, globalization and
private sector-led industrial growth
1. Recent economic growth
The Asian and Pacific developing region
has frequently been termed one of the most
dynamic parts of the global economy. However,
these economies again registered a decline in
GDP growth in 2001 to 3.1 per cent as compared
with 7.0 per cent in 2000.6 Several economies
registered a decline in their growth rate (see tables
I.1 and I.2). There was also a slowdown in the
global GDP growth rate. The slowdown was
particularly evident in the information and commu-
nication technology sector and in economies with
a preponderance of ICT-related manufacturing
activities and with high trade-to-GDP ratios, as in
East and South-East Asia, were most affected by
the slowdown. While some economies and
subregions remained relatively immune initially,
the dramatic suddenness of the global slowdown
and its intensity slowed GDP growth in these
economies and subregions as well. The events of
11 September 2001 aggravated the slowdown
through a loss of business and consumer confi-
dence.
It should be noted that since March 2002,
signs of a global and regional upturn were being
seen. On balance, evidence of a gentle recovery
in both the global and regional economies was
becoming discernible. The majority of the ESCAP
economies were expected to exceed their 2001
GDP growth rates in 2002 (see table I.2). A
benign inflationary environment and comfortable
external positions indicated that most economies in
the region had considerable leeway to compensate
for the loss of external demand through domestic
stimulus measures.7
6 Asian Development Bank, Asian Development Outlook
2002 (New York, Oxford University Press, 2002), p. 4.
7 “Summary of the economic and social survey of Asia and
the Pacific, 2002” (E/2002/18), 15 April 2002, p. 1.
4
Thus, the Asia-Pacific region is quite resil-
ient and is able to cope with economic problems
much more quickly. In general, it managed to
trigger a process of unprecedented economic
growth led by industry (in particular manufactur-
ing) among a selected few developing countries
owing to a combination of appropriate policies and
a conducive international economic environment
during the last three decades despite catching up
with the crisis in 1997. The aggregate GDP
growth of the Asia-Pacific region (excluding
China) grew by an annual average of 7 per cent
during the period 1980-1996 but contracted by
over 4 per cent in 1998 after growing 5.6 per cent
in 1997. Conducive national policies aimed at
successful integration of national economies into
the world economy certainly played a fundamental
role in explaining East Asia’s success stories.
Only during the last three years of the 1990s, had
it become obvious that major adjustments at both
the national and international levels were necessary
to manage the globalization process to the benefit
of all.
In the coming years, the Asian and Pacific
region in general is expected to continue achieving
higher growth rates, depending on the degree of
development in the United States and Japanese
economies. Thus, a regional economic recovery
in 2003 is essentially predicated on a significant
improvement in the external environment, sup-
ported by appropriate domestic policy measures.
However, the pace of economic performance in
general and industrial growth in particular in some
developing economies of the region could remain
unsatisfactory. The least developed countries and
the economies in transition could achieve only
marginal growth. Many such poorer economies
could stagnate and remain poor, unless major
economic and industrial transformations are
brought about at the regional and global levels,
promoting the integration of those economies. It is
therefore essential that the production system at
the regional and global levels be diversified, and
dispersed and the production process fragmented,
so that not only efficiencies and cost-effectiveness
are achieved, but also the disadvantaged group of
countries could somehow find niches in regional
and global production and create jobs and incomes
in their respective economies. It should be noted
that as production becomes more and more
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges

Table I.1. Real GDP of selected Asian and Pacific economies

(Annual percentage change)

10-year
average
1982-1991 1992 1993 1994 1995 1996 1997 1998 1999

Asiaa
Bangladesh 4.8 4.3 4.5 4.8 5.0 5.3 5.0 5.2 3.89
Bhutan 4.4 5.0 5.1 6.9 6.0 5.7 4.6 6.5 5.26
Cambodia 4.8 7.5 7.0 7.7 7.0 1.0 1.0 4.97 4.0
China 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0
Fiji 4.8 3.5 4.2 2.4 3.3 3.6 4.0 4.5 4.95
Hong Kong, China 6.3 6.1 5.4 3.9 4.5 5.0 -- 5.1 3.06 10.05
India 4.2 5.0 6.7 7.6 7.1 4.7 6.3 6.55 6.37
Indonesia 7.2 7.3 7.5 8.2 8.0 4.5 -- 13.0 0.85 4.77
Kiribati -- 1.6 0.8 7.2 6.5 2.6 3.3 6.1 2.5 2.0
Lao People’s Democratic Republic 7.0 5.9 8.1 7.1 6.9 6.5 5.0 5.0 5.7
Malaysia 8.9 9.9 9.2 9.8 10.0 7.3 -- 7.4 5.81 8.54
Maldives 6.3 6.2 6.6 7.2 6.5 6.2 6.0 8.55 7.58
Marshall Islands 0.1 5.4 2.7 -- 1.9 -- 13.1 -- 5.3 -- 4.3 -- 1.8 –
Micronesia, Federated States of -- 1.2 5.7 -- 0.9 1.3 -- 0.5 -- 3.8 -- 2.8 -- 2.0 –
Myanmar 9.7 5.9 6.8 7.2 7.0 7.0 7.0 10.92 5.46
Nepal 4.1 3.8 8.2 3.5 5.3 5.0 3.0 3.94 5.99
Pakistan 7.8 1.9 3.9 4.1 4.9 1.0 2.6 4.33 5.09
Papua New Guinea 11.8 16.6 1.9 -- 2.6 2.9 -- 2.4 1.4 3.15 -- 1.21
Philippines 0.3 2.1 4.4 4.8 5.8 5.2 -- 0.6 3.32 3.95
Republic of Korea 5.4 5.5 8.3 8.9 6.8 5.0 -- 6.7 10.89 8.81
Samoa 4.1 1.7 -- 0.1 6.8 6.1 1.6 1.2 2.5 3.5
Singapore 6.5 12.7 11.4 8.0 7.5 8.4 0.4 5.86 9.89
Solomon Islands 9.5 2.0 5.4 10.5 3.5 -- 2.3 0.5 -- 0.5 -- 1.0
Sri Lanka 4.3 6.9 5.6 5.5 3.8 6.4 4.7 4.3 6.0
Taiwan Province of China 6.8 6.3 6.5 6.0 5.7 6.8 4.7 5.42 5.98
Thailand 8.1 8.4 9.0 8.9 5.9 -- 1.7 -- 10.2 4.22 4.31
Tonga 0.3 3.7 5.0 4.8 -- 1.4 -- 4.4 -- 1.5 – 1.5
Vanuatu -- 0.7 4.5 1.3 2.3 0.4 0.6 6.0 -- 2.5 3.97
Viet Nam 8.6 8.1 8.8 9.5 9.3 8.2 3.5 4.2 5.5

Central Asia
Armenia -- 52.6 -- 14.1 5.4 6.9 5.9 3.3 7.2 3.3 6.0
Azerbaijan -- 22.7 -- 23.1 -- 19.7 -- 11.8 1.3 5.8 10.0 7.4 10.27
Georgia -- 44.9 -- 29.3 -- 10.4 2.6 10.5 10.7 2.9 2.9 1.5
Kazakhstan -- 5.3 -- 9.2 -- 12.6 -- 8.2 0.5 1.7 -- 1.9 2.8 9.44
Kyrgyzstan -- 13.9 -- 15.5 -- 19.8 -- 5.8 7.1 9.9 2.1 3.6 5.04
Mongolia -- 9.5 -- 3.0 2.3 6.3 2.4 4.0 3.5 3.2 2.98
Russian Federation -- 19.4 -- 10.4 -- 11.6 -- 4.2 -- 3.4 0.9 -- 4.9 3.2 7.5
Tajikistan -- 28.9 -- 11.1 -- 21.4 -- 12.5 -- 4.4 1.7 5.3 3.7 8.3
Turkmenistan -- 5.3 -- 10.0 -- 17.3 -- 7.2 -- 6.7 -- 11.3 5.0 16.0 17.6
Uzbekistan -- 11.1 -- 2.3 -- 4.2 -- 0.9 1.6 2.5 4.3 4.4 4.0

Source: IMF, World Economic Outlook 2000, Statistical Appendix. Available at <www.imf.org/external/pubs/ft/weo/2001/01/
data/growth_a.csv>.
a Excluding Central Asian economies.

5
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

Table I.2. Selected economies of the ESCAP region: rates of economic

growth and inflation, 2000-2004
(Percentage)

Real GDP Inflationa

2000 2001b 2002c 2003c 2004c 2000 2001b 2002c 2003c 2004c

Developing economies of the

ESCAP regiond 7.0 3.1 4.2 5.4 5.9 2.1 3.1 3.0 3.4 3.6

South and South-West Asiac 4.5 4.6 5.5 6.0 6.6 6.1 6.9 7.3 6.7 6.3
Bangladesh 5.9 6.0 4.3 .. .. 3.4 1.6 4.0 .. ..
India 4.0 5.4 6.0 6.3 7.0 3.7 4.2 5.0 5.0 4.5
Islamic Republic of Iran 5.9 5.5 6.5 6.5 6.0 12.6 12.0 14.0 14.0 11.5
Nepal 6.4 5.9 5.0 6.0 6.5 3.5 2.4 4.5 5.0 5.0
Pakistan 3.9 2.6 4.0 4.7 5.2 3.6 4.7 5.0 5.0 5.0
Sri Lanka 6.0 0.9 3.3 5.5 5.9 6.2 13.0 9.0 7.5 6.6
Turkey 7.1 -- 8.4 2.0 4.4 4.1 54.9 65.0 51.2 43.0 34.9

South-East Asia 6.5 1.8 3.2 4.4 4.6 2.3 5.0 4.3 3.9 3.9
Cambodia 5.4 5.3 4.5 6.3 6.0 -- 0.8 -- 0.6 3.0 5.0 5.0
Indonesia 4.8 3.3 3.8 4.9 4.6 3.7 11.1 9.8 6.3 5.3
Lao People’s Democratic
Republic 5.7 6.4 5.0 .. .. 25.1 9.0 12.0 15.0 ..
Malaysia 8.3 0.4 3.2 5.1 6.1 1.6 1.5 1.6 3.4 4.0
Myanmar 13.6 5.0 5.1 5.9 .. -- 0.1 9.6 .. .. ..
Philippines 4.3 3.4 4.0 3.4 4.0 4.4 6.3 5.7 5.3 5.0
Singapore 9.9 -- 2.0 2.0 5.8 5.7 1.4 1.0 0.8 1.5 1.7
Thailand 4.4 1.5 2.5 2.5 3.5 1.6 1.6 1.8 2.5 3.1
Viet Nam 6.8 6.8 6.1 6.8 7.3 -- 1.7 -- 0.1 2.0 3.8 7.6

East and North-East Asia 8.0 3.2 4.3 5.7 6.2 0.8 1.1 1.2 2.1 2.7
China 8.0 7.3 7.0 7.5 7.6 0.4 0.7 1.1 2.2 2.5
Hong Kong, China 10.5 -- 2.0 1.0 6.0 6.3 -- 3.8 -- 1.6 -- 1.0 2.5 4.0
Mongolia 1.1 1.4 4.0 5.0 6.0 11.8 8.8 6.0 5.0 5.0
Republic of Korea 8.8 3.0 3.9 4.6 5.0 2.3 3.2 2.8 2.6 3.4
Taiwan Province of China 5.9 -- 2.2 1.7 4.0 5.4 1.3 0.0 0.0 1.0 1.5
Pacific island economies -- 1.0 -- 1.2 2.7 2.7 2.5 7.1 7.2 8.2 7.1 5.9
Cook Islands 3.2 3.2 3.3 .. .. 2.0 1.0 1.0 .. ..
Fiji -- 2.8 1.5 5.0 4.0 3.0 3.0 2.3 2.5 3.0 3.0
Papua New Guinea -- 0.8 -- 3.3 1.2 1.8 2.1 10.0 10.3 12.0 10.0 8.0
Samoa 7.3 6.5 4.8 4.3 4.1 1.0 1.5 2.0 2.0 2.0
Solomon Islands -- 14.5 -- 7.0 5.5 3.0 2.0 6.0 8.0 10.0 6.0 5.0
Tonga 6.1 3.0 2.5 2.9 3.0 7.0 8.0 3.0 3.0 3.0
Vanuatu 4.0 2.0 3.0 3.5 3.5 4.1 3.0 2.0 2.5 2.5

(Continued)

6
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges

Table I.2 (continued)

(Percentage)

Real GDP Inflationa

2000 2001b 2002c 2003c 2004c 2000 2001b 2002c 2003c 2004c

Developed economies of the

ESCAP region 2.5 -- 0.2 -- 0.9 1.6 1.5 -- 0.4 -- 0.4 -- 0.7 -- 0.3 0.2
Australia 3.8 4.1 3.0 4.1 3.6 4.5 4.2 2.3 2.4 2.9
Japan 2.4 -- 0.5 -- 1.2 1.4 1.4 -- 0.7 -- 0.7 -- 0.9 -- 0.5 0.0
New Zealand 3.8 2.6 1.9 3.3 2.0 2.6 2.7 2.1 1.8 1.8

Memo:
Kazakhstan 9.6 13.0 6.3 6.8 7.2 13.5 8.4 6.9 6.7 7.0
Russian Federation 8.3 5.7 3.5 4.0 4.3 20.8 18.6 15.5 13.0 11.0
Uzbekistan 4.0 4.0 2.5 3.0 .. 24.9 25.6 25.5 23.1 ..

Sources: ESCAP, based on International Monetary Fund, International Financial Statistics, vol. LV, No. 1 (January 2002); Asian
Development Bank, Key Indicators of Developing Asian and Pacific Countries 2001 (New York, Oxford University
Press, 2001) and Asian Development Outlook 2001 (New York, Oxford University Press, 2001); Economist Intelligence
Unit, Country Reports and Country Forecasts (London, 2001 and 2002), various issues; and national sources.

Notes: This table is based on data and information available up to 15 March 2002.
The estimates and forecasts for countries relate to fiscal years defined as follows: fiscal year 2001/02 = 2001 for India
and the Islamic Republic of Iran; and fiscal year 2000/01 = 2001 for Bangladesh, Nepal and Pakistan.
a Changes in the consumer price index.
b Estimate.
c Forecast/target.
d Based on data for 28 developing economies representing about 95 per cent of the population of the region (excluding
the Central Asian republics); GDPs at market prices in US dollars in 1995 have been used as weights to calculate the
regional and subregional growth rates.

globalized and as transport and communication
costs are reduced, the intensity of competition
increases, and it becomes desirable to search for
new economical sites to produce different
products, parts and components to serve different
marketplaces.
For all developing countries including the
least developed ones and the economies in transi-
tions, some form of industrialization and industrial
growth must be recognized as the principal means
to provide stability and economic growth. Abun-
dant natural resources, low labour rates and even
large markets are no longer indispensable factors
for development, nor sufficient attractions for
investors. Essential infrastructure, enhanced skills,
technological capability and improved management
practices constitute the key elements of competi-
tiveness in the emerging pattern of global competi-
tion and industrialization. Industrial development
continues to be the main channel for value added,
together with certain related service sectors. While
industry remains the principal engine for economic
growth and overall prosperity, at the same time,
because of the liberalized process, the increased
globalization of industry and the extraordinary
and rapid pace of technological innovations and
adaptation, new challenges and prospects for
industrialization are being created. It is therefore
essential not only to reiterate the key role of the
industrialization of developing countries in the new
context, but it is also necessary to assess the
current industrial development trend and prospects
for new international relationships at the enterprise

7
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
and institutional levels. As a result, industrial
growth in developing countries is likely to become
increasingly complex and difficult during the
coming years. Furthermore, in developing coun-
tries of the region, major institutional changes and
new strategies and mechanisms will be required for
the successful integration of developing countries
into the mainstream of international trade, invest-
ment and technological flows. Industrial policy
reforms and the role of government will need
major changes and adjustments to ensure that
market shortcomings are adequately adjusted and
corrected through appropriate policy interventions
to improve long-term economic performance
and ensure that economies can be truly part of
the mainstream of global trade and investment.
Countries must increasingly assume a leading role
in enhancing both domestic and international com-
petitiveness and the increased export orientation of
local enterprises. At the same time, the growing
complexity of industrialization in the light of
global economic developments highlights the need
for specialized institutional support at the interna-
tional level to provide a range of technical services
for accelerated industrialization and technological
process in developing countries.8
2. Liberalization and globalization
process and SMEs
Thus, it has to be underscored that the
process of globalization and liberalization has
assisted individual firms in operating across
national boundaries in Asian and Pacific countries,
affecting thereby the whole process of industrial
development in different economies. Increasingly
it is being realized that the opening of global
markets through trade liberalization is not only
making it easier for firms to extend their opera-
tions beyond national boundaries but also provid-
ing greater potential for expansion and growth.
But all countries are not benefiting, as this will
8 Bhavani P. Dhungana, “Economic integration and indus-
trial production networking: Asia’s prospects and
challenges in 21st century”, paper presented at the Work-
shop on the Emerging Economic Map of Asia: Regional
Production Restructuring, Asian Integration and Sustain-
able Development, Bangkok, 1-2 August 2001, p. 5.
8
require competitive capacity and additional re-
sources for investment, in addition to technological
and marketing linkages to promote rapidly chang-
ing and high-quality products and services. This is
where the importance of international and global
production networks lies. It is very essential that
all countries and economies be somehow linked
and integrated into such production networks so
that sustainable regional and global production
structures could be created for everyone to play
mutually beneficial economic roles.
Furthermore, as a result of globalization
factors, the world has witnessed unprecedented
growth in output and trade over recent decades.
World output grew by an annual average of 2.7 per
cent during 1981-1990 and 3.5 per cent in 1996
and 1997, before the crisis reduced growth to 1.9
per cent in 1998. However, it increased to 3.8 per
cent in 2000, but fell to 1.3 per cent in 2001.9
World trade has grown at about twice the rate, at
4.5 per cent on average during 1981-1990 and
about 7.0 per cent during 1991-1997 with a growth
rate of 10.5 per cent in 1994 largely owing to
sustained trade liberalization. World trade volume
grew by 12.4 per cent in 2000, but declined to -0.2
per cent in 2001.10 In 2002 the world trade
volume is expected to increase by 2.5 per cent.
Average tariffs in industrial countries fell from 40
per cent in 1946 to about 5 per cent in 1990. By
the early 1990s, world exports (adjusted for
inflation) were nearly 10 times higher than 40
years earlier.11 Even in 1998, world trade grew at
twice the rate of growth in world output.12 In
2003 world trade is expected to grow by 6.6 per
cent in comparison with the world output growth
of 4.0 per cent in that year.13 Global FDI flows
rose from US$ 24 billion in 1990 to US$ 120
billion in 1999. For many developing countries,
private capital flows have largely replaced official
9 UNCTAD, Trade and Development Report 2002, p. 5.
10 World Bank, Global Economic Prospects and the Deve-
loping Countries 2002, p. 3.
11 International Herald Tribune, 4 January 2000.
12 United Nations, World Economic and Social Survey 1999.
13 International Monetary Fund, World Economic Outlook,
April 2002, p. 6.
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
capital flows. In 1990, official capital provided
half the loans and credits to 29 major developing
countries (including India, China and the Republic
of Korea in Asia). By 1999 private flows totalled
about US$ 136 billion to these countries compared
with only US$ 22 billion in government capital
flows.14
As indicated above, the Asian and Pacific
region also witnessed rapid economic growth
during the 1980s and 1990s as a result of globali-
zation factors in combination with conducive
national policies. To a large extent, this economic
growth was triggered by the impressive growth of
the industrial sector, in particular manufacturing,
especially after the switch from import substitution
to export promotion as the main development
strategy adopted by most East Asian economies.
This policy has proved tremendously successful as
judged by the rapid export growth of selected
Asian countries.
A rise in the share of manufactured exports
and imports as a share of total merchandise trade
would be consistent with rapid growth in manu-
facturing value added. Manufactured exports have
indeed shown a steadily increasing share of total
merchandise exports with very large increases in
each ASEAN country and increases among
SAARC countries as well.15
Indonesia had a spectacular rise in manu-
factured exports as a share of total merchandise
exports from just 2 per cent in 1980 to over 50 per
cent in 1995 and 1996. Manufactured exports had
become dominant in the exports of Malaysia (76
per cent), Singapore (84 per cent), Thailand (73
per cent), India (74 per cent), Nepal (99 per cent)
and Pakistan (84 per cent) by the mid-1990s.
Shares of manufactured imports had also risen
14
Institute of International Finance, as quoted in Inter-
national Herald Tribune, 4 January 2000. Private capital
flows comprise bank loans, bond financing, equity
investments in local stock markets and foreign direct
investment.
15 Export Competitiveness and Sustained Economic
Recovery, Studies in Trade and Investment No. 46,
(ST/ESCAP/2150), pp. 38-39.
perceptibly in every case in ASEAN, but manu-
factured goods shares in imports fluctuated in
South Asia. Imports of manufactured goods in
much of South Asia were subjected to high tariffs
and several types of controls.
However, in general there has been a
dramatic shift in the pattern of developing country
trade, with a shift away from dependence on
commodity exports to much greater reliance on
manufactures and services and the greatly in-
creased importance of exports to other developing
countries. While national-level policy initiatives
remain the principal focus of trade policy reforms,
developing countries have become increasingly
involved in regional and multilateral trade negotia-
tions. The multilateral system has made substan-
tial adjustments to the increased importance of
developing countries, but reforms in governance
and a sharper distinction between positive and
negative approaches to integration seem likely to
be needed. Furthermore, between 1980 and 1985
manufactured exports and imports grew slowly in
ASEAN (with the exception of Indonesia, where
manufactured exports rose rapidly from a very
small base between 1980 and 1985). The slow
growth during the first half of the 1980s reflects
the period of economic recession in the region.
Import growth was sharply negative in the
crisis-ridden Philippines in 1980-1985. Notably,
there was a dramatic recovery of growth of manu-
factured imports and exports in the Philippines
once the economic and political situation had been
stabilized after 1986. In South Asia manufactured
imports grew very slowly in Bangladesh, Pakistan
and Sri Lanka during 1980-1985, but have shown
higher growth since then. In Nepal, manufactured
imports decelerated after 1985 and growth became
negative between 1990 and 1995. Growth in
imports of manufactured goods fluctuated in India.
The performance of manufactured exports of
India after 1990 was quite good compared with
1980-1985. Nepal steadily increased its exports
of manufactured goods. The performance of
Pakistan’s manufactured exports fluctuated. Sri
Lanka had fairly strong growth in manufactured
exports during the 1980s.
Indeed, it is now widely recognized that the
maintenance of an open liberalized domestic
economy was decisive in explaining the growth of
9
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
East Asia and other successful developing coun-
tries. It not only allowed for large inflows of FDI
but also for the rapid export growth generated to a
large extent by foreign-invested companies. East
and South-East Asia have been the leading destina-
tion among developing countries for global FDI
flows. FDI inflows have been particularly high in
those countries, which also witnessed large export
growth. It is evident that those countries which
failed to open their economies and adopt an export
promotion strategy also failed to reap the benefits
of the globalization process. Globalization, inter-
preted as constituting growing opportunities for
world trade and investment, after all enabled coun-
tries with an export promotion strategy to actually
increase their exports. Without globalization, indi-
vidual countries, including developed countries,
would have continued their protectionist policies,
so common in the direct aftermath of the
global depression of the 1930s, and would have
prevented East Asian and other developing coun-
tries from increasing their exports at such high
rates.
The latest success story in Asia with respect
to export growth has been China since the country
started to liberalize its economy in the early 1980s.
China is a very large economy in terms of absolute
size of production and trade. China has proved
attractive to foreign investors as a result of its
rapid economic growth, large size, abundance of
low-cost labour and increasing trade orientation.
Recent studies have found that Chinese manu-
facturing industries and firms have proven to be
formidable competitors with ASEAN counterparts
in both the United States and Japan. The export
shares of China in labour-intensive manufactures
rose sharply in the 1990s in both the United States
and Japan and had an undeniable impact on the
market share of ASEAN. China devalued the yuan
twice in 1990 and 1994 and strengthened its
competitiveness vis-à-vis the ASEAN countries as
they by and large pegged their currencies to United
States dollar, which appreciated strongly against
the yen and most other major currencies in 1995
and 1996. The sharp currency realignments in
1997 and 1998, coupled with China’s pledge to
avoid competitive devaluation, had eroded this
competitive advantage, however. It is also note-
worthy that China, like most of South-East Asia
10
(the Philippines being the exception), experienced
an export slowdown in 1996. Thus, China is not
able to avoid cyclical swings in export markets any
more than other Asian economies. South Asian
industries and firms may also have experienced
some competitive pressure from China, particularly
in markets for labour-intensive manufactures such
as textiles, apparel, footwear and leather goods,
toys and other miscellaneous manufactures. None-
theless, trade with China also appears to have
been expanding rapidly in the case of India
between 1991 and 1997, with exports and imports
both expanding impressively. China maintains a
merchandise trade surplus with the SAARC region.
Both SAARC and ASEAN members have an
interest in the terms and conditions of China’s
accession to the World Trade Organization (WTO)
and may wish to consider commercial benefits and
costs in that context.
The growing trend of intraregional trade and
investment is in fact a reflection at the regional
level of global trends, which are pushed by
globalization. However, as globalization is likely
to continue at an accelerated pace, the implications
for industrial development and restructuring in
line with the requirements of globalization are
wide-ranging and include both opportunities and
challenges. That having been said, it should be
noted, especially in the context of promoting
SMEs, that a critical long-term policy challenge
which the ESCAP region will face is how to
manage globalization, extend the duration of the
current recovery and broaden its reach so that
the poor can benefit from economic growth. Much
will depend on creating new sources of growth
by increasing the region’s export competitiveness,
especially of exports by SMEs, while maintaining
financial stability in increasingly open and inter-
dependent economies.
This is the critical issue on which the
competitiveness of SMEs will depend and attempts
will be made to seek answers to the following
questions:
(a) What are the policy reforms that will
ensure that the region can sustain the international
competitiveness of SMEs in a globalizing world
economy?
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
(b) How can the productivity and
efficiency of SMEs be boosted? What institutional
and infrastructural factors are necessary for
improving the efficiency of SMEs?
(c) What are the implications of the
currency exchange rate crisis for the long-term
stability and export competitiveness of SMEs?
(d) What are the implications of regiona-
lism and multilateralism for the survival and com-
petitiveness of SMEs?
(e) What economy-wide integrated policy
issues are important for the promotion of SMEs
and their competitiveness at the international
market?
C. Role of SMEs in the development
process: some country experiences
1. General observations
SMEs all over the world have played a
fundamental role in promoting economic and in-
dustrial production. In particular, SMEs provide
the necessary foundations for sustained growth and
rising incomes in the less developed and transi-
tional economies. Sustained and healthy growth of
the SME sector in weaker economies is obviously
necessary, as it is difficult to imagine raising
overall living standards and social peace in those
economies without SME development. In general,
SMEs provide the bulk of the entrepreneurs and
employment in those economies and they are
mostly in the private sector. The development of
the SMEs and their linkages with larger enterprises
have also played a significant role in the highly
successful business practices of the vertically
integrated Japanese “keiretsu” financial-industrial
groups during most of the post-war period. Simi-
lar linkages appear to have been important in
recent successes of “township and village enter-
prises” (TVE) in China. Another quite different
synergistic relationship, based on both horizontal
and vertical linkages, is represented by the kind
of local cooperative/competitive development com-
mon for a long time in Europe and North America,
but only recently dignified with the titles of
“industrial district” and “cluster”.16 However, the
SME sector in many developing countries has
usually been neglected and discriminated against in
terms of access to government attention, access to
finance, management and marketing expertise and
technology, as compared with large enterprises.
This has been particularly so in the economies in
transition, where the large-scale State sector had
assumed the major role in economic and industrial
development. Private sector development in the
economies in transition and in the least developed
countries should, therefore, start by strengthening
and promoting SMEs as to allow these enterprises
to grow into medium- to large-scale enterprises
and enable them to take over the functions of the
previously State-owned enterprises.
Although there are variations in the
proliferation of SMEs and their contributions to
the economy, in recent decades there have been
some efforts to improve the conditions for SME
promotion in the Asian and Pacific region.
Policies have been adopted and attempts made to
improve the institutional facilities for their func-
tioning. However, it also has to be noted that in
the Asian and Pacific region SMEs comprise a
wide range of plant sizes and technologies, both
across and within countries, covering three broad
tiers of activities. At the top, there is the modern
SME sector, often closely linked with large enter-
prises as subcontractors and producing modern
consumer and manufacturing products such as
metal goods, paints, processed foods, plastic goods
and wood products. These types of enterprises
generally use more modern technology and
are located nearer to cities and ports with well-
developed infrastructure facilities. In addition,
urbanization and localization tend to facilitate the
growth of the modern SME sector. At the other
extreme can be found the traditional SME sector,
consisting of artisans, workshops, household units
and craft industries and other industries, which are
normally found in rural areas. Enterprises operat-
ing in this segment of the SME spectrum usually
16 Robert McIntyre, The Role of Small and Medium
Enterprises in Transition: Growth and Entrepreneurship,
Research for Action No. 49 (United Nations University,
World Institute for Development Economics Research
[WIDER], December 2001), p. 5.
11
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
employ rudimentary implements and rely on local
markets for the supply of raw materials and the
sale of the final products. Here, the agrarian
nature of the economy and fragmented markets,
low technology and weak infrastructure favour
labour-intensive manufacturing at the household
level. Between these two sets of SMEs are
the agro-based industries, most often found in
semi-urban areas, which utilize agricultural raw
materials as major production inputs but may
depend on distant markets to sell their products.
These types of SMEs, clustering around townships
and population centres, have a great potential in
meeting some of the urgent needs of developing
countries, especially those with weaker economies.
In most less developed economies and
economies in transition in the Asian and Pacific
region, the bulk of the industrial labour force is
engaged in small- and medium-scale enterprises.
Small-scale and cottage industries in LDCs usually
employ around 80 per cent of the entire industrial
workforce of the country. This sector also makes a
valuable contribution to the industrial value added
of the economy. However, most of the value
added, varying from around 40 to 70 per cent,
routinely originates from only a few industries,
usually food and beverages, jewellery and gems,
leather and leather products, jute and jute products,
textiles, furniture, wood products and handicrafts,
indicating the narrow base of the SMEs in the
economy. In the more advanced economies, SMEs
are found in a wide array of industries.
2. Selected country experiences
SMEs in Bangladesh have contributed
significantly to manufacturing growth and employ-
ment creation. There are around 27,000 medium-
sized enterprises and around 150,000 small-scale
enterprises in the country. At present, 80 per cent
of manufacturing establishments are SMEs,
accounting for 80 per cent of the labour force and
50 per cent of the output of the sector and 5 per
cent of GDP. SMEs provide vital linkages to
larger enterprises, particularly in the high-growth
export sector, and also form part of the core
business activities in both rural and urban areas.
The garments industry contributed to SME deve-
lopment through orders for accessories, packaging
12
materials, etc., while the footwear industry in-
creased subcontracts to SMEs. In addition, agro-
processing and poultry have recently emerged as
important activities for the development of SMEs.
Over the past decades, SMEs have contributed
significantly to fostering labour-intensive growth
and reducing poverty. Their production processes
are often marked by outdated technologies. SMEs
in general cannot offer the requisite collateral and
meet the transaction costs for obtaining access to
institutional credit. SMEs also find it relatively
more difficult to access key infrastructure, includ-
ing electricity and gas. The policy environment is
not conducive to the growth of SMEs. They are
subject to the same procedural rigours of registra-
tion, taxation, credit disbursement, export and
import as large enterprises, thus adding high costs
to their operations.
In India, small-scale industries (SSIs)
account for 95 per cent of the country’s industrial
units, 40 per cent of industrial output, 80 per cent
of employment in the industrial sector, 35 per cent
of value added by the manufacturing sector, 40 per
cent of total exports and 7 per cent of net domestic
product.
In Pakistan, the SME sector employs about
80 per cent of the industrial labour force and
makes up about 60 per cent of the manufacturing
sector. However, the contribution of SMEs to
GDP is only 15 per cent.
In Indonesia, before the 1997 economic
crisis, almost two thirds of small business were in
the agricultural sector, over 17 per cent in trading
(including restaurants and hotels), over 7 per cent
in processing industries, 5 per cent in the service
sector, 2.5 per cent in consultancy and 4 per cent
in other sectors. Thus, although SMEs account for
more than 90 per cent of the total number of
companies in Indonesia, their share in the Indone-
sian economy is very insignificant, as 80 per cent
of GDP is produced by large corporations.
SMEs constitute a large portion of
Thailand’s national economy as they account for
70 per cent of employment in the industrial sector
and 4.7 per cent of total manufacturing value
added. About 98 per cent of establishments in the
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
manufacturing sector in Thailand are SMEs,17
which are scattered in both the Bangkok Metro-
politan area and regional areas. The main indus-
tries which are dominated by SMEs in Thailand
include metal and steel, plastic products, rubber
and garments. The competitiveness of SMEs is
thus a crucial component of the national competi-
tiveness agenda. The SME Promotion Act was
enacted in February 2000. The SME Promotion
Committee, chaired by the Prime Minister, and the
Office of Small and Medium Sized Enterprise
Promotion, have been established to promote
the development of SMEs. The SME Promotion
Fund has also been established with seed money
from the Government and other private sources.
The Fund can be used for lending to SMEs
or groups of SMEs and for funding projects
of government departments, other government
agencies, State enterprises and private sector or-
ganizations as approved under the SME Promotion
Action Plan.
Concerted efforts are being made to support
SMEs through: (a) strengthening of technological
and management capabilities; (b) developing skills
and knowledge; (c) enhancing market accessibility;
(d) strengthening of the financial support system;
(e) establishing a conducive business environment;
(f) commercialization and incubation programmes;
and (g) developing networks and clusters.18
Additional work is needed on SMEs, given their
potential for job creation.
SMEs in Malaysia, defined as companies
having paid-up capital of less than M$ 25 million
with not more than 150 full-time employees, are
primarily involved in the manufacturing, engineer-
ing and printing areas. SMEs contributed almost
30 per cent of total output, 17.6 per cent of value
17 Korea Trade-Investment Promotion Agency (KOTRA),
A Strategy for Internationalization of SMEs in the Asia-
Pacific Region: Lessons from the Empirical Study on
Korean and Other APEC Member Countries (October
1999), pp. 116-117.
18 Research Institute for Development and Finance, Japan
Bank for International Cooperation (JBIC), Issues of
Sustainable Development in Asian Countries: Focused
on SMIs in Thailand, JBIC Research Paper No. 8-1
(January 2001), pp. 9-12.
added and 17.5 per cent of employment in the
manufacturing sector in 1995. Figures for that
year show that only 20 per cent of SMEs are
involved in exports. Currently more than 80 per
cent of total manufacturing firms in Malaysia are
SMEs. Malaysian Industrial Development Finance
Berhad, which covers the manufacturing sector,
provides 60 per cent of its coverage to SMEs.
In the Philippines, SMEs accounted for
99 per cent of all enterprises, 45 per cent of
employment and 28 per cent of value added in the
manufacturing sector in the mid-1990s.
Singapore has no statistics for SMEs, but it
is estimated that SMEs account for over 40 per
cent of manufacturing production and over 25 per
cent of value added in manufacturing.
In the Republic of Korea, SMEs accounted
for 70 per cent of employment, 46 per cent of
gross output and 47 per cent of value added in
1997. Since the mid-1990s, SME policies in the
Republic of Korea have focused on fostering
competitive SMEs, accelerating the shift towards a
more sophisticated and value-added industrial
structure through automation- and information-
based processes and providing assistance for tech-
nology development and quality improvement.
SMEs have been encouraged to form cooperative
ties with large companies and enhance their market
competitiveness at home and abroad. Short-term
policies have focused on ensuring stability for
SMEs in, for example, access to financing, particu-
larly in the wake of the financial crisis. In addi-
tion, sanctions against unfair transaction practices
between large companies and SMEs have been
strengthened, and support for SME technology
development projects has been increased. SME
policies also place emphasis on promoting exports.
The Small and Medium Business Administration
(SMBA) was established in 1996 as the central
support organization to assist SMEs. SMBA has
11 regional offices throughout the country, working
in cooperation with related organizations such
as the Small and Medium Industry Promotion
Corporation (SMIPC), Korea Federation of Small
Business (KFSB), Korea Credit Guarantee Fund
(KCGF) and Korea Technology Credit Guarantee
Fund (KOTEC).
13
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
In China, the Government has not adopted
a comprehensive SME policy yet. However, the
State Economic and Trade Commission has deve-
loped policies to support SMEs’ management
control, financing and technology development
since it established its Small and Medium Enter-
prises Department in 1998. In March 1999, the
National People’s Congress recommended more
reforms and restructuring of SMEs and recently
government circles have started to use the term
SME more frequently. It is known that measures
to support SMEs, especially in financing and
preferential tax policies, have been implemented
actively. The large State-owned corporations’
difficult management situation has prompted the
Chinese Government to implement a promotion
policy for SMEs. Currently there are no accurate
statistics on SME exports; however, it is roughly
estimated that 60 per cent of total exports from
China come from the SME sector. The main area
that the Chinese Government is focusing on to
promote SMEs is financial support, which includes
relieving SME debt through policy adjustments
and providing credit and preferential tax treatment
to SMEs. Especially to provide credit loans to
SMEs, the Government encouraged banks to
expand loans to SMEs by establishing a depart-
ment that deals with SME credit loans exclusively.
3. SMEs and export promotion
In developing economies of the ESCAP
region, SMEs are now exporting a wide variety of
products and continue to play a crucial role in
generating and diversifying exports. Although the
developing countries’ exports are mostly labour-
intensive, as economies of the region are undergo-
ing industrial restructuring of varying kinds with
emphasis on the private sector as the engine of
growth, the importance of SMEs in exports has
taken on a new dimension. In particular, SMEs
play a significant role in the first or early phase
of an export-oriented industrialization strategy by
supplying low-cost labour-intensive products such
as textiles and garments, leather goods and other
consumer products. Again, as SMEs begin to
modernize, they have been active in producing
light engineering goods such as forgings, castings,
diesel engines, simple machinery, machine tools,
domestic appliances and construction hardware.
14
Electronics is in a different category, being
knowledge-intensive but requiring little capital and
infrastructure; it provides a valuable opportunity
for a new breed of young entrepreneurs, techni-
cally and professionally qualified, to make their
mark. In countries such as the Republic of Korea,
China, India, the Philippines, Thailand and Indone-
sia, this sector is proving to be highly productive
especially for exports from the SME sector. At the
margin, imports of SMEs also tend to be less
capital-intensive than those of large enterprises.
This pattern of exports and imports not only
generates additional employment, but also has a
positive impact on the trade balance. In all the
newly industrialized economies (NIEs), the export-
oriented development strategy made a significant
contribution and in that context SMEs had a
major role to play. Even after Japan and Asian
NIEs reached an advanced stage of development,
SMEs in their economies continued to play a
critical role in the export of manufactured
products, especially in those that are technology-
and skill-intensive such as computers and software,
and specialized parts and components for the
machinery, transport and aircraft industries. While
promoting the ESCAP region’s export competitive-
ness of SMEs entails creating new sources of
productivity growth in the SME sector with
stability and further trade liberalization and greater
flow of information, the contribution of SMEs to
direct exports is considerable in most economies of
the region. This contribution is even higher if
indirect exports are included. Statistics are usually
only available to limited extents for direct exports
and once again, the picture varies across countries
in the region. In India, SMEs account for about 35
per cent of total exports. Since SMEs in Indonesia
do not play a very significant role, only less than 5
per cent of SMEs are involved in exports but this
figure is much higher when indirect exports are
included in terms of export items, textiles, fabrics,
garments and agro-based products. In recent years
exports of jewellery products from SMEs have
increased rapidly in Indonesia. In Malaysia, SME
exports make up about 20 per cent of total exports.
In Pakistan, SMEs exports account for about 80
per cent of total exports of manufactured products.
In the Philippines, some 90 per cent of exporters
fall into the category of SMEs and their contribu-
tion to exports is estimated at around 20 per cent.
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
In the Republic of Korea, SMEs accounted for
41.8 per cent of exports in 1996. Main export
items include electric and electronic products,
machinery, other household goods and plastic
items. In China, textiles and light industry have
emerged as SME-dominated export sectors. These
two sectors now account for over one third each of
the total exports of China. In Japan, although
SMEs occupy a very important place, in terms of
exports, they are not significant. SMEs play a very
important role in the exports of Taiwan Province of
China. In Singapore, as companies are focusing
on direct or indirect export of goods through multi-
national corporations, the ratio of exports from
SMEs is not high.
Other developing countries trying to repeat
the success of the NIEs face vastly different
external market conditions. In particular, the
product structure of SMEs would have to change
in line with changes in external demand. Since
external demand is shifting to human capital and
information-intensive products, the SMEs of the
Asian NIEs are better placed than SMEs in other
countries of the region to respond to this change.
The newcomers, particularly countries eager to
repeat the success of the NIEs, may find that their
SMEs are less favourably placed. They are likely
to encounter increased competition from other
SMEs from outside the region. In addition, the
high cost of some capital goods and exchange rate
volatility add to their difficulties.
SMEs make a valuable contribution as
subcontractors to large enterprises, which often
tend to be transnational corporations (TNCs).
They produce parts and components for large
enterprises on a contractual basis, using local
resources and skills. In terms of economic fluctua-
tions, they act as “shock absorbers” for the large
enterprises, adjusting their own employment and
production levels to reflect changes in demand
and supply conditions. In these ways, they add to
the flexibility and viability not only of the large
enterprise sector but also of the entire economy.
While the importance of such linkages is recog-
nized, the actual existence and utilization of the
vast potential to forge and strengthen such linkages
have remained limited and therefore require
increased government attention.
4. SMEs and foreign direct investment
Although information on FDI by SMEs is
difficult to obtain, in some cases it is obvious that
SMEs are playing an increasingly important role in
FDI, especially from the more advanced develop-
ing countries. However, not all countries collect
comprehensive data on SME-related FDI. Excep-
tions in this regard are Japan and the Republic of
Korea. However, there is no survey to identify
inward or outward FDI by SMEs. Nevertheless, in
the Republic of Korea, investment abroad by small
businesses amounted to 65.7 per cent of total
outward investment in 1996 or US$ 3,968 million.
In 1996 small and medium-sized TNCs accounted
for 55 per cent of new foreign affiliates by
Japanese firms.19 In Thailand, 46 per cent of the
approximately 2,500 Japanese firms operating
in the country are SMEs.20 In 1997 the United
Nations Conference on Trade and Development
(UNCTAD) undertook a questionnaire survey and
analysed the problems and obstacles facing invest-
ment by SMEs. This is the only comprehensive
analysis on the subject.21
On the basis of the above analysis, it
appears that SMEs are quite important in their
contribution to overall development in countries of
Asia and the Pacific. They have also increasingly
become involved in the globalization process,
which has clearly created opportunities. Interna-
tionalization of SMEs has opened up new opportu-
nities for growth within the domestic economy
through employment promotion, entrepreneurship
development and exports. However, globalization
also has its costs and has affected SMEs somewhat
negatively, in particular when one looks at it with
reference to the recent Asian crisis. Some such
implications of the globalization process for SMEs
are presented in the following section of this study.
19 UNCTAD, World Investment Report 1999: Foreign
Direct Investment and the Challenge to Development
(United Nations publication, Sales No. E.99.II.D.3).
UNCTAD defines SMEs as firms with 300-500 workers.
20 According to the Board of Investment in Thailand,
Bangkok Post, 3 March 2000.
21 UNCTAD, Handbook on Foreign Direct Investment by
Small and Medium-sized Enterprises: Lessons from Asia
(United Nations publication, Sales No. E.97.II.D.4).
15
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
D. Promoting the competitiveness
of SMEs within the ongoing process
of globalization
The analysis and information provided in
the earlier sections of this study have pointed out
that globalization and its various aspects have
impacted in different ways on the SMEs, which
has not been positive all the time. Furthermore, in
most of the developed countries, SMEs enjoyed
the support of the Government in terms of
appropriate legislation for the provision of credit,
technical support and other incentive measures and
built-up their capacity to deal with the adverse
impacts of globalization. However, in developing
countries, SMEs enjoy only limited support from
government for the same types of facilities. In
addition to the problems that the SMEs have to
face in developing countries, new challenges have
unfolded as a result of the globalization process.
SMEs of developing countries, particularly small
manufacturing firms, are facing serious challenges
due to new developments at the regional and
global levels, leading to severe competition in
domestic as well as international markets. Some
of these challenges are presented below.
1. Trade liberalization and multilateral
agreements
While SMEs in Asia and the Pacific will
mainly benefit in the long run from trade liberali-
zation within the region, the various provisions of
regional and multilateral agreements including the
Uruguay Round agreements have led to substantial
tariff cuts in developed countries, changing the
structure of export markets, especially for products
which are important to SMEs. For instance,
above-average cuts involve seven product groups,
which together account for over 70 per cent of
industrialized countries’ imports: metals; mineral
products and precious stones; electrical machinery;
wood, pulp, paper and furniture; non-electrical
machinery, chemicals and photographic supplies;
and other manufactured articles, all of which are
sectors in which SMEs are direct producers or
suppliers. However, not only SMEs in Asia and
the Pacific will benefit, but SMEs from other
16
regions will as well, which will intensify the level
of competition among SMEs globally for exports
to developed countries. Moreover, high tariffs are
maintained in developed countries on products
which are also important to SMEs, such as textiles
and garments, rubber, leather, footwear and travel
goods. It is also to be noted that regional
economic groupings are gaining power and are
changing the patterns of international trade.
For those countries with a less developed
economy and industrial sector, including the LDCs
in South and South-East Asia, their commitments
under the regional and multilateral agreements
will provide both opportunities and challenges, in
particular for SMEs. While opportunities lie
mainly in the necessity to upgrade national capa-
bilities and the performance of both public and
private enterprises forced by international competi-
tion, challenges include mobilizing the necessary
financing, political commitment and skills to do so.
While trade liberalization provides major opportu-
nities for SMEs to increase their exports, a major
challenge will be to improve their competitiveness
not only for exports but also at home as SMEs
have to compete with imports and larger inflows of
FDI, including foreign investment from other
SMEs.
One of the most significant outcomes of the
Uruguay Round was the decision to incorporate
world trade in textiles and apparel into the General
Agreement on Tariffs and Trade (GATT)/WTO and
to phase out the multifibre arrangement (MFA)
over a period of 10 years ending in 2004. The
implications of this measure for SMEs are
considerable as they play an important role in the
production of textiles and garments and related
areas. The Governments of South and South-East
Asia should monitor the implementation of the
agreement. In the meantime, it will be essential
to promote competitiveness in the region’s textile
industry. For SMEs, the important thing is to
seek out niche markets for lower-quality low-price
garments and textiles. To the extent that they are
direct exporters, competition is expected to be
fierce. To the extent that they are suppliers to
TNCs, they will also face challenges as it will
become easier for TNCs to shop around the world
for the most suitable supplier. Increasingly, there
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
will be a shift away from low-price low-quality
goods to higher quality in conformity with ISO
9000 (international standards for quality manage-
ment systems) and ISO 14000 (international
standards for environmental management systems).
However, niche markets for low-priced goods will
continue to exist, in particular in the region. As a
result, SMEs need to concentrate on competing at
home and in the region rather than at the global
level.
Technical standards are a vexing problem
in expanding trade in machinery, particularly elec-
trical machinery, telecommunications equipment,
motor vehicles and transport equipment. They also
are very important in food, pharmaceuticals and
other consumer products, sectors where SMEs play
an important role to various extents, mainly as
subcontractors. As such, they are indirectly
affected by technical standards. The diversity of
technical standards and capabilities in the region
and globally presents a formidable barrier to the
free flow of trade as was recognized in the
Uruguay Round Agreement on Technical Barriers
to Trade (TBT). Countries are able to restrict
imports through rather onerous and costly con-
formance requirements. Imported products may
be subject to laboratory testing and other pro-
cedures that are non-transparent and add
substantially to the item’s cost. This has given rise
to greater efforts by Governments, firms and
industry associations to meet standards set at
the international level and gain certification by
the International Organization for Standardization
(ISO).
Trade-related investment measures (TRIMs)
have been included in the Uruguay Round agree-
ments, although LDCs are exempted from imple-
mentation for a period of 10 years (up to the end
of 2004). The use of performance requirements
is unnecessary when outward-looking policies
are already in place. However, in cases where
tariff and non-tariff protection provides higher
profits to domestic sales, TRIMs may be a
temporary necessary evil. Regulations restricting
foreign ownership are likely to be redundant unless
a very high percentage of production is exported,
as surveys of TNCs reveal a positive and signifi-
cant correlation between foreign ownership share
and export propensities in countries without export
performance requirements.22 The importance
for SMEs is that investment liberalization will
expose them to more intense competition from
TNCs in the home market and for their export
markets.
An important development is the adoption
of the Agreement on Trade-related Aspects of
Intellectual Property Rights (TRIPs). The TRIPs
Agreement has incorporated all the essential
provisions of the international conventions govern-
ing intellectual property protection administered
by the World Intellectual Property Organization
(WIPO) and made them universally applicable
on a most-favoured nation (MFN) basis.23 So far,
many developing countries in the Asian and
Pacific region have continued to violate intellectual
property rights and incurred sanctions from deve-
loped countries, notably the United States. As
many SMEs are in businesses where intellectual
property rights have been violated, the implementa-
tion of TRIPs will directly affect them. It may
also lead to increased investment inflows, which
could crowd them out. However, opportunities are
created to improve their competitiveness and their
own rate of innovation. SMEs are known for their
flexibility and innovativeness and TRIPs may give
them an extra stimulus to undertake their own
research and development (R&D). In addition,
technology transfer will be facilitated as TNCs will
now have better guarantees that the technology
transferred will not be abused with detrimental
effects to their own operations. The absence of
intellectual property rights protection has been
seen as a major impediment to technology transfer
to developing countries.
Subsidies, safeguards and countervailing
duties have been traditionally used and abused as a
hidden form of trade protection. In developing
countries, SMEs are major recipients of subsidies.
The Uruguay Round Agreement on Subsidies and
22 Eric D. Ramstetter, “Comparisons of foreign multi-
nationals and local firms in Asian manufacturing over
time”, ICSEAD Working Paper No. 98-18.
23 WIPO, “Intellectual property for business” <http://www.
wipo.int/sme/en/ip_business/index.htm>.
17
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
Countervailing Measures has limited the use of
these instruments but not altogether eliminated
them. Major subsidy programmes in developed
countries are exempted from the prohibitive
provisions while countervailing duties are per-
mitted in exceptional cases where “material injury”
to domestic producers is indicated. What consti-
tutes “material injury” will be difficult to judge
and is therefore subject to different national
interpretations. Developing countries should be
wary of developed countries’ practice of levying
countervailing duties while their own practice
with regard to subsidies would have to be severely
restricted in order to conform to the Agreement
and strengthen competitiveness in the domestic
markets. A similar argument can be made with
respect to safeguards. However, it will give deve-
loping countries the same tools to protect their
domestic industries, including the SMEs.
In the end, trade liberalization within the
region is probably of more significance than at the
global level. The implementation of the ASEAN
Free Trade Area (AFTA) will directly open up
avenues for SMEs in the ASEAN region to
increase their exports and foreign investment while
also exposing them to increased FDI and imports
at home from countries at similar or slightly higher
development levels. Competition at this level will
be the fiercest. However, less developed countries
such as Cambodia, the Lao People’s Democratic
Republic and Viet Nam are likely to benefit from
FDI from developing countries in the region at a
higher development level, which may provide more
appropriate competition and advantages to their
indigenous business sector than similar investment
and imports from the industrialized countries,
with which the indigenous sector obviously cannot
compete. Realizing the importance of SMEs,
initiatives within ASEAN and Asia Pacific Eco-
nomic Cooperation (APEC) have now been taken
to improve the competitiveness of SMEs of their
member States, ranging from financial support
(such as venture capital) to the establishment of
data banks and information centres and technology
support as well as modalities for skills develop-
ment and human resources development in the
SME sector. In particular, SMEs will benefit from
initiatives within APEC to improve the business
environment through the harmonization of regula-
18
tions and other measures through the Business
Advisory Council. In addition, the APEC Center
for Technology Exchange and Training for
Small and Medium Enterprises (ACTETSME) is
intended to support the sustainable development
and growth of SMEs in the Asian and Pacific
region and at the same time make them globally
competitive. The Center is envisaged to perform
the role of an information clearing house and
referral facility.
While it is generally recognized that SMEs
can greatly benefit from global and regional trade
and investment liberalization, the actual impact on
SMEs has been mixed but on the whole not very
positive. For instance, it is reported that in many
countries in the region liberalized imports of
finished products has led to dumping at below-cost
prices against which small-scale units could not
compete while it shifted demand away from
domestic goods to imported goods. In general, it
is pointed out that SMEs have not benefited from
the economic boom in various countries of the
region: while they have gained better access to
land and lower prices for machinery and equip-
ment, and finance through incentives and govern-
ment assistance, the cost of services has generally
speaking gone up while increased competition
has driven many SMEs out of business. In addi-
tion, any import benefits may not accrue in those
countries, such as in South Asia, where SMEs
have to go through middlemen for their imports.
In those cases where import tariffs were lowered
on both consumer goods (areas of activity of
SMEs) and inputs such as machinery and equip-
ment, the SMEs have suffered. In cases where
tariff cuts on consumer goods were sequenced (or
are scheduled) after import liberalization on input
goods (such as India), SMEs have been able to
survive in better shape.24
24 Rizwanul Islam, ed., Small and Micro Enterprises in
a Period of Economic Liberalization: Opportunities
and Challenges (New Delhi, ILO/SAAT, 1996). This
publication also notes that the sequencing of trade
liberalization with respect to cutting tariff and non-
tariff barriers has also shifted incentive structures for
SMEs to the advantage of large enterprises in various
countries.
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
2. Information technology and SMEs
Creativity and innovations through major
breakthroughs in technology, particularly in infor-
mation technology, has created many opportunities
and challenges for the SMEs, bringing with them
new changes in production management and
commercial practice. It should be noted that in
order to succeed in the emerging global economy,
managers of small and large businesses alike need
to redefine how they interact with their customers,
suppliers and competitors. To that end, organi-
zational strategies and interaction with other
stakeholders must be continuously reviewed and
repositioned with a view to the enhancement of
corporate functioning and the speedy flow of
information and decision-making. Information
technology (IT) offers a wide variety of supports
and alternatives which are of crucial importance
to dynamic firm management. In that context,
small enterprises have to move effectively into
more integrated management methodologies using
IT applications. In this process, with the advance
of enterprise-wide client-server computing comes
a new challenge: how to control all major busi-
ness processes with a single software architecture
in real time. The integrated solution, known as
enterprise resource planning (ERP), promises
benefits ranging from increased efficiency to
improved quality, productivity and profitability.25
A negative implication of this process is the
replacement of labour by labour-saving techno-
logies adopted by the larger enterprises, raising
their productivity to much higher levels than
the competing SMEs. SMEs can ill afford the
high costs involved in adopting similar techno-
logies and run the risk of being driven out of
business. However, in the area of information
technology, the Internet and the possibility of
electronic commerce have opened up myriad
opportunities for SMEs to start, operate and
expand their businesses at low cost. In particular,
electronic commerce will enable SMEs to streng-
then customer relationships, reach new markets,
optimize business processes, reduce costs, improve
25 ESCWA, Potential of Manufacturing Small and Medium
Enterprises for Innovation in Selected ESCWA Countries
(2001), p. 21.
business knowledge, attract investments and create
new products and services. In addition, e-com-
merce would enable them to compete against
larger, more established firms and in new and
previously untapped markets. While SMEs do
not have the brand recognition of the large
enterprises, with e-commerce they can create a
presence and compete in markets that were tradi-
tionally dominated by the large enterprises.
Internet use in general would also greatly facilitate
communications, which would lower their operat-
ing costs.
The main challenge for SMEs is therefore to
upgrade their technological capabilities with regard
to Internet use and conduct e-commerce effec-
tively. A major constraint is the lack of telecom-
munication infrastructure or the restrictive regimes
present in various Asian economies. For instance,
while computer density is 21.6 in Singapore, it is
only 0.3 in Viet Nam and China. Telephone main
line density ranges from 51.3 in Singapore to 1.1
in Papua New Guinea in the APEC region. Of the
less developed countries in the Asian and Pacific
region, Malaysia stands out with a telephone main
line density of 18.3, compared with 2.1 for Indone-
sia, 7.0 for Thailand and 2.5 for the Philippines.26
Government policy to provide an enabling environ-
ment is therefore crucial for SMEs to utilize the
full potential of the Internet and computerization of
their operations. It should be noted that in this
period of knowledge-based development processes,
SMEs must transform themselves as learning
organizations and become increasingly knowledge-
based organizations.
3. Investment flows and integration of
capital markets affecting SMEs
The rapid increase of FDI flows, including
intraregional inflows has major implications for
the SME sector in two respects. The first respect,
as indicated earlier, refers to the role of SMEs
in domestic markets as suppliers of parts and
components or basic services, largely on a subcon-
tracting basis, to foreign investors. The second is
26 World Bank, World Development Report 1998/1999
(Washington, 1999).
19
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
the internationalization and transnationalization of
SMEs themselves as SMEs increasingly invest
abroad. With regard to the first respect, it has
been mentioned that SMEs have been integrated
in complicated global production and investment
networks set up by TNCs as part of their global
strategic management policies. The Asian and
Pacific region in particular has witnessed27 a
strong rise in the number and extent of such
networks characterized by the importance of
strengthened linkages of various kinds between
SMEs and TNCs, which in turn have contributed
to the emergence of national competitive advan-
tages of selected less developed countries in the
region in particular areas and industrial subsectors.
Thus, semiconductors have become a major and
leading export industry in Singapore and later
Malaysia, auto parts and components in Thailand,
computer peripherals in Taiwan Province of China,
software design in India and textiles and garment
production at various stages in many countries in
the region ranging from the more advanced
ASEAN economies to South and Central Asian
and even Pacific island economies such as Fiji.
In all these cases, indigenous SMEs have been
increasingly and substantively involved as suppli-
ers to TNCs either within the domestic market
or for export to other subsidiaries in the TNC-
operated regional and global production networks
for further processing. More important, it can be
demonstrated that those countries that have been
most successful in forging such linkages between
their SMEs and TNCs have done relatively better
in the overall economic and industrial development
process and have been able to optimize the
benefits of foreign investment as such linkages
ideally translate into the transfer of much-needed
technology, capital and expertise and provide
indigenous companies with better access to
international markets. While these linkages refer
mainly to backward linkages, forward linkages
involving retail and service operations under-
taken by SMEs have also become increasingly
27
See “SME FDI in Asia: extent, pattern and trends”, in
UNCTAD, Handbook on Foreign Direct Investment by
Small and Medium-sized Enterprises: Lessons from Asia
(United Nations publication, Sales No. E.97.II.D.4), pp.
27-34.
20
important and still have enormous potential, further
widening and broadening global production
networks.
With regard to the second respect, as
pointed out earlier it can be observed that SMEs
worldwide, but particularly in Asia, have increas-
ingly become foreign investors themselves or
recipients of foreign investment usually in the
form of joint ventures. Interest in the role of
SMEs in FDI flows derives from the potential
special contribution which these companies can
make to developing countries. Their relatively
recent arrival as investors provides a new source
of foreign capital for these countries. Their
assumed specific characteristics, i.e., their greater
flexibility, relatively labour-intensive technologies,
greater adaptability to local economic conditions
and capacity to serve small communities, could
make them more suited to the conditions of most
developing countries than their large TNC counter-
parts. Therefore, for policy makers in developing
countries the FDI flows that SMEs can provide
may constitute a valuable supplement to flows
of more conventional types of TNCs, which, as
indicated above, have been reducing their involve-
ment in certain regions of developing countries in
recent years.
In many developing economies, SMEs have
now firmly begun to enter the international market.
In most cases, SMEs invest abroad for the same
reasons as large firms. As with large firms, they
need to be close to the markets they are serving.
Local production is necessary when tariff barriers
exist that obstruct their imports. Also, those SMEs
which supply components and other parts to large
enterprises follow their clients abroad as they
themselves internationalize their activities. Many
TNCs now have, through the system of “partner-
ship sourcing”, rather close relations with their
suppliers. Instead of using many small suppliers,
they tend to choose a few and contract with
them to supply goods produced to the higher
standards of design and production and delivered
to strict schedules. By using these closer relations,
supplier firms can follow their clients abroad,
knowing that their products will have a ready-made
market.
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
While investments from SMEs clearly have
advantages for host countries, they may be a mixed
blessing as on the one hand overseas SMEs
strengthen national competitive advantages through
their contribution to quality and exports but on the
other hand they risk crowding out indigenous
SMEs. A more preferable investment pattern from
a domestic point of view is the establishment of
joint ventures between larger enterprises from
countries at relatively higher development levels
on the one hand and SMEs from other countries
at relatively lower development levels. The
UNCTAD World Investment Report 1999 explains
that “in today’s globalizing world economy, the
increasing competitive pressures faced by firms of
all sizes impel more and more of them to establish
an international portfolio of locational assets to
remain competitive. However small parent firms
and their foreign affiliates may be, they are part
of an increasing network of production linkages
across borders”. As a result, the region has
witnessed significant growth in the level of intra-
regional investment flows in the form of joint
ventures involving SMEs. This process has been a
particular feature of the development process
in countries and areas like Taiwan Province of
China and Singapore but recently also countries
like China and countries in Indo-China have
benefited from joint ventures with enterprises from
neighbouring countries, often involving SMEs.
Subregional economic cooperation frameworks
such as ASEAN have facilitated and promoted
such joint ventures through a variety of industrial
complementarities and cooperation schemes.
However, with respect to overall inflows of FDI,
the share of FDI coming from SMEs is as yet
relatively small owing to numerous problems
SMEs face, not only in their investment but
in their general operations. Lacking government
attention and support, despite paying lip service to
their cause, has prevented SMEs in many countries
from growing and making up an essential “middle
class” of enterprise which would facilitate their
linkages with larger enterprises, including TNCs,
and would ensure a much healthier private enter-
prise sector than is currently the case.
While it is generally understood and recog-
nized that the promotion and attraction of FDI
has great potential to favourably contribute to the
national economic development process, it is
most definitely not a sufficient policy in itself.
The development of national entrepreneurial acti-
vity and capabilities resulting in the formation of
healthy domestic enterprises which are able to
compete internationally is probably even more
important. Only with a strong indigenous enter-
prise sector is FDI likely to make a positive impact
with less potential to crowd out domestic invest-
ment but more potential to transfer technology,
capital and expertise either separately or as a
convenient package. At the same time, the chance
that mutually beneficial linkages between the
indigenous business sector, which consists mostly
of SMEs, and TNCs can be successfully forged
is much higher. Governments and private sector
institutions alike have a role in formulating and
implementing policies and strategies to attract
and promote FDI and promote their domestic SME
sector with the objective of establishing a healthy
business sector at the national level which includes
an environment that ensures fair competition
between foreign and domestic companies and
facilitates and promotes linkages between the two
sectors to the extent that such linkages are indeed
useful. As far as the Government is concerned,
support for SMEs does not necessarily have
to come in the form of direct financial and techni-
cal support but rather in providing a conducive
macroeconomic and legal framework which does
not discriminate unfairly against SMEs but, as
indicated above, creates a level playing field for
large and small companies and domestic and
foreign companies alike. SMEs should be assisted
in such a way that they can help themselves.
Assistance should mainly consist of clearing
unnecessary hurdles and obstacles, which are
mostly of a legal and financial nature, rather than
subsidies and other forms of handouts. Supporting
policies should also ensure a free flow of informa-
tion and strengthen countries’ institutional capabili-
ties in both the government and private sectors.
Chambers of commerce and other private sector
institutions could set up extensive data and
information networks which SMEs can tap at little
cost on such issues as market access and tech-
nology availability among others. At the same
time, Governments need to develop comprehensive
21
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
national policies for the development of SMEs,
which involves focusing on specific subsectors and
cluster formation in line with a country’s national
competitive advantages. In this context, the esta-
blishment of specific industrial parks for SMEs in
particular industrial subsectors which have access
to adequate infrastructural facilities and which are
in close touch with R&D institutions and centres
of excellence and higher learning as well as with
foreign companies could be considered. As part of
such policies, the consolidation of SMEs and
the forging of horizontal linkages among SMEs
should be encouraged in line with the global
merger and acquisition trend among TNCs. With
TNCs getting bigger and bigger, SMEs cannot
afford to stay behind. Lastly, active measures to
improve the quality of SME products and services
need to be taken which would make them more
responsive to consumer needs both at home and
abroad but would also make them more attractive
partners for TNCs.
The integration of capital markets for SMEs
has opened new avenues for financing. Tradi-
tionally constrained by adequate access to financial
resources, the liberalization of financial markets
has enabled the larger SMEs to tap international
capital markets. In fact, the larger presence of
foreign banks in domestic economies facilitated
foreign investment of SMEs following their larger
counterpart abroad. As such, FDI by large enter-
prises is followed by FDI by banks and SMEs
conveniently replicating similar business networks
existing at home. However, for the majority of
indigenous SMEs, access to finance remains a
problem as most are not aware of the financ-
ing options available or are simply too small to
tap either domestic or foreign capital markets,
although the establishment of over-the-counter
(OTC) markets in selected countries, particularly
for high-tech SMEs, has improved the situation
considerably. These SMEs also benefit from
increasing capital available from global venture
capital funds which are roaming the world for
investment. The formation of joint ventures
between SMEs has also provided new ways for
financing SME activity through capital brought in
by the foreign partner.
22
E. Conclusions and recommendations
1. Conclusions
It is obvious that globalization and its mani-
festations have already had clear impacts on SMEs
of Asia and the Pacific, which have not altogether
been positive, despite the great potential for SMEs.
In recent years, while it is easier to point to market
forces as the ultimate saviour of development and
growth including the development of SMEs, there
is a general consensus that rapid and not well-
thought-out means of liberalization of trade and
investment, including too rapid and inappropriate
sequencing of reform measures, will do more harm
than good, especially for SMEs. While market
forces would squeeze out inefficient SMEs and
would, at least in theory, improve economic
efficiency at the national level, the social conse-
quences of overreliance on the market and
uncontrolled liberalization measures should be the
major consideration to continue active government
support for SMEs in developing countries, to
allow them at least time to adapt to changing
global and regional economic realities. One of the
major challenges for Governments in developing
countries is the evaluation of various economic
policies affecting SMEs. In many cases, policies
do not effectively address the key problems
confronting small firms, and measures taken in
different areas are inconsistent. Assessing the real
impact of each policy measure is not easy and has
been attempted in a rather haphazard manner in
several countries. Nonetheless, all Governments in
developing countries of Asia and the Pacific can
benefit from sharing their experiences on both
successful and unsuccessful practices, with insights
of the private sector to inspire more mutually
beneficial policy frameworks for globalizing small
firms. Effective benchmarking is one way to
highlight weaknesses and help to build momentum
for shaping policies that can allow for greater
benefits from cross-border business networking. It
can also help Governments to address the costs
and challenges which arise from global industrial
restructuring affecting SMEs. In so doing,
Governments need to realize that SMEs have
already changed themselves to some extent along
three major lines:
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
1. There is a growing “professionalism”
in SME management as well as more dependence
on formal financial institutions;
2. SMEs are increasingly diversifying their
products into knowledge- and skills-based sectors
such as electronics, informatics, precision compo-
nents and parts;
3. SMEs are increasingly diversifying their
markets away from domestic markets to overseas
markets.
However, the share of SMEs actually
involved in more sophisticated and higher value-
added activities remains as yet small in most
countries of the region. There is therefore a need
for a comprehensive and well-integrated package
of measures and incentives, both on the supply
side and on the demand side, to foster the
growth of a vibrant SME sector and improve the
competitiveness of SMEs in both domestic and
international markets. In developing such a com-
prehensive and well-integrated support package,
careful consideration should be given to several
aspects. First, the ever-present temptation to
create new organizational structures would have
to be resisted, and existing institutions, suitably
reorganized, reformed and strengthened, should be
utilized to extend support services and input to the
SMEs. In that regard, decentralized organizational
structures should be used to reach out to the
SMEs. Second, support measures should be
extended only to deserving SMEs and not to those
which are likely to waste resources. Perpetual
support and subsidies should not be granted to
inefficient SMEs. Third, promotional measures
should be development-oriented rather than
protective or restrictive. In a development-oriented
approach, market structures that increase competi-
tiveness, innovation and resilience are emphasized
so that SMEs can become self-reliant and an effec-
tive source of competition for the large enterprises.
Fourth, incentive measures should be direct and
use prices and markets as far as possible. Fifth,
there may be instances where the Government
finds it difficult to reach the SMEs, especially
those that are located in rural and remote areas.
In such instances, government agencies should
actively seek to involve non-governmental organi-
zations (NGOs) in developing programmes and
delivering support services to the SMEs. In low-
income countries such as Bangladesh and Nepal,
some NGOs have proved to be highly effective
in delivering credit and providing other kinds of
support to rural-based small and craft industries.
Overall, the ability of SMEs to compete in the
global marketplace depends on their access to
certain critical resources, the most important of
which are finance, technology and managerial
skills. TNCs have been an important means for
SMEs to gain access to new technologies and
management know-how. The shift in corporate
production strategies from simple integration to
more complex integration has widened the oppor-
tunities for SMEs while at the same time raising
the requirements for entering TNC networks. The
current challenge for developing countries is
first to adopt policies to deepen the developmental
effects of FDI by attracting TNCs willing to forge
such linkages and then to undertake measures to
promote such linkages between TNCs and
SMEs.28 Specifically, the support measures for
the improvement of competitiveness of SMEs can
be categorized as follows:
(a) Organizational and policy support
measures
All countries of the region have evolved
institutions to support SMEs. In particular, in the
developing economies of the region, organizational
support has assumed two distinct roles, which can
be classified as (a) regulatory and (b) promotional.
The regulatory role is concerned with aspects
such as a framework of laws and regulations for
registration and licensing, maintenance of statisti-
cal records, regulation of foreign investments,
prevention of misuse of concessions and concen-
tration of economic power, and reducing locational
28 UNCTAD, “Enhancing the competitiveness of SMEs
through linkages” (TD/B/COM.3/EM.11/2), paper pre-
sented to the Trade and Development Board Commission
on Enterprise, Business Facilitation and Development
Expert Meeting on the Relationship between SMEs and
TNCs to Ensure the Competitiveness of SMEs, Geneva,
27-29 November 2000.
23
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
constraints. The promotional role is the positive
role with respect to inputs such as infrastructure,
financial support, training, technology and market-
ing. The regulatory and promotional aspects
are applicable to both new entrants and existing
units.
In almost all countries there is either a
separate policy statement for SMEs (or for cottage
and small industries) or a general industrial policy
statement with some portions of it relating to this
sector. There is a ministry or a department in
overall charge of industry and a host of institutions
dealing with or extending support to SMEs. Very
few Governments have, however, enacted special
legislation to back up SMEs.
There is a perceived need for individual
economies to set up focal points for SMEs at the
national level which are linked to other similar
focal points in neighbouring countries and other
countries in the region and even outside the region.
Such linkages provide for quick and efficient
information exchange on trade and investment
opportunities for SMEs. In this context, extensive
use could be made of the Internet. Such focal
points could also provide training and information
on sources of technology and finance and act as
instigator for setting up and strengthening linkages
among SMEs under cooperative marketing and
joint manufacturing arrangements and linkages of
various kinds between SMEs and large enterprises,
both domestic and foreign. Subsidiaries of such a
focal point could be set up in various areas of a
country. Thus, the Governments in developing
countries should adopt a comprehensive set of
selective support measures for linkages between
SMEs and large firms as well as TNCs. Business
associations should also play an important role in
facilitating such linkages, as well as networking of
SMEs.
The globalization process has called for a
drastic reorientation in terms of domestic economic
policy issues calling for a change in the Govern-
ment’s role towards SMEs. One of the principal
measures in support of the SMEs would have to
involve the attenuation of macroeconomic and
sectoral policy biases against them which have
accumulated over the years in many developing
24
countries of the region. The elements of these
policies and their consequences are fairly well
known. Trade and exchange rate policies in
support of rapid industrialization efforts often give
rise to overvalued exchange rates, which make the
exports of SMEs non-competitive in international
markets. Tariffs and taxation are important
elements of policy in all countries. However it
has been found that in most cases they benefit
large industry and not necessarily SMEs. It has
been established that import regimes (including
tariff rates) are inherently biased in favour of
large industry. As far as tax concessions are
concerned, only in a few countries like India does
exemption from central excise tax seems to be
directed to SMEs. In most other countries, tax
concessions seem to be given on the basis of
considerations other than size. Investment incen-
tives are generally scale-based, favouring large
projects and enterprises and capital-intensive
production techniques over small-scale and labour-
intensive technologies. Macro policies also tend to
protect large enterprises against competition from
SMEs.
It is therefore necessary to define new key
elements in policies and in the role of the Govern-
ment in adopting measures to remove the barriers
that prevent SMEs from prospering. The elements
relate to self-reliant policy (helping SMEs to help
themselves); stronger private sector empowerment
(membership organizations, self-regulation, policy-
making); private and non-governmental business
development services (with government funding
but without direct government intervention);
information technology-driven assistance (use the
information superhighway); greater linkage be-
tween SMEs and large enterprises (creating the
missing middle); and industry clusters for critical
mass.29 Such measures should lead to a reduction
in biases in terms of access to economic inputs
such as credit, training and technology. Reforms
towards low and uniform tariffs and quotas,
realistic interest rates and relaxing physical
controls on size and output go a long way towards
29 UNIDO, Proceedings of the Asia-Pacific Regional
Forum on Industry, Bangkok, 23-24 September 1999,
p. 23.
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
harmonizing macro and sectoral policies with
measures designed to benefit SMEs. On the de-
mand side, macro and sectoral policy measures
should aim at fostering agricultural and rural
development, especially in raising rural incomes
and encouraging exports so as to harness the
potential of external demand to the maximum.
In low-income economies, macro and sectoral
policies favouring agricultural development have
particular relevance, for such policies can increase
rural income, thereby creating demand for income-
elastic SME products. In addition, economic liber-
alization and deregulation measures should take
into account the situation of SMEs and proceed in
an appropriate way of sequencing which would not
unduly harm the SME sector.
(b) Entrepreneurial and managerial skills
SMEs which are trying to enter global
markets require good entrepreneurial and manage-
ment skills. Thus, any support, including
infrastructural support, would have to be combined
with sound institutions in developing an efficient
SME sector through measures designed to support
the development of SME entrepreneurs and
managers who have great potential in generating
benefits not only for the SMEs but also for
other enterprises. In general, entrepreneurs in
the SME sector are often “home-grown”, acquiring
their skills and leadership qualities in their own
workplace and business environment. Beyond a
certain point, this “learning by doing” approach
becomes less and less useful in assisting small
enterprises in graduating into modern small enter-
prises, equipped with newer forms of technology
and marketing skills. Furthermore, SME manage-
ment needs to be experienced and able to
communicate both inside the enterprise and with
outside parties. Therefore, training and support
programmes may be needed to improve the quality
and skills of both employees and management.
Moreover, SMEs would need practical assistance
in legal and consulting services to negotiate for
better terms in international business transactions.
In designing these support services, careful atten-
tion would have to be paid to ensure proper opera-
tional linkages between service providers and
SMEs. Failure to develop such links frequently
led to rigid application of rules and regulations,
institutional inertia and an inability to respond to
changing requirements through innovation and
foresight. The prime objective of forging such
links should be to make the entire effort a two-way
process in which the supporting institutions and
SME entrepreneurs find themselves in a continu-
ous dialogue. This is especially true for rural and
remotely-based SMEs whose needs are too often
neglected.
One of the most critical areas in which
strong support needs to be extended to the SME
entrepreneur is in access to information. Access to
strategic information, e.g., on potential foreign
business partners, regulations and business envi-
ronment issues in foreign markets, is another
challenge for SMEs. These barriers need to be
addressed as they can prevent SMEs from partici-
pating in international alliances and other global
business linkages. In fact, the intensity of strategic
partnering tends to rise with the size of companies,
indicating that larger firms actively seek and find
external opportunities through strategic linkages.
Government Internet home pages for SMEs and
other private services (e.g., market research) can
improve small-firm access to business-related
information in foreign markets.30 Thus, SMEs
often fail to prosper because they have limited
access to information. This may be because infor-
mation is controlled or available but not accessible
because of ignorance or relative isolation from
information centres and sources. Computerization
and the introduction of the Internet would go a
long way towards providing SMEs with proper
access to information, although in many countries
Internet use is still controlled while SMEs may not
have the necessary skills and other resources (e.g.,
capital) to acquire this technology and effectively
utilize it. Governments and private sector institu-
tions such as chambers of commerce could assist
in setting up data and information banks on
markets, technology and other areas of concern to
SMEs. Regional centres in rural areas for informa-
tion dissemination should also be set up.
30 Kentaro Sakai, “Global industrial restructuring: implica-
tions for small firms”, STI Working Papers 2002/4
(OECD, Paris, February 2002), p. 33.
25
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
(c) Provision of finance
The most pressing problem faced by
SMEs in improving their competitiveness is the
lack of adequate financing facilities. All countries
of the region recognize the importance of this
vital input and have created a network of financial
institutions and banks, and many of them have
created specialized institutions to meet the specific
needs of SMEs. However, the traditional small-
scale enterprises relied little on external finance.
In recent times there has been an increasing
tendency on the part of SMEs in developing
countries to seek finance from banks and other
financial institutions. In virtually all countries,
however, there are numerous complaints about
the paucity of loan funds available to SMEs and
the onerous terms imposed for accessing formal
finance, thereby restricting the possibilities of
improving the competitiveness of SMEs. Addi-
tionally, despite increasing awareness of the need
for a seed capital scheme and venture capital,
the institutional framework for these cannot be
considered well developed. In some countries,
supervised credit in its commonly applied form of
supply of machinery on a hire-purchase basis has
been introduced. Supervised credit also sometimes
takes the form of assistance in the purchase of raw
materials and intermediate inputs.
Some countries have adopted fiscal policies
or provided tax relief directed explicitly at SMEs
or at firms contributing in some special way to the
development effort, regardless of size. In India,
for example, small-scale industries are exempted
from the payment of excise duties on production
up to a certain limit. Tax holidays are given in
Malaysia and other countries.
There are several issues in the area of
providing development financial assistance to
SMEs which require careful consideration. Re-
gardless of the stage of development of the
economy, a number of factors determine the
accessibility of organized finance for SMEs,
including the structure of financial institutions, the
terms and conditions of credit and the diversity of
the financial instruments offered. Generally, these
are geared to serve the financial needs of large
enterprises and better-established public sector
26
enterprises with which the SMEs lack both the
managerial resources and informational advantage
to compete effectively.
While it is widely recognized that SMEs
may indeed qualify for institutional finance, the
interest rate policy generally works against them.
Most countries of the region offer finance at subsi-
dized rates to their industry. One consequence of a
subsidized interest rate policy is the creation of
excess demand over supply. Faced with such an
excess demand, financial institutions are forced to
ration out the credit at their disposal. One crite-
rion used in the choice of clients in a rationing
scheme such as this is enterprise size, where the
large-scale sector has an advantage. At times, their
size is taken by financial lenders as an indicator of
their profitability and hence the lenders consider
the risk of loans advanced to them to be lower. In
the process, SMEs progressively get squeezed out
of the organized sector and many of them find
themselves dependent on the informal sector for
external finance, especially those that are located
in townships and rural areas.
This raises an important question relating
to mobilization of financial resources for SMEs.
The mobilization of financial resources for SMEs
can be an uphill task given the intense competition
for domestic resources in all the developing
countries of the region. While the majority of
small enterprises depend on retained profit and
informal sources of credit for expansion, the
need for external finance increases rapidly with
the growth in size, first as working capital and
then as fixed capital. The latter requirement for
external finance is found mostly in the modern
and better-established segment of the SMEs. The
response of the developing countries has been
the establishment of a variety of institutions and
agencies, as indicated above, with varying degrees
of success.
In recent years, following the successful
example of Japan in mobilizing savings, many
countries in the region have introduced savings
schemes and experimented with a wide array of
new financial instruments and innovations. Along
with efforts to boost savings mobilization,
measures have been adopted to increase the
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
accessibility of SMEs to organized finance. One
such measure has involved the growing use of
guarantees for loans advanced to SMEs.
Many countries have also tried to restrict
the activities of informal credit intermediaries.
However, given the inability of the formal sector
to meet the credit requirements of SMEs, it may
be more useful to increase the complementa-
rity between formal and informal credit markets.
In that regard, the banks could lend to the
informal credit intermediaries for on-lending to
small enterprises, thereby reducing the administra-
tive and other costs of the formal sector’s direct
lending.
(d) Technology capacity-building for
SME competitiveness
One of the most important factors in
capacity-building for improved competitiveness of
SMEs is through technological upgrading. The
need to apply modern efficient and relevant
technology in order to survive in an increasingly
competitive environment has never been so urgent.
It is often stated that globalization and liberaliza-
tion have opened new opportunities for firms in
developing countries to acquire technology from
abroad and that increased competitiveness in
technology markets has made technologies cheaper
and more accessible. This may indeed occur in
some industries and sectors, while in others tech-
nology remains costly and access is still difficult
for SMEs in the developing world. Acquiring
technologies and the technological capacities
needed to master technologies involves time,
effort, cost and risk and complex interactions
between firms as well as between firms and
institutions. Very often the transfer of technology
to solve the problems of industries is available.
However, transfer agents are needed to make it
accessible to these industries, which also have to
be assisted by dissemination of information on
choice of technology, source of equipment, know-
how and “show-how”. It should also be noted
that every effort should be made to promote the
wider applications of information technology in
the SME sector. However, lack of finance and
skills has constrained this. Although information
and communication technology (ICT), including
the Internet, has great potential for allowing SMEs
to expand their customer base, enter new product
markets, rationalize their businesses and search
globally for potential business partners, many small
firms have not fully exploited these opportunities
owing to a lack of awareness and skills and the
necessary resources to make initial investments.
Costs of installation, access and use of ITC, which
vary widely across countries, present barriers for
small firms. Governments have to make special
efforts to enhance small-firm awareness and skills
for the use of ICT and electronic commerce. In
this context, there is an equally urgent need on
the part of multilateral and other international
agencies, to assist countries in promoting the
application of ICT for SME use.
Available evidence indicates that technical
information and technology for SME use obtained
from countries at similar stages of development are
more useful and relevant. However, some of the
major impediments in this respect include lack of
local capacity and the skills required to select,
acquire, adapt and assimilate technologies, finan-
cial constraints and lack of awareness of, as well
as relevant information on, available technologies.
Few SMEs have the networking and monitoring
capabilities that would enable them to access and
evaluate technological information. SMEs, be they
in developing or developed countries, generally
tend to be risk-adverse, particularly when it comes
to the introduction of innovations based on new
technologies. Despite these limitations, new forms
of inter-firm technology cooperation are beginning
to emerge that involve longer-term mutual benefits
and go beyond short-term financial gain. The
common feature of these new forms of coopera-
tion is the sharing of capabilities to develop
new products, technologies and processes, or to
produce and market new products. It is in consi-
deration of these factors that increasing emphasis
has to be placed on technical cooperation among
developing countries (TCDC) and economic
cooperation among developing countries (ECDC)
with the active cooperation and assistance of the
developed countries and multilateral and bilateral
aid agencies in implementing TCDC and ECDC
projects.
27
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
The need for technological upgrading has
become more urgent in a globalizing world. SMEs
can ill afford to be left behind in the process
of technological upgrading and the information
technology revolution, which has led to an ever-
increasing use of the Internet for companies’
communication and information needs. Sustained
programmes with specific focus on SMEs need
to be adopted by Governments to allow the
introduction of computers and other information
technology in the private sector while adopting the
necessary legislation to that effect.
(e) Regional cooperation measures for
SME competitiveness
The potential of intraregional trade and
investment flows, as a means to spur the growth
of a modern, export-oriented SME sector is
awaiting full utilization. Regional cooperation in
SME development is based on the premise that
it will enable them to take advantage of econo-
mies of scale. At the national level, cooperatives
have historically been viewed as conduits to
assist SMEs in reaping economies of scale in
marketing and purchasing. Regional cooperation
can extend this process, enabling national SMEs
to take advantage of scale economies more
effectively. Additionally, regional cooperation in
SME development can improve the prospects
of developing countries to create the necessary
conditions for the growth of a viable and modern
SME sector. This in turn can stimulate the
development of a vibrant industrial sector.
Subcontracting systems at a regional level can
also be utilized, thus promoting closer interface
and interdependence between large enterprises
and SMEs. However, it is essential to identify
priority industries in devising regional cooperation
measures.
There are three broad possibilities here
which could be pursued on a regional basis. First,
specific SMEs with export potential could be
identified, in such areas as textiles, leather goods
and electronics. Once such an identification is
done, each industry could be closely evaluated to
see where and how it needs assistance in product
development, standardization, technology upgrad-
28
ing and skills development. Second, once these
industries are identified for assistance, regional
initiatives could be launched to develop arrange-
ments through which market-sharing schemes can
be designed. In this way, much wasteful competi-
tion for foreign markets can be replaced by
cooperation for access to these markets on an
equitable basis. Third, in the area of forging
linkages between large industries and SMEs,
specific industries from Japan, China and the
Republic of Korea can be studied to see how such
linkages were developed, what risks did they face
and how they succeeded. Lessons thus gathered
can then be disseminated to other developing
countries. Technology flow, technical and finan-
cial assistance, improved supply and marketing
arrangements, promotion of industrial activities
and training of personnel are a few areas where
such schemes may be formulated to foster such
cooperation.
Regional cooperation measures would have
to be supplemented by measures at the national
level, particularly by removing those barriers that
hinder the growth of SMEs. These measures
would include removal of obstacles in obtaining
access to inputs such as technology, credit and
training, reforming tariff structures and removing
quotas, introducing realistic interest rates and
dismantling physical controls on size and output.
Four specific areas where regional cooperation can
be enhanced are:
1. New and emerging technologies for
SME-development;
2. Support to SME entrepreneurs and
managers for enterprise development;
3. Skills development for SME growth;
4. Mobilization of financial resources as
both fixed and working capital.
The role of national focal points and
subregional and regional networks of such focal
points for SMEs was discussed before. As far
as finance is concerned, the establishment of
subregional development banks or even a regional
development bank for SMEs in Asia and the
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
Pacific, with financial and technical support from
and under the auspices of the Asian Development
Bank or International Finance Corporation of the
World Bank for instance, could be considered.
Technology information and supply centres are
currently managed by regional organizations such
as ASEAN and APEC while at the regional level
at large the Asian and Pacific Centre for Transfer
of Technology (APCTT) plays a fundamental role.
In the long run, as such subregional cooperation
widens to a larger level, such centres could be
integrated and consolidated into truly regional
centres which are electronically linked to global
centres and data banks.
2. Recommendations
The previous sections presented the current
situation of SMEs in Asia and the Pacific and
prospects and challenges facing them in a globaliz-
ing world. At the moment it seems that SMEs
are negatively affected by globalization as the
policy environment in which they have to operate
at the national level is often not conducive. While
Governments pay lip service to their cause, the
ruling elites in many countries often have stakes
in the large enterprises and as a result the SMEs
find themselves on the losing end. Even potential
linkages with TNCs are not entirely the result of
the efficiencies of the market subject to political
will and commitment. While globalization is
forcing Governments to take more integrated
action to help SMEs – the recent Asian crisis
made their importance painfully clear – there is a
risk that the big money attached to TNCs and
large-scale operations will divert Governments,
banks and major business concerns (with often
overlapping interests) once again away from
attention to the SME sector. There are clearly
exceptions. In economies like Malaysia, Singa-
pore and Taiwan Province of China, SMEs have
been a fundamental cornerstone of development
success. The relative neglect of the SMEs in a
country like the Republic of Korea was certainly
part of the process that set the crisis in motion.
In fact, various studies have indicated that SMEs,
in particular the smaller ones, were more affected
by national and local conditions than by globali-
zation per se.
While Governments play an important
role in supporting SMEs, the SMEs themselves
cannot sit idle and wait until they get some
support which may never come. In fact, the most
successful SMEs are those that are actively
seeking partners and support themselves and
realign their competitive strategies to the realities
of the global marketplace. It is important for
SMEs to adopt modern financial management
techniques and actively look for suitable tech-
nology that is affordable and would improve
their productivity. They need to be ready to
take risks as risk-taking is the main characteristic
of the successful entrepreneur, in exploring
overseas markets for exports or even for direct
investment. In this context, the proper selection
of partners for joint cooperation schemes in
financing, management or technology, both at
the national level and across borders, is very
important. However, it is imperative for SME
entrepreneurs to overcome their pride and
reluctance to give up management autonomy in
their own, often family-owned businesses. After
all, TNCs will not enter into joint ventures and
mergers unless there are clear advantages to doing
so. Given the surge of mergers and acquisitions
between large TNCs at the global and regional
levels, SMEs cannot afford to lag behind as
huge TNCs will not be able to do business with
tiny enterprises. Even the SMEs that cater for
domestic demand will find themselves ultimately
linked in a larger enterprise network which
comprises other SMEs and large enterprises,
including TNCs, in an economic environment
which can be truly termed global.
Thus, there is an urgent need to improve
the competitiveness of SMEs in this globalizing
world. This aspect has to be dealt in a com-
prehensive and coherent manner encompassing
policies, institutions and other support measures.
Specifically, the following urgent actions are
required:
1. National Governments have played a
crucial role in the growth of SMEs through a
variety of support programmes such as credit
and reservation policies as well as mandatory
procurement programmes and technology support.
29
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
In order that SMEs continue to operate effectively,
Governments in Asia and the Pacific need to
provide a conducive economic environment with
a minimum of restrictions on production, trade
and investment. They also need to implement the
right macroeconomic policies to maintain price,
exchange rate and interest rate stability, appro-
priately liberalize trade and investment regimes
and provide a proper financial, legal and institu-
tional framework. In this task, Governments
may decentralize decision-making mechanisms to
be as close to the SMEs as possible and involve
industry associations and NGOs to a greater
extent;
2. For the above-mentioned purpose,
Governments may review the policy frame
followed in their countries relating to the SMEs
(specially in respect of export-oriented units) so
as to take into account the many changes that
inevitably take place in the next few years as a
result of the multilateral agreements including the
Uruguay Round and the new round of agreements.
Governments may also make the SMEs in their
countries fully aware of the implications of those
agreements (through workshops and seminars) and
prepare them adequately to meet the challenges
of increased competition both at home and
abroad. Such a comprehensive and critical review
should also take note of the need to harmonize
these challenges with the social and economic
compulsions in those countries;
3. The SMEs in the ESCAP region have
demonstrated a proven capability to export
a wide range of products particularly in textiles
(and ready-made garments), leather and leather
products, light engineering (including electrical
appliances), agro-based products and electronic
items (including computer software). They
contribute in many countries as much as 50
per cent of industrial production, 60 per cent of
employment and 40 per cent of direct exports;
4. Policies may be reoriented to streng-
then the export sector through effective marketing
information networks, assisting SME delegations
in going abroad to study at first hand opportunities
for export and also organize joint marketing
30
through collective action and launch awareness
campaigns on the need to maintain quality and
environmental standards by conforming to widely
accepted standards such as the ISO 9000/14000
series;
5. Governments have a critical role to
play in providing the necessary infrastructure –
both physical and social – to enable SMEs to
operate efficiently and provide them with a
skilled workforce that can function with high
productivity. Private sector assistance could be
enlisted in this task through carefully designed
fiscal policies and tax incentives. Vocational
training programmes for workers and improved
entrepreneurial and management skills for super-
visory personnel have to be organized in close
cooperation with industry associations and training
institutions;
6. It is now widely recognized that
low wages, by themselves, cannot sustain for
long a viable growth process, which can only
be done by continued technology upgrading and
exposure to improved management and organiza-
tional techniques. Governments have to set up
(if not already existing) suitable national R&D
centres for each relevant subsector where relevant
innovation practices could be developed and
diffused widely throughout the industry and the
sector as a whole, as has been done effectively
under the Sparks Programme in China. It is
necessary, however, to ensure that such tech-
nologies are eco-friendly and attempts should
be made to acquire them for dissemination
throughout the country. In this connection,
APCTT may function as a focal point in pro-
viding information to member countries on
the availability and suitability of such techno-
logies;
7. One method that has proved effective in
several developed countries as well as in some
countries of the ESCAP region is to enhance the
collective efficiency of SMEs through operation
in clusters specializing in a specific product. Such
clusters can consist of both large and small
enterprises and other units to provide specialized
services. Each cluster can have a resource centre
 I. Strengthening the Competitiveness of SMEs in the Globalization Process: Prospects and Challenges
to coordinate the activities of the cluster, collect
and disseminate information and generally function
as the brain of the cluster. While such clusters
need to arise on their own, Governments can
provide support services to enable them to
operate efficiently preferably by cluster industry
associations. Current international economic reali-
ties demand a holistic view of trade, technology,
investment and capital flows, not only for large
industries but for SMEs as well;
8. It is noted that a number of regional
arrangements such as APEC, AFTA and SAPTA
(South Asian Preferential Trading Arrangement)
could provide greater opportunities for SMEs in
the region to come together. In addition,
subregional groupings (in the shape of growth
triangles or quadrangles) could be proposed where
SMEs may find it easier to work in close
cooperation. In such groupings, an inventory of
the SMEs with the capability to participate in
regional networking arrangements for production
and exports can be made and publicized widely.
Within this context, local authorities may consider
networking themselves to make this idea more
effective;
9. Any such regional networking would,
however, require some concrete steps to be
taken such as: (a) uniformity in standards and
testing procedures; (b) compatible management
and operational styles; (c) liberal tax laws (includ-
ing avoidance of double taxation); (d) clearly
defined pricing policies and arbitration procedures;
(e) supportive R&D as well as entrepreneurship
development programmes and vocational skills
development programmes; (f) clear agreement on
the terms of technology transfer (such as royalties,
know-how fees, etc.); (g) inculcation of an entre-
preneurial spirit that blends cooperation and com-
petition; and (h) a nodal agency in each country
which can help to coordinate efforts;
10. It is noted that easy access to credit on
reasonable terms continues to be a major problem
for SMEs in most countries. In that context,
governments may advise the financial institutions
in their countries to provide deserving SMEs with
long-term as well as short-term credit so as to be
able to operate to their full capacity;
11. The heartening feature of the SME
scene in many countries in recent years is the
involvement and participation of women both on
the shop floor and entrepreneurs managing small
businesses. It is felt that the presence of women
in the industrial field will have a beneficial effect
on the economic and social life of society as a
whole and Governments may therefore provide
special support to such women entrepreneurs
through various incentives and exemptions.
Efforts should be made to organize women’s
entrepreneurship programmes at the national and
regional levels and facilitate training programmes
and other supporting activities as extensively as
possible. Regional organizations such as ESCAP
and the Asian Development Bank (ADB) should
assist countries in such activities;
12. Ultimately, it is the entrepreneurs who
will have to adopt the right strategies to compete
successfully in a changing economic environment.
To this end, they need to focus on specialization
strategies, be responsive to market needs, seek out
market niches, adopt superior and relevant tech-
nologies, develop higher skills levels and generally
cultivate an attitude which would combine a com-
petitive spirit with a willingness to cooperate with
other units in joint collaborative arrangements;
13. It should be noted that regional
cooperation programmes could be initiated under
the auspices of various regional organizations and
regional arrangements, aimed at strengthening
national capacities in promoting SMEs in general
and export-oriented ones in particular. In this
respect, regional bodies such as ESCAP and ADB
and regional and subregional bodies such as
APEC, ASEAN and SAARC should also initiate
and strengthen their activities aimed at assisting
Governments in undertaking reviews of their
policy directions, organize training in specific
areas such as financial and marketing management
and technology transfer, strengthen selected institu-
tions for the SMEs and help to foster subcon-
tracting through a network of clusters. ESCAP
may consider promoting networking of SME
associations through appropriate projects. Particu-
lar attention should be paid to the needs of the
LDCs, Pacific island economies and economies in
transition so that the growth process is accelerated
to keep pace with the rest of the region;
31
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

14. The most important aspect in en-
hancing the global competitiveness of SMEs is
to make them attractive business partners for
foreign firms. SMEs do not necessarily have
to establish foreign facilities for production to
become more international. Small firms can ex-
port their products and services through exploiting
international distribution networks. Governments
can help small firms to compete globally by
ensuring easy access to strategic business informa-
tion.31 Therefore, Governments need to play a
proactive role in supporting SMEs by helping
them to improve their competitiveness in a globali-
zation process.
31 Ibid., p. 30.

32
 II. PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs
IN ASIA AND THE PACIFIC
Tarun Das*
A. Introduction
This paper deals with the prospects
and challenges for promoting resource-based and
agro-based SMEs for employment generation and
export promotion, thereby helping countries to
promote integration at the regional and global
levels. The paper identifies areas for policy
orientations, institutional capacity-building and
private sector-led rural enterprise development with
a view to improving employment in rural areas and
productivity improvement for poverty alleviation.
As the study is concerned with the role of
agro-based and resource-based SMEs for employ-
ment generation and poverty alleviation, the time
frame of the study is confined mainly to the 1990s.
For analytical purposes, Asian economies consi-
dered in the study have been grouped into the
following regions:
• South Asia, comprising Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka;
• The NIEs, comprising Hong Kong,
China; the Republic of Korea; Singapore;
and Taiwan Province of China;
• Developing economies in South-East
Asia, comprising Cambodia, Indonesia,
the Lao People’s Democratic Republic,
Malaysia, Myanmar, the Philippines,
Thailand and Viet Nam. These countries
along with Brunei Darussalam and
Singapore constitute ASEAN and AFTA.
Three other economies in East Asia, i.e.,
Japan, Mongolia and China, are also included in
the study.
* Economic Adviser, Department of Economic Affairs,
Ministry of Finance, New Delhi.
B. Resource-based and agro-based
industries: the sector’s main
characteristics
1. Economic significance
(a) Contribution to GDP
The growth rate of manufacturing value
added (MVA) and the share of MVA in GDP in
selected Asian countries are given in table II.1.
It is observed from the table that the share of MVA
in GDP in 2000 was highest in South and East
Asia at 30.4 per cent. China had the highest share
at 42.8 per cent followed by the Republic of Korea
(35 per cent), Malaysia (32.4 per cent), Thailand
(31.7 per cent) and Mongolia (30.1 per cent).
(b) Contribution to employment
Table II.2 presents male and female employ-
ment by economic activity in selected Asian
economies in 1990 and 2000. It is observed from
the table that in the NIEs, the service sector has
the predominant share of both male and female
employment followed by industry and agriculture
in that order, whereas in most of the countries
in South Asia and South-East Asia, agriculture
and allied sectors have the predominant share of
both male and female employment. Over time,
consistent with the change in sectoral shares in
GDP, both the male and the female labour force
have shifted from agriculture to industry and ser-
vices in the NIEs and South- East Asian countries.
Table II.3 provides information on the share
of females in total employment by different
branches of manufacturing in selected Asian coun-
tries (Macao, China; Taiwan Province of China;
India; Indonesia; Japan; Malaysia; Myanmar;
Nepal; Philippines; Republic of Korea; and Sri
Lanka) in the most recent period for which
33
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

Table II.1. Growth rate and share of MVA in selected Asian countries, 1980-2000

Total MVA Per capita MVA Share of MVA

Country or area Growth rate (%) Growth rate (%) Value (US$) in GDP

1980-1990 1990-2000 1980-1990 1990-2000 2000 1985 1990 2000

Newly industrialized economies

(NIEs)
Hong Kong, China 4.7 -- 1.8 3.5 -- 3.6 1 499 20.9 16.3 8.9
Republic of Korea 12.1 7.5 10.8 6.6 3 434 25.6 28.9 35.0
Singapore 6.6 6.7 4.3 3.6 5 049 22.2 27.2 25.4
Taiwan Province of China 8.4 5.1 7.0 4.2 3 920 35.7 32.7 29.3
China and Mongolia
China 10.7 13.2 9.1 12.1 347 31.6 33.1 42.8
Mongolia 5.8 1.1 2.7 -- 0.2 210 26.5 29.0 30.1
South-East Asia
Cambodia 8.0 8.7 3.8 5.4 13 4.1 5.2 7.7
Indonesia 12.6 6.6 10.5 5.0 201 17.2 20.7 24.8
Lao People’s Democratic Republic 6.8 12.1 4.1 9.4 53 7.6 10.0 17.9
Malaysia 8.9 9.3 6.1 7.0 1 258 19.9 26.5 32.4
Myanmar -- 0.1 6.6 -- 2.0 4.9 70 8.5 7.8 8.2
Philippines 0.2 3.0 -- 2.2 0.8 187 24.6 24.8 24.1
Thailand 9.5 5.8 7.6 4.4 650 22.0 27.2 31.7
Viet Nam 7.1 11.1 4.7 9.3 28 14.0 12.3 16.4
South Asia
Bangladesh 3.0 7.3 0.4 4.9 53 13.4 12.7 16.0
Bhutan 12.7 10.5 9.9 8.3 30 5.7 8.1 12.1
India 7.4 7.2 5.2 5.3 92 17.1 18.7 20.0
Maldives 12.0 8.8 8.6 5.6 63 5.3 5.4 6.1
Nepal 6.6 8.5 4.3 5.9 21 5.9 6.0 8.8
Pakistan 7.7 3.6 4.5 1.0 65 16.3 17.4 17.0
Sri Lanka 6.3 8.1 4.6 6.9 122 12.6 14.8 19.0
East Asia
Japan 4.8 0.6 4.2 0.3 6 865 25.8 25.8 23.9
World
Industrialized countries 2.8 1.9 2.0 1.4 2 669 22.9 22.4 21.5
Developing countries 5.1 6.4 3.0 4.6 314 21.4 22.2 25.5
Least developed countries 2.2 4.3 -- 0.6 1.7 37 10.2 9.7 10.0
Low-income 5.9 5.9 3.4 3.8 88 15.3 16.8 18.3
Middle-income 2.4 3.2 0.2 1.4 556 22.2 21.9 21.7
High-income 8.5 5.8 6.3 4.3 2 685 21.2 22.7 25.3
Africa 3.9 2.9 1.0 0.4 78 12.6 12.3 12.3
Latin America 1.4 2.9 -- 0.6 1.2 643 25.0 24.1 22.8
South and East Asia 9.0 8.9 6.9 7.3 300 22.8 25.1 30.4
ASEAN 7.5 6.5 5.3 4.7 292 18.9 23.0 25.9
West Asia and Europe 4.0 2.7 1.3 0.5 580 16.8 16.2 16.8
World 3.1 2.8 1.4 1.3 1 037 22.7 22.4 22.3

Source: World Bank, World Development Report 2002.

34
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

Table II.2. Employment by economic activity in selected Asian economies

Agriculture Industry Services

Male Female Male Female Male Female

Country or area % of male % of female % of male % of female % of male % of female

labour force labour force labour force labour force labour force labour force

1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998- 1980- 1998-
1982 2000 1982 2000 1982 2000 1982 2000 1982 2000 1982 2000

Newly industrialized economies

(NIEs)
Hong Kong, China 2 0 1 0 47 28 56 12 52 71 43 88
Republic of Korea 31 10 39 13 32 34 24 19 37 56 37 68
Singapore 2 0 1 0 33 33 40 23 65 67 59 77
Taiwan Province of China .. .. .. .. .. .. .. .. .. .. .. ..
China and Mongolia
China .. .. .. .. .. .. .. .. .. .. .. ..
Mongolia .. .. .. .. .. .. .. .. .. .. .. ..
South-East Asia
Cambodia .. .. .. .. .. .. .. .. .. .. .. ..
Indonesia 57 .. 54 .. 13 .. 13 .. 29 .. 33 ..
Lao People’s Democratic Republic 77 .. 82 .. 7 .. 4 .. 16 .. 13 ..
Malaysia 34 21 44 13 26 33 20 29 40 46 36 58
Myanmar .. .. .. .. .. .. .. .. .. .. .. ..
Philippines 60 47 37 27 16 18 15 13 25 36 48 61
Thailand 68 50 74 47 13 20 8 17 20 31 18 36
Viet Nam .. .. .. .. .. .. .. .. .. .. .. ..
South Asia
Bangladesh .. .. .. .. .. .. .. .. .. .. .. ..
Bhutan .. .. .. .. .. .. .. .. .. .. .. ..
India .. .. .. .. .. .. .. .. .. .. .. ..
Maldives .. .. .. .. .. .. .. .. .. .. .. ..
Nepal .. .. .. .. .. .. .. .. .. .. .. ..
Pakistan .. .. .. .. .. .. .. .. .. .. .. ..
Sri Lanka 44 38 51 49 19 23 18 22 30 37 28 27
East Asia
Japan 9 5 13 6 40 38 28 22 51 57 58 73
World
Low- and middle-income .. .. .. .. .. .. .. .. .. .. .. ..
East Asia and Pacific .. .. .. .. .. .. .. .. .. .. .. ..
Europe and Central Asia .. 22 .. 21 .. 31 .. 16 .. 48 .. 64
Latin America and Caribbean .. 20 .. 11 .. 28 .. 14 .. 52 .. 75
Middle East and North Africa .. .. .. .. .. .. .. .. .. .. .. ..
South Asia .. .. .. .. .. .. .. .. .. .. .. ..
Sub-Saharan Africa .. .. .. .. .. .. .. .. .. .. .. ..
High-income 7 4 6 2 42 36 22 15 51 60 72 82
World .. .. .. .. .. .. .. .. .. .. .. ..

Sources: World Bank, World Development Indicators 2002 and World Development Report 2002.
Note: Two dots (..) indicate that data are not available.

35
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

Table II.3. Share of females in total employment by branches in selected Asian countries
(Percentage)

Taiwan
Province Republic
Branch (ISIC) Macao, of India Indonesia Japan Malaysia Myanmar Nepal Philippines of Sri
China China Korea Lanka

1997 1997 1997 1999 1999 1997 1999 1996 1995 1999 1998

Food products (311-312) 48 45 15 41 59 38 .. 8 33 50 34

Beverages (313) 24 34 6 35 31 38 .. 9 9 24 12
Tobacco (314) 39 93 35 82 34 16 47 7 45 19 71
Textiles (321) 70 53 9 52 60 49 .. 37 52 47 62
Wearing apparel,
except footwear (322) 81 79 55 78 84 73 .. 18 80 74 86
Leather and fur products
(323) 58 34 16 55 50 71 53 8 67 42 69
Footwear (324) 78 65 38 73 54 55 73 16 58 49 57
Wood and cork products
(331) 10 41 9 36 29 35 .. 3 17 23 35
Furniture, fixtures,
except metallic (332) 6 38 1 32 28 28 21 5 29 23 4
Paper (341) 20 32 4 23 32 34 .. 19 23 20 20
Printing and publishing
(342) 29 37 3 .. 30 38 45 7 31 31 12
Industrial chemicals (351) .. 24 1 17 11 18 .. .. 20 11 19
Other chemicals (352) 50 45 19 47 34 40 46 10 33 30 41
Petroleum refineries (353) .. 10 0.3 .. 9 11 13 5 13 .. ..
Petroleum, oil, lubricant
and coal products (354) .. 11 5 .. 15 13 .. .. 23 .. ..
Rubber products (355) 40 41 4 23 29 45 35 12 41 20 30
Plastic products (356) 30 45 5 49 40 43 47 7 27 26 40
Pottery, earthenware (361) .. 39 7 .. 42 55 50 .. 44 51 48
Glass (362) 17 38 2 .. 24 28 36 6 9 17 17
Other non-metallic
mineral products (369) 16 23 7 .. 19 16 .. 15 14 14 28
Iron and steel (371) .. 15 1 4 10 13 .. 0.1 8 7 6
Non-ferrous metals (372) .. 23 1 14 17 22 20 .. 18 12 3
Metal products (381) 11 33 2 25 25 25 27 2 19 20 7
Non-electrical machinery
(382) 17 35 2 17 24 42 .. 1 48 19 ..
Electrical machinery (383) 69 52 8 62 37 67 .. 5 70 41 45
Transport equipment (384) 4 24 1 11 17 21 .. .. 12 10 10
Professional and scientific
equipment (385) 57 57 12 63 36 91 .. .. 80 36 30
Other manufactures (390) 68 52 16 .. 42 71 38 21 65 43 74
Total manufacturing (3) 72 42 11 .. 35 47 .. 22 46 31 58

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Notes: ISIC = International Standard Industrial Classification.
Two dots (..) indicate that data are not available.

36
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

data are available. It is observed from the table
that in many countries, the share of female
employment in total sectoral employment is
higher than that of male employment in tobacco,
textiles, wearing apparel, footwear, leather and fur
products, chinaware and potteries.
employee is not uniform across the countries.
However, the productivity of the majority of agro-
based and resource-based industries such as food
products and beverages, textiles and clothing,
apparel, leather products and footwear was rela-
tively high in most of the countries.

(c) Contribution to productivity 2. Issues at stake

Table II.4 presents value added per em-
(a) Prospects of agro-based and
ployee in different branches of manufacturing in
resource-based SMEs
selected Asian countries (Japan; Bangladesh; Hong
Kong, China; Macao, China; Taiwan Province of
China; India; Indonesia; Malaysia; Republic of Up to mid-1997, the economies of South-
Korea; Singapore; and Sri Lanka) in the latest year East Asian countries experienced robust economic
for which data are available and may provide some growth due to:
indication about differences in labour productivity
in different segments. For almost all the countries, • Political, social and economic stability
iron and steel has the highest labour productivity, • Endowment of natural and human
while the sector with the lowest value added per resources

Table II.4. Value added per employee in selected Asian countries

(Hundreds of US$)

Hong Taiwan Republic

Japan Bangladesh Kong, Macao, Province India Indonesia Malaysia of Singapore Sri
Products (ISIC) China China of China Korea Lanka

1999 1997 1999 1997 1990 1998 1999 1997 1999 1999 1998

Food products (311-312) 738 37 356 108 276 26 46 208 639 463 60
Textiles (321) 535 11 327 128 161 20 42 197 427 335 28
Wearing apparel (322) 339 9 276 113 203 26 25 74 238 180 25
Leather and fur
products (323) 635 39 213 74 124 20 28 78 421 342 40
Footwear (324) 505 33 142 83 123 21 27 80 267 187 51
Wood and cork products
(331) 621 17 277 67 109 13 38 101 423 291 22
Furniture and fixtures
(332) 427 15 261 142 226 25 20 101 363 235 8
Paper (341) 1 030 24 351 99 231 28 81 173 715 498 50
Rubber products (355) 1 013 11 336 .. 141 47 46 167 570 409 46
Plastic products (356) 853 38 294 119 160 28 36 168 484 303 33
Pottery, earthenware
(361) 615 13 .. .. 116 20 72 102 260 .. 28
Iron and steel (371) 1 440 82 460 .. 442 67 149 741 1 175 750 80
Non-ferrous metals (372) 1 096 .. 462 .. 347 68 198 337 773 343 35
Metal products (381) 869 23 326 129 132 34 56 172 409 354 30

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Note: Two dots (..) indicate that data are not available.

37
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
• Efficient legal and institutional frame-
work
• Pro-business and pro-foreign direct
investment policies
• Sound macroeconomic policies
• Emphasis on the market, private enter-
prise, outward-looking industrialization
and relatively open economies
Despite this growth, Asian SMEs suffered
from age-old problems:
• Low level of productivity, lower average
value added and output levels per
employee
• Inadequate access to financial institu-
tions and high credit cost
• Higher costs of raw materials because
of small quantities ordered
• Inadequate level of technology and
managerial skills due to lack or inad-
equacy of R&D and difficulty of access
to technological information
• Difficulties in marketing and distribu-
tion due to lack of direct overseas
market exposure and penetration
Although many government programmes
focused on developing the SME sector, these
support programmes suffered from the following
deficiencies:
• Involvement of too many government
agencies with minimal coordination
• Short-run and unfocused approach for
the development of SMEs
• Absence of continuity or frequent
revisions to many programmes
• More benefits accrued to large and
medium industries compared with small
industries
• Involvement of many non-governmental
organizations for private groups (local
chambers, federations and associations)
necessitating need for greater coordi-
nation
38
Economic liberalization affected small and
medium industries in many ways with some
positive as well as negative effects:
• Decrease in number of microenterprises
• Better access to and low prices for
machinery, equipment and tools
• Greater competition in consumer goods
sectors
• Improved access to the system of new
and universalized government incentives
• Increased access to financial resources
• High costs of support services including
infrastructure
• More opportunities for subcontracting
and networking from foreign investment
• Greater competition from foreign invest-
ments in modern market and labour
force
The East Asian economic crisis diminished
the positive effects, at times even negating them
and magnifying the negative effects. The crisis
exposed weaknesses in the competitive ability
of the traditional manufacturing and had dispro-
portionate effects on small and medium-size enter-
prises. Although East Asian firms, including
those in crisis countries, were adept at adopting
new manufacturing techniques, they faced con-
tinual challenges from low-wage developing
countries and from China and Japan. As in the
case of the Mexican crisis, the East Asian crisis
led to a sharp fall in production and investment in
non-tradable sectors. This is expected because
currency depreciation, which favours traded goods,
reduces the incentive to invest in non-tradable
sectors.
(b) Major issues for consideration
The above analysis indicates that major
issues at stake for the development of agro-
based and resource-based SMEs include the
following:
• Integration of agriculture and agro-
based industries
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
• Availability of raw materials and credits
• Location of industry, transport costs and
access to markets
• Economies of scale and size of markets
• Availability of skilled labour and
capacity-building
• Lack of modern technology
• International barriers to trade
• Role of multinationals and foreign
investment
• Environment and sustainability
In many developing countries there is lack
of coordination for the development of agriculture
and agro-based industries due to several restric-
tions imposed on both internal and external trade
in agricultural commodities. Owing to lack of
basic infrastructure such as electricity and
transport, agro-based food processing industries
are generally established close to the cities and
towns, which are the major consumption and
demand centres for these goods. As a result, trans-
port costs for raw materials become high and
impose a burden on the cost of production. In
order to reap several fiscal and monetary benefits,
agro-based and resource-based industries generally
lack vertical expansion and therefore suffer from
the low economies of scale.
C. Rationale for development
and contribution of agro-based and
resource-based industries to
poverty alleviation
1. Rationale for development
of agro- and resource-based SMEs
The rationale for promoting agro- and
resource-based SMEs lies in their valuable contri-
butions to employment generation and poverty
alleviation. These enterprises contribute signifi-
cantly to poverty alleviation and promote economic
and social justice by employing a significant
portion of the poor and low-skill workforce, which
may otherwise remain unemployed or underem-
ployed. Higher employment in rural areas helps
in the reduction of inequalities, development of
backward areas and balanced regional growth and
development.
Poor persons cannot participate in the
growth process for reasons of extreme deprivation
or vulnerability combined with poverty or face
continuing exposure to risks of ill health and
malnutrition, which may jeopardize their ability to
participate in the opportunities offered by growth.
Employment generated by SMEs provides effective
safety nets that ensure the rural poor against the
income fluctuations.
Development of agro-based and resource-
based industries provides opportunities for the
growth of economic activities in the informal
sector and microenterprises in both rural and urban
areas. The informal sector remains an important
source of income and employment for the poor and
self-employed in developing countries. This sector
is very diverse and covers multiple economic
activities ranging from petty trading and personal
and domestic services to manufacturing, transport
and construction. The social groups include
artisans and craftsmen, hawkers, fruit and vegeta-
ble vendors, women and daily labourers for
construction and other services. Employment or
ownership of microenterprises provides the poor
with a source of empowerment and income
security and enables them to participate actively in
rural and overall economic development.
Agro-based industries open up new channels
of distribution and marketing for agricultural
commodities produced by the small and marginal
farmers and raise their incomes. Development of
resource-based industries, particularly SMEs, in
rural areas leads to valorization of agricultural
land, agricultural commodities and other resources.
The location of agro-based and resource-
based industries in rural areas helps to distribute
the benefits of economic growth broadly among
the rural poor. It also improves value addition and
the productivity of rural industries through wider
distribution networks and greater access to both
internal and external markets.
39
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
A dynamic small and medium industries
sector serves not only to create employment but
also to earn foreign exchange through exports,
upgrade the quality of the labour force and diffuse
technological know-how throughout the economy.
These industries help to mobilize domestic re-
sources by utilizing the savings, labour and
agricultural raw materials that otherwise remain
idle. They serve the low-income consumer
markets and produce a wide variety of goods that
also includes sophisticated products for export.
The location of small and medium industries
in rural areas creates livelihood opportunities that
help to stop migration to urban centres. They
provide a training ground for small-scale entre-
preneurs and business management personnel, who
may later join larger undertakings.
The role of financial markets as an instru-
ment to promote SMEs and alleviate poverty is
generally focused on supplying credit facilities.
However, credit is only one of the financial
services that the poor need. Access to bank
accounts or savings facilities in the rural areas is
equally important. For example, people who
derive their income primarily from agriculture
must build up financial assets following harvests to
sustain themselves for the rest of the year. Even
the poorest households are eager to save if they
can obtain positive real interest rates and there are
conveniently located deposit collecting facilities.
This point has been confirmed by the experience in
Bangladesh and Indonesia.
Integration of SMEs into global market
offers the potential for more rapid growth and
poverty reduction. Increased market access for
agricultural products would work to directly
address poverty reduction in developing countries.
While the rapid expansion of demand for unskilled
labour in manufacturing and urban services in
many developing countries has sharply reduced
rural poverty, about three quarters of the world’s
poor still live in rural areas, where agriculture is
often the dominant economic activity. Agriculture
accounts for about 27 per cent of GDP in develop-
ing countries, a similar share of exports and 50 per
40
cent of employment. This dependency on agricul-
ture is even higher in LDCs. But agricultural
markets are among the most heavily distorted and
attract tariffs several times higher than those facing
manufactured imports.
Historically, textiles and clothing have
played a unique role in economic development and
poverty reduction. Their contribution to the indus-
trial revolution in Western Europe and North
America in the eighteenth and nineteenth centuries
is well known, and they continued to spearhead
industrialization in many developing countries in
the twentieth century. Since textile and clothing
production often requires only simple technology
and is intensive in unskilled labour, many develop-
ing countries have a strong comparative advantage
in these sectors. In the mid-1960s, developing
countries accounted for 15 per cent of world textile
exports and less than 25 per cent of world clothing
exports. By 1998, these shares had reached 50 per
cent and 70 per cent, respectively. However, the
sector has also long been a prime target for protec-
tionism.
Despite these positive aspects, SMEs are
criticized for their inability to realize economies of
scale in procurement and production and have
higher costs of production. In many countries,
SMEs exist on the strength of costly government
support programmes in terms of several fiscal,
monetary and other concessions.
2. Growth and poverty alleviation
In many Asian developing countries, agro-
based and resource-based small and medium
industries have succeeded in achieving the
intended objectives of absorbing surplus labour,
alleviating poverty and bringing about more
balanced regional growth. In many cases, SMEs
have succeeded in raising their share in terms of
number of establishments, employment and output
vis-à-vis large-scale industries. This is clearly
illustrated in the Philippines in the case of
professional and scientific equipment, electrical
machinery and non-metallic products, pottery, glass
products and electrical equipment.
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

Table II.5 presents the average annual
growth rates by broad branches of manufacturing
in selected Asian economies (India; Indonesia;
Republic of Korea; Singapore; Sri Lanka; and
Hong Kong, China) during the 1990s. Although
growth rates of agro-based and resource-based
industries were adversely affected in the East
Asian countries due to economic crisis at the end
of 1990s, India and Sri Lanka achieved significant
growth rates in the value added of these industries
in the 1990s.
During the 1990s, sectors achieving average
annual growth rates exceeding 8 per cent (i.e.,
the average growth rate of MVA recorded by
East Asian countries in the 1990s) include the
following:
• Non-metallic mineral products, motor
vehicles and trailers, paper and paper
products, radio and TV sets, textiles,
chemical products, basic metals, and
machinery and equipment in India

Table II.5. Average annual growth of manufacturing in selected Asian economies, 1990-1999
(Percentage)

Products by ISIC India Indonesia Republic Singapore Sri Lanka Hong Kong,
of Korea China

15. Food and beverages 4.7 100.0 2.6 0.4 1.6 0.0
16. Tobacco products 2.6 .. 0.8 .. .. ..
17. Textiles 8.3 4.3 -- 3.1 -- 5.6 7.0 -- 2.1
18. Wearing apparel, fur products -- 4.4 26.6 -- 5.0 -- 5.4 .. -- 1.2
19. Leather, leather products, footwear 1.7 .. -- 7.6 -- 1.5 .. ..
20. Wood and wood products
(except furniture) 0.5 -- 3.5 -- 3.1 -- 3.6 14.5 ..
21. Paper and paper products 10.9 28.2 5.4 -- 1.4 10.0 2.4
22. Printing and publishing .. -- 3.6 0.6 4.4 .. ..
23. Coke, refined petroleum products,
nuclear fuel 4.0 10.7 19.0 1.8 .. ..
24. Chemical and chemical products 8.3 .. 13.6 17.1 1.1 -- 4.7
25. Rubber and plastic products 3.0 .. 3.7 1.5 .. -- 7.1
26. Non-metallic mineral products 18.3 4.6 2.6 1.5 0.2 ..
27. Basic metals 9.3 12.6 7.3 -- 0.6 0.1 -- 4.9
28. Fabricated metal products 2.3 0.3 1.4 2.5 5.7 ..
29. Machinery and equipment n.e.c. 8.0 -- 9.7 4.1 3.9 .. -- 5.5
30. Office, accounting and computing
machinery 3.4 .. 73.9 .. .. ..
31. Electrical equipment and apparatus 5.3 2.8 6.2 5.8 .. 0.2
32. Radio, television and communication
equipment 10.6 .. 55.7 .. .. ..
33. Medical, precision and optical instruments 2.7 -- 6.5 3.7 .. .. ..
34. Motor vehicles, trailers, semi-trailers 13.4 -- 4.8 14.3 2.6 .. ..
35. Other transport equipment 7.5 .. 25.7 .. .. ..
36. Furniture manufacturing n.e.c. .. .. -- 2.1 -- 5.3 .. -- 3.7
37. Recycling .. .. .. .. .. ..
Total manufacturing 7.1 3.9 9.9 8.1 3.1 -- 1.9

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Notes: ISIC = International Standard Industrial Classification.
n.e.c. = not elsewhere classified.

41
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
• Food and beverages, wearing apparel
and fur products, paper products, coke
and petroleum, and basic metals in
Indonesia
• Coke and petroleum products, chemical
products, basic metals, computers and
office machinery, radio and TV sets,
motor vehicles and other transport
equipment in the Republic of Korea
• Chemical products in Singapore
• Wood and paper products in Sri Lanka
• None in Hong Kong, China, which
recorded negative growth for most of
the subgroups
Of all the crisis economies, the Republic
of Korea’s industrial production recovered the
fastest, rising above the pre-crisis levels within two
years, whereas the levels of industrial production
in Malaysia, Thailand and Indonesia remained
below the pre-crisis level even after two years
(World Bank, 2000). The more rapid recovery in
the Republic of Korea partly reflects its greater
strengths in sectors such as electronics, computers
and telecommunications. The Korean firms also
performed well in transport equipment, whereas
Malaysian and Thai firms suffered in these sectors.
The Republic of Korea had poor performance
in traditional and resource-based sectors such
as food, chemicals, base metals, paper and pulp
products.
Traditional manufacturing sectors were
expected to lead the way to recovery in the crisis
countries having lower wages. In Thailand the
textiles sector grew rapidly following the
depreciation of baht, but output fell back to
pre-crisis levels as the currency appreciated and
Thai products faced steep competition in export
markets. Traditional manufacturing in the
Republic of Korea rebounded only slightly after
the crisis, reinforcing a secular decline.
Small and medium-sized firms were
adversely affected in all crisis countries. While
aggregate Korean industrial output started to
increase in late 1998, production by SMEs conti-
nued to fall in absolute terms until July 1999,
42
resulting in a decline by one third from pre-
crisis production levels. In other countries,
where SMEs had a larger proportion in industrial
production, poor performance by SMEs intensified
the overall industrial setback. For example, more
than 50,000 small firms and 400,000 households
throughout Thailand accounted for about 50
per cent of non-performing loans in 1999. The
inability to restructure these debts effectively
contributes to financial sector problems, which
feed back into the continued financial difficulties
of SMEs.
Despite these adverse effects of the
economic crisis, countries continued with their
commitment to liberalization and globalization
while strengthening international regulation for
financial markets and capital flows. Countries
continued to review the rigid and outdated laws,
rules and regulations, particularly in services,
finance, labour, technology and all production in-
puts. As SMEs account for almost 80 per cent of
industrial establishments in Asia, and these SMEs
faced a serious shortage of capital, markets
and professional management, all the countries
continued to have special programmes for the
development and technology upgrading of a SMEs.
They also emphasized the development of both
physical and social infrastructure, especially public
utilities, research and development and technical-
oriented infrastructure, which are particularly
needed by the small and medium enterprises.
The countries continued to move from
resource-based and labour-intensive types of indus-
tries to skill- and knowledge-based and medium-
and high-technology industries. They also further
liberalized foreign investment policies to attract
more of the widely accepted foreign direct invest-
ment and portfolio investment.
Table II.6A to II.6C presents sectoral shares
in manufacturing employment and value added in
selected countries (India; Indonesia; Philippines;
Republic of Korea; Singapore; China; Hong Kong,
China; Sri Lanka; and Thailand) in the most recent
year for which data are available. These tables
indicate that agro-based and resource-based manu-
facturing units account for major shares in value
added in all these countries.
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

Table II.6A. Distribution of employment and value added among the manufacturing sectors
(Percentage)

India Indonesia Philippines

Products by ISIC
Labour MVA Labour MVA Labour MVA

15. Food and beverages 16.1 12.2 13.9 13.6 16.8 29.8
16. Tobacco products 5.3 2.0 6.0 8.9 0.7 4.1
17. Textiles 17.1 12.4 15.7 12.6 4.8 2.1
18. Wearing apparel, fur products 3.3 1.0 10.7 5.0 14.2 5.2
19. Leather, leather products, footwear 1.5 0.5 7.0 3.7 3.8 1.0
20. Wood and wood products (except furniture) 0.9 2.5 10.2 7.5 2.1 0.9
21. Paper and paper products 2.0 2.0 2.4 3.8 2.1 2.2
22. Printing and publishing 1.3 1.3 1.3 2.9 2.7 2.0
23. Coke, refined petroleum products, nuclear fuel 0.8 2.0 0.1 0.2 0.2 9.7
24. Chemical and chemical products 9.6 15.7 4.7 7.2 5.0 12.0
25. Rubber and plastic products 3.4 3.7 6.9 5.3 3.8 2.5
26. Non-metallic mineral products 5.2 5.3 0.1 0.0 4.3 4.8
27. Basic metals 7.3 9.1 1.4 4.5 3.5 3.9
28. Fabricated metal products 3.2 4.0 2.7 2.9 3.6 1.8
29. Machinery and equipment n.e.c. 8.8 5.8 1.2 0.8 3.3 1.7
30. Office, accounting and computing machinery 0.2 0.5 0.0 0.0 2.1 3.2
31. Electrical equipment and apparatus 3.1 8.5 1.7 3.1 4.3 3.4
32. Radio, television and communication equipment 1.7 2.4 3.7 4.9 11.3 2.8
33. Medical, precision and optical instruments 1.0 1.5 0.5 0.6 3.3 1.2
34. Motor vehicles, trailers, semi-trailers 3.3 4.7 1.0 2.6 1.8 2.0
35. Other transport equipment 3.4 4.3 1.6 6.9 1.0 1.8
36. Furniture manufacturing n.e.c. 1.3 1.5 6.9 2.8 5.0 1.9
37. Recycling 0.0 0.1 0.1 0.0 0.1 0.0

Total manufacturing 100.0 100.0 100.0 100.0 100.0 100.0

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Note: n.e.c. = not elsewhere classified.

• In India, chemical products had the
highest share in MVA (15.7 per cent)
followed by textiles (12.4 per cent),
food and beverages (12.2 per cent),
basic metals (9.1 per cent) and electrical
machinery (8.5 per cent). Sectors
having a significant share in employ-
ment include food and beverages,
tobacco, textiles, chemical products,
basic metals, machinery and equipment,
and automobiles.
• Dominant sectors for MVA in Indonesia
include food and beverages (having a
share of 13.6 per cent in MVA), textiles
(12.6 per cent), tobacco products (8.9
per cent) and wood products (7.5
per cent). Sectors having a significant
share in employment include food and
beverages, textiles, chemical products,
non-metallic mineral products, basic
metals, machinery and equipment, elec-
trical machinery and automobiles.
• Dominant sectors for MVA in
Philippines include food and beverages
(29.8 per cent) and chemical products
(12 per cent). Sectors having a signifi-
cant share in employment include food
and beverages, textiles, wearing apparel
and fur products, chemical products,
non-metallic mineral products, electrical
machinery, radio and TV sets and
furniture.

43
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

Table II.6B. Distribution of employment and value added among the manufacturing sectors
(Percentage)

Republic of Korea Singapore China

Products by ISIC
Labour MVA Labour MVA Labour MVA

15. Food and beverages 7.0 7.8 5.1 3.1 8.2 10.2
16. Tobacco products 0.1 1.1 0.0 0.0 0.6 5.4
17. Textiles 9.0 5.5 0.4 0.2 11.0 6.7
18. Wearing apparel, fur products 5.5 1.9 2.3 0.5 4.4 3.1
19. Leather, leather products, footwear 2.1 1.0 0.3 0.1 2.4 1.7
20. Wood and wood products (except furniture) 1.0 0.6 0.4 0.2 1.0 0.8
21. Paper and paper products 2.2 2.3 1.3 0.8 2.6 2.1
22. Printing and publishing 3.1 2.5 5.8 4.8 1.3 1.2
23. Coke, refined petroleum products, nuclear fuel 0.4 3.8 0.9 4.1 1.5 3.6
24. Chemical and chemical products 5.4 9.5 6.4 18.5 11.1 12.0
25. Rubber and plastic products 5.8 4.2 5.7 2.3 3.9 3.6
26. Non-metallic mineral products 3.4 3.9 1.7 1.4 9.3 6.1
27. Basic metals 4.2 6.6 0.4 0.4 8.3 9.0
28. Fabricated metal products 6.8 4.0 10.8 4.8 3.6 3.3
29. Machinery and equipment n.e.c. 10.2 7.1 10.3 5.3 4.3 3.6
30. Office, accounting and computing machinery 1.9 2.8 12.6 22.5 6.9 4.0
31. Electrical equipment and apparatus 5.2 3.7 3.1 1.9 4.6 6.0
32. Radio, television and communication equipment 9.7 16.2 17.4 19.4 4.3 7.6
33. Medical, precision and optical instruments 1.7 1.0 2.4 2.8 1.2 1.1
34. Motor vehicles, trailers, semi-trailers 8.0 8.7 1.0 0.6 6.8 7.2
35. Other transport equipment 3.8 4.1 9.3 5.8 2.0 1.3
36. Furniture manufacturing n.e.c. 3.2 1.6 2.2 0.7 0.5 0.5
37. Recycling 0.2 0.1 0.1 0.1 0.1 0.1

Total manufacturing 100.0 100.0 100.0 100.0 100.0 100.0

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Note: n.e.c. = not elsewhere classified.

• Dominant sectors in MVA in the
Republic of Korea include radio and TV
sets (16.2 per cent), chemical products
(9.5 per cent) and food and beverages
(7.8 per cent). Sectors having a signifi-
cant share in employment include food
and beverages, textiles, wearing apparel
and fur products, chemical products,
rubber and plastic products, fabricated
metal products, machinery and equip-
ment, radio and TV sets, electrical
machinery, and automobiles.
• Dominant sectors in MVA in Singapore
include computers and office machinery
(22.5 per cent), radio and TV sets
(19.4 per cent) and chemical products
(18.5 per cent). Sectors with high
employment potential include food
and beverages, chemical products,
fabricated metal products, machinery
and equipment, computers and office
equipment, radio and TV sets, and
automobiles.
• China had a significant share of
MVA in food and beverages, chemical
products, basic metals, radio and TV
sets and automobiles. Sectors having a
significant share in employment include
food and beverages, textiles, chemical
products, non-metallic mineral products,
basic metals, computers and office
equipment, and automobiles.

44
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

Table II.6C. Distribution of employment and value added among the manufacturing sectors
(Percentage)

Hong Kong, China Sri Lanka Thailand

Products by ISIC
Labour MVA Labour MVA Labour MVA

15. Food and beverages 11.1 10.6 14.1 26.4 19.0 25.4
16. Tobacco products 0.4 0.9 5.6 12.2 0.4 0.1
17. Textiles 14.0 10.9 15.2 9.3 10.1 6.8
18. Wearing apparel, fur products 16.5 10.9 33.3 18.4 7.1 3.3
19. Leather, leather products, footwear 0.1 0.1 2.3 2.4 3.9 2.2
20. Wood and wood products (except furniture) 0.2 0.1 1.4 0.6 2.1 0.8
21. Paper and paper products 1.5 1.3 1.0 1.1 1.4 1.8
22. Printing and publishing 16.0 16.2 2.1 0.9 1.6 1.3
23. Coke, refined petroleum products, nuclear fuel 0.2 0.3 0.4 2.1 0.1 0.1
24. Chemical and chemical products 2.4 3.3 2.2 6.8 3.0 4.4
25. Rubber and plastic products 2.9 2.2 7.1 6.7 8.8 6.7
26. Non-metallic mineral products 2.0 4.2 5.8 4.0 6.4 8.6
27. Basic metals 0.9 1.0 0.3 0.5 4.2 1.5
28. Fabricated metal products 3.9 3.0 1.3 0.9 2.8 3.3
29. Machinery and equipment n.e.c. 3.5 4.2 0.4 0.5 4.8 5.4
30. Office, accounting and computing machinery 2.5 3.6 0.7 1.0 1.8 3.1
31. Electrical equipment and apparatus 2.9 3.6 0.7 1.2 4.4 5.6
32. Radio, television and communication equipment 7.5 13.0 0.4 0.5 6.4 3.8
33. Medical, precision and optical instruments 2.3 2.5 0.1 0.0 0.3 0.2
34. Motor vehicles, trailers, semi-trailers 4.8 4.6 1.6 2.2 3.9 10.8
35. Other transport equipment 0.0 0.0 0.0 0.0 0.1 0.8
36. Furniture manufacturing n.e.c. 4.3 3.7 4.0 2.2 7.5 3.9
37. Recycling 0.0 0.0 0.0 0.0 0.0 0.0

Total manufacturing 100.0 100.0 100.0 100.0 100.0 100.0

Source: UNIDO, International Yearbook of Industrial Statistics 2002.

Note: n.e.c. = not elsewhere classified.

• Dominant sectors in MVA in Hong Sectors with high employment include

Kong, China, include food and
beverages, textiles, wearing apparel,
printing and publishing, and radio and
TV sets. Sectors having a significant
share in employment include food and
beverages, textiles, wearing apparel and
fur products, printing and publishing,
radio and TV sets, furniture and auto-
mobiles.
• Sri Lanka had dominant shares of
MVA in food and beverages, tobacco
products, wearing apparel, chemicals
and rubber and plastic products.
food and beverages, tobacco products,
textiles, wearing apparel, rubber and
plastic products, non-metallic mineral
products, and furniture.
• Thailand had dominant shares in food
and beverages, motor vehicles, non-
metallic mineral products, textiles and
rubber and plastic products. Sectors
with high employment include food and
beverages, textiles, wearing apparel,
rubber and plastic products, non-
metallic mineral products, radio and TV
sets and furniture.

45
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
The significance of SMEs in the deve-
lopment process may be beyond the recorded
shares in MVA and employment that are directly
attributed to them. They are often the vehicles
which facilitate the birth and expansion of large-
scale industries in the structural transformation
that occurs with growth in income. For example,
in the Republic of Korea, much of the increase in
employment of factories with 100 or more workers
since the 1960s came from small firms that grew
larger and larger over time. In India, Indonesia
and the Philippines, most of the enterprises now in
existence began as household firms, subsequently
growing into SMEs and larger enterprises in a
number of cases.
In order to achieve faster growth and
alleviation of poverty, industrialization in many
developing countries has focused on development
of textile and clothing industries. As a labour-
intensive sector, clothing provides significant job
opportunities in labour-abundant economies having
a comparative advantage due to lower wages.
Moreover, for over two decades the quota regula-
tions of the Multifibre Arrangement enabled late-
comers to access markets for clothing and textiles
once other countries filled their MFA quotas.
More recently, improvements in production
and communication technologies and declining
transport costs have enabled geographical separa-
tion of the labour-intensive segments from the
skills- and capital-intensive segments of the manu-
facturing process in textiles and clothing. For
example, while growing automation has increased
the capital intensity of the pre-assembly stages
of the production process, the assembly stages
have remained relatively labour-intensive. As a
result, it has become both technically feasible and
economically profitable for high-wage country
manufacturers to relocate their assembly stages of
production to low-wage countries and reimport the
end products for domestic sale or for export to
third markets. The NIEs in East Asia were the
first to establish production facilities under
outsourcing agreements with large United States
retailers and brand-name merchandisers.
It is generally held that prices of manufac-
tures are much less flexible than prices of primary
commodities in world trade, because markets for
46
manufactures are much less competitive. Most
markets for manufactures have high barriers to
entry; many are oligopolistic, controlled by a small
number of producers who often compete on the
basis of quality, design, marketing, branding and
product differentiation rather than prices.
In most major industrial countries, wages
in firms are not flexible owing to a number of
labour market regulations, including minimum
wage legislation, collective bargaining and restric-
tions on hiring and firing. The absence of such
conditions in the labour markets of most deve-
loping countries, together with large amounts of
surplus labour, often implies that wages in deve-
loping countries are much more flexible than in
industrial countries. This increases the ability of
firms to lower wages when there are price declines
so those profit margins are maintained. It thus
allows them to compete on the basis of prices in
markets for labour-intensive manufactures.
Furthermore, the East Asian experience
shows that mobility of low-skilled labour is greater
among developing countries than between deve-
loping and industrial countries. All these factors
combined not only introduce greater price
flexibility in the markets for developing countries’
labour-intensive manufactures vis-à-vis those
exported by industrial countries, but also exert
downward pressure on their prices and terms of
trade.
The share of developing countries in world
exports grew considerably during the period 1980-
1998 for both clothing and selected products from
the electronics industry, which are labour-intensive.
However, the increase was concentrated in a small
number of economies. The NIEs accounted for
two thirds of all clothing exports from developing
economies during the first half of the 1980s, but
their share declined thereafter to about one fifth by
the mid-1990s, as they upgraded their exports and
began to exit from the clothing markets. Their
market shares were taken up by other developing
countries in Asia, notably those in South Asia,
the ASEAN-4 (comprises Indonesia, Malaysia, the
Philippines and Thailand), China, Turkey and
Mexico.
In the markets for the selected products
from the electronics sector, NIEs accounted for
most of the spectacular increase in the share of
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
developing countries in world exports in 1980-
1995. During this period, the share of these
economies increased from two thirds to three
fourths of all developing country exports of these
products. Other developing countries, such as the
ASEAN-4, China and Mexico, have succeeded in
increasing their market shares in the past few
years. It is interesting to note that the ASEAN-4
and China have gained market share in the elec-
tronics sector much more rapidly than in clothing.
3. Employment generation
Small and medium industries have predo-
minant shares in output, exports and employment
in agro-based and resource-based industries in
many Asian countries such as Bangladesh, India,
Pakistan, China, the Republic of Korea, Indonesia,
Thailand and the Philippines. They played a sig-
nificant role in economic development even in the
United States, Germany, Japan and Singapore.
They are mainly in textiles, garments, wood prod-
ucts, food processing, leather products, fabricated
metals, machinery and equipment, rubber and plas-
tic products, pottery, and printing and publishing.
International experience indicates that even
under the most competitive conditions, unorgan-
ized and small business enterprises not only
provide major employment opportunities but also
survive alongside the highly organized sector. For
example, there are about 23 million small business
enterprises in the United States that constitute the
principal source of new jobs in the economy. All
firms under the United States Small Business Act:
• Employ 53 per cent of the private
workforce
• Represent 99 per cent of all employers
• Account for more than 50 per cent of
GDP
• Account for 28 per cent of jobs in the
high-technology sectors
• Provide 55 per cent of all innovations
• Provide virtually all new jobs in the
economy
• Account for 47 per cent of all sales in
the country
• Account for 35 per cent of federal
contract deals
• Account for 51 per cent of private
sector output
• Represent 96 per cent of all United
States exporters.
Nearly 60 per cent of United States small
businesses have 4 employees or less, 18 per cent
have 5 to 9 employees, 11 per cent have 10 to 19,
9 per cent have 20 to 99 and only 1.4 per cent
have 100 to 499, the traditional high-end demar-
cation in qualifying in the small business segment.
As regards Asian countries, in 1990 small
and medium enterprises accounted for 95 per cent
of establishments in Bangladesh, 98 per cent in
Thailand, 93 per cent in Malaysia, 70 per cent in
Indonesia and 80 per cent in the Philippines.
The SSI sector in India produces over 7,500
products ranging from consumer goods to sophi-
sticated machinery and computer peripherals and
covers a wide spectrum of industries. Small-scale
industries basically fall under the unorganized
sector, which accounts for 93 per cent of employ-
ment. In addition, the SSI sector contributes over
40 per cent of the gross turnover in manufacturing
output, 45 per cent of manufactured exports and 40
per cent of total exports.
In Japan, of the total of 54,160,000 people
engaged nationwide (excluding those in primary
industries), 42,270,000, i.e., 78 per cent of employ-
ment, are in small and medium enterprises. Their
share of employment in various manufacturing
subsectors ranged from 41 per cent in transport
machinery to 100 per cent in silverware. SMEs
accounted for 99 per cent of all business establish-
ments, 52 per cent of both manufacturing value
added and exports, 64 per cent of wholesale
business and 78 per cent of retail sales.
Development in the Republic of Korea has
largely been driven by the expansion of conglo-
merates, but in the 1980s, the SME sector began to
grow rapidly. There are now nearly 96,000 small
and medium manufacturing enterprises, which
employ 1 to 300 persons each. They account for
69 per cent of total employment in this sector.
47
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
Like the Republic of Korea, Taiwan Pro-
vince of China has made rapid strides in expanding
its industrial base and enhancing exports. SMEs in
Taiwan Province of China account for 90 per cent
of enterprises and 65 per cent of exports. The root
of the progress made by both the Republic of
Korea and Taiwan Province of China is the
combined result of sound economic policies and
a strong scientific and technological base. Like
the Republic of Korea, Taiwan Province of China
benefited tremendously from the Asian export
boom to the United States. The main exports
have been textiles, clothing, footwear, furniture,
chemicals, electric appliances and consumer and
computer electronics.
In China, the highest priority is given to
employment generation, environmental and eco-
logical protection, poverty eradication and raising
the living standards of people in rural areas by
increasing agricultural productivity. In China,
SMEs provide nearly 75 per cent of urban job
opportunities and the number of units has
exceeded 8 million, being 99 per cent of total
enterprises in China. A large number of these
enterprises employ around four persons per unit
under the SME sectors. SMEs account for 78
per cent of employees, 64 per cent of industrial
turnover, 52 per cent of corporate profits and 52
per cent of fixed assets held by industry.
In 1985, the Government of China started
the Spark Programme, a project aimed at establish-
ing “big agriculture” in the vast rural areas to
foster the development of industrialized agricul-
ture, animal husbandry, forestry and all types of
agro and forest produce processing industries. The
Spark Programme is a scientific and technological
development plan implemented by the State
Science and Technology Commission (SSTC) to
develop advanced technologies for township
enterprises. From 1986 to 1993, more than 50,000
projects had been implemented at various levels
under the Spark Programme, covering more than
85 per cent of the total number of towns and
training 30 million technical and management
personnel. Over 400 types of advanced technical
equipment had been developed and more than
100 Spark technology-intensive zones had been
established. Since 1993, 71 regional pillar indus-
48
tries, 43 Spark technology-intensive zones and 173
industries in provinces have been established all
over China. Today, there are over 2,000 techno-
logy trade markets all over China employing about
1 million people.
In China, rural industries dominate pro-
duction in cement, iron and steel, fertilizers,
hydropower and agri-machinery and contribute 25
per cent of rural employment. The initial focus of
rural industry in China was on primary processing
of farm products, handicrafts, manufacture and
repair of simple farm tools, and developing and
processing local industrial resources. The indus-
tries were small and used primitive techniques.
Reforms in China have encouraged rural indus-
trialization along with the entry of multinationals
in export-oriented sectors.
Subcontracting and ancillarization have
helped the dispersal of industry and the growth of
the small and medium industries and rural non-
farm sector in many countries. The most success-
ful example of subcontracting from large urban
areas to small rural entrepreneurs is in Japan. The
division of responsibility and resources, in keeping
with its economic propensity, has given Japan an
unparalleled global edge. Its success is attributed
to expanding demand, limited capital of large
companies, low basic skills required by small units
and paternalistic relationships. Big business
houses share the production process, technology
and innovation with small/medium industries.
Thailand, Malaysia and Indonesia have
adopted the Japanese model with variations to suit
each nation’s cultural and social environment. In
Thailand large companies are allowed to develop
ancillaries, which can operate within the same
factory premises and yet are entitled to have
independent recruitment, wage structure and
service conditions.
In Pakistan, subcontracting has been
practised over a long period in traditional products
such as carpets, garments and footwear. Subcon-
tracting is also strong in the labour-intensive
activities of rattan in Indonesia and for garments in
Philippines. The “Bapakangkat” (parent unit) and
“Anakangkat” (related units) of Indonesia are good
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
examples of networking. Under the scheme, in
addition to contractual networking, the Bapa-
kangkat provides technical and financial assistance,
leases plant and equipment and trains people,
leading to higher employment and lowering the
cost of production.
These facts suggest that although the
definition of SSEs may not be uniform across
countries, they contribute significantly to employ-
ment generation. As unemployment is the root
cause of poverty, the SMEs through employment
generation help in poverty reduction. However,
all available studies show that the growth and
quality of employment in the SMEs have been very
much affected by the absence of timely low-cost
credit, improved technology, good infrastructure,
quality consciousness, modern marketing, proper
organization and a synergy with large, organized
industries.
All measures should be taken to improve
technology, quality and productivity by vocational
and other training, skills development, organiza-
tional changes like cluster development, etc.
Indeed barely 5.3 per cent of Indian youth in the
labour force in the age group 19-24 in 1999-2000
are trained in vocational skills through formal
training as against nearly 30 per cent in selected
least developed countries (LDCs) and above 70 per
cent in developed countries.
SMEs have high employment elasticity.
Their employment intensive-character should be
protected by selecting proper labour-intensive
technology drawn from all sources, including the
grass-roots indigenous level. Proper rules and
regulations should be laid down so that benefits
of higher growth are translated in the form of
increased earnings for the workers.
As the major portion of the poor exist in
the unorganized sector, faster growth and produc-
tivity in this sector will also reduce poverty. In the
attempt to increase labour productivity, it is
necessary to improve job quality and security by
major changes in legislation regarding basic social
security, working conditions, minimum wages and
protection of labour interests.
D. Economic policies and strategies
for development of agro-based and
resource-based industries
1. Industry development formulation
The development of the agro-based and
resource-based industries provides the poor with
opportunities to generate income and assets. But
these industries face many barriers to development
and cannot fulfil their potential to generate income
or improve wealth distribution to the poor and to
contribute to poverty alleviation. In rural areas,
the business environment may not be favourable to
thriving agro-based industries. This reflects not
only low skills development but also low access
to capital, information and technology. These
constraints are discussed in detail in the following
sections.
Even after the establishment of WTO, there
are still several barriers in multilateral trading
arrangements for market access in agro-based
manufactures. Although there have been some
initiatives in this area such as preferential market
access provided by the European Union (EU) and
the United States, the improved access they offer is
restricted to the poorest countries. Given that
those countries generally are not large exporters
of labour-intensive manufactures, the initiatives do
little to improve market access for such exports.
In Canada and the United States, tariff peaks are
concentrated in textiles and clothing; in the EU
and Japan, in agriculture, food products and
footwear.
The majority of developing countries with
the capacity to expand exports of agro-based
products continue to face significant barriers.
Trade in textiles and clothing continues to be
governed by quota regulations, and developing
countries’ manufactured exports encounter high
tariffs and increased contingent forms of protec-
tion, such as anti-dumping action and labour and
environmental standards.
The roadblock towards technological
upgrading and transfer of technology to SSIs is
also due to complex modalities of technology
49
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
transfer, lack of knowledge about the new global
trade system which is being engineered by WTO
through GATT, the General Agreement on Trade in
Services (GATS), TRIMS and TRIPS, and various
technical and non-tariff barriers for exports of
products of SSIs imposed by advanced countries
on the grounds of the environment, health and
labour among other factors. Another important
constraint pertains to inadequate availability of
finance for the acquisition or patenting of any
indigenously developed technology or product.
Technology quality management by adhering to
ISO standards has been found lacking in many
SSIs.
After the establishment of WTO, the
roles of intellectual property rights (IPRs) and
patenting have become dominant in the flow
of technologies and international trade. IPRs
include copyrights, patents, trademarks and de-
signs. All these have far-reaching implications
for SSIs since reverse engineering, an important
source of technology for SSIs, is difficult under
the stricter IPR regime. The issues of IPRs
and patenting have serious implications for
specific segments like agro and food processing,
biotechnology and chemicals including pharma-
ceuticals.
In order to learn from international best
practices and formulate appropriate policies for
the development of agro-based and resource-
based industries, the following measures are
suggested:
(a) A task force at the regional level
may help to come up with an action plan to
formulate strategies to support the development of
agro-based and resource-based industries;
(b) A regional capacity-building pro-
gramme could help regional governments or
development agencies to work with the private
sector to stimulate growth and opportunity;
(c) Identification of some pilot pro-
grammes in progressive regions can provide a
good demonstration or benchmark for other
regions to replicate.
50
2. Business environment
(a) Licences and regulatory system
All countries have a specialized, organized
and very elaborate system of rules and regulations,
licences and control for the development of SMEs.
Fiscal and other incentives are also given in some
form or other to SMEs and export-oriented units in
almost all countries, including developed countries.
Some of these policies are directed explicitly at
these industries, while others are generally aimed
at firms in certain priority sectors on account of
their special role in development.
The nodal agency for SSI promotion and
development in the United States is the Small
Business Administration (SBA). Established in
1953, SBA provides financial, technical and
management assistance to enable Americans to
start, run and grow their business enterprises.
SBA has a portfolio of US$ 45 billion in business
loans and is the United States single-largest
promoter of small business. It provides loans, loan
guarantees and what are called “disaster loans”. In
1998, SBA offered management and technical
assistance to more than 1 million business entre-
preneurs.
Japan has enacted the Small and Medium
Enterprise Basic Law, which stipulates that the
Government must implement necessary measures
in a comprehensive manner in the following areas
for the SME sectors:
(a) Modernization of equipment;
(b) Improvement of technology;
(c) Stimulation of demand;
(d) Rationalization of management;
(e) Structural upgrading of small and
medium enterprises;
(f) Prevention of excessive competition
and establishment of proper subcontracting.
The Spark Programme on rural industrializa-
tion approved by the Chinese Government in 1986
aims at modernizing the rural economy through
science and technology. The Programme works at
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
three levels – county, province and central Govern-
ment. In general, units under Spark include (a)
village and township enterprises having R&D units
in cooperation, (b) R&D units which have village
or township units for cooperation and (c) a
scientific and production consortium. Spark has
adopted a mechanism of setting up a technology
development and extension network that interlinks
local sectors and central departments and institu-
tions for continuous flow of technology.
In addition, China has set up non-profitable
productivity centres promoted by SSTC that
provide comprehensive service to medium and
small-sized enterprises. These productivity centres
are equipped with computers, fax machines and
training equipment and systems used in the United
States; Japan; Hong Kong, China; Italy; Australia;
the EU; and Singapore. China’s experience in
providing 100 million jobs in rural enterprises
under the non-farm sector during 1986-1993
reveals that its rural non-agricultural enterprises
owe their success to a market-orientation, availabi-
lity of infrastructure, stress on higher technology,
incentive-linked wages, competitiveness, diversity
in products and community cooperation.
Small and medium-sized enterprises play an
important role in the Republic of Korea’s economy
that is supported both by the Government and
a well-developed institutional mechanism and
infrastructure. The development of SSIs has the
support of the Republic of Korea’s Constitution,
which states that “promotion of SSIs is the duty of
the nation”, while the country has also developed
comprehensive SME legislation.
In India, the primary responsibility for
developing village and small industries rests
with the state governments. However, the central
Government provides various fiscal and monetary
incentives and support services for the promotion
of SSIs and also for the development of all
industries in industrially backward areas to
reduce regional imbalances. The Government
prescribes minimum credits (currently 40 per cent
of total credits) that government-owned commer-
cial banks must lend to the priority sectors, which
include agriculture, SSI and retail trade and trans-
port operators. In addition, it has established
specialized institutions that extend long-term
finance for fixed-asset purchases. Some credits
and equity funds also come from State industrial
development corporations. Government provides
various other fiscal, monetary and non-monetary
incentives to promote SMEs and export-oriented
units.
India has a unique policy of reserving
products for exclusive manufacture in the SSI
sector as a promotional and protective measure for
SSI, which was initiated in 1967 with 47 items and
reached a peak of 873 items in October 1984. The
policy is applicable only to manufacturing units
and not for servicing or repair activities. This
policy has statutory backing from the Industries
(Development and Regulation) Act, 1951. As at
30 June 2001 there were 799 items on the reserved
list. One item, ready-made garments, was de-
reserved in January 2001; a further 12 items were
de-reserved in June 2001 and another 14 items in
2002.
(b) Fiscal and investment incentives
Tax incentives accorded to firms are in the
form of exemptions from sales taxes, customs
duties and income taxes. Such exemptions are
granted for a variety of purposes and have
selective effects from the standpoint of firm size.
In India, for example, small firms are given a
central excise duties exemption which declines
with firm size until it disappears for large indus-
tries. However, many countries generally grant tax
concessions on the basis of considerations other
than size. Tax holidays are granted for the estab-
lishment or expansion of industries, which are
classified as new or necessary or particularly desir-
able, such as infrastructure and core industries.
Investment incentive packages are also
provided for diversifying exports and for regional
dispersion of growth and employment opportuni-
ties. India, which perhaps has the biggest pro-
gramme and network for small industries, has an
elaborate organization to promote investments in
different small industries and ancillaries. These
provide for industrial estate facilities, tax holidays,
export incentives and other direct subsidies such
as transport subsidies, concessional credit and
purchase and price preference.
51
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
In Indonesia and the Philippines, new
investment promotion facilities such as import duty
concessions on capital goods and raw material
imports are available to firms, including small and
medium industries, in priority sectors.
The general nature of the investment
incentive system, except in India, however, places
the SMEs in a disadvantageous situation for the
following reasons:
• The proliferation of licences, permits,
taxes and duties and control over
agricultural price policies impose major
costs on agro-based and resource-based
SMEs.
• Administrative procedures, documenta-
tion and follow-up activities for incen-
tives involve fixed costs, and the net
value of the implicit subsidy is much
lower for SMEs.
• SMEs have less capability in financial
management and project evaluation,
making it more difficult to meet
documentation and project feasibility
prerequisites for a loan.
• Investment boards are generally located
in the capital, and the travel time and
expense can be a significant burden on
SMEs, which are generally located in
the rural areas.
• Many types of tax concessions, e.g.,
exemption from duties on imported
machinery, are more valuable to large
firms than to small labour-intensive
firms.
• General tax rates on corporate and
individual incomes are very high in
many countries in Asia (see table II.7).
(c) Export promotion schemes
Of all the policies pursued in East Asia,
“export promotion” is the most often talked about.
This policy starts from a basic principle in inter-
national economics, that any tax on imports is a
tax on exports, either through raising the cost of
export production or through making the domestic
52
market more attractive. In East Asia, one major
factor for economic success has been the main-
tenance and encouragement of export competitive-
ness, while retaining some degree of domestic
protection.
East and South-East Asia, in addition to
maintaining realistic exchange rates and reducing
the average level of tariffs, pursued policies
directly in support of exports by granting free trade
status for all export activities. This is achieved
through: (a) fenced private or public free trade
zones (FTZs); (b) non-fenced FTZs; (c) bonded
manufacturing warehouses (BMWs); (d) duty
exemptions; and (e) duty drawbacks/rebates. The
first three were specialized schemes, which had
been widely and effectively used in countries at
the early stages of development. Duty exemptions
and drawbacks are economy-wide schemes that
were desirable complementary systems, used at
the advanced stage of development. However,
development experience suggests that in many
low-income countries, the implementation of
economy-wide schemes has been flawed, owing
to inadequate development of the necessary
instruments, institutions and mechanisms (World
Bank, 1996).
The fundamental features of the Republic of
Korea’s pioneering export promotion drive were
the duty drawback scheme, implemented through
the domestic letter of credit and the export finance
system. The instruments selected for the Republic
of Korea’s export drive were comprehensive
and far-reaching. They included the provision of
income tax deductions, import duty exemptions
and drawbacks, liberal access to pre- and post-
shipment and investment finance at preferential
rates, export finance guarantees and credit
insurance, preferential rates for electricity and rail
transport, and supportive infrastructure investment,
such as the provision of free trade zones.
Taiwan Province of China also effectively
used the system of duty drawbacks for export
promotion, but the scheme was significantly
different. In Taiwan Province of China, unlike in
the Republic of Korea, duty rebates are claimed on
the basis of customs documents of exports and
imports. Export credit (through banks) is much
less significant as a proportion of export value than
 Table II.7. Tax policies in selected Asian economies in 1990 and 2000

Tax Taxes Domestic Export Import Highest marginal income tax rate
revenue on income, taxes on goods duties duties
profits and and services Individual Corpo-
capital gains rate
Country or area Rate Exemption rate
% limit
% % of corresponding % % on income
of GDP of total taxes value added of tax revenue of tax revenue % (US$) %
2000 1990 2000 1990 2000 1990 2000 1990 2000 2000 2000 2000

Newly industrialized economies (NIEs)

Hong Kong, China .. .. .. .. .. .. .. .. .. 17 13 462 16
Republic of Korea .. 38 .. 7 .. 0 .. 13 .. 40 63 507 28
Singapore 16 45 50 4 5 0 0 4 3 28 400 000 26
Taiwan Province of China .. .. .. .. .. .. .. .. .. .. .. ..
China and Mongolia
China 7 50 7 1.5 6.5 0 0 22 7 45 12 089 30
Mongolia 22 28 16 9 16 0 2.3 20 8 .. .. ..
South-East Asia
Cambodia .. .. .. .. .. .. .. .. .. 20 38 412 20
Indonesia 17 65 65 6 6 0.1 0.5 7 2 35 20 949 30
Lao People’s Democratic Republic .. .. .. .. .. .. .. .. .. 40 658 ..
Malaysia .. 43 .. 6 .. 10 .. 15 .. 29 39 474 28
Myanmar 3 30 35 7 4 0 0 23 9 30 .. 30
Philippines 14 33 44 6 5 0 0 28 21 32 10 000 32
Thailand 14 26 34 9 8 0.2 0.3 24 12 37 92 829 30
Viet Nam 15 .. 32 .. 8 .. 0 .. 21 50 5 695 32
South Asia
Bangladesh 7 .. 15 .. 5 .. 0 .. 30 .. .. ..
Bhutan .. .. .. .. .. .. .. .. .. .. .. ..
India 10 19 36 7 5 0.1 0.1 36 27 30 3 222 40
Maldives .. .. .. .. .. .. .. .. .. .. .. ..
Nepal 9 13 21 7 7 0.4 1 37 31 .. .. ..
Pakistan 12 13 28 9 8 0 0 44 16 35 17 271 ..
Sri Lanka 15 12 15 15 14 4 0 27 13 35 3 630 35
East Asia
Japan .. 73 .. 2.4 .. 0 .. 1.4 .. 37 156 863 30

Sources: World Bank, World Development Indicators 2002 and World Development Report 2002.

53
II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

Note: Two dots (..) indicate that data are not available.
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
in the Republic of Korea. More of the credit
comes through suppliers’ credit (in the form of
post-dated cheques), or buyers’ credit (mainly from
Japanese trading companies, which account for an
estimated 30 to 50 per cent of Taiwan Province of
China’s exports). Indirect exports cannot get ex-
port credit on the basis of documentary proof of
their production for export. Finally, the Republic
of Korea’s system differs from that of Taiwan
Province of China’s in the area of input coeffi-
cients. For many products they have been set more
generously in the Republic of Korea, so as to give
more of a subsidy to exports through an extra
rebate.
Indonesia, Malaysia and Thailand also
applied export support instruments including tax
incentives, duty drawbacks and exemptions, and
export and investment finance. But the intensive
efforts were initiated only in the early 1980s and
the system of exemptions and drawbacks was
unsatisfactory because of limited access (especially
by small and indirect exporters) and slow and
cumbersome procedures. Compared with the
Republic of Korea, the South-East Asian systems
have not been as comprehensive in coverage or as
automatic in access.
There are four main methods of financing
trade: (a) company credit; (b) bank credit; (c) bank
loans; and (d) self-financing. In most developing
countries, exporters cannot meet financing needs
through company credit or bank credit because
they lack modern banks and trading companies that
can internalize the risk-taking. Therefore, the
immediate objective of ensuring access to trade
financing must be met through bank loans.
The three instruments for the bank loan-
based trade financing system are: (a) transaction-
based, self-liquidating mechanisms for trade
financing (including rediscount mechanisms of the
central bank); (b) institutions to deal with export-
ers’ non-performance risk, i.e., pre-shipment export
finance guarantees (PEFG); and (c) institutions to
deal with overseas buyers’ non-payment risk, i.e.,
export credit insurance and guarantees (ECI/G).
The Bank of Korea’s trade financing mechanisms
are particularly good examples of successful bank
loan-based trade financing and consisted of all
these instruments.
54
3. Development of skills and technology
Despite attractions such as political stability,
the rapid pace of deregulation, moderate inflation,
availability of relatively cheap labour, large domes-
tic market and plentiful natural resources, most of
the Asian developing countries face obstacles to
technology transfer. These difficulties vary in
degree across all Asian countries especially in
agro-based industries given their different levels of
technological development and absorptive capacity.
They fall broadly into the following categories:
(a) Poor infrastructure and utilities;
(b) Strict laws and regulations on foreign
firms, and inefficiencies in the implementation of
deregulation policies;
(c) Shortage of trained technical and
managerial workforce;
(d) Weak local supporting industry in the
production of parts and components;
(e) Low rate of diffusion of technology to
the rest of the economy except for FDI;
(f) High cost of technology agreements;
(g) Transfer of technology which is not
environment friendly.
An important condition for successful tech-
nology transfer is the ability of the host countries
to attract foreign investment and provide an envi-
ronment that enhances the willingness of foreign
investors to take a long-term view and transfer
know-how to local partners and workers.
Lack of transparency and excessive bureauc-
racy in the implementation of foreign investment
laws often cause a big gap between approval and
actual realization rates, which may be as low as 30
to 35 per cent in the case of several countries in
the Asian and Pacific region. Furthermore, the gap
between approval and actual investment is as long
as two to three years.
Most of the SAARC countries share com-
mon strengths and problems. The problems relate
to the low level of technology, environmental
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
degradation and a limited export base concentrated
on natural resources and semi-finished products.
For a long time, these countries were dependent on
the West for their technological needs and paid
little attention to building their own technological
capabilities.
By and large, SAARC countries encouraged
transplantation of turnkey projects operating at a
suboptimal level of efficiency and capacity utiliza-
tion and were unable to absorb, adapt and develop
technologies needed for their economic develop-
ment. Whatever science and technology (S&T)
infrastructure was developed, it remained weak in
establishing linkages with the productive sectors.
Furthermore, much of the aid acquired in the past
was spent on public sector projects that were
inefficient. There is also a lack of sufficient
linkages and networking among academia and
enterprises.
The Chinese case is an example that has met
with considerable success in technological upgrad-
ing of its small-scale sector through transfer of
technology by creating sufficient institutional
mechanisms. In this direction, the Spark Pro-
gramme was initiated in 1986 for village and town-
ship enterprises (VTEs) in rural areas and the
Torch Programme (for high- technology areas) was
initiated in 1988 to cater for industries mostly in
120 high-technology development zones (HTDZs)
in urban areas. To facilitate transfer of technology
and reduce the barriers between research institu-
tions and enterprises, some 55,000 new technology
enterprises (NTEs) have been set up. The Govern-
ment provides soft bank loans, preferential taxation
policies and development of infrastructure facilities
and risk capital for start-up for NTEs through a
government-financing agency known as the
Venture Investment Corporation.
With the onset of economic liberalization in
India in 1991, the Government of India liberalized
the import of technologies by domestic manufac-
turers. Some salient features relating to the tech-
nology import policy are:
• There is a commitment to development
and utilization of indigenous capabilities
in technology and manufacturing, and
their upgrading to world standards.
• Foreign investment and technology
collaboration are welcome to obtain
higher technology to increase exports
and expand the production base.
• The relationship between domestic and
foreign industry is much more dynamic
in terms of technology and investment.
• Indian companies are free to negotiate
terms of technology acquisition with
their foreign counterparts according to
commercial judgment.
• Procedures for foreign investment,
foreign technology agreements and
services of foreign technicians have
been made easier and more liberal.
• Imports of capital goods have been
completely liberalized with a significant
reduction in import duties.
India has acquired imported technologies,
either by outright purchase, direct foreign invest-
ment and joint ventures or on the basis of royalty
payments. For the acquisition of foreign technolo-
gies, Indian companies have also received support
and assistance from international organizations like
APCTT, the United Nations, UNIDO and the Inter-
national Development Research Centre (IDRC) of
Canada.
The main sources of imported technologies
have been the United States, the United Kingdom,
the former Union of Soviet Socialist Republics,
Germany, France and Japan. Many financial and
non-financial support systems built over a period
of time helped in the acquisition, adaptation and
assimilation of imported and indigenous technolo-
gies. India was also able to provide technical and
consultancy services not only to African and Asian
developing countries but also to some developed
countries. However, India still lags far behind in
its R&D activities when compared with advanced
countries, since the expenditure on R&D is very
low (see table II.8).
The R&D expenditure at 0.6 per cent of
GNP in India, 0.4 per cent in Malaysia, 0.2 per
cent in the Philippines, 0.1 per cent in Thailand,
55
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

Table II.8. Science and technology development in selected Asian economies

Scientists Technicians Science and Science Expenditures High-technology

and engineers in R&D engineering and for exports
in R&D students technical R&D
Country or area journal % of
% of total articles Billions manu-
per million per million tertiary level % of of factured
people people students GNP US$ exports

1990-2000 1990-2000 1987-1997 1997 1989-2000 2000 2000

Newly industrialized
economies (NIEs)
Hong Kong, China 93 100 36 2 080 .. 5.2 23
Republic of Korea 2 139 574 32 4 619 2.70 54.0 35
Singapore 2 182 283 .. 1 164 1.13 73.6 63
Taiwan Province of China .. .. .. .. .. .. ..
China and Mongolia
China 459 187 43 9 081 0.06 40.8 19
Mongolia 468 92 24 13 0.07 5.7 16
South-East Asia
Cambodia .. .. 13 3 .. .. ..
Indonesia .. .. 39 123 0.07 5.7 16
Lao People’s
Democratic Republic .. .. 20 2 .. .. ..
Malaysia 154 44 27 304 0.42 40.0 59
Myanmar .. .. 56 3 .. .. ..
Philippines 156 22 14 159 0.21 8.5 59
Thailand 102 75 18 356 0.10 13.9 32
Viet Nam 274 .. .. 106 .. .. ..
South Asia
Bangladesh 51 32 47 130 .. 0 0
Bhutan .. .. .. .. .. .. ..
India 158 115 25 8 439 0.62 1 245 4
Maldives .. .. .. .. .. .. ..
Nepal .. .. 13 35 .. 0 0
Pakistan 78 14 32 232 .. 0 0
Sri Lanka 188 45 34 61 .. 0.1 3
East Asia
Japan 4 960 663 21 43 891 2.80 127 368 28
World
Low- and middle-income .. .. 35 75 298 .. 156.8 16
East Asia and the Pacific 496 193 43 14 817 0.88 100.5 25
Europe and Central Asia 2 212 478 44 34 905 0.83 15.6 10
Latin America and Caribbean 287 .. 30 10 075 0.58 40.5 16
Middle East and North Africa .. .. 29 3 106 .. .. 1
South Asia 158 114 24 8 896 0.62 .. 3
Sub-Saharan Africa .. .. 29 3 499 .. .. 8
High-income 3344 .. 25 437 339 2.30 847.0 22

World .. .. 35 512 637 2.12 1 003.8 20

Sources: World Bank, World Development Indicators 2002 and World Development Report 2002.
Note: Two dots (..) indicate that data are not available.

56
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
0.07 per cent in Indonesia and 0.06 per cent
in China in 1989-2000 was considerably lower
than in the United States (2.6 per cent), Japan
(2.8 per cent), Germany (2.3 per cent), the
Republic of Korea (2.7 per cent) and Singapore
(1.1 per cent). In the United States, Japan,
Germany and the Republic of Korea, the major
portion of the funds was contributed by the private
sector. In contrast, R&D expenditures are mostly
funded by the public sector in Thailand, Indonesia,
China and India.
India has built a wide array of institutions
to support the development and diffusion of indus-
trial technologies since the inception of planning in
1951. It has virtually all basic, applied, hardware
and software and R&D institutions, some of which
meet world-class standards. But these institutions
have failed to commercialize R&D activities as
these are virtually financed and controlled by
the public sector without any linkage with the
private sector. Since 1993 the Government has
encouraged private sector funding of research
institutions by providing tax relief on R&D
expenditure.
4. Access to capital
(a) Lending by commercial banks
In the Republic of Korea, the United States,
Japan, China and India, the credit guarantee pro-
grammes help small enterprises to have access to
bank loans without collateral support. Like India,
the Republic of Korea has set up a special techno-
logy development fund and other programmes to
support venture capital. On the marketing side, the
Central Government, local autonomous authorities
and State-run corporations in the Republic of
Korea are encouraged to extend procurements from
SMEs and provide special incentives to increase
exports.
Among the numerous government support
organizations for SSIs, the Korean Technology
Banking Corporation and Korea Technology Credit
Guarantee Fund provide finance for technology
development projects and venture capital finance,
in addition to extending credit guarantees for SSIs.
Research cooperatives promoted by industry are
encouraged to undertake R&D. The Korean Tech-
nology Banking Corporation (a private institution)
and the Korean Development Investment Corpora-
tion (a subsidiary of the Korean Development
Bank) provide substantial financial support.
The Small and Medium Industry Promotion
Corporation (SMIPC), a non-profit autonomous
organization established by the Republic of Korea
in 1979, provides financial assistance for industrial
extension services concerning management and
technology. Mention may also be made of the
Korean Institute of Industries and Technology
Information, a non-profit organization, and the
Ministry of Commerce, Industry and Energy, which
helps in nationwide dissemination of information
to support industrial and technological develop-
ment in the Republic of Korea.
In Germany, special privileges and special
incentives are provided for small and medium-
sized firms. For example, in the “equity support
programme” earmarked for small and medium
industries, special support is given to young entre-
preneurs and new enterprises. This programme
includes, among others, no interest for two years, a
comparatively low interest rate, 10-year grace
period and 20-year repayment period.
India has a very organized system under
which public sector commercial banks and finan-
cial institutes provide various types of financial
assistance to SSI units. The Small Industries De-
velopment Bank of India (SIDBI) is a good exam-
ple of a specialized bank which provides financial
and other services exclusively to SMEs. SIDBI
was set up under an Act of Parliament as the all-
India financial institution for the promotion,
financing and development of SSI and commenced
operations on 2 April 1990. Apart from extending
financial assistance, SIDBI coordinates the func-
tions of institutions engaged in similar activities.
As an apex institution for SSIs, SIDBI’s lending
operations are supplemented by promotional and
developmental activities. SIDBI focuses on meet-
ing the credit requirements of the SSI sector in
general and in emerging areas like technology
upgrading, venture capital financing, information
technology, microenterprises and export promo-
tion.
57
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
China has a pilot project to introduce credit
guarantee schemes for SMEs covering 30 pro-
vinces. As per estimates, a corpus of around 7.6
billion yuan has been raised. Like India, China
has the National Technological Innovation Fund to
supplement technology upgrading among SMEs.
In Bangladesh, the Government directs
funds to SMEs through scheduled banks, which
are obliged to lend prescribed share of their total
resources to these industries as working capital.
Some nationalized banks have also helped to
finance subcontracting arrangements of small
industries to large ones, but these constitute a
small portion of the banks’ loan portfolio, and as
with the other loans, the recovery rate is low. In
Indonesia the most important among the priority
schemes has been the provision of working capital
and small investment credit for fixed-asset
acquisition, but lending has been below target as
the lending agencies involved have exercised
extreme caution in the disbursement of such loans.
The Philippines also has specialized
programmes for SMEs.
Despite all these measures, in virtually all of
the countries, small and medium industries com-
plain about the paucity of funds available to them
and the onerous terms associated with loans they
receive. Interest rates on government loans are
lower than market rates but the funds available are
limited and high collaterals are required by both
private and government banks. Interest rate
spreads are very high in many countries.
(b) Specialized financial institutions
In industrialized countries, in addition to
commercial banks which undertake general
lending, there are large numbers of specialized
financial institutions including those in rural areas
that focus on lending of particular types, such as:
• Factoring companies, which lend
against trade receivables and which
frequently undertake the task of debt
collection for companies using their
services. The receivables themselves
provide the security for the loan.
58
• Leasing companies, which lend for the
purchase of capital equipment, allowing
the lessee to take delivery of equipment,
which effectively serves as the collateral
for the leasing contract.
• Trade credit suppliers, which finance
purchases of raw materials and use raw
material inventories as collateral.
• Mortgage finance companies, which
specialize in financing mortgages.
The specialized financial institutions play a
vital role in allowing businesses to grow, including
agro-business. In most developing countries there
are very few leasing or trade credit entities as the
financial and judicial systems necessary for their
effective operations do not exist.
(c) Role of microfinance institutions
Since the late 1980s, the number of
microfinance institutions (MFIs) has grown rapidly
in many developing countries. MFIs can be de-
fined as formal, semi-formal or informal providers
of financial services to low-income clients, includ-
ing the self-employed. Financial services generally
are restricted to lending although some MFIs also
provide savings, insurance and payments services.
There are a number of reasons why MFIs
are likely to bring benefits to the poor. MFIs enjoy
better local knowledge and proximity, which is an
important advantage because the majority of poor
households live in vast rural areas that are unde-
served by the commercial banks. Furthermore, the
semi-formal and informal MFIs complement the
formal financial system by providing financial
services to those who have limited access to the
formal financial system.
However, the importance of microfinance
as an instrument of poverty alleviation should be
treated with caution. The quality of the loan
portfolio of MFIs is often poor because of inad-
equate management. A large number of these
institutions are not efficient and survive on subsi-
dies from their donors. Lending rates charged by
MFIs are usually very high. The linkages between
MFIs and commercial banks are often weak.
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
Replication of successful MFI models is often
impossible owing to differences in demographic
or cultural contexts. Finally, there are still no
countries with a comprehensive network of
microfinance institutions.
The above analysis indicates that access to
capital is a critical factor for the development of
agro-based industries, particularly SMEs. Funding
is critical to these industries in their early stages of
development. Commercial banks should offer
more appropriate instruments to SMEs and develop
microcredit schemes with the support of govern-
ment.
There is also a need to develop specialized
banks for the supply of venture capital, trade
credits, mortgage finance, factoring and leasing
services to SMEs.
Commercial banks in the East and South-
East Asian countries are suffering lending
constraints in the aftermath of the Asian crisis.
Governments and multilateral lending institutions
(like ADB) should consider establishing special
funds dedicated to helping to fund SMEs in the
agro-based and resource-based sectors.
5. Infrastructure and information
technology
Development of a proper legal and institu-
tional set-up and efficient infrastructure (transport
and telecommunications) is essential for the deve-
lopment of SMEs. In open economies, such as
Singapore; Hong Kong, China; or Mauritius, only
minimal investment laws and regulations exist and
administrative costs are negligible. Most develop-
ing countries like India are faced with a transition
period. The experience of countries such as Indo-
nesia, Malaysia, Taiwan Province of China and
Thailand suggests that the transition can be man-
aged well. The faster an economy is reformed, the
easier the management of private investment in-
cluding foreign investment. Regulations can be
simple and their administration can be made effi-
cient and transparent.
As regards infrastructure, some of the meas-
ures to improve the production and marketing of
SMEs are suggested below:
(a) Cluster development
A “cluster” refers to a geographically
bounded concentration of similar, related or com-
plementary businesses, with active channels for
business transactions and communications that
share specialized infrastructure, labour, markets
and services. The cluster approach assists SMEs
in introducing innovative marketing. UNIDO has
helped to develop clusters for exports of textiles,
rubber and pharmaceuticals in India to improve
their international competitiveness.
(b) Trading houses
The Japanese experience in this area is
worth noting. Japan is the pioneer in setting up
large trading houses known as “Sogo Sosha”.
These companies assisted in the marketing of
products of Japanese SMEs. In order to encourage
exports of products of SMEs, the Government of
India encouraged the setting up of export houses
and trading houses and also extended various
facilities and incentives to export houses and
trading houses.
(c) E-commerce and development of
information technology
E-commerce has revolutionized international
trade owing to:
• Reduction in transaction costs globally
• Direct contractual relations between
buyers and sellers
• More transparency in dealings
The three major directions of commercial
activity, i.e. (a) business to business (B2B), (b)
business to consumer (B2C) and (c) business to
government (B2G), have been very much captured
through e-commerce and can help SMEs to expand
their market and obtain information on both
demand and supply and behaviour of customers.
Hong Kong, China and Singapore are aggressively
expanding their ICT infrastructure to improve
their ability to take advantage of the Internet and
globalization.
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
All developed and developing countries are
now attaching special importance to the develop-
ment of IT infrastructure through the formulation
of national policies on IT and related sectors. The
Government of India has adopted a convergence
bill to cover telecommunications, IT and broadcast-
ing under the same Act. Under the framework of
WTO, there is a special international arrangement
on IT under which all participating countries have
agreed to duty-free entry for all IT products and
components.
(d) Networking
Networking can play a dominant role in
supporting SMEs in marketing their products.
Networking is of many types. However, vertical
(aimed at finding complementary activities in the
development of a new product) and knowledge
networks (associations geared to solving a common
technology or market information) are more
relevant in the context of the market.
E. Role of the World Trade
Organization for the development
of agro-based and resource-based
industries
1. Role of the World Trade
Organization
The prevailing world trade order came into
existence in 1995, with the culmination of the
Uruguay Round of trade talks. The institutionali-
zation of this order is represented by WTO, which
monitors the compliance of member countries
with a number of agreements on trade relationships
between countries and also acts as a dispute reso-
lution mechanism.
The current order is fundamentally different
from the previous regime, manifested primarily in
GATT and focusing mainly on commodities and
manufactured goods. In addition to commodities,
a number of other factors have become extremely
important in cross-border transactions. These
can be broadly classified in three categories:
services, knowledge and capital. The agreements
60
administered by WTO now cover the first two
categories, while a collective agreement on capital
flows is also on the agenda for future talks. Thus,
the new order is far wider in scope than the one it
replaced.
Quantification of all these various impacts is
obviously very difficult. Most of them are outside
the purview of this study. However, the most
significant impact on the developing countries is
likely to be that of the elimination of quantitative
restrictions (QRs) under GATT.
While the Uruguay Round agreements
achieved a sizeable reduction in the use of non-
tariff measures (NTMs), the phasing-out period
for the existing NTMs differed significantly for
different products. NTMs in agriculture, affecting
temperate zone food products (particularly grains
and dairy products) exported mainly by developed
countries, were to be phased out almost immedi-
ately, but those on textiles and clothing were given
a transition period of 10 years and voluntary export
restraints (VERs) four years. These imbalances
are reinforced by the unequal incidence of
VERs across exporting countries and products.
For example, as at 1992, of the 79 VERs outside
agriculture and textiles and clothing, 69 involved
Japan and the Republic of Korea as exporters,
and they applied mainly to motor vehicles and
consumer electronics.
Regarding broad product categories, avail-
able evidence suggests that trade liberalization has
been limited and slow in agriculture, textiles and
clothing, compared with other sectors. Access to
markets for these products continues to be much
more restricted. Agricultural subsidies, particularly
in the EU, have been largely responsible for
restricting the growth of exports of a number of
agricultural commodities from developing coun-
tries.
In manufacturing, except in textiles and
clothing, differences in the evolution of market
access conditions are not large enough to explain
the differences in the pace of expansion of trade in
these products. Among other factors, the growing
importance of international production networks
appears to have played a greater role.
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

2. WTO and market access
Market access covers a broad range of
issues, which are briefly outlined in box II.1.
The scope of this report is limited to analysing
protection in agro- and resource-based exports with
special attention to trade in agriculture and textiles
and clothing (T&C), two sectors that are of great
export interest of developing countries. In the
context of the Doha Development Agenda, WTO
members are committed to negotiations aimed
at substantially improving market access for
agricultural and industrial products, in particular
for developing countries.
(a) Import tariffs
Successive rounds of multilateral negotia-
tions have lowered average levels of protection.
Industrial countries have generally set applied tariff
rates close to their tariff binding, enhancing the
predictability and transparency of market access
regimes. In contrast, most developing countries
bind their tariffs at levels well above their applied
rates so that they could in principle substantially
increase their applied tariffs without infringing
their WTO commitments. Among broad country
groups, it is notable that the average tariffs of
LDCs (17.9 per cent) are higher than those of
other developing countries (14.0 per cent) and well
above those of industrial countries (5.2 per cent).
However, averages of MFN applied tariffs
by importing country or region provide an
incomplete picture of protection for the following
reasons:
(a) A number of barriers are not covered
by the standard MFN databases, including specific
tariffs (i.e., absolute monetary value per unit of
imports), tariff rate quotas, prohibitions, contingent
protection, the costs of rules of origin and environ-
mental and technical standards;
(b) The averages do not capture the impact
of tariff dispersion, in particular tariff peaks and
escalation;

Box II.1. WTO and market access

Market access refers to the ability of providers of foreign goods and services to sell in a given country.
For the purpose of market access negotiations, WTO subdivides tradable items into four groups, i.e., agricultural
goods, textiles and clothing, industrial goods, and services. A different set of multilaterally agreed rules applies
to each group.

Main market access barriers include:

• Import tariffs and other price-based border measures: government policies usually targeted at
restricting market access in a particular commodity and raising budget revenue. These measures
include import duties tariff, quotas and other border duties, levies and charges.

• Non-tariff border measures: government policies that may restrict market access through non-price
instruments. Such measures include quantitative restrictions (import quotas, direct prohibitions,
domestic content requirements, licensing); contingency measures (anti-dumping, countervailing and
safeguard measures); TBT (regulations, standards, testing and certification procedures); and sanitary
and phytosanitary measures (SPS) (food, animal and plant health and safety).

• Domestic policy measures: government policies, which may restrict market access if not applied
uniformly to domestic and imported goods and services. These are tax, competition, credit and
investment policies; price controls; and fiscal incentives, in particular, trade-distorting export subsi-
dies and domestic support.

Negotiations on market access. The Doha Development Agenda envisages negotiations on market access
in all of the above areas.

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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

(c) Because of preference schemes and
differing export structures, the barriers faced
by exporters to the same market can vary
widely;
(d) Uncertainty over market access related
to contingent protection, interpretation of norms
and procedures and the discretionary nature of
many preference schemes may represent a further
disincentive to exporters.
Developing countries generally face higher
barriers to their exports than industrial countries.
Adoption by all industrial countries of schemes
that provide unrestricted market access for LDCs
could have significant benefits without imposing
undue costs on other suppliers, given the very
small share of LDCs in world trade (around 0.5
per cent). Trade preferences also have duty draw-
backs. Apart from the economic inefficiencies,
they create vested interests and should therefore be
set firmly within a context of rapid multilateral
liberalization.
Improved market access for LDC exports
will not be sufficient to ensure sustained growth in
exports as constraints in key infrastructure sectors
like telecommunications, transport and financial
services often add more to export costs than
foreign trade barriers (World Bank 2002b).
(b) Agreement on agriculture
Agriculture has traditionally been heavily
protected from import competition. It was not
until the conclusion of the Uruguay Round in 1994
that the sector was brought under effective GATT
discipline. The Uruguay Round marked the begin-
ning of a gradual liberalization process in agricul-
ture, initially over 6 years for industrial countries
and 10 years for developing countries. WTO
members also made a commitment to engage in
negotiations to continue the reform process in
the final year of the 6-year implementation period,
part of the so-called “built-in agenda”. The key
commitments entailed a move away from quanti-
tative restrictions, a binding of maximum tariff
rates and the reduction of domestic support and
export subsidies (see box II.2).

Box II.2. Uruguay Round: principal commitment on agriculture

Tariffication and binds: Non-tariff measures to be converted to bound tariff at the start of the imple-
mentation period with average tariff cuts by industrial countries of 36 per cent over six years from a 1986-1988
base, and a minimum cut of 15 per cent on any tariff line.

Minimum import access: Tariff rate quotas were introduced to guarantee minimum market access by the
end of the implementation period.

Domestic support, as measured by the total aggregate measurement of support (AMS), to be reduced by
20 per cent from a 1986-1988 base over the implementation period. Exempt are domestic supports of less than 5
per cent, “green box” subsidies allowed for purposes such as development and technical progress and “blue box”
subsidies linked to output reduction schemes.

Export subsidies to be reduced by 36 per cent in value and subsidized exports by 21 per cent in volume
for each product over the implementation period from a 1986-1990 base.

Special safeguard provisions, triggered by volume increases or price reductions, permit the imposition of
additional duties up to specified limits.

• Greater flexibility was given to developing countries in their commitment to market access reductions
in domestic and export subsidies (generally two thirds of developed country commitments and a
longer implementation period of 10 years).
• For subsidies excluded from the reduction commitments, the measures will be considered
non-actionable in terms of countervailing duties and legal challenges at WTO until the end of 2003.

62
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific

Under the Agreement on Textiles and Cloth- period 1995-2005 and quotas that have not been
ing (ATC), quota restrictions are being gradually removed are subject to a progressive increase in
abolished (as products are “integrated”) over the their growth rates (see box II.3).

Box II.3. Agreement on Textiles and Clothing (ATC)

• Under the Uruguay Round ATC, MFA quotas are to be phased out progressively over a 10-year period.
In the first stage, which began on 1 January 1995, WTO members were required to integrate products
representing not less than 16 per cent in volume terms of their 1990 imports of T&C. In stage 2, starting
January 1998, not less than a further 17 per cent was to be integrated; and in stage 3, from January 2002, a
further 18 per cent. Finally, on 1 January 2005, all remaining products (amounting to a maximum 49 per
cent) are to be automatically integrated.

• Products not yet integrated are subject to a special transitional safeguard mechanism, whereby an importing
country can apply quantitative restrictions for up to three years on imports from a particular source of supply
which causes or threatens to cause serious injury to the domestic industry. After integration, regular GATT
safeguards apply.

• In addition to this integration process, ATC accelerated the growth rates for the remaining quotas.
The annual growth rates of quota volumes were increased by a factor of 16 per cent for the first stage of the
Agreement, by a further 25 per cent for the second stage and another 27 per cent for the last stage. LDCs
enjoy one-stage advancement in the acceleration of quota growth.

• In additional to the MFA quotas, T&C imports are subject to exceptionally high tariffs in both developed and
developing countries. Trade-weighted average (applied) tariffs for non-OECD countries are 16 per cent.
This average conceals large variations among individual countries. The largest developing country exporters
tend to have higher tariffs. ASEAN, China and South Asia all have tariffs in the range of 20-33 per cent on
textiles and of 30-35 per cent on clothing.

F. Conclusions and recommendations (c) Constraints on infrastructure;

1. Role of agro-based (d) Low economies of scale;

and resource-based industries
(e) Lack of modern marketing;

In many developing countries, agro-based (f) Increased capital intensity;

and resource-based SMEs contribute significantly to
GDP growth, employment generation and poverty
alleviation. In general, SMEs have higher labour
elasticity and have grown at a higher rate than the
overall industrial sector. This proves their ability to
compete globally. But these industries face a
number of problems and constraints, which include
the following:
(a) Lower productivity and outdated tech-
nology;
(b) Lack of skilled labour and managerial
skill;
(g) High cost of domestic credit and lack
of foreign investment;
(h) Increased competition due to removal
of QRs and reduction of customs duties.
A wide range of opportunities can be
seized by small-scale and labour-intensive indus-
tries. This is particularly so in the Asian region,
where the horizontal division of labour through
trade and joint venture projects is increasing
sharply.

63
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
The following measures need to be given
priority to strengthen the SMI sector:
• It is necessary to facilitate the transfer
of technology to SMEs by suitable
arrangements such as regional infor-
mation networks and the provision of
timely and adequate finance to SMEs.
• Adequate backward and forward
linkages need to be established between
small and large units in terms of
subcontracting, production sharing and
manufacture of parts.
• Suitable measures should be taken to
enhance the access of the SMI sector
to information particularly relating to
external markets and foreign invest-
ment.
• Vertical expansion of SMEs may be
limited owing to reservation of items
and limits on investment. A review of
the reservation policy and investment
limits is necessary to facilitate capacity
expansion, technology upgrading and
economies of scale.
• Much of the existing growth of
SMEs has taken place in and around
the metropolitan areas, but balanced re-
gional growth requires that the process
of industrialization be extended to the
countryside. In this respect, the expe-
rience of China in setting up township
enterprises on a large scale may be
particularly relevant for other develop-
ing countries.
• SMEs are most vulnerable to trade
protectionism and exchange rate fluc-
tuations. Undesirable tariffs and non-
tariff restrictions on their products must
be removed to enhance the export
potential of SMEs.
2. National-level policies
At the national level, the development of
agro-based and resource-based SMEs calls for
various policies, including the following:
64
Marketing – Sectors with a competitive
advantage need to be identified and sector-specific
innovative marketing support devised. SMEs need
to be promoted as ideal destinations for franchising
and outsourcing. A mandatory policy on govern-
ment purchases would provide a captive market.
The United States Small Business Act provides for
the compulsory purchase of 24 per cent of govern-
ment purchases from small business.
Technology – In the pre-liberalization era,
technology upgrading was often the last priority
for SSIs. With limited competition in the market-
place, depreciated machinery provided a cost
advantage. This has changed with liberalization,
which emphasizes better quality. As technology
upgrading becomes a key parameter of competi-
tiveness, it is necessary to focus on enhancing
technology information through a technology bank
and facilitating technology transfers through soft
financing and a capital subsidy scheme.
Infrastructure – Power, water, industrial
estates, roads, telecommunications and a clean
environment are some of the more critical aspects
of infrastructure for doing business. Production
and commerce are heavily dependent on these
inputs. Improvement in infrastructure facilities for
SMEs is necessary to enhance their efficiency and
productivity.
Clusters – Clusters have the potential to be
springboards of core competencies. The creation
of common facilities, upgrading of infrastructure,
demonstration projects, capacity-building, streng-
thening of associations, targeted credit delivery and
brand building are activities that it is suggested be
built around clusters.
Cluster development has to be accorded
priority for existing ones and potential clusters
would have to be identified and an appropriate
action plan worked out for their integrated deve-
lopment. The programme needs support in the
form of adequate infrastructure for the clusters and
active involvement of industry associations in the
maintenance of their services.
Access to information – The World Wide
Web is changing the face of the marketplace.
Information is being described as the fifth factor of
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
production. Databases on market-related and
financing-related information need to be identified
and made accessible in a user-friendly manner.
Governments must provide more of their SSI-
related services through the Internet.
Innovative financing techniques – There is a
need to develop innovative financing measures
such as setting up venture capital funds, leasing
companies, mortgage finance companies, factoring
companies, trade credit suppliers and microfinance.
Microfinance – The development of
microfinance promotes economic growth, thereby
contributing to poverty alleviation. Not only does
financial development foster economic growth and
create employment opportunities for the poor, but
it also helps to mobilize savings.
3. Development strategy for agro-based
and resource-based industries
While agro- and resource-based small and
medium industries play important roles at different
stages of a country’s economic, social and political
development, various studies conclude that many
of the small and medium industries in Asian
developing countries are less efficient and less
productive than their larger counterparts. They
suffer from high-mortality rates, which inflict
heavy costs to the economy. Many of them lack
entrepreneurial and technical resources to make
them successful. While various incentives may
make them profitable, the efforts might be
economically wasteful.
(a) Macroeconomic policies
Macroeconomic stability is one of the
necessary conditions for efficient development
of the resource base of industries and poverty
reduction. Macroeconomic volatility puts a break
on economic growth. High and unpredictable
inflation hurts everybody, particularly the poor as
their incomes are not indexed to prices, and thus
contributes directly to higher poverty rates.
However, sound macroeconomic policies
have only limited capacity to alleviate poverty
directly. These policies should be directed at
promoting growth through prudent implementation
of macroeconomic goals, developing direct inter-
ventions for protecting the interests of the poor and
for target groups of industries with employment
potential and comparative advantage.
The experiences of India, Bangladesh,
Pakistan, China, the Republic of Korea, Indonesia,
Thailand, the Philippines, Japan and Singapore
suggest that given appropriate programme and
policy assistance, small and medium industries can
make substantial contributions not only to output
and employment but also to exports. Rather than
general subsidies, selective support should be
extended to qualified firms and industries only
with fixed-term finance for the specific purpose of
assisting them in becoming competitive.
(b) Fiscal incentives
In many countries, tax holidays have been
given as an investment incentive, but the benefit
has been marginal either because they are not
available to small and medium industries or they
are more accessible to larger industries. Moreover,
tax holidays have been less effective in the
regional dispersal of industries, as industries tend
to be located near the main demand centres or
regions with better infrastructure facilities. Instead
of providing tax breaks for industries, it may
be more productive to develop basic infrastructure
facilities in backward areas through increased
allocation of public funds.
A reform of government policies should
redirect the focus from the microeconomic level of
the firm to the macroeconomic level of business
and the economic environment. Instead of focus-
ing on the different concessions to be provided,
greater emphasis should be placed on creating an
environment conducive to long-term development
of not only efficient but also viable small and
medium industries. This may entail the disman-
tling of costly incentives and subsidies that
encourage inefficiency and waste in firms, increas-
ing the availability of essential inputs and bank
credits for small and medium industries and
introducing a wide array of marketing options and
possibilities.
65
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
(c) Technology development
One of the major problems faced by SMEs
is technological obsolescence and the use of
outdated plant, machinery and equipment. Consi-
dering the urgent need to attain technological
competitiveness of SSIs in the face of global
competition, it is important to stimulate technolo-
gical revolution in SSIs.
However, developing countries should not
blindly adopt advanced technologies but acquire
or develop technologies that are appropriate to
local needs and ensure a smooth transition from
outdated traditional technologies to more modern
technologies conforming to local conditions. It is
generally agreed that instead of importing and
adopting advanced technologies from the West,
developing countries should acquire, adapt and use
technologies that are available from “regional
sources” as these are more compatible with the
local culture, skills, raw materials and demand.
The technology policies adopted by SSIs
should be an integral part of the overall S&T
policies in all countries. The experiences of the
developed economies of the United States, Japan
and Europe have shown that the average size of a
firm increases with the growth in national and per
capita incomes. SSIs in the developed countries
are far more productive than even large firms
because of the usage of modern technology and
management techniques. Economic development
is invariably accompanied by a reduction in wage
disparities among different sectors, industries and
firms of different sizes.
In order to remain competitive in the era of
globalization, it is imperative that SMEs upgrade
their technology, which may involve (a) introduc-
tion of new tools and equipment, (b) changes in
the manufacturing process, (c) improvement in the
quality of products, (d) introduction of new de-
signs, (e) use of new raw materials and (f) use of
modern management and information technology.
This requires an integrated approach encompassing
identification, technology transfer, adaptation and
absorption. Governments should provide financial
assistance to SMEs for technology upgrading and
modernization. The following are some of the
recommendations for such an integrated approach:
66
Technology information – Setting up a
technology bank at the country and regional levels
which will have information on technologies
available and their sources is recommended. In
addition, the bank could provide information on
technology policy, technologies for different
sectors and their applications, institutional infra-
structure, sources of finance for acquiring techno-
logy within the country and from abroad. To start
with, it will disseminate information on upgrading
of technology, process know-how and design
along with institutions and also provide consul-
tancy services or any other input required. A
compendium of available technologies from R&D
institutions in various countries could be brought
out on a sectoral basis and circulated among the
facilitating institutions and industry associations
for dissemination of technology related informa-
tion.
Financial assistance – Financing may also
be provided to units entering into collaboration for
technical know-how and technology upgrading
with a view to enhancing the marketability of their
products or entering into buy-back arrangements
for exports. Concessional customs duties within
the WTO framework may be provided for the
imports of environment friendly plants and machi-
nery for technology upgrading of SMEs as is
generally applicable to export-oriented units.
Industry clusters – As major portions of the
exports of SMEs emerge from industrial clusters,
a massive programme needs to be launched to
modernize export-oriented industrial clusters.
Quality upgrading – More SMEs should be
encouraged to obtain ISO 9000. Encouragement
could be given to small industry associations in the
form of financial grants to set up and operate
testing laboratories. Strengthening of existing test-
ing facilities in technical institutions would also be
necessary. At least one testing facility for each
major cluster should be set up to fulfil their needs.
Role of FDI – The diversity of experiences
in Asia with respect to FDI requires different
policy approaches on the part of host countries.
Those countries that have only recently been open
to FDI need to ensure that the “open door policy”
is maintained and remains stable. They should
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
examine the possibility of a further liberalization
of FDI regimes; the harmonization of FDI and
related policies on industry, trade and technology;
and improving the efficiency of their administrative
set-up for investment approvals. In doing so, all
countries in the region should pay particular atten-
tion to firms from neighbouring countries so as to
capitalize on the growing intraregional investment.
Special attention needs to be given to small and
medium-sized enterprises whose special needs –
dictated by their limited financial and managerial
resources and insufficient information – may call
for incentives for joint ventures. The Asian market
has high potential for small and medium-sized
TNCs.
Consortia for SSI marketing – Governments
may promote the setting-up of more consortia for
SSI marketing and provide them with financial
and other support. The participation of SMEs in
domestic and international trade fairs should be
encouraged and promoted.
(d) Infrastructure and human resources
development
Efficient physical infrastructure and skilled
labour are critical factors for enhancing produc-
tivity and efficiency. For the more dynamically
traded goods and services, telecommunications are
the most important facilitator of investment, and
technological and organizational innovations drive
foreign investment into those countries which have
trained and skilled workforces and fairly high
educational standards. This points to the overrid-
ing importance for developing countries of invest-
ing more in the development of human resources,
infrastructure and services. It also highlights the
risk of being marginalized in the case of least
developed countries with a lowly of skilled labour
force and infrastructure constraints. The existence
of a dynamic local business sector creates a
supportive environment through efficient networks
of local suppliers, service firms, consultants,
partners or competitors. It is therefore necessary
to concentrate efforts on the development of
local entrepreneurship. Equally important is the
availability of high-quality telecommunications
and transport systems, energy supply and other
utilities.
(e) Competent and committed bureaucracy
Another important institutional prerequisite
appears to be the establishment of a competent
economic bureaucracy. The complexity and diffi-
culty of managing targeted industrial policies
places high demands on the economic administra-
tors, who must be able to balance financial support
for targeted industries with penalties for non-
performance. The economies of Japan, the
Republic of Korea and Taiwan Province of China
had economic bureaucracies capable of imposing
discipline on private industry. In short, the
management of a set of successful industrial poli-
cies requires a stable macroeconomic framework
and committed economic bureaucracy capable of
running complex pricing policies and objectively
running public subsidy schemes.
(f) Legal, institutional and regulatory system
It is also necessary to strengthen the
regulatory system and the legal and institutional
set-up for the orderly growth of industries. As
regards the limits and nature of government inter-
vention in private sector activities, it is necessary
to devise optimal rules for the regulatory system,
which while serving its legitimate purpose will not
transcend its limits to the disadvantage of private
sector development. First, any policy affecting
allocation of resources and regulation of the
private sector needs to be transparent and based on
a specified set of procedures. Second, even when
there is strong presumption in favour of govern-
ment intervention, it is imperative to limit it to the
minimum necessary scale. Third, from among the
available alternative regulatory sets, it is necessary
to select the one which provides the least scope
for rent-seeking.
Along with deregulation, more important
measures need to be directed towards creating a
legal and institutional infrastructure for the smooth
functioning of the private sector. This is well
illustrated by the Indonesian experience. Although
Indonesia’s industrial policy, trade and financial
sector reforms were deep and sweeping, they failed
to achieve the full benefit as Indonesia lagged in
changing its corporate law and other laws vital to
trade and industry. The same applied to issues of
land and property rights.
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
An important lesson from the East Asian
development experience is that a holistic approach
to deregulation is more productive than partial
deregulation in any one sphere, say in industrial
policy, which is divorced from any reform in other
areas. Domestic deregulation should proceed in
tandem with liberalization of trade and tariffs in
order to ensure optimal allocation of resources
between traded and non-traded goods.
4. Role of external trade
(a) Trade and techniques of production
A detailed analysis of the relationship
between trade and MVA in the UNCTAD Trade
and Development Report 2002 shows that for more
than a decade, world trade has been growing on
average faster than world income as a result of
rapid integration. Policies governing market
access for both goods and FDI had a more decisive
influence on the evolution of trade in many
products. The increased mobility of capital,
together with continued restrictions on the mobility
of labour, has accelerated trade in a number of
sectors where production chains can be split up
and located in different countries.
Policies in developing countries have also
contributed by offering various incentives to FDI
and encouraging TNCs to operate in their territo-
ries with minimum restrictions. UNCTAD further
observed that the aggregate picture conceals
considerable diversity in the developing world:
• First, countries that have not been able
to move away from primary commo-
dities the markets for which are rela-
tively stagnant or declining have been
marginalized in world trade.
• Second, most developing countries that
have been able to shift from primary
commodities to manufactures have
done so by focusing on resource-
based, labour-intensive products which
generally lack dynamism in world
markets.
• Third, a number of developing countries
have also experienced a rapid rise in
skill- and technology-intensive products.
However, with some exceptions, the
68
involvement of developing countries in
the manufacture of such products has
been confined to labour-intensive and
assembly-type processes with little value
added.
• Fourth, a few developing economies
have seen sharp increases in their shares
in world manufacturing value added.
This group includes some East Asian
NIEs that had already achieved
considerable progress in industrializa-
tion before other developing economies
began to shift their emphasis to export-
oriented production.
• Fifth, with the exception of this last
group, exports of developing countries
continue to be concentrated on resource-
based, labour-intensive products.
However, market growth is slow for
many of these products, which continue
to be protected by both tariff and non-
tariff barriers in industrial countries.
The above trends lead to the conclusion that
a simultaneous drive by a large number of develop-
ing countries to expand their existing exports and
increase competition among them for attracting
FDI in labour-intensive products could be self-
defeating, as this could cause significant terms-of-
trade losses and create frictions in the global
trading system. UNCTAD suggested that these
problems could be avoided by three sets of factors:
• First, by faster growth of markets for
labour-intensive manufactures in more
advanced economies (both the indus-
trialized countries and the NIEs), which
in turn depends on faster income growth
and improved market access.
• Second, the middle-income countries
should diversify their trade and produc-
tion and move out of labour-intensive
manufactures and create space for
lower-income countries, both in the
markets of advanced countries and in
their own markets.
• Finally, the developing countries them-
selves should expand their domestic
markets by overcoming their deep-
seated problems of unemployment and
poverty.
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
A return to rapid and sustained growth and
full employment policies in the industrialized
countries is crucial for averting problems associ-
ated with potential frictions within the multilateral
trading system. The growth in trade among deve-
loping countries is also crucial for expanding
markets for labour-intensive products. In particu-
lar, industrial upgrading in more advanced deve-
loping countries would allow new players to
take over labour-intensive activities in line with
the “flying geese paradigm”. This has already
happened to some extent. China and the other
highly populated low-income countries that have
adopted more export-oriented strategies gained
much of the market shares given up by NIEs when
those economies shifted to more capital- and
technology-intensive exports.
The industrial upgrading needed in the
middle-income countries depends, to a large extent,
on the policies they pursue in such areas as trade,
industry and technology. It also depends on the
extent to which large economies such as China,
India and Indonesia will rely on foreign markets to
create jobs and incomes for large segments of their
population.
Rapid industrialization in the NIEs, particu-
larly at the early stages of their development,
depended heavily on expansion of exports. As
these countries were poor in natural resources, they
depended on expansion of labour-intensive manu-
facturing to earn foreign exchange to import capi-
tal goods and some essential primary commodities
such as oil. They had also small domestic markets
and their industries needed foreign markets to
achieve the necessary economies of scale in
production. But large countries such as China and
India can rely less on foreign markets for their
industrialization. The skills mix and resource
endowments in China and India are sufficiently
well developed to allow rapid upgrading in a
number of technology-intensive sectors to enable
them to earn the foreign exchange needed for
sustained economic growth and development of
agro-based and resource-based industries.
(b) Role of export promotion policies
Export promotion schemes have been a criti-
cal part of East Asia’s economic success and merit
special consideration. These schemes consisted
mainly of duty exemption and drawback systems.
But such schemes had limited success in other
Asian developing countries owing to cumbersome
rules and procedures, and the costs from delays
and paperwork outweigh the reductions in duty.
A review of experience in East Asia and Africa
suggests that simple exemption schemes focusing
on the direct exporter are more sustainable and
attractive to the private sector than drawback
mechanisms
One of the key requirements of a modern-
ized duty exemption or drawback should be the
development of a system of pre-tabulated and
published input-output coefficients. The work of
pre-tabulating the quantity or value coefficients
should be carried out by technical persons, sepa-
rated from the customs, while the customs office
should focus on the implementation of exemptions
and drawbacks based on the pre-tabulated and
published coefficients. This is based on the expe-
rience of (a) the Republic of Korea and Taiwan
Province of China; (b) recent experiences of deve-
loping countries such as India and Bangladesh;
(c) almost 50 World Bank projects (during 1980-
1990) on the implementation of duty-free import
administration reforms most of which failed prima-
rily owing to the mishandling of input-output
coefficient administration; and (d) the new GATT
rules on export subsidies, which require the
systematic documentation of input-output coeffi-
cients.
The other key measure of export support has
been the supply of export credits to exporters,
especially for pre-shipment finance. It is necessary
to restructure and strengthen the existing financial
system with a focus on trade finance, rather than
creating new institutions for supply of export or
foreign exchange credits.
It is also necessary to modernize customs
administrations in many countries for quick dis-
bursement of duty drawback claims. An inefficient
customs administration comes in the form of slow
or non-existent rebates and negative effective
protection. An alternative solution that merits con-
sideration would be zero tariffs on imported raw
materials and intermediates, coupled with increased
reliance for revenue purposes on domestic indirect
taxes, such as value added tax (VAT).
69
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
(c) Free trade zones
Free trade status for export activities can be
achieved through (a) fenced private or public
FTZs, (b) non-fenced FTZs or (c) bonded draw-
backs/rebates. These specialized schemes have
been widely and effectively used in countries at the
early stages of development. The fundamental
feature of the Republic of Korea’s pioneering
export promotion drive was the duty drawback
scheme implemented through the domestic letter of
credit (DLC) and the export finance system. In the
Republic of Korea, the Input Coefficient Adminis-
tration, which estimates and publishes detailed
input-output coefficients, band and individual com-
modity drawback rates and the back-to-back credit
system offered through domestic DLCs, has
efficiently provided tax-free inputs and ready
access to working capital finance for direct and
indirect exporters. India, Taiwan Province of
China, Indonesia, Malaysia and Thailand also have
export support instruments including tax incen-
tives, duty drawbacks and exemptions, and export
and investment finance for exporters.
Four broad conclusions can be drawn from
the Asian experience for the development of export
promotion zones:
• Where the general economic climate
is reasonable, or becoming so, the
development of FTZs can be a useful
instrument in the development of ex-
port-oriented industry, as they can lower
initial investment costs for investors and
encourage economies of agglomeration.
• FTZs should be a component of a
broader outward-oriented development
strategy, rather than a substitute for such
a strategy, or an excuse to delay much-
needed economy-wide trade reforms.
• FTZs should have proper infrastructure
and linkages with other parts of the
country through proper hinterland deve-
lopment.
• The benefits from FTZs in terms of
foreign exchange earnings, employment,
technology transfer and linkages with
domestic markets may be limited unless
70
accompanied by an appropriate policy
framework and human capital develop-
ment for sustained export development.
• While accepting that sometimes market
failure justifies a potential role for the
public sector in the development of free
trade zones, the pricing of land in such
zones should not be subsidized. Simi-
larly, as part of a general programme to
promote foreign investment, Govern-
ments should be sure to remain open to
the private development of such indus-
trial estates, as is being done in China.
5. Participation at the regional level
(a) Regional economic cooperation
A strengthening of regional economic coop-
eration could help this process along in East and
South Asia. The successful use of strategic trade,
industrial and macroeconomic policies led to a
pattern of regional division of labour, described as
the “flying geese” model. As the leading econo-
mies in the region successfully shifted from
resource-based and labour-intensive industries to
sophisticated manufacturing activities, they pro-
vided space for the less developed countries to
enter simpler manufacturing stages. Regional trade
and investment flows played a central role in
this process by helping to create markets and by
transferring skills and technology to neighbouring
countries. The challenge now lies in the extension
of this regional dynamics and growth pattern to
include newly emerging countries such as China
and India, as well as other less developed countries
in South and East Asia.
Since regional economic arrangements
imply close interdependence among a group of
economies, there is the risk of a contagion effect-
ing that the problems in one country may be
transmitted to its neighbours. In fact, a number of
financial problems in the regional integration at the
end of the 1990s contributed to volatile capital
flows fuelling a boom-bust cycle in East Asian
economies. Thus, maintenance of stable and rapid
regional growth needs not only credible economic
policies for upgrading of production and exports,
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
but also appropriate regional arrangements to
ensure the stability of financial markets, including
lending facilities and agreement on a sustainable
pattern of exchange rates (UNCTAD 2001).
(b) Role of ESCAP
ESCAP and its regional institutions such as
APCTT, the Asian and Pacific Centre for Agricul-
tural Engineering and Machinery (APCAEM) and
the Regional Coordination Centre for Research and
Development of Coarse Grains, Pulses, Roots and
Tuber Crops in the Humid Tropics of Asia and the
Pacific (CGPRT), have carried out many activities
in the past and could do more in the future to
promote the exchange of national experiences,
skills training and endogenous capability-building,
research on sectoral restructuring, dissemination of
information and specific technology and environ-
mentally sound technologies (ESTs) through semi-
nars, workshops and technology fairs.
(i) FDI and technology transfer
FDI-related technology transfer has played a
major role in the development of many developing
members of ESCAP, such as the Republic of
Korea and Taiwan Province of China, as well as
South-East Asia, as is evident from their flexible
and practical approach to FDI. Other ESCAP
members are advised to take a similar approach.
In particular, ESCAP members that have
abundant, low-cost labour should welcome labour-
intensive technology; this should be the case even
in countries that have already built up a high level
of science and technology, for instance, China and
India. Technology is a means for developing the
economy and improving the standard of living.
Low-level technology is usually appropriate for
those economies seeking to attain full employment,
which is the best policy for eradication of poverty.
(ii) FDI and export promotion
FDI can be critical in introducing wide-
spread technological change, improving the agility
and competitiveness of firms and providing access
to skills and global markets. This is evident in
China, and to a lesser extent in Bangladesh, India
and Kenya, where FDI is increasingly generating
spillover effects in many sectors. Successful cases
show the importance of having Governments
promote and welcome FDI, particularly in infra-
structure such as communications and energy.
They also show the importance of avoiding exces-
sive regulation and restrictions on expatriates and
financial flows and the business activities of firms.
Export promotion through FDI is a key
reason for the Governments’ desire to attract FDI.
FDI can help to channel capital into industries that
have the potential to compete internationally, and
the global linkages of TNCs can facilitate their
access to foreign markets. The share of foreign
affiliates in total Chinese exports increased from a
negligible amount in 1978 to 27.5 per cent in
1993, with even higher shares in electronics,
machinery, footwear, toys, travel goods and textiles
and clothing. Given that the absolute volume of
China’s total exports has also been increasing
substantially, this is a remarkable achievement.
(iii) Multilayered bilateral cooperation
FDI and technology are increasingly flowing
into ESCAP member countries from not only
developed countries but also from Asian NIEs and
other dynamic Asian economies. Technology from
the latter may often be more appropriate than that
of Japan in the case of less-developed economies,
in the sense that in the former it is more labour-
intensive. For this reason, the flow of FDI and
technology from Asian NIEs and other dynamic
Asian economies should be actively encouraged by
all organizations including ESCAP.
(iv) Cooperation at the subregional level
In the ESCAP region, ASEAN and SAARC
are major subregional associations. The fact that
both the associations are building up intrasub-
regional cooperation for preferential trade with
minimal discrimination against other countries is a
welcome move. These arrangements will realize
economies of scale for their member countries, the
size of which will be measured by manufacturing,
including in India and Indonesia. It is hoped that
discrimination against non-member countries will
not intensify.
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
(v) Role of NGOs
NGOs can serve as technical advisers to
importing agencies by helping them in the choice,
appraisal and negotiation of technology transfer,
and in the assimilation and dissemination of
imported technologies. They may also be objec-
tive observers in monitoring the government
activities needed to facilitate the transfer process.
Their comments on the activities can serve as
bases for the national legislative institutions, such
as parliament, to force the Government to improve
services and cooperation. NGOs may conduct
long-term studies on the technology requirements
of a country or enterprise and help in skills
training and access to information.
(vi) Source book on ESTs
In 1993 APCTT, with support from the
Ministry of Environment of India, published a very
useful book entitled 101 Environmentally Friendly
Technologies, giving details of technology in
different sectors, in such areas as the use of
solar energy, energy conservation, energy from
wastes, building materials, material conservation,
new products and equipment, food processing,
waste composting, waste treatment and waste
recycling.
It would be appropriate to prepare a similar
source book containing information on ESTs. This
could be prepared by ESCAP in cooperation with
APCTT and other technology transfer institutes
in the region. Technology sourcebooks from tech-
nology-supplying countries of the region would be
very valuable, but it must be ensured that they are
updated periodically.
(vii) Cooperation among country
associations
There is a need for national Governments,
NGOs and international organizations in Asia and
the Pacific to intensify their efforts to facilitate
technology flows to and from countries of the
region. For this there should be continual inter-
action and dialogue among country federations,
chambers and associations of industries.
72
A number of initiatives could be taken
by them, either jointly at the regional level or
separately at the national level, to promote stronger
technology transfer and greater economic deve-
lopment in the region. The initiatives should
include:
(a) In-depth studies on the status of endog-
enous capabilities of developing coun-
tries of the ESCAP region in agro-
based and resource-based industries,
with a view to identifying areas of
comparative advantage and cooperation
on the basis of complementarity;
(b) Research on problems in technology
flows between developed and deve-
loping countries, and their role and
influence in different sectors of the
economy;
(c) Establishment of a regional scheme
of demand-oriented training in skills
involved in different aspects of tech-
nology transfer. Such a scheme would
utilize institutional and on-the-job
training facilities of more advanced
developing countries and could be
operated with the cooperation of
national technology transfer centers;
(d) Organization of seminars, workshops
and conferences to provide for the
exchange of national experiences, in-
troduce new investment forms and
disseminate particular technologies;
(e) Strengthening of the existing informa-
tion networks on technology transfer so
that they can better satisfy the require-
ments of the developing countries;
(f) Formulation of a common strategy for
the prevention and removal of barriers
to flows of investment, technology,
goods and services;
(g) Establishment of national and then
regional databases on imported tech-
nologies and an information-sharing
network;
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
(h) Provision of a suitable form of linkage
between research institutions, techno-
logy brooking agencies and concerned
government departments in the deve-
loping countries of the region;
(i) Strengthening the cooperation between
regional institutions such as APCTT,
CGPRT and APCAEM, and the divi-
sions of the ESCAP secretariat, and
between ESCAP and other interna-
tional organizations.
6. Multilateral level actions
(a) Role of WTO
Improving market access for developing
country exports requires a comprehensive approach
to liberalization. The Doha Development Agenda
of WTO contains important commitments but
initial efforts need to be sustained. Particular
issues include:
• The phasing-out by all countries of
tariff peaks (tariffs of 15 per cent or
higher) and multiplicity of rates is
essential for the development dimension
of the current round of multilateral trade
negotiations.
• Developing countries should receive
more technical assistance in implement-
ing product and process standards.
• Schemes that provide unrestricted
market access for all least developed
countries should be extended by all
large trading nations.
• In agriculture, effective liberalization
must cover border protection and
subsidies in both industrial and deve-
loping countries. The Organisation for
Economic Cooperation and Develop-
ment (OECD) countries must de-link
agricultural income support from
production and coordinate reforms of
subsidy and tariff regimes.
• In textiles and clothing, the priority
must be to accelerate the removal of
quotas in order to avoid an adjustment
shock in 2005 as a result of the
phasing-out of quotas under the
Uruguay Round Agreement on Textiles
and Clothing (ATC). The simultaneous
reduction in import tariffs would help to
mitigate adjustment pressures.
• Reform of market access in developing
countries themselves would contribute
as much to a development-oriented
multilateral trading system.
• Distribution effects of reforms should
be recognized and dealt with properly.
Food security issues and the concerns of
poor consumers, in particular, must be
addressed as part of overall poverty
reduction and development strategies by
the multilateral organizations.
(b) Market access for agriculture
and T&C exports
Market access barriers in world trade
remain significant for products of export interest
to developing countries. The liberalization of
imports, especially for agricultural products and
textiles and clothing, can generate large benefits
for developing countries in terms of incomes,
exports and employment. These benefits would
derive partly from the elimination of access barri-
ers to industrial country markets and partly from
reforms of the trade regimes of developing coun-
tries themselves. In the aggregate, further opening
of external trade is a win-win proposition for both
industrial and developing countries.
It is desirable to accelerate the removal of
quotas on textiles and clothing imports. Given the
risks associated with the backloading of quota
removal under ATC, the objective should be to
limit the adjustment shock at the end of the
transition period for both importing and exporting
countries.
It is also desirable under the Doha round
negotiations to substantially lower tariffs on T&C
trade, in both industrial and developing countries.
Tariffs in this sector are exceptionally high and
liberalization can be expected to carry large
benefits for developing countries in terms of
exports, employment and income.
73
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
In order to prevent anti-dumping action from
taking the place of quotas and tariffs once these
are liberalized, trade remedy rules should be
reviewed with the aim of limiting the scope for
discretion and incorporating consumer interest.
7. Technical assistance
For stronger regional integration in South
Asia as well as East and South-East Asia, many
countries are starting to coordinate and harmonize
policies for tariffs, taxation, investment and busi-
ness regulations. But the most productive impetus
to regional integration would come from removing
the restrictions on movements of goods, capital and
people. Regional integration is also likely to get
a boost from strengthening the regional growth
centres in South Asia and South-East Asia. These
could produce important pull effects on growth
throughout the continent. They would also help
to promote FDI by enlarging markets. Regional
integration should not be a substitute for globaliza-
tion, but should be a means to strengthen it.
Multilateral agencies have helped the deve-
loping countries by providing financial and techni-
cal support and investment guarantees for the de-
velopment of infrastructure and human resources.
They have also played a more catalytic role in
mobilizing funds from a wide range of private
sources. External assistance should further be
increased and continue to be provided on
concessional terms, given the long-term nature of
investment in human capital and its link to poverty
alleviation, skills formation and enhancement of
industrial productivity and efficiency.
Although the technical assistance received
from these institutions has been found to be very
valuable, there is scope for improvement in the
following fields:
74
• Promotion of regional cooperation in
human resources development, R&D,
S&T development, technology blending,
use of IT and computer training and
facilities
• Consultancy and training aimed at tech-
nology upgrading and skills improve-
ment for the growth and globalization
of SMEs with special attention to entre-
preneurs from rural areas, ethnic minor-
ity areas, economically backward areas,
ethnic and backward classes, and
women and young entrepreneurs
• Regional technical assistance pro-
grammes on harmonization of national
and regional policies on trade, tariffs,
taxation, investment and business
regulations and plans for private sector
development and foreign investment
• Promotion of technology management,
evaluation, assessment and enterprises
cooperation for the blending of indig-
enous technology and imported tech-
nology
• Improvement of the institutional ma-
chinery and administrative and legal
framework with a view to facilitating
private investment, including foreign
investment
• Advisory services for developing coun-
tries and LDCs to strengthen capital
markets and attract foreign portfolio
investment
• Technical support for developing
countries and countries in transition to
upgrade their institutional capacity to
identify, design, negotiate and imple-
ment schemes on BOT/BOO/BOLT for
infrastructure development
 II. Promoting Resource-based Export-oriented SMEs in Asia and the Pacific
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 III. ISSUES AND STRATEGIES FOR THE TRANSFER
AND ADOPTION OF PROSPECTIVE TECHNOLOGIES
BY SMEs AND SMALL GROWERS FOR
PROCESSING OF HORTICULTURAL PRODUCE
IN DEVELOPING ASIAN COUNTRIES

K. Lakshminarayanan*

A. Introduction domestic or export markets. Lack of adequate

Horticultural production has emerged as a
major economic activity in developing countries,
especially those which were hitherto heavily
dependent on agricultural production, often at
subsistence levels, but are now increasingly look-
ing for ways to increase both national and family
incomes. Asia alone has around 44 per cent of
the world’s acreage under fruit, covering a wide
range such as apples, bananas, oranges, grapes and
mangoes in addition to tropical and sub-tropical
fruits such as pineapples, papayas, guavas, lychees
and passion fruit.
Quite primitive systems of cultivation,
harvest and post-harvest handling and treatment of
horticultural produce as well as poor infrastructure
in terms of transport, storage and marketing in
many developing countries contribute to a high
proportion of wastage of this perishable com-
modity, estimated to range between 20 and 50 per
cent. Major infrastructure limitations in deve-
loping countries also continue to impose severe
constraints on domestic distribution as well as
export of horticultural produce.
Losses are this high in many developing
countries, especially in Asia, because of difficulties
in collecting horticultural produce from numerous
small farms and lack of efficient transport to
* In-charge, Technology Management, Asian and Pacific
Centre for Transfer of Technology (APCTT), New Delhi.
systems and procedures for grading and sorting
permit even greater spoilage during storage and
transport. The situation is further compounded in
tropical and subtropical countries, whose warm,
humid climates accelerate the spoilage of the
produce. Post-harvest losses of vegetables and
fruit in most Asian and many other developing
countries are so high and the causes so diverse that
a great deal of research, training and upgrading of
systems and procedures is needed for preventive
measures to take effect.
Against this background, processing of
horticultural produce into different products is
increasingly being seen as a major aspect of
endeavours to reduce wastage and boost the
competitiveness of horticultural produce from
developing countries and particularly tropical fruits
from the Asian region. Processing helps to tackle
some of the problems posed by perish-ability and
seasonal gluts, especially in the context of poor
storage and transport infrastructures. In addition to
extending shelf life, processing also results in
value addition and employment generation, as well
as enabling vertical integration and diversification.
Recent technological innovations in processing and
packaging also favour fruit processing. Addition-
ally, over the past decade or more there has been a
steady increase in demand for processed horticul-
tural products both internationally and in domestic
markets in producing countries although, given the
somewhat weaker growth in domestic demand and
the attractiveness of export markets, the latter have
assumed greater importance in most developing
countries.

77
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
1. Prevalent market scenario
Market demand for fresh horticultural
produce grew steadily during the 1990s and that
for processed fruits and nuts grew at about 60 per
cent per annum. However, only about 15 per cent
of this trade involves developing countries.
Further, exports of fruit from Asia lag behind those
from other major fruit-producing regions such as
Central America, which has 33 per cent of global
exports, and South America with 37 per cent for
several reasons related to domestic conditions as
well as impediments to trade with importing
regions of the world.
International trade in processed fruits and
vegetables is very large with an ever-increasing
number of different types being processed and
exported. Whereas even a few decades ago
processing was limited to mostly temperate fruits
and vegetables as were grown and consumed in
mostly Western developed countries, the range
has now broadened to include tropical and
subtropical produce. World trade in processed
horticultural products increased from about US$
13 billion in 1991 to about US$ 14.9 billion in
1995 and this overall trend has continued since.
In general, the world market for fruit juices,
the largest group of processed horticultural
products, is expected to show further growth and
also a sharper rise in growth rates both because of
the current low per capita consumption in some
growing markets and growing health consciousness
in most markets favouring consumption of such
products.
The dietary preferences of consumers have
now become considerably more diverse than
earlier. For instance, people in North America and
Europe have exhibited a growing fondness for
tropical fruit and vegetables, both fresh and
processed. Also, processing and preservation
techniques have been improved substantially so
that the final product is tasty and nutritious and has
long shelf life. Many developing countries have
taken advantage of this continuing and rising
worldwide demand for processed fruits and vegeta-
bles and have earned valuable foreign exchange
from exports of products.
78
In the case of tropical produce, pineapples,
mangoes, papayas and bananas form the backbone
of trade in tropical products, while other produce
such as lychees, rambutans, jackfruit and vegetable
products such as okra also have a good, if smaller
demand. There is also growing demand in several
European markets for tropical fruit salads, two- or
multiple-fruit products, e.g. papaya/mango/guava,
frozen tropical fruit products for use in bakery and
dairy products and baby foods, and for tropical
jams, syrups and other retail tropical fruit products.
Many processed products are produced by manu-
facturers in the importing developed countries from
imported raw material or intermediates. Often,
trade from developing countries constitutes what
are termed “bright cans” where the branding and
marketing is done by the importer who attaches his
own label to the imported product. Nevertheless,
some companies in Thailand and the Philippines
have been successful in exporting labelled
products, as have some companies from the
Caribbean.
Apart from export markets, which are
understandably emphasized in the case of smaller
countries and those countries in which horticulture
constitutes a large proportion of the economy,
growing domestic consumption within developing
countries, which is rising further with the rising
prosperity at least of the middle class, is an
increasingly important factor influencing the de-
mand for both fresh and processed horticulture
produce. Processed products are increasingly
finding good and growing markets in developing
countries both for local producers and for multina-
tional corporations (MNCs) and other international
corporations bringing substantial foreign invest-
ment into Asia, Africa and Latin America.
Many studies have pointed to “spillover”
advantages of horticultural produce into areas
such as balanced diets and nutrition and social
rituals attached to ornamentals and flowers, all of
which are perceived as signs of refinement
and upward mobility. Horticulture also plays an
important role in providing raw materials for
conventional pharmaceuticals and herbal medi-
cines, aromatics, cosmetics, organic dyes and a
variety of value added products which are gaining
increasing importance in the international market.
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
These achievements in horticulture have
been achieved through active researches into
cultivation, preservation, processing and related
technologies, as well as the extension of these
technologies downstream through technology
transfer both within countries and between coun-
tries and regions. And yet seen in the initial
paragraphs of this section, serious problems remain
to be tackled, chief among them being the enor-
mous differentials that remain between developed
and developing countries in respect of technologi-
cal capability, access to and degree of participation
in international trade and the contribution of horti-
culture to both production and consumption in
developing countries.
2. Current trends in developing
countries
We may now note some of the major trends
in horticulture processing in some developing
countries in Asia and elsewhere, focusing on
technological and managerial aspects, so as to
indicate the major issues that need to be addressed
in technology transfer in this sector.
In Bangladesh, the modern organized fruit
processing industry comprises relatively small
volumes of canning, freezing and dehydration.
However, jams, jellies and pickles are made in
large quantities, chiefly by small entrepreneurs at
the home or cottage scale, and extruded snacks,
puffed rice and potato chips are made and sold in
the domestic market by small and medium enter-
prises. Some units, especially larger ones, have
modern facilities operating hygienically in con-
formity with the United States good manufacturing
practices (GMP). On the whole, however, most
facilities are in need of upgrading and personnel
require considerable training on a wide range of
aspects.
In Thailand, earlier horticultural export-
oriented production involved manioc and other
tubers but steadily gave way to processed fruits
and vegetables exported to markets in the United
States, the EU and South-East Asia and today
representing about 50 per cent of total horticultural
exports from the country. Processed fruit products
exported from Thailand include canned and juiced
pineapple, canned banana, of which over 30 per
cent goes to the United States, whereas over 90 per
cent of fresh banana exports are to Hong Kong,
China; dried and canned mango exported mostly to
United States and EU markets while most fresh
mango exports are to Asian markets. Smaller
quantities of fresh and processed longan, rambutan,
durian, lychee, ginger and dried tamarind are also
produced and exported. Processed vegetables are
also important products of the Thai horticultural
processing industry and its exports. Other impor-
tant products exported from Thailand are processed
or canned asparagus exported to Japan, canned
baby corn exported to the United States, the EU
and Asia, processed or preserved bamboo shoot
comprising over 90 per cent of total bamboo shoot
production to the United States, which absorbs
over 60 per cent of these exports and frozen okra.
Recently, the production and export of fresh cut
flowers and orchids has assumed greater impor-
tance in Thailand.
As may be imagined, given the requirements
of the markets to which Thailand mainly exports,
the processes and facilities in Thailand are of
relatively high standard so as to ensure competi-
tiveness in these demanding market environments.
In India, the world’s second largest producer
of fruits and vegetables, the horticultural process-
ing industry is quite rapidly changing its profile,
especially in the last decade or so after economic
liberalization was initiated especially in respect of
licensing and foreign investment policies generally
and also specific to this industry. While most
processing activity in India continues to take place
in a highly decentralized manner, mostly in small-
scale industries or in cottage/home-scale units with
relatively small capacities of up to 250 tons/year,
there are several large units contributing abut 15
per cent of total production run by MNCs or big
Indian corporations with capacities in excess of 30
tons/hour. Many export-oriented units also operate
in India. India’s domestic consumption has also
increased substantially in recent times with a
burgeoning middle class with considerable spend-
ing power, a phenomenon which has served to
attract substantial foreign direct investment in this
sector, amounting to over US$ 250 million up until
79
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
1997, for manufacture of processed horticulture
products in both the domestic and international
markets. By the end of the eighth plan period
(1992-1997), investment in the organized food
processing industry is estimated to have reached
US$ 5 billion, of which about US$ 1 billion is
estimated to be FDI.
While traditional processed products made
in and exported from India comprised chiefly fruit
pulp or juice, ready-to-serve beverages, canned
fruit and vegetables and a wide range of jams,
squashes, pickles and chutneys, the product range
now increasingly includes frozen pulp and vegeta-
bles, frozen or dried fruits, vegetable curries in
retortable pouches, canned mushrooms and mush-
room products, etc. Exports of cut flowers and
dried flowers are also increasing. Yet for all these
changes, India still accounts only for a measly 1
per cent of global trade in this sector and the scope
for technological upgrading of the industry at all
its different stages is enormous.
In Africa, 40 per cent of all manufacturing
value added is created in the food processing
subsector. In Uganda and the United Republic of
Tanzania, since supply and market linkages are
weak but crucial, only a few entrepreneurs have
ventured beyond processing traditional or basic
food products. In Uganda some enterprises have
successfully entered into fruit processing, in
particular drying of fruits and juice extraction.
Studies have shown that obtaining suitable tech-
nologies and attractive packaging materials are
some of the problems that these enterprises face.
Given the constraints posed on both raw material
and market fronts, most food processors sell their
products in the domestic market, exceptions being
plantation commodities such as coffee, tea and
cashew, dried spices especially from Zanzibar,
some dried fruits produced mostly on contract with
importing companies in Europe (chiefly the United
Kingdom) and some other products, for instance
honey, that gain entry into Europe through the fair
trade market segment.
Former Soviet countries in Central Asia
such as Uzbekistan, for instance, are now attempt-
ing to diversify their processed horticulture
products to cater for the newly accessible markets
80
in Europe. Products such as syrups, concentrated
juice, pulp, canned fruit and other fruit- and
vegetable-based products are being focused on
as future exports. The programme to develop
this area of the country’s economy provides
for replacement of equipment, reconstruction of
processing plants and introduction of new produc-
tion lines, attracting foreign credit and establishing
joint ventures based on modern technologies, state-
of-the-art equipment and experience. Specialist
farms and agricultural companies with foreign
collaboration are sought to be established in order
to build solid backward linkages for supply of
assured quantities and quality of raw materials to
supply units which make products such as juice,
tomato paste, wines, cognac, vodka, tinned fruit
and vegetables.
Despite the addition of production capacities
and consequent increase in processing volumes,
it is felt that the full potential has yet to be
realized. Some of the constraints felt are the lack
of suitable packing materials to meet international
requirements, the state of the existing plant and
machinery and the lack of the latest technologies,
all of which are to be tackled through suitable
foreign partnerships in terms of both technology
and investment.
It must be emphasized that lack of or
weaknesses in infrastructure or technology are
not the only constraints as far as the export of
processed horticultural products in developing
countries is concerned. Large importing compa-
nies based in developed countries are relatively
conservative, and often act as strong lobbies
against changes in existing distribution structures,
making new entry more difficult than usual, and
problems of marketing of products in developed
country markets can be quite daunting for most
enterprises from developing countries. Non-tariff
barriers and costs of market entry of branded
goods are also very high in most developed
countries. Thus, in Europe, for instance, major
suppliers from outside the EU are Brazil, Israel,
South Africa, the United States, Thailand, China,
Mexico, the Philippines and Kenya, with Poland
being the main supplier from Eastern Europe and
the Andean countries from South America also
featuring owing to their special duty free
privileges.
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
In general, therefore, several factors make
it difficult for developing countries to compete
with exporters from the United States, the EU and
Israel, all of which have substantial horticultural
processing industries. Additional competition is
also emerging from Eastern Europe, especially for
some temperate-zone processed products. Given
other financial, physical and human resource
factors, trade is increasingly being dominated by
a few large MNCs or by some well-established
individual export companies.
Yet there are several examples of success
among small and medium firms from several
developing countries. Studies have shown that
factors behind these successes have included
specific targeting of quality markets and products,
large volumes allowing diversification of markets,
efficient linkages among processing industries as
well as between them and growers, effective
governmental policies and promotion of the
industry as a whole and exports in particular, as
well as good logistical management given most
developing countries’ distance from the main
importing markets.
3. Developments in horticulture
processing technology
The number and variety of processed fruit
and vegetable products has increased substantially
in recent years at least partly owing to the in-
creased recognition and emphasis by consumers of
the importance of these products in a healthy diet.
Updated and modernized processing and
preservation technologies such as heating, freezing
and drying together with the more recent commer-
cial introduction of a variety of processing tech-
niques continue to provide the consumer with an
increased choice of products. This has been
achieved, apart from new process protocols and
products, by new heating and freezing techniques
such as microwave or ohmic heating or cryogenic
freezing, combined with new packaging materials
and technologies such as aseptic packing and
modified atmosphere packaging.
In overall terms, the trend in new processed
fruit and vegetable products is to add value by
increasing taste or flavour, having a greater variety
of fruit and vegetable products with longer and
more stable shelf life, making available processed
horticultural products cutting across seasons and
providing increased convenience to the consumer.
New fruit varieties and advances in dehydra-
tion technologies have given a fresh impetus to
dried fruit. Apart from traditional dried fruit such
as raisins, apricots, peaches, prunes, figs and dates,
new fruit such as cherries, apples and a variety
of berries such as cranberries, raspberries and
strawberries have been made available in varying
degrees of dehydration. Such dried fruits are
increasingly perceived as value added products in
themselves or by adding flavour, colour, texture
and diversity to other preparations such as cakes,
puddings and other desserts. Dried fruits which
are not only simply dehydrated but also osmoti-
cally dehydrated (i.e., dehydrated by infusing the
product with sugar while natural water is drawn
out, both processes taking place through osmosis
while the produce is immersed in optimized sugar
solutions) are available these days, allowing for
greater variety in recipes using such products.
Dried fruit is also more widely available in
different forms, including whole dried, cut, diced
and powdered. The growing interest in ethnic
cuisines in developed countries and among more
affluent sections in developing countries and a
shift towards a lifestyle perceived as more healthy
have also contributed to the popularity of dried
fruit in markets throughout the world.
Dried herbs and herbal powders are another
value added item used for culinary purposes and as
intermediates in herbal or other medicines, cosmet-
ics and other products. Dehydration processes also
lead on to products such as onion, garlic, ginger
and tomato powders as well as a wide range of
herbal and spice powders which are consumer-
friendly convenience products as well as inter-
mediates used by manufacturers of ketchups, soup
powders, biscuits or other baked products, confec-
tionaries and condiments and so on. Dehydrated
pre-cut and diced vegetables are an extremely
viable and attractive substitute for similarly
prepared frozen vegetables, although such products
have yet to make any significant impact on the
market except for some traditional products
such as sun-dried tomatoes, dried mushrooms and
desiccated coconut. Dehydrated vegetables do not
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
require a cold chain from production through
wholesaler/retailer to consumer and can be
prepared, transported, stocked and retained by the
consumer without any level or degree of energy-
intensive refrigeration at any stage of the
entire marketing chain. Dehydrated horticultural
products thus have the potential to open up a
whole range of new or otherwise value added
products. Dehydration technologies are also
available in a range of scales and degrees of
sophistication, from simple solar drying through
forced-air dryers to freeze or spray drying, lending
themselves to varying scales of operation and
especially to decentralized production systems
stretching right down to the farm level.
B. Technology gaps
As can be seen from the above, the
manufacturing and value added chain from farm
to factory to consumer in different developing
countries, as well as in different scenarios within
individual developing countries, contains numerous
technology gaps which need to be addressed
through technology transfer. Obviously, no single
approach or strategy can be applied across the
board and, indeed, the first step would be to
clearly identify these gaps, the technologies which
need to be introduced or upgraded in order to fill
them, as well as the other issues which need to be
addressed integrally along with technology issues
in order to make the system as a whole work
as desired. It would be presumptuous and well
beyond the scope of this paper to even try to
enumerate technology gaps in individual develop-
ing countries, but some attempt may be made here
to broadly point to the major areas likely to require
attention in many, if not most, developing
countries.
1. Overall system deficiencies/gaps
Before coming to specific technology issues,
it needs to be emphasized that deficiencies or gaps
at the overall level need to be recognized and
addressed since, clearly, technologies do not
operate in a vacuum but rather within a system.
In most developing countries, the further
growth and development of horticultural process-
ing suffers from several constraints, such as:
82
• Poor quality or limited range of varie-
ties, cultivars and planting material
• Poor or obsolescent on-farm practices
during cultivation, harvest and post-
harvest handling
• Weak transport system and related
infrastructure impeding effective long-
distance transport of fresh and
processed commodities
• Limited availability, distribution and
continuous supply of electricity parti-
cularly in rural areas
• Inadequacies in maintaining hygiene
and sanitary/phyto-sanitary standards
during preservation and processing
• Weaknesses in grading, standardization,
packaging material and systems, all
contributing to losses and poor quality
• Weaknesses in human resources
especially in technical and managerial
skills, again particularly in the rural
producing areas
• Shortage of technical and market
information
• Low domestic consumer income or
other factors limiting domestic demand
for processed foods
• Obsolete or low-level technologies
causing high processing losses and
low-quality products
Many of these issues have already been
touched upon in previous sections and require no
detailed explanation. It will, of course, be evident
that not all these issues can be addressed through
technology transfer and call for much wider
system-level action in specific country contexts.
Nevertheless, experience shows that practical
interventions in technology transfer must take into
account of these factors and must, in each specific
intervention, address these issues to the extent
possible within the scope of the particular inter-
vention itself. Without such a holistic approach,
technology transfer endeavours are unlikely to
create or leave behind working models which
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
could act as exemplars with a visible demonstra-
tion effect which could catalyse wider replication
or adoption.
We may now take a broad look at some
of the specific technology areas but again keeping
in mind that these require to be addressed in a
country- and context-specific manner.
2. Processes and equipment/machinery
In many developing countries, processing
techniques and corresponding equipment/machi-
nery and facilities are of the Second World
War vintage and, in order to enable units there
to compete effectively in international markets,
require upgrading if not refurbishing. The follow-
ing main elements of plant and machinery likely to
require addressing may be highlighted, it being
stressed that this is only a broadly indicative rather
than exhaustive listing:
• Pre-treatment of raw material: fumiga-
tion chambers, other pre-treatment for
conformity with S/PS (sterile/partially
sterile) requirements and UV/X-ray
chambers for testing and quality control
especially for fruit fly
• Chilling and freezing: pre-chilling,
refrigeration, individual quick freezing
(IQF) technology, blast freezers, plate
freezers, liquid nitrogen tunnels
• Canning: rotomat as against still retorts
• Evaporation and concentration: evapo-
ration under vacuum and concentration
by freezing or by use of membranes
• Dehydration: shelf dryers, vacuum
dryers, continuous dryers, freeze dryers,
spiral dryers; also these dryers operated
by natural gas or solar energy
• High-value extraction: oleoresin extrac-
tion processes for ginger, garlic, cloves,
etc.; super-critical fluid (SCF) extrac-
tion for extraction of volatile flavours
from spices, e.g. cucumin from
turmeric, in addition to tea, coffee, etc.
The equipment and processes are
expensive but give good returns on in-
vestment and yield high-value products
• Packaging: aseptic packaging especially
for large quantities of pulp/juice/
concentrates; retail packaging systems
and packaging materials
Once again, we need not go into detail here
except to note that a wide range of technology
options are available today and can be adopted
depending on raw material availability and quality,
product range, scale of operations, desired product
quality as per consumer preference, buyer specifi-
cations or trade regulations, shelf life required,
destination markets and so on. Decisions regard-
ing each of these and other parameters need to be
made carefully for each unit or plant in a context-
specific manner. The latest or the biggest is not
necessarily the best. Indeed, the advantage in
horticulture processing is that there is enormous
flexibility available and systems can be put
together to match an extremely wide range of
requirements. What is necessary is to determine
these carefully based on a clear understanding of
the market, which must be understood properly in
this highly market-driven industry, and then design
a system to match these requirements.
It must also be pointed that there is a
widespread lack of appreciation of the possibilities
of and potential for vertical integration in the
horticultural processing industry. Processing of
fruits and vegetables allows for different produc-
tion operations to be taken up at different levels,
each level making products or intermediates as
required, which can be integrated downstream.
Suitable technologies are available and can be
selected for multiple, decentralized and semi-
processing facilities to prepare, preserve and
protect produce for later centralized processing,
packaging and marketing. Such disaggregation
and subsequent aggregation can be achieved within
enterprises, which can organize their production
facilities and operations in tiers, as well as between
enterprises, which may tie up or collaborate in
some other manner to achieve the same effect.
Such decentralized systems are particularly suitable
for countries with dispersed cultivation areas and
weak transport linkages inhibiting more centralized
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
processing. In some developing countries, models
for such decentralized networked production
have been effectively developed and demonstrated,
such as in India, where such demonstration
projects are being pilot tested in the north-eastern
states with the support from APCTT and the
Government of India’s Ministry of Science and
Technology.
3. Backward linkages
While the emphasis in this paper is on
processing technologies proper, it is evident that
these cannot be addressed in isolation. Indeed,
experience in all countries has clearly shown that
the processing industry is crucially dependent on
backward linkages to the raw material in terms of
its quality both inherent to the variety as well as in
relation to the effect of harvest, post-harvest and
storage/transport handling.
Often the issues are as much economic as
technology- or quality-related. It is common in
developing countries in Asia and other regions for
sophisticated post-harvest procedures to be used
for some export commodities by large commercial
enterprises, alongside simple, low-cost methods
used by smallholders, who only have access to
small local markets. There is also an increasing
gap between the industrialized and less indus-
trialized countries, in terms of the quality of their
storage and marketing facilities and their food
processing technology. For instance, the marketing
chain in Japan is longer and more sophisticated
than in most other countries. Many methods of
preventing post-harvest losses have been developed
so that produce can meet the exacting standards of
Japanese consumers. These include sophisticated
and expensive methods such as vacuum pre-
cooling, individual packing of items and packing
produce in plastic trays wrapped in film. Such
methods inevitably mean high marketing costs and
therefore high prices for the consumer.
Keeping in mind these economic and
managerial issues, within the horticultural field
itself, produce, and especially fruit, handling
systems notably in harvest, post-harvest, storage
and transport, as well as marketing infrastructure
and other arrangements, in most developing
84
countries require major improvements if qualitative
shifts are to be made away from the present rather
low level of exports. Apart from infrastructural
issues, most of these can be achieved through
effective training and other human resources
development strategies which need to be built in to
any technology transfer endeavour. This would
require collaboration between institutions or
agencies dealing with processing aspects on the
one hand and with horticulture on the other so that
necessary synergy is brought about.
One of the recommendations often made
in respect of backward linkages is to tie up
producers, especially small growers, to processing
units through contract farming systems as a means
of ensuring quality raw material supply. Many
large corporations, especially MNCs, have adopted
this procedure in many developing countries, the
linkage with the farmers extending to supplying
them with quality seeds or planting material or
even sponsoring research into developing new
strains and then disseminating them. A brief
discussion on the potential and problems asso-
ciated with organized contract farming linked
to fruit-processing units is called for since the
literature and available experience in several deve-
loping countries have thrown up many issues for
debate.
In general, opinion is divided between those
who feel that contract farming is a means to trans-
fer new technologies to small farmers and raise
their incomes and those who argue that contract
farming is only another version of the “putting-
out” system in manufacturing which makes the
farmer captive to the processing unit through this
new form of indentured labour. Studies quoted
extensively in the literature appear to show that the
reality lies somewhere in between, that there are
situations where the grower has benefited while
there are others in which he has not and, more
particularly, that there are crops and situations
which are suitable for small-holder participation
while others are not.
One must also understand the economic
motivations behind the system and its individual
manifestations, particularly the issue of institu-
tional and market failure that drives much of
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
contract farming. In the first place it must be
recognized that in many developing countries,
small growers mostly do not participate in activi-
ties linked to value added production for either the
domestic market or for export. Small growers are
extremely vulnerable to price fluctuations and
other market vagaries and therefore see some
benefit in assured purchases by corporate process-
ing units through contracts in addition to obtaining
better inputs in the form of planting material and
entering into a wider market. However, cases of
small growers being pressured into accepting lower
prices or being denied inputs and so on are not
infrequent.
Experience seems to suggest that whereas
contract farming may suit some MNCs or other
large corporations, processing units in general may
benefit more from the kinds of synergistic arrange-
ments spoken of earlier between processors’ and
growers’ associations with the catalytic support of
Governments. Models and examples of growers’
cooperatives themselves running processing enter-
prises are also available and increasing, as are
networked systems involving growers in clusters
being partners in a common processing enterprise.
It must also be stated that several simple
technological interventions are available and can
be adopted for post-harvest handling such as for
heat dissipation, reduction of physical injury and
pest or disease control and all these can have a
significant impact on reducing losses and increas-
ing product quality. A variety of treatments and
other measures designed to extend shelf life are
also very important and need to be systematically
introduced into the mainstream of horticultural
production in developing countries. Infestation by
fruit flies is a major problem in production and
especially in the export of tropical fruit and the
problem needs to be tackled at different levels,
from field-level controls to various types of
treatment to ensure complete freedom from any
infestation enabling clearing of quarantine restric-
tions currently applied in major markets such as
the United States and Japan.
In the longer term, systematically carried out
horticultural research in plant breeding may be a
useful approach to loss prevention as studies have
shown that losses differ with different varieties.
Biotechnology also has important contributions to
make to sustainable agriculture, for instance in
tissue culture for multiplication of different varie-
ties, gradual replacement of chemical pesticides by
biocontrol and biopesticides, use of biofertilizers
that enhance nitrogen fixation and other aspects
adding value to the produce.
C. Problems and prospects in
technology transfer
We may now turn to some constraints
inhibiting equitable growth in the global horticul-
ture processing industry as well as in the transfer
of technologies within it. We shall also, in this
section, look at the potentialities and possibilities
of overcoming some of these obstacles and of
promoting technology transfer.
1. Barriers in international trade
It is well known and widely agreed that
international trade in agriculture and horticultural
products is characterized by production and market
disequilibria. As stated earlier, profitable horticul-
ture is a visible sign of advanced agriculture in
sound and growing economies, and it therefore
follows that the policy of most such countries is
to protect horticulture because of its role in pro-
viding and supporting higher standards of living.
In the long run, such policies contrast with the
concepts and workings of free trade. This is one
of the reasons why there is greater consensus in
WTO on global liberalization in various other
sectors than in agriculture. Fortunately, given its
dependence on climate and seasonality and the
perishability of its produce, horticulture to some
extent forces a degree of integration of producing
zones and a mutuality of interests in trade.
However, even with such an offset of inherent
disadvantages, some problems of inequity will
remain so long as different countries with quite
different levels of economic strength and techno-
logical capability produce the same commodities in
the same season at significantly differing costs as
happens today with apples, tomatoes and flowers
and other ornamentals.
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
Some countries such as Bangladesh in Asia
and several African nations had hoped to gain
from the Uruguay Round of the WTO agreements,
in particular the provisions made with respect to
developing and least developed countries, but these
hopes have been largely belied.
World Bank studies have shown that
protectionist trade barriers have affected exports of
processed foods in the so-called “Quad” countries,
i.e., the United States, Canada, the EU and Japan,
with food industry products including fruit juices,
canned meat, peanut butter and sugar confec-
tionaries having import duty rates exceeding 30 per
cent in several markets as against average duties of
4-8 per cent for other commodities. Higher protec-
tion will clearly prevent all but the most efficient
horticultural producers in developing countries
from entering developed country markets while
enabling even relatively more inefficient producers
in these countries to retain their market share. The
case of cut flowers from Africa, as also its greater
trade shares in fruits and vegetables facing lower
protection and subsidies, shows that many of the
poorest countries could expand their exports if
protection in agriculture is lowered in developed
economies.
2. R&D and S&T capability
The expectedly high differential between
developed and developing countries as regards
research on horticulture and related processing,
and S&T institutions and capabilities in these
sectors is another major barrier both to growth of
this sector in developing countries as well as to
technology transfer, which requires at least some
extent of scientific and technical capability in the
recipient country.
Whereas developed countries have a long
history of research in horticulture and related
areas as well as institutionalized capabilities in the
State sector, private sector and university system,
developing countries have adopted different
approaches to achieve the necessary capabilities
in their own internal contexts and in order
to remain competitive internationally. Different
86
developing countries have evolved varying models
involving appropriate mixes of public and private
sector research and facilities. The experience of
different developing countries has shown that
a collaborative approach, where all elements
complement each other, works better than systems
in which there is no common ground between
the public and private sectors as in some countries
of South America and Asia where the public
sector lacks skilled researchers, funds, facilities,
projects, international exchanges and the like.
While in most cases this approach may also corre-
spond to national horticulture interests and aims,
in others it could take the dangerous form of
natural resource exploitation and the transfer of
results abroad.
Product or process development in the
area of horticulture processing is mostly carried
out in-house by individual processing units or
corporate entities, while research on more sophis-
ticated machinery development and packaging
materials/processes is carried out mostly by corpo-
rate manufacturers as well as research institutions
and the university system.
However, the bulk of the research is being
conducted in horticulture itself, and research
subjects which have emerged as priority areas and
which obtain most support are:
• Genetics, including breeding, biodiver-
sity, gene banks and plant genetic
resources
• Biotechnology
• Integrated and sustainable production
systems
• Post-harvest handling and storage
• Marketing and consumer education
There are many factors which act as
constraints on regional/international cooperation in
R&D. It would be natural to assume that countries
in contiguous regions or similar agro-climatic
zones would have common produce and may there-
fore have greater chances of success in research
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
collaboration. Yet the commodity approach has
been successful to date only for major food crops
like soybean, grain, maize, rice, etc. Part of the
reason may be the lack of major international fund-
ing for similar researches on horticultural produce
since, after all, such produce does not represent
enormous trade volumes internationally and is not
considered, even by Food and Agriculture Organi-
zation of the United Nations (FAO), as commodi-
ties relevant to food security. At the same time,
crops like coffee, cocoa, bananas and apples do
have global reach and may some day attract inter-
nationally collaborative R&D. Some limited suc-
cesses in collaborative researches have, however,
been achieved in the case of banana and plantain
in Africa funded by international agencies, and the
mostly private sector-funded researches on tomato
in collaboration with researchers’ associations,
and there are also umbrella groups for nuts as
well as for medicinal herbs and plants. A kind of
intermediary role between regional and commodity
cooperation in research and policy-making is also
played by certain large agencies and organizations
like FAO and the International Plant Genetic
Resources Institute (IPGRI) for plant genetic
resources.
In the area of technology transfer in
horticultural processing, which is the subject of
this paper, it is not envisaged that R&D of such a
fundamental nature would be required or under-
taken. Rather, the need would be for technology
adaptation and adaptive research to suit local
conditions, which would be essential for any
technology transfer in this sector, where one
can rarely conceive of a direct implantation of a
process from one region/country to another given
the variations in produce type/variety, agro-climatic
conditions and local factors relating to infra-
structure and product range, among others. For
such adaptive research, however, there are no
ready-to-hand mechanisms or institutional struc-
tures. It is clear, therefore, that some new efforts
need to be launched, perhaps on a more limited
scope both geographically and in terms of
subject areas, to undertake the necessary adaptive
research required as part of technology transfer
endeavours.
D. Technology management issues
Perhaps the most important issues relevant
to technology transfer are those relating to
technology management, which would be informed
by all the different macro-level considerations
discussed hitherto. It is necessary to underline the
fact that technology transfer does not involve
disembodied processes or equipment; rather, these
need to be embodied in a particular facility, unit
or enterprise which would have to be set up in
relation to specific parameters such as raw mate-
rials available, their quality and quantity, market
scenario and target market, product range with
quality and other specifications, scale of opera-
tions, technology choice, plant and machinery,
human resources available and required, backward
linkages and forward linkages for sales. In many
technology transfer exercises, there is a faulty
assumption that the task is to bring in the latest/
best technologies, irrespective of the specifics
involved, and that this would make it possible to
tackle the problems initially encountered. Far from
being a generic exercise, technology transfer has
indeed to be tailor-made for each concrete field
situation. At the country level, some degree of
generalization is inevitable but it too must be
context-specific rather than take any single or
common approach.
1. System design
The first major issue to be addressed and
decided upon in the production system to be
adopted pertains to the scale of operations.
A system involving large-scale processing
requires substantial capital investment and high
technical and managerial skills. Because of the
high demand for processed foods in recent years,
many large-scale factories were established in
developing countries with mixed results but with
conspicuous failures in West Africa. Most of these
failures were apparently related to high labour
inputs and relatively high cost, lack of managerial
skills, high cost and supply instability of raw
materials and changing governmental policies.
These experiences underlined the necessity of
establishing better backward linkages for raw
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
materials, for better overall planning and especially
for more in-depth feasibility studies prior to setting
up production facilities.
While large-scale industries can certainly
not be ruled out in developing countries, histori-
cally small- and medium-scale processing have
proved to be more successful than large-scale
processing in developing countries, especially
since the marketing is fraught with uncertainties
except for well-established players and large
MNCs. For the technology transfer exercises
envisaged, it is suggested that the focus clearly
remain on small enterprises since, apart from other
considerations, this is the sector requiring the
greatest assistance and where spread effects are
likely to be the maximum in developing econo-
mies.
2. Choice of technology
Cumulative experience in many countries as
well as recommendations of FAO and several other
agencies suggest that system design and related
choice of processing technologies in developing
countries should be guided by the need to combine
labour, material resources and capital so that not
only the type and quantity of goods and services
produced are taken into account, but also the
distribution of their benefits and the prospects of
overall growth. These criteria should include:
• Increasing incomes of growers and
workers/artisans through maximum
utilization of locally available raw mate-
rial and maximum possible local pro-
curement of equipment/machinery
• Reducing production and transport costs
and overheads by optimum utilization of
renewable energy (e.g., solar energy
and biogas) and reducing the moisture
content of products wherever and to
the maximum extent possible before
transport
• Engendering better distribution of
income and greater local value addition
by decentralizing processing activities
and involving growers themselves at
least in some semi-processing activities
88
• Maximizing national output by reducing
royalty payments and capital costs and
minimizing imports of equipment, pack-
ing materials, additives, etc.
• Maximizing the availability of high-
quality, standard processed products
for internal and export markets, thereby
reducing post-harvest losses, giving
added value to indigenous crops and
increasing the volume and quality of
agricultural output
3. Post-harvest operation
The importance of linking up processing
units and operations with the procurement and
quality of the raw produce itself cannot be overem-
phasized and must form part of the overall activity
undertaken. Leaving aside issues pertaining to
improved varieties and planting materials, and even
taking the currently available raw material as
given, a great deal can be achieved through
effective backward linkages in terms of the
viability and profitability of the unit, improvement
in incomes of growers and reduction of produce
losses.
Grading and sorting of raw material will
have a considerable effect on product quality by
eliminating poor produce and promoting better
material handling. Growers supplying raw material
should be encouraged to undertake proper grading
and sorting practices not only to facilitate better
product quality but also to encourage a process of
learning the true value of their raw material and
the importance of its quality in fetching better
prices. However, it must be recognized that
grading or sorting never improve quality, but
merely separate produce on the basis of size and
quality respectively.
Practices and measures while produce is still
on the tree, at harvest time and during post-harvest
handling are also vital in promoting the quality of
produce before it enters the production process or
the market. Proper application of pesticides, other
pest-prevention measures, correct timing of the
harvest, correct plucking techniques, adequate
storage procedures and other such measures will
go a long way towards reducing losses and
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
promoting produce quality. While efficient pre-
and post-harvest handling cannot compensate for
poor initial quality of horticultural produce, great
improvements can be achieved through improved
management. The production system could there-
fore have in-built appropriate procurement pricing
systems and managerial practices to further this
process.
4. Market considerations
As emphasized earlier, horticulture pro-
cessing is a highly market-driven industry, heavily
dependent on transient consumer tastes and charac-
terized by enormous variability and competition in
market conditions. Many an enterprise has folded
because of erroneous decisions regarding scale,
product definition and range, pricing, branding and
labelling, etc., which have not matched the targeted
market. These are extremely important aspects of
technology management in this sector.
A huge variety of processed products are in
the market today both domestically in different
countries and internationally. In designing the
production system of an enterprise, decisions have
to be taken with respect to the range of products to
be made in relation to the available produce.
In small or medium enterprises, experience
has shown that all-year production based on the
various types of produce available locally in the
different seasons is a better option than single-
produce operations, which are likely to be only
seasonal, limiting capacity utilization, employment
generation and market spread, to guard against
failures. Similarly, both finished and intermediate
products can be made and both have their own
advantages and disadvantages, the former involv-
ing the enterprise getting involved with retail
marketing with its attendant risks and additional
costs of branding, labelling and sales, while the
latter increases the dependence of the enterprise on
a few buyers who can cartelize and control prices.
Product quality, pricing and other factors such as
whether the product should or should not contain
chemical preservatives, added flavours and colours,
added sugar and so on are all crucial decisions
with a direct bearing on the positioning and
marketability of the products.
Careful and rigorous market analysis is
essential to address the above issues before
setting up the unit and commencing production.
Unfortunately, these kinds of exercises are usually
beyond the means of small or medium enterprises,
but recourse can be had to existing market studies
and intelligence and local consultancies. Prior
discussions with trade representatives can also
help.
Experience also suggests that, despite the
attractiveness of export markets and the importance
to the host nation of export earnings, small and
medium enterprises should give importance to
and specifically address local and wider domestic
markets. The latter are likely to be more familiar
and involve less risks, would permit relatively
easier entry and access and could constitute the
foundation of economic viability with exports as
the icing on the cake. Large corporations and
MNCs also tend to deal with fewer products in
much larger quantities as this matches their
production and marketing systems well and lends
itself to more effective market promotion, thus
leaving space for SMEs with a wider and more
differentiated product range with less competition.
Locally preferred products and flavours can also
be more readily built in to the product range
of such enterprises, creating a market niche for
themselves.
The need for continuous monitoring of
the market and variations in demand should be
explicitly recognized and built in to the enterprises
and the systems sought to be transferred, so that
the enterprise is not caught unawares by changes
in consumer preferences or entry of rival products,
and once again underlining the market-driven
nature of this industry.
5. Human resources development
Managerial and technical skills are ex-
tremely important in this industry perhaps even
more so than in most others, especially because the
product lines are likely to keep undergoing change
in tune with market trends and because continuous
and rigorous quality control and management are
essential.
89
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
Technical personnel should be properly
trained and measures taken to periodically upgrade
their knowledge and skills so that they are in
touch with technological improvements, quality
specifications and sanitary/phyto-sanitary require-
ments.
Managerial personnel should be similarly
trained and periodically exposed to new develop-
ments and encouraged to keep abreast with market
trends, new processes and equipment and other
developments in the industry.
Together, these personnel should be
equipped to undertake periodic updating of equip-
ment and processes to guard against obsolescence,
maintain product quality and competitiveness.
These HRD aspects are critical aspects of techno-
logy management in this industry since the success
or otherwise of the enterprise ultimately rests on
them.
E. Conclusions
Some recommendations may now be made
regarding programmes and strategies for techno-
logy transfer to SMEs in developing countries,
keeping in mind the various issues discussed
above.
1. Technology transfer at the
enterprise level
We may first list some of the salient aspects
which should form an integral part of the process
of planning and establishing any and each enter-
prise or unit in horticulture processing, so that
these in turn become integral components of the
envisaged technology transfer programme and
strategies:
• Locally felt needs as regards raw
material utilization and losses, prices
obtained, marketability, etc., should be
properly studied and ascertained; em-
phasis should be given to produce with
small farmers, who should be networked
for procurement or partnership
90
• The overall market situation should be
carefully studied and a preliminary
product range defined in relation to both
the market and raw material availability;
the properties, quality, etc., of the
different products may also be initially
laid down
• In the light of the above, a broad system
design laying down proposed scales,
mechanisms for the procurement of raw
material and other supplies, marketing
strategies and human resources re-
quired/available should be worked out
• Technology needs/gaps should be
identified to match the above system
design and new/upgraded equipment
and machinery required, preferably
available domestically and maximally
capable of local maintenance/repair
should be listed with specifications
• Personnel at technical and managerial
levels should be fully and properly
trained
• Processes and protocols for different
products should be standardized, quality
control measures worked out and
mechanisms for quality management put
in place
• Trial production and trial marketing on
a pilot basis should be undertaken to
iron out production problems, assess
consumer/buyer response, assess costs
and viability and finalize product range
• Full-scale production and marketing
with continuous monitoring of feedback
2. Strategies and programmes
for effective technology transfer
and adoption
With the above requirements in mind, the
following major issues and other elements of an
envisaged strategy for the transfer of prospective
technologies to promote horticultural processing in
Asian developing countries may be considered:
 III. Issues and Strategies for the Transfer and Adoption of Prospective Technologies by SMEs and
Small Growers for Processing of Horticultural Produce in Developing Asian Countries
• Greater priority should be given to the
development of technology assessment
capabilities for sustainable development
and institutional linkages for evaluating
relevant technologies
• Emphasis must be on “technology
management”, i.e., integrating entre-
preneurship technology, finance and
marketing aspects instead of transfer of
technology/techniques only
• Agribusiness incubators should be set
up to encourage start-up entrepreneurs/
enterprises
• The technology package and system
design evolved and transferred should
be holistic, needs-based and context-
specific while being up to date with
respect to international quality and
hygiene standards and aiming at long-
term market opportunities to ensure
sustainability
• Adaptive research towards appropriate,
locale-specific and improved techno-
logies should be encouraged with the
active participation of NGOs and R&D
agencies
• Introduction of sophisticated processing
equipment and packaging materials
must be based on the specific needs of
domestic and export markets
• Decentralization of technology transfer
activities must be planned to assist
small farmers and institutional linkages
must be strengthened
• Training must focus on the promotion
of best practices and experiences of
other developing countries
• Backward linkages down to the farm
level should be built in, including
measures relating to the improvement of
produce quality, on-farm practices and
post-harvest handling
• Advocacy regarding horticultural policy
frameworks should also be articulated
• Linkages with complementary sectors
should be promoted wherever feasible
and promising
• Demonstration projects should be
encouraged to pilot test technology
transfer at the national, subregional and
regional levels
• “Clearing houses and IT kiosks” should
be set up to promote and transfer new
and innovative technologies
• Regional and subregional networks/
associations should be promoted to
facilitate R&D and enterprises coopera-
tion
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
REFERENCES
Arthey, David and Philip Ashurst, eds., 2000.
Fruit Processing: Nutrition, Products and
Quality Management (Aspen Publishers).
Dauthy, Mircea Enachescu, 1995. Fruit and
Vegetable Processing (FAO Agricultural
Services Bulletin No. 119) (Rome, FAO).
Dietz, H. Martin, Stephen Matee and William
Ssali, 2000. Assessment of the Small-scale
Food Processing Subsector in Tanzania and
Uganda: Study Report (ACP-EU).
Food and Fertilizer Technology Center, 1993.
“Postharvest losses of fruit and veget-
ables in Asia” <http://www.agnet.org/library/
abstract/ac1993d.html>.
Giovannucci, Daniele, ed., 2001. “The guide to
developing agricultural markets and agro-
enterprises” <http://wbln0018.worldbank.org
/essd/essd.nsf/Agroenterprise/agro_guide>.
Government of Canada, 1996. Focus India: A
Business Guide for Canadian Food Process-
ing Firms (Canada, Department of Foreign
Affairs and International Trade, South Asia
Division).
ILO, various articles available at <http://www.ilo.
org/public/english/dialogue/sector/sectors/
food.htm>.
Ludwig, J.H.D., 1997. “Processing and marketing:
FSD strategies review report” (RETA/
V00128) (Hanoi, Social Forestry Develop-
ment Project [SFDP] Song Da, Ministry of
Agriculture and Rural Development-GTZ-
GFA).
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Sahai, Suman, 1999. “Biotechnology capacity of
LDCs in the Asian Pacific Rim”, AgBio
Forum, vol. 2, No. 3 & 4 <http://www.
agbioforum.org/v2n34/v2n34a07-sahai.htm>
or <http://www.agbioforum.org/v2n34/v2n
34a07-sahai.pdf>.
Sansavini, Silviero, 1998. “Key issues facing
research in horticulture: an overview, pros-
pects and the role of cooperation” <http://
www.agrsci.unibo.it/wchr/wc5/sansavin.
html>.
UNCTAD, 1977. “Opportunities for vertical diver-
sification in the food processing sector in
developing countries”, paper presented at
the Expert Meeting on Vertical Diversi-
fication in the Food Processing Sector in
Developing Countries, Geneva, 1-3 Sep-
tember 1997 (TD/B/COM.1/EM.2/2) <http://
www.unctad.org/en/docs//c1em2d2.en.pdf>.
Vandendriessche, Henri. Tropical Fruit Processing
Industry: Case Studies of the Industry in
Developing Countries (Paris, OECD, Deve-
lopment Centre).
Verma, L.R. and V.K. Joshi, eds., 2000. Posthar-
vest Technology of Fruits and Vegetables:
Handling, Processing, Fermentation and
Waste Management (New Delhi, Indus).
World Bank, various articles of the World Bank’s
Agribusiness and Markets Thematic Group
<http://wbln0018.worldbank.org/essd/essd.
nsf/Agroenterprise>.
 IV. REPORT OF THE EXPERT GROUP MEETING
ON PROMOTING RESOURCE-BASED EXPORT-ORIENTED SMEs
FOR POVERTY ALLEVIATION IN ASIA AND THE PACIFIC
ESCAP secretariat
The Expert Group Meeting on Promoting
Resource-based Export-oriented SMEs for Poverty
Alleviation in Asia and the Pacific was organized
by the United Nations Economic and Social
Commission for Asia and the Pacific (ESCAP), at
the United Nations Conference Centre, Bangkok,
from 21 to 23 January 2003.
The overall objective of the Meeting was
to deliberate on the critical issues related to the
promotion of agro- and resource-based SMEs
which could be export-oriented and which could
utilize the resources available, especially in the
rural areas. The other objective was to explore
the possibilities for enterprise development in rural
areas with a view to alleviating poverty in those
areas.
A. Regional overview of the status
of the resource-based export-oriented
SMEs and their impacts on poverty
alleviation in Asia and the Pacific
The Expert Group Meeting pointed out that
SMEs played an important role in the economies
of all the Asian countries, irrespective of their
stage of development. In many countries of the
region, SMEs accounted for 40 to 50 per cent of
the total output, employing over two thirds of the
workforce. SMEs were generally seen as being
more employment-oriented and tended to have a
large presence in items like food processing,
leather, footwear, furniture, metal fabrication,
printing and in recent years producing parts and
components in a wide range of the engineering
industry. Since they used labour-intensive techno-
logy, their growth was considered to be beneficial
to labour-abundant economies for employment
generation and poverty alleviation. Capital pro-
ductivity was generally high in SMEs with no
clearly established evidence on total factor produc-
tivity.
SMEs were the continuous breeding ground
of entrepreneurs and a source of savings. As many
large firms had their roots in the SME sector, the
significance of small firms’ performance went
beyond their immediate contribution to output and
employment. In achieving the objectives of equita-
ble distribution of income and regional dispersal of
economic activities, especially in the promotion of
rural industrialization and rural resource utilization,
the SME sector could make a valuable contribu-
tion. Rural SMEs, by their location, created more
dispersed economic activities and even in the
urban areas, small-scale enterprises contributed to
the more even spread of work centres and popula-
tion. These features exerted a positive influence
on the distribution of income.
The Meeting also pointed out that Govern-
ments of the region had adopted a wide range of
institutional and promotional measures in the areas
of infrastructure, finance, human resources deve-
lopment and technology to spur the growth of
the SME sector. However, these policies and
measures had produced mixed results. In addition
to many gaps, a lack of coordination among the
financial support schemes and technical assistance
programmes was clearly evident in several
countries, especially the developing ones. Despite
many attempts at redressing the imbalance, many
economies still showed policy-induced biases
against SMEs. In some instances, financial and
fiscal policies tended to operate less in the interest
of SMEs and more in the interest of large-scale
93
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
enterprises. The large enterprises had superior
managerial and financial resources to deal with
government agencies, reinforcing their institutional
advantage over the SMEs.
During the course of deliberations, the
experts were of the opinion that despite the new
challenges caused by the rapid pace of globaliza-
tion and global integration of economic activities,
SMEs in the developing as well as developed
countries of the region needed to demonstrate
and establish a great deal of interdependence with
large enterprises, thereby generating benefits for
each other. This feature of their coexistence could
become a useful source of structural change
through the development of linkages between
them, either vertically or horizontally. As many
SMEs faced limited markets and were often
constrained by lack of resources to expand, sub-
contracting arrangements with large enterprises
could become an important element in the design
of a new strategy for the development of SMEs.
The rural-based SMEs in weaker economies such
as LDCs and economies in transition were likely
to face increased competition as investments in
physical infrastructure were increased. It was
pointed out that that would require significant
efforts, especially in the developing economies of
the region in creating more linkages across sectors
as well as between enterprises of different sizes.
New export markets could also be explored to
relax the constraints posed by a limited market.
The Meeting was of the opinion that the
major problem faced by SMEs in developing
economies was the lack of a skilled labour force
and technological upgrading. Those inadequacies
had prevented SMEs from being linked properly
in the economic restructuring process at both the
domestic and regional levels. It was therefore
desirable that in the context of changing techno-
logical situations and marketing strategies for
SMEs which constituted the backbone of the
economy in several economies, to receive fair
and appropriate treatment in overall planning and
development programmes. In that context, it was
emphasized that special measures targeting tech-
nology capacity-building for rural SME promotion
should be initiated. It was pointed out that
Governments as well as international donor agen-
cies could look into the possibilities of setting up
agro-based rural technology/business incubators.
94
It was also emphasized that research and develop-
ment activities for innovations in promoting rural
resource-based enterprises should be promoted
with the cooperation of government and academic
institutions. The experts also pointed out that un-
der the existing international agreements and
mandates, there were several mandatory require-
ments to meet the technical and environmental
standards. Furthermore, under the new round of
multilateral agreements, it was likely that new
mandates would evolve requiring SMEs from all
countries to abide by those mandates. It was there-
fore necessary to apprise the enterprises in rural
areas of these developments and to build up
capacities to meet the requirements. In that con-
text, linkages were necessary between research
institutes and enterprises.
The Meeting emphasized that access to
finance was one of the critical problems faced
by SMEs in both rural and urban areas. That
problem was quite critical regardless of whether
the enterprises were resource-based or otherwise.
The experts were of the opinion that subsidized
credit programmes had failed badly as they did
not actually benefit the targeted SMEs. It was
pointed out that the experience of Grameen Bank
in Bangladesh was a successful case in rural
enterprise financing and needed review for possi-
ble replication. It was also emphasized that the
strengthening of rural banking and other financial
facilities was urgently needed, including the
promotion of venture capital funding. The view
was also expressed that it was timely to explore
and institute market-oriented financial services in
the rural sector rather than subsidized credit. It
was further emphasized that there was an urgent
need to promote an efficient rural financial market
with the institutional capacity to mobilize rural
savings and leverage such funds through the
commercial markets for the benefit of rural
resource-based SMEs.
The Meeting strongly pointed out that the
Government’s role was very important in pro-
moting resource-based rural SMEs. A clear
transparent national policy framework with a clear
institutional mechanism for its implementation was
essential. It was also necessary for Governments
to be involved in the provision of rural infrastruc-
tures, rural financial reforms and land and property
 IV. Report of the Expert Group Meeting on Promoting Resource-based Export-oriented SMEs
registration systems but more importantly in human
resources development, including the promotion
of entrepreneurships. Furthermore, such skill de-
velopment should also become a priority area for
NGOs and the private sector, as the availability of
skills and entrepreneurship was vital for resource-
based enterprise development as well as for the
identification of proper opportunities in the rural
areas. The private sector as an end-user should
also be more involved in developing training
curricula. As NGOs had proved to be successful
in several countries in identifying and training
entrepreneurial talent at the grass-roots level, they
could also increase awareness of the governmental
human resources development projects. The
private sector could play an important role as
“mentor” for new entrants.
While Governments had to shoulder heavier
responsibilities in augmenting the supply of
adequately trained manpower, both technically and
managerially, it was also important for Govern-
ments in most of the developing countries to
improve and re-engineer the public institutions to
assist SMEs. There was an urgent need to reorient
and reform public institutions so that they could
adequately and appropriately respond to the needs
of rural private enterprises.
B. Evolving model of
programmes for enhancing the
competitiveness of SMEs, and issues
and strategies for the transfer and
adoption of prospective technologies for
processing horticultural produce
A presentation highlighted the specific
programme activities initiated by APCTT in pro-
moting rural industrialization and enhancing the
competitiveness of resource-based SMEs in
selected sectors such as bamboo, fruits and
vegetables, herbal medicine and garment sectors.
The emphasis of the programmes was on streng-
thening technology management capabilities at
both the institutional and enterprise levels. The
approach was to evolve model programmes to
address capacity-building issues relating to SMEs
in facing local and global competition in the
new WTO regime and knowledge-based economy.
for Poverty Alleviation in Asia and the Pacific
In view of the high growth potential existing
for SMEs in the fruits and vegetables processing
sector, the presentation dealt with the developmen-
tal issues involved in small-scale and high-quality
processing techniques in the present market
scenario and the strategies and technology transfer
issues introduced in aspects pertaining to the
production system, technology choice strengthen-
ing backward linkages and capacity-building for
human resources development and in the techno-
logy area, i.e., market development. With this in
view, the specific demonstration projects being
undertaken by the Centre in cooperation with
ESCAP, national and other international agencies
were elaborated. The methodology stressed the
need to evolve new mechanisms to address the
problems of microenterprises and also integrate
technology management dimensions in enhancing
the competitiveness of both the enterprises and
intermediary agencies.
The Meeting emphasized the role of inter-
national organizations especially in strengthening
entrepreneurship development programmes and
in promoting agribusiness incubator capabilities
among SMEs in rural areas. It was also pointed
out that in order to sustain the long-term competi-
tiveness of resource-based SMEs, there was also a
need to promote and further strengthen industrial
clusters in selected traditional sectors. The appli-
cation of ICT was considered to be an important
tool in strengthening the linkages between
products, markets and technology. This must form
an important component in the demonstration
activities planned in member countries to enhance
networking at various levels.
C. Country experiences
The various country presentations high-
lighted the policy issues and other facilities
implemented at the national level with a view to
promoting resource-based SMEs.
In Bangladesh, the main thrust in SME
promotion was in the development of agro-based
processing and essential consumer goods products.
The important area of investment was in agricul-
tural tools and equipment, irrigation pumps, motors
95
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
and other equipment, fertilizers and insecticides,
dyes and chemical, leather and rubber products,
rural transport equipment, sports goods, food, fruit
and vegetable preservation and processing, fish,
poultry and cattle feed, cotton spinning, textiles,
handlooms, hosiery and silk products, machine
tools, poultry and dairy products. The techno-
logical levels of the majority of SMEs in Bangla-
desh were low. Many governmental, semi-govern-
mental and non-governmental organizations and
other institutions at the national level were respon-
sible for providing assistance to entrepreneurs
through SMEs in the country. Industrial credit in
Bangladesh was financed through a multi-agency
system consisting of: (a) government-sponsored
industrial banks – Bangladesh Shilpa Bank, Bang-
ladesh Shilpa Rin Sangshtha; and (b) commercial
banks and specialized financial institutions like
Bangladesh Krishi Bank, the Bank of Small Indus-
tries and Commerce and the Bangladesh Small and
Cottage Industries Corporation (BSCIC).
In Cambodia, the small and medium
industries constituted 98 per cent of total industrial
establishments and basically consisted of food,
beverages and tobacco and wood-based products.
In recent years, garments had emerged as an
important export item. The SME sector suffered
from low technological levels, lack of formal
finance and inadequacy of trained manpower, both
technical and managerial. There was an urgent
need to initiate legal and regulatory measures to
support and promote SMEs in Cambodia.
In China, during the past few years, with the
deepening of reform measures and opening up,
especially after the country’s entry into WTO, the
economy was increasingly in transition towards
market economy. Thus, a more favourable envi-
ronment for SME development had been created.
Some of the key strategies that China was
implementing to boost economic development were
expected to effectively push SME development
forward. Such policies were:
(a) Establishing special laws to guarantee
SMEs’ healthy development;
(b) China’s western region development
strategy to boost SME development;
96
(c) Lifting restrictions on foreign trade
licences to benefit the development of SMEs’
foreign trade business;
(d) Tertiary sector development to enable
SMEs to further exert their advantages;
(e) Strengthened guidance to SMEs in
their technical innovations and personnel training;
(f) Consolidating regional economic
cooperation and boosting the export of resource
products.
Owing to all the factors mentioned above, it
was expected that the Chinese SMEs would
strengthen their development environment and
would have a more favourable environment in the
future. In the years to come, China was expected
to realize comprehensive socio-economic progress
by boosting SME development and help to free
more people from the fetters of poverty.
In India, SMEs had occupied an important
place for a long time. SSI consisted of 3.5 million
units and employed 19.3 million people. Its share
in industrial production was 39 per cent and in
exports, 34 per cent in 2001. The SSI sector had
been growing at the rate of 6 per cent and
consisted of 8,000 items. The technologies used in
the SSI sector ranged from simple traditional
village types to the most sophisticated ones. Major
production items included drugs and pharmaceu-
ticals, pesticides, fertilizers, synthetic detergents,
textiles, leather and leather products, agricultural
implements, etc. The SSI sector had always been
treated as an area of employment promotion in the
context of the Indian economy. Various measures
at both the central and state levels had been
enacted. The major challenge was still to upgrade
the technological levels of a large number of
establishments in the SSI sector.
Malaysia had relied on the production
and export of primary commodities for a certain
period of time. SMEs, which were defined as
companies with annual sales turnover not exceed-
ing RM 25 million and full-time employees up to
150, accounted for 90 per cent of total manu-
facturing establishments and contributed 33.3
per cent to the total manufacturing value added.
 IV. Report of the Expert Group Meeting on Promoting Resource-based Export-oriented SMEs
The Government, with the active support of the
private sector, had launched several programmes
to assist SMEs in such areas as (1) industrial
linkages, (2) technology development, (3) techno-
logy acquisition, (4) skills development, (5) market
development, (6) infrastructure development and
(7) advisory services. Special programmes for
export-oriented SMEs consisted of (1) tax relief,
(2) duties and sales tax exemption, (3) other finan-
cial incentives and schemes, etc. However, the
SMEs in Malaysia needed technological upgrading
and reduction in factor costs if they were to
compete at the global and regional levels by
improving the export competitiveness.
In Nepal, SMEs, which had fixed assets of
less than Rs 100 million (US$ 1 = Rs 78), were
viewed as an important source of employment
generation and rural industrialization, helping to
create backward and forward linkages in the
economy and thereby increasing the rural income.
The Government provided various incentives and
facilities including interest rebates in selected
priority areas as well as institutional support for
the choice and adaptation of modern technologies.
Most of the SMEs suffered from technological
difficulties and lack of skilled manpower.
In the Republic of Korea, SMEs accounted
for 84 per cent of total employment and 35 per
cent of total exports. Various arrangements such
as the Small and Medium Business Administration
(SMBA), the Small and Medium Business Centre
(SMBC) and other SME-related associations had
been set up. In recent years the Government had
been putting a great deal of emphasis on SME
development in the Republic of Korea, instead of
the earlier emphasis on the “Chaebol” system.
In Thailand, SMEs had always occupied an
important place. In recent years the Government
had implemented a new “one village one product”
initiative, which was aimed at building self-
reliance at the local community level, by utilizing
local resources and adding higher value. Through
its various offices, especially the Ministries of
Agriculture and Cooperatives, Commerce, and
Science and Technology, the Government provided
various services in the areas of production,
management, marketing, standardization, quality
control and product design. Most of the products
for Poverty Alleviation in Asia and the Pacific
consisted of textiles and garments, food and herbs,
ceramics and other handicrafts. Although the
initiative had been in operation for only two years,
34 per cent of the products under the scheme were
already being exported.
In Viet Nam, SMEs played an important role
in the nation’s economic growth in creating
employment, in export promotion and in reducing
poverty. However, SMEs in general were facing
serious problems in the areas of adequate provision
of capital, low levels of technological capabilities
and information on markets. The Government had
implemented several measures to support SMEs,
however, the implementation of those measures
needed to be speeded up.
D. Recommendations
At the national level, the development of
agro-based and resource-based SMEs calls for
various policies, including the following:
(a) General policies
(i) In general, the private sector should
be allowed to take the leading role in
the development of SMEs. However,
Governments should create an enabl-
ing environment for the sustained
growth and development of SMEs
by strengthening legal institutional,
administrative and financial set-ups and
formulating appropriate policies at both
the micro and macro levels.
(ii) Member countries should take appro-
priate policy and operational measures
to promote backward and forward link-
ages among resource-based small and
medium industries and large industries
with a view to developing resource-
based and export-oriented SMEs.
(b) Fiscal policies
Instead of providing special tax holidays and
other fiscal incentives, the focus should be on
strengthening the rural infrastructure and public-
private partnerships for the dispersal of SMEs and
balanced regional development.
97
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
(c) Marketing
Sectors with a competitive advantage need
to be identified and sector-specific innovative
marketing support devised. SMEs need to be
promoted as ideal destinations for franchising and
outsourcing. In this context, ICT must be used
as an effective tool for enhancing marketing
capabilities in rural areas. Member countries can
support the initiatives of ESCAP and other inter-
national agencies should support member country
initiatives to enhance the competitiveness of
SMEs through training programmes, demonstration
projects, trade fairs and other market promotion
activities.
(d) Finance
Member countries should focus on
expanding the financing base through the micro-
credit arrangement in rural areas, where micro-
enterprises may develop. In this respect, the
experience of some member countries in intro-
ducing credit cards, credit ratings, credit guarantee
systems and village funding schemes for small-
scale industries may be particularly relevant for
other developing countries.
(e) Entrepreneurship development
Special programmes need to be evolved at
the national level in cooperation with bilateral and
international organizations for skills upgrading and
98
entrepreneurship development, including women
entrepreneurs for small-scale enterprises. The
member countries suggested evolving pilot demon-
stration projects in selected sectors to enhance the
capabilities of SMEs.
(f) Technology
As technology upgrading and quality control
are critical factors for competitiveness in the
context of the WTO regime and knowledge-based
economy, it is necessary to focus on technology
upgrading issues and evolve new mechanisms such
as industrial clusters and agribusiness incubators.
Member countries should focus on improving their
capabilities in technology assessment, IPR and
other management through training programmes.
(g) Infrastructure
Improvement in infrastructure facilities for
the SMEs in rural areas is necessary to enhance
their efficiency and productivity.
(h) Regional cooperation
It is necessary to evolve programmes to
strengthen networking and share experience on
best practices for promoting SMEs. It was stressed
that ESCAP should strengthen its activities to
support the initiatives of member countries in that
regard.
 V. FOREIGN DIRECT INVESTMENT: DETERMINANTS,
TRENDS IN FLOWS AND PROMOTION POLICIES
Joong-Wan Cho*
A. Globalization and foreign
direct investment
Globalization is an inevitable and irrevers-
ible process, and dealing with the imperatives of
globalization capitalizing on its positive aspects
and mitigating the negative ones is perhaps the
most important challenge for the new millennium.
Globalization has enhanced the opportunities for
success, but it has also posed new risks to deve-
loping countries.
Globalization has many faces; however,
globalization is first and foremost comprehended
in economic and financial terms. In this sense, it
may be defined as the broadening and deepening
linkages of national economies into a worldwide
market for goods, services and especially capital.
As a result of a revolution in telecommunications
and information technologies, the last 15 years
have witnessed dramatic increases in trade linkages
and cross-border capital flows, as well as radical
changes in the form, structure and location of
production.
Perhaps the most prominent face of globali-
zation is the rapid integration of production and
financial markets over the last decade; that is, trade
and investment are the prime driving forces behind
globalization. Foreign direct investment (FDI)
has been one of the core features of globalization
and the world economy over the past two decades.
It has grown at an unprecedented pace for more
than a decade, with only a slight interruption
during the recession of the early 1990s. More
* Economic Affairs Officer, Investment and Enterprise
Development Section, Trade and Investment Division,
Economic and Social Commission for Asia and the
Pacific.
firms in more industries from more countries are
expanding abroad through direct investment than
ever before, and virtually all economies now com-
pete to attract multinational enterprises (MNEs).
As a result, global flows reached a historic high
of US$ 340 billion with the global stock of FDI
reaching US$ 3,266 billion in 1996.
This trend has been driven by the complex
interaction of technological change, evolving
corporate strategies towards a more global focus
and major policy reform in individual countries.
The past two decades have witnessed an unparal-
leled opening and modernization of economies in
all regions, encompassing deregulation, demono-
polization, privatization and private participation in
the provision of infrastructure, and the reduction
and simplification of tariffs. An integral part of
this process has been the liberalization of foreign
investment regimes. Indeed, the wish to attract
FDI has been one of the driving forces behind
the whole reform process. Although the pace
and scale of reform have varied depending on
the particular circumstances in each country, the
direction of change has not.
Most developing countries were starting to
look to FDI as a source of capital when flows of
official development assistance (ODA) declined
sharply in the 1990s. FDI usually represented a
long-term commitment to the host country and
contributed significantly to gross fixed capital
formation in developing countries. FDI had
several advantages over other types of capital
flows, in particular its greater stability and the fact
that it would not create obligations for the host
country, as had been observed in the context of the
Asian financial crisis of 1997-1998.
Emerging issues in the areas of foreign
direct investment are an essential part of the core
process of globalization. Of particular urgency is
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

the issue of the quality of the policies that need to
be adopted by countries as a result of the growth
of FDI and the role it plays in their competitive
position in global and regional markets. FDI can
play a key role in improving the capacity of the
host country to respond to the opportunities offered
by global economic integration, a goal increasingly
recognized as one of the key aims of any develop-
ment strategy.
B. Foreign direct investment flows:
determinants and recent trends
1. Review of host country
determinants of FDI
Nowadays, virtually all countries are
actively seeking to attract FDI, because of the
expected favourable effect on income generation
from capital inflows, advanced technology,
management skills and market know-how. It
would be useful to review the key determinants
and factors of FDI based on the theories of interna-
tional investment.
Table V.1 lists three key determinants and
factors associated with the extent and pattern of
FDI in developing host countries: attractiveness of
the economic conditions in host countries; the
policy framework towards the private sector,
trade and industry, and FDI and its implementation
by host governments; and the investment strategies
of MNEs.
The review of host country determinants
is closely linked with the role of national policies
and especially the liberalization of policies, a key
factor in globalization, as FDI determinants. Loca-
tion-specific determinants have a crucial influence
on a host country’s inflow of FDI. The relative
importance of different location-specific determi-
nants depends on at least three aspects of invest-
ment: the motive for investment (e.g., resources,

Table V.1. Host country determinants of FDI

• Markets Size; income levels; urbanization; stability and growth prospects;

access to regional markets; distribution and demand patterns.
Economic conditions • Resources Natural resources; location.
• Competitiveness Labour availability, cost, skills, trainability; managerial technical
skills; access to inputs; physical infrastructure; supplier base;
technology support.

• Macro policies Management of crucial macro variables; ease of remittance;

access to foreign exchange.
• Private sector Promotion of private ownership; clear and stable policies; easy
Host country policies entry/exit policies; efficient financial markets; other support.
• Trade and industry Trade strategy; regional integration and access to markets;
ownership controls; competition policies; support for SMEs.
• FDI policies Ease of entry; ownership, incentives; access to inputs; transparent
and stable policies.

• Risk perception Perceptions of country risk, based on political factors, macro

management, labour markets, policy stability.
MNE strategies • Location, sourcing, Company strategies on location, sourcing of products/inputs,
integration integration of affiliates, strategic alliances, training, technology
transfer.

Source: Sanjaya Lall, Attracting Foreign Investment: New Trends, Sources and Policies, Economic Paper 31 (Commonwealth
Secretariat, 1997).

100
 V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies
market or efficiency-seeking), the type of invest-
ment (e.g., services or manufacturing), and the size
of the investors (small and medium MNEs or large
MNEs) (UNCTAD 1998a).
As a consequence of globalization and
economic integration, one of the most important
traditional FDI determinants, the size of national
markets, has decreased in importance. At the same
time, cost differences between locations, the
quality of infrastructure, the ease of doing business
and the availability of skills have become more
important (UNCTAD 1996). Traditional economic
determinants, such as natural resources and
national market size for manufacturing products
sheltered from international competition by high
tariffs or quotas, still play an important role in
attracting FDI by a number of developing and
developed countries as well as economies in
transition (e.g., China, Australia and Kazakhstan).
The economic determinants related to large
markets, trade barriers and non-tradable services
are still at work and account for a large share
of worldwide FDI flows. Although FDI remains
strongly driven by its traditional determinants, the
relative importance of different locational determi-
nants for competitiveness-enhancing FDI is shift-
ing. While low-cost labour remains a locational
advantage, the increasingly sought-after advantages
are competitive combinations of wages, skills and
productivity (UNCTAD 1998a).
With the creation of regional integration
frameworks (e.g., ASEAN), access to the regional
market supersedes access to national markets as an
important FDI determinant. This also depends on
how well the country is integrated into the regional
bloc in terms of policy harmonization as well as
physical accessibility, which gives policy determi-
nants an increasing importance.
For foreign investors, the host country
policies on the repatriation of profits and capital
and access to foreign exchange for the import of
intermediaries, raw materials and technology are
particularly important. The pattern of recent FDI
flows supports the conclusion that liberal policies
on technology, which tend to go hand in hand with
more liberal policies in general, serve to attract
more and better foreign investments.
Core FDI policies consist of rules and
regulations governing the entry and operations of
foreign investors, the standards of treatment
accorded to them and functioning of the markets
within which they operate (UNCTAD 1997).
Among the supplementary policies used to
influence locational decisions, trade policy plays
the most prominent role. Asian countries have
used both FDI and trade policies to encourage
MNEs to contribute to their export-oriented
development strategies. Other related policies may
include privatization policies and policies deter-
mined by international agreements, such as bila-
teral investment treaties (BITs). BITs augment the
international dimension to national direct invest-
ment policies focused on insurance and protection
and other broader issues. However, as in the case
of BITs, it is precisely the function of the enabling
framework to allow other determinants, especially
economic determinants, to assert their influence.
2. Summary of recent trends
in FDI flows
After a decade of steady and strong growth,
foreign direct investment flows declined sharply
in 2001 and continued their decline in 2002,
decreasing further by 27 per cent. In 2002, the
volume of FDI inflows reached about US$ 534
billion, which contrasts with US$ 735 billion in
2001, and is equivalent to a third of the US$ 1,492
billion peak in 2000 (see table V.2). A major
factor behind this decline is the slowdown in the
world economy, which has reduced world demand
and accentuated and accelerated the global restruc-
turing process of major MNEs in sectors character-
ized by excess capacity. The decline in FDI in
2001 also reflects the aftermath of the 11 Septem-
ber 2001 incident.
The decline in 2001 was mainly con-
centrated in developed countries as a result of a
considerable drop in cross-border mergers and
acquisitions (M&As). FDI inflows to developed
countries decreased by 59 per cent, compared with
14 per cent in developing economies. In 2002,
similar trends continued with a major decline in
developed countries and a smaller decline in
developing countries. FDI in 2001 was higher
than that in 1998, after which dramatic increases
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific

Table V.2. FDI inflows by region, 1997-2001

(Billions of US$)

Host region 1997 1998 1999 2000 2001

World 478.1a 694.5a 1 088.3a 1 491.9a 735.1a

Developed economies 267.9 484.2 837.8 1 227.5 503.1
(56.0)b (69.7)b (77.0)b (82.3)b (68.4)b
Developing economies 191.0 187.6 225.1 237.9 204.8
(39.9)b (27.0)b (20.7)b (15.9)b (27.9)b
Africa 10.7 9.0 12.8 8.7 17.2
(5.6)c (4.8)c (5.7)c (3.7)c (8.4)c
Asia and the Pacific 106.0 96.4 103.0 133.8 102.3
(55.5)c (51.4)c (45.8)c (56.2)c (49.9)c
Latin America and the Caribbean 74.3 82.2 109.3 95.4 85.4
(38.9)c (43.8)c (48.5)c (40.1)c (41.7)c
Central and Eastern Europe 19.1 22.6 25.4 26.6 27.2
(4.0)b (3.3)b (2.3)b (1.8)b (3.7)b

Source: World Investment Report 2002: Transnational Corporations and Export Competitiveness (UNCTAD/WIR/2002).
a Including FDI inflow figures of least developed countries and oil exporting countries.
b Percentage share of the world total.
c Percentage share of the developing economies total.

in cross-border M&As led to record flows in In spite of the substantial liberalizing

1999 and 2000. This is the third downward cycle
in FDI since the late 1980s, which reflects such
short-term factors as business cycles, portfolio
investment sentiment and M&As, which work in
parallel with longer-term factors (UNCTAD
2002).
The economic slowdown has intensified
competitive pressures, forcing companies to search
for cheaper locations. This may have resulted
in increased FDI in activities that benefit from
relocation to low-wage economies. FDI outflows
may also have risen from countries in which
domestic markets have been growing slower than
foreign markets. There are signs that both factors
have contributed to the recent increase of Japanese
FDI in China. In general, there has been a redis-
tribution of FDI towards developing countries,
where growth has reportedly been higher than
in developed countries. The rise in developing
countries’ shares may also reflect the further
liberalization of their FDI regimes, which was
reinforced by the growth in the number of bilateral
investment promotion and protection treaties.
measures of the 1990s, developing countries still
attract less than a third of world FDI flows, and
these flows remain highly concentrated. In 2001,
the five largest host countries in the developing
world received 62 per cent of total inflows. The
decline in FDI flows in 2001 largely reflects a fall
in cross-border M&As, the principal vehicle since
the mid-1990s for FDI in developed countries. It
could be argued that 2001 saw a return of FDI to
normal levels after the surge of M&A activities in
the period 1999-2000. In developing countries and
economies in transition, FDI in 2001 in fact proved
fairly resilient despite the global downturn and the
11 September 2001 incident. This resilience was
more pronounced in comparison with inflows of
portfolio investment and bank lending. On a net
basis (inflows less outflows), FDI flows were the
only positive component of private capital flows to
developing countries and economies in transition
during 2000-2001 (UNCTAD 2002).
It is worthwhile to note that FDI in develop-
ing countries has been larger than official inflows
since 1997. It was 10 times larger than bilateral

102
 V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies

ODA in 2000. This contrasts with the latter half
of the 1980s, when the two were about equal. It
needs to be stressed, however, that for the least
developed countries, ODA remains of paramount
importance.
3. FDI inflows to the
Asian and Pacific region
FDI flows to the developing economies of
Asia and the Pacific declined from US$ 134 billion
in 2000 to US$ 102 billion in 2001. Much of the
decline was due to an over 60 per cent drop in
flows to Hong Kong, China, which had recorded a
massive inflow of US$ 62 billion in 2000 (see
table V.3).
FDI flows to China, the largest recipient
among the developing countries for most of the
1990s, regained their momentum after three years
of stagnation, to reach US$ 47 billion in 2001.
The upward trend in FDI is likely to be sustained
in the coming years, particularly in the light of the
country’s accession to WTO in November 2001.
In addition to investment by new entrants,
reinvested earnings of foreign affiliates in China
have become an important source of FDI, account-
ing for about one third of the total inflows during
2000-2001. FDI continues to play a prominent
role in China’s economy. For example, foreign
affiliates now account for 23 per cent of the total
industrial value added, 18 per cent of tax revenues
and 48 per cent of total exports (MOFTEC 2001).

Table V.3. FDI inflows to the Asian and Pacific region, 1997-2001
(Millions of US$)

Host subregion/economy 1997 1998 1999 2000 2001

Asia and the Pacific 105 978 96 386 103 008 133 795 102 264
Asia 105 828 96 109 102 779 133 707 102 066
West Asia 5 645 6 705 324 688 4 133
Islamic Republic of Iran 53 24 35 39 33
Turkey 805 940 783 982 3 266
Central Asia 3 844 3 152 2 466 1 895 3 569
Azerbaijan 1 067 1 085 510 130 227
Kazakhstan 2 107 1 233 1 468 1 278 2 760
South, East and South-East Asia 96 338 86 252 99 990 131 123 94 365
China 44 237 43 751 40 319 40 772 46 846
(41.7) (45.4) (39.1) (30.5) (45.8)
Hong Kong, China 11 368 14 770 24 596 61 938 22 834
(10.7) (15.3) (23.9) (46.3) (22.3)
India 3 619 2 633 2 168 2 319 3 403
Indonesia 4 677 -- 356 -- 2 745 -- 4 550 -- 3 277
Malaysia 6 324 2 714 3 895 3 788 554
Philippines 1 249 1 752 578 1 241 1 792
Republic of Korea 2 844 5 412 9 333 9 283 3 198
Singapore 10 746 6 389 11 803 5 407 8 609
Thailand 3 626 5 143 3 561 2 813 3 759
Pacific 150 277 229 88 198
Fiji -- 11 140 -- 79 -- 69 -- 3
Papua New Guinea 88 110 296 130 179

Source: World Investment Report 2002: Transnational Corporations and Export Competitiveness (UNCTAD/WIR/2002).
Notes: Figures in parentheses ( ) denote percentage share of the regional total.
Negative figures denote disinvestment.

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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
Turning to North-East Asia, the FDI boom
has subsided with inflows falling from US$ 76
billion in 2000 to US$ 30 billion in 2001. FDI in
the Republic of Korea fell by some 67 per cent in
2001 to US$ 3 billion as the surge of post-financial
crisis M&As subsided.
Flows to South-East Asia stagnated at
US$ 13 billion; part of the reason was continued
divestment (US$ 3 billion in 2001) in Indonesia,
where divestments have exceeded FDI inflows
since late 1998. In Malaysia, FDI remained stag-
nant, whereas inflows to the Philippines rose from
US$ 1.2 billion in 2000 to US$ 1.8 billion in 2001.
FDI in Singapore also increased by 59 per cent to
US$ 9 billion, the first time since 1998, but still
below the peak of US$ 11 billion reached in 1997.
Faced with the erosion of its competitiveness in
electronics vis-à-vis other countries in the region,
Singapore has designated the biomedical industry
as the next pillar of its growth area, and has
been improving infrastructure and targeting
high-potential companies in that industry through
various investment funds, including venture
capital. FDI in Thailand increased by US$ 1
billion to US$ 3 billion and the MNEs continued
to consolidate their regional auto-manufacturing
bases in Thailand. Viet Nam is entering a new era
as host to FDI strengthened by the bilateral trade
agreement with the United States, and the prospect
of its accession to WTO.
Inflows into South Asia reached US$ 4
billion, a 32 per cent increase over 2000. Out of
the subregion’s total FDI, US$ 3.4 billion went to
India, a 47 per cent increase over the previous
year. India, which is by far the largest recipient in
the region, has been taking steps to liberalize its
FDI regime further. Inflows into other economies
in the subregion stagnated or declined apparently
owing to perceived instability in the investment
environment, particularly after the 11 September
2001 incident.
FDI in Central Asia rose by 88 per cent in
2001, to US$ 3.6 billion, driven by the doubling
of inflows into Kazakhstan (US$ 2.8 billion).
Resource-based activities, particularly in copper
and zinc as well as in oil and gas extraction, took
up the largest share (77 per cent) of inflows into
the subregion.
104
The Pacific region remains marginal in
terms of FDI inflows, with US$ 200 million in
2001. Political instability coupled with relatively
poor infrastructure added to the structural con-
straints of location and size in the Pacific island
countries.
Overall, the prospects for FDI in the Asian
and Pacific region remain bright. Surveys suggest
Asia will continue to be an important location
for the expansion of the international production
system, where China topped the list in Asia,
followed by Indonesia and Thailand. Greenfield
investment will once again become the preferred
option by far for FDI entry into the region follow-
ing the M&A boom during the financial crisis
(MIGA 2002).
C. Host country FDI promotion
policy trends
Recently, the FDI inward policy regimes of
most countries around the world, both developed
and developing, have taken on a liberal framework.
The liberalization of core FDI policies consists of
reducing barriers for inward FDI, strengthening
standards of treatment for foreign investors and
ensuring the proper functioning of markets and
a level playing field for all investors. Ironically,
with policy regimes becoming increasingly open
and similar, many countries have found that they
need to make further efforts to attract FDI in
such a competitive climate; FDI is now recognized
as one of the most important sources of much-
needed capital and managerial, technical and
marketing know-how not only in the manufactur-
ing industry, but also in services and the resource-
based industry. Moreover, world-wide liberaliza-
tion convergence increases the locational choice
for FDI.
Measures aimed at attracting FDI are not
always sufficient to ensure the greatest possible
benefits that countries expect from FDI, such as
technology transfer to foreign affiliates and domes-
tic firms, more and deeper linkages with local
enterprises, higher exports, higher employment and
upgraded skills. At the same time, host countries
seek to reduce any negative effects related to
 V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies
foreign investment, such as financial volatility,
anti-competitive practices, abusive transfer pricing,
the crowding-out of domestic firms and excessive
dependence on foreign ownership. In brief, for
host countries the central concern is to maximize
the positive effects of FDI and minimize its
negative effects.
When considering what host country
policies could effectively help developing countries
and economies in transition to attract FDI and
benefit from it, a wide range of host country policy
measures were implemented, for example, to:
• Create a sound and stable macro-
economic and political environment,
including a transparent and predictable
business environment
• Develop physical and technical infra-
structure, and promote clusters
• Develop human resources
• Develop domestic enterprise capabili-
ties, especially SMEs
• Address environmental and social
concerns
• Adopt competition laws and reduce
restrictive business practices
• Influence the behaviour of investors
by offering investment incentives and
imposing performance requirements
• Create larger markets through regional
and bilateral cooperation
• Protect investment, including intellec-
tual property rights
Countries have implemented active FDI
promotion policies that have evolved over the
years, as the objective has shifted from simply
attracting a desired quantity of FDI to attracting
quality FDI with a highly beneficial impact on
the domestic economy. In the first generation of
investment promotion policies, many countries
adopt market-friendly policies. They liberalize
their FDI regimes by reducing barriers to inward
FDI, strengthening standards of treatment of
foreign investors and assigning a greater role
to market forces in resource allocation. Some
countries can go a long way in attracting foreign
investment with these steps, if the basic economic
determinants for obtaining FDI are right.
On the issue of FDI performance require-
ments and effectiveness, almost all countries, both
developed and developing host countries, have had
recourse to such requirements at some stage in
their development. Specific objectives for the use
of performance requirements include:
• Deepening and broadening of the
industrial base
• Generation of employment opportunities
• Linkage promotion
• Export generation and performance
• Trade balancing
• Regional development promotion
• Avoidance of restrictive business
practices
• Technology transfer
Strong local firms attract FDI; the entry of
foreign affiliates, in turn, enhances the competi-
tiveness and dynamism of the domestic enterprise
sector. The strongest channel for diffusing skills,
knowledge and technology from foreign affiliates
is backward linkages with local firms. This can
contribute to the growth of a vibrant domestic
enterprise sector, the foundation of economic
development. Foreign affiliates, in turn, can
benefit from backward linkages as they reduce
costs and enhance access to local tangible and
intangible assets. Hence there is a substantial
mutual interest between foreign affiliates and
domestic firms in creating and deepening back-
ward linkages. With respect to the technology
transfer requirement, technology and know-
how flowing from parent firms to their foreign
affiliates are one of the principal channels for
international technology transfer. MNEs are the
repositories of much of the world’s most advanced
technologies, and most technology transfer
takes place within the MNEs. Intrafirm payments
of royalties and licence fees account for the
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
majority of the total sales of these transactions.
More competition in host country markets
increases the pressure and incentives for MNEs
to transfer more and better-quality technology to
affiliates.
In a globalizing economy, however, per-
formance requirements are used less frequently,
because they are increasingly considered an
unnecessary bother, which might discourage
foreign investors. In contrast, the use of invest-
ment incentives has proliferated. Sometimes coun-
tries even engage in direct competition for specific
investment projects with financial and other incen-
tives, and such competition can be very costly.
In spite of this competition, there is considerable
evidence to suggest that incentives are a relatively
minor factor in the location decisions of MNEs
relative to other locational advantages.
Countries have used various policies and
measures to attract FDI and increase the benefits
from it, from targeted promotion policies to
incentives and performance requirements, as
well as measures to support the enterprise sector.
Many of these measures, however, have been
subjected to new international rules in the frame-
work of multilateral agreements such as the
WTO Agreements on TRIMs and on Subsidies and
Countervailing Measures (SCMs). For example,
local content requirements have been phased out
by most countries in line with the requirement
of the TRIMs Agreement. At the same time, FDI
and trade liberalization, as well as more intense
competition for FDI, have reduced the reliance on
other investment performance requirements.
In the second generation of investment
promotion policies, Governments actively seek to
attract FDI by marketing their countries, which
usually leads to the setting-up of national invest-
ment promotion agencies (NIPAs).
The third generation of investment promo-
tion policies takes as a starting point the enabling
framework for FDI and a proactive approach to
attracting FDI. It then proceeds to target foreign
investors at the level of industries and firms to
meet their specific developmental priorities, for
example, in export promotion or linkage creation.
106
The key to the success of these new investment
promotion strategies is that they actually address
one of the basic economic FDI determinants while
understanding the changing locational strategies
of MNEs. Regardless of the level at which FDI
is promoted, the competitiveness of the domestic
enterprise sector and a pool of skilled people are
the keys to the product to be marketed. Another
important element of targeting is a sound analysis
of MNEs’ strategies affecting the choice of
location. In response to the increased geographical
and functional specialization in many industries,
countries may find it useful to identify production
niches through which they can link up with
international production systems.
There are, however, risks involved in
developing a more targeted and focused strategy.
Resources may be focused on attracting invest-
ments that do not materialize, or considerable
efforts and resources may be devoted to seeking
the wrong types of firms, or firms that would have
invested in any event. Improving the overall
policy environment for investment should not be
sacrificed to a selective focus on attracting a few
firms. Also, for most developing countries, the
investors to target will probably not be the largest
MNEs in the world, but smaller firms within the
appropriate industry or activity. Although adopting
an investor-targeting strategy can clearly be
effective in attracting FDI, it presents considerable
challenges for Governments. Effective targeting
requires business-oriented NIPAs with well-
developed links to the private sector as well as
other branches of government, to identify and
create comparative advantages that are sustainable
(UNCTAD 1997).
In today’s highly competitive world
economy, the ability to attract FDI, especially high-
quality FDI, increasingly needs an investment
product. One implication of this is that countries
that want to attract high-quality FDI and benefit
from it need to develop differentiated and efficient
clusters that offer real and identifiable locational
advantages to international investors and even-
tually become brand names recognizable to any
national or international investor seeking this
particular configuration of advantages. Bangalore
in India has such a brand name for the
 V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies
development of software, as do Singapore and
Hong Kong, China, for financial services and
regional headquarters. It must be recognized, how-
ever, that such a targeted approach, and especially
the development of a locational brand name, is
difficult, costly and takes time. Moreover, a more
targeted and fine-tuned approach, which in the
end seeks to match the specific functional needs
of corporate investors with specific locational
products, requires fairly sophisticated institutional
capacities. It is, however, facilitated by the
proliferation of sub-national agencies, and also
even by municipal investment promotion agencies
that as a rule, seek to market more specific invest-
ment products. But this gives rise to another
challenge: the need to coordinate polices across
various administrative levels in a country. Proper
consultation and coordination mechanisms between
central and provincial or municipal governments
need to be strengthened for proper and efficient
investment attraction (ESCAP 2002).
In sum, the continuous need for countries to
move up the ladder and improve the attractiveness
of their locational advantages is a challenging task
for policy makers in developing countries and
calls for sophisticated and comprehensive policy
approaches. Regardless of the level at which FDI
is promoted, and regardless of the precise mix of
the three basic investment promotion strategies
pursued, the competitiveness of the domestic
enterprise sector, including a pool of skilled
people, is the key to the investment product.
Investment facilitation measures
Host Governments have a choice between
allowing in foreign investment without specific
approval or subjecting proposed investment to
screening and approval against specific criteria.
While the trend to creating a more enabling FDI
framework continues, many countries still evaluate
and screen FDI at the point of entry. The time
required to obtain the various licences, permits and
approvals needed can sometimes be considerable
and can negatively influence the cost-efficiency of
a location; the cost in terms of both money and
time are especially important to export-oriented
foreign investors.
Investment and business facilitation mea-
sures include promotion efforts, provision of
incentives to foreign investors, reduction of unnec-
essary costs of doing business in a host country
(e.g., reducing or eliminating corruption and
improving administrative efficiency) and provision
of amenities that contribute to the quality of life
of foreign investors and expatriates. Investment
facilitation services are another increasingly
important component of promotion activities in
both developed and developing countries. Such
services consist of counselling, accelerating
the various stage of the approval process and
providing assistance in obtaining all the permits
needed.
Under the pressures of competition for FDI
in a globalizing economy, investment facilitation
measures and services have been extended to
include after-investment services. Sequential
investment, the reinvestment of earnings by
established foreign affiliates, can be a significant
source of FDI; also there is a growing awareness
that satisfied investors are the best evidence
of a good investment climate in a host country
and that they can therefore help to attract other
investors.
Countries compete increasingly for FDI
not only by improving their policy and economic
determinants but also by implementing pro-active
investment facilitation measures that go beyond
policy liberalization. Successful attraction of FDI
should also be followed up by efficient facilitation
and implementation of investment projects and
by ensuring that local investment regulation
and procedures are consistent with the central
government policies, laws and regulations (ESCAP
2003).
NIPAs can reduce administrative barriers
by fostering the development of industrial and
export processing zones. In addition to good
infrastructure and tax incentives, such zones can
constitute islands of administrative efficiency and
provide a buffer between export-oriented foreign
investors and regulatory authorities. NIPAs can
also help to ensure the relevant laws and
regulations governing export-oriented FDI are
easily accessible by foreign investors. Increased
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
transparency of the administrative system and
investment procedures makes it easier for foreign
investors to predict costs for the realization
of investment projects. A range of instruments
could be applied to improve public governance,
including performance assessments, e-government
and codes of conduct for the officials at
NIPAs and other investment-related government
agencies.
One way for NIPAs to attack regulatory
inefficiencies and red tape is to develop so-called
“investor road maps”. These have been developed
by the Foreign Investment Advisory Service
(FIAS) as a tool for identifying and reducing
the number and scope of procedural steps,
regulatory requirements and administrative barriers
that constitute the day-to-day interactions between
government and entrepreneurs (FIAS 2001).
The number of agencies whose supervision,
approval or other input is required in the invest-
ment process presents a Government with a
substantial risk of coordinating/avoiding duplica-
tion for each phase of the promotion strategy,
including image-building, generating specific
projects and, most specifically, facilitation services
relating to screening, approvals and follow-up.
To address this problem, there is a strong need to
launch an initiative to assist developing economies
in their efforts to promote good governance in
investment facilitation, which could be measured
by the efficiency and transparency of investment-
related procedures and practices. Establishment
of an office of an investment ombudsman at the
national level (for example, in the case of the
Republic of Korea) could be part of a good
governance programme in investment promotion
and facilitation for other developing economies to
consider and adopt.
D. FDI by small and medium
enterprises
In a liberalizing and globalizing world
economy in which all enterprises, whether large or
small, are increasingly subjected to international
competition, the internationalization of SMEs,
through both inward and outward investment,
108
deserves increasing attention, as these firms play
a central role in economic development. SMEs
constitute an important part of the economies
of most Asian countries, contributing substantially
to employment and production. They can also
make a major dynamic contribution to growth and
development. Internationalized SMEs, in particu-
lar, offer a significant potential source of growth
and development for developing countries. For
example, smaller MNEs are more likely to: (a)
transfer appropriate technology to developing
countries; (b) have a favourable impact on the
trade balance; and (c) have more flexible local
arrangements and contribute more to the local
economy by using subcontracting to a greater
extent (UNCTAD 1998b).
SMEs contribute to development in two
main ways:
• Through conventional contributions via
the normal production process, such as
investment in tangible and intangible
capital and technological processes.
The contribution of SMEs in this way is
probably relatively small, and roughly
in proportion to the role of SMEs in
production or value added, around 40
to 60 per cent in the leading Asian
economies.
• Through the less conventional “entre-
preneurial engine”. In developed coun-
tries at least, SMEs’ contribution to
growth is larger than might be
suggested by conventional models, and
mostly comes from a relatively small
proportion of high-growth SMEs.
SMEs engaged in FDI are more likely
to be among this core group of high-
growth firms. It is important to take
this fact into account in the design of
policies to facilitate FDI for develop-
ment. The process of SME interna-
tionalization, especially through SME
FDI, can offer significant opportunities
for development.
FDI by SMEs has grown remarkably since
the mid-1980s. Driven, among other factors, by
the need to be present abroad to access markets
 V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies
and resources in order to maintain their competi-
tiveness in a rapidly liberalizing and globalizing
world economy, small and medium MNEs are
increasingly internationalizing their production
activities. FDI by SMEs thus complements large
MNEs as a potential avenue for the transfer of
productive resources and technology that can
enhance the growth and competitiveness of deve-
loping countries. As a case in point, the first wave
of Japanese investment abroad, in the 1960s,
was led by small and medium firms seeking low
wage bases overseas. In the 1970s and 1980s, it
became dominated by large manufacturers, seeking
natural resources, production sites in or near large
export markets and low-cost assembly sites for
labour-intensive processes in South-East Asia. The
current wave is led by support industries, which
produce parts and machinery for the big manu-
facturers and are finding it increasingly expensive
to supply components from their home base (Fujita
1998).
Most SMEs face several handicaps in
investing in developing countries. They lack
information on investment opportunities and local
conditions, they are particularly sensitive to
political risk and macroeconomic uncertainties
and they are unfamiliar with the different legal
systems and regulations involved. Apart from
the right policy environment, with stable and non-
discriminatory policies and good market prospects,
the promotion of FDI by SMEs has to address
the information gaps and risk elements that are
inherent in the internationalization of small firms.
Many developing host countries are already
making efforts to do this. A number of countries
do not require formal approval for FDI below
a certain size. Several that had requirements
regarding the minimum size of foreign invest-
ments have abolished them: Malaysia, Thailand
and Indonesia are good examples. The Republic
of Korea has reduced the minimum size require-
ments over time. The reduction of clearance
formalities is being achieved by the setting-up of
one-stop agencies for FDI promotion. Policies
used by developing countries to help SMEs in
general, such as lower tax rates and credit,
infrastructure and other forms of assistance on
favourable terms, can also help SME MNEs if
their entry is facilitated in other ways.
Entry into overseas markets by SMEs
also has been facilitated by a new array of cost-
saving and risk-reducing investment techniques,
allowing foreign companies to take effective
control and expand production abroad without
majority equity stakes or ownership control in the
venture. Such techniques include joint ventures,
international subcontracting deals, licensing
arrangements, franchising, management contracts,
turnkey projects, and production and risk-sharing
agreements. These new forms of investment
reduce the start-up and working capital costs of
investments, limit MNEs’ exposure to political and
commercial risks and allow them to circumvent
administrative barriers to market entry, without
losing competitive strength (Oman 1984).
In sum, SMEs that engage in FDI are an
important part of the entrepreneurial engine that
drives development and growth. In many deve-
loping countries, however, the SME sector is
insufficiently developed in terms of the core of
dynamic and fast-growing SMEs that contribute
significantly to development. FDI by SMEs has
the potential to strengthen the SME sectors of
home as well as host countries, contributing to the
health and dynamism of their economies. The
potential in this regard is high, as more than 95
per cent of all firms are small or medium-sized.
Increasing the awareness and understanding in
developing countries of this insufficiently tapped
source of investment can thus usefully contribute
to their development, including the development of
their own SMEs. Carefully designed policies are,
however, needed to encourage FDI by and in
SMEs. A number of countries have considerable
experience as regards SME development generally
as well policies to attract investment by such
enterprises and to expand and strengthen its role in
development. An understanding of this experience
would be useful in formulating policies and pro-
grammes with respect to attracting and benefiting
from FDI by SMEs, since developing Asia has a
larger potential to mobilize FDI by SMEs than any
other developing region. Asian SMEs are likely to
be among the primary sources of future Asian
development. For this to be realized, appropriate,
enhanced Asian linkages have to be established at
all levels.
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Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
E. Conclusions and implications for
regional action and cooperation
FDI inflows could bring important benefits
to the recipient economies in the form of capital
inflows, technology spillovers, human capital
formation, international trade integration, enhance-
ment of enterprise development and good govern-
ance. However, FDI could have negative effects
in such areas as market structure and balance
of payments and could lead to crowding-out
of domestic enterprises, as well as other social
impacts. Government policies are therefore
needed to enhance benefits and minimize negative
effects.
The role of an enabling environment for
FDI including political stability as a key factor
in attracting and maintaining investors cannot
be overemphasized. Another universally acknow-
ledged principle is the need to offer stable,
transparent and non-discriminatory regimes for
foreign investors. Such an environment would
consist, among other things, of a legal framework
maximizing a country’s potential for attracting
FDI, adequate infrastructure, good governance, an
effective judicial system and respect for the rule
of law.
The policy mix has to be adapted to
the special circumstances prevailing in different
countries and might have to evolve over time.
Factors influencing this mix are level of deve-
lopment, market size, domestic capabilities and
existing levels of FDI. Globalization offers better
opportunities for small economies to compete for
export-oriented FDI, but it also implies more com-
petition between countries. Hence, it is becoming
increasingly important for countries to consider
what the best policy approach is for attracting
and benefiting from FDI in accordance with
their development objectives. Even at an early
stage of their development, countries need to
attach importance not just to the size of FDI, but
also to its qualitative aspects.
Concerns have arisen that competition to
attract FDI will intensify among countries, espe-
cially the type of FDI that can bring major benefits
110
to recipient economies by enhancing their export
competitiveness or by providing linkages with
domestic enterprises. Indeed, countries are in-
creasingly recognizing the positive contribution
that FDI can make to economic development
through an increase in export capacity, employment
generation, transfer of technology, industrial
upgrading and training of labour. In this kind of
international investment environment, there is a
great need to strengthen the capacity of host
countries, particularly developing countries, in
dealing with FDI inflows. This involves devising
FDI policies and enhancing legislative and institu-
tional structures in order to attract new investment
and building new skills and capacity by training
policy makers, officials, managers and local
entrepreneurs as regards what they can offer
foreign investors and how to attract and assist them
in FDI realization.
While most multilateral organizations
concentrate on promotion and attraction of FDI,
relatively little has been done in the area of invest-
ment facilitation and realization, which is of
particular concern for the further promotion of
investment. There seems to be a strong need to fill
this gap in investment facilitation and realization
within an effective framework of FDI promotion
policies, especially at the SME level, such as:
• Promoting the exchange of experiences
and the transfer of best practices and
establishing regional networks
• Enhancing FDI flows in small and
medium industries (SMIs) by organizing
investment promotion and facilitation
meetings at certain intervals, keeping in
view the needs and priorities of the host
countries in the region
• Providing regional perspectives on
emerging issues related to FDI and
SME capacity-building and undertaking
studies in those areas for the harmo-
nization of investment policies and
strategies. There is considerable scope
for the harmonization of the laws
and regulations, property rights, equity
sharing and other requirements related
to FDI
 V. Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies
Countries have used various proactive
policies and measures to attract and increase the
benefits from FDI, ranging from targeted pro-
motion policies to incentives and performance
requirements, as well as measures to support
the enterprise sector. Many of these measures,
however, have been subjected to new international
rules in the framework of multilateral agreements
such as the WTO Agreements on TRIMs and
SCMs and other regional or bilateral agreements.
The challenge for policy makers is to deepen their
understanding of what policies and policy tools are
most important from a development perspective
and how international rules in the area of invest-
ment would affect them.
Finally, while SME MNEs remain relatively
small players in the global FDI scene, their impor-
tance should not be underestimated in the long
term. They are bound to become more interna-
tional as the pace of globalization increases. They
can offer simple technologies and can diffuse skills
and know-how to local enterprises more readily
than large MNEs. In this context, the following
agenda for regional action and cooperation could
be envisaged:
• Regional information networking on
FDI opportunities in the SME sector of
the region
• SME-specific measures, such as an
SME investors club which will focus
attention on SMEs and provide support-
ing activities by government agencies,
private industry and other SMEs
• Provision of a regional training
programme for members and associate
members to evolve comprehensive
investment promotion and facilitation
policy measures, especially at the SME
level
• Design and implementation of good
governance programmes in investment
promotion and facilitation at the
regional and/or subregional level
111
Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific
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Copyright © United Nations 2003
ISBN: 92-1-120176-4
ISSN: 0252-4481
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