SMEs Participation in Global and Regional

Value Chains: Greater Mekong Subregion

Workshop on International Trade Finance, Logistics and Business Development UMFCCI, Yangon, Myanmar 27-29 November 2015

George Abonyi

Visiting Professor

Department of Public Administration and Executive Education Program

Maxwell School, Syracuse University

28 November 2015

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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)

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CHALLENGE (1)

Overcoming barriers to SME internationalization

(supply side perspective)

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4

Benefits of SME

Internationalization

Supports growth in revenues, size, and market share

Exposes firm to international best

practice

Facilitates adding value through

product, process, and business

model innovation

Employment generation

Strengthens productivity

Improves overall competitiveness

Why not: significant barriers to

SME Internationalizatione.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

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CHALLENGE (2)

Internationalization in slow-growth and

uncertain global and regional economies

(demand side perspective)

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Market challenge where will global demand

for GVCs come from: New normal and

greater divergence in the global economySource: 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 2009

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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 regions 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 intra-

regional 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

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Chinas investment-driven growth:increasing debt, declining efficiency,

most new debt is to service old debt Chinas increasing debt and composition

mostly SOEs and local government Nearly 50% related to real estate

Chinas 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

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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. 2015

Chinas import growth (by

volume) has declined

significantly

Source: OECD, 16 Sept. 2015

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China market challenge

Chinas 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 Asias 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

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OPPORTUNITY

Continuing key role of developed markets, but more difficult and uncertain

Asian emerging markets present great opportunities for long term growthBut in coming years mostly at lower end of the income scale, with local constraints

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The future of the region is brightSource: Australian Government White Paper (2012)

Asias rising share of global GDP Asias rising incomes (Bubble area reflects size of GDP; income per person in PPP)

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Future of ASEAN is brightSource: Euromonitor International (2015)

Economy

Market

Youth

$

If ASEAN were a single economy it would be the 7th largest in the world; and could be the 3rd largest by 2030

With 622 million people, ASEANs potential market size is larger than EU (502 million) and North America (354 million)

With median age of 28.8 years in 2014, ASEANs population is younger than EUs (42.1), Chinas (40.8) and North America (38)

Total consumer expenditure is expected to grow by 108% in real terms across ASEAN, 2015 - 2030

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ASEAN consumer expenditure is

increasingbut unevenlySource: Euromonitor International (2015)

ASEANs Real GDP Growth and Total

Consumer Expenditure: 2000 2014 Averaged 5.4% p.a.; expanded by 117% in real

terms to reach $1.4 trillion in 2014

By 2030 ASEAN to be the 3rd largest

economy, after US and China, worth $3.1

trillion in constant 2014 dollars

Consumer Expenditure per

Household in ASEAN:

2014 and 2030

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Asian emerging markets and

consumers are different But significantly lower disposable incomes in AEC in coming years as compared with developed

economies, regions 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 (19902030)

Reflects consumers purchasing power

In 2030: narrower, but US still 4.6 x China

Source: Euromonitor International (2014)

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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 2030

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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

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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)

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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 t