Thursday, December 2, 2010

SMEs in SEZs

The role of SMEs in China’s growth is less well known, compared to the popularity of big manufacturing industries. But, SMEs have played a crucial role in growth in China’s success in light manufacturing success. A WB team visited industrial zones in China and Vietnam to study the success of SMEs there. They argue that facilities provided by the government in industrial zones led to the success of SMEs in China. The Chinese government provided market enabling conditions and encouraged firms to follow market-price signals. It, however, did not provide direct subsidies, thus avoiding inefficiencies and market distortions.

One spectacular example of China's success and the role played by zones is the Weihai Zipper Company in Zhejiang. Starting from virtually nothing, over a span of two decades, it now exports $15 million worth of zippers to about 60 countries. It currently employs 3000 workers with an estimated daily output of 4 million zippers. This company is part of a zipper industrial cluster which counts more than 500 companies (China has more than 75% of the world’s market share in zipper, with the industry employing more than a million workers). Weihai Zipper Company decided to move to an industrial zone because the government offered a great package of cheap and abundant land and a predictable supply of utilities, especially water and energy. The manufacturer said that moving to the industrial zone enabled the scale up of the company by providing more space for plant expansion and for workers’ dorms in the park.

China has more than 1000 industrial zones following a central government policy encouraging the development of such zones. Most cities and counties have followed the models set by the large zones developed by the central and provincial governments. The local governments are motivated to develop industrial zones to get tax revenues and revenues from selling land, as well as nice records of administrative performance. Of course, not all Chinese industrial zones have been successful; the better ones were built on existing or potential industrial strengths, in other words, local comparative advantages.  These industrial zones played a critical role in facilitating the growth of Chinese SMEs from family operations catering to the local market to global powerhouses. These zones not only provided Chinese SMEs with good basic infrastructure (e.g. roads, energy, water and sewage), security, streamlined government regulations (e.g. government service centers) and affordable industrial land, they also provided technical training, low cost standardized factory shells allowing Chinese entrepreneurs to "Plug and Play" as well as Chinese workers with free and decent housing accommodations right next to the plants. Hence they played a very critical role in helping Chinese small enterprises to grow into mid-size and large enterprises, avoiding the "Missing Middle" problems that other countries face.

These industrial "Plug and Play" zones considerably reduced the start up investment costs and risks for SMEs at a phase in their development where they are still too risky for bank loans. They also facilitated the development of industrial clusters allowing tremendous economies of scale and scope for Chinese industries (the emergence of clusters was further facilitated by the Chinese government's support for the development of input and output markets). In a nutshell, the Chinese government facilitated SME development through the efficient provision of public goods and market information about sellers and providers but not subsidies. For example, firms pay market prices for the use of utilities. Most importantly, competition between firms is intense. The government does not bail out failing firms. It should also be noted that most of these zones did not preselect particular light industries, letting market forces drive the organic development of specialized clusters.

Now, India is also going on the same lane with this kind of industrial zone.

“Improving infrastructure in the entire country will take a long time, so if you want to promote industry, you need to create more islands of excellence, which these SEZs are.

[…]About 100 zones have opened since 2006, attracting 1.6 trillion rupees in investment, 60 times the level four years earlier. That helped create more than half a million jobs, the Commerce Ministry said. About 478 more SEZs have been approved.

[…]The government-sponsored and private enclaves reduce red tape by offering a single office for environmental, tax and other government clearances. They also offer a way around power and water shortages in a nation that produces 10% less electricity than it needs. Companies operating in the zones get tax breaks for 15 years and don’t have to pay local excise or customs duties.”