Challenges ahead for Thailand's SMEs
The world economy is slowing down. Thailand has not been spared. The Asian Development Bank has lowered its growth forecast to a modest 2.7% for the year. Former finance minister and central bank chairman Virabongsa Ramangkura recently warned that the slowdown could last as long as five years.
Small and medium-sized enterprises feature prominently in the government's strategy to stimulate growth and development, with a recent plan calling for boosting credit to smaller firms and encouraging them to expand into regional and global markets.
The focus on SMEs is appropriate. Economies with lots of thriving SMEs are more dynamic and competitive than those dominated by a handful of sclerotic giants. More importantly, successful SMEs are critical drivers of inclusive growth, according to new research from the International Trade Centre (ITC), the joint agency of the United Nations and the World Trade Organisation.
But helping SMEs flourish in international markets goes beyond access to credit. ITC's SME Competitiveness Outlook, released this month, spells out how developing countries can understand what is holding small- and mid-sized firms back, and how best to enable them to succeed.
The report focuses on SMEs because 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% of national employment around the world -- 75% in Thailand.
Large companies everywhere tend to be more productive than small ones. But the gap in productivity is 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 "internationalise", whether by exporting or importing directly or selling to firms that do, register particularly high productivity, wage, and employment gains. Encouraging Thai SMEs to reach out to Asean markets and beyond clearly makes a lot of sense.
But while helping SMEs become more productive and competitive makes for inclusive growth, figuring out how best to do so isn't easy. The factors holding SMEs back vary from one place to another. Tax policies can dis-incentivise firms from growing. 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. Sometimes firms themselves lack skilled managers and staff. 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 organises 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 it also depends on the existence of a system to certify that their products meet international standards, and macro-level considerations like swift customs procedures.
The report's findings will help governments and their partners identify which weaknesses are most harmful. This paves the way for targeting reforms where they are most needed. Why invest more in expensive broadband infrastructure when what companies really need are the business skills to create websites and use email?
A customer stands next to a display of footwear for sale on a street in the capital. Limited internet use and few international quality certifications are hampering Thai small businesses' access to foreign markets. EPA
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. Thailand, one of 25 developing countries analysed in detail in the report, is no exception. Even though the country's telecommunications infrastructure is generally good, small firms make very little use of the internet, which is why they underperform in the "connectivity" pillar. Mid-sized firms do better, though not as well as might be expected in a country at Thailand's income level.
Broadly speaking, however, Thailand comes out favourably in the report's analysis. Thai companies operate in a trade-supportive business environment, with Thailand scoring well on indicators for logistics and ease of trading.
At the firm level, Thai SMEs adapt to changing market conditions more effectively than their counterparts in other developing countries, helped by their relatively thorough integration into the financial system (which in turn may be a product of past government policy). A high proportion of investments are financed by banks, aided by regulations requiring firms to have audited financial statements. Audited accounts also send positive signals to foreign firms interested in establishing supplier-buyer relationships with Thai SMEs. Mid-sized Thai firms' relatively strong investments in worker training enhance their capacity to adapt to changing market conditions.
While in many countries the international competitiveness of otherwise capable firms is dragged down by a weak business and policy environment, or vice versa, Thailand does well on both fronts. This may be why SMEs' share in Thailand's total exports is among Asia's highest, at close to 30%, compared to only 16% in Indonesia and 10% in the Philippines.
But even if Thai SMEs are competitive by regional standards, the report's indicators make clear where Thailand still has ample room to improve. Beyond their limited internet savvy, relatively few small companies have international quality certifications, hampering their access to foreign markets. Inadequate access to skilled labour is still perceived as a constraint by SMEs. These are logical priorities for future government policy.
Arancha Gonzalez is the Executive Director of the International Trade Centre, the joint agency of the United Nations and the World Trade Organisation.