Integrating small and medium-sized enterprise into global trade flows

China - 26 February 2018

In China, the term “small and medium-sized enterprises (SMEs)” refers to “different forms of enterprises under different ownerships that are established within the territory of the People’s Republic of China that meet the social needs and create more job opportunities, and comply with the industrial policies of the State”. 1 This definition is rather more complex than that in other countries, where the definition of SMEs tends to be based purely on their size. 2 It is nevertheless the case that, in China also, SMEs tend to be enterprises which have fewer employers, lower sales volume and lower gross assets. Most Chinese enterprises are SMEs. Indeed, they account for more than 98 per cent of industry and contribute to 60 per cent of China’s GDP, 75 per cent of its industrial value-added output and 50 per cent of its revenue (as of June, 2012). 3 Chinese SMEs also provide for 75 per cent of China’s urban employment opportunities and absorb more than 50 per cent of the workers laid off from the state-owned enterprises. They employ more than 70 per cent of the new entrants to the labour market (Jianjun, 2006). Hence, Chinese SMEs play an important role in China’s economic development, due to their contribution to GDP and the employment they create, as well as their vigorous creative ability.
The diversified, networked and clustered division of the globe has greatly promoted the development of SMEs globally, and the internationalization of SMEs has been in the spotlight overall in the world economy. However, there is considerable room for Chinese SMEs to more fully exploit the economic opportunities provided through international trade. This will be illustrated by examining more closely the performance of SMEs established in Shanghai. In SMEs, the output of sales revenue generated by new products is lower when compared to large enterprises. The difference is particularly large when focusing on exports of new products. This suggests that Chinese SMEs are not well integrated into the dynamic segments of global trade flows.
Most Chinese SMEs are not fully integrated into global and regional value chains, and their lack of innovative capacity may be one reason for this. Evidence suggests that multinational enterprises (MNEs) expect SME suppliers to be adaptable, agile and flexible. Notably, they expect SMEs to be able to develop new product lines and change product specifications (Krywulak and Kukushkin, 2009). Lack of innovative capacity may, therefore, make it difficult for SMEs to connect to global value chains. It may also imply that Chinese SMEs are trapped in “captured growth status” (Yongchun et al., 2013), which means that the main profits are captured by foreign enterprises. The discussion in the following sections will examine the possible reasons behind the relative lack of dynamism in Chinese SMEs and will discuss what can be done from an economic perspective to raise innovative capacity within the context of global competition.

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