Comparative Analysis of Enterprise Data (Summary)

2010 marks an important year for APEC. A new APEC vision is being created to set a path beyond the Bogor's objective in preparation for this year's summit meetings.

Small and medium-sized enterprises play a critical role in creating jobs, achieving innovation, and developing economies in the APEC economies. SMEs are required to advance further in order to establish a growth trajectory after the global financial crisis. I would like to welcome a lively exchange of thoughts for the establishment of institutional infrastructure to maximize the diversity and potentials of SMEs.

The theme for APEC Japan 2010 is "Change and Action." We will plan required changes in line with the structural shift in the global economy and implement specific actions.

When the APEC was established, the key issue was trade friction. Today, the global economy faces a great structural shift through simultaneous recessions after the global financial crisis and the rise of emerging countries.

Against this backdrop, we plan to set up a long-tem comprehensive growth strategy based on five pillars: "Balanced Growth," "Inclusive Growth," "Sustainable Growth," "Innovative Growth," and "Secure Growth."

The second "Inclusive Growth" includes support for SMEs.

SMEs generate about half of the GDP in the APEC region. The Asia Pacific region is leading global economic growth, and major growth is expected going forward. The two engines, SMEs and the Asia Pacific region, should work together to produce synergistic effects on economic development.

In the past there existed the idea that each nation would have one of every industry and the major corporations within these industries were seen as the endpoint of industrial development. These tended to be standalone organizations, organized internally by a hierarchy. Vertical integration allowed the corporation to produce most inputs internally and they were also able to engage in long-term planning with five to 10-year horizons. There was a strong commitment to corporate secrecy and loyalty, with careers being typically within the company, and employees starting at the base and working their way up the corporate ladder. In this model, the innovation process was very separate from implementation and commercialization activities, and occurred in R&D labs. This process involved secretive operations in the pursuit of long-term research that did not have much concern for commercialization or profitability.

That model is now being replaced by the model that has grown out of places like Silicon Valley where innovation happens in all firms at every stage of production. Silicon Valley is mostly made up of SMEs with minimized internal hierarchy and vertical unbundling of production. There are also very open boundaries between firms and much "job-hopping". Furthermore, there are high levels of experimentation through entrepreneurship and learning through failure or trial and error, and these lessons tend to be absorbed by the community collectively.

A new set of institutions has played a key role in this system. These are sets of networks, often ethnically driven, but also in the form of alumni associations or technology associations, that cut across firms and institutions, helping entrepreneurship to flourish by providing mentors, partners, and service providers to prospective entrepreneurs and by enabling the sharing of new information across firms.

The semiconductor industry, which was pioneered and grown by Silicon Valley, has been revolutionized by this. Here we can see an increasingly decentralized environment with increased fragmentation of production and vertical specialization, allowing entrepreneurs to continually find new niches to fill and to become the best in the world in. Thus, firms specialize and collaborate with vendors and suppliers all along a supply chain that is external to the company. The semiconductor industry has also become a truly global industry, with companies in the supply chain coming from around the world.

When reviewing the evolution of Silicon Valley we can see that growth occurred in a series of waves associated with particular clusters of technologies. With each new wave of increased technology, specialization and depth occurred, leading to growth fueled by the innovative recombination of new and existing skills and further innovation. This constant innovation has occurred to such an extent that traditional boundaries between industries are being completely blurred.

It is important to note that nobody could have predicted this evolution. Whereas in the past, with clearly defined industry sectors, the direction of innovation was clear. Technology trajectories are not clear at present, especially since, with the rise of global supply chains, innovative solutions can come from anywhere in the world. As a result, firms cannot plan 10 years in advance and must learn to scan the global environment to find partners or customers to solve problems for them.

Here are four proposed lessons regarding SMEs for policymakers and SMEs themselves. The first is that there are no recipes or set criteria to guarantee growth. One unsuccessful recipe that was attempted mostly in countries in Latin America in the 1990s was the idea of perfecting the free market by removing trade barriers and minimizing regulation, etc. Those countries stumbled while countries like China and Korea, that had more heterodox approaches, and where the state was involved in growth, flourished.

Another recipe was investing in a national growth strategy by supporting national "champion" firms and investing in strategic technology sectors and national innovation systems. This was typified by Finland and Nokia. The problem with this approach is the inherent assumption that the contours of the economy of the industry are constant. However, in a world where innovation can come from anywhere, you need to be continually scanning to keep up with global developments. Finland failed to do this and stumbled, but it is now recovering.

The third failed recipe was to try to recreate Silicon Valley by putting together a technology park, university research, and venture capital, etc. This was attempted in Cambridge, England. It had a university, a research park, and finance, but the three sectors were isolated, making it hard to quickly recombine, learn and innovate. The lesson to be learnt here is that we should try to connect to dynamic regions in the world economy, rather than to try to grow them anew.

The second lesson for policymakers and SMEs is to differentiate before cutting costs. Firms and regions that have been successful have done so by developing distinctive skills and not cutting costs. Firms need to be cost competitive, but simply cutting costs can be counterproductive, undermining learning and innovation. The task for governments is to be in continual dialogue with the business community to identify domestic strengths and devise ways to enhance these strengths and connect them to global supply chains.

The third lesson is linked to global value chains and the significance of diaspora networks. These can be very important for linking particular places to the global economy. Such networks are made up of immigrants in Silicon Valley who were educated in the United States and have now reached back to their home countries. Governments and SMEs can utilize diaspora networks to identify underutilized resources at home and to transfer global best practice in terms of not only technology, but also in the form of business models, links to customers and partners, and brokering technology or institutional transfer.

The fourth lesson is the need to monitor progress carefully. Constant monitoring and measuring of outcomes are required to assess internal progress and developments in a turbulent global economy so that adjustments can be made accordingly.

Chinese Taipei's emergence from being a poor agricultural economy to the leading manufacturer of electronic systems around the world was in part due to the creation of a Science and Technology Advisory Group. It included many overseas Chinese who urged them to focus on the emerging semiconductor industry. Ireland, India, and Israel are other examples of similarly successful nations.

We should continue our discussion by understanding the critical roles played by SMEs in the economy and different impacts felt by each country in the global economic crisis.

• Globalization of SMEs
  In the electronic equipment industry, more than half of SMEs' shipment value is incorporated into the trade with foreign countries, as we include both direct and indirect exports. The key components of SMEs' globalization are "network building" and "information." We need to take a look at how they grasp information in each local area and disseminate their corporate image.
• Productivity Improvement
  Productive SMEs tend to expand their business overseas through exports and foreign investments, and SMEs that operate overseas tend to improve their productivity. However, there are quite a few SMEs in Japan that are highly productive but have not expanded their operations overseas. Those SMEs have potentials to be globalized.
• Expected Assistance
  SMEs play a critical role in maintaining the employment level. We need to offer timely financial assistance to help maintain this function. Fostering human resources for SMEs and their successors is also a challenge.

SMEs in Indonesia are mostly microenterprises with low manpower and asset value. They are mainly located in rural areas, concentrating on agriculture, and usually conducted by poor households, so subcontracting is still underdeveloped. SMEs are considered a tool to reduce poverty and a source of employment rather than a source of entrepreneurship or innovation.

The main problems facing SMEs in Indonesia are a lack of affordable raw materials; marketing in the competition against large enterprises; and lack of capital. Hopefully they can benefit from APEC in the form of larger market opportunities, cheaper raw materials, and the transfer of technology.

aigo was started 18 years ago with 220 Renminbi and was a classic example of an SME.
There are differences between people and cultures and so uniqueness is very important at aigo, especially in the industrialized world where everything is the same. The right side of the brain is a key because it is the creative part of the brain and can be used to create new value.

With the rise of the knowledge-based economy and the new age of information, and in the wake of economic crisis, we can no longer rely on traditional growth models or business activities. As such, there are great opportunities available to SMEs and startup businesses in the post-crisis world economy.

Hong Kong, China has a business friendly environment and the government has introduced various programs designed to aid startup companies, including those in the fields of technology design, digital environment and digital entertainment. These include technical and management assistance; practical support; business matching; business information and consultation; and export marketing.

Different companies require different forms of support and business incubators need to give them a unique design and a facilitating environment for growth so that they will become self-sustaining operations.

• This year marks our company's 450th anniversary of foundation. It is a family-owned company. We are focusing on molding with 373 employees.
• We produce a large-variety of products in small volume, such as water and sewerage pipe conduit equipment, landscape materials, and molded products. We adopt traditional techniques for some products to keep traditional craftsmanship intact.
• Out management principle is two-fold. One is "sincere management and business that matches the times." The other is "coexistence and prosperity with customers, regions, and global environments." As part of our company policy, we emphasize the development of new products and new businesses as well as on evolution of "techno-craft" (i.e. the amalgamation of high-tech and improved skills), which allows us to produce products in variation and random volumes.
• We started overseas trading in the 1930s. Though our exports have been decreasing ever since the Plaza Accord, we are trying to revitalize this part of our business. In this symposium, I would like to discuss how SMEs can enhance business opportunities in both the Asia Pacific region and other locations overseas.

Prof. Wakasugi : What roles do SMEs play in the globalized economy and economic integration? What challenges do they face there?

Prof. Saxenian : SMEs are playing a bigger role in the global economy because of their flexibility and adaptability. In terms of challenges, they each need particular information and particular support to access global networks.

Mr. Feng : A unique or special product will create opportunity. In addition, the internet has played a vital role in global communication and access.

Prof. Wakasugi : What I find intriguing about the statement of Professor Saxenian was "differentiate first, cost-cutting doesn't matter." Could you comment on this as a first-line business owner?.

Mr. Okamoto : The most important element of an SME is its "characteristics". The biggest challenge for SMEs is the lack of human resources, but we expect to receive public assistance for overcoming this challenge.

Prof. Wakasugi : Dr. Tambunan mentioned that he was not 100% sure how he can evaluate what type of impact APEC will have on SMEs.

Dr. Tambunan : Although the global economy and trade liberalization have expanded market opportunities, local SMEs must face the challenges of innovation, competing with imports, and finding ways to participate in global production value chains.

Prof. Wakasugi : I would like to have your comment on the relationship between globalization and SMEs in the context of the export marketing fund program provided by the Hong Kong government.

Mr. So : SMEs account for 90% of all operations in the APEC economies and employ 50% of the work force, and from that alone, it is apparent that we need SMEs as an impetus to drive the economy forward. What is required now is capacity building and expansion; and the challenges facing SMEs aiming for globalization are the need for access to the global economy, the market, and the quality of human resources. The export marketing fund is aimed at addressing these challenges and will open the door for SMEs to tap into global markets.

Prof. Wakasugi : Professor Saxenian stated that R&D of the 20th century has lost its validity and that a new strategy is required. Could you comment on the role of innovation for the survival of corporations?

Prof. Saxenian : Innovation is vital and must be ongoing in every aspect of production. It can take many forms: organizational, technological, or in terms of a business model.

Prof. Wakasugi : What policies do you expect from the government?

Dr. Tambunan : Direct policies and indirect policies are simultaneously needed. Indirect policies include microeconomic trade investment policies, monetary policy, and fiscal policies that all must create a conductive environment for SMEs to compete with large enterprises. Direct policies should focus on capacity-building in technology and human resources, in spite of the fact that SME policies mainly focus on how to give subsidized special credit schemes to SMEs in many countries.

Mr. Okamoto : We need to put in place an environment for fair competition including the elimination of tariff-based barriers. Some people expressed concerns for subsidies, but since overseas production involves great risks, I think it is reasonable to provide subsidies to hedge such risks. A stronger yen should also be reined in.

Q1:

What policy should be taken by retailers and service businesses that occupy a large portion of SMEs? I suppose SMEs should try to be like WalMart rather than Google or Microsoft.

Q2:

Small-and-medium-sized retailers and service businesses also need the impetus to expand their business overseas.

Q3:

There was a suggestion today that policies should be transformed from manufacturer-oriented to service-oriented. Does it cover large companies as well as SMEs?

Q4:

What SME policies do you expect for local governments?

Q5:

Isn't it better for SMEs to protect their technology rather than to spread and globalize it?

Mr. Okamoto

It would be great if local governments promote the policy of "local production for local consumption" in addition to the existing financial and employment assistance. The globalization of retailers is tough, but we will be able to apply overseas the business model of wholesalers that maintain their revenue through the combination of product sales with installation work.

Prof. Saxenian

Manufacturing has become very efficient and thus the service sector will probably experience the most productivity enhancements in the near future. There are also many innovative retailers that are actually wiping out existing firms since innovation is destructive as well as creative, as Schumpeter taught us. The service sector is where the really interesting innovations will continue to happen, and SMEs can do a very good job here.

Mr. So

The service industry is where a lot of innovation will start. Furthermore, the retail sector is not removed from the global economy, and the significance of marketing and promotion to establish a global brand can facilitate innovation in the design sector.

The idea of protecting domestic technology is outdated and will cause regions to miss out on the enhanced efficiency of the world's trading system.

Dr. Tambunan

Due to differences in the problems faced in different sectors, sector-based SME policies are necessary.

Protectionism is pointless. There is no "local" anymore. The benefits of APEC are not only trade, tourism, and investment, but also the transfer of technology.

Mr. Feng

Governments should train SMEs to take advantage of the Internet and also to be the best in a particular field.

Prof. Wakasugi

The protection of technology makes sense, but technology will spill over in the end. Various technologies are intertwined to create a new technology, and blocking technological exchange will halt further development. We need to hit the right balance between protection and development.

Every country needs to maintain its unique position within APEC. I believe that we can achieve both harmony and diversity.

Prof. Wakasugi

We have reached a consensus on the role of SMEs and their growth in globalization. We have also confirmed that SMEs play an important role in achieving innovation, creating new businesses, creating jobs in each region, and providing diverse services and goods. From a policy perspective, the promotion of entrepreneurship among SMEs, the acceleration of free and open trade among APEC member countries, the infrastructure ensuring fair competition, information delivery, and business matching assistance are important. In addition, with long-term perspectives in mind, both financial assistance that is not limited to subsidies and assistance for human resources development are also required.