The Problem with SMEs in Asia

In the West, small and medium-sized enterprises (SMEs) have been a key part of economic growth. In Asia, however, SMEs have been at a disadvantage for decades.

Unlike their Western counterparts, SMEs in Asia face many obstacles to growth. These include a lack of support from policymakers and banks, as well as a lack of innovation or development. It is no secret that SMEs have been left out of the Asian economic boom so far.

SMEs represent the backbone of a successful economy. By definition, they are small, privately owned businesses which contribute greatly to the economy. According to statistics, a staggering 98 percent of all businesses are SMEs.

They represent 90 percent of all jobs and produce 70 percent of the world’s gross domestic product (GDP). Their positive effect on the economy is obvious. In fact, the biggest challenge facing SMEs in Asia is actually more common than being an entrepreneur: access to finance. In fact, if their main sources of funding dried up, many SMEs in Asia would struggle to survive.

Challenges Faced By Small And Medium-Sized Enterprises In Asia

There are several reasons why SMEs in Asia are not growing as fast as they could. For one, companies in Asia lack innovation and development. On average, they spend less than 20 percent of their revenue on research and development (R&D). This figure is significantly lower than in the West, where SMEs dedicate around 50 percent of their revenue to R&D. To be fair, Asia is a very dynamic region, so this number is more likely to be even lower, but it does show the challenges that Asian SMEs face.

The solution to this problem lies in the way that SMEs use innovation to boost their growth and profitability. Many businesses in Asia have failed to innovate because they did not want to invest time or money into developing new products or technologies, believing that there were no benefits to the business.

Lack Of Support From Policymakers And Banks

While SMEs have long been ignored by both the public and private sectors in Asia, banks have taken up the responsibility of funding SMEs through different financing options. In general, SMEs in Asia face a shortage of financing options and experience extremely high interest rates when they borrow from banks. For example, a loan for a medium-sized business in Korea can be as high as 20 percent. Banks like to lend to large and established companies, while small businesses are typically funded through the issuance of a special kind of bond known as “term loans.”

This issue is compounded by the fact that banks are often hesitant to lend to SMEs, as they are more likely to have a high degree of risk than large businesses.

Lack Of Innovation Or Development

Over the last 30 years, SMEs in Asia have only grown between 2 and 3 percent per year compared to 10 percent or more in the West. As a result, their average productivity has stagnated and most SMEs are barely meeting local demand for their products and services. This is in part due to low levels of R&D spending by both private businesses and government agencies.

The lack of innovation and development has caused many SMEs to spend large sums of money on skills development for themselves, rather than invest in technology and employee training. This leaves them with a stark choice: face increased competition from global businesses or turn their back on global markets. As a result, they lose their market-leading position.

What Can Be Done To Help?

According to the 2020 Global Competitiveness Report, not much has changed for SMEs in Asia compared to prior years. The majority of the Asia Pacific region is still plagued by competitive disadvantages, which include “inefficient regulations, high cost of power and water, poor transport infrastructure, and restrictive labour policies”. The report also cited slower economic growth and a widening income gap as key challenges facing the region.

The Need For A Holistic Approach To SME Growth

SMEs across Asia have been slow to grow, often because their customers are more likely to buy from large businesses instead. Smaller businesses may also be struggling because they lack information and expertise. This could be because these businesses are not yet as profitable, which means they don’t see the need to invest in financial services.

Furthermore, the SME sector also faces an extremely competitive environment. This often comes from larger companies that have invested in processes and know-how to cater to their customers. Small businesses can compete with bigger businesses in terms of innovation, customer service and the cost of their products, but these companies also offer financing.

Supporting SMEs With Social Entrepreneurship Programs

SMEs face several obstacles to growth in Asia. A common stumbling block is the mismatch between management and the characteristics of the business itself. In general, SMEs in Asia lack the intellectual property and skills required to scale-up their operations. Furthermore, the social entrepreneurship program is one way to support SMEs in their quest to grow. Through these programs, they are given funding, resources, and other support to turn their businesses into social enterprises and positively impact their communities. There are several foundations that have opened up programs to support social entrepreneurs across Asia and the rest of the world.

Conclusion

Despite their many disadvantages, SMEs can help drive economic growth, reduce poverty and create jobs in a region where they are a key part of the economy. At the same time, SMEs must find ways to overcome the barriers to growth that exist in Asia. In order to do this, governments should do more to support and empower SMEs, and financial institutions must continue to provide support and capital to help SMEs grow. If SMEs are to truly contribute to economic growth, they must be given the support they need.

China’s GDP rose to 6.1% in 2019. Other regions in Asia, including India and Indonesia, performed better, at 4% and 5% respectively. Some argue that it is smaller companies that were driving this growth well before the pandemic.