SMEs Participation in Global and Regional Value Chains: Greater Mekong Subregion

Transcription

1 SMEs Participation in Global and Regional Value Chains: Greater Mekong Subregion Workshop on International Trade Finance, Logistics and Business Development UMFCCI, Yangon, Myanmar November 2015 George Abonyi Visiting Professor Department of Public Administration and Executive Education Program Maxwell School, Syracuse University 28 November

2 Overview of the story Challenge Expanding GMS SME exports to regional and global markets Overcoming barriers to SME internationalization (supply side) Exporting in slow-growth global and regional economy (demand side) Opportunity Regional and global export markets for long-term growth but with a difference Growing Asian emerging markets: for now mostly at lower end of income scale Slow developed economies: continuing importance, but more difficult markets Response Expanding GMS SME exports to regional and global markets on 3 tracks Exporting existing (final) products/services Innovating for Asian emerging markets and beyond Promoting SME suppliers in global (regional) value chains (GVC) 2

3 CHALLENGE (1) Overcoming barriers to SME internationalization (supply side perspective) 3

4 Supports growth in revenues, size, and market share Improves overall competitiveness Exposes firm to international best practice Benefits of SME Internationalization Strengthens productivity Facilitates adding value through product, process, and business model innovation Employment generation 4

5 Why not: significant barriers to SME Internationalization e.g. SME export share of 5 ASEAN economies around 23% Source: Abonyi (ERIA, 2015) Internal barriers: relate to firm-level capability and resource constraints Seen as most important, e.g. mind set, information, finance, skills External barriers: relate to business environment both national and international E.g. general domestic SME-related business environment, logistics, clustering, trade facilitation 5

6 CHALLENGE (2) Internationalization in slow-growth and uncertain global and regional economies (demand side perspective) 6

7 Market challenge where will global demand for GVCs come from: New normal and greater divergence in the global economy Source: IMF WEO, October 2015; October 2008 Slow-growth global economy esp. developed economies; also slowing but relatively faster growth in Asian emerging economies Especially ASEAN, China, India (ACI) And political uncertainty of economic management (e.g. EU, China) Note: IMF has continually overestimated growth since

8 Developed economies and China markets: slow, uncertain. For regional (East Asian) value chains: - Developed economies: primary final market - China: intermediate market key role in GVCs Developed economies (particularly US) driving region s growth as final markets Intra-ASEAN trade is less than 25% of its total trade Developed markets slow uncertain growth Source: Lim and Lim (2012) China has imported 50% of all intraregional intermediate exports (parts, components); but for final export to developed economies economies, e.g. iphones to US and EU (source: ADB, 2011) China: rebalancing and extended slow growth From high (national) savings and related investment- and export-driven model; to domestic consumption driven growth Challenge of political economy 8

9 China s investment-driven growth: increasing debt, declining efficiency, most new debt is to service old debt China s increasing debt and composition mostly SOEs and local government Nearly 50% related to real estate China s Debt to GDP ratio Source: MGI (2015) Growing non-productive overinvestment: i.e. declining efficiency of investment (Marginal Product of Capital) Source: Ha Jiming, Goldman Sachs China (2015) S 9

10 Key Chinese activity indicators Nearly every industry is at 30% or more overcapacity Average accounts receivable for consumer electronics retailers/manufacturers:123 days Average days of inventory for clothing companies: 174 days (Bloomberg 2015) Source: Haver Analytics, in Financial Times, 19 Aug China s import growth (by volume) has declined significantly Source: OECD, 16 Sept

11 China market challenge China s rebalancing from investment to consumption-driven growth even if smoothly successful, will mean extended slow growth; AND does not automatically translate into increased imports of final manufactures China as market for final goods is shaped not by size or growth of GDP, but capacity to generate net demand for import of final manufactures China has been major importer of (South) East Asia s exports of parts and components; but for its final exports to developed economies, e.g. iphones to US and EU To become a growth locomotive for manufactures of the region (e.g. GMS) China would need to raise not only its domestic consumption as a share of GDP, but also its imports of final goods from the region 11

12 OPPORTUNITY Continuing key role of developed markets, but more difficult and uncertain Asian emerging markets present great opportunities for long term growth But in coming years mostly at lower end of the income scale, with local constraints 12

13 The future of the region is bright Source: Australian Government White Paper (2012) Asia s rising share of global GDP Asia s rising incomes (Bubble area reflects size of GDP; income per person in PPP) 13

14 Future of ASEAN is bright Source: Euromonitor International (2015) Economy Market Youth If ASEAN were a single economy it would be the 7 th largest in the world; and could be the 3 rd largest by 2030 With 622 million people, ASEAN s potential market size is larger than EU (502 million) and North America (354 million) With median age of 28.8 years in 2014, ASEAN s population is younger than EU s (42.1), China s (40.8) and North America (38) $ Total consumer expenditure is expected to grow by 108% in real terms across ASEAN,

15 ASEAN consumer expenditure is increasing but unevenly Source: Euromonitor International (2015) ASEAN s Real GDP Growth and Total Consumer Expenditure: Averaged 5.4% p.a.; expanded by 117% in real terms to reach $1.4 trillion in 2014 By 2030 ASEAN to be the 3 rd largest economy, after US and China, worth $3.1 trillion in constant 2014 dollars Consumer Expenditure per Household in ASEAN: 2014 and

16 Asian emerging markets and consumers are different But significantly lower disposable incomes in AEC in coming years as compared with developed economies, region s traditional final markets (source: Lawrence, ADBI (2013)) Fragmented markets, growing income inequality, and high proportion of rural population will condition consumer spending Per Capita Real Annual Gross Income in China and USA ( ) Reflects consumers purchasing power In 2030: narrower, but US still 4.6 x China Source: Euromonitor International (2014) 16

17 Consumer is at the centre of understanding market potential Source: Euromonitor International (2015) Household Income Distribution in ASEAN: 2014 Households by Annual Disposable Income Band in ASEAN: 2014 and

18 Implications (1) Continuing dependence on slowing developed markets: Given current patterns of domestic demand in the region, developed economies (e.g., US, EU) will continue to play a key role as final markets for manufactures over medium term, within framework of global value chains and related production networks in key industries, e.g. electronics, automotives, garments, agro-industry. (2) Expanding opportunities in Asian emerging markets over the longer term but with a difference: Expanding Asian emerging markets (e.g. AEC + China + India) will present increasing growth/diversification opportunities For SME suppliers in GVC/networks increasingly focusing on regional markets For SMEs exporting products/services to final consumers in AEC (emerging Asia) But for markets with very different characteristics than developed economies 18

19 RESPONSE Promoting more GMS SME internationalization on 3 tracks 1. Exporting existing (final) products/services 2. Innovating for Asian emerging markets and beyond* 3. Suppliers in regional and global value chains (GVC) 19

20 Integrating GMS SMEs into global and regional value chains Around 80 percent of world trade is now through GVCs (UNCTAD 2014) Participation in GVCs as key means for SMEs to internationalize as suppliers (subcontractors) of intermediate inputs (parts, components, services) for MNEs from within or outside the region Benefits of participation in GVCs, e.g. Strengthening the technical and managerial capabilities of firms Increasing capacity utilization and production efficiency Strengthening the reputation and credibility of the firm Providing manageable way for SMEs to reach and compete in global markets Challenges of participation in GVCs: Requirement to deliver right product (product standards), in the right quantity (production capacity), with the right quality (quality standards), at the right time (efficient logistics), and produced in the right way (process standards) And to upgrade (add value) over time 20

21 GVC examples Apparel - Garment GVC Automotive GVC Source: Cattaneo et al (2013) 21

22 Changing nature of GVCs in a post-crisis (2008) world Consolidation Lead firms are reducing number of suppliers; more difficult for new (SME) suppliers to enter GVCs, who now have to have the required capabilities Convergence Technology/product synergies: lead firms in different sectors increasingly sourcing from same suppliers, e.g. Foxconn: Apple, Acer, Cisco Re-shoring (to some extent) Lead firms re-shore to home market due to cost and risk extent not clear, but contributing to decline in orders from Asian SME suppliers Trade in services becoming more important and more complex Well beyond business process outsourcing, to higher value, knowledge based services such as R&D and design, increasingly linked to production Rise of e-commerce and ICT Internet-based business-related services can facilitate SME participation as suppliers Emerging economies increasingly important final markets 22

23 SME participation in GVCs: General stages of internationalization Sourece: Abonyi (ERIA, 2015), Adapted and modified from SPRING Singapore (2011) Preparation Involves preinternationalization, getting ready to enter foreign markets directly or as suppliers in global value chains e.g. providing adequate working capital, risk sharing for bank borrowing, internationalization workshops, GVC supplier skill development Active Engagement Start and early implementation of internationalization activities e.g. building linkages and alliances, assistance with regulatory requirements Growth and Expansion Strengthening and enlarging the product market position of the firm in foreign markets, or as supplier in a global value chain e.g. strengthening capacity for compliance with international standards, clustering and networks 23

24 SME participation in GVCs: 2-level strategy Basic constraints, and key differences among value chains Differing logistics and skill needs of electronics, automotives, agro-industry: Need both general and GVC-specific policy focus General policy focus Understanding of structure and dynamics of global value chains by policy makers and SMEs (e.g. Thailand, India) Strengthen trade facilitation services -- customs, logistics (e.g. Cambodia) Support for general ICT capabilities Understanding and meeting general business standards (e.g. ISO) Special attention: supply chain financing Receivables finance or factoring: sell (large) buyer - approved invoice to bank Addresses key SME constraints of lack of collateral and poor financial position 24

25 SME participation in GVCs: 2-level strategy GVC-specific policy focus Understanding structure and dynamics of particular GVCs Understanding and meeting GVC-specific standards (product, process, market, firm) Skill development (e.g. PSDC, Penang Malaysia) GVC-focused logistics services, particularly for SMEs (e.g. fresh fruit and vegetables, e.g. Thailand) Market/buyer-related information for specific GVCs, (e.g. value chain specific trade fairs, online platforms, and advisory centres) Strengthen GVC-specific clusters, with particular focus on cluster/business institutions (e.g. Thailand: HDD vs. rubber manufacture) 25

26 GMS SMES, BORDER AREA DEVELOPMENT, AND CROSS-BORDER LINKAGES Strengthening mutually beneficial cross border value chain (GVC) linkages Source: Abonyi and Zola (ADB, 2015); Abe et al (UNESCAP, 2013/14) 26

27 Strengthening cross-border linkages in the Greater Mekong Subregion Economic rationale Relatively less-developed and more advanced economies can provide complementary inputs for mutual benefit; can be particularly important in developing border areas, e.g. Thailand and Myanmar Business rationale Global value chains and related production networks fragment production to different geographic locations with complementary factor endowments E.g. electronics (HDD); garments Special role of border areas Border areas provide opportunities to leverage cross-border linkages for local development and as gateways to the wider national economy GMS: Thailand and neighbours opportunities for mutual benefit 27

28 Example: Thailand s position in the Hard Disk Drive (HDD) Global Value Chain (GVC) Source: Hiratsuka (2006) 28

29 Example: Using Thailand-Cambodia crossborder linkages in the HDD GVC Source: UNESCAP (2013/14): Business for Development: Capacity building of enterprises (SMEs) in the Greater Mekong Subregion for their effective penetration into regional and global markets 29

30 Opportunity: Mae Sot (Thailand) Myawaddy (Myanmar) garment value chain cross-border linkages Mae Sot Production base for labour-intensive industries, in particular, garments (e.g. 470 plants (mostly SMEs), 20,000 day/migrant workers Introduction of baht 300/day minimum wage Challenge: upgrade to higher value, higher tech/skills Thailand s garment industry Priority SEZs for Thailand Myawaddy Myanmar: reforms for market-oriented, internationally integrated economy Challenge: diversification of manufacturing and link to global value chains; and focus on state/region (local) development, including local employment generation Myawaddy: in Kayin State; industrial zone (IZ) being developed On priority national economic corridor 30

31 Example: GMS Cross-border value chain in garments and textiles Cross-border linkages to upgrade? Source: Abe et al (UNESCAP 2013/14) 31

32 Mae Sot Myawaddy linked Special Economic Zones (SEZ) [Cross-border Special Economic Zone (CSEZ)] Facilitating Mae Sot Myawaddy garment production linkages through in-bond processing system; supported by infrastructure, trade facilitation, and HRD development initiatives. (based on Taguchi, 2013) 32

33 Mae Sot Myawaddy on the GMS East West Economic Corridor (EWEC) Source: Asian Development Bank 33

34 THANK YOU 34