Role of PTAs for Promoting MSMEs Integration in GVCs Masato Abe, Ph.D. IEDS, TIID, ESCAP Regional Dialogue on ENHANCING THE CONTRIBUTION OF PREFERENTIAL TRADE AGREEMENTS TO INCLUSIVE AND EQUITABLE TRADE UNCC, Bangkok, Thailand, 22 June 2017 1
Topics Opportunities and challenges for MSMEs in the context of economic integration through RTAs Policies to facilitate MSMEs integration into GVCs effectively ASEAN/CLMV cases (thus talking about AEC)
Mega-RTAs in the future
Stages of economic integration 1. Reduction in trade barriers Preferential trading area (PTA) Free trade agreement/area (FTA) 2. Customs union 3. Common market Mercosur 4. Economic union 5. Monetary union EU 6. Fiscal union 7. Complete economic integration TPP, RCEP FTAAP NAFTA AEC Deeper Integration
Trade shares of selected RTAs, 2014 70% 60% 50% 40% 30% 20% 10% 0% AEC ENEA EU ASEAN NAFTA Intra-subregional trade (% of total subregional trade) Share of world trade (%) Source: IMF, Direction of Trade Statistics (DOTS). Available from https://www.imf.org/en/data (accessed 18 November 2015). Notes: 2013 data used for Brunei Darussalam; data for Democratic People s Republic of Korea and Myanmar are not available. 5
What is a global value chain? A sequence of all functional activities required in the process of value creation involving more than one country (UNCTAD, 2013) Cross-border trade in intermediate goods and services that are incorporated within the production process of goods and services for final consumption About 60 per cent of global trade under GVCs (UNCTAD, 2013) Production fragmentation Sector-specific characteristics Led by multinationals 6
A simplified GVC PRODUCTION DISTRIBUTION CONSUMPTION Value added Value added Value added Value added RAW MATERIALS INTERMEDIATE PRODUCT FINAL PRODUCT FINAL PRODUCT FINAL PRODUCT 2 ND TIER SUPPLIER 1 ST TIER SUPPLIER LEADING ENTERPRISE DISTRIBUTOR END CUSTOMER FINANCIAL INSTITUTION MARKET RESEARCH FIRM 3 RD PARTY LOGISTICS PROVIDER 7
Simplified auto value chains Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Function R&D & Design Materials Parts sourcing Parts integration Assembling Marketing & services Cost for assembler Low to medium Low High High Low Medium to high Integrators (1st tire) Dealers & service centres Standardizers Material suppliers (1st - lower tire) Component specialists (1st lower tire) Assemblers Assembler owned distributors Glass Rubber Plastic Steel Textile Electronics Body panels Mechanical & Electronic components Wheels, tyres & seats Engines Transmissions Others (CKD) (CKD) Exporting to other markets Note: Logistics costs are included in each function.
Customers A GVC example Home Country J Country L Country T 5 days by air Supplier L Supplier T Distribution Centre J 1200km 600km 100km 1 month by ocean Country V Distribution Centre V Distribution Centre T Customers Customers
Automotive supply chains 1960s 1970s-80s 1990s 2000s 2010s Production nodes Distribution links Assembling Auto parts supply R&D centres
Main factors driving GVCs RTAs can provide necessary fundamentals to the development of GVCs Source: Modified from ESCAP (2015) 11
Intraregional exports of GVC products by country income level groups, 2013 (Percentage of intraregional exports) Source: The authors calculation based on data from the United Nations Comtrade database 12
Who are MSMEs? More than 99.9% of entire business/commercial entities in a nation Micro, small and medium, as well as those in the informal sector Typically less than 250-300 employees All sectors Diversified needs Niche market and smaller production Lack of economies of scale Resource and capacity constraints Supply, human resources, technology Finance
GDP Contribution of SMEs Source: Ayyagari, Beck and Demirgüç-Kunt, 2003. Note: Residual includes large enterprises and public sector.
MSME contribution to economic activity by country Republic of Korea Philippines Thailand India Viet Nam Malaysia Indonesia 0 10 20 30 40 50 60 70 80 90 100 MSMEs to total (%) MSMEs employees to total (%) MSMEs contribution to GDP (%) MSMEs exports to total (%) Sources: ADB (2015); Department of Trade and Industry of the Philippines (2014); Ministry of Planning and Investment of Vietnam (2014).
Log GDP per capita (2015) MSME density versus national productivity 5.5 Qatar Singapore Hong Kong (China) 5 Australia United States United Kingdom Russian Federation Republic of Korea 4.5 India Thailand 4 Philippines Viet Nam Indonesia 3.5 Burundi Myanmar Madagascar y = 0.1166x 2-0.0454x + 3.9695 R² = 0.29 3 0 0.5 1 1.5 2 2.5 3 3.5 4 Log SME density Sources: Chu (2015); SMEAJ (2015); Ping (2014); SME Finance Forum (2016); World Bank (2016).
RTAs: Challenges and Opportunities I Provide more opportunities to (a) relatively larger businesses and (b) businesses based in the relatively wealthier countries Provide significant potential for MSMEs who can offer better quality, cost and delivery Intensify competition for MSMEs with the inflows of foreign-made goods and services Put pressure on upgrading product quality or decreasing prices through R&D activities, technological advancement and innovation
RTAs: Challenges and Opportunities II Combined with infrastructure improvements in energy, ICT, and transport, enable MSMEs to have cheaper, more reliable access to the goods and services Create upward pressure on wages (as well as lands and other services) as the region becomes more fully integrated Enhance the ability of MSMEs to get money from banks or other financial institutions as the financial sector is likely to have a much improved capacity to loan out money
Benefits of GVCs for local SMEs Bolster productivity of participating enterprises, including SMEs Provide opportunities for creation of high(er)- skilled and better paid jobs Require different styles of engagement with GVCs for different development levels Limited opportunities in low-income economies to benefit from technology dissemination and skills upgrading whose firms specialize in tasks that rely on low-wage/unskilled labour Knowledge-intensive tasks of GVCs in high-income economies 19
Three major strategies End-tier supplier Third-tier supplier Second-tier supplier First-tier supplier Lead firm/retail outlets Consumers TEXTILE COMPANIES FINAL MANUFACTURERS All Retail Outlets Department Stores Garments factories Brand-named apparel or textiles companies Specially stores Cotton, Wool, silk, etc. Yarn (Spinning) Fabric Upstream Expansion Domestic Designers Subcontractors Stay-in Online stores Downstream Expansion Mass merchandise chains Consumers Home textiles factories Overseas buying offices Discount chains Oil, Natural Gas Petroche micals Chemical Fibers Industrial textiles factories Trading Companies Off-price, factory outlets, mail order, others Raw Material NETWORKS COMPOENT NETWORKS PRODUCTION NETWORKS EXPORT NETWORKS MARKETING NETWORKS Market or Demand Signal Source:Modified from Liu (2016).
Upgrading of SMEs in GVCs Process upgrading Transforming inputs into outputs more efficiently by recognizing the production system or introducing superior technology Product upgrading Moving into more sophisticated product lines in terms of increased unit values Functional upgrading Acquiring new, superior functions in the chain, such as design or marketing Intersectoral upgrading Applying the competences acquired in a particular function to move into a new sector 21
Global Enterprises in Emerging Asia 200 180 160 140 120 100 80 2006 2015 60 40 20 0 China India Hong Kong, China Singapore Malaysia Thailand Philippines Indonesia Viet Nam ASEAN Source: Compiled based on the dataset of the Forbes Global 2000 (2015).
Corruption Perceptions Index 2015 0=highly corrupt Ease of doing business and corruption perceptions 100 90 80 Denmark Singapore U.K. Germany U.S. Hong Kong, China 70 Japan 60 Taiwan, China 50 Republic of Korea 40 30 20 Malaysia Thailand Indonesia India China Philippines Viet Nam Cambodia Lao PDR 10 0 0 20 40 60 80 100 120 140 Ease of Doing Business, 2016 ranking, 1=best Sources: Developed by the authors based on Transparency International (2015); World Bank (2016).
Credit to business, percentage of GDP 250 200 150 100 50 2005 2010 2015 0 Source: Developed by the authors based on World Bank (2016).
Logistics performance and quality of infrastructure, 2014 Source: Asian Development Bank (ADB). (2014). Myanmar Unlocking the Potential: Country Diagnostic Study. 25
Public Investment Projects in CLMTV (by cost) Source: ADB (2015) 26
Core Non-tariff measure Restrictiveness Index in ASEAN, 2009 Source: OECD (2016). 27
Overall Services Trade Restrictiveness Index in ASEAN, 2008-11 Source: OECD (2016). 28
Innovation output index 2015 Innovation output and ease of doing business 80 70 60 50 y = 0.0013x 2-0.4091x + 51.842 R² = 0.6087 40 Viet Nam 30 Philippines Indonesia 20 10 0 0 20 40 60 80 100 120 140 160 180 200 Ease of doing business ranking 2016 Source: The authors based on the data of WIPO (2015); World Bank (2016).
R&D expenditure by funding source in Asia 100% 90% 80% 70% 60% 50% 40% 30% Not specified Abroad Government Business 20% 10% 0% Source: UNESCO (2015).
Innovation vs. branding Y=0.402X+4.934 R 2 =0.330 Source: The author s based on WDI (2016).
Key policy issues Business environment Access to finance Infrastructure Trade and logistics facilitation Technology, innovation and branding SME policies vs. general business policies Developing countries SME provisions under RTAs Protection? Nurturing? Cooperation with foreign investors?