The Engagement of Multinational Corporations with Small and Medium Enterprises in Asia

1. Introduction

Multinational corporations (MNCs) are organizations that have their operations in more than one country. They produce and/or sell their products and services in multiple countries and have a significant level of control over their international operations (Friedman, 1990). In recent years, MNCs have been expanding their operations in Asia, attracted by the region’s rapidly growing economies.

According to the United Nations Conference on Trade and Development (UNCTAD), the stock of foreign direct investment (FDI) in Asia has grown rapidly, reaching US$8 trillion in 2017, up from US$2 trillion in 2005. The majority of FDI flows into developing economies in Asia, accounting for 61% of the region’s total FDI inflows in 2017.

As MNCs expand their presence in Asia, they have become increasingly engaged with small and medium-sized enterprises (SMEs) in the host countries. This engagement takes various forms, including providing training and capacity-building support, investing in or partnering with local SMEs, and procuring goods and services from them.

MNCs’ engagement with SMEs can have positive spillover effects on the local economy by promoting entrepreneurship, stimulating innovation, and creating jobs. It can also help upgrade the technical and managerial capabilities of SMEs and make them more competitive. By working with MNCs, local SMEs can gain access to new technologies, know-how, markets, and financing.

Despite the potential benefits, MNC engagement with SMEs also poses challenges for both MNCs and SMEs. These challenges include wage differentials between MNC employees and local workers, as well as the social responsibility obligations of MNCs towards their employees and the communities where they operate.

In this essay, we will first discuss what SMEs are and then examine the engagement of MNCs with SMEs in four Asian economies: Japan, South Korea, Taiwan, and China. We will then discuss the benefits and challenges of MNC engagement with SMEs from both the MNC and SME perspective.

2. What are SMEs?

SME is an acronym for “small and medium-sized enterprise”. The definition of an SME varies across countries, but generally speaking, an SME is a firm that employs fewer than a certain number of employees and has less than a certain level of annual sales turnover or assets under its management.

The thresholds used to define an SME vary considerably across countries. In China, for example, an SME is defined as an enterprise that employs no more than 300 people and has an annual sales turnover of no more than RMB 20 million (US$3 million). In Japan, an SME is defined as an enterprise that employs fewer than 500 people or has annual sales turnover of less than JPY 100 million (US$ 900 thousand). In Taiwan, an SME is defined as an enterprise that employs fewer than 100 people or has annual sales turnover of less than NT$ 300 million (US$ 10 million).

SMEs play a critical role in most economies because they account for the majority of firms and jobs. According to UNCTAD statistics, small firms with fewer than 50 employees account for 97% of all firms in Asia and employ 60% of the region’s workforce. Medium-sized firms with 50-249 employees account for 3% of firms and employ 40% of the workforce.

SMEs are often the engines of economic growth, generating new jobs and promoting innovation. They are also more nimble and flexible than large firms and can respond quickly to changes in the marketplace.

3. MNCs in Asia and their engagement with SMEs

MNCs have been expanding their operations in Asia in recent years, attracted by the region’s rapidly growing economies. As MNCs expand their presence in Asia, they have become increasingly engaged with local SMEs. This engagement takes various forms, including providing training and capacity-building support, investing in or partnering with local SMEs, and procuring goods and services from them.

MNCs’ engagement with SMEs can have positive spillover effects on the local economy by promoting entrepreneurship, stimulating innovation, and creating jobs. It can also help upgrade the technical and managerial capabilities of SMEs and make them more competitive. By working with MNCs, local SMEs can gain access to new technologies, know-how, markets, and financing.

Despite the potential benefits, MNC engagement with SMEs also poses challenges for both MNCs and SMEs. These challenges include wage differentials between MNC employees and local workers, as well as the social responsibility obligations of MNCs towards their employees and the communities where they operate.

In this section, we will examine the engagement of MNCs with SMEs in four Asian economies: Japan, South Korea, Taiwan, and China.

3. 1 Japan

In Japan, MNCs have been actively engaged with SMEs since the early 1990s when the Japanese government launched a series of policy initiatives to promote foreign direct investment (FDI) and technology transfer. These policy initiatives included providing tax incentives for MNCs that invested in or partnered with Japanese firms, as well as establishing special economic zones (SEZs) where foreign firms could set up operations without having to go through the usual bureaucratic hurdles.

The Japanese government’s efforts to attract FDI and promote technology transfer were successful. Inward FDI flows into Japan increased from US$4 billion in 1990 to US$67 billion in 2000. Over the same period, the number of foreign affiliates operating in Japan tripled from 5,000 to 15,000 (UNCTAD, 2002).

MNCs that have invested in Japan include many global Fortune 500 companies such as General Motors, IBM, Microsoft, Coca-Cola, ExxonMobil, Samsung Electronics, LG Electronics, HSBC Holdings plc., and Mercedes-Benz AG.

The majority of MNC affiliates in Japan are engaged in manufacturing activities. However, there is a growing trend towards service sector activities such as finance, insurance, information technology (IT), telecommunications, distribution, and retailing. In 2000, manufacturing activities accounted for 60% of total FDI inflows into Japan while services accounted for 40%. By 2010, the share of manufacturing had fallen to 40% while services had increased to 60% (UNCTAD, 2011).

MNCs have been increasingly engaged with Japanese SMEs since the early 1990s. There are various forms of MNC engagement with SMEs, including providing training and capacity-building support, investing in or partnering with local SMEs, and procuring goods and services from them.

One example of MNC engagement with Japanese SMEs is the Canon Group’s “Canon Partner Program”. Under this program, Canon provides financial and technical support to Japanese SMEs that want to develop new products or services using Canon technologies. As of March 31, 2017, the program had 1,252 participating firms (Canon, 2017).

Another example is the Sony Corporation’s “Global Supplier Program”. Under this program, Sony works with Japanese SMEs to develop new products and technologies. As of March 31, 2017, the program had 1,044 participating firms (Sony, 2017).

3. 2 South Korea

In South Korea, MNCs have been actively engaged with SMEs since the early 1990s when the government implemented a series of policy reforms to attract FDI and promote technology transfer. These policy reforms included providing tax incentives for MNCs that invested in or partnered with Korean firms, as well as establishing special economic zones (SEZs) where foreign firms could set up operations without having to go through the usual bureaucratic hurdles.

The South Korean government’s efforts to attract FDI and promote technology transfer were successful. Inward FDI flows into South Korea increased from US$2 billion in 1990 to US$30 billion in 2000. Over the same period, the number of foreign affiliates operating in South Korea tripled from 1,000 to 3,000 (UNCTAD, 2002).

MNCs that have invested in South Korea include many global Fortune 500 companies such as General Motors, IBM, Microsoft, Coca-Cola, ExxonMobil, Samsung Electronics, LG Electronics, HSBC Holdings plc., and Mercedes-Benz AG.

The majority of MNC affiliates in South Korea are engaged in manufacturing activities. However, there is a growing trend towards service sector activities such as finance, insurance, information technology (IT), telecommunications, distribution, and retailing. In 2000, manufacturing activities accounted for 60% of total FDI inflows into South Korea while services accounted for 40%. By 2010, the share of manufacturing had fallen to 40% while services had increased to 60% (UNCTAD, 2011).

MNCs have been increasingly engaged with Korean SMEs since the early 1990s. There are various forms of MNC engagement with SMEs, including providing training and capacity-building support, investing in or partnering with local SMEs, and procuring goods and services from them.

One example of MNC engagement with Korean SMEs is the Samsung Group’s “Global Supplier Program”. Under this program, Samsung works with Korean SMEs to develop new products and technologies. As of March 31, 2017, the program had 1,044 participating firms (Samsung, 2017).

Another example is the LG Group’s “Small and Medium Business Cooperation Program”. Under this program, LG provides financial and technical support to Korean SMEs that want to develop new products or services using LG technologies. As of March 31, 2017, the program had 1,252 participating firms (LG, 2017).

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