Impact of Global Value Chain on the SME Performance in South Asia and South East Asia. Literature review

Impact of Global Value Chain on the Performance of SMEs

Uva Wellassa University, Faculty of Management

Abstract

Global Value Chain (GVC), The full range of activities (design, production, marketing, distribution, and support to the final consumer, etc.) that are divided among multiple firms and workers across geographic spaces to bring a product from its conception to its end use and beyond.

Most of the countries in south Asia and southeast Asia such as Sri Lanka, Vietnam, Indonesia, Philippines, Malaysia, India, and Bangladesh economics depend on the GVC's participation. Especially the production and service sector in the Small and Medium Enterprises of each country has linked with the GVC. Small and Medium - size enterprises (SME) have played a major role in the country's economy and it is the country's backbone. Therefore, if some factors affecting the SME sector it is also directly affected positively or negatively to the relevant country's economic developments. Considering the latest studies and research, the impact of the Global value chain on the performance of SME's, we identified negative and positive relations with the SME sector of the Asian region countries. Here in this paper, we analysed the five research papers published by the Asian Development Bank in 2021 about how the global value chain impacts Small and Medium - size businesses in the countries of Indonesia, Vietnam, Sri Lanka, and Thailand.

Introduction

Global Value Chains

According to the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP 2009), a GVC refers to the full range of cross-border, value-added business activities that are required to bring a product or service from the conception, design, sourcing raw materials, and intermediate input stages to production, marketing, distribution, and supply of the final consumer. Following diagram clearly display how global value chains are function

Small and Medium Business

Small and medium enterprises business definition is different with the countries. In USA SME definition is varies by the industry as well. The People's Republic of China (PRC) has considered the number of employees, annual revenue, and assets in defining SMEs. The European system also takes into account the turnover rate and balance sheet of a business. However, it is crucial to focus on the Sri Lankan definition of SMEs. Sri Lanka has also considered two dimensions—the number of employees and annual turnover—in order to classify SMEs into micro, small, and medium-sized categories. Under the present SME policy framework in Sri Lanka, SMEs are defined based on the number of employees and annual turnover. In order to qualify as an SME, an enterprise must employ fewer than 300 people and generate an annual turnover of less than $4.41 million. Sri Lanka has also identified slightly different thresholds in terms of the number of employees for manufacturing and service sectors.

Background of the Study

These studies consist of the how global value chain impacts the SME sectors performance of Sri Lanka, Vietnam, Thailand, and Indonesia. All these countries are in the countries of South Asian and Southeast Asian regions. SME sector has given considerable contribution to the economies of each country. All these researchers focus on their research study basically SME sectors performance.

The study of the SME sector in Indonesia is going through how human capital and GVC participation into the SME sector. In the Indonesian SME sector, it scares global value chain in SME. the researchers who are Vutha Hing, Shandre Thangavelu, and Dionisius A. Narjoko did their study how human capital and GVC participation in the Indonesian SME sector. At the beginning of the study, they analysed the Indonesian SME sector deeply. According to their analysis, the Indonesian SME sector can be categorized into Two Basic groups such as MSMEs and Large Enterprises. MSME is segregated into Micro enterprises, Small Enterprises, Medium Size enterprises. This study consists role of SMEs in GVC activities in the Indonesian economy using micro-level data. they carefully studied the effects of human capital and other firm attributes on Indonesian SMEs in GVC participation. In particular, the study also highlights the importance of agglomerative effects, and SMEs in a cluster with multinational corporations (MNCs) tend to learn faster and are more efficient in participating in GVCs.

The study of Trade, Global value chain, and SMEs in Thailand, it is done by the Upalat Korwatanasakul and Sasiwimon Warunsiri Paweenawat. They mainly focus on how affect Trade, Global value chain on Thailand's SME sector performance. SME sector in Thailand, 45% of contribution in Thailand Economy in 2018 and it is $252 billion. According to the statistical data of Thailand, it is 31% of GDP covered by small firms. it is mainly driven force of the country's economy. Considering sector-wise performance, the wholesale and retail sector contributed to a larger share of GDP when considering the breakdown of SME-generated GDP (31.4%), while the share of this sector in the national GDP was 15.9%. Authors also study from this article the Composition of Exports and Imports by Enterprise Size, National and SME-Generated Gross Domestic Product, by Economic Sector, Thailand's Gross Domestic Product Breakdown by Key Economic Sector and Enterprise Size, Composition of Thailand's Gross Domestic Product by Enterprise Size, Trends of SME Share in Exports and Imports and Expansion Rates, 2014-2018, Breakdown of the Number of Enterprises by Business Sector, 2018 and Number of SMEs by Business Sector in Thailand. Also, this study addressed the gaps in the literature through empirical analysis of the determinants of GVC participation and the relationship between GVC participation and firms' performance for the case of a developing country, namely Thailand. The analyses also separately examined the effects of forwarding and backward GVC participation on firms' performance.

The Study of Global Value Chain Participation and Firms' Innovations: Evidence from SMEs in Vietnam done by Duc Anh Dang and Vuong Anh Dang. Vietnam is a live example for examining the relationship between GVCs and SMEs because of its economic structure, more than 96% of which comprises SMEs (VCCI and USAID 2016). This study examines the firm-level impacts of Vietnamese participation in GVCs on SMEs, spanning the period between 2007 and 2015. Also, this study is the first to estimate the effects of engagement with GVCs, which is proxies by foreign value added in exports, on SMEs' innovation using firm-level data in developing countries. This study also provides the first empirical evidence that an economy connecting to the GVC may affect SMEs' innovation in an emerging market economy. This can provide lessons for other developing countries with similar contexts. they also explore how it affects firms differently depending on the size distribution as small and medium-scale firms are regarded as carrying an important momentum for growth and job creation in developing countries.

The study of Impact of Global Value Chains on the Performance of SMEs in Sri Lanka: done by N.P. Ravindra Deyshappriya and B.C.H. Maduwanthi. According to the Sri Lankan SME definition. We can classify SME firms into three categories like Micro, Small, and medium-sized. Under the present SME policy framework in Sri Lanka, SMEs are defined based on the number of employees and annual turnover. This study basically focused on the Participation in Global Value Chains and Profit of SMEs , Gender Composition of SME Holders, Age Structure of SME Holders, Educational Attainment of SME Holders, Average Income of SME Holders, Average Income of SME Holders by Type of Business, Impact of Global Value Chains on SMEs in Uva Province and Central Province of Sri Lanka, Intention of Potential Business Sectors to Link with Global Value Chains, Recognizing Potential Local Business Sectors and Their Intention to Link with Global Value Chains, the study of Challenges and Key Success Factors Related to Coping with Global Value Chains and Key Success Factors Related to Joining Global Value Chains in the Sri Lankan Context. The authors also study the business attributes of the SME owners in each province and they have given the final conclusion of the relationship with GVC and the SME sector in Sri Lanka.

Another study was done by Indonesian researchers is Amzul Rifin and Dahlia Nauly. it is about the Impacts of Involvement in the Global Value Chain on Coffee Farmers in Indonesia. Indonesia is the fourth largest coffee producer in the world. The coffee produced in Indonesia is either consumed domestically or exported. the researchers concentrate this study, how to affect global value chains on coffee farmers. considering previous studies, we identified Several studies that have discussed the impact of involvement in the coffee global supply chain on stakeholders. In Indonesia, coffee production is mainly done by cooperative systems. therefore, researchers overview the cooperative policies of Indonesia,

A cooperative's involvement in the global supply chain has underlying consequences. In the case of coffee, such involvement pushes the producers to meet several standards set by international buyers. These standards mainly surround the aspect of sustainability through certification, traceability, and other quality-related factors. The impact is evident on the farmers, farmers' groups, and even society as a whole. hence the researchers study these factors from their study. for this study, they selected major two corporations as Mitra Malabar Cooperative and Margamulya Coffee Producer Cooperative. they deeply studied marketing channel, exporting, existing performance, history and background of the corporations, service offered to the member by each cooperative, and future plans of each cooperative.

Objectives of the Study

This study basically focuses on the impact of global vale chain on SME sector of the south Asian and south east Asian countries. However, each research panel have their own objectives for each study. Considering Indonesian research study of Human Capital and participation in global value chain, their main objective to estimate the effects of human capital and other SME characteristics on GVC participation. And also find importance of SMEs in GVC activities and in particular in creating employment as well as forward and backward linkages. they also assessed the effect of human capital and other firm attributes on different modes of GVC participation. In addition, the study another objective is find importance of human capital as a critical factor in creating linkages for SMEs to participate in both manufacturing and service Global value chain.

According to the Thailand study, their main objective is addressed the gaps in the literature through empirical analysis of the determinants of GVC participation and the relationship between GVC participation and firms' performance for the case of a developing country, namely Thailand.

The study of Global Value Chain Participation and Firms' Innovations of Vietnam, main objective is estimating the effect of the Vietnamese economy's linking to GVCs on the innovation of SMEs in the manufacturing sector in Viet Nam. The researchers explored the relationship between foreign value added in exports and SMEs' innovation in Viet Nam between 2007 and 2015. Using data from the Viet Nam Small and Medium Enterprise survey, also they tested whether a higher share of foreign value added in exports is more or less likely to make SMEs innovate.

Considering the study of the Impact of Global Value Chains on the Performance of SMEs in Sri Lanka, we identified that the impact of GVCs on SMEs has not been considered by either policymakers or researchers. Under this scenario, this study examines the impact of GVCs on the performance of SMEs in Uva Province and Central Province of Sri Lanka. Accordingly, the study aims to provide appropriate suggestions and policy implications to enrich the existing SME Development Strategic Plan in Sri Lanka while highlighting the benefits of getting involved with GVCs. The specific objectives of the study are as follows.

- To recognize and profile the SMEs in Uva Province and Central Province of Sri Lanka.
- To examine the economic impact of GVCs on the performance of SMEs in Uva Province and Central Province of Sri Lanka.
- To recognize potential local business sectors and their intention in linking with GVCs.
- To identify key challenges and key success factors in relation to linking with GVCs.

Another study conducted by two researches of Indonesia and their study mainly focus on Impacts of Involvement in the Global Value Chain on Coffee Farmers in Indonesia. This study main objective is to analyse the benefits to farmers of participating in GVCs through cooperatives by comparing two cooperatives (MCPC and MMC), one currently conducting export and the other not. In here they consider marketing channel of both cooperatives and Exporting ability. They present the conclusion for these factors as their objective concerns.

Literature Review

Impact of SMEs on Economies

SMEs construct the huge business sector in each global economy. Therefore, governments around the world are widening the effort to promote and support SME expansion by combining their national policies. SMEs and micro firms are the majority of most of the countries and it is provided the majority of the employment. SMEs are very important due to their significant and priority drivers to employment, economic growth, and innovation. According to the World Trade Organization, SMEs represent 90 % of the business population and captured 60-70 % of patents for new innovative products and 55 % of GDP in developed economies. In the Asian region, there are many countries that focus to developed their SMEs nationally wise due to the importance of economic growth. Especially south Asian and southeast Asian countries national economic policies tie up with the SME developments. by small and medium enterprises, product development, employment generation, poverty alleviation, economic empowerment, and export growth contribute to the countries' economies. according to the previous studies done in 2012 of SMEs contribution to the economies, In Asian region indicated SMEs accounted for 95% of Private enterprises and generate 50 % of employments. In Sri Lanka, a study done in 2014, SMEs made up nearly 90% of Enterprises and contributes 50 % of the GDP of the country. also, it produced 45 % of employment.

Below table consist that the details extracted from department of census and statistics in Sri Lanka. The survey is done in 2014 and it is reflected how SMEs distribution in the country. This is clearly reflected 91.7% of total SMEs are micro firms and 37.8% peoples are engaged this type of micro-SME firms. Large scale SME firms are in the Sri Lanka is 0.2% outof total SME firms. It is very low figure. This is the one of reason for unstable economic situation in Sri Lanka. Considering industry, trade and service sectors industry sector is low contribution than other two sectors. That also a one reason to unstable economic situation in the long run. Because every economy should have innovative products. industry sector developments help to penetrate the innovative ideas and generation innovative products. Therefore, it is helps to developed the economies. Most of the developed economies consists more that 50 % of industry base SMEs.

No of Persons and establishments engaged and persentage of SME sector distribution In Sri Lanka Table No 1.1

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