South Asian SMEs: Explore trade through JV

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Saurabh Gupta | 04 Dec, 2009
SMEs, which play a crucial role in the overall development of South Asian economies, face significant challenges for survival and growth in an uncertain environment. SMEs in SAARC region always search for avenues which would help them to expand their business in this situation of subdued demand.

Small and Medium Enterprises (SMEs) in SAARC nations contribute significantly towards economic growth and are crucial for poverty reduction due to their contribution to employment and income generation. At the same time, it is also true that the main problem faced by SMEs across the SAARC region when trying to obtain funding is that of uncertainty.

It is well known that joint ventures (JV) are an effective way of expanding and diversifying the production base and trade structure of the economy. The uncertainty of economic turmoil continuous cast a shadow on the economic performance of SMEs of the South Asian Association for Regional Cooperation (SAARC) region.

SMEs of SAARC countries, comprising Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka have become particularly vulnerable to economic slowdown owing, inter-alia, to their structure of production and absence of deep pockets to sustain their operations in downbeat times.

SME Times spoke to different business leaders from SAARC region during a conference organized by PHDCCI in New Delhi recently. Md. Nazibar Rahman, business leader from Bangladesh, told SME Times, "Bangladesh SMEs are facing the problem of adiquate finance. The interest rates of our banks are very high and SMEs have to borrow the money from the banks, for which they have to pay high rates of interest. If you want to get working capital, which is vital for the industry, in that case bank or any financial institutions want collateral."

He also said that Bangladesh and India had a very porous border line and so there were two systems of border trade are going on. "One is legal and other is illegal trade and so illegal trade between the two nations is eating the profits of the SMEs of both the nations. This is also threat to Bangladesh SMEs because illegal trading is more than the legal trading and second is that the commodities which are imported illegally cost become higher than the legally imported products. The governments are required to check border security so that illegal trade can be checked," he added.

SMEs rarely have a long history or successful track record that potential investors can rely on in making an investment. Larger companies (particularly those quoted on a stock exchanges) are required to prepare and publish much more detailed financial information â which can actually assist the finance-raising process. Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk.

It is well known that joint ventures are effective ways of expanding and diversifying the production base and trade structure of the economy. Indeed, joint ventures facilitate vertical specialization which allow the countries to reap economies of scale by concentrating on a specific production process in the value addition chain. A good example of vertical integration between business entities in South Asia could be a joint venture between business enterprises in India and Bangladesh in the jute industry wherein Bangladesh produces jute and West Bengal has processing mills.

Setting up joint production capacities among SMEs of SAARC countries can also be contemplated in food, pharmaceuticals, textiles, rubber, leather, tea blending and harnessing of natural resources for energy generation.

M. Yahya Chawla, Director, Mega Poultry Company, Karachi- Pakistan, said, "The biggest challenges before the Pakistani SMEs is electricity or power these days because the larger industries can afford to have their own power generation system, but SMEs if they go for power generation systems they cannot remain in competition."

On the issue of cross border trade he said, "To boost the cross border trade and to give priorities to SMEs, the governments are required to spare time from their political argufy."

Cooperation in the energy sector has remained one of the key priorities of SAARC. There is need to address regional and global energy issues to facilitate energy trade within the SAARC region to enhance more different use of energy with in the region. Nepal and Bhutan have huge potentials in hydro-power, while India and Pakistan have energy deficiency. If Nepal and Bhutan generate hydro-power, India and Pakistan can be good customer of that energy.

South Asian countries possess a comparative advantage in herbal, Auyurvedic and Unani medicines. According to a recent study medicinal plants related trade is estimated at USD 60 billion per year, and is further growing at about 7 percent annually. Among the South Asian countries, India has emerged as a leading producer of pharma products on account of lower manufacturing costs and the R&D expertise. The progress of the Indian pharmaceutical sector is positive reflection on South Asia as a whole and other countries can gain substantially by this.

Agro-food processing is also one of the best sector for joint venture among South Asian countries. The South Asian countries are by and large are into processing fruit and vegetables, cereals, milk, confectionery, oilseeds and spices. It is suggested to set up modern food machinery design and development center in India and Pakistan with facilities for R&D, pilot plant, fabrication workshops and consultancy facilities.

Although the South Asian countries compete with each other in the developed countries' market for textile and clothing (T&C) exports, there exists a potential to establish the region as the global hub for the T&C trade through regional cooperation in trade, investment and skill development. According to reports, trade barriers erected by South Asian countries against each other, is one of the main obstacles to a South Asian textile and apparel hub. These trade barriers inhibit regional industry growth by obstructing the exchange of raw materials in the garment trade.

On the other hand Rohan De Silva, Chartered Designer from Sri Lanka had emphasized on people to people contact. He said, "I think people to people contact, like we are here in India to meet our business friends, can boost cross border relations among SAARC region SMEs."

De Silva said, "Sri Lankan SMEs are going through a bit of recession so there fore the credit problem is always there. The banks are tight; the government is trying at its best to help us out so I think they definitely will work on it."

It is important to explore the possibility of creating regional vertical integration, to ensure a certain degree of specialization in countries within the region. To form a hub, all the countries in the region should remove tariff barriers on raw materials. There is also a need for reducing documentation and procedures for imports and exports. SAARC countries should also adopt more favorable policies on investment towards each other and create an enabling environment for technology and skills.

At a bilateral level, India's large diversified industrial base and acquired expertise and experience in setting up of small and medium enterprises can be of considerable use for SMEs in the region. India's skilled and comparatively cheep manpower resources and its bank of diversified technologies and resources can be effectively brought together in a winning combination for projects in our countries or even to third countries.