Strategies to Boost the Inclusion of ASEAN Small and Medium-Sized Enterprises in Global Value Chains

Small and medium-sized Enterprises (SMEs) are the backbone of ASEAN member states’ economies. SMEs’ role in driving economic development, providing employment opportunities, and closing the gender gap in the labour force cannot be underestimated. Allowing for different definitions of SMEs across the region, there are more than 70 million SMEs in ASEAN. Of those, 65.5 million are in Indonesia, with most of the remainder in Thailand (3.2 million), Malaysia (1.2 million), the Philippines (1.1 million), and Vietnam with 700,000. Yet their strong domestic numbers do not correspond with their weak representation in the international market and global value chains (GVC).

Participating in international trade is a complex process for many SMEs. It may be challenging for SMEs to find end-buyers in foreign markets on their own accord, comply with their national export requirements, and to efficiently manage complex logistics networks or acquire skilled human capital to do so. Participating in trade through established GVCs by way of relationships with well-established locally domiciled players in the global trade network could provide them an entry point through which to participate in international trade activities.

The OECD’s research on Southeast Asia has found that 23 per cent of ASEAN SMEs import (directly or indirectly) and less than 12 per cent export (directly or indirectly). This highlights that SMEs are underrepresented in GVCs compared to larger firms, with 58 per cent importing and 54 per cent exporting. Furthermore, many of these larger firms are foreign-owned (30 per cent of large importers and 23 per cent of large exporters), indicating a disparity. In terms of SME importers and exporters, only 4 per cent and 2 per cent of them are foreign-owned, respectively, which likely accounts for their lower participation in GVCs.

As such, establishing links between SMEs and transnational corporations (TNCs) is crucial for integrating SMEs into GVCs. It is essential to foster a supportive environment for foreign direct investment (FDI), as FDI plays a key role in forging strong links between SMEs and TNCs. Research shows that FDI-facilitated relationships with foreign firms can significantly enhance SME participation in GVCs through access to global networks and technologies. This can be achieved through a variety of collaborative efforts, including strategic partnerships, contractual arrangements and technology licensing, amongst others.

Challenges in Integrating SMEs into GVCs

Internal factors such as competitiveness, and human and financial resources are crucial for SMEs to engage in GVCs. OECD research shows that highly productive firms with long-term growth potential tend to participate in GVCs. Improving the competitiveness of SMEs requires targeted support such as technological upgrading and specialised training. Access to advanced technology helps SMEs to streamline operations and meet international standards, while customised training in supply chain management and other programmes enhancing export readiness equips them for the challenges of global trade. In addition, partnerships with larger companies can provide further learning opportunities through shared expertise and resources.

External factors pose significant challenges to SMEs’ participation in GVCs. Domestically, SMEs face obstacles such as limited access to finance, poor infrastructure, inadequate logistics systems, unreliable broadband internet connections, especially in rural areas, and a lack of digital skills. These challenges can limit their operational capacity and growth potential. Public policy initiatives should promote inclusive development and take note of challenges faced especially by SMEs.

Financial constraints remain a major obstacle to SMEs’ growth, especially for start-ups. Traditional banking, through loans and credit schemes, remains the dominant source of finance in the region. However, the emergence of financial technology (FinTech) has begun to improve SMEs’ access to finance. It is important to continuously review policies to create an enabling environment for FinTech and explore alternative financing options such as venture capital, angel funding, public equity, Peer-to-Peer (P2P) lending and equity crowdfunding. These measures can support the diverse financial needs of SMEs, enhance their financial access, and thus provide the foundation for greater sustainability of their businesses.

Digitalisation also plays a crucial role in improving SMEs’ competitiveness and facilitating their integration into GVCs. The SME Policy Index 2018 shows that exporting firms are generally more advanced in adopting digital technologies, which helps them manage logistics and comply with international standards more efficiently. In contrast, non-exporting SMEs often use digital technologies mainly to increase their market visibility. There is an urgent need to broaden the understanding and use of advanced digital technologies among SMEs to help level the playing field for participation in GVCs.

In addition, a lack of access to information about international markets continues to hamper SMEs’ engagement in GVCs. While national policies and strategies exist to support SME exports – a key component of GVC participation – awareness of these programmes among SMEs remains low. Raising awareness and facilitating access to these support mechanisms is essential to ensure that SMEs can effectively take advantage of these opportunities.

ASEAN Continuing Support and Future Direction for SMEs

ASEAN as a regional platform continues to address the challenges of SMEs integration into GVCs, with one key initiative being the ASEAN Strategic Action Plan on SME Development 2016-2025, which establishes a platform to discuss SME challenges and opportunities, provide SMEs with better market access information through business matching, promote partnerships with multinational companies, and adopt international quality standards. In 2018, the ASEAN SME Policy Index was established to monitor and assess the effectiveness of policies that support SMEs. Preparations are underway for the ASEAN SME Policy Index 2024, which aims to reflect recent changes and emerging trends in the SME sector. This index will serve as an important tool for policymakers to better design and implement relevant policies to meet the evolving needs of SMEs.

Going forward, it is essential to have a comprehensive understanding of the challenges SMEs face in engaging in GVCs. One way to facilitate this would be to obtain reliable data. Currently, most studies on SME participation rely on a mix of enterprise surveys, case studies and administrative data, which often suffer from limitations such as incomplete country coverage, inconsistent time series analyses, and different definitions of SMEs within and across regions. With better data, more targeted, evidence-based policies can be implemented to focus on improving access to finance, streamlining export procedures, supporting technological upgrading, and increasing SME awareness of export and import support programmes.

At the regional level, ASEAN plays a crucial role in facilitating the exchange of best practices and regulatory updates, as well as in discussing trends or challenges faced by SMEs that can inform regional initiatives. ASEAN is also an important contributor to SME-related data collection. In addition, regional initiatives aimed at enhancing SME competitiveness include the facilitation of business matchmaking events and thematic capacity building programmes, which are essential to increase the opportunities for SMEs to participate in GVCs.

Continuous monitoring, review and adaptation of SME policies at the national level remain essential, as does the strengthening of regional cooperation. Aligning relevant domestic policies with regional developments will enable ASEAN’s SMEs to take full advantage of the opportunities offered by regional and global economic integration, thereby fostering sustainable growth and greater regional resilience against dynamic global challenges.

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Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.