Hong Kong Trade Development Council SME Expo Hong Kong 21 - 23 November 2005 Trends, Opportunities and Challenges Facing SME Exporters of Services in APEC Chris Hall Macquarie Graduate School of Management PECC SME Network Leader 100231.1327@compuserve.com

1 Services typically makes up 70% of GDP in developed APEC economies, 50% in developing economies SMEs are structurally and dynamically important to the APEC economy SMEs are heavily represented in services SMEs are under represented in exports The way SMEs approach internationalisation is changing and the time cycle is getting shorter It is very difficult to accurately gauge service exports, and even in manufactures, the services component is a major part of the value chain for SME exports Demand and supply forces have created greater opportunities for SMEs to export services in the last decade Governments impede export services growth by lack of harmonisation and effective IP protection 2 3 4 5 6 7 8

1 Services typically makes up 70% of GDP in developed APEC economies, 50% in developing economies source: world bank

2 1990 2.2 billion 37 million % jobs 60% 20% 21% 19% latest (2000+) SMEs are structurally and dynamically important to the APEC economy 1990 2.2 billion 37 million % jobs 60% 20% 21% 19% latest (2000+) 2.5 billion 50 + million % firms 98% 73% 20% 5% people SMEs priv non agric <5 employees micro 5 - 19 employees small 20 - 100 medium SMEs in APEC continue to be structurally important to the APEC economy, especially for jobs. The average SME in APEC employs <10 people

2010 economies have 19% of APEC’s human population but have 35% of the SMEs. China has half of APEC’s population but only 18% of APEC’s SMEs. 2010 economies have about 20 people per SME, while 2020 economies have about 120 people per SME - there is a shortage of about 70m entrepreneurs in APEC! SME 2010 2020 POP 2010 people per SME 2020

Large firms employ about half the workforce, but add relatively few net jobs Dynamically, fast growing SMEs, especially internationalised SMEs contribute around 70% of net job growth Small firms add and destroy a lot of jobs, - dynamic net job addition varies with cycle and economy

3 SMEs are heavily represented in services About 80% of SME private sector employment is in services segments in APEC economies, but accurate data are difficult to get for developing economies

SMEs can increasingly compete successfully across borders in a range of services areas that traditionally were often regarded as non-tradable, or difficult for SMEs to access, such as .... education and training consulting services business services software and ICT professional services personal services (spas, etc) restaurants call centres design and quality healthcare finance and advisory etc.

4 SMEs are under represented in exports SMEs contribute about 30% of exports and 10% of FDI and this has not changed much in the last 10 years total APEC exports ~ about $ 3 trillion in 2000 SMEs about 30% and if SMEs about 50% of trade exports could be $4 trillion If a better business and policy environment for international SMEs allows them to reach the same contribution levels at international levels as SMEs do nationally (ie about 50%) they could add about $1 trillion to APEC exports.

Estimates of SME % contribution to exports by economy 2000

5 Activity 1980s 2000s years 1 Start up The way SMEs approach internationalisation is changing and the time cycle is getting shorter Activity 1980s 2000s years 1 5 10 15 Start up Home market growth, need for bigger market Use agents to test international market Establish corporate existence abroad Develop global network of offices or alliances

Service exporting SMEs : cannot afford to spend years developing a domestic market before internationalising - they need to move quickly to capture competitive advantages cannot just put things in a container and send them off - they must be actively engaged in international activity at the outset tend to generate at least as many jobs abroad, and often 2X to 5X the jobs they create at home tend to transfer more technology and IP to the recipient or target economy, and thus has a bigger FDI component tend to use commoditising, licensing and franchising arrangements if they need to expand quickly across borders

6 It is very difficult to accurately gauge SME service export levels and trends Definitional problems - eg is a Starbucks selling a meal in HK to a US tourist exporting services or importing them or simply supplying a domestic service? Even in manufactured exports, the services component is often a major part of the value chain for SMEs Measurement problems - ie difficulty in capture of data, since there is often no customs clearance or manifest or duty payable. VAT collection offers some opportunity, where there is VAT rebate for exports. MNC effect - even SMEs can now have some choice as to where they declare income, and it is a legitimate hedge to do so in some cases The upshot is that we have no accurate estimates of the level or trend of the role of SMEs in internationalisation of services

7 Demand and supply forces have created greater opportunities for SMEs to export services in the last decade Supply side..... cheaper more reliable international communications - fax, internet, voip, mobile falling real costs of travel better computing and technology - lowered real cost of CRM, KM, collaborative software, business support services etc increased propensity to outsource and contract across borders by large firms and by direct customers better search engine capacity to find specialised SME niche suppliers makes it easier for SMEs to compete with better known brands Demand side.....

Some examples.......... security anomaly detection artificial intelligence wine broking and education services electronic home control IT and software

8 Governments impede export services growth by lack of harmonisation and effective IP protection What impedes SMEs taking advantage of international services opportunities... multiple, uncoordinated regulatory regimes and administrative burdens access to finance - export finance credit guarantee is often not geared to services unless there is a factorable contract finding suitable trustworthy local partners, licensees and agents cost and difficulties of reliably registering IP, brand names etc, and of cost effectively resolving disputes in relation to theses improved harmonisation , common registration and dispute resolution procedures will be important for international SME services growth

1 Services typically makes up 70% of GDP in developed APEC economies, 50% in developing economies SMEs are structurally and dynamically important to the APEC economy SMEs are heavily represented in services SMEs are under represented in exports The way SMEs approach internationalisation is changing and the time cycle is getting shorter It is very difficult to accurately gauge service exports, and even in manufactures, the services component is a major part of the value chain for SME exports Demand and supply forces have created greater opportunities for SMEs to export services in the last decade Governments impede export services growth by lack of harmonisation and effective IP protection 2 3 4 5 summing up...... 6 7 8