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The challenges of SME innovation and technology upgrading in developing economies: insights from Malaysia, Thailand, and the Philippines.


Over the years, governments have given increased attention and resources to SME development for a variety of reasons. In developing Asian economies, poverty alleviation and employment generation have typically been cited as goals in supporting SMEs, especially during the 1970s and the 1980s. However, when the Asian financial crisis of the late 1990s exposed the vulnerability of affected economies, support directed at SMEs shifted to programs that encouraged technological upgrading so as to broaden and deepen the industrial structure. This is especially critical for the second-tier newly-industrializing economies (NIEs) of Southeast Asia (i.e. Indonesia, Malaysia, Thailand, the Philippines, and Vietnam), which cannot anymore rely on resource-based and low-cost labor advantages to sustain their economic growth (Habaradas, 2008).

Support for the technological upgrading of SMEs has taken many forms, including skills training, productivity improvement programs, and even the setting up of business incubators and technology parks.

To illustrate, the Office of Small and Medium Enterprises Promotion (OSMEP) of Thailand has come up with a creative mix of programs aimed at supporting SMEs. These include the following: (a) SMEs Mentorship Project, (b) SMEs Incubation Project, (c) Network for Promoting Innovation Commercialization Project, (d) SMEs Sector Analysis and Early Warning Project, (e) iSME Development Project, (f) Knowledge Enhancement and Development Project, (g) Corporate Social Responsibility for SMEs Project, and (h) Venture Capital Service and Regional SMEs Mentorship Center.

Another example is the Small Enterprises Technology Upgrading Program (SET-UP), which is handled by the Department of Science and Technology (DOST) of the Philippines. This is a nationwide program designed to improve the productivity of SMEs through technology upgrading. Under SET-UP, various types of services / interventions are made available to identified clusters or sectors. These services include technology selection, technology acquisition, technology training, process and equipment design, packaging, productivity improvement, quality assurance, standardization, materials identification / selection, waste management, product improvement, and IPR protection (Alabastro, 2004).

Some governments also offer a long list of grants, loans, and other forms of financial assistance meant to address various SME requirements. Consider this partial list of grants and soft loans being made available by Malaysia's Ministry of International Trade and Industry (MITI) and its agencies through the Small and Medium Industries Development Corporation (SMIDEC): (a) Matching Grant for Business Start-ups, (b) Matching Grant for Product and Process Improvement, (c) Matching Grant for Certification and Quality Management Systems, (d) Grant for Enhancing Marketing Skills of SMEs, (e) Matching Grant for Enhancing Product Packaging, (f) Matching Grant for Development and promotion of Halal Products, (g) Grant for Skills Upgrading, (h) Grant for RosettaNet Standard Implementation, (i) Soft Loan for Small and Medium Enterprises, (j) Soft Loan for Factory Relocation, and (k) Soft Loan for Scheme for ICT Adoption.

In spite of all these support mechanisms, however, overall results have fallen short of expectations. Proof: (1) many loans and grants meant for SMEs are underutilized; (2) few SMEs are able to upgrade their capabilities to qualify as suppliers of large enterprises, especially of multinational corporations (MNCs); (3) many SMEs fold up due to competition posed by imported goods and large foreign investors; and (4) a limited number of SMEs, especially in far-flung areas, has availed of government support programs (Habaradas, 2008b).

A study by Virasa and Tangjitpiboon (2000), for example, found that very few private companies take advantage of the Thai government's support for technology development such as the tax scheme, loans, technical information, and consulting services, among others. This was validated by an OSMEP study (2003), which showed that 31.7 percent of total SMEs have not received any information on SMEs promotion projects provided by the government offices; that 71.2 percent of total SMEs have never participated in any kinds of government project; and that 44 percent of SMEs that never participated in any projects reported that the activities provided were not suitable their needs.

The case of Malaysia, as shown in its national survey on innovation (MASTIC, 2003), is also quite revealing. Of the 749 respondents firms, 263 firms undertook innovative activities. Of these 263 firms, only 11 companies (4%) reported having received government support and incentives. Because of this, MASTIC acknowledged the need to evaluate government support, assistance and incentives "in order to ascertain the bottlenecks in the delivery system as well as to find ways for enhancing the effectiveness of government support."

So why is it difficult to encourage SMEs in developing countries like Malaysia, Thailand, and the Philippines to innovate and to upgrade their technological capabilities in spite of the availability of various financing schemes and other support activities?

Intarakumnerd and Virasa (2004), in their study on government policies and measures that support technological capability development of firms in Thailand, provide us with some answers. According to them, not many firms avail of fiscal and financial incentives offered by government because of three reasons: (a) firms do not recognize the availability of such incentives (as shown by a nationwide survey indicating that only 2-3 percent of sampled firms knew about these incentives); (b) these incentive tend to focus on narrowly-defined R&D (excluding a very large proportion of activities that contribute to technology development such as engineering and design), which most Thai firms are not interested to engage in; and (c) these incentive schemes are difficult to avail because of highly restrictive procedures set in place to avoid corruption and the misuse of funds.

An earlier study by Beise and Licht (1996), as cited by Audretsch (2004), identified the following barriers to innovation: (a) too long a gestation period required for innovative activity, (b) legal restrictions and restrictive government policies, (c) long drawn-out processes for obtaining government approval for a new product, (c) shortage of financial capital, (d) lack of competent employees, and (e) very high levels of risk. Also worth mentioning is the study by Caputo, Cucchiella, Fratocchi, Pelagagge, and Scacchia (2002), which identified several obstacles to SME innovation: (a) high innovation costs, (b) high risks related to innovation activities, (c) absence of financial resources, (d) absence of skilled workers, (e) organizational constraints, (f) regulations and technical standards, (g) low customer interest in product innovation, (h) absence of information on technology, and (i) absence of market information. In summary, the obstacles or barriers to innovation could be classified in terms of the nature of innovation, internal constraints, and external conditions (see Figure 1).

This paper looks into the experiences of Malaysia, Thailand, and the Philippines in their attempts to promote innovation and technological upgrading among their SMEs. The next section briefly describes the legal and institutional framework of SME development in the three countries. The succeeding section looks into the key challenges faced by these countries and selected responses to these challenges. The last section discusses several useful frameworks that enable us to understand the differences among SMEs and how these differences affect their ability and willingness to engage in innovation and to invest in technological upgrading.


SMEs comprise the bulk of business enterprises in Malaysia, the Philippines, and Thailand, as it is in many other Asian countries (see Table 1). They also employ a large segment of these three country's total workforce (56.4% in Malaysia; 69.9% in the Philippines; 76.7% in Thailand), and contribute significantly to national output (32% in both Malaysia and the Philippines, and 38.9% in Thailand).

In terms of the legal framework (see Figure 2), Thailand and the Philippines have special laws for SMEs. The Philippines has the Magna Carta for Small Enterprises (R.A. No. 6977), recently amended as the Magna Carta for Micro, Small, and Medium Enterprises (R.A. 9501), and the Barangay Micro Business Enterprises Act of 2002 (R.A. No. 9178), while Thailand has the SME Promotion Act B.E. 2543. This is not the case in Malaysia. All three countries, though, have included incentives for SMEs in their investment laws, tax laws, and other laws (e.g. free zones acts).

SME development efforts in Malaysia are closely linked to overall economic goals as evidenced by the explicit references made by the SME Development Blueprint to the Ninth Malaysia Plan and the Industrial Master Plan. This is also true for Thailand, which framed its existing SME Promotion Plan in accordance with the 10th National Social and Economic Development Plan, the National Science and Technology Strategic Plan 2004-2013, and the Sufficiency Economy Philosophy. In the Philippines, the SME Development Plan does not refer to the Medium-Term Development Plan, at all, probably because the overall goals for SME development are spelled out in the special SME laws that were mentioned earlier.

In terms of SME strategy, there are some differences among the three countries (see Figure 3). The strategic thrust of Malaysian SME development is clearly to enhance SME competitiveness in the regional and global arena, as can be gleaned by the programs and incentives offered by various government agencies. While the SME Development Plan of the Philippines also states the need to develop managerial and technological capabilities to enhance competitiveness in global markets, support programs and incentives are clearly aimed towards poverty reduction and employment generation. Moreover, the increased priority given to potential growth areas (e.g. manufacturing-related services, medical devices, metal products, transport services and logistics, professional and management services, ICT) supports the global aspirations of the Malaysian government for its SMEs. SME development efforts in Philippines, on the other hand, still prioritize the traditional sectors (e.g. food industry, organic and natural products, wearables), which is consistent with its welfare goals. Thailand seems to have found some balance between its vision of becoming variously the "Detroit of Asia", the "Kitchen of the World" and "Bangkok Fashion City" and its attempt to address rural poverty through the development of community enterprises via the OTOP program (Habaradas, 2008b).

Obviously, the SME development efforts in these three countries are largely influenced by their levels of economic development. Given the relatively advanced state of its economy, Malaysia has the resources to provide a comprehensive and integrated package of programs and incentives for its SME sector. Thailand, too, has begun to allocate a much bigger budget on its SME promotion efforts, especially during the past few years. The Philippines, on the other hand, has to deal with scarce resources that might be better spent for basic infrastructure, which has been neglected over the past two decades.

In terms of institutional structure (see Figure 4), there are similarities among the three countries except for the fact that the Philippines does not have the equivalent of SMIDEC (Malaysia) and OSMEP (Thailand), which serve as powerful coordinating and monitoring bodies in the implementation of SME programs and activities. What we have in the Philippines is the Bureau of Small and Medium Enterprise Development (BSMED), which is under the Department of Trade and Industry (DTI), but this bureau does not have an all-encompassing mandate, unlike SMIDEC and OSMEP.

The Philippines, however, explicitly mentions in its SME development plan the role of local government units (LGUs) and non-government organizations (NGOs) as part of the support network for SMEs. This is not evident in the cases of Malaysia and Thailand.


This section begins with a general overview of the level of technological capabilities of SMEs in Malaysia, the Philippines, and Thailand. It then describes the challenges faced and selected responses made in the critical areas of SME financing, human capital development, and SME networking.

Overview of Technological Capabilities of Malaysian, Filipino, and Thai Firms

Several studies have shown that most firms in these three countries have low technological capabilities, and relatively few have undertaken innovation activities.

The National Survey of Innovation of Malaysia, for example, reported a 35-percent incidence of innovation for the period 2000-2001. Of the 749 firms that completed the questionnaires, 263 firms (or 35%) indicated that they carried out innovation activities, while the remaining 486 firms (or 65%) indicated otherwise. This incidence of innovation, however, is higher than the 21 percent recorded in the previous national innovation survey.

In the Philippines, very few studies have been conducted on the innovation activities of firms. According to the Annual Survey of Philippine Business and Industry (ASPBI) conducted by the National Statistics Office (NSO), 65 percent of firm-respondents claimed to have conducted some form of innovation activities. The most prevalent form of innovation activities is adapting existing products and processes from abroad to Philippine conditions. Some firms also acquire new technology, especially in the electronics and electrical industry, mainly through technology licensing and consultancy services.

In Thailand, Intarakamnerd, et. al. (2002) cited previous studies showing "that most firms have grown without deepening their technological capabilities in the long run and that their technological learning has been very slow and passive." They also cited the study of Arnold (2000), which revealed that only a small minority of large subsidiaries of global

firms, large domestic firms, and SMEs have R&D capability, and that majority of them continued to struggle with strengthening their design and engineering capabilities. The main concern for a very large number of SMEs, however, is building up more basic operational capabilities and their craft and technician capabilities "for efficient acquisition, assimilation, and incremental upgrading of fairly standard technology."

Even the R&D / Innovation Survey of Thailand for 2000 revealed that most sampled firms conducted activities requiring a "shallow level of technological capabilities such as simple quality control and testing" Less than half have capability in design; only about one-third have reverse engineering capability; and less than 15% have done R&D. It is interesting to note, however, that almost half of the sampled firms (48%) that carried out product or process innovation did not conduct R&D formally. This means that most of the innovative activities in Thai firms are not products of formally-organized R&D, which is probably typical in many developing countries. Moreover, most Thai firms rely on off-the-shelf imported technology (e.g. machinery) and turn-key technology transfer from abroad. Since many of these firms started out as trading enterprises, they pay more attention to quick return rather than the long-term development of technology capability (Intarakamnerd, et. al., 2002).

Financing for Technology Upgrading

According to Wattanapruttipaisan (2003), about 75 and 90 per cent of SME entrepreneurs in the ASEAN region rely largely on their own savings, internal resources of the firm (such as retain earnings and other enterprise funds), short-term (unsecured) borrowings from relatives and friends (also known as business angels or informal equity investors), and grey-market loans. In addition, bank finance does not often cover all the financing needs of SMEs. In Malaysia, for example, funds from commercial banks met respectively 62 and 21 per cent of working capital and long-term investment requirements from the surveyed SMEs; the corresponding figures for SMEs in Thailand being 57 and 37 per cent. Public financial institutions and private finance companies remain a minor source ofSME financing in both countries. Wattanapruttipaisan added that the SME sector accounts for only approximately one-fifth or less of the institutional credit extended to all businesses in the late 1990s, slightly lower than SME contribution to aggregate production, and "certainly much less than the relative importance of SMEs in domestic employment generation."

Other major findings of Wattanapruttipaisan (2003) are as follows: (a) SMEs pay a higher rate of interest compared to those imposed on their large-scale counterparts; (b) they face more restrictive requirements on institutional credit obtained by them; (c) development finance institutions played only a minor financing role; (d) the informal financial markets remain a major source of funds for SMEs in ASEAN; and (e) it is access to finance (rather than the cost of finance) that has constrained SME competitiveness.

Recognizing the financial constraints faced by many SMEs, governments typically provide support in the form of grants and soft loans. Funds are channeled through both developmental financial institutions and commercial financial institutions. Support is also provided in terms of providing credit guarantees.

In Malaysia, there are various matching grants that are meant to finance product and process improvement, quality certification and management system improvements, market development, skills upgrading, factory audit, and acquisition of strategic technology. An example of these grants is the Technology Acquisition Fund (TAF), which is administered by the Ministry of Science, Technology and Innovation (MOSTI). The Fund aims to promote technology upgrading through the introduction and utilization of technologies in the manufacturing and physical development of existing and new products or processes; and to increase wealth creation and technology content of Malaysian companies through the acquisition of foreign technology (i.e. licensing, non-exclusive purchase of technology, or outright purchase of technology). Project proposals eligible for consideration under the TAF must be listed in the following priority technology clusters: biotechnology, agriculture, ICT, and industrial (e.g. advanced materials, advanced manufacturing, alternative energy).

Aside from grants, the Malaysian government also offers a variety of loans, such as the Fund for Small and Medium Industries 2, New Entrepreneurs Fund 2, Rehabilitation Fund for Small Businesses, Bumiputera Entrepreneur Project Fund, New Trade Finance Products for SMEs, Soft Loan for Small and Medium Enterprises, Soft Loan Scheme for Factory Relocation, and Soft Loan Scheme for ICT Adoption.

SMIDEC, in its 2005 Annual Report, revealed that "the number of approvals for grants and soft loans in 2005 increased by 48.4 per cent to 1,465 compared with 987 approvals in 2004. The total value of loans increased from RM42.9 million in 2004 to RM104.6 million in 2005. Of the 1,465 approvals, 1,316 were for grants, amounting to RM19.8 million, while 149 were for soft loans valued at RM84.8 million."

In the Philippines, the government has been implementing the SME Unified Lending Opportunities for National Growth (SULONG) program, which is a key component of the country's SME Development Plan 2004-2010. SULONG is geared towards expanding the enterprise base by graduating micro, small and medium enterprises to higher levels of classification by providing them with more access to government assistance. 'Sulong' is a Filipino word which means 'move forward', and is an appropriate rallying call to make SMEs an even more productive sector (Leano, 2006).

SULONG is the result of collaboration among various government financial institutions (GFIs). Under the program, GFIs apply simplified and standardized lending procedures and guidelines (e.g. standardized application procedures, requirements, fees and interest rates) to provide SMEs with greater access to capital. Participating GFIs include Land Bank of the Philippines, Development Bank of the Philippines, Small Business Corporation, Quedan and Rural Credit Corporation, Philippine Export-Import Credit Agency, and the National Livelihood Support Fund (Leano, 2006).

Loans amounting to nearly P120 billion were given out to 58,694 small and medium-scale Filipino entrepreneurs between 2004 and 2007 under the SULONG Program. It is estimated that the loans generated 1.8 million new jobs for poor and low-income workers during the said time frame (Romero, 2008).

In Thailand, the government set up a specialized financial institution named Small Business Credit Guarantee Corporation (SBCG), which is under the supervision of the Ministry of Finance. The main objective of the SBCG is to assist SMEs that seek a guarantee for the unsecured portion of loans in obtaining adequate credit from financial institutions. Statistics show that guarantee approval, measured in terms of number of projects increased from 1,102 in 2002 to 3,376 projects in 2005. The guarantee amount increased from 4.1 billion baht in 2002 to 7.5 billion in 2005.

According to Anuchitworawong, Intarachote, & Vichyanond (2006), the SBCG "has played a vital role in facilitating additional credit to SMEs", allowing these SMEs to increase their investments, expand their business, and generate more employment opportunities. More importantly, credit guarantees reduced the expected cost of lending of financial institutions, therefore increasing their willingness to provide funds. The lower cost of guaranteed debt is a result of SBCG entering into a contract with financial institutions to encourage them to extend credit to SMEs and ensuring repayments to the financial institutions when the SMEs become delinquent.

Also worth noting is the partnership between the National Innovation Agency (NIA) of Thailand with local and international venture capitalists to set up a fund for innovative Thai companies with growth potential. The fund is a result of cooperation among NIA, local venture-capital firm Vnet Capital, venture capitalist Japan Asia Investment (JAIC) and SME Bank. NIA approved a BT50-million budget for the fund, JAIC contributed Bt100 million, while SME Bank and Vnet Capital provided Bt50 million and Bt10 million respectively. As a local VC firm, Vnet Capital serves as fund manager. The VC partner from Japan will also assist local companies to get access to overseas markets, especially in Japan. NIA's decision to engage in investments is a way of encouraging local companies not only to continue working on new innovation but also to see opportunities outside of the country (Sutharoj, 2007).

Human Capital Development

The quality of a country's human resources is critical because it affects the ability of firms to innovate and to absorb technology. In all three countries, there is a fairly high level of literacy and also rising enrolments at the secondary and tertiary levels. These have provided a trainable and efficient basic workforce, which contributed to these countries' industrial development before the 1990s. However, the current level of formal skill creation is not enough to manage a large increase in the technological levels of SMEs or to meet the technological needs of firms that belong to the high-technology sectors.

In Malaysia, for example, there is growing evidence of skills shortages at all levels, particularly in technical fields. Businesses complain about the constraints to upgrading and deepening posed by the lack of particular skills, and by high turnover rates for middle level skilled employees (Jomo, 2007). Lall (1995, as cited in Jomo, 2007) said that there are large gaps between demand and supply at all levels of skill and for all types of education. For example, Malaysia lacks engineering and science graduates, and needs a tenfold increase in science and engineering graduates as a proportion of the population to achieve the same levels found in Singapore, South Korea, and Taiwan (Best, 2007). Reforms, however, are underway to address this weakness of the higher education sector in Malaysia, especially with the formulation of the National Higher Education Strategic Plan 2007-2010 and the National Higher Education Action Plan 2007-2010.

In Thailand, there is also a shortfall of skilled labor. Russell (2007) cited the findings of the Federation of Thai Industries, which said that the supply of engineers in Thailand would be short 50,000 by 2008. In the automotive industry alone, the demand for engineers has been growing rapidly especially since the industry is on track with its production target of 1.8 million vehicles by 2010. By 2010, the automotive industry is forecasted to need 18,850 engineers. This situation has been acknowledged by the Education Ministry, which projected the shortfall of engineers to reach 100,000 by 2010. The Ministry also projected the overall labor shortfall to reach 580,000 in the same period.

Again, the higher education system is seen as the culprit, At the tertiary level, the number of graduates from Thailand's top engineering programs--Chulalongkorn, Thammasart, Mahidol and Sirinthorn universities and the King Mongkut Institute of Technology (KMIT) and King Mongkut University of Technology Thonburi (KMUTT)--was only 3,663 in 2006. If this number remains unchanged, only 14,652 additional engineers will enter the workforce by 2010, far short of the predicted demand of 100,000.

In the Philippines, the skills shortage is not as pronounced as compared to Malaysia and Thailand. In fact, the ADB (2000) reported that the Philippines is competitive in skill-intensive products because of a relatively large educated and trainable workforce. But even if the Philippines has a relatively well-educated workforce, only a small minority (about 6 percent) has had relevant skills training. To quote the ADB report (2000):
   To be competitive in world markets, the Philippines needs to
   continuously improve the skills and productivity of its workforce.
   Labor productivity depends on many factors, including the quality
   of management and the nature of production technology. The skills
   of the workforce and the ability of workers to move efficiently
   across sectors as the economy changes are centrally important. The
   skills and flexibility of the workforce make important
   contributions to the competitiveness of an economy in global

These three countries recognize that sustained growth in the global markets will require deepening of the technological competence of enterprises and workers. Increases in skills and productivity of the labor force are necessary to increase the quality and value of output without raising labor costs beyond competitive levels. The governments of these countries have, therefore, established structures and programs to address this important concern.

In Malaysia, the National SME Development Council has mandated Pembangunan Sumber Malaysia Bhd. (PSMB), an agency under the Ministry of Human Resources (MOHR), to co-ordinate and to oversee training and human resource development for SMEs. Under PSMB, training needs are analyzed and programs are kept in line with SME requirements, from the most basic to the more technically advanced. PSMB also administers the Government's Human Resources Development Fund (SME Annual Report 2006).

Among the major initiatives of PSMB in 2006 are as follows: (a) Introduction of an SME Training Accreditation System into the Myskill Card in order for SME employers to keep a record of employee training; (b) Establishment of six training committees were established by PSMB to identify SME training needs and to ensure that courses met specific and targeted requirements; (c) Launching of the HRD Portal, a web-based portal that acts as an online training resource centre for employers, employees and training providers. The portal allows SMEs to register for training courses, to access up-to-date information on available courses, seminars, conferences, and events on human resource training. It also disseminates information on the training programs offered by 29 ministries and agencies involved in capacity building for SMEs.

Responding to MNCs' complaints, the Malaysian government acted to build a network of industrial skills institutions responsive to the changing needs of high-technology investors. In 1989, the Penang State government helped to found Penang Skills Development Center, which is managed by a committee of representatives from the firms, and supported by the State government in the form of land and personnel. The PSDC provides advanced training to industrial workers, technicians and engineers in one of Malaysia's major electronic industrial zones. Under the auspices of the Penang Development Corporation (PDC), the PSDC has played the role of "expanding the supply of technically trained workers 'in synch' with the development of technology management capabilities of enterprises in the state" (Best, 2007). Using this as a model, the federal government encouraged other states with industrial concentrations, including Selangor, Kedah, and Johor, to set up similar industry-managed training centers during the 1990s.

The federal government matched these initiatives by negotiating with the British, German, French, and Japanese governments to set up specialized training institutes, as Singapore had done a decade earlier. By 2001, the state skills development centers had trained 153,455 workers, and the 'bilateral' training institutes had graduated 7,374 trainees. Four private sector centers had enrolled 122,107 trainees, the vast majority of them in the Federation of Malaysian Manufacturers' Institute of Manufacturing courses (Felker and Jomo, 2007).

To encourage firms to invest in skills training the government established the Human Resource Development Fund, and made available the Grant for Skills Upgrading.

Recognizing that the shortage of skilled labor constrains technological upgrading, the government reformed incentives related to human capital formation. In 1993, it replaced an existing tax incentive for corporate training expenses with the Human Resources Development Fund (HRDF), an industry sector-wide payroll levy and training subsidy scheme. Firms with more than 50 workers were required to contribute one per cent of their payrolls to the Fund; in exchange, they could apply for reimbursement of a percentage of expenses on approved training programs or submit their in-house annual training plans for approval. Over the next decade, the Fund collected some RM1.03 billion in employer payroll levies. In 1996, the government extended the scheme to SMEs, allocating RM20 million for training subsidy. By the end of 2001, though, only 17 per cent of these funds had been disbursed, and only 3 per cent of the country's SMEs had enrolled in the training program (Felker and Jomo, 2007).

The Grant for Skills Upgrading is aimed at enhancing the skills and capabilities of employees of SMEs in the technical and managerial levels, particularly in critical areas such as the electrical and electronics, information technology, industrial design and engineering fields. SMIDEC has appointed 22 training providers to undertake technical skills for SMEs, including skills development centers (SDCs) in Sarawak, Johor, Penang, Terengganu, Pahang, Kedah, Perak, Selangor, Negeri Sembilan, Malacca and Sabah. Assistance is given in the form of a matching grant where 50% of the cost of training is borne by the government and the remainder by the applicant. In addition, the remaining costs can also be claimed through the HRDF.

In 2006, a total of 1,447 SME employees attended various skills development training programs implemented by the 22 SDCs appointed by SMIDEC under the Skills Upgrading Program. The variety of available courses from these appointed SDCs range from technical skills to soft skills in marketing and management in critical areas such as the electrical and electronics, information technology, industrial design and engineering fields. SDCs were also required to install a tracking mechanism to monitor the career progress of their trainees.

In the Philippines, it is government's policy to enhance global competitiveness by producing a highly qualified and competitive workforce for the economy. This is one of the reasons why the Technical Education and Skills Development Authority (TESDA) was created in 1994. Its mandate is to promote and strengthen the quality of technical education and skills development (TESD) programs to attain international competitiveness (ADB, 2000).

TESDA coordinates all aspects of the TESD system, including school-based, center-based, community-based, and enterprise-based training. Following the recommendation of the Congressional Commission on Education, all types of middle-level skills development (MLSD), including the non-formal skills training of the former National Manpower and Youth Council and the apprenticeship training programs of the Department of Labor and Employment, were integrated under TESDA.

A distinguishing characteristic of the TESD system in the Philippines is that 60 percent of all training institutions are private and that they accommodate 80 percent of total enrolments in institution-based middle-level skills development. Private TESD is financed exclusively from non-public sources, mainly by tuition fees and endowment income. In contrast with other countries, there is little government subsidy for private training.

According to an ADB Report (2000), the Philippines "has been successful in establishing an extensive system for education and training that has contributed to economic and social goals." The same report cited a survey that 60 percent of firms provided systematic training for employees and invested significantly in training; and that smaller firms also provide training, although less often and less formally, for the most part through on-the-job skills transfer. The ADB Report, however, raised concerns about the role, responsibilities, and management capacity of TESDA; the quality and relevance of TESD programs; constraints faced by private providers of technical education and skills development relative to access to capital; and equitable access to TESD programs by the poor.

In Thailand, the Department of Skill Development (DSD), under the Ministry of Labor, is responsible for skill training, retraining, and upgrading skills of the workforce to meet the national qualification standards. Skill training includes technical and non-technical skills in manufacturing, services and commerce. Soft-skill training is also available to build competency in leadership, problem solving, communication, decision-making, and teamwork, among others, to facilitate the lifelong learning / training for employability (Wongboonsin, 2008). The DSD, like TESDA in the Philippines, has become a leading institution in establishing a network of skill development institutions nationwide.

In 1994, the Thai government passed the Skill Development Promotion Act BE 2537 and set up the Skill Development Fund under the Ministry of Labor. The amended Skill Development Promotion Act B.E. 2545 (A.D. 2002) further encourages employers to play a vital role in upgrading the knowledge and skills of their workforce by providing a tax deduction of up to 200 percent of the cost of training. It encourages private companies or establishments to set up and register with the DSD their own training centers for workplace learning. According to the records of the DSD, 233,132 workers were trained in various workplaces during the period October 2005-April 2006. (Wongboonsin, 2008).

Also, the Ministry of Labor and the Ministry of Education of Thailand are working together to set up a system for transferring credits between skills and basic knowledge in order to encourage the upgrading workers' knowledge and skills along the lifelong-learning approach. Those that complete a skill training program under the DSD gets a chance to obtain a higher certificate up to a degree level.

Intarakumnerd, et. al. (2003), however, observed that even if the DSD has invested heavily to upgrade its vocational training program, its main concern is employment, and not the technological development of Thailand. Training subsidies, they said, do not go to training programs that develop skills necessary "for crossing the thresholds of technological capabilities."

SME Linkages

An important strategy to promote 'technological deepening' through technology spillovers is encouraging linkages among large firms (particularly MNCs) and local SMEs. The expectation is that through subcontracting linkages, SMEs benefit from the technical assistance, information, and training provided by large foreign and local companies to their suppliers.

To encourage technology spillovers and to speed up industrial deepening in Malaysia, SMIDEC launched Industrial Linkage Program (ILP), which fosters partnership between SMEs and large-scale industries (LSIs). Under the ILP, support is given to enhance the capacity and capability of local SMEs in meeting quality, technical specifications and delivery schedules, as well as in maintaining cost and price competitiveness. By participating in the ILP, SMEs are expected to achieve a high level of competency in supplying parts and components required by the LSIs, which could pave the way for their entry into the regional and global markets.

According to the SMIDEC Annual Report 2005, 1,088 SMEs from various sectors were registered under the ILP, out of which 415 SMEs (38.1%) were linked to MNCs and large companies. In 2005 alone, the 157 SMEs that were linked to LSIs generated potential sales amounting to RM96.8 million. During the same period, a total of 108 SMEs in the food and non-food sectors were linked by SMIDEC to hypermarkets as potential suppliers. Out of these, 31 SMEs have been appointed, with total sales valued at RM2.1 million. Six have progressed to become suppliers to the hypermarkets under their in-house brand.

Another key program is the Vendor Development Program (PPV), which is administered by the Ministry of Entrepreneur and Cooperative Development (MECD). Launched in 1998, the PPV supports the localization program, which seeks to increase local content of manufactured goods. Under the program, SMEs are given opportunities to become vendors through outsourcing activities established by anchor companies (local conglomerates, GLCs and MNCs) (MECD Annual Report 2005).

In implementing the PPV, the MECD has established industrial networks and collaboration with certain industries to identify new potential sectors for vendor development. It also collaborates with technical agencies, specifically SIRIM Berhad, Kulim Technology Park Corporation (KTPC), National Productivity Centre (NPC) and Malaysian Timber Industrial Board (MTIB) to increase product quality, productivity, as well as the technical and technological knowledge of the vendor companies.

From 1998 to 2005, a total of 391 SMI vendor companies had been appointed and developed in various fields. Of the total, 255 companies (65%) are still operational. Most of which are involved in domestic markets, while a few have already exported their products to the international markets.

Another model in strengthening the capabilities of local firms through technology absorption and diffusion is the case of the Malaysian state of Penang. In 1969, the Penang government set up the Penang Development Corporation (PDC), which played a pivotal mediating and supporting role in encouraging linkage between MNCs and local firms. As MNC's local sourcing grew, the PDC surveyed likely supplier firms, published sourcing guides, helped suppliers locate in the FTZs, and assisted them in winning investment incentives from the federal investment agency, MIDA (Felker and Jomo, 2007).

Today, Penang has world-class manufacturing capabilities in mass production, including JIT and TQM systems, with a number of examples of flexible mass production. According to Best (2007), Penang has turned into a regional supply base with a growing degree of local horizontal integration, as proven by the emergence of a locally-owned supplier base with increasing capabilities in technology management.

In Thailand, linking up SMEs with large corporations is an important component of the country's policy to strengthen its supporting industries. In 1992, the government established the BOI Unit for Industrial Linkage Development (BUILD) to take charge of industrial linkage development. BUILD acts as "an intermediary between manufacturers of ready-made products and small-and medium-sized manufacturers of parts, which will result in the linkage of industries and the transfer of production technology" (BUILD, undated).

The objectives of BUILD are: (a) to promote the establishment of an industrial linkage network by strengthening the relationship between assemblers and parts suppliers; (b) to promote the development of supporting industries, which will enhance the competitiveness of assemblers in Thailand; (c) to help small-and medium-sized manufacturers of parts increase production efficiency and product quality; (d) to promote cooperation between foreign investors, Thai parts manufacturers, and government offices; (e) to promote Thailand as the region's center for parts manufacturing and source of raw materials; and (f) to eliminate obstacles in subcontracting and to push for policy changes that will facilitate industrial linkage development.

Activities of the Industrial Linkage project that directly benefit SMEs include the following: (a) providing information about subcontracting opportunities in Thailand by utilizing a computerized database; (b) linking sellers and buyers in related businesses; (c) providing technical and management support for domestic parts manufacturers who wish to become subcontractors, with officers from BUILD acting as coordinators on both the buyers' and sellers' behalf; (d) preparing investment manuals, complete with technical details and marketing information, for prospective subcontractors; (e) managing and coordinating training programs to enhance the marketing and technological capacity of small-and medium-sized manufacturers; (f) arranging for Thai parts manufacturers to participate in trade shows and exhibitions abroad; and (g) coordinating and providing assistance for manufacturers in acquiring services in technology, management, finance and marketing from other government offices.

Worth noting is the Vendors Meet Customers Program, under which BUILD acts as an intermediary between SME parts-and-components manufacturers and customers / assemblers. By bringing the SMEs to visit assembly plants and meet with procurement officers, they gain a better understanding of the assemblers' needs and requirements. Assemblers, on the other hand, benefit from the ability to source parts locally. The program has even enabled some Thai parts to serve as suppliers of international customers in Japan, Germany, and the USA (Crawford, 2005).

BUILD, which helped generate industrial trade worth $155 million between 2001 and 2004, was named the best business linkage program by the World Association of Investment Promotion Agencies in 2004.


Enhancing the ability and willingness of SMEs to absorb, adopt, and / or develop new technology requires more than identifying the constraints they face and then providing programs and other support mechanisms meant to remove these constraints. For example, there is compelling evidence that the availability of financial grants and loan programs does not automatically translate into full utilization of these grants and loans by SMEs even if many SMEs require funds for both their operational and capital investment activities. Many of these SMEs are hesitant to undergo the procedures to avail of loans from banks and other lending institutions; some are not even willing to disclose their financial records to these lending institutions; and even those who are inclined are not all equipped to prepare a sound business plan.

There is obviously a need to adopt a more holistic (rather than a merely comprehensive) approach in dealing with SMEs, one that recognizes their relative abilities to adopt innovative practices, and one that considers their strategic motives. Some SMEs dream of growing large and conquering foreign markets; some are quite content with the current size of their operations and prefer to concentrate their efforts on the domestic market. These differences in commercial ambitions could be due to a variety of factors, including the individual owners' entrepreneurial spirit and risk aversion, the availability of material and financial resources, the cost and appropriateness of existing technology, the availability of technical and managerial talent, the internal processes and organizational characteristics of the firms, and even existing market conditions.

Fortunately, there has been an increased recognition among policymakers

of the unique requirements of SMEs, which affect their willingness to engage in innovative activities, and to avail of incentives meant to assist them in upgrading not only their technological, but also their overall operational, capabilities (Habaradas, 2008b).

Malaysia's SMIDEC, for instance, identifies several phases of enterprise development leading to global competitiveness (see Figure 6). It hypothesizes that the technological level of firms advances over time, and that they have different basic requirements or concerns at each stage. By designing programs to cater to the specific needs of industry, resources could be channeled from underutilized programs to those that would have greater impact on firms.

In Thailand, several researchers that have worked with the NSTDA came up with a tentative taxonomy of government policies and measures to support the development of technological capability among firms (see Figures 7 and 8). The analysis undertaken by Intarakumnerd and Virasa (2004) portray a dynamic view of technological capability development that considers three key elements: strategic and business-related capability, internal capability, and external linkage capability.

The central idea underlying this taxonomy is that firms have different technological capabilities, and therefore, require different types of support or intervention. Thus, firms that don't perceive the need to upgrade their technological capability (Stair 1) will not be receptive to product development assistance or to grants for design and engineering as compared to firms that fall under Stairs 3 and 4. Perhaps, state-subsidized programs to enhance technology awareness (or technology management courses) might be more relevant to them at this stage of their technological capability development.




This 'development staircase' is superior to SMIDEC's 'phases of enterprise development' because it does not make the dangerous assumption that the technological level of firms is determined by their stage on the corporate life cycle. As we all know, there are young firms that utilize high technology as well as old firms that are content with basic production technology they have utilized over the years. Thus, technological capability is not necessarily a function of a company's age.

Recognition of the different requirements of SMEs has led into a more customized approach in dealing with these firms. A good example is the Industrial Technology Assistance Program (ITAP), which is being implemented by the National Science and Technology Development Agency (NSTDA) of Thailand.

ITAP: A Customized Approach

NSTDA is an autonomous organization operating under the policy guidance of its board, which is chaired by the Ministry of Science and Technology of Thailand. One of its centers, the Technology Management Center (TMC) was established in 2005 to support technology transfer, S&T human resource development, S&T infrastructure development, and the development of S&T policy (NSTDA, 2006).

One of TMC's key programs is the Industrial Technology Assistance Program (ITAP), which is designed to encourage the application of technology and to accelerate the rate of technology development in Thai SMEs. Under ITAP's Industrial Consultancy Services, a potential SME client is given a free preliminary problem diagnosis by ITAP industrial technology advisors. Problems could range from acquiring new raw materials or finding substitute raw materials to product design; from prototyping to reverse engineering. ITAP will then seek technical experts that could address the SMEs specific needs, and then assist the expert and the entrepreneur in developing an appropriate work contract. Up to 50% of the cost of availing of the technical expert's services will be borne by ITAP. The support extends to project monitoring and evaluation, and is augmented by other ITAP services such as technical trainings and seminars, provision of industrial and technology information, and technology acquisition, etc.

Needless to say, ITAP has a deep pool of technical experts which come not only from government, but also from academe and the private sector; many of these experts also come from outside of the country. Since each engagement is tailored to fit the requirements of the specific SME, the results have so far been encouraging.


The experiences of Malaysia, the Philippines, and Thailand in improving the technological capabilities of their SMEs provide useful insights to other developing countries, especially in the ASEAN region. Their successful programs and practices could serve as useful models for other countries that find themselves in similar circumstances. The not-so-successful programs and practices, on the other hand, could serve as food for thought for policy makers and implementers of SME support programs.

In conclusion, we can say that setting up the appropriate legal framework and providing the physical infrastructure is important in promoting technological upgrading among SMEs in a developing economy. However, building the social infrastructure is equally important. This requires a sustained effort in nurturing trust and in fostering the spirit of collaboration among the government, educational and training institutions, financial institutions, and the SMEs themselves.


I would like to thank the Nippon Foundation Fellowships for Asian Public Intellectuals (API Fellowship Program) for the funding support that enabled me to gather data used in this paper.


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Raymund B. Habaradas, De La Salle University
Table 1
Contribution of SMEs to selected Asian economies

Country               Measures used in definition of

China (2004)          Employment, sales and assets
Indonesia (2006)      Employment, sales and assets
Korea (2003)          Employment and assets
Malaysia (2005)       Employment and sales,
Philippines (2003)    Employment and assets
Singapore (2004)      Employment and fixed assets
Thailand (2006)       Employment and fixed assets
Vietnam (2002)        Employment

Country               % of total    % of total      % of SME
                       number of     workforce    contribution
                         firms                       to GDP

China (2004)             99.0          75.0           56.0
Indonesia (2006)         99.9          99.6           57.0
Korea (2003)             99.8          86.5           49.4
Malaysia (2005)          99.2          56.4           32.0
Philippines (2003)       39.6          69.9           32.0
Singapore (2004)         90.0          45.0           25.0
Thailand (2006)          99.5          76.7           38.9
Vietnam (2002)           99.9          77.3            n/a

China and Medium Size Enterprises Main Source of

Indonesia APEC--SME Profile (

Korea and Medium Business Administration (SMBA)

Malaysia Census of Establishment and Enterprises 2005

Philippines Census on Business Establishment

Singapore Environment for SMEs in Singapore

Thailand OSMEP 5th Anniversary Annual Report 2006

Vietnam Establishment Census 2002

Figure 1.
Obstacles / barriers to innovation

Nature of innovation    Internal constraints    External conditions

* High innovation       * Absence or            * Low customer
  costs                   shortage of             interest in
                          financial               product innovation
* High levels of                                * Absence of
  riski related to      * Absence of skilled      information on
  innovation              workers / lack of       technology
* Long gestation          employees.            * Absence of market
  period required                                 information
                        * Other
                          organizational        * Restrictive
                          constraint              government
                                                  policies: legal

                                                * Bureaucratic red
                                                  tape for product

Source: Caputo. et. al (2002) and Beise and Licht (1996)

Figure 2.
Policy environment for SME development--
Malaysia, Thailand, and the Philippines compared

Malaysia                Thailand                 Philippines

* The Ninth Malaysia    * 10th National          * National SME
  Plan (9MP)              Social and Economic      Agenda
                          Dev't Plan
* Third Industrial                               * SME Development
  Master Plan (IMP3)    * Science and              Plan 2004-2010
* National SME            Strategic
  Development             Plan 2004-2013
                        * Master Plan for
                          Efficiency and
                          Productivity in the
                          Industry Sector

                        * Sufficiency
                          Economy Philosophy

Laws                    * Second SME             Special laws, for
                          Promotion Plan         SMEs
* of Investments                                 * Magna Carta for
  Act of 1986           Special Laws for           Micro, Small and
                        SMEs                       Medium Enterprises
* Income Tax. Act
  1967                  * SME Promotion Act      * Barangay Micro
                          B.E. 2543                Business
* Customs Act 1967                                 Enterprises Act
                        Other Laws                 of 2002
* Sales Tax Act 1972
                        * Revenue Code           Other Laws
* Excise Tax 1976
                        * Act of Accounting      * RA 7916--Special
* Free Zones Act          B.E. 2543                Economic Zones Act
                        * Property Tax Act       * RA 7227--Clark and
                          B.E. 2475                Subic Special
                                                   Economic and
                                                   Freeport Zone
                        * Compensation Act
                          B.E. 2537              * RA 8424--Tax
                                                   Reform Act
                        * Excise Tax Act B
                          JE. 25 27              * EO 226-Omnibus
                                                   Investment Code;
                                                   Priorities Plan

                                                 * RA 7459--Programs
                                                   on Science -and
                                                   Investors and
                                                   Incentives Act

                                                 * RA 7844--Export
                                                   Development Act of

Figure 3.
Strategic thrusts of SME development plans--
Malaysia, Thailand and the Philippines compared

Malaysia                Thailand                Philippines

* Enhancing the         * Reviving SMEs to      * Developing
  competitiveness         become an economic      managerial and
  of SMEs                 and social              technological
                          mechanism in the        capabilities to
* Capitalizing on         country                 enhance
  outward investment                              competitiveness
  opportunities         * Building and
                          improving             * Supporting growth
* Driving the             infrastructure and      industries that are
  growth of SMEs          reducing hindrances     active in the
  through                 in business             global markets
  technology,             operations
  knowledge and                                 * Supporting
  innovation            * Enhancing               linkages of SMEs
                          sustainable SME         with leading
* Instituting a           growth                  Philippine firms
  more cohesive
  policy and            * Improving SME         * Strengthening SME
  supportive              exporters'              financing support
  regulatory and          potential to the        programs
  institutional           international level
  framework                                     * Streamlining
                        * Creating and            systems that
* Enhancing the           developing new          provide support
  growth and              entrepreneurs           programs and
  contribution of                                 incentives:
  SMEs in the           * Improving the           streamlining
  services sector         potential of            implementation of
                          community               SME policies
                          enterprises in
                          solving poverty       * Building
                          problems and            capabilities of
                          spreading               institutions that
                          development to the      generate and
                          regions                 implement programs
                                                  for SME development

Figure 4.
Institutional structure for SME development--
Malaysia, Thailand, and the Philippines compared

Institution                   Malaysia                Thailand

Policy making           * National SME          * Board of Small
                          Development             and Medium
                          Council QtSDQ           Enterprises

Lead agency             * Ministry of           * Ministry of
                          International Trade     Industry
                          and Industry

Central                 * SMTDEC                # OSMEP
coordinating body

Other government        * Ministry of           * Ministry of
ministries /              Agriculture and         Finance
departments               Agro- based
involved                  Industry              * Ministry of
                                                  Agriculture and
                        * Ministry of             Cooperatives
                          Domestic Trade and
                          Consumer              * Ministry of
                        * Ministry of
                          Entrepreneur and      * Ministry of
                          Cooperative             Science and
                          Development             Technology

                        * Ministry of Human     * Commission on
                          Resource                Higher Education

                        * Ministry of
                          Industries and

                        * Ministry of Rural
                          and Regional

                        * Ministry of
                          Science, Technology
                          and Innovation

                        * Ministry of

                        * Ministry of
                          Culture, Arts and

                        * Ministry of
                          Housing and Local

                        * Ministry of
                          Higher Education

Support network         * Special government    * Special government
                          agencies                agencies

                        * Commercial and        * Commercial and
                          developmental           developmental
                          financial               financial
                          institutions            institutions

                        * Skills development    * Private sector
                          centers                 services

                        * Universities and      * Universities and
                          research                research
                          institutions            institutions

                        * Various industry      * Various industry
                          associations            associations

Institution                  Philippines

Policy making           * SME Development
                          Council CSMED)

Lead agency             * Department of Trade
                          and Industry

Central                 * None
coordinating body

Other government        * Department of
ministries /              Science and
departments               Technology
                        *  Department of Labor
                           and Employment

                        * Department of

                        * Department of
                          Environment and
                          Natural Resources

                        * Department of
                          Interior and Local

Support network         * Special government
                          agencies and training

                        * Commercial and
                          financial institutions

                        * Local government

                        * Private sector services

                        * Universities and
                          research institutions

                        * NGOs

                        * Various industry

Figure 5.
Sampling of SME support pro pains m Malaysia, Thailand and the

Type of program              Malaysia                 Thailand

Financing             * Matching Grant for     * Capacity Building
                        Business Start-ups       Fund

                      * Grant for Skills       * Machine Fund
                        Upgrading Technology
                        Acquisition Fund       * Venture Capital
                      * Commercialization
                        of Research and
                        Development Fund

Stills, upgrading     * Human Resource         * Skill Development
                        Development Fund         Fund

                      * Entrepreneur           * Dual Vocational
                        Development              Training
                        Training Course
                                               * Institute of Small
                      * Nationwide               and Medium
                        network of skills        Enterprise
                        development              Development
                        centers                  (ISMED)

                                               * Nationwide
                                                 network of skills

Technical             * SME Experts            * Industrial
assistance /            Advisory Panel           Technology
business advisory                                Assistance Program
                      * Business Advisory
                        Services               * Mentoring System

Industrial linkage    * Industrial Linkage     * Business Matching
                        Program                  Project

                      * Vendor

Industrial sires      * SME Industrial         * OSMEP's SME
and incubation          Estates                  Incubation Project
                      * Malaysia               * Thailand Science
                        Technology               Park
                        Corporation            * Thailand Software
                        (MTDC)                   Park

                      * Technology Park

Productivity          * National               * Thailand
                        Productivity             Productivity
                        Corporation              Institute

Type of program            Philippines

Financing             * Small and Medium
                        Enterprises Unified
                        Opportunities for
                        National Growth

Stills, upgrading     * Technical
                        Education and
                        Skills Development
                        Authority (TESDA)

Technical             *
assistance /
business advisory

Industrial linkage    *

Industrial sires      * University of the
and incubation          Philippines (UP)--
centers                 Ayala Techno Hub

Productivity          * Development
                        Academy of the
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Author:Habaradas, Raymund B.
Publication:Journal of International Business Research
Geographic Code:9MALA
Date:Mar 1, 2009
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