Private Enterprise and Financial Markets > Micro, Small and Medium Enterprise
SME Competitiveness: The Power of Networking and Subcontracting
By Albert Berry (01/97, IFM-105, En)
Effective participation of SME in a developing economy has many advantages, as demonstrated in the successful development of such countries as Taiwan and, earlier, Japan. While there has been some progress on other aspects of SME support (especially credit provision), "linkage-inducing" policy is for the most part a new and experimental area. There is ample evidence that both large-small and small-small linkages are important in Latin America, albeit less so than in the "model" cases of East Asia. The challenge for policy in this area is to understand the source of potential payoff to increased inter-firm cooperation, the contexts which facilitate it, and the potential instruments to induce it. The theoretical grounds for suspecting that market forces will not on their own generate a near-optimal level of cooperation are strong, since socially desirable cooperation often requires either high levels of interpersonal trust or very low transactions costs or both. The detailed analysis of cases where it appears that policy instruments used have been effective (i.e. "best practices" implemented) is important to sort out what works or might work in Latin America.
The typical economic logic of large-small subcontracting lies in the fact that large firms can do some things better than small ones but other things less well. Horizontal cooperation among SMEs contributes to "collective efficiency"--the competitive advantage derived from local external economies and joint action. The benefits from trade between--or cooperation among--small firms are related in part to the fact that the most efficient small firms are usually those that restrict the range of functions they perform, relying on market transactions to supply the other required products and services. Often the main pre-requisite for a dense subcontracting system is better performance on the part of potential subcontractors. This is one of the requirements of successful clusters of SMEs as well. Public policy is important both in the provision of relevant general and technical education and of technical assistance, short courses and the like. The successful SME countries of East Asia, beginning with Japan, have strong technical support systems to complement large-to-small technical assistance and to raise the efficiency of smaller firms more generally. Latin American countries need such networks. Most existing programmes are too new to permit a judgment of whether they will soon bear significant fruit. Several types of support for inter-firm cooperation involving SMEs are solid candidates for "best practice" status. These include: (I) support for local and international fairs; subsidies to foreign buyers to visit fairs, producers' groups etc.; (ii) support for relevant business associations--sometimes umbrella SME associations, sometimes industry-specific ones, often local ones; (iii) practically oriented support for large-small linkages, e.g. along the lines of the SEBRAE programme in Brazil; (iv) SME network support programmes, of which the Danish Network Cooperation Programme and Chile's PROFOs are good examples; (v) support for education and training institutions and other types of infrastructure which could contribute to potential or actual groups of SMEs; (vi) encouragement of SME suppliers through public sector purchasing (e.g. the Cear program); (vii) subcontracting exchanges; though it is not clear whether they will often have a large payoff, their modest costs makes them a logical component; (viii) collection and organization of information on the important SME sectors, relationships among firms, the leaders in each sector and region; serious monitoring of the programmes which are put into place.
As for how policies should be implemented, two points deserve comment. First, support should be provided on a group basis where possible, in order to increase the chances of inter- firm cooperation. Second, the modus operandi of support systems and their components should be one-shot or time-limited when possible in order to avoid the creation of permanent bureaucracies, at least until the benefits have been shown to be clearly satisfactory. Thus, for example, subsidies for participation in any given network should normally be time-limited. Effective policies to strengthen inter-firm linkages will thus, for the most part, be both complementary to market forces and "light touch" in character.
Last updated: 06/13/07
