Table Of ContentFulfilling the Export
Potential ofSmall and
Medium Firms
Fulfilling the Export
Potential of Small and
Medium Firms
by
BRIANLEVY
World Bank
ALBERT BERRY
University of Toronto
JEFFREY B. NUGENT
University of Southern California
with
JOSE FRANCISCO ESCANDON
MOTOSHIGE ITOH
UNSUKIM
SHUJlRO URATA
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data
Levy, Brian.
Fulfilling the export potential of small and medium firms / by Brian Levy,
Albert Berry, Jeffrey B. Nugent ; with Jose Francisco Escandon ... [et al.].
p. cm.
Includes bibliographical references and index.
ISBN 978-1-4613-7354-4 ISBN 978-1-4615-5169-0 (eBook)
DOI 10.1007/978-1-4615-5169-0
1. Exports-Developing countries. 2. Small business-Developing
countries. 3. Foreign trade promotion-Developing countries. 4. Developing
countries-Commercial policy. 1. Berry, R. Albert. II. Nugent, Jeffrey B.
III. Title.
HF1413.lA73 1999
382' .6'091724-dc21 98-51684
CIP
Copyright c 1999 by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 1999
Softcover reprint ofthe hardcover lst edition 1999
AII rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, mechanical, photo
copying, recording, or otherwise, without the prior written permission of the
publisher, Springer Science+Business Media, LLC
Printed on acid-free paper.
TABLE OF CONTENTS
List ofContributors vii
Acknowledgments ix
1. Supporting the Export Activities ofSmall and Medium Enterprise
(SME)
BrianLevy, Albert Berry andJeffrey B. Nugent
2. Technical, Marketing and Financial Support for Indonesia's Small
and Medium Industrial Exporters 31
AlbertBerry andBrianLevy
3. The Support System for Small and Medium Exporters inJapan 73
Motoshige Itoh and Shujiro Urata
4. Korean SMEs and Their Support Mechanisms 115
Linsu Kim andJeffrey B. Nugent
S. Colombia's Small and Medium Exporters and Their Support
System 169
Albert Berry andJose Francisco Escandon
6. Comparative Analysis ofSME Support Systems 221
BrianLevy, Albert Berry andJeffrey B. Nugent
7. Implications for Theory, Policy and Future Research 261
Jeffrey B. Nugent, Albert Berry andBrianLevy
References 277
Index 289
CONTRIBUTORS
ALBERT BERRY
ProfessorofEconomics, University ofToronto, Toronto, Ontario, Canada
JOSE FRANCISCO ESCANDON
Consultant, Bogota, Colombia
BRIAN B. LEVY
World Bank, Washington, D.c', U.S.A.
LINSU KIM
School ofBusiness Administration, Korea University, Seoul, Korea
JEFFREY B. NUGENT
ProfessorofEconomics, UniversityofSouthernCalifornia, Los Angeles, California
MOTOSHIGE ITOH
Professor ofEconomics, University ofTokyo, Tokyo, Japan
SHUJIRO URATA
Professor of Economics, School of Social Sciences, Waseda University, Tokyo,
Japan
ACKNOWLEDGMENTS
This study was initiated by the World Bank, which covered the costs of Brian
Levy's time and hosted a conference in February 1994 ("Can Intervention Work?
The Role of Government in SME Success") and other meetings at which the
research methodology and results were discussed. Funding for the consultants and
field work was made available by a trust fund sponsored by the Government of
Japan. Mary Shirley offeredvaluable support in keeping the work moving forward.
We wouldalso like to thankourcollaborators in the four countries studied in depth.
In Colombia, David Manrique assisted with the interviews and members of the
PlanningCommission (Departamento Nacional de Planeaci6n) collaborated in the
processingofthe data. InIndonesiathe Institute for Social and Economic Research
at the University of Indonesia, Jakarta, provided a base for our work and Imam
Rasyidi and Pribadiundertook the interviewing task. InJapan, research assistance
was provided by M. Honma, T. Izumida, T. Konno and J. Shibata. In Korea the
interviewswereconductedby MoonGu Huh, Hoo-NamChoi and Sung-Wook Min,
materialsonthe sectoral supportsystems were collected by Sang-Ho Song, Kyung
Kyu Shin, Myong-Hyun Kim and Chon-in Choi, while Baohong Sun, Victor
Gastanaga, Seung-Jae Yhee, Sung-Jin In and Mi-Kyung Pai Kim provided help in
data analysisand translation. We benefitted from comments received at the World
BankConference and atapresentation ofthe results to policy-makers in Colombia
in September, 1995.
1
SUPPORTING THE EXPORT
ACTIVITIES OF SMALL AND
MEDIUM ENTERPRISE (SME)
B. Levy, A. Berry and J.Nugent
1.1 Why is Policy for SMEExporters Important?
There is no longerdoubtthat theperfonnanceofsmalland medium enterprises (SMEs)
is very importantforboththe economic andthe social development ofmost developing
(orlessdeveloped)countries (LDCs). That importance reflects SME's well-recognized
advantages in employment generation, income growth, entrepreneurial training,
technical and allocative efficiency, lower degree of wage inequality and greater
flexibility in the face ofchanging demand patterns, trade policies and macroeconomic
conditions. Yet, becauseofthe force ofglobalization, the needsfor debt repayment and
the increasing appreciation for the efficiency effects ofinternational competition, the
continued success and usefulness ofthe SME sector in LDCs' economic and social
development, they will also have to succeedinpenetrating international markets. Large
enterprises (LEs) have long enjoyed major advantages over SMEs in export markets,
sofinding the secretsto SME successonthat front represents a considerable challenge.
The magnitudeofthe challenge is renderedgreaterbyvirtueofthe dearth ofknowledge
concerning (a) the problems faced by SMEexporters, (b) how some ofthem do manage
to overcome these problems, and (c) the effectiveness ofvarious (governmental and
non-governmental) collective support systems in helping SMEs in this objective.
Thoughthere maybe aconsiderableoverlapbetween the problems ofSMEs in general
and those ofexporting SMEs in particular, given the substantial knowledge that has
beenaccumulatedonthe former, we feel it appropriate and important to focus on the
latter, Le., theproblemsand meansto successofexportingSMEs. Even ifthere should
be agreement that exporting will be essential to future SME success, the knowledge
ofhow to make this happenandthe particular role for public policy in this respect are
altogetherinsufficient. Asonmanyotherissues, there are great differences ofopinion,
even among economists, as to the merits of intervention. In the meantime, activist
governments and non-governmental institutions have been practicing SME export
supporting interventionsofmany differenttypes but with extremely little in the way of
seriousevaluationoftheireffectiveness. Inmanycountrieswhere potentially interesting
supportprograms for SMEexportershave beenintroduced, their effects may well have
beenswampedbythe continuinglegacyofregulationsandpractices which discriminate
against the SMEsectorinmany ways, as inthe taxsystem, access to foreign exchange,
2
access to credit, inappropriate monetary and fiscal policies, and the general weightof
red-tape. Moving from this unfortunate legacy to a well designed and implemented
support system for SMEs is a largejump. Yet, it is also one which needs to be made
withoutdelay. We hope that thisstudy will provide useful evidence on both the needs
of SME exporters in the areas of marketing, technology and finance and on the
usefulness ofdifferent means ofsatisfying these needs.
Why are SME exporters becoming increasingly pivotal in many developing
countries?Weseeat leastfour reasons. First, thevirtuaIly universal trend towardfreer
trade is raising the ratios of exports and imports to GDP in the great majority of
countries, thereby raising the importanceofthe performance ofexporting and import
competing firms and activities ingeneral. Indeed, the remarkable way in which, over
I
the last several decades, one Asian country after another has emerged from relative
backwardness and isolationfrom international markets to make its presence felt in the
international trade of manufactures accounts in no small way for the rising relative
importance of manufactures in LDC exports2 and of LDCs in world exports of
manufactures. This experience would seem to suggest that, under the right
circumstancesatleast, almostanycountrycansucceedinmanufacturesexportsofsome
type by building on its comparative advantage. Second, the trends toward flexible
specialization and just-in-time delivery, and to smaller and smaller computers have
greatlylowered the disadvantagesofsmallscaleinproductivityortechnicalefficiency.
Third, the opportunities for SMEs in export markets, traditionally hampered by
informational externalitiesand economiesofscale incommercialization, are improved
bythe "informationrevolution" andmoregenerallybythedecliningcostofinformation
about international markets and international communications.3 The case studies to
follow leave no doubt that SMEs are already playing a significant and sometimes
rapidly growing role in the exports ofall four countries surveyed (Indonesia, Japan,
Korea and Colombia). Their historically important role in the manufacturing exports
of Japan, especially indirectly as subcontractors for large exporters, and the virtual
doubling of the SME share in Korea's manufactured exports in less than ten years
(from21%in 1982-83to41.3%in 1989-91)showthattheobstaclestoSMEexporting
can be overcome. Finally, the employment generating potential of SMEs and their
relatedpotentialcontributiontodistributionalequityareincreasinglyattractivebecause
of the trend toward increasing inequality witnessed in a majority of countries, both
developedand developing, overthe lastdecadeortwo. Thisisespeciallyimportantfor
two reasons: (1) growing income gaps constitute an increasing threat to social and
political stability, and (2) they are often attributed to increasing integration across
countries (Berry and Stewart, 1997). For these reasons, the bulk of this study is
devotedtoadetailedattempttoidentifytheconditionsunderwhichSMEexportershave
succeeded, and the role of collective technological, marketing and financial support
systems in distinguishing success from failure for various types offirms.
Many developing countries seeking to encourage exports have embarked on
programs ofpolicy reform, commonly termed "structural adjustment". In the face of
the seemingly limited and'slow response to these reforms, analysts in many countries
are beginning to question whether this standard prescription -- though necessary -- is
sufficient to seteconomies on a path ofsustained and healthy economic development.
Policies of structural adjustment are designed to provide an environment of strong
incentivesfordevelopment,includingmacroeconomicstability,anappropriateexchange
rate, and pricing on the basis of market signals and opportunity costs. But such
3
adjustment policies ignore the issue of which economic agents will respond to new
opportunitiesforefficientinvestment.Consequently,growingattentionisbeingdirected
tothedeterminantsofprivatesectorsupplyresponse. Withinthatsector, SMEswarrant
heightened attention as potential agents ofeconomic activity, especially in countries
where the role of competitive large enterprise is either not yet very extensive or is
deemed to beexcessiveandharmful to financial stabilityandcompetition.4 Putanother
way, simple prescriptions like "get the prices right", "deregulate", or "improve the
incentives ofsuppliers" are aimed in the right direction and are unlikely per se to be
bad advice, but they provide little help to policy makers trying to decide what to do
abouta specific institutioninaspecific situationorhowbestto answerquestions like:
(1) "Whatexactly needs to be fixed and by howmuch?" (2) "How can the benefitsof
theexistingsystemberetainedbutatlowercost?" (3) "Howcantheneedsofaspecific
target group (like SME exporters) best be satisfied?"
Makingmarkets workbetterisanimportant partofthe task ofimproving the
context for SMEs, but it involves more than deregulating or removing policy-based
price distortions. Often the challenge is less a matter of eradicating market
imperfections than(in the absence of, orat bestexistenceofextremely thin, markets)
thanofcreating, extendingand improvingmarkets. Marketsdo notnecessarily appear
automatically, and theirevolutionand performancecandepend greatly onthe number
and character of the economic agents involved, the controls and monitoring by
regulatory agencies and social institutions. Central to market efficiency are low
transactioncostswhichcanbetheresultofeitherappropriateformal rulesand/orsocial
norms and trust which provide market participants with the assurance that other
participantswillnotcheatinmarketrelations. Therelevanceofthesenormsinreducing
transaction costs has been widely appreciated (e.g., Landa, 1994) and is again shown
in our analysis ofIndonesia in the following chapter.
Simultaneouslywiththeimplementationofstructuraladjustmentprograms, the
last decade or so has seen an increasing number of countries begin to evolve better
thought-out support policies for their SME sector, in recognition of the potentially
important role of SMEs in both growth--including export-led growth -- and in
employmentcreationanddistributionalequity. Sincebothlogicandaconsiderablebody
ofempiricalevidencesuggestthatSMEswillliveuptotheirpotentialbetterwhenthere
is active government support ofvarious types for them (World Bank 1997b; UNIDO
1997), the policy trend in favour ofleaving more to the market has sometimes come
into conflict with a pro-active approach to SMEs. For example, there has been much
criticism of institutions which target subsidized credit to SMEs and in a number of
casesthispracticehasbeenterminated. Howfarshouldthisretreatfrom sector-specific
supportinstitutionsgo?Whatcriteriashouldguideit? Mostreal-worldinstitutionshave
bothstrengthsandweaknessesandgeneratebothbenefitsandcosts. Successfulreforms,
therefore, are those which retainas muchofthe benefitsaspossible and increase them
where possible, butalso lower the costs. As the old mothers' lamentput it, one thing
not to do is "to throw the baby out with the bath water". To accomplish welfare
increasing reforms while reducing the size and extent of government intervention,
without risking disaster in the process, requires detailed understanding of each
institution and correspondingly detailed recommendations as to how it may be
improved. Insomeofthecountryexperiencesexaminedinthisstudy,institutionswhose
statedresponsibility istoassistSMEsinsomeway butwhichshouldbedispensedwith
are identified. Inothercases interventions which would seemworthy ofexpansionare
4
identified. Broadgeneralizationsmustbedrawnverycarefully. Yet, inourconcluding
chapters we shall attemptjust that.
The potential for the creation and expansion of SME has sometimes been
reduced to a matter of entrepreneurship. In particular, does there exist a sufficient
numberofindividualswiththeinitiativeanddiscipline tostartandtooperatetheirown
enterprise?However, thisSchumpeterianconceptionofentrepreneurshipisincreasingly
believed to provide too narrow a framework for an analysis ofthe roots ofeffective
business activities inLDCs. Rather, a more subtle and satisfactory approach5 takes as
its starting point the bundle ofentrepreneurial functions that must be performed in a
successfulenterprise. BesidestheSchumpeteriantalentsofinitiativeanddiscipline, this
bundle offunctions includes the ability to gainaccess to finance and other inputs, the
ability to market the goodsand services produced by the enterprise, and the ability to
continuallyimproveitstechnicalcapabilities. Thepresentresearcheffortfocusesonthe
relation between these last, non-Schumpeterian functions and the performance of
SMEs.6Itaccepts thathowwell variousmarkets functionmay beas importantormore
so than the supply ofentrepreneurial talent (however the latter may be defined), and
also the corollary that, where markets leave gaps, public sector involvement may be
important.
1.2 The Research Question
Thestudies reportedinthis volumedocumentandevaluategovermnentinvolvementin
the developmentoffinancial, technological and marketing supportsystems for SMEs.
TwobroadpresumptionsunderlietheimportanceweattachtoresearchonSMEsupport
systems and on related govermnent policy. The first is that the micro-environment of
private, govermnental and NGO (non-govermnental organization) market and
institutional supportsexternaltothe firm isanimportantdeterminantofSMEsuccess.?
Large firms canuse non-marketmechanisms to internalize withinthe firm manyofthe
administrative, technical and marketing skills that they need to conduct business. By
contrast, however, SMEs lack the resources and in-house functional diversificationof
their larger counterparts, and as a result have to depend more on external sources to
acquiretechnologicalandmarketingcapability. Suchaccessinvolvestransactionscosts.
It follows that the lessdevelopedare the technical and marketing supportsystems, the
higherwillbethetransactionscoststoSMEs, withacorrespondingimpairmentintheir
competitiveposition. Soonekeygoaloftheresearchistounderstandthecharacteristics
ofwell-functioning support systems and their relation to transactioncost reduction.8
The second presumption is that the social returns to well-functioning SME
support systems -- and, more broadly, to SME success -- exceed the private returns to
individual firms. This view is supported by several distinct lines ofreasoning. First,
and most familiar, is the above-mentioned argument that there are informational and
othermarket failures associated with the provisionoftechnical and marketing support
to SMEs.9 These failures create the expectation that the SME sector will not only be
weak in these areas but will, overall, be smaller than it would be in the absence of
those failures. Second, a similar but more general argument holds that imperfections
in the key factor markets (labour, capital and materials) constrain the SME sector to
be smaller than would be socially optimal. Whereas large firms benefit from under
pricedcapital (thoughpaying aboveequilibriumpricesfor somecategoriesoflabour),
