In search of more vibrant SMEs
The Jakarta Post
In an attempt to boost lackluster growth, President Joko 'Jokowi' Widodo's administration has in recent weeks announced a series of new deregulatory and stimulus measures.
New research from the International Trade Centre (ITC), the joint agency of the UN and the World Trade Organization (WTO), points to how Indonesia could complement these reforms by bolstering the international competitiveness of Indonesia's small and medium enterprises (SMEs), which account for 90 percent of jobs in the country.
The SME Competitiveness Outlook will aim to provide annual guidance on where best to concentrate efforts to boost countries' SME sectors. The inaugural edition, published last week, makes a compelling case for small and mid-sized firms as the missing link to inclusive growth.
Jobs are the main channel through which people share in ' or are left out of ' economic growth. And SMEs account on average for around 70 percent of national employment around the world.
Large companies everywhere tend to be more productive than small ones. But the gap between small and large companies tends to be far wider in developing countries. Low productivity in turn means lower wages and worse working conditions.
This productivity gap has a silver lining: there is a lot of room to improve. Improving SME productivity translates into more and better paying jobs, distributed across less fortunate sections of the economy. SMEs able to 'internationalize', whether by exporting or importing directly or selling to firms that do, register particularly high productivity, wage, and employment gains.
Helping SMEs become more productive and competitive, therefore, means working for inclusive growth. Figuring out how best to do so, however, isn't easy. Different factors hold SMEs back in different places. In some countries, tax policies dis-incentivize growth.
Elsewhere, access to finance dries up the moment businesses become too big for micro-lenders. Intermittent electricity and spotty internet access often render them uncompetitive. Expensive transportation and long customs delays can frustrate attempts to operate across borders. Sometimes firms themselves lack skilled managers and staff, or fail to understand market opportunities. They might struggle to meet international health and safety standards.
The SME Competitiveness Outlook helps us understand the country-specific constraints most relevant to business success. The report systematically organizes them across three key pillars: the ability of SMEs to connect, compete and change. It then analyses these determinants of SME competitiveness at the level of companies, their immediate business environment, and national policy.
Problems on any pillar, at any level, can be fatal to international competitiveness. For instance, the ability of a country's SME sector to supply quality goods in a timely and cost-effective manner is a function of firms' own abilities, but also of the existence of a system to certify that their products meet international standards, not to mention macro-level considerations like swift customs procedures. Similarly, smaller companies' ability to absorb knowledge and adapt to changing market forces has much to do with internet penetration rates and access to finance.
The report's findings will help governments and their partners identify which weaknesses are most harmful, in turn paving the way for well-targeted reforms. After all, why invest more in telecommunications infrastructure when what companies really need are bank accounts?
Among the lessons to emerge from the inaugural report is that across developing country regions, smaller firms vastly underperform larger ones in terms of using the internet to connect to customers and suppliers. Indonesia, which is one of 25 developing countries analyzed in detail in the report, is no exception, with small and mid-sized firms' weak use of email and websites responsible for the country's poor performance under the 'connectivity' pillar of competitiveness.
Another insight is that the international competitiveness of otherwise capable, entrepreneurial firms can be dragged down by a bad business and policy environment. The converse is also true: a good business environment can go a long way towards masking firm-level weaknesses.
Indonesia appears to fall into the latter camp. A relatively strong national and immediate business environment, due in part to strong performances in cluster development and university-industry collaboration, has not translated to similar performances at the firm level. Beyond the poor connectivity performance, Indonesian SMEs are ill-equipped to adapt to changing market demands, because of difficulties accessing bank financing and a weak investment in staff training.
SMEs, and in particular small firms, struggle to take advantage of Indonesia's relatively open trade policy, good logistics performance, and effective customs clearance processes. One factor hampering their capacity to compete is difficulties obtaining international quality certifications.
While other countries in South and East Asia are similarly marked by relatively strong business environments and weak firm-level capabilities, the extent of the discrepancy in Indonesia is striking. It may account for why SMEs account for only 16 percent of total exports in Indonesia, compared to nearly 30 percent in Thailand.
There is a strong case for the Indonesian government to pay more attention to the firm level capacities of SMEs, with a view to increasing their use of internet communication tools, and strengthening their capacity to upgrade their product portfolios and to changing market conditions.
A more vibrant SME sector would go a long way towards President Jokowi's goal of developing Indonesia from the bottom up. It would also represent an important step towards achieving the ambitious new Global Goals for Sustainable Development adopted last month by the world's governments. Eradicating extreme poverty by 2030, expanding opportunities for all, and protecting our planet will require rapid growth ' but growth that is both environmentally sustainable and equitably distributed.
The writer is executive director of International Trade Centre.
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