SMEs facing greater challenges arising from competition,

technological and increasing consumer sophistication.

Credit Advisory Unit (CAU): CAU believes that SME development efforts are now further challenged by fiercer regional and global competition, rapid changes in technological and increased sophisticated, demanding and constantly changing consumer preferences and market requirements. Furthermore, there are other pressing issues for policy attention as well.

SMEs will continue to be an important socio-economic backbone of the region, although many segments of the SME sector remain burdened by limited skills and technological capabilities. Notably, there remains a great shortage of medium-sized firms, and this has severely constrained many efforts made to accelerate upgrading, diversification and linkages among the regional economies. Lastly, domestic output and employment has to be uplifted from the significant contraction caused by the 1997-1998 crisis, the 2001-2002 slowdown in global and regional economic activities, and the negative impact from of the severe acute respiratory syndrome in 2003. Meanwhile, additional job opportunities have to be created for the constantly expanding pool of workers (women, school leavers and university graduates etc.) and a business friendly environment, opened up for the potential and existing SME entrepreneurs themselves.

Another common issue raised by CAU is SME financing, which has been and will remain perennial issue. Many financial support measures for SMEs have limited outreach at disparate cost. Criteria for and terms of financing appears to be rewarding those enterprises with a certain scalable size and good management practices, especially for those jurisdictions with established credit bureaus. In addition, capital markets in the region are generally far from adequate for SME debt (bonds) and equity (shares) financing. Higher transaction costs and the lack of expertise in the evaluation of SMEs render it unprofitable for commercial banks to focus on such enterprises as their main debt clientele. Meanwhile, most SMEs do not have a bankable business plan, which can reduce stringent bank demands for quality collaterals. Proper financial reporting and information disclosure is another difficult issue to resolve for many SMEs.

These dynamics bring about a crucial need for value creation and capacity building by enterprises regardless of size, according to CAU. The process is mediated through more active, focused participation in trade and investment, easier access to the global store of knowledge and information, and greater integration into more focused business linkages nationally and regionally. Individual creativity and entrepreneurial initiatives are also much needed to stay competitive. CAU holds the view that entrepreneurship is the foundation of gainful progress in the market economic system. Higher levels of efficiency and flexibility in product quality, cost and delivery punctuality are other determinants of sharpened competitiveness at the domestic and external levels. The upgrading process, largely pushed and pulled by innovation, can be further leveraged through the formation of inter-firm networks and linkages within and across borders. SMEs need to be increasingly involved in borderless transactions via e-commerce. Indeed, the tremendous potential of “virtual” trade remains untapped by most enterprises, both large and small, in ASEAN.

The public sector plays a significant role in sustaining a stable and equitable pattern of economic, social and, for that matter, SME development. An implied imperative in this regard is good governance and a conducive policy environment – especially in the promotion of entrepreneurial initiatives, private enterprise, on-going learning and innovation, and cross-border linkages and collaboration. As such, it is essential to ensure greater consistency, coherence and clarity in SME-related policies and programme both across industries as well as within the public sector itself. Meanwhile, the needs for programme sustainability and maximum outreach entail an efficiency-oriented policy approach, greater policy focus, and better policy coordination in the delivery of SME-support and facilitating activities.