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Print Edition> Business
UPDATED: October 25, 2010 NO. 43 OCTOBER 28, 2010
Observer: The Rise of Asian SMEs

Export-oriented Asian SMEs—and the vital role they play in generating growth and employment—traversed difficult financial terrain in 2008-09. But with the global financial crisis behind them, their outlook is only looking more prospective with time. Som Subroto, global head of SME Banking of Standard Chartered Bank, explained SMEs' function and difficulties in an exclusive article for Beijing Review. Edited excerpts follow:

Across Asia, small and medium-sized enterprises (SMEs) are bouncing back. Not only does this reflect the remarkable resilience and adaptability of SMEs, but it's also great news for Asians who rely, now more than ever, on these dynamic businesses for their prosperity.

Asian SMEs, particularly those involved in exports, were hit hard by the global financial crisis. However, a Standard Chartered research report now points to a sound recovery in the sector, propelled by Asia's strong recovery in the past year and the turn in the U.S. inventory cycle, which has allowed exports to pick up. Indeed, signs show that many SMEs have emerged stronger from the crisis.

As the dust settles, it would seem that conditions for SMEs were less tough in this recession than during the 1997-98 Asian financial crisis. The reasons for this are numerous. Chiefly, Asian banks were less affected in this downturn and maintained lending rates, while governments across Asia, drawing on lessons from the Asian financial crisis a decade earlier, worked pro-actively to sustain the flow of credit to SMEs particularly through government guarantee schemes.

In the past 10-15 years, there has been a seismic shift in the understanding of SMEs as drivers of growth and employment. It is hardly possible to overstate their importance to Asian economies. Firms with fewer than 250 employees make up the vast bulk of businesses. They typically account for around 50 percent of formal employment and contribute 30-60 percent or more to GDP.

SMEs also power international trade, with SMEs in China accounting for as much as 68 percent of export volume. In fact, throughout Asia the significance of SMEs to cross-border trade is often much greater than perceived, because many of them function as essential suppliers to larger exporting firms. Often, small firms create significant clusters, supplying one or a few large companies, all part of the global production chain.

Meanwhile, new technologies—the Internet and changing manufacturing processes—are shifting the economies of scale. The division between small and large enterprises is changing, with SMEs becoming increasingly crucial to maintaining economic momentum across Asia.

SMEs are vital, not just to support the present recovery, but also to help generate the huge numbers of new jobs required to meet the demographic needs of Asia's young populations. Dynamic and resourceful, many SMEs introduce new products or processes to the market. They are also social safety nets, cushioning the poor and the vulnerable from economic adversity. And, with increasing numbers of female entrepreneurs, they play an important role in helping women to become active participants in the economy. This is important, because there is compelling evidence that, when women work, they have a substantial impact on both overall economic growth and the reduction of poverty.

For banks, SMEs represent a great opportunity as new technologies make it easier to deploy state-of-the-art business models with customized statistical credit scoring for smaller firms. The traditional view of SMEs as being unprofitable to banks is hopelessly outdated. With the right business model, dedicated teams and tailored, cost-effective products, it is possible to manage SMEs profitably. Yet, access to financing remains a primary concern for SMEs, many lacking essential financial resources.

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