SMEs and Economic Dynamism in The Republic of China

1
SMEs and Economic Dynamism in The Republic of
China

• Chi Schive
• Chair Professor of Economics
• Shih Hsin University

October l, 200
2
Outline

• Are SMEs Efficient? A General Framework
• An International Comparison of SMEs
• Changing Competitiveness of Taiwans SMEs
• Adaptability and Flexibility of SMEs
• SMEs Complementarities to large enterprises
• SMEs and Innovation

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• I. Are SMEs Efficient? A General Framework

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• We may read a lesson from the young trees of the
  forest as they struggle upwards through the
  benumbing shade of their older rivals. Many
  succumb on the way, and a few only survive those
  few become stronger with every year, they get a
  larger share of light and air with every increase
  of their height,... Though the taller ones have a
  better access to light and air than their rivals,
  they gradually lose vitality and one after
  another they give place to others, ... And as
  with the growth of trees, so was it with the
  growth of business as a general rule.

Alfred Marshall (1920)
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Long-Term Average Cost Curve Which one?

LAC
Q
0
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SMEs are as Efficient as the Large ones

• Survivor technique -- Competition of different
  sizes of firms sifts out the more efficient
  enterprises.
• Classify the firms in an industry by size, and
  calculate the share of industry output coming
  from each class over time. If the share of a
  given class falls, it is relatively inefficient.
• Finding -- wide range of optimum firm sizes in
  each industry is the standard model in the theory
  of production.

According to George Stigler
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• II. An International Comparison
• of SMEs Performance

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Definitions of SME in Taiwan, 1967-2000
Source White Paper of SMEs (Ministry of Economic
Affairs 2004).
9
International comparison of Manufacturing SMEs
1970-74
Source Bruch, M. and U. Hiemenz (1984), Table
2-1, p. 8-9. Taiwan Statistical Data
Book (1989), Table 11-17, p. 336-7.
10
International comparison of Manufacturing SMEs
1970-74 (continue)
Source Bruch, M. and U. Hiemenz (1984), Table
2-1, p. 8-9. Taiwan Statistical Data
Book (1989), Table 11-17, p. 336-7.
11
SME Share of Manufacturing Employment in Taiwan,
1961-2001

1-99 employees
Source Directorate-General of Budget, accounting
and Statistics, Industrial and Commercial Census,
various issues.
12
SME Share of Exports
SourcesWhite Paper on Taiwans SMEs, various
issues.
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SMEs Contribution to Taiwans Dynamism
High Start-up Rate
Low Entry Barriers
High Exit Rate
Keen Competition
Efficient Allocation of Resources
High Turnover Rate
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Flexibility and Adaptability
Notes 1. Elasticity of substitution. 2. Fareel
efficiency index. Source Hu, Ming-Wen, and Chi
Schive, A Study on the Productivity and
Efficiency of SMEs in Taiwan Manufacturers,
Taiwan Economic Review 25(1), 1-26, 1997, in
Chinese.
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III. SEMs Complementarities to Large Enterprises
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Complementing and Competing with Large Enterprises

• SMEs may form an industrial horizontal and
  vertical networking via division of labor among
  themselves and with large enterprises
  (core-satellite grouping).
• Example in Taiwans information industry - There
  is a whole system of up and down streams of
  manufacturers, providing an extensive list of
  original equipment manufacturing producers and/or
  parts supplies.

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Grape Type (Horizontal)
Onion Type (Vertical)
Core
Exporting industry/OED Producers
Car, Steel, IT
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Core-Satellite Groupings, 1993
Source Core-Satellite Development Center,
Ministry of Economic Affairs.
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IV. SEMs and Innovation
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SME Share in High-Tech Industries 1993

Source Ministry of Economic Affairs, White Paper
on Small and Medium Enterprise Administration,
1998, in Chinese.
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SME Share in High-Tech Industries 1993

Source Ministry of Economic Affairs, White Paper
on Small and Medium Enterprise Administration,
1998, in Chinese.
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V. Conclusion
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SME Friendly Environment in Taiwan

• Stable macroeconomic environment, conservative
  fiscal and monetary policies, leaving room and
  resources for SMEs.
• Attracting DFI to introduce appropriate
  technology for creating jobs and setting up new
  industries, providing an assimilating model for
  SMEs.
• Strong culture-rooted entrepreneurship with good
  education system, the nurturing of young
  entrepreneur.
• Timely aids from the Government , SMEs credit
  enhancement program.

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Appendix
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SME Share of Number of Companies
Source White paper on Taiwans SMEs, various
issues.
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International comparison of SMEs
SourcesTaiwan Directorate-General of Budget,
Accounting and Statistics (1966-86), Taiwan
Institute of Economic Research (1992), Aiginer
and Tichy (1991), Loveman and Sengenberger
(1991), Storey and Johnson (1987), Burch and
Hiemenz (1984), and Igigawa and Iwaya (1972).
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International comparison of SMEs (continue)
Notes a SMES are defined as firms with 4-99
employees b All sectors, including
manufacturers. SourcesTaiwan Directorate-General
of Budget, Accounting and Statistics (1966-86),
Taiwan Institute of Economic Research (1992),
Aiginer and Tichy (1991), Loveman and
Sengenberger (1991), Storey and Johnson (1987),
Burch and Hiemenz (1984), and Igigawa and Iwaya
(1972).
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International comparison of SMEs (continue)
Notes a SMES are defined as firms with 4-99
employees b All sectors, including
manufacturers. SourcesTaiwan Directorate-General
of Budget, Accounting and Statistics (1966-86),
Taiwan Institute of Economic Research (1992),
Aiginer and Tichy (1991), Loveman and
Sengenberger (1991), Storey and Johnson (1987),
Burch and Hiemenz (1984), and Igigawa and Iwaya
(1972).
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Employment Structure of Firms with Different
Sizes, by country, 1977-83
Unit
Source Storey, D.J. and S. Johnson, (1987),
Table 2-2, p. 12. Note a) between 6 and 9
persons. b) 6 persons and above. c) 20 persons
and above. d) between 1 and 29 persons.
e) between 30 and 99 persons.
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Size Distribution and Employment structure of
Firms with Different Sizes, by Country, 1961-66
Unit
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Employment Structure
Unit
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Net Private Capital Inflows to Emerging Economies
US. billion
Note 1. Net private capital flows comprise net
direct investment, net portfolio investment, and
other long- and short-term net investment flows,
including borrowing. 2. NIEs Hong Kong, South
Korea, Singapore, Taiwan, and Israel. 3. Annual
averages. Source IMF, World Economic Outlook,
December 1998.
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Net Inflows of FDI, Equity and Foreign Bank
Lending to Asian Crisis-Afflicted Countries
Unit billion
600
Foreign bank lending
400
FDI
200
Portfolio equity
0
1995
1996
1997
1998
1999
-200
-370
Source World Investment Report 1999.
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Approved Taiwanese Outward Direct Foreign
Investment in 2000, by Domestic Firm Size and
Area (Major)
Notea) High income countries or areas included
the US, Canada, West European Countries, Hong
Kong, Japan, Singapore, Australia,
and New Zealand. b) Among others, middle
to low income countries were Mexico and other
Central and South America countries,
Eastern Europe, Mainland China, Malaysia,
Thailand, Indonesia, Philippines, Viet Nam, South
Asia, and Africa. Sources The figures were
compiled by the authors from the original data
prepared by the Bureau of Statistics,
Ministry of Economic Affairs, Survey on
Overseas Investment by Manufacturing Industry
(2000).