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«Published Annually Vol. 6, No. 1 ISBN 978-0-979-7593-3-8 CONFERENCE PROCEEDINGS Sawyer School of Business, Suffolk University, Boston, Massachusetts ...»

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Growth of SME sector – 12% on average New business formation – registered SMEs to grow by 12% Existing SMEs to grow by 10% in terms of employment or turnover Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Employment creation – SMEs to generate 50% of net job creation Literature Review: SME Policy and Performance in Laos Literature and research on SME Development in Laos is expectedly limited due to the fact that the country has remained a closed economy and interest in its economy has been lacking by academics and institutions. Data about the economic sectors is also dated and often inaccurate.

In 2003, the Laotian government’s Deputy Director of Industry presented a self-evaluation of SME Development Framework in Laos to the OECD sponsored Regional Workshop on “Trade Capacity Building and Private Sector Development in Asia” in Phnom

Penh, Cambodia. (Inmyxai, 2003) It reported that:

The Lao Expenditure and Consumption Survey (LECS 2) carried out by the National Statistics Center in 1997/1998 indicated that 165,000 households were involved in operating small businesses in Laos and only 7% employed paid labor.

An industry survey carried out by the Ministry of Industry and Handicrafts and the United Nations Development Organization (UNIDO) revealed that small businesses accounted for 98.1% of manufacturing, while medium and large businesses made up 1.5% and 0.4% respectively. The survey also estimated that small businesses created employment for 57% of the industrial labor force. Medium and large enterprises employed 7% and 37% respectively. SME contribution to GDP could not be ascertained.

The major problems faced by SMEs were: inability to compete with neighboring countries due to the poor investment and business environment; SME regulations were not fully developed; lack of service institutions; lack of sources of financing; and poor policy formulation and implementation leading to lack of cooperation between public and private sectors.

In order to improve the situation, an SME Development Framework and SME Development Fund were created. These and other training programs were adopted so as to create an enabling business environment for SMEs, enhance competitiveness of SMEs, and provide services to improve SME performance.

In the first of its kind study on “Development of Excellent Entrepreneurs in Small and Medium Enterprises in Laos and Cambodia” and presented to the International Conference on Sustainable Development: Challenges and Opportunities for GMS on December, 2007, in-depth interviews were used to “explore the similarities and differences of the SMEs entrepreneurial characteristics, business experiences, problems and supporting requirements in Laos and Cambodia.” (Southiseng et. al., 2007) The findings led to the conclusion that performance of SMEs have improved due to increase in number of entrepreneurs.

However, both countries faced the same challenges:

Unclear and uncertain rules and regulations for establishment of SMEs Lack of accessible credit and Shortage of entrepreneurial and managerial training facilities and programs The study recommended the systemic training of entrepreneurs, improvement and development of adequate infrastructure, provision of credit for start-ups and reduction of tax rates to stimulate to increase daily revenue for the many in need.

A joint 2007 study by academics from the national University of Laos and Hiroshima University Japan on “Corporate Financing and Performance of SMEs” empirically investigated the “moderating effects of ownership types and management styles to corporate financing on the performance of SMEs.” (Kongmanila & Kimbara, 2007) The study collated and analyzed data of 160 trading SMEs in Vientiane, the capital of Laos over the period 2002-2004. The results led the authors to argue that both internal financing (retained earnings) and external financing (debt equity) are the main factors that influence the performance of trading SMEs in Laos.

In a related paper by the same two researchers (Kongmanila & Kimbara, 2008) and specifically aimed at SMEs in Laos, examination was made of 146 trading SMEs to determine (1) financial performance and relationship to managerial types; and (2) relationship between managerial types and financial performance in relation to the size of the firm. Using the MANOVA method to prove defined evidence, it was found that there is no difference between founder-CEO and professional-CEO on financial performance of the firms, though the size of firm does have direct impact on performance. Larger firms outperformed smaller ones to a certain level (sales in excess of USD 500,000) and the study recommended that control then be handed from founder-CEO to management-CEO.

Conference papers © Knowledge Globalization Institute, Pune, India, 2012

A study was done to evaluate the impact of FDI and trade liberalization on SME development in Laos as part of a series of research projects at the Economic Research Institute for ASEAN (Association of South East Asian Nations) and East Asia (ERIA) in

2007. Challenges faced by SMEs in Laos were identified as: high taxes, high inflation, unstable exchange rate, and inadequate funding. (Kyophilavong, 2007) Additional problems discovered were: need for innovation, lack of competitive capability, lack of market and opportunity, and need for networking. It was found that though FDI does provide SMEs with opportunities to increase production but trade liberalization had a negative rather than a positive impact. Recommendation made for change in policy to address these issues by improving collection of data and its analysis, annual monitoring of policy implementation;

increase in SME capacity in productivity, quality and quantity; better coordination of training activity; and reduction of the tax rate, controlling inflation and foreign exchange rate.

A study was conducted by the ERIA in 2009 (No.8) to understand the issues Lao SMEs face during economic integration process.

The economic integration for the ASEAN region has accelerated growth for the region but some economies (including Laos) are still lagging. The national development goal of Laos is to remove itself from the group of Least Developed Countries (LDC) by

2020. SME development is crucial to reaching this goal. The barriers identified prior to this study were:

Lack of data on enterprises in Laos SMEs dominated the economy and there were few large firms in the economy Lack of access to capital Lack of skilled technical labor Lack of business service providers

A survey of SMEs was done using personal interviews. The constraints of SME growth this study found included:

Most sectors faced constrained financial access except for garments, wood processing and handicrafts and most of these products are sold domestically Most sectors failed to meet international standards as they lacked capacity to improve business processes, adopt new production methods, and introduce new products to markets The external barriers identified were the poor economic conditions and high taxes in the domestic market The internal barriers were poor distribution and logistical support including availability of warehousing facilities and excessive costs involved in transportation Shortage of working capital to finance new business start ups Insufficient trained personnel for market expansion Table 3 illustrates the type of household and government expenditure as a percentage of GDP over the last 5 years since 2005.

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Note. Adapted from UNCTAD 2011. Retrieved May 10, 2011 from http://unctadstat.unctad.org/TableViewer/tableView.aspx Conference papers © Knowledge Globalization Institute, Pune, India, 2012 An assessment was done to ascertain current government assistance to SMEs and the survey found that little support had been forthcoming from government or NGOs. Only 20% of SMEs received some form of assistance overall and the lowest ranked categories where support was received from government and NGOs were: financing, technology development and transfer and business linkages and networking. This study concluded that action be taken by the government to address these issues, in particular the shortage of working capital and the need to meet international standards. Kyophilavong, 2009) The most recent study on SME Development in Laos was done in 2010 by Southiseng and Walsh of the School of Management at the Shinawatra International University in Bangkok, Thailand. (Southiseng and Walsh, 2010) The study analyzed competition and management issues of SMEs in three provinces of Laos: Vientiane, Sawannakhet and Luang Prabang. The study used qualitative research as well as secondary data. Fifty two in-depth interviews were conducted. The SME sector is important to the Lao economy and 74% of enterprises were family owned. These concentrate on food processing, garment production, construction materials, wooden furniture, tourism, education, trading, transportation, internet services and others. Increases in the SME sector have certainly contributed to job growth and overall GDP growth. Table 5 illustrates the overall incremental increase in real GDP growth rates per capita over four years from 2006 to 2009 relative to Cambodia, Indonesia, Thailand and Viet Nam.

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Note. Adapted from UNCTAD 2011. Retrieved May 10, 2011 from http://unctadstat.unctad.org/TableViewer/tableView.aspx The findings are that entrepreneurs find it difficult to access modern technology and finance, have limited resources in terms of capital and skill; and receive unfair treatment from government officials. Management styles usually focused on short-term day-to-day objectives and few were able to consider longer-term considerations or business sustainability. Skills management and capacity building in these SMEs were narrowly conceived and required to be profit-based. Training and development of human resources was seen as a cost rather than an investment. Recommendations for enhancement of SME productivity and

capacity included:

Income tax rates should be reduced substantially so as to allow for greater capital availability for reinvestment Credit and financing need to be increased and process made easy and more accessible Training increased to provide capacity in product design, quality improvement, and product presentation and packaging Training be provided to entrepreneurs about complying with laws and commercial regulations, international insurance policies, payment and financing methods, and ways of entering international markets E-commerce systems be developed, introduced and implemented

Discussion: Policy Considerations for Laos

It is imperative that the value of the contribution that the SME sector makes to the national economy must be recognized more substantially. Most Southeast Asian governments do recognize the importance of SME development as essential and necessary for the overall health of each country’s economy. The SME sector accounts for upward of 90% of all firms outside the agricultural sector and the biggest source of employment, providing livelihood for three quarters of the region’s population.

(Bhasin & Venkataramany, 2010) This is true for Laos as it attempts to free itself from the label of a least developed country by Conference papers © Knowledge Globalization Institute, Pune, India, 2012

2020. Table 5 illustrates that Lao has the highest percentage of labor force in the agriculture sector as compared to the other Southeast Asia Countries.

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Note. Adapted from UNCTAD 2011. Retrieved May 10, 2011 from http://unctadstat.unctad.org/TableViewer/tableView.aspx In spite of the importance SMEs to the national economy, the country still lacks an established, well crafted and effectively managed policy for the development of a strong base of corporate and entrepreneurial leaders. It becomes imperative that first a comprehensive strategy, followed by a detailed plan and then its implementation becomes a priority for the country.

Discussed below are some policy considerations.

Though the country is eager to develop its private sector and increase business activity, it is very difficult country to run a th business in Laos. In a World Bank 2010 report, Laos ranked 167 out of 183 countries for ease of doing business and of the nine ASEAN countries profiled, it was ranked last. It takes roughly 100 days and seven procedures to start a business in Laos.

nd With regard to protecting investors, it ranks 182 of 183 countries surveyed. Corruption remains a problem although the government at the highest level has made combating corruption a priority. Laos is listed 158 of 180 nations in Transparency International’s 2009 Corruption Perception Index (CPI).

The Proposed ASEAN Policy Blueprint for SME Development 2004-2014 (Asasen, 2003) used the following objectives for

development and integration of SMEs:

Higher income growth Fuller deployment of domestic resources Gainful integration through global and regional trade and investment, and Greater equity in access, distribution and development The report notes that the vital contribution of SMEs to economic development cannot be overstated. They remain the largest source of domestic employment. Yet, they remain “poor cousins of large firms” and yet SMEs have “driven the emergence of world-class industries.” and A new development context has been ushered in by trade and investment liberalization in combination with rapid advances in many fields. These include information processing, telecommunications, transportation, bio-technology and engineering and the new material sciences. As a result there have been fundamental changes in the pace, patterns and processes of interaction within and between independent economies and enterprises. (Asasen, 2003) This paradigm shift highlights the need and importance of networks, linkages and alliances. It also requires that prerequisites of efficiency and competitiveness be the cornerstone of policy formulation.

Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Entrepreneurship is the foundation for gainful progress in the market economic system. Higher levels of efficiency and flexibility in product quality, cost and delivery punctuality are other determinants of sharpened competitiveness at the domestic and external levels.

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