The Thai government is rightly worried about the ability of small and medium-sized enterprises (SMEs) to survive the growing competitive challenges they face. Rising labor costs, fast-changing technology, free trade agreements and the globalization of markets mean that many small companies will be hard-pressed to survive the next five years.
Since SMEs make up more than 99% of all enterprises in this country, employ 78% of the workforce and generate 43% of non-agricultural GDP, these changes pose a challenge to the entire Thai economy.
Difficulties in meeting this challenge led the Thai government to become the first in Southeast Asia to invite the Organization for Economic Cooperation and Development (OECD) to review its SME and entrepreneurship policies. Earlier this month the Office of SME Promotion (OSMEP) conducted a seminar and brainstorming session with senior government officials, and in recognition of Kenan’s long experience in assisting SME development, I was invited to participate as moderator for the discussion.
Mr. Pak Tongsom, the deputy director-general of OSMEP, said the policy review showed that urgent changes were needed.
“There is no time to waste in making the policy changes needed to help our entrepreneurs with the funding, skills and knowledge to overcome the challenges and seize the opportunities confronting them,” he said in opening the seminar.
Dr. Jonathan Potter, the senior economist in the OECD Centre for Entrepreneurship, Small and Medium-sized Enterprises and Local Development who headed the policy review, said his team had identified a number of weaknesses. These included a lack of policy coherence among the many government agencies dealing with SMEs, failure to develop enough middle-sized enterprises, lack of technological readiness, inflexible financing for SMEs and a business environment burdened with unnecessary red tape and corruption.
For anyone working in the Thai SME sector, these findings revealed no surprises.
The tendency of government agencies to work in silos, often competing with one another for budget, is a common problem. The OECD team recommended reinforcing the role of OSMEP as the central body for SME and entrepreneurship policy formulation and coordination. This is a good idea, but I expect it will take a strong stand at the cabinet level to induce powerful ministries such as Industry and Commerce to cede their policy leadership roles to OSMEP. Sharing and improving the various SME statistics and databases maintained by different agencies are also needed to provide better management information for policy implementation.
Dr. Potter said policy implementation could be improved by moving to flexible, rolling program budgeting, away from the current system of fixed annual budgets. He also called for an independent, results-based evaluation of all projects and programs in order to pull funding from ineffective activities.
Technological readiness is another difficulty. Dr. Potter told the seminar that although Thailand has a high rate of entrepreneurship, some 30% of Thai entrepreneurs were forced into business out of necessity, rather than because they had a new technology or a great business opportunity. This compares with developed economies where, on average, only 4% of entrepreneurs are in business because they have no other choice. Dr. Potter warned that Thailand’s high proportion of “necessity SMEs” means they will have difficulty competing in a crowded low-tech market, leading to slow growth and poor employment conditions.
The OECD team recommended that government support focus more on technology-driven SMEs with the capabilities to grow quickly into medium-sized enterprises, as these companies could provide a much bigger boost to the economy. Research has shown that as few as 6% of a nation’s companies can be responsible for 90% of new job creation.
OSMEP agreed. “Even giants are born small,” Pak said. “We need effective policies and sufficient nurturing to help our baby giants grow to their full potential.”
The OECD recommended the creation of an “SME Toolkit” website similar to one used in Singapore that would provide information and software to help SMEs with issues such as accounting, finance, business planning, marketing and technology.
The officials at the seminar said that the findings of the OECD policy review were already being incorporated into the country’s Third SME Promotion Master Plan (2012-2016), due to go into effect shortly.
If that plan and the proposed policy improvements win approval and strong support from the government, Thai SMEs will be in a better position to compete in the challenging decade ahead.