Financing small and medium enterprises in Asia and the Pacific
| Published date | 13 April 2015 |
| DOI | https://doi.org/10.1108/JEPP-07-2012-0036 |
| Pages | 2-32 |
| Date | 13 April 2015 |
| Author | Masato Abe,Michael Troilo,Orgil Batsaikhan |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Financing small and medium
enterprises in Asia and the Pacific
Masato Abe
Business and Development Section, Trade and Investment Division,
United Nations Economic and Social Commission for Asia and
the Pacific (ESCAP), Bangkok, Thailand, and
Michael Troilo and Orgil Batsaikhan
School of Finance, Operations and International Business,
Collins College of Business, University of Tulsa, Tulsa, Oklahoma, USA
Abstract
Purpose –The purpose of this paper is to propose policy suggestions for the financing of small and
medium enterprises (SMEs) in the Asia-Pacific region. Recent literature suggests that lack of capital is
the most severe constraint for SME survival and growth. Enabling policymakers to assist SMEs in
their search for financing will boost economic growth.
Design/methodology/approach –The methodology includes both quantitative and qualitative
components. Current World Bank data on the strength of various financial institutions in the
countries of interest is analyzed to discover areas of improvement. Additionally, 32 experts from East
and South Asia were interviewed several times to determine areas of concern in financing SMEs. Their
responses and the evidence from the World Bank data form the basis of the policy prescriptions in
the paper.
Findings –Financing is a critical constraint for SMEs for several reasons. Many SME owners do not
manage working capital effectively, information asymmetry between banks and SMEs retards the loan
application and approval process, and underdeveloped equity markets deny SMEs future growth
opportunities. Policymakers can ameliorate conditions by serving as facilitators and communicators;
governments should not provide financing directly if possible.
Practical implications –It is hoped and expected that the policy prescriptions offered herein will
enhance the growth and survival prospects of SMES, thereby creating more employment, innovation,
and economic growth.
Originality/value –The main contribution of this work is its scope. While the financing of SMEs is a
familiar topic, the review of issues and policies in East and South Asia, and their distillation into
practical advice for officialdom, is what makes this manuscript unique.
Keywords Policy, SMEs, Cash flow, Financing, Capital markets, Asia-Pacific region
Paper type General review
Introduction
While not every small and medium enterprise (SME) turns into a large enterprise, they all
face the same issues in their early days: finding the right type of finance at an affordable
cost to start and grow the business. Although the various regions of the world differ
significantly in their socio-economic characteristics, the fundamental financing difficulties
that SMEs face around the globe are essentially similar (Boocock and Wahab, 2001). The
ability of SMEs to develop, grow, sustain, and strengthen themselves is heavily
determined by their capacity to access and manage finance. Unfortunately, SMEs,
including micro-enterprises and start-ups, in the developing countries of East and South
Journal of Entrepreneurship and
Public Policy
Vol. 4 No. 1, 2015
pp. 2-32
©Emerald Group Publishing Limited
2045-2101
DOI 10.1108/JEPP-07-2012-0036
Received 16 July 2012
Revised 11 September 2013
Accepted 11 September 2013
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The authors appreciate useful inputs provided by Sailendra Narain, Diana Dai, Paradai Adi-
sayathepkul, Linghe Ye, and Julia Huepfl. The opinions expressed in this paper are those of the
authors and do not necessarily reflect the views of the United Nations.
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JEPP
4,1
Asia consistently cite lack of access to finance as a serious obstacle to their development
and the necessity of effective governmental interventions have been suggested (Economic
and Social Commission for Asia and the Pacific (ESCAP), 2009). In this paper we include
the East Asian countries of Cambodia, China, Indonesia, Lao People’sDemocraticRepublic
(PDR), Malaysia, the Philippines, Thailand, and Viet Nam, and the South Asian nations of
Bangladesh, India, Nepal, Pakistan, and Sri Lanka for analysis.
SME financing refers to a range of mechanisms to provide additional funds for
development of SMEs. There are several noteworthy aspects of SME financing.
The ability to increase capital relatively quickly in response to SMEs’growth is a key
feature; this is most evident with venture capital in high-tech sectors. Another salient
characteristic of SME financing is complementarity, as it augments existing trad itional
sources of financing in many contexts. Effective finance is also sustainable in the
sense that the funding of successful SMEs begets more capital for future SMEs,
thereby creating a virtuous cycle.
This paper[1] begins with a brief description of SME definitions and types.
It continues with an examination of the current situation of SME financing in the region
and the financing needs of SMEs in different growth stages. We discuss various
financial instruments available for SMEs (cf. Berger and Udell, 2005; Zavatta, 2008).
We then review literature pertinent to SME financing and policy. Our methodology
consists of an analysis of World Bank data covering debt and equity markets of the
nations in our study, as well as a series of interviews with experts in the SME policy
sector. We conclude the paper with policy prescriptions generated by our methodology,
covering potential market distortion by public interventions.
Definition and typology of SMEs
Definitions of what constitutes an SME in East and South Asia vary quite widely from
country to country and even within single countries, depending on the business sector
concerned, such as agriculture, natural resources, manufacturing, services, and
retailing (ESCAP, 2009). There is no universal determinant or criterion of an SME.
Much depends on the character of the respective host country, and the profile of its own
particular corporate sector, from which a relative measure of an SME including
financing is then typically made, sometimes on a rather arbitrary basis. The three main
parameters that have been generally applied to define SMEs are:
(1) number of employees;
(2) turnover of business; and
(3) capital investments.
Table I summarizes the definitions of SMEs among selected East and South Asia n
countries and multilateral organizations. Both the number of employees and the size of
investment are mainly used for such national definitions, while some countries also set
separate definitions among different SME segments, such as manufacturing and
services. Developing countries in East and South Asia typically define SMEs, including
micro-enterprises, as commercial entities with <100-300 employees (Asian Association
of Management Organizations (AAMO), 2007).
The definition in each national context facilitates the t argeting of policy
interventions to a specific group of enterprises, such as the provision of technical
assistance, fiscal and financial concessions, and other incentives. It also makes the
physical identification of SMEs on the micro level possible, encouraging better
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Financing
small and
medium
enterprises
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