GLOBAL SUPPLY CHAINS: Small and medium-sized enterprises have unprecedented opportunity to get into the act
AMONG the most significant developments in Asian business has been the emergence of global supply chains.
Regional foreign direct investment (FDI) flows have accelerated the development of global supply chains, forging linkages between export growth and local business development. It is also taking advantage of untouched local resources, such as low-cost labour and natural endowments, plus consumer demand in developed markets.
Further underpinning the global supply chain phenomenon in Asia have been national export-oriented development strategies, trade and investment liberalisation, integrated logistics systems and the application of advanced information and communications technology.
China, Asean and India have been Asia's major FDI recipients. As a result, global supply chains flourish throughout the region in diversified industrial sectors, including metals, energy, automobiles, semiconductors, electronic components and chemicals.
Global supply chains enable small and medium-sized enterprises (SMEs) to act as suppliers of labour-intensive parts and components or to provide other basic services, largely on a subcontracting basis.
Most global supply chains are led and coordinated by a larger transnational enterprise, which controls factors such as brand recognition, technology, production assets and distribution channels.
This lead firm requires and helps SME suppliers to implement improvements in the quality of their products or services, their productivity and the upgrading of their human resources. The lead firm also ensures the consistency and reliability of the suppliers.
Recently, economists, in developing Asian countries, have observed several trends in the development of global supply chains which are particularly relevant to SMEs.
First, enterprises from emerging economies -- beyond Asia's traditional economic powerhouses of Japan, South Korea and Taiwan -- have expanded their access to the markets of regional trading partners. This is partly due to the development of various free trade and investment agreements at the regional level.
As a result, some enterprises from China, India and Asean economies have been transforming themselves into transnational corporations, in line with the national economic expansion of their home countries. This trend is supported by increasing FDI outflows from those countries to neighbouring developing countries, as with intra-Asean FDI flows.
This has helped to offset the decline in FDI flows from developed countries after the global financial crisis and has provided new opportunities for local SMEs to engage with global supply chains.
Second, and in parallel, many SME suppliers in Asian developing countries have been moving to higher value-added functions within global supply chains.
Third, mainly due to increasing labour costs, some suppliers in emerging economies such as China, Malaysia and Thailand have started transferring traditional labour-intensive operations to less-developed neighbouring countries. This is particularly evident in sectors such as garment and apparel, consumer goods, electronics, food processing and automotive parts.
Fourth, SMEs are acquiring more technology and knowledge through global supply chains from larger or more advanced partners.
As they become integrated into global supply chains and gain skills and knowledge about conducting business across borders, SMEs in Asia begin to attract more foreign investment, usually in the form of joint ventures, as with the automotive parts industry in Thailand.
The spread of global supply chains in Asia has opened opportunities for local SMEs, particularly in underdeveloped countries, to tap into larger and more efficient business networks as well as gain access to overseas markets.
In many developing countries in Asia, however, SMEs still play a limited role as they may lack the scale and necessary knowledge for entering and integrating into global supply chains. They often require a more enabling environment to help them improve their capacity.
This involves having stronger policies and regulatory frameworks, supporting infrastructures, access to financing, an entrepreneurial culture, technology incubation and business development services.
SMEs that seek to establish partnerships in global supply chains should understand the structure of a specific supply chain and, more importantly, the specific characteristics of lead firms.
If SMEs are unable initially to enter a supply chain as a supplier of higher value-adding functions, they can join at a lower-value level, where entry barriers are comparatively low, and subsequently position themselves to move up the value-adding ladder.
Policymakers can provide assistance by conducting the type of research which is beyond the resources of individual SMEs. This will help identify which sectors and products to promote and pinpoint which supply chains offer the greatest opportunity for growth.
This generally involves three steps: 1) analysing the competitiveness of the home economy; 2) selecting product sectors; and 3) ascertaining existing supply-side capacity for those sectors.
Policymakers also can increase the capacity and competitiveness of SMEs in global supply chains by reducing domestic red tape, developing infrastructure, facilitating adequate flows of finance, and improving both business and general education.
Finally, SMEs can benefit from pro bono consulting and training - and even financial support - that many lead firms offer to their suppliers to improve efficiency throughout the supply chain.
This article first appeared on www.fungglobalinstitute.org.
