Linking MSMEs with GVCs, Way Forward
By Paneetha Ameresekere
Micro, small and medium enterprises (MSMEs) in Sri Lanka linked to Global Value Chains (GVCs) make more profits than others, an Asian Development Bank (ADB) study dated June 2020, but released only the following month (3 July 2020), said.
“MSMEs linked with GVCs achieve a higher average profit than non-GVC SMEs,” it added. Ensuring a higher level of quality, the availability of skilled labour and access to better finance have become the most crucial success factors that can push SMEs into linking with GVCs, it said.
Most of the successful MSMEs in Sri Lanka have better access to finance and also have productive and skilled workers. Better access to finance fulfils all types of financial requirements of firms, while skilled labour sustains an efficient production process. In addition, access to better technologies and the ability to produce at low cost are the other secrets to their success, the report said.
The findings of the study strongly recommend that Government, Non- Government Organisations (NGOs), and policymakers, that they should encourage MSMEs to participate in GVCs by allowing them to grow as internationally competitive entrepreneurs.
“A solid public-private partnership to inculcate an entrepreneurial culture in the society and to provide advanced technological know-how by attracted Foreign Direct Investments (FDIs) and local and international training for MSME operators as an option to enhance technological know-how are sine qua non for MSME growth,” the report said.
The ADB study which focused on 329 MSMEs located in four backward districts in the island, namely Nuwara Eliya, Matale, Badulla and Monaragala, found that the average monthly profit levels of MSMEs that are engaged in GVCs in these four districts were considerably higher than that of the average profit for MSMEs in all four districts, including those catering to the domestic market only, which was Rs 178,125 for GVC linked MSMEs only.
The findings coincide with a project started by the Government to enhance the profile of the MSMEs in both Uva (Monaragala and Badulla Districts) and in the Central Province (Kandy, Matale and Nuwara Eliya) to reduce poverty by providing better employment opportunities, it added.
Sustainability of MSMEs
The report further said that though in the past surveys had been undertaken in respect of the sustainability of MSMEs, those surveys had, however, overlooked the importance of linking MSMEs with GVCs, but had rather concentrated on their sustainability vis-à-vis the local market only.
Nevertheless, whether it be in regard to the sustainability of MSMEs catering to the domestic market only or MSMEs linked to GVCs the problems are similar, namely having in place an enabling environment, access to research and development (R and D), building an entrepreneurial culture, skills and development, access to finance, and market facilitation, the ADB said.
Meanwhile, five main business sectors, namely Information Technology (IT), apparel, gems and minerals, tea and other agricultural products and handcraft were sectors with the most potential to link with GVCs, while IT, apparel, and gems and minerals are more likely to link with GVCs, the report said. In addition to tea, other agricultural products such as organic fruits and vegetables, and value-added products such as banana chips and tomato pulp and sauce can also be linked with GVCs. In particular, during the harvesting season, bananas and tomatoes can be stored at low cost and also fruit pulps and sauces can be prepared with the available technology in the country, the ADB report said. These semi-value-added products can then be linked with GVCs efficiently and ensure better earning opportunities for such entrepreneurs, it said.
“We have more than 150 farmers and they produce high-quality cucumbers and bell peppers,” an organisation of greenhouse farmers in Badulla District, interviewed by the ADB, said. “They also use more advanced technology for their cultivation and also to build their greenhouses. Currently, more than 50 per cent of the output of our organisation is purchased by SriLankan Catering of SriLankan Airlines. We have the potential to double our capacity, if demand can be ensured,” the interviewees had further said.
It is apparent from the above statement that MSMEs in the agricultural sector have a higher potential to access GVCs, the report added. In particular, MSMEs in the IT sector have a greater intention to expand their services internationally and link with GVCs to achieve the benefits of a globalised world. Similarly, the garment and apparel sector in which Sri Lanka has comparative advantages compared to other regional counterparts has also been searching for global opportunities, it further said.
However, the study recognised challenges such as a lack of access to finance, a lack of technology, a lack of information, being unable to meet quality standards, and an inability to produce the quantity required as the main obstacles to linking with GVCs.
Furthermore, factors such as ensuring the quality of products, the availability of skilled labour, better access to finance, access to better technologies, the ability to produce at low cost, and access to business development services (BDSs) increases the potential to link MSMEs with GVCs, it said.
The importance of overcoming these challenges is illustrated by the fact that an SME holder in, food processing, in the Nuwara Eliya District told the ADB, “The global market needs high-quality products and also at a competitive price. However, how can we increase quality and reduce production costs when outdated technology is used? We don’t even have cool room facilities to store fruits and vegetables. Hence, there should be a proper and long-term mechanism to enhance technology related to food processing.”
Access to finance
With respect to ‘access to finance,’ the ADB report said that most of the Government and private commercial banks are reluctant to provide financial facilities to MSMEs, indicating that financing MSMEs is a risk to banks. Furthermore, most of the microfinance institutions functioning in Sri Lanka have imposed higher but hidden interest rates on their loans and consequently MSMEs may end up in a debt trap, the ADB said.
Among some of the other constraints inhibiting MSME growth were taking approximately 258 days to complete the business registration process together with a cost of 5 per cent of the land value in the current context “is not conducive to fostering entrepreneurship.” The lack of BDSs, inadequate R and D facilities, the lack of quality certification at district level and the linkage to export markets not being readily available come up as key issues, whilst the biggest issue is the difficulty in gaining access to concessionary finance, the report said.
“Another point is that MSMEs pay on average 28 types of taxes, which are highly complex and time-consuming,” it said. “Successive Governments in their SME development programmes, overlook helping MSMEs to access sufficient and reliable information that leads to more rational decision-making, to safeguard transactions from opportunism, and to selecting a suitable governance mechanism. MSME development programmes have neglected to support formal governance; as a result, there is a high possibility that MSMEs in Sri Lanka have greater transaction costs, which impede their growth,” the study further said.