Key Ingredients for ASEAN Enterprise Success

ASEAN member states do not count for much in the global economy on their own. Indonesia, the biggest economy in Southeast Asia, has a GDP of US$861 billion, but that is still smaller than the economy of Tokyo.

Yet combined, the GDP of ASEAN member states is about US$2.6 trillion. If ASEAN were a single country, it would be the seventh largest economy in the world. In addition, in 10 years’ time, ASEAN is expected to overtake the United Kingdom and France to be the fifth largest economy — after the United States, China, Japan and Germany.

ASEAN member states do not count for much in the global economy on their own. Indonesia, the biggest economy in Southeast Asia, has a GDP of US$861 billion, but that is still smaller than the economy of Tokyo.

Yet combined, the GDP of ASEAN member states is about US$2.6 trillion. If ASEAN were a single country, it would be the seventh largest economy in the world. In addition, in 10 years’ time, ASEAN is expected to overtake the United Kingdom and France to be the fifth largest economy — after the United States, China, Japan and Germany.

ASEAN is very diverse — 10 different cultures, economic systems, histories and political orders. Each nation in the grouping has its own ego and its own self-interest. This creates trouble for the organisation from time to time. Yet looking at the global picture, maintaining the ASEAN Community is a strategic imperative and economic necessity.

The Southeast Asian countries as ASEAN are competitive with other regions of the world and an attractive destination for investors. ASEAN will do well if its member states work together in navigating the interests of powerful neighbours and the bewildering technological developments transforming the marketplace and society.

The ASEAN Community has three pillars — Political/Security, Economic and Socio-Cultural. The ASEAN Economic Community or AEC has achieved positive results, though there are persistent complaints that ASEAN businesses are still not fully aware of the benefits accruing from the arrangement. Tariff reduction and removal of obstacles to facilitate trade and open markets are ongoing.

ASEAN is amalgamating its five free trade agreements with China, South Korea, Japan, Australia/New Zealand and India into the Regional Comprehensive Economic Partnership (RCEP). Infrastructural development and connectivity are being improved. Overall, growth prospects for the AEC are good: more than 5 percent annually for the next five years.

ASEAN has prioritised the development of small and medium enterprises (SMEs) to achieve equitable, inclusive and sustainable growth, as they represent more than 95 percent of all enterprises in the region. This could contribute to poverty reduction as well as improve the status of women in the region, as almost half of these enterprises are owned by women.

SMEs are the backbone of the ASEAN economies. According to the ASEAN Secretariat, they employ 52–97 percent of all workers. However, their share of total exports remains small, between 10 and 30 percent. This means much remains to be done to strengthen the role of SMEs in driving ASEAN economic integration.

The ASEAN Strategic Action Plan for SME Development laid out five key strategies: promote productivity, technology and innovation; increase access to finance; enhance market access and ‘internationalisation’; enhance policy and regulatory environments; and promote entrepreneurship and human capital development.

Several analysts have claimed that most SMEs in the region are not fully equipped to deal with the new business realities presented by the AEC and RCEP. The AEC is an integrated market and production base of over 620 million people, which could expand to more than three billion through RCEP. Both the AEC and RCEP could bring many opportunities for SMEs, allowing them to realise economies of scale and increase their participation in global value chains.

Still, it is projected that SMEs will face intense competition from the entry of multinational corporations and cheap imports. ASEAN member states should fine-tune their lines of action in relation to the specific needs and circumstances of their SMEs.

Productivity and technology improvements will drive the integration of SMEs with the production networks of multinational corporations. However, there are challenges in boosting the productivity of ASEAN’s SMEs.

Average labour productivity (GDP per person employed) in ASEAN was equivalent to only 31 percent of US labour productivity in 2015. There should be more specialised training within ASEAN SMEs to help boost their labour productivity to the levels needed to become qualified suppliers in global value chains.

The lack of a strategic approach to innovation policy for SMEs is one of the impediments facing SME development in ASEAN. Protection and promotion of intellectual property rights, development of broadband infrastructure and industrial parks, and the provision of financial incentives in research and technology development are some policy measures, which must be instituted to develop SMEs’ innovation capacities.

Access to finance is a key concern for ASEAN SMEs. There is a big gap in the access to finance in the less developed ASEAN member states when compared with Singapore, Malaysia, Thailand, Indonesia or the Philippines. There are also cumbersome requirements.

According to the World Bank, an average of 47 days is required for 13 procedures to start a business in Indonesia, while it requires 73 days for six procedures in Lao PDR. It would only take three days to complete three procedures in Singapore and online electronic applications are made to a single authority. The business registration process must be simplified.

Promoting human resource development and entrepreneurship is essential for SMEs to succeed. Entrepreneurship learning programs help equip SMEs with improved management and business methods. One of the initiatives of the ASEAN Strategic Action Plan for SME Development aims to establish a common curriculum for entrepreneurship in the region through an educational program that is currently being implemented in ASEAN universities.

ASEAN must implement and sustain an effective SME development policy that will propel regional cooperation among its member states. This will assist these enterprises to expand internationally and integrate into global supply chains. Only by making its smallest actors stronger will ASEAN fully realise the opportunities presented by the region’s evolving and deepening integration.

What ASEAN’s enterprises need to succeed is republished with permission from East Asia Forum