the impact of global value chain on lao pdr's sme development
TRANSCRIPT
i
The Impact of Global Value Chain on Lao PDR's SME Development
Chanhphasouk VIDAVONG1; Viengsavang THIPPHAVONG
2
and Sithanonxay SUVANNAPHAKDY3
Abstract
The research aims to address two questions that tighten the development nexus between SME
development and GVC. Does GVC participation enable SMEs to attain benefits that would
otherwise be out of their reach? What characteristics of firms that are likely to determine SME
participation in GVC? The analysis examines the impacts of GVC participation on SME
performance by applying the augmented production function and identifies determinants of
SME participation in the GVC by employing a probit model. We found weak evidence about
the positive impact of GVC on SME profits, but plugging into GVC remains a promising
channel for the development of SMEs in Lao PDR. The impact of GVC on SME profit is
statistically significant only when firm‘s characteristics are excluded from the model. In
addition, the empirical results show that firm size, training of employees, and direct exports of
SMEs play a vital role in determining the likelihood of their participation in GVC.
Key words: Development; Global Value Chain (GVC); Lao PDR; Small and Medium Sized
Enterprise (SME).
1 Deputy Director of Academic Affair Division, Economic Research Institute for Industry and Trade, Ministry of
Industry and Commerce (Ph.D candidate, Graduate School of International Development-GSID, Nagoya
University, Japan).
2 Deputy Director General of Economic Research Institute for Industry and Trade, Ministry of Industry and
Commerce (MA in Economic Development, Australia, 2010).
3 Trade Facilitation Specialist, Department of Import and Export, Ministry of Industry and Commerce (Ph.D. in
Economics, Hiroshima Shudo University, Hiroshima, Japan).
1
1. Introduction
1.1 Rationale of the Study
Since the government of Lao PDR introduced an economic reform in 1986, the country has
experienced an increase in trade volumes, and the influx of Foreign Direct Investment (FDI)
grew in the past decades. Although FDIs have undoubtedly benefited the country's economy
considerably, they have been highly concentrated in the capital-intensive resource sector,
particularly in hydropower and mining, which created little long-term jobs. To further
accelerate economic growth the government has also adopted an open door policy which
resulted in the country joining a regional bloc of ASEAN in 1997 and the WTO in 2013. The
ASEAN Economic Community (AEC), which has been in effect starting in late 2015, will
further deepen Lao PDR's integration into the regional production and trade systems. Almost all
of Lao business entities are classified as small and medium size enterprises (SMEs). Enterprises
in Lao PDR are concentrated in four major cities namely Vientiane, Champasack, Savannakhet
and LuangPrabang, where new enterprises registry grew (Lao Economic Census, 2015).
The economic integration of Lao PDR with regional and global systems in the past recent years
has provided businesses with new opportunities and greater access to the world markets.
However, this has also increased competition and brought about new challenges for Lao SMEs
including, but not limited to, the need for better technique and technology required for raising
productivity and quality in order to be competitive in the regional and world markets. Firms
may choose to overcome these challenges by engaging in a global value chain (GVC), linking
with foreign or multinational firms. The GVC will enable SMEs to receive the capital,
technique and technology needed for raising competitiveness, and access larger regional and
global markets. Some studies have been made on the production network and competitiveness
of SMEs in Lao PDR, but none of those has examined specifically through the GVC
perspective. While there are a number of firms in Lao PDR engaging in business partnership
with foreign or multinational firms, a specific policy and program to promote domestic SMEs
to take advantage of the GVC did not clearly exist. Thus, this study is keen to examine whether
and to what extent firms engaging in GVC outperform others, and the underlying reasons.
Subsequently, the analysis demonstrates how engaging in GVC promotes growth and
competitiveness of SMEs in Laos.
2
1.2 Objectives of the Study
In this research, we aim to address two questions that tighten the development nexus between
SME development and GVC. The first fundamental question that underlies this research is –
does GVC participation enable SMEs to attain benefits that would otherwise be out of their
reach? We address this question by assessing the impact of GVCs on SME performance. This
objective is also in line with the economic integration policy of Government of Lao PDR
(GoL), which promotes joint venture business partners of local business with foreign
companies. The development of such business cooperation can help Lao businesses to
participate in GVC which is highly promoted by the government as a strategy to diversify the
economy away from the resource sector. It was also expected to enhance the role of SMEs in
GVCs. The second fundamental question that underlies this research is – what are firm
characteristics that likely determine SME participation in GVC? We aim to gauge some of these
characteristics, utilizing the results of a firm-level survey conducted in different regions of Lao
PDR. We expect our finding to enable policy makers to develop or refine existing policies and
programs to be more effectively enabling SMEs to grow by taking advantage of the GVC.
2. Factors Influencing SMEs Development
It is undeniable that the development of trade liberalization in the past decades has significantly
contributed to the expansion of the GVC in the developing world. The reduction of tariffs and
trade barriers under multilateral and bilateral trade agreements, which aims to accelerate free
flow of goods and investments, has facilitated the GVC to utilize potential advantages, such as
geographic location, labors, logistics and services in developing countries (Brunner, 2013;
Yuhua, 2014). The prevalence of GVC in the context of production network between
multinational corporations (MNCs) and small and medium enterprises (SMEs) has become an
important milestone of exotic business cooperation in developing countries. Many developing
countries that have successfully integrated with global production network in the 1970s and
1980s experienced high economic growth where domestic SMEs benefited from production
linkages with MNCs (Gereffi and Sturgeon, 2013; Abe, 2013; Yuhua, 2014).
As the country's production and trade systems become more integrated with the regional and
global systems, new opportunities and challenges emerge for firms. While accesses to the
market, credit, technology and inputs expand, SMEs are able to tap into these new opportunities
in order to benefit from regional and global integration (Kaplinksy and Readman, 2001;
Caspari, 2003; UNCTAD, 2010). In a more competitive environment, domestic firms must
3
raise operational efficiency and quality in order to survive and grow. However, this requires
firms to acquire and adapt new and better technologies and techniques involving production,
management and marketing, which could be prohibitive for many firms with potentials.
Domestic firms may attempt to raise the capital from domestic sources for the necessary
modernization and expansion of marketing capacity needed to penetrate new market territories.
For the few that could, it can take a long time unnecessarily, while others with the potential may
not survive. Linking with the GVC through partnership with foreign or multinational firms
would be an effective and efficient way for many SMEs to overcome those challenges, allowing
SMEs to increase unit value added and be able to supply products to sophisticated markets
(Caspari, 2003).
An effective policy and program deliberately designed for this purpose would benefit many
SMEs in Lao PDR, which accounted for 99% of the total business entities that created 83% of
the total employment in the country (SMEPDO, 2006). Through GVC, domestic SMEs would
more easily and efficiently be able to gain access to foreign market, to new technology needed
to raise product quality and efficiency, and to improving business skills (George, 2005; Nichter
and Goldmark, 2009; Pietrobelli and Rabellotti, 2011). However, infrastructure, connectivity,
friendly business environment and cost-minimizing business operation, innovation and
macroeconomic stability have seemed to outweigh the success or failure of SMEs participation
in GVC (Elms and Low, 2013) and enhancing the role of SMEs in GVC. Thus, by those
circumstances, Lao SMEs may face both the pushing and pulling factors that affect business
benefits when engaging in the GVC.
There are several previous studies showing that FDI contributes significantly to SMEs
development. A paper studied FDI and SME linkages of Lao Brewery Company and Lan
Xang Mineral (GIZ-HRDME, et al., 2007) indicated that FDI plays an important role to SME
development directly and indirectly. However, an increase in FDI may not positively make a
knock-on-effect on SMEs while precise SMEs policies and business regulations are also
important matters. The common benefits to Lao SMEs from big investment projects of
foreign multinational corporations (MNCs) can be seen in a form of subcontract suppliers on
goods and services, even though not many firms can fulfill the standards and conditions set by
MNCs. Nevertheless, the best practices for SMEs development based on linkages with FDI
through GVC can be learned from the Malaysia and Singapore experiences (UN, 2010). The
report shows that there were a number of factors involved behind the gains for SMEs from
FDI. The two fundamental factors underlying the successes of SMEs development by
4
promoting FDI in Malaysia and Singapore were infrastructure and human capital
development, i.e., enhancing technical capability and international market access. In addition,
financial supports and FDI incentives are also important aspects in order to encourage
innovation.
3. Literature Review
To understand how GVC influences the business development of SMEs, this part provides a
theoretical background of the international business cooperation and then discussed some
stylized facts based on previous studies. It is clear that the theories of ownership, location and
internalization advantage have become a theoretical background explaining why a company
decides to invest overseas (Sydor, 2011). This later explains how MNCs take advantages of
differentiation of technology, comparativeness and transaction costs of other companies in
many continents. The study done by Feenstra (1998) showed that FDI, trade and GVCs had a
significant correlation, and thus firms were likely to allocate their business activities in the most
efficient location (i.e. outsourcing). On the other hand, Grossman and Rossi-Hansberg (2008)
also illustrated that the development of business affiliation could increase firms‘ business
competition by utilizing an equivalent technology of another firm in overseas (off-shoring).
However, the profitability of firms engaging in either outsourcing or off-shoring of MNCs is
highly depending on the firm‘s size that is expected to have more efficient management and
production technology. Thus, large firms may be more advantageous in terms of production
costs efficiency, and be able to set more competitive price than their smaller counterparts
(Yuhua, 2014; Arudchelvan and Wignaraja, 2015). Consequently, SMEs are likely to be less
common type of firms participating in the global production network compared to large firms.
Pietrobelli ( 2011) found that SMEs that were participating in GVC were able to benefit from
production expansion, new information and innovation accessibility and assimilation in the
global production network. Moreover, GVC can help SMEs to overcome the business
impediments, namely the lack of specialized skills, information and technology, raw material,
market assets, information, finance and other necessary facilities (Humphrey, 1995; Nadvi and
Schmitz, 1999; Rabellotti, 1997). Thus, GVC can be seen as a driving force for SMEs
development in a host country (OECD and WTO, 2013). Factors that are found to have a
significant correlation between SME and GVC are firm size, technological capacity, the
ownership of a foreigner technology license and R&D (Arudchelvan and Wignaraja, 2015).
5
In the case of Lao PDR, there is a small number of literatures examining the correlation
between GVC and SMEs. Kyophilavong (2010), by using production function with logit
model of 151 samples of Lao SMEs, found that strong business capacities, large shares of
foreign investors, and the ability to access financial sources were the key contribution factors
to an effective participation of SMEs in GVC. Patel and Hyman (2013) and Abe (2013)
suggest that Lao SMEs that are in the global supply chain are likely to be able to raise value
added of exports and promote business growth. However, meeting with high international
standard in management and production processes can be a big challenge for Lao SMEs in
GVC participation.
To further explore the effect of GVC on Lao SMEs, we applied an augmented Cobb-Douglas
production function to examine how SMEs benefit from GVC, a method widely used in
economic studies. For instance, by using an augmented Cobb-Douglas production function,
Kuen and Jiann (2004) and ADB (2014) found that technological capacity changes have a
positive influence on firm‘s productivity growth. Nevertheless, this result should be
interpreted with caution. This is because of participating in global production network also
means a closer business relationship with superior firm which can help SME to improve
knowledge intensity, innovation, investment and labor skills and, thus, can leverage R&D
development. For instance, an increase in firm‘s productivity for Chinese tech-companies is
not only from technology capacity changes brought about by network participation, but also
from in-house R&D development (G.Z. Hu, Albert et al., 2003).
4. Methodology and Data
4.1 Methodology
We investigate the impact of GVC on SME performance in two stages. In the first stage, we ask
whether SMEs participating in GVC are more capable of making profits than those that are not
participating in GVC. To do this, we develop an econometric model based on the
Cobb-Douglas production function to analyze the direct and indirect impacts of GVC on SME
profits. In the second stage, we examine the determinants of SME participation in GVC. To do
this, we develop a probit model to link the binary variable of SME participation in GVC to
firm-level characteristics. The models are explained below separately.
6
4.1.1 Impact of GVC on SME Performance
Following Dikova, Jaklič, Burger, and Kunčič (2015) and Van Biesebroeck (2005), we extend
the Cobb-Douglas production function to estimate the direct and indirect impacts of GVC on
SME performance. The production function relates SME performance to GVC indicator,
factors of production, productivity, innovation, firm age, and location. Our empirical model is
specified as follows:
1 𝑙𝑛𝑌𝑖 = 𝛽0 + 𝛽1𝐺𝑉𝐶𝑖 + 𝛽2 𝐺𝑉𝐶𝑖 × 𝑙𝑛𝐸𝑋𝑖 + 𝛽3 𝐺𝑉𝐶𝑖 × 𝑙𝑛𝑇𝑟𝑎𝑖𝑛𝑖 + 𝛽4 𝐺𝑉𝐶𝑖 × 𝑙𝑛𝑅𝐷𝑖
+ 𝛽5𝑙𝑛𝐸𝑋𝑖 + 𝛽6𝑙𝑛𝑇𝑟𝑎𝑖𝑛𝑖 + 𝛽7𝑙𝑛𝑅𝐷𝑖 + 𝛽8𝑙𝑛𝐾𝑖 + 𝛽9 𝑙𝑛 𝐿𝑖 + 𝛽10𝑙𝑛𝐻𝑖
+ 𝛽11𝑙𝑛𝐴𝐺𝐸 + 𝛽12VTEi + εi
where
𝑙𝑛Yi - SME profit
𝐺𝑉𝐶𝑖 - a dummy variable, taking a value of one for an SME participating in GVC, and
zero for a non-participating SME
𝑙𝑛EXi - value of firm‘s export
𝑙𝑛Traini - number of employees that are trained annually
𝑙𝑛RDi - share of R&D expenditure in total revenue
𝑙𝑛Ki - firm‘s total capital
𝑙𝑛 𝐿𝑖 - number of permanent employees
𝑙𝑛Hi - firm‘s average wage per employee
𝑙𝑛AGE - firm‘s years of establishment
VTEi - a dummy variable of firm‘s location, taking a value of one if firm is located in
Vientiane, or zero otherwise
εi - a random error term for observation i
In equation (1), SME performance is measured by profit denoted by 𝑙𝑛𝑌𝑖 . SME profit is
calculated as a difference between sales revenues and production costs, and taken as logarithm
value. The use of profit serves as quantitative and objective gauge of SME performance, which
is consistent with existing literature on business analyses applying the production function
(Croce, Martí, and Murtinu, 2013; Eggert and Tveteras, 2013; Verma, 2012). To assess the
impact of GVC on SME profit, we include two sets of independent variables, one for capturing
7
the impacts of GVC on SME profit and another for controlling for GVC participation and
location. A former set is further subdivided into two groups: direct and indirect impacts of
GVC.
Direct impact of GVC. SME participating in GVC is hypothesized to have higher profit than
non-participating SME. According to Harvie, Narjoko, and Oum (2010), SME participating in
GVC exploits competitiveness from economies of scale, while non-participating SME does not.
Higher competitiveness presents SME with more opportunity to seek for profits. Therefore, the
coefficient of GVC, 𝛽1, is expected to have a positive sign.
Indirect impact of GVC. The interaction terms between the GVC dummy and productivity
indicators ( (𝐺𝑉𝐶𝑖 × 𝑙𝑛𝐸𝑋𝑖 , (𝐺𝑉𝐶𝑖 × 𝑙𝑛𝑇𝑟𝑎𝑖𝑛𝑖) ) and between the GVC dummy and
technological capability indicator (𝐺𝑉𝐶𝑖 × 𝑙𝑛𝑅𝐷𝑖) are used to test for the significance of
GVC, whether it facilitates the impact of productivity and technological capability on SME
profit. To ensure that the interaction terms do not proxy for GVC, the level of productivity, or
the degree of technological capability, each of them is included in the regression independently.
The coefficients of interaction terms, namely 𝛽2, 𝛽3, and 𝛽4, are expected to have positive
signs.
A set of control variables is described as follows.
Productivity indicators. Higher productivity makes SME more effective and efficient in
meeting the requirements of customers, and thereby resulting in higher profit. Productivity is
represented by firm‘s export value (𝑙𝑛𝐸𝑋𝑖 ) and the number of employee trained per year
(𝑙𝑛𝑇𝑟𝑎𝑖𝑛𝑖). Both variables are in natural logarithms, namely, ln(1+export) and ln(1+train)4.
The use of firm‘s export as a proxy variable for productivity is justified by the theoretical model
by Helpman, Melitz, and Yeaple (2004) and Melitz (2003) who argue that only a few highly
efficient firms are able to export and invest overseas because they are able to make sufficient
profit to cover the large trade costs required for overseas operations.
Technological capability indicators. Higher level technological capabilities enhance firm‘s
absorption capacity of new technologies and promotes the production of greater variety of
products, which together enhances production efficiency. Firm-level technological capabilities
are measured by share of R&D expenditure in total revenue (𝑙𝑛𝑅𝐷𝑖). The coefficient of R&D
expenditure, 𝛽7, is expected to have a positive sign.
4 The figure ‗1‘ is added to the number of employee trained per year in order to take log. Some SMEs do not provide training to
their employee, which make the training variable contain zeros.
8
Total capital. Firms with more capital are hypothesized to have a higher profit than firms with
less capital. Total capital is represented by the total amount of financial and physical capital,
denoted by 𝑙𝑛𝐾𝑖 . SMEs with sufficient capital are able to acquire newly developed production
equipment and invest in new plant to meet higher demand. Therefore, the coefficient of the
capital, 𝛽8, is expected to have a positive sign.
Firm size. A larger SME is hypothesized to have a higher profit than a smaller one. Firm size is
represented by the number of permanent employees, 𝑙𝑛𝐿𝑖 . This is commonly used in
empirical work. Wignaraja (2013), for example, used number of employees as a proxy variable
for firm size, among other firm-specific variables to investigate the firm-level characteristics
shaping SMEs‘ participation in production networks. A larger size enables SMEs to exploit
economies of scale which reduce the cost of production, and thereby increasing their profits.
Thus, the coefficient of firm size, 𝛽9, is expected to have a positive sign.
Human capital. A higher level of human capital contributes to higher profitability of an SME.
A high level of human capital facilitates the development of effective business strategies and
absorb technological spillovers from newly developed production technologies that enhance
SME‘s competitiveness (Dueñas-Caparas, 2006; Van Dijk, 2002). Workers‘ education and the
chief executive officer (CEO)‘s education and experience are particularly significant for SME
performance. For example, a literate workforce made up of high school graduates is more
productive and adaptive to new technology than one that is not. We measure the level of human
capital by the average wage rate (𝑙𝑛𝐻𝑖). We also perform a range of robustness test using three
alternative variables of human capital, including secondary level educated workers, education
level of CEO, and experience of CEO. The coefficient of human capital, 𝛽10, is expected to
have a positive sign.
Firm age. Lower firm age is hypothesized to have a higher profit. Firm age is represented by
number of years since established, 𝑙𝑛𝐴𝐺𝐸. The negative impact of firm age on profit can be
explained by two reasons. First, younger SME may use relatively modern technology, which
increases productivity and product quality (Van Dijk, 2002). Second, younger SME may be
more proactive in learning about business and technological opportunities such as market
information from buyers of output or technical know-how from equipment suppliers, but also
be more flexible in combining external and internal information to realize opportunities
(Wignaraja, 2013). Thus, the coefficient of firm age, 𝛽11, is expected to have a negative sign.
9
Location. SMEs located in the Vientiane Capital (VTE) tend to have greater access to
transportation, infrastructure, and information and communication technologies and therefore
are better able to earn profits. The dummy variable for capital city, VTE, takes a value of one if
the SME is located in the Capital or, zero, otherwise. The coefficient of VTE, 𝛽12, is expected
to have a positive sign.
4.1.2 Determinants of SME Participation in GVCs
This section develops an empirical model to analyze factors affecting the participation of SMEs
in Lao PDR in GVC. The literature on international trade, industrial organization and
technology, highlights firms‘ characteristics such as size, skills and technological capabilities
as key determinants of firm participation in GVC. Following Wignaraja (2013), we apply a
probit model to investigate firm‘s characteristics that influence its participation in GVC as
follows:
2 𝐺𝑉𝐶𝑖 = 𝛽0+𝛽1𝑙𝑛𝐸𝑋𝑖 + 𝛽2𝑙𝑛𝑇𝑟𝑎𝑖𝑛𝑖 + 𝛽3𝑙𝑛𝑅𝐷𝑖 + 𝛽4𝑙𝑛𝐾𝑖 + 𝛽5𝑙𝑛𝐻𝑖 + 𝛽6 𝑙𝑛 𝐿𝑖 +
𝛽7𝑃𝑟𝑒𝐸𝐷𝑈𝑖+𝛽8𝑙𝑛𝐴𝐺𝐸 + 𝛽9𝑉𝑇𝐸𝑖 + 𝜀𝑖 ,
where
𝐺𝑉𝐶𝑖 - a dummy variable, taking a value of one for an SME participating in GVC, and
zero for a non-participating SME
lnEXi - value of firm‘s export
lnTraini - number of employees that are trained annually
lnRDi - share of R&D expenditure in total revenue
lnKi - firm‘s total capital
lnHi - an average wage, a proxy for human capital
𝑙𝑛 𝐿𝑖 - number of permanent employees
𝑃𝑟𝑒𝐸𝐷𝑈𝑖 - a dummy variable for education level of firm‘s president, taking a value of one for
at least bachelor a degree or, zero, otherwise
lnAGE - number of years since established
VTEi - a dummy variable of firm location, taking a value of one if firm is located in
Vientiane or, zero, otherwise
εi - an independently and normally distributed random error term for observation i
10
In equation (2), participation in GVC is captured by a binary variable reflecting different
activities by SMEs. The dependent variable takes a value of one if an SME undertakes any form
of activity in a GVC (as an exporter, an indirect exporter or a combination of the two) and zero
for a wholly domestic-oriented SME. Coefficients of all independent variables, except firm age
(lnAGE), are expected to have a positive sign.
4.2. Data
Regarding to the research questions of this study, new up to date data are required in order to
reflect the current situation. Besides that, a specific design of questionnaires is required to
obtain data that respond directly to the research questions. Thus, a survey was carried out in
order to obtain data that respond to our research questions. Furthermore, we also interviewed
three large companies in Vientiane capital to capture their perspective on how SME
development can be promoted by tapping into GVC.
Data collection was conducted in two stages. First, we identified the potential SMEs
participation or non-participation in GVCs using secondary data from the Industry and
Handcraft Department of the Ministry of Industry and Commerce, the Provincial Industry and
Handcraft Sectors, and the Member Directory of Lao National Chamber of Commerce and
Industry (LNCCI). These agencies recorded statistics on business registration and operation in
Lao PDR. Then, once the targeted SMEs were identified, we proceeded with defining the
sample size in various sectors, constructing questionnaires for survey, and collecting data.
We classify firms into three types namely, foreign or joint-venture firms, multinational firms,
and domestic firms. Foreign joint-venture firms and multinational firms are likely to have broad
business connection with both local and international suppliers. Those are Lanexang Mineral;
Lao Brewery; Burapha Agriculture; Beeline, Lao Telecommunication; Lao Plaza Hotel,
Charoen PokPhand Group (CP) and some tour businesses. From these companies, we asked for
contacts of their business partners for surveys. Some firms were able to make an interview
immediately; others requested that the questionnaire form be left with them and to be collected
later. However, for firms in the provinces, most were interviewed and all data were collected on
the day of the visit and asked the staff of Department of Industry and Commerce in local
province to assist as well.
The questionnaire comprised of five parts. The first part covers the general business profile
including year of establishment, type of business, type of investment, GVC participation,
business activity, size of firm, and financial status. The second part emphasizes on technology
11
and R&D, new equipment purchase, and new technology currently in use. The third part
consists of human resource management, regarding to the manager and staff capability. The
forth part is about the business relationship with their customers and suppliers in order to see
how they communicate with each other on their business conducts. Finally, the fifth part
contains questions involving factors that can influence their business decisions and their
concerns over the business environment and government regulations.
Data were collected in Vientiane Capital, Luangpabang, Savanakhet and Champasack
provinces with sample shares illustrated in figure 4.1. The respondents that include directors,
managers and owners accounted for 82.4%, and the remaining respondents include general
staff, secretary, salesman, accountant and assistant. A total of 165 questionnaires were
distributed to target group, but only 135 forms were returned. Among the returned forms, 61
are qualified for empirical study. Out of 135 samples, 60% of firms participate in GVC.
About half of the respondents are small firms, and another half is medium sized firms.
The 135 samples consist of three main sectors including services, manufacturing and trade.
Manufacturing accounts for 42.7%, including food and beverages, agricultural products, textile
and garment, and others. Service businesses account for 33.1%, consisting of accommodation,
tour services and logistic services. Trade, including retailer and wholesaler, together accounts
for 16%, and others account for 8%.
Figure 4.1: Distribution of 135 sample firms by provinces
Source: Authors‘ calculation using survey data.
27.41
37.04
23.70
11.85
Share of Sample Survey by Area (%)
Vientiane Capital
Luangpabang
Savannakhet
Champasack
12
Table 4.1: Patterns of missing data
Variable Full sample Reduced sample+
Total Missing Complete Total Missing Complete
lnY 131 48 83 125 46 79
lnK 131 8 123 125 8 117
lnH 131 60 71 125 57 68
lnL 131 6 125 125 4 121
GVC 131 1 130 - - -
lnRD 131 1 130 - - -
lnAGE 131 5 126 - - -
Note: +sample size after dropping missing data in GVC, lnRD, and lnAGE. Source: Authors‘ estimation.
The sample used for the empirical analysis contains 131 observations, after firms with a
negative profit are dropped. The sample further reduces to 125 after some with missing data on
firm age (lnAGE), spending on research and development (lnRD), and GVC are dropped. See
Table 4.1. The largest missing data occurs in wage rate (lnH), followed by profits (lnY),
physical capital (lnK), and firm size (lnL). These variables have missing values in different
observations. This further reduces the number of observations in the regression analysis, which
requires complete values in all variables under investigation.
4.2.1 Educational Level of SME Managers
The level of education of the managers (or decision makers) and workers are very crucial for
firm‘s success. SME firms with more educated staff are likely to have a better business
performance than those with less educated staff. Among the samples in our survey, top
managers with a master degree account for 16.5%, with a bachelor degree, 53.7%, and with a
vocational school, 28.1%. Regarding to English language competency, in a self-assessment
questionnaire, 15% of those managers placed themselves at the ―excellent‖ level, 35% placed
themselves at the ―well‖ level, and 34% placed themselves at the ―fair‖ level.
13
Figure 4.2: English language skill of a high decision maker of firms
Source: Authors‘ calculation using survey data.
As illustrated in Figure 4.2, managers are considered to have a good command of the English
language. Furthermore, 32% of the managers surveyed can speak more than one foreign
language. Of the total number of samples, only 27% of the managers have some experience
working with foreign or multinational firms. Only 31% of large and medium firms hire
managers, while small firms did not hire manager at all. Of all hired workers, 15% have
completed a bachelor degree and 31% completed a vocational certificate. Around 54% of
workers have completed high school or lower.
4.2.2 R&D and Information Technology
Research and development are very important factors influencing business performance by
improving productivity, or enabling firms to develop new products, or identifying new markets,
or gaining understanding of changes in the market to enable firms to adapt to improve
performance (G.Z. Hu, Albert et al., 2003; Kuen et al., 2004). The survey found that 20% of
firms surveyed have invested in R&D while 60% of the samples participated in GVC. Among
those that invested in R&D generally spent less than 5% of their total annual revenue on R&D.
Most common expenditure on R&D involved training, product development, system
improvement, market analysis, new equipment procurement and update information
technology. Among the sample firms, 70% of them were self-financed for procurement of
production or services equipment and 30% used borrowed money from outside sources. The
reason that firms upgrade production/service is commonly (60%) to increase productivity and
to develop new product/service (see Figure 4.3).
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Excellent Good Fair Poor Very poor
14.96
34.65 33.86
10.246.30
14
Figure 4.3: The reason for the purchase of new equipment
Source: Authors‘ calculation using survey data.
Figure 4.4: The ratio of IT’s expenditure to annual turnover
Source: Authors‘ calculation using survey data.
Firms can utilize information technology (IT) to enhance performance. A study of Tsai and
Wang (2004) has demonstrated that technological capacity is an important determinant to
supplement the competitive advantage of Taiwan‘s electronics firms. The IT in this survey
30.85
31.91
15.96
10.64
10.64
Purposes for the Purchase of New Equipment
New Product and Service Development Increasing Productivity
Production or Service Subsitution Exist Production Cost Reduction
R&D Facilitation
31.85
35.56
6.67
25.93
The Ratio of IT's Expenditure to Annual Revenues (%)
No Expenditure Less than 0.5% Less than 1% More than 1%
15
means the internet and computer for information exchange in business. However, 32% of the
sample firms surveyed indicated that they have never invested in IT, 42% invested less than 1%
of their annual revenue in IT and 26% invested more than 1% of their annual revenue in IT
(Figure 4.4). SMEs in Lao PDR invested very little in IT in comparison with other ASEAN
nations such as Singapore, Thailand, and Malaysia (ASEAN, 2015). The purpose of utilizing IT
by firms in the sample is mainly for communication with customers, advertisement, customer
relationship management, product design, social network, and business to business (B2B)
communication. See details in Table 4.2.
Table 4.2: Purpose for using IT
The purpose for utilizing information technology
No Term Percentage
1 Business to Customer (B2C) 18.40
2 Advertisement 17.92
3 Customer Relationship Management 13.68
4 Production Design 11.32
5 Social Network Management 9.43
6 Information Exchange 8.96
7 Business to Business (B2B) 8.02
8 Supply Chain Management 6.60
9 Human Resource Plan 5.19
10 Others 0.47
Source: Authors‘ calculation using survey data.
4.2.3 Perceived Constraints by SMEs
Table 4.3 shows the highest to the lowest issues of concern firms raised during the survey. Each
sample firm was asked to mark three main problems out of 21 items that it faced. Our results are
similar to that of the enterprise survey by GIZ reported in 2009 and 2011. The most common
concerns found were unclear custom collection of tariff and fees, lack of labor, high electricity
cost, high tariff, lack of support from GOL, lack of capital, low labor quality.
16
Table 4.3: List of business concerns
No Items Percent
1 Unclear Custom Collection 13.21
2 Lack of Labor 10.88
3 High Electricity Cost 8.81
4 High Tariff 7.51
5 Lack of Government Support 7.25
6 Lack of Capital 6.22
7 Low Labor Quality 5.96
8 Financial Access Difficult 5.18
9 Lack of Expert 5.18
10 High Transport Cost 4.66
11 High Communication Cost 3.89
12 Lack of Government Coordinating Body 3.89
13 Poor Transportation 3.63
14 High Wage 3.63
15 Quality of Electricity Service 2.59
16 Difficulty Involving Import and Export Procedures 1.55
17 Low Quality of Communication 1.55
18 Low Quality of Education 1.30
19 Others 1.30
20 Lack of Head Manager 1.04
21 Lack of Engineer 0.78
Source: Authors‘ calculation using survey data.
4.2.4 Some Perspectives of Large Firms on SMEs Development
In order to understand the business linkages between multinational, foreign joint venture
companies and SMEs in Laos, we interviewed three large firms in Vientiane capital. They
include Lao Brewery Company, Burapha Agriculture, and Donchanh Palace Hotel. These firms
respectively represent business linkages in manufacturing, agro-processing, and service
sectors. The interviews reveal that more than 80% of those firms‘ business activities have
linked to SMEs as suppliers or service providers. However, SMEs contributed less than 20% of
value added to the final products/services. This is because most SMEs can supply only raw
17
materials or primary services. Furthermore, a lack of information on business demands of large
firms has also partially contributed to SMEs‘ missing out the opportunities to fully engage in
the supply chain of those firms. It is also reported that SMEs are sometimes reluctant to engage
in the supply chain of those large firms.
Large firms interviewed also suggested that SMEs could gain more benefits from business
linkages with them if they are more able to manage to provide a stable supply/service, price
more competitively, have better quality control, provide a guaranty certificate of
product/service, offer sales credit, and to create their own brands. Nevertheless, government
could be more engaged in facilitating linkages between SME and large firms as a way to
promote industrialization.
5. Empirical Results
In this section, we provide estimations of two econometric models specified in Equations (1)
and (2). Equation (1), expressed in a log-linear Cobb-Douglas production function, is estimated
using the ordinary least square method to investigate the direct and indirect impact of GVC on
firm‘s profit. Equation (2), a probit model, is estimated using the maximum likelihood method
to examine the determinants of SME participation in GVC.
5.1 Impact of GVC on SME Performance
The econometric results show that there is weak evidence of the positive impact of GVC on
firm‘s profit, which we used for measuring firm performance. We explored the impact of GVC
on firm‘s profit with various model specification under seven alternative models. Model VII is
the full model, which includes all variables specified in Equation (1). All other models are
restrictions thereof. Sample for Models I-III contains 79 observations, while the sample for
Models IV -VII contains 63 observations. The sample size for the latter is reduced due to
missing data for firm‘s characteristics, especially wage rate.
Table 5.1 reports the regression results of the seven model specifications, all of which include a
dummy of GVC, but differ in terms of the inclusion of direct export, training of employees,
expenditure on R&D, and firm‘s characteristics. However, while we experimented with various
specifications, we focus our interpretation of the statistical results on Model V, which we
consider the best model specification. Model was selected as the best model specification based
on three indicators, namely log-likelihood, root mean squared error (RMSE), and adjusted
R-square (adjusted R2). The greater the log-likelihood and adjusted R
2, the better the model
18
performs. The lower the RMSE, the better the model performs. Based on these indicators,
Model V is the best model specification.
20
Table 5.1: Impacts of GVC on SME profit
Explanatory variables Model I Model II Model III Model IV Model V Model VI Model VII
GVC 1.109*** 1.094*** 1.166*** 0.379 0.321 0.109 0.350
(0.349) (0.369) (0.402) (0.348) (0.303) (0.369) (0.398)
lnEX 0.269*** — — — 0.090* — 0.036
(0.068) (0.051) (0.052)
lnRD — 3.088 — — 1.923* —
2.779***
(2.533) (1.055) (1.006)
lnTrain — — 0.698* — 0.046 — 0.141
(0.411) (0.200) (0.286)
GVC×lnEX -0.181** — — — 0.098 0.061
(0.086) (0.059) (0.091)
GVC×lnRD — 18.346* — — — -9.987 -9.650
(10.219) (9.977) (9.671)
GVC×lnTrain — — -0.448 — — -0.004 -0.135
(0.449) (0.218) (0.325)
lnK — — — 0.326** 0.311** 0.358** 0.327**
(0.152) (0.152) (0.157) (0.156)
lnH — — — 0.337** 0.276* 0.300** 0.265*
(0.143) (0.145) (0.140) (0.150)
lnL — — — 0.704*** 0.582*** 0.748*** 0.652**
(0.197) (0.192) (0.223) (0.244)
lnAGE — — — -0.084*** -0.088*** -0.091***
-0.089***
(0.030) (0.028) (0.029) (0.030)
VTE — — — 0.295 0.302 0.332 0.330
(0.319) (0.395) (0.375) (0.430)
Constant 17.611*** 17.635*** 17.549*** 4.813 6.236** 4.715 5.941*
(0.256) (0.273) (0.286) (3.430) (3.104) (3.130) (3.246)
Observations 79 78 79 63 63 63 63
Model degrees of 3 3 3 6 9 9 12
21
freedom
Residual degrees of
freedom 75 74 75 56 53 53 50
Adjusted R2 0.215 0.156 0.143 0.437 0.491 0.464 0.469
RMSE 1.459 1.503 1.523 1.269 1.206 1.237 1.231
Log-likelihood -139.90 -140.40 -143.30 -100.70 -95.75 -97.36 -95.23
LR test (baseline in
Model VII) 89.29*** 90.36*** 96.14*** 10.90* 1.05 4.27 —
Note: Robust standard errors are reported in parentheses; * indicates statistical significant at the 10% level, ** at the 5% level, and *** at the 1%
level. Source: Authors‘ estimates.
22
The regression result in Model V indicates five important aspects. First, there is no evidence
that participating in GVC has a positive impact on SME profit, when firm‘s characteristics are
accounted for. The estimated coefficient of GVC has an expected positive sign, but it is not
statistically significant at any conventional level.
Second, expenditure on R&D and direct exports improve profitability of firms regardless of
their connectivity to GVC. Their estimated coefficients are positive and statistically significant
at the 10% level. The magnitude of coefficient of expenditure on R&D (lnRD) is 1.92,
indicating that a 1% increase in the firm‘s expenditure on R&D increases its profit by 1.9%.
Similarly, the magnitude of coefficient of direct exports (lnEX) is 0.09, indicating that a 1%
increase in the firm‘s direct export increases its profit by 0.09%.
Third, the fundamental variables of firm characteristics are key determinants of SME profits.
These include wage rate of employee (lnH), number of employees (lnL), and total capital (lnK).
Their estimated coefficients are positive and statistically significant at least at the 10% level.
The magnitude of the coefficient of wage rate of employee indicates that a 1% increase in the
wage rate results in an increase in SME profits by 0.28%. To the extent that the wage rate
reflects the quality of employee, an increase in wage rate improves the quality of employees and
creates more incentive for them, which in the long run improves firm-level productivity.
In addition, the regression result in Model V suggests that firms with a larger number of
employees and those with more total capital tend to have higher profits than others. The
regression result indicates that a 1% increase in the number of employees leads to an increase in
SME profits by 0.58%. Similarly, a 1% increase in total capital leads to an increase in SME
profits by 0.31%.
Fourth, the production function of the sample SMEs exhibit increasing returns to scale, where a
one-fold increase of all the inputs raises SME profits by more than one-fold. Returns to scale is
measured by the sum of estimated coefficients of productive factors, namely wage rate, number
of employees, and total capital. By summing the estimated coefficients of productive factors,
the returns to scale for the production function is 1.37, indicating that a 1% increase of all the
inputs results in an increase in SME profit by about 1.37%. That said, SMEs tend to benefit
from production expansion.
Finally, an old firm is less competitive than new one. The estimated coefficient of firm age is
negative and statistically significant at the 1% level for regression results. The magnitude of its
coefficient indicates that a 1% increase in firm age decreases SME profit by about 0.09%. This
23
implies that, to maintain competitiveness, SMEs need to be more active in learning new
management and production techniques. In our sample of 63 SMEs, the oldest firm was
established in 1990 and the youngest, in 2015. An average firm age in our samples is about
eight years old, and about a third have been established longer than eight years.
5.2 Determinants of SME Participation in GVC
In this section, we investigated whether certain firms‘ characteristics are important determinant
in their participation in GVC. The research findings confirm that firm size (measured by
number of employees), training of employees and export-oriented SMEs play an important role
in determining the likelihood of SME participation in GVC.
Table 5.2 reports the probit regression results for the determinants of SME participation in
GVC with five model specifications. Model V is the full model, which includes all variables
specified in Equation (2). All other models are restrictions thereof. Sample size differs in each
model specification due to missing data for observed variables in the model. The sample for
Models I, IV, and V contains 65 observations. The sample for Model II —includes productive
factors except wage rate— contains 112 observations. The sample for Model III — excludes all
productive factors — contains 124 observations.
The different model specifications provide additional insights about robustness of determinants
of SME participation in GVC. The most robust determinant is the firm size (lnL). Its estimated
coefficient is positive and statistically significant at least at the 5% level in all model
specifications. Direct exports (lnEX) and training of employees (lnTrain) also determine the
likelihood of SME participation in GVC. Their estimated coefficients are positive and
statistically significant at the 10% level in two out of four models. More precisely, the estimated
coefficients are found to be significant in Models I and V, when the wage rate is included into
the model.
24
Table 5.2: Probit regression results for the determinants of SME participation in GVC
Explanatory variables Model I Model II Model III Model IV Model V
lnEX 0.117* 0.013 0.022 — 0.145*
(0.070) (0.042) (0.032) (0.080)
lnRD -7.831*** -3.828** -1.685 — -9.442***
(2.383) (1.661) (1.231) (2.395)
lnTrain 0.442* 0.161 0.170 — 0.655*
(0.266) (0.149) (0.130) (0.381)
lnK 0.103 0.151 — 0.032 0.096
(0.183) (0.115) (0.168) (0.199)
lnH -0.199 — — -0.154 -0.217
(0.165) (0.168) (0.177)
lnL 0.563** 0.419*** — 0.608*** 0.642**
(0.284) (0.134) (0.233) (0.274)
PreEDU — — — — -0.180
(0.416)
lnAGE — — — — -0.033
(0.030)
VTE — — — — -0.376
(0.510)
Constant -0.567 -4.168* 0.194 0.353 0.084
(3.923) (2.267) (0.136) (4.035) (4.309)
Observations 65 112 124 65 65
Model degrees of freedom 6 5 3 3 9
Pseudo R2 0.322 0.156 0.0253 0.180 0.347
Wald Chi2 18.78*** 22.39*** 3.66 12.45*** 26.68***
Log-likelihood -30.28 -64.01 -81.50 -36.65 -29.18
LR test (baseline in Model I) 2.188 69.650*** 104.600*** 14.930** —
25
Note: Robust standard errors are reported in parentheses. *, **, *** is significant at 10%, 5%, and 1% level, respectively. Source: Authors‘
estimation.
25
Among the five models, Model V is the preferred one for explaining the determinants of SMEs
participation in GVC based on two criteria, namely log-likelihood and pseudo R-square
(pseudo R2). To interpret Model V, we calculate the marginal effects of probit estimation,
which indicates the change in probability when the independent variable increases by one unit.
For continuous variables this represents the instantaneous change given that the unit may be
very small. For binary variables, the change is from 0 to 1. The results shown in Table 5.3
reveal five important aspects of SME participation in GVC.
Table 5.3 Marginal effects of probit estimation in Model I
Explanatory
variables
Marginal effects
lnEX 0.055*
(0.029)
lnRD -3.602***
(0.822)
lnTrain 0.250*
(0.143)
lnK 0.037
(0.076)
lnH -0.083
(0.067)
lnL 0.245**
(0.103)
PreEDU -0.069
(0.159)
lnAGE -0.013
(0.011)
VTE -0.143
(0.195)
Note: Marginal effects of probit estimation in Model I (Table 5.2) at sample means of
repressors. Source: Authors‘ estimation.
First, firm size (lnL) is an important determinant of SME participation in GVC. The marginal
effect of the firm size is positive and statistically significant at the 5% level. Accordingly, a
10% increase in firm size results in an increase in the probability of SME participation in GVC
by 2.45%. It is interesting to examine predicted probabilities of the size variable holding all
other variables at their means.5 The probability of an SME participating in GVC with one to 18
employees increases from 17% to 61%, compared to an increase from 80% to 85% for one that
has 55 to 81 employees. This is illustrated in Figure 5.1a, which plots the probability of SME
5The same assumption is made for all the probabilities given in the text. A complete set of results on predicted probabilities is
available on request.
26
participation in GVC against log of employees. The probability of SME participation in GVC
increases sharply when log of employees takes the value between 0.5 and 4, which corresponds
to the number of employees between 2 and 55. However, the likelihood of GVC participation
grows slowly when the log of employees is greater than 4 or the number of employees is greater
than 55. This result suggests that larger SMEs are more likely to join the GVC than smaller
ones, and size can be important to overcome the initial fixed costs of entering GVC.
Second, direct exports (lnEX) is an important determinant of SME participation in GVC as
well. The coefficient of export is positive and statistically significant at the 10% level.
Accordingly, a 10% increase in exports results in an increase in the probability of SME
participation in GVC by 0.55%. The probability of an SME with direct export from about
US$1,000 to US$8,100 to participate in GVC increases from 76% to 22%, compared to an
increase from 90% to 95% for one that exported US$442,000 to US$40 million. This is
illustrated in Figure 5.1b, which plots the probability of SME participation in GVC against log
of exports. The concave curve for the relationship between SME participation in GVC and log
of exports in Figure 5.1b indicates that the probability of SME participation in GVC increases
with direct exports at certain point and then decreases beyond such point. This result suggests
that firm‘s efficiency can be important to overcome the initial fixed costs of entering such GVC.
Third, SMEs with higher number of trained employees are more likely to participate in GVC.
The estimated coefficient of training (lnTrain) is positive and statistically significant at 10%
level. Its magnitude is 0.25, indicating that a 10% increase in number of trained employees
increases the likelihood of SME participation by 2.5%.
Figure 5.1: Probability of SME participation in GVC with respect to firm size and export
a. Firm size b. Export
Source: Authors‘ estimation.
0.16
0.36
0.56
0.76
0.96
0.2 1 1.8 2.6 3.4 4.2 5 5.8
Pro
bab
ilit
y o
f G
VC
par
tici
pat
ion
Log of number of employees
0.50
0.60
0.70
0.80
0.90
1.00
0 2.5 5 7.5 10 12.5 15 17.5 20
Pro
bab
ilit
y o
f G
VC
par
tici
pat
ion
Log of exports
27
Fourth, SMEs with R&D are unlikely to participate in GVC. The coefficient of R&D is
negative and statistically significant at 1% level. Its negative sign is unexpected, but it may
reflect the fact that SMEs with R&D are capable of developing their own products and supply
to certain markets. The research finding suggests that lower level of expenditure on R&D
makes SMEs more likely to participate in GVC. The explanation for this is that in a production
network, R&D is not important for each firm unit within the network. Most firms producing
goods in a production network receive order with precise specifications using available
technology or may be provided or dictated by the buyer(s). Normally, only the parent
companies spend on R&D.
Fifth, education level of SME president is not an important determinant of SME participation in
GVC. The coefficient on SME president holding at least bachelor degree is negative and not
statistically significant. Our finding is similar to that of Wignaraja (2013) who finds that
education levels of SME general manager, ranging from primary school to college degree, do
not matter for SME participation in global production network. In addition, we found no
evidence that physical capital and human capital, firm age and firm location play significant
role in determining SME participation in GVC.
To sum up, estimation results from the probit model show that there are three important
variables that encourage SME to participate in GVC. These variables are firm size, training of
employees and direct exports.
6. Conclusions and Policy Implication
6.1 Conclusion
This paper investigates the question of whether GVC improves SME performance in Lao PDR.
Our empirical results show that there is weak evidence about the positive impact of GVC on
SME profits, but plugging into GVCs remains a promising channel for the development of
SMEs in Lao PDR. The impact of GVC on SME profit is statistically significant only when
firm‘s characteristics are excluded from the model. However, the results show that the
production functions of all SMEs exhibit increasing returns to scale, where the magnitude of
returns to scale indicates that a 1% increase of all the inputs results in an increase in SME profit
by about 1.37%. That said, SMEs tend to benefit from the expansion of their production by
engaging in GVCs.
In addition, the paper explores the determinants of SME participation in GVC in Lao PDR. Our
econometric results confirm that firm size, training of employees and export-oriented SMEs
28
play a vital role in determining the likelihood of SME participation in GVC. A 10% increase in
firm size, number of trained employees, and direct exports increases the likelihood of SME
participation by 2.45%, 2.5%, and 0.55%, respectively. Meanwhile, we found no evidence that
total capital, human capital, firm president, firm age and firm location play significant role in
determining SME participation in GVC.
Moreover; the survey showed that 20% of firms surveyed have invested in R&D while 60% of
the samples participated in GVC. Among the sample firms, 70% of them were self-financed for
procurement of production or services equipment and 30% used borrowed money from outside
sources. The reason that firms upgrade production/service is commonly (60%) to increase
productivity and to develop new product/service.
Furthermore, the surveyed data indicates that the main constraints of sample firms include
custom schemes, lack of labor force, high tariff, poor infrastructure, high cost of utilities (water
supply, electricity), lack of promotion policy from the government, lack of capital and financial
access. Furthermore, sustainable supply/service, regular supply/service, reasonable price, good
quality control, punctuality, considerable guaranty certificate/standard of product/service, sale
credit and creating own brand have challenges SMEs to overcome for effectively engaging in
GVC. It is also noticed that for most SMEs that have been in the supply chain of large firms are
likely to be able to supply only raw materials and primary services which do not create high
profit return. Lack of access to large firms‘ demand information also hinders SMEs to actively
engage in the supply chain.
6.2. Policy Implication
Based on compiled information and statistical analysis of the study it can be summarized that
SMEs still lag behind large firms in GVC engagement and profitability. The evidences show
that a lack of management skills, capital shortage, and insecure quality and quantity standard
has become an essential business setback of SMEs in the sample. The empirical results also
reveal that the presence of GVC in Laos tend to benefit large firms and export-oriented SMEs
rather than purely domestic-based market SMEs. Therefore, to help SMEs overcome those
business impediments and enable them to benefit from GVC, a policy to promote SMEs needs
to focus on some key areas.
A policy for helping SMEs to increase production capacity and quality is crucial for SMEs to
develop and be able to tap into global production network. The policy action should focus on
facilitating access to finance, enhancing the use of new technology and promoting backward
29
linkage of MNCs, particularly for those that have already been established in the SEZ.
Eventually, those policy approaches would help SMEs to gain economies of scale, quality
improvement, financial stability and labor skill development. More specifically, key areas that
require special attention include:
1) The policy to promote cheap market intelligence will help enable SMEs to develop
better business plans and be better prepared in the market. Currently, one of the
important sources for market intelligence, called Lao Trade Portal, maintained by
Department of Import and Export, Ministry of Industry and Commerce, has become a
uniqueness and up-to-date on-line source of crucial information for importers and
exporters. Other relevant sources from government agencies namely, Department of
Trade Promotion and Product development, and Foreign Trade Policy Department are
becoming complementary sources for SMEs to turn to when trade regulations under
WTO and ATFA are needed. In sum, the policy action should emphasize promoting
cheap access to reliable market intelligence.
2) The government should enhance an incentive policy to encourage SMEs to use new
technology and innovation in production processes. An effective way for promoting
modernization in production processes is enhancing foreign and local business
partnership in a form of joint-venture and business affiliation. This approach can help
SMEs to benefit from skill and technological transfer. In addition, in order to increase
productivity and quality, the policy should facilitate import of new technology,
especially in agro-processing industries that are considered to have potential in
producing exportable products by engaging in GVC.
3) Easy access to finance is a crucial factor to enhance production capacity and GVC
participation of SMEs. Thus, the policy requirement on this issue is promoting an
effective risk management by information sharing of credit rating and lending history.
The central bank of Lao PDR has to elaborate more an important role as a center of
lending and guiding information that can be used as a reference for issuing loans, credit
guarantee corporation as well as trade finance to SMEs of commercial banks and other
financial institutes in Laos. Subsequently, the problems associated with using land title
as collateral for bank loans may become less important in the future. Furthermore, the
government should have special lending schemes for SMEs through various channels,
and attract more international financial aid for SMEs development. With the existing
program, however, it should evaluate the program implementation along with
30
enhancing capacity building of sufficient staff on implanting in order to address weak
institutional capacities and the financial constraints to the growth of SMEs reported by
UNDP 2015, P11-12.
4) The government should consider providing tax incentive to large local and select
foreign firms that can create production network with SMEs. This will help large firms
to reduce the gap of cost comparison caused by supply of local SMEs with higher cost
comparing to imported supplies. Thus, it may increase an incentive for large firms to
expand business cooperation with local suppliers. The tax incentive can be in the form
of special reduction on profit tax in a year that has been proved by sales record between
large firms and SMEs.
5) Since most of Lao businesses are classified as SMEs, therefore, it will be impossible at
this stage to provide special support to all SMEs in the country. A pick-up winner-based
for special policy support will help target group of local SMEs to grow and then become
a trickle-down effect to intra- and inter-production linkage development. However, the
beneficiary of this policy should be wisely and extensively selected. Besides that, the
selection processes have to touch on those potential export-oriented SMEs which are
being or preparing to be part of MNCs‘ production network within the country and the
region.
6) A special technical support from the government is needed to ensure that SMEs can get
national and international management and production qualification, i.e., ISO, GMP,
GAP, QC, HACCP, CCP, HALAL and 5S. In addition, providing capacity building to
upgrade business skills such as, market analysis, international business and production
management will help SMEs to be better prepared for participating in GVC.
7) Include SME promotion programs, in order to raise the opportunity of SME to
participate in GVC, in both national and line ministries development agenda practically
and harmoniously. This will include selective and practical SME promotion activities in
the action plan of the five-year national socioeconomic development plan and the
ministry‘s implementation plan. In addition, the Prime Minister Office should play a
center role in monitoring and strengthening the coordination of SME action plans
among line ministries effectively. By these circumstances, those SME promotion
projects will have funding guaranty and systematic assistance of supporting programs.
There are some limitations in this study, especially target sample that might be addressed in the
future research. Firstly, the sample firms in our study combined several sectors together. It
31
should be disaggregated sector by sector in order to have a more concrete policy
recommendation. Secondly, some firms are not willing to answer questions on financial
information. Therefore, firms which did not provide financial data were excluded from the
statistical analysis. Thirdly, there are several factors that can affect the participation of SMEs in
GVC, for instance, infrastructures, domestic regulations, business supporting service, trade
policies, but do not capture in this study. Finally, because of using statistic cross-section data
analysis, it may not predict factual evidences comprehensively. Thus, the finding needs to be
interpreted with caution. Panel data analysis would be valuable to highlight changes over time.
32
Reference
- Abe, M. 2015. SME Participation in Global Value Chains: Challenges and Opportunities.
Asian Development Bank, Asian Development Bank Institute
- Abonyi, G. 2005. Integrating SMEs into Global and Regional Value Chains: Implications
for Subregional Cooperation in Greater Mekong Subregion. UNESCAP, Bangkok.
- ADB. 2014. Asia in global value chains. Asian Development Bank, No. FLS146851-3.
- Arudchelvan, M and Wignaraja, G. 2015. Internationalization through Global Value Chains
and Free Trade Agreements: Malaysian Evidence. ADBI, Working Paper 515.
- ASEAN. 2015. Beyond AEC 2015: Policy Recommendations for ASEAN SME
Competitiveness. ASEAN SME Working Group.
- Brunner, Hans-Peter. 2013. Can Global Value Chains Effectively Serve Regional
Economic Development in Asia?. Asian Development Bank. License: CC BY 3.0 IGO.
- Caspari, C. 2003. Participation in Global Value Chains as a Vehicle for SME Upgrading: A
Literature Review. International Labour Office, Geneva, Working Paper No. 44
- Croce, A., Martí, J., & Murtinu, S. 2013. The impact of venture capital on the productivity
growth of European entrepreneurial firms: ―Screening‖ or ―value added‖ effect? Journal of
Business Venturing, 28(4), Pp 489–510.
- Deborah, K. Elms and Low, P. 2013. Global value chains in a changing world. World Trade
Organization, Geneva, ISBN: 978-92-870-3882-1
- Dikova, D., Jaklič, A., Burger, A., & Kunčič, A. 2015. What is beneficial for first-time
SME-exporters from a transition economy: A diversified or a focused export-strategy?
Journal of World Business.
- Douglas, J. M., 2006. Technological Diversity, Related Diversification, and Firm
Performance. Strategic Management Journal, 27. pp: 601-619.
- Dueñas-Caparas, M. T. 2006. Determinants of Export Performance in the Philippine
Manufacturing Sector. Discussion Paper No. 2006–18. Makati City, Philippines: Philippine
Institute for Development Studies.
- Eggert, H., & Tveteras, R. (2013). Productivity development in Icelandic, Norwegian and
Swedish fisheries. Applied Economics, 45(6).
- Feenstra Robert, C. 1998. Integration of Trade and Disintegration of Production in the
Global Economy. Journal of Economic Perspectives—Volume 12, Pages 31–50.
33
- George, A. 2005. Integration SMEs into Global and Regional Value Chains: Implication for
Sub-regional Cooperation in the GMS. www.researchgate.net/publication/228714236.
- Gereffi, G and Sturgeon, T. 2013. Global Value Chains and Industry Policy-The role of
emerging economies. Fung Global Institute (FGI), Nanyang Technological University
(NTU), and World Trade Organization (WTO).
- Giuliani, E and Pietrobelli C. 2005. Upgrading in Global Value Chains: Lessons from Latin
American Cluster. World Bank Vol. 33, No.4, pp. 549-573.
- GIZ-HRDME, et al., 2007. FDI-SMEs Linkages, Lao PDR: Two case study-Lao Brewery
and Lane Xang Mineral, Vientiane Capital, Lao PDR.
- GIZ-HRDME, et al., 2009, 2011, 2013. The Main Report Enterprise Survey. Vientiane
Capital, Lao PDR.
- Global Development Solution. 2005. Integrated Value Chain Analysis of Selected Strategic
Sectors in Lao PDR. World Bank.
- Greene, W.H. (2008). Econometric Analysis (6th
Edition), Chapter 4 Statistical Properties
of the Least Squares Estimator. New Jersey: Pearson Prentice Hall.
- Grossman, Gene M. and Esteban Rossi-Hansberg. 2008. Trading Tasks: A Simple Theory
of Offshoring. American Economic Review, 98(5): 1978-97.
- G.Z. Hu, Albert et al., 2003. R&D and Technology Transfer: Firm-Level Evidence from
Chinese Industry. William Davidson Institute, Working Paper, Number 582.
- Harvie, C., D. Narjoko and S. Oum (2010). Firm Characteristic Determinants of SEM
Participation in Production Networks, ERIA discussion paper series 2010-11, Jakarta+
Economic Research Institute for ASEAN and East Asia.
- Helpman, E., Melitz, M. J., & Yeaple, S. R. 2004. Export Versus FDI with Heterogeneous
Firms. American Economic Review, 94(1), 300–316.
- Humphrey, J. 1995. Industrial Organization and Manufacturing Competitiveness in
Developing Countries. Special Issue of World Development, 23 (1), 1-7.
- Kaplinksy, R and Readman, J. 2001. Integrating SMEs in Global Value Chains towards
Partnership for Development. UNITED NATIONS INDUSTRIAL DEVELOPMENT
ORGANIZATION Vienna.
34
- Kuen-Hung Tsai and Jiann-Chyuan Wang. 2004. R&D Productivity and the Spillover
Effects of High-tech Industry on the Traditional Manufacturing Sector: The Case of Taiwan.
The World Economy, Volume 27, Issue 10, Pp 1555–1570.
- Kyophilavong, P. 2010. Integrating Lao SMEs into a More Integrated East Asia Region.
ERIA Research Project Report 2009-8, Jakarta: ERIA. Pp.165-195
- Lao National Assembly, 2012. Small and Medium Enterprise Promotion Law.
- Lao Statistic Bureau, 2015. Lao Economic Census II. Lao Statistic Bureau Report,
Vientiane Capital, Lao PDR.
- Melitz, M. J. 2003. The Impact of Trade on Intra-Industry Reallocations and Aggregate
Industry Productivity. Econometrica, 71(6), 1695–1725.
- Ministry of Industry and Commerce, 2011. The Development Strategy of Processing
Industry and Trade 2011-2020. Vientiane Capital, Lao PDR.
- MPI, 2011. 7th
National Economic and Social Development Program. Lao PDR, Vientiane
Capital.
- Nadvi, K, 1995. Industrial Clusters and Networks: Case Studies of SME Growth and
Innovation. Washington, DC: UNIDO, Small and Medium Enterprises Program.
- Nadvi, K., and Schmitz, H. (1999) Industrial clusters in developing countries, World
Development 27 9 (Special issue)
- Nichter, S and Goldmark, L. 2009. Small Firm Growth in Developing Countries. World
Development Vol. 37, No. 9, pp. 1453–1464.
- OECD, WTO, 2013. Value Chains and the Development Path. Aid for Trade at a Glance:
Connecting to Value Chain, Chapter 3, Pp 89-118.
- Patel, H and Hyman, B. 2013. Potential Products of Laos PDR for Export to ASEAN and
ASEAN+Market. Internationale Zusammenarbeit (GIZ) GmbH, www.giz.de/laos.
- Peitrobelli, C and Rabellotti, C. 2011. Global Value Chains Meet Innovation System: Are
There Leaning Opportunities for Development. World Development, Vol. 39, No. 7,
pp.1261-1269.
- Prime Minister‘s Decree. 2004. Promotion and Development of Small and Medium Sized
Enterprises. No. 42/PM, dated 20 April.
- Rabellotti, R. 1997. External Economies and Cooperation in Industrial District: A
Comparison of Italy and Mexico. London and Basingstoke: Macmilan.
35
- Rubin, D. (1976). Inference and Missing Data. Biometrika, 63, pp. 581-592.
- Rubin, D. (1987). Multiple Imputation for Non-response in Surveys. New York: John
Wiley and Sons.
- SMEPDD. 2010. Overview of Small and Medium Enterprises in Laos. Ministry of Industry
and Commerce, Vientiane Capital.
- Sydor, A. 2011. Global Value Chains - Impacts and Implications. www.international.gc.ca
- UN, 2011. Best Practices in Investment for Development: case study in FDI- How to create
and Benefit from FDI-SME linkages- Lesson from Malaysia and Singapore. New York and
Geneva.
- UNCTAD. 2013. Global value chain: investment and trade for development. New York and
Geneva: United Nations.
- UNCTAD. 2011. How to create and benefit from FDI-SME Linkages: Lessons from
Malaysia and Singapore. UNITED NATIONS, New York and Geneva, 2011, Investment
Advisory Series B, number 4.
- UNCTAD. 2010. Integrating Developing Countries‘ SMEs into Global Value Chains.
United Nations. Available at http://unctad.org/en/Docss/diaeed20095_en.pdf.
- UNDP. 2015. Country Analysis Report: Lao PDR Analysis to inform the Laos– United
Nations Partnership Framework (2017-2021). The United Nations in Lao PDR, Vientiane
Capital.
- Van Biesebroeck, J. 2005. Exporting raises productivity in sub-Saharan African
manufacturing firms. Journal of International Economics, 67(2), 373–391.
- Van Dijk, M. 2002. The Determinants of Export Performance in Developing Countries: The
Case of Indonesian Manufacturing. Eindhoven Centre for Innovation Studies Working
Paper No. 02.01. Eindhoven, the Netherlands: Eindhoven University.
- Verma, R. 2012. Can total factor productivity explain value added growth in services?
Journal of Development Economics, 99(1), 163–177.
- Wignaraja, G. 2014. Can SMEs Participate in Global Production Network? In Global Value
Chains in a Changing World, Geneva: World Trade Organization.
- Yuhua, Z. 2014. Integrating SMEs into Global Value Chains: Policy Principles and Best
Practices, No.6 APEC Policy Support Unit.