SME Finance constraints in China: Lessons from Benchmark ...


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SME Finance constraints in China: Lessons from Benchmark ...

  1. 1. SME Finance constraints in China Lessons from Benchmark Countries Walter García-Fontes Universitat Pompeu Fabra (Barcelona – Spain) Regional Conference on Investment Competitiveness in East Asia 21-23 November 2005 Kuala Lumpur - Malaysia
  2. 2. What are effective policies? <ul><li>Improve social welfare by removing market imperfections or failures </li></ul><ul><li>Policies may also fail (as markets) </li></ul><ul><li>Requisites for effectiveness </li></ul><ul><ul><li>Policy designer has to have detailed information </li></ul></ul><ul><ul><li>Adequate administrative authority </li></ul></ul><ul><ul><li>Forecast of medium and long term effects </li></ul></ul>
  3. 3. What arguments are in favor of the direct financial support for SMEs? <ul><li>SME enhance competition and entrepreneurship: positive impact on innovation and productivity </li></ul><ul><li>SME more productive than large firms but their development constrained by lack of finance </li></ul><ul><li>SME labor intensive and their development helps in reducing unemployment and poverty </li></ul>
  4. 4. What arguments against on direct financial support for SME? <ul><li>Advantage of large firms: economies of scale, better position for innovation, stability of employment and high wages </li></ul><ul><li>Distortions in the optimal distribution of sizes across firms may reduce employment </li></ul><ul><li>General business environment most important factor for firm growth: </li></ul><ul><ul><li>Low entry and exit barriers </li></ul></ul><ul><ul><li>Well defined property rights and contracts </li></ul></ul><ul><ul><li>Competitive financial system </li></ul></ul>
  5. 5. What instruments have been used to support SMEs? <ul><li>Direct credit support </li></ul><ul><ul><li>Justified by imperfections in capital markets </li></ul></ul><ul><ul><li>Infant industry arguments </li></ul></ul><ul><ul><li>Problems: resource allocation distortion and favor incumbents </li></ul></ul><ul><li>Credit guarantee schemes </li></ul><ul><ul><li>Face deficiencies in collateral provision </li></ul></ul><ul><ul><li>Problem: moral hazard </li></ul></ul><ul><li>Venture capital </li></ul><ul><ul><li>Important after solving some other more basic constraints </li></ul></ul>
  6. 6. What can be highlighted of SME policies in Japan? <ul><li>Different stages: SME traditional sector in Japan </li></ul><ul><li>Three main components (complements of private sector): </li></ul><ul><ul><li>Finance (Japan Finance Corporation for Small and Medium Enterprise – JASME, National Life Finance Corporation – NLFC, Shoko Chukin Bank, and others) </li></ul></ul><ul><ul><li>Credit supplementation (JASME, Credit Guarantee Corporations) </li></ul></ul><ul><ul><li>Enhancement of capital (Small and Medium Business Investment & Consultation Co. Ltd.) </li></ul></ul><ul><li>Financial support provided under competitive conditions </li></ul>
  7. 7. What can be highlighted of SME policies in Japan? (II) <ul><li>Support comes from interaction between public and private sector </li></ul><ul><li>Technical, financial and marketing assistance </li></ul><ul><li>Subcontracting: auto parts and synthetic textiles </li></ul><ul><ul><li>Technical support : parent firms, equipment suppliers and other providers </li></ul></ul>
  8. 8. What can be highlighted of SME policies in Japan? (III) <ul><li>How does support to SME through subcontracting networks work? </li></ul><ul><ul><li>Competition for subcontracts: technical improvements for quality requirements of large firms </li></ul></ul><ul><ul><li>Public support subordinated to private relations: creation and development of private networks </li></ul></ul><ul><ul><li>Marketing support: parent firms or trading companies </li></ul></ul>
  9. 9. What can be highlighted of SME policies in Korea? <ul><li>SME support started after development period </li></ul><ul><li>How could firms get support despite underdevelopment of financial sector: </li></ul><ul><ul><li>Credit rationed on the basis of export performance </li></ul></ul><ul><ul><li>Competition in the international sector help in screening and monitoring of credits </li></ul></ul><ul><ul><li>Overcome the adverse selection problems </li></ul></ul>
  10. 10. What can be highlighted of SME policies in Korea? (II) <ul><li>Support system for SMEs </li></ul><ul><ul><li>Technical </li></ul></ul><ul><ul><ul><li>External support system: technical assistance, training programs, information services, joint research opportunities </li></ul></ul></ul><ul><ul><ul><li>Financial incentives </li></ul></ul></ul><ul><ul><ul><li>Public research institutes: technology transfer </li></ul></ul></ul><ul><ul><ul><li>Non-profit private agencies </li></ul></ul></ul>
  11. 11. What can be highlighted of SME policies in Korea? (III) <ul><li>Support system for SMEs (ctd.) </li></ul><ul><ul><li>Marketing </li></ul></ul><ul><ul><ul><li>Overcoming marketing costs: external markets for exports </li></ul></ul></ul><ul><ul><ul><li>Korea Trade Promotion Corporation (KOTRA): information about foreign opportunities, market research, assistance with trade fairs, overseas marketing trips. </li></ul></ul></ul><ul><ul><ul><li>Korea Traders Association (KTA): private support for public relations, lobbying and information-sharing. </li></ul></ul></ul>
  12. 12. What can be highlighted of SME policies in Korea? (IV) <ul><li>Support systems for SME (ctd.) </li></ul><ul><ul><li>Financial assistance </li></ul></ul><ul><ul><ul><li>Originally: Unregulated non-bank financial institutions (mutual savings and loan funds, popular funds, private finance companies) </li></ul></ul></ul><ul><ul><ul><li>After the 1980s: </li></ul></ul></ul><ul><ul><ul><ul><li>Credit funds to encourage collective and cooperative activities among SMEs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Tax breaks for restructuring </li></ul></ul></ul></ul><ul><ul><li>Subcontracting: increasing role </li></ul></ul>
  13. 13. What types of policies have been implemented? <ul><li>Association and cooperation </li></ul><ul><ul><li>Vertical and horizontal integration of SMEs and other firms. </li></ul></ul><ul><ul><li>Special credit and tax exemptions to SMEs that belong to associations </li></ul></ul><ul><ul><li>Joint marketing and information exchange </li></ul></ul><ul><ul><li>Cooperation with universities and research centers (special training) </li></ul></ul><ul><ul><li>Subcontracting </li></ul></ul>
  14. 14. What types of policies have been implemented? (II) <ul><li>Technical assistance </li></ul><ul><ul><li>Public R&D research centers for the diffusion and adoption of new technologies </li></ul></ul><ul><ul><li>Facilities: in-house technical assistance and provision of infrastructure for testing and prototyping </li></ul></ul><ul><ul><li>Support centers: technology transfer, patents, foreign and domestic technology acquisition and adoption </li></ul></ul><ul><ul><li>Proximity: Local and regional branches </li></ul></ul>
  15. 15. What types of policies have been implemented? (III) <ul><li>Marketing assistance </li></ul><ul><ul><li>Joint marketing projects for associations and cooperatives </li></ul></ul><ul><ul><li>Marketing technical services: diffusion of information on local and foreign markets </li></ul></ul><ul><ul><li>Promotion of internationalization of SMEs </li></ul></ul><ul><ul><li>Promotions of trade fairs, exploratory tours, identification of foreign services </li></ul></ul><ul><ul><li>Special training for international trade and product promotion </li></ul></ul>
  16. 16. What types of policies have been implemented? (IV) <ul><li>Financial assistance </li></ul><ul><ul><li>Loan assistance channeled through cooperatives and associations </li></ul></ul><ul><ul><li>Public funds as a signal for the involvement of the private sector </li></ul></ul><ul><ul><li>Tax exemptions and depreciation allowances: investments in equipment, R&D, export promotion and training </li></ul></ul>
  17. 17. Some best practice criteria <ul><li>Financing programs: sector-specific, well focused and limited duration </li></ul><ul><li>Direct subsidies: no clear evidence on their effectiveness – functioning business environment </li></ul><ul><li>Export orientation: most successful SME support is related to promotion of access to international markets </li></ul>
  18. 18. Some best practice criteria (II) <ul><li>Policies as part of long term development strategy </li></ul><ul><li>Credit programs channeled through well-capitalized and professionally managed autonomous institutions </li></ul><ul><li>Market-based criteria for the assessment of the loans </li></ul><ul><li>Monitoring criteria: clear and objective information </li></ul>
  19. 19. Some ideas for improving SME access to finance in China <ul><li>Adapting the credit system for the financing of SMEs </li></ul><ul><li>Specialized financial institutions oriented towards SME credit </li></ul><ul><li>Social-credit environment and credit rating </li></ul><ul><li>Increased transparency in financial and accounting information of SMEs </li></ul>
  20. 20. Some ideas for improving SME access to finance in China (II) <ul><li>Favorable external environment for SME: legal guarantee system, venture support, fiscal and taxation support, professional and technical training, information and consultation system </li></ul><ul><li>Improvement in financial information systems </li></ul><ul><li>Support for inter-firm cooperation: </li></ul><ul><ul><li>marketing support in local and especially international markets </li></ul></ul><ul><ul><li>Associations to facilitate efficiency-enhancing information-sharing </li></ul></ul><ul><ul><li>Help in the establishment of subcontrating networks between large and small firms </li></ul></ul>