Promoting the Productivity of Smes in ASEAN Countries
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Promoting the Productivity of SMEs in ASEAN Countries Promoting the Productivity of SMEs in ASEAN Countries STRENGTHENING CAPABILITIES, ENABLING BUSINESS DYNAMICS STRENGTHENING CAPABILITIES, ENABLING BUSINESS DYNAMICS BUSINESS ENABLING CAPABILITIES, STRENGTHENING Promoting the Productivity of SMEs in ASEAN Countries Strengthening Capabilities, Enabling Business Dynamics PUBE This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. © OECD (2021) The use of this work, whether digital or print, is governed by the Terms and Conditions to be found at http://www.oecd.org/termsandconditions. FOREWORD | 3 Foreword This report is a contribution to the Canada-OECD Project for ASEAN SMEs (COPAS). It benefited from financial support from the Canadian government to the OECD Southeast Asia Regional Programme. Under COPAS, the OECD is conducting policy research to develop new policy insights to support implementation of the ASEAN Strategic Action Plan for SME Development 2016-2025. The report is co-ordinated with the ASEAN Secretariat and its members and has benefited from comments by the ASEAN Coordinating Committee on Micro, Small and Medium Enterprises. The work on this report pre-dates the COVID-19 crisis where the urgency of policy actions to improve the performance of small and medium-sized enterprises (SMEs) has increased further. SMEs are faced with a sharp fall in demand for their products and services, and are expected to bear the brunt of the economic cost of the pandemic, as they account for the bulk of employment in the most affected sectors. The challenge for ASEAN countries will be to define the right strategy for SMEs following the crisis, including the provision of policy support to help SMEs overcome the crisis and structural reforms that will support them during the recovery and strengthen their role for the future. The policies set out in this report are focused on these structural reforms that can enhance productivity and make SMEs a stronger engine for ASEAN countries in the time to come. The report benefited from inputs from many staff in the OECD Secretariat, notably Matej Bajgar, Giuseppe Berlingieri, Sara Calligaris, Flavio Calvino, Chiara Criscuolo, Isabelle Desnoyer-James, Jana Emmenegger, Gernot Hutschenreiter, Clara Koegel, Heesang Ryu and Jonathan Timmis. Doan Thi Thanh Ha (for Viet Nam), Keiko Ito, Kyosuke Kurita (for Indonesia) and Kiyo Tanaka (for Cambodia) facilitated the empirical work in this report with national firm-level data on business dynamics and productivity, that benefited from co-operation with national experts in Cambodia, Indonesia, Thailand and Viet Nam. Koen de Backer and Dirk Pilat provided overall guidance to the report and developed the policy messages. Laurent Moussiegt provided statistical support. Editorial and formatting support was provided by Angela Gosmann and Stella Horsin. Thanks also go to OECD’s Global Relations Secretariat for broader support in engaging with Southeast Asia, in particular Max Bulakovsky and Annie Norfolk Beadle, and to Sarah Box and Kelsey Burns in the OECD’s Directorate for Science, Technology and Innovation. An early version of this report was presented to the 8th Meeting of the Regional Policy Network on SMEs on 17 October 2017 in Manila, the Philippines. A final version benefited from comments by the ASEAN Coordinating Committee on Micro, Small and Medium Enterprises. PROMOTING THE PRODUCTIVITY OF SMES IN ASEAN COUNTRIES © OECD 2021 TABLE OF CONTENTS | 5 Table of contents Foreword 3 List of acronyms, abbreviations and units of measure 7 Executive summary 9 1 Introduction and policy recommendations 11 2 Why productivity matters 19 Productivity and economic growth 20 Growth and productivity in ASEAN countries 23 Looking beyond GDP 26 Firm-level perspectives on productivity 29 SMEs and productivity growth 29 A policy framework for productivity 33 Notes 35 3 Challenges for productivity growth in ASEAN countries 37 Benefiting from the production revolution 38 The digital transformation 39 Adjusting to structural change: From manufacturing to services 42 Informality 44 Notes 46 4 The drivers of productivity: What capabilities for SMEs? 47 Investments in tangible capital 48 The role of intangible investment 50 Innovation capabilities 51 Talent and skills 53 The role of management 54 Notes 56 5 Business dynamics and productivity 57 The role of firm-specific factors 60 Reallocation and productivity growth 64 Notes 68 PROMOTING THE PRODUCTIVITY OF SMES IN ASEAN COUNTRIES © OECD 2021 6 | TABLE OF CONTENTS 6 Productivity in interconnected economies 69 Diffusion: Global frontier firms and laggards 70 The role of international connectedness 74 Notes 81 7 An agenda for SME productivity in ASEAN countries 83 Foster a broad and coherent policy agenda 84 Strengthen SMEs’ capabilities for innovation 87 Foster talent and skills 97 Enhance SME access to finance 100 Strengthen international connectedness for SMEs 105 Promote entrepreneurship and business dynamism 110 Reduce informality 113 Notes 115 References 117 FIGURES Figure 2.1. Income and productivity levels in ASEAN and comparator countries, 2018 20 Figure 2.2. A stylised depiction of the factors shaping aggregate productivity growth 22 Figure 2.3. Composition of economic growth in ASEAN, annual average rates, 2000-08 and 2009-18 24 Figure 2.4. Labour productivity levels, ASEAN-8 and comparator countries, 1970-2018 25 Figure 2.5. Sources of economic growth and environmentally adjusted multi-factor productivity growth 27 Figure 2.6. SME share of total establishments and employment in ASEAN countries, 2014 30 Figure 2.7. Relative productivity by size classes, manufacturing and non-financial market services 31 Figure 2.8. A policy framework for productivity 35 Figure 3.1. The importance of manufacturing in value added and employment, ASEAN, 1995-2015 43 Figure 3.2. Size of the informal economy, average 1999-2006 45 Figure 4.1. Share of firms buying fixed assets, by size class, ASEAN 48 Figure 4.2. Share of firms investing in R&D, by size class, ASEAN 50 Figure 4.3. Share of firms that introduced a new product/service, by size class, ASEAN 52 Figure 4.4. Average management scores by country 55 Figure 5.1. Size distribution: Share of units 61 Figure 5.2. Size distribution: Share of employment 62 Figure 5.3. Age distribution: Share of units 63 Figure 5.4. Average employment by age class 64 Figure 5.5. Static labour productivity decomposition 66 Figure 6.1 Differences in productivity performance across firms: Indonesia 71 Figure 6.2. Differences in productivity performance across firms: Thailand 71 Figure 6.3. Differences in productivity performance across firms: Viet Nam 72 Figure 6.4. ASEAN trade, 2000-16 75 Figure 6.5. ASEAN foreign direct investment, 1980-2016 77 Figure 6.6. Global value chain participation by ASEAN economies, 2015 78 Figure 6.7. Share of firms exporting directly or indirectly, ASEAN 79 Figure 6.8. Centrality and the organisation of global value chains, 1995 and 2011 80 Figure 7.1. Share of low performers in mathematics and science 98 Figure 7.2. The FDI Regulatory Restrictiveness Index 107 Figure 7.3. ASEAN countries in The World Bank’s Ease of Doing Business Index, 2020 112 TABLES Table 7.1. Policy recommendations to increase SME access to finance in ASEAN 104 Table 7.2. Quality of different types of transport infrastructure 109 PROMOTING THE PRODUCTIVITY OF SMES IN ASEAN COUNTRIES © OECD 2021 LIST OF ACRONYMS, ABBREVIATIONS AND UNITS OF MEASURE | 7 List of acronyms, abbreviations and units of measure AEC ASEAN Economic Community AIM Amanah Ikhtiar Malaysia COPAS Canada-OECD Project for ASEAN SMEs DLT Distributed ledger technology EAMP Environmentally adjusted multi-factor productivity EDB Economic Development Board (Singapore) ERIA Economic Research Institute for ASEAN and East Asia ETPL Exploit Technologies FDI Foreign direct investment GDP Gross domestic product GVC Global value chain ICT Information and communication technology ILO International Labour Organization ITAP Industrial Technology Assistance Program (Thailand) KBC Knowledge-based capital KPI Key performance indicator MFI Microfinance institution MNE Multinational enterprise MOHE Ministry of Higher Education (Malaysia) MOSTI Ministry of Science, Technology and Innovation (Malaysia) MTI Ministry of Trade and Industry (Singapore) NIEO Nanyang Innovation and Enterprise Office (Singapore) NPR Next production revolution NRF National Research Foundation (Singapore) NTU Nanyang Technological University (Singapore) PROMOTING THE PRODUCTIVITY OF SMES IN ASEAN COUNTRIES © OECD 2021 8 | LIST OF ACRONYMS, ABBREVIATIONS AND UNITS OF MEASURE OP Olley-Pakes PISA Programme for International Student Assessment (OECD) PISA Programme for International Student Assessment (OECD) PPP Purchasing power parity R&D Research and development SAP Strategic Action Plan SDG Sustainable Development Goal (United Nations) SEZ Special economic zone SMEs Small and medium-sized enterprises SNA System of National Accounts SOE State-owned enterprise STEM Science, technology, engineering and mathematics STRI Services Trade Restrictiveness Index (OECD) THB Thai baht TVET Technical and vocational