INTRODUCTION

Asia has been continuously growing during the recent decades, and this growth has alleviated poverty
and increased the number of middle-income countries in the region. However, the recent regional and
global economic slowdown requires a new growth model forAsia,withstrengthened dynamics for small
and medium-sized enterprises (SMEs) to boost national productivity. SMEs are the backbone of the
economies of Asia, accounting for 98% of all enterprises and 66% of the national labor force on average
during 2007–2012. SMEs contributed 38% of the gross domestic product or manufacturing value-added
in Asia on average in 2007–2012, suggesting their contribution to the region’s economies can be
expanded further. SMEs influence trade SMEs brought about 30% of the total export value in Asia on
average in 2007–2012. In the People’s Republic of China (PRC), SMEs accounted for 41.5% of total
export value in 2012, up 6.8% year-on-year, while in Thailand they made up 28.8% of total export value
with 3.7% year-on-year growth. SMEs that are part of the global supply chain have the potential to

(ADB2014).Definitions of SMEs are different country by country: In some countries the criteria
promote international trade and mobiliz edomestic demand.

for the categorization is capital, in some countries it is based on the number of employees, and other
countries use a mixed criteria like Japan, and it varies in each business.
Limited access to finance, lack of a database, low research and development (R&D)expenditures,
undeveloped sales channels, and a low level of financial inclusion are some of the reasons behind the
slow growth of SMEs. In this paper, we will focus on four major reasons that have slowed SME
development in Asia including: i) lack of finance, ii) lack of comprehensive databases, iii) low level of
R&D expenditures, and iv) insufficient use of information technology in SMEs. We will then provide
remedies for mitigating them.

IMPORTANCE OF SMES IN ASIA:

As for the importance of SMEs in Asia, according to a survey conducted by the Asian Development Bank
(ADB) on 14 economies from the five ADB regions: (a) Kazakhstan (Central Asia); (b) the People’s
Republic of China and the Republic of Korea (East Asia); (c) Bangladesh, India, and Sri Lanka (South Asia);
(d) Cambodia, Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam (Southeast Asia); and (v)
Papua New Guinea and the Solomon Islands (the Pacific), SMEs, together with microenterprises, account
for more than 90% of total enterprises in each country (ADB 2014). SMEs, including microenterprises,
contributed 59.1% of nominal gross domestic product (GDP) in Indonesia in 2012, a figure that is
gradually increasing (Figure 1). SMEs and microenterprises in Thailand contributed 37.0% of nominal
GDP in 2012, and in Malaysia, 32.7% of real GDP in the same year. Thailand targeted an increase of
SME contribution to GDP of 40% or more in its country strategy 2012. In Kazakhstan, the nominal GDP of
SMEs tended to increase but their contribution to GDP decreased over 2010–2012, and was 17.3% in
2012.

CHALLENGES SMES FACE:

SMEs face challenges from increased competition, the ability to adapt to rapidly changing market
demand, technological change, and capacity constraints relating to knowledge, innovation, and
creativity. For many SMEs, however, their potential is often not fully realized due to factors related to
their small scale:
i. lack of resources (finance, technology, skilled labor, market access, and market information);
ii. lack of economies of scale and scope;
iii. higher transaction costs relative to large enterprises;
iv. lack of networks that can contribute to a lack of information, know-how, and experience of domestic
and international markets;
v. increased market competition and concentration from large multinational enterprises caused by
globalization and economic integration;
vi. inability to compete against larger firms in terms of R&D expenditure and innovation (product,
process, and organization);
vii. subject to “churning” and instability; and
viii. lack of entrepreneurial zeal, capacity, and know-how.
In addition, many small businesses find that their geographical isolation puts them at a competitive
disadvantage. Despite these substantial obstacles many economies remain heavily dependent on SMEs,
particularly for employment generation. Despite their perceived weaknesses SMEs have not been swept
away with the process of globalization and regional integration, but, rather, their role and contribution
have changed and evolved which have enabled many to remain internationally competitive and
collectively be an important source of employment generation (Harvie and Charoenrat 2015).
In this section we will focus on explaining four major challenges faced by SMEs:
i) difficulties in accessing finance, ii) lack of information infrastructure for SMEs, iii) low
level of business R&D in the SME business sector, and iv) insufficient use of information technology.3.1
SMEs’ Difficulties in Accessing FinanceFigure 3 shows the level of difficulty in raising money depending
on firm size: the thick line shows the difficulties faced by SMEs, and the thin line shows the relative ease
for large enterprises. Data points below zero indicate that companies are finding it difficult to raise
money from either banks or the capital market. SMEs appear to face a more difficult situation in raising
money when compared with large firms Lack of Information Infrastructure for SMEsThe financial
industry deals with information intrinsically. However, there is an asymmetric information problem
between suppliers and demanders of funds in general. Information infrastructure is necessary to
remedy this problem. Many big enterprises list their shares on stock markets and issue securities in
bond markets. Therefore, institutional information sharing schemes of capital markets can facilitate
access to a wide range of information necessary to estimate the creditworthiness of big
enterprises.However, most SMEs have no connection with capital markets. Financial institutions can
closely and continuously observe borrowers, but it is costly to do so for borrowers of small loans.The
lack of information infrastructure for SMEs exacerbates the information asymmetry problem.In
collateral-based lending, the provision of collateral is the simplest way for SMEs and financial
institutions to reduce the risk premium in loan formulations. However following the introduction of the
Basel capital accord, many governments expanded policy-based finance for SMEs for mitigating the
constraints on SME finance as an urgent countermeasure. Under such a situation, efficient and lower
cost credit risk evaluation tools were necessary for SME financing, especially for transaction-based
lending. To address the serious credit constraints on SMEs to conform to Basel II requirements on risk
management, comprehensive information infrastructure is needed. This soft infrastructure will be
explained in Section 4 of this paper.

3.3 Low Level of Business R&D in SME Sector:

Business enterprise expenditure on research and development (BERD) is an important driver of

innovation and economic growth. During the last decade, BERD intensity rose significantly in many Asian
economies like the Republic of Korea, the People’s Republic of China, and India. However in many other
Asian economies it slowed or did not increase significantly. An economy’s R&D is generally concentrated
in a limited number of large firms. In some economies, however, small and medium-sized firms account
for a significant share of the total business R&D effort. This may be due to a relatively large body of
SMEs or to SMEs that perform a large amount of R&D (such as specialized R&D units that are part of a
larger group). The share of SMEs in total BERD in some Asian economies is low, like Japan with only 5%;
this is one of the important reasons behind the slowed economic growth in Japan. However, when we
look at economies in many non-Asian developed economies this ratio is more than two-thirds like in
Estonia and New Zealand (OECD 2013). Foreign-controlled affiliates also play an important role in
domestic R&D. However, when looking at Japanese data, in 2009–2010 they accounted only for 6.3%. In
many other Asian economies this ratio is small. But when we look at non-Asian developed economies,
this ratio is large, for example 70% in Ireland (OECD 2013).
3.4 Insufficient Use of Information Technology in SMEs information technology has developed rapidly.
Household ownership of mobile phones, smartphones, and tablet computers has also spread quickly in
the recent years. Accordingly, more consumers have come to prefer Internet sales to over-the-counter
sales and the e-commerce market for individuals is expanding.However, SMEs have been unable to
sufficiently utilize such opportunities. Most small enterprises do not have their own websites. For
instance, in Japan while households’
mobile phone ownership reached beyond 90% and Internet users reached 90.58% of the population in
2014 (World Bank 2016), SMEs selling products and receiving orders via their own websites accounted
for only 10% of the total and less than 10% have their own online shops or market their goods on
Internet shopping sites (METI 2014).
REMEDIES FOR TACKLING SME DEVELOPMENT CHALLENGES:
The previous section defined some major challenges that face SMEs. In this section, we provide
some efficient remedies for the development of SMEs in Asia, these solutions have worked in some
Asian economies and it is necessary to expand them to the rest of Asia.
4.1. Diversifying Channels of Financing In this section: we describe three different methods for
easing SME financing by developing (i) credit guarantee schemes by governments, (ii) private SME
lenders, and (iii) hometown investment trust funds for financing risky SMEs and start-up businesses.
4.1.1 Development of credit guarantee schemes:
Owing to the significance of SMEs to Asian national economies, it is important to find ways to provide
them with stable finance. However, SMEs usually have severe difficulties raising money. The under
supply of credit to SMEs is mainly because of the asymmetric information, high default risk, and lack of
collateral. SMEs have more difficulties accessing finance compared to large enterprises. Lending
institutions mainly prefer to increase the flow of funds to the latter sector, since the aforementioned
reasons are lower in this group. In order to fulfill this problem, various government and donor initiatives
have emerged in developed as well as developing and emerging economies, and created the Credit
Guarantee Scheme (CGS). The public credit guarantee scheme is a tool to reduce the supply–demand
gap in SME finance.The CGS has been used over the decades in many countries and in various forms as a
way to increase the flow of funds into targeted sectors and groups. The purpose for the creation of such
schemes is to contribute to the flow of funds in the sectors that have difficulties raising funds, that is,
the SME sector. The CGS makes lending more attractive by absorbing or sharing the risks associated with
lending to the targeted sector. This scheme can also increase the amount of loan funds available to an
enterprise beyond its own collateral limits, because the guarantee is form of loan collateral. The
guarantee manager can assume the additional role of loan assessor and monitor, which can improve the
quality of the loans made (Zander, Miller, and Mhlanga 2013). However, guarantee funds have a cost,
which is paid through the fees charged and/or subsidized by the government or by third party
institutions.
CONCLUSIONS:

SMEs face challenges from increased competition, the ability to adapt to rapidly changing market
demand, technological change, and capacity constraints relating to knowledge innovation, and
creativity. For many SMEs, however, their potential is often not fully realized due to factors related to
their small scale: lack of resources (finance, technology, skilled labor, market access, and market
information); lack of economies of scale and scope; higher transaction costs relative to large enterprises;
lack of networks 18 that can contribute to a lack of information, know-how, and experience of domestic
and international markets; increased market competition and concentration from large multinational
enterprises caused by globalization and economic integration; an inability to compete against larger
firms in terms of R&D expenditure and innovation (product, process, and organization); being subject to
“churning” and instability; and a lack of entrepreneurial zeal, capacity, and know-how. This paper
provided solutions for mitigating four major challenges faced by SMEs:
i) Three different methods for easing SME financing are by developing
i) credit guarantee schemes by governments, (ii) private SME lenders, and
iii) hometown investment trust funds for financing risky SMEs and start-up businesses.
ii) The lack of SME databases is another challenge for SMEs. Their financial and nonfinancial accounts
are often difficult to assess.
As a possible solution for other Asian economies, we provided the example of the Credit Risk Database
(CRD) in Japan that shows how SMEs can be rated based on financial and nonfinancial data. The CRD
includes a large amount of data that can be used to rate SMEs through statistical analysis.
iii). The third major challenge of SME development is the lack of R&D expenditure.
To mitigate this problem we provided a variety of solutions. In addition to providing grants, contracts,
and loans, Asian governments should contribute to business R&D through tax incentives. This is already
occurring in many Asian economies. Collaboration is a key vector of innovation-related knowledge flows
both for firms that use R&D (either internally developed or externally acquired) and for those that are
not R&D active.
iv). The last major challenge for SME development is the insufficient use of information technology
for sales. It is possible that national governments through the municipalities that are nationwide, or
through societies of commerce and industry and chambers of commerce and industry provide close
mentoring-style support to SMEs and small enterprises for teaching them how to use information
technology in their business.

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