Overview of MSMEs in Asia-Pacific Regions

MSMEs are the backbone of the Asia-Pacific region’s region’s economy, and due to their often local nature, they can contribute to local resilience and economic complexity. MSMEs kindle domestic demand, create jobs, innovate and compete nationally, and potentially, regionally. Access to finance and expanded markets are key to MSME growth. Traditional MSME strengths in the region are in wholesale and retail trade, agribusiness, food processing, accommodation, and other service-related business.

MSMEs are a driving force behind Asia’s economies, accounting for an average 97 per cent of all enterprises and 69 per cent of the national labour force. Their contribution to GDP is considerably smaller, being on average about 41 per cent of each country’s GDP.¹⁶ Increased FDI inflows since the 2007–2008 global financial crisis encouraged the entry of large multinational enterprises (MNEs) into Asia, which created new demands for domestic products and services from MSMEs, typically in supporting industries for parts and components.¹⁷ Accordingly, such linkages were expected to improve labour productivity if MSMEs actively joined global value chains. However, the COVID-19 pandemic has caused a decline in domestic and foreign demand on, and investments in, MSME products and services. MSMEs are unstable entities easily disrupted by external shocks such as economic and financial crises, disasters, and sudden changes of business environment (like reaction to a pandemic).

Across the Asia-Pacific, there are notable differences between the various regions and the MSMEs that make up considerable parts of these economies. From the largely agrarian MSMEs of Central Asia and the Pacific, to the more industrialized manufacturing MSMEs of North-East Asia, and the service-oriented MSMEs of South Asia, the makeup of small businesses in the region is diverse. Table 2 provides some broad observations of the different Asia-Pacific regions and the most notable factors of the MSMEs within them.

MSMEs in the Asia-Pacific Regions

Central Asia
The role of MSMEs in the Central Asian economy varies considerably, with figures indicating that they employ from a low of 19 per cent of employees in Kyrgyzstan to 77 per cent in Uzbekistan. The real number is hard to estimate accurately, due to the presence of an uncounted (or undercounted) informal economy making up about 1/3rd or more of these nation’s economies.

MSMEs make a larger contribution to the non-resource rich agrarian economies of Central Asia. In Afghanistan, for example, in 2009, 80-90 per cent of the enterprises were classified as MSMEs (defined as enterprises with less than 300 employees). Most of these enterprises were rural businesses and contributed to more than 50 per cent of GDP and 75 per cent of employment.  In Tajikistan, according to the latest figures available from 2015, 54.7 per cent of the firms were classified as MSMEs according to the national definition and accounted for about half of total employment in the country.  Uzbekistan presents similar structural characteristics. Although only firms with less than 100 employees were classified as MSMEs, they accounted for 56 per cent of total GDP and 76.5 per cent of employment in 2014.

In comparatively wealthier Azerbaijan and Kazakhstan, a majority of firms are classified as MSMEs (94 per cent and 90 per cent, respectively), but they contribute only a much smaller proportion of GDP (20 per cent of GDP in 2014, in Kazakhstan).  This is explained by the GDP of these countries being substantially concentrated in the oil and gas industries, which is not typically the domain of MSMEs.

North-East Asia
Since the economic reformation in China, MSMEs have become one of the driving forces in the economy. In 2019, the number of MSMEs was estimated to be over 38 million. According to the SME Promotion Law of China , MSMEs are classified based on the number of employees, annual revenue and total assets. For example, a medium-sized agricultural enterprise is required to hire a minimum of five hundred people. A small-sized construction enterprise can have a maximum business revenue of 8.5 million U.S. dollars. Compared to the MSMEs in other economies which often employ below 100 or 500 people, MSMEs in China stand out for their large size. Currently, MSMEs represent more than 90 per cent of the enterprises in the country. They also contribute over 60 per cent to GDP, over 70 percent to patents, and account for 80 per cent of nationwide jobs in the country.  The primary sectors for MSMEs in China are the industrial sector, construction, transportation, wholesale and retail business, and hotels and restaurants.

In the Republic of Korea (RoK) and Japan, since the industrialization of these countries, MSMEs have typically supplied parts and components to very large firms or conglomerates (Zaibatsu in Japan and Chaebol in Korea) as subcontractors.  , There are 3.5 million MSMEs accounting for 99.7 per cent of the total number of companies in Japan.  One of the six parts of an industry revitalization plan announced by the Japanese Government in 2013 was to enhance innovation of SMEs through mobilizing resources, encouraging entry into strategic markets, and supporting MSMEs to export.  The RoK’s government has been making efforts to promote MSMEs and reduce their reliance on Chaebol.

In Mongolia, MSMEs make up almost 98 per cent of businesses but contribute only about 25 per cent of the country’s GDP.  The SME Law was first introduced in 2007 in which MSMEs are defined differently in different sectors, but always less than 200 employees and also with limits on turnover.

Pacific
Pacific States have extremely limited domestic markets and thus limited growth opportunities, unless they can become competitive and expand to international markets. Their competitiveness, though, is hampered by high transaction costs in moving goods across borders.

In Pacific states MSMEs also face many problems around access to finance, particularly in the agricultural sector. Many commercial banks are typically risk-averse and may be unwilling to recognize some specialized equipment as capital that can be loaned against, given the small or remote markets into which any seized property would have to be sold. The legal and regulatory framework, including here insurance and credit rating practices, is also underdeveloped and contributes to a difficult environment for MSMEs seeking credit to expand.

South Asia
In South Asia, MSMEs are prevalent across the economy, and take part not only in agriculture and services, but also in manufacturing. In Bangladesh, for example, some 99 per cent of all non-farm enterprises fall into the MSE category, providing employment to 20.3 million Bangladeshi workers. The distribution of enterprises by broad economic activities and size reveals that the majority of MSEs operate non-manufacturing activities (around 90 per cent), however, 50 per cent of medium-sized businesses undertake manufacturing activities.

In Sri Lanka, MSMEs account for 45 per cent of the country’s employment, and 52 per cent of the country’s GDP.  In Pakistan, similarly, MSMEs account for 78 per cent of the country’s industrial employment and 40 per cent of the country’s GDP.  In Nepal, approximately 10 per cent of MSEs are involved in manufacturing, but this rises to 20 per cent for medium-sized enterprises.  The Maldives differs somewhat form other South Asian countries due to its size. Outside of the capital, where tourism is a significant sector, the MSMEs in more outlying parts of the country are heavily involved in fisheries and agriculture.

South-East Asia
ADB research finds that 97 per cent of enterprises in this region are MSMEs, they employ 69 per cent of the workforce, and contribute 41 per cent of the GDP. Between 61 and 89 per cent of MSMEs in this region are in services, many engaged in traditional wholesale and retail trade. The proportion of MSMEs taking part in manufacturing activities in the region varies from 5 to 17 per cent. Over the period 2010 to 2018, MSMEs in South-East Asia contributed an average of 20 per cent to a countries’ export value.

The MSME sector in South-East Asia is quite dynamic and various efforts are being made to improve opportunities for smaller businesses. Indonesia, Malaysia, the Philippines and Thailand have, for example, created dedicated MSME stock markets to increase the financing options available to these businesses. ASEAN maintains a Coordinating Committee on Micro, Small and Medium Enterprises (ACCMSME) as a forum for discussion of MSMEs, and regional support for MSMEs from member states trying to expand internationally.