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SMEs - the answer to our economic woes?

Oct 99

Should Hong Kong have a more comprehensive SME policy?

Mr Sidney Chan, Assistant Director-General of Industry at the Industry Department of the SAR Government, believes Hong Kong should maintain its laissez-faire approach and the Government should not become too embroiled in individual policy issues for SMEs. However, he did agree that Government could take a holistic approach - help when necessary guiding SMEs to other sources of assistance.

"We are a free-market economy with a level playing field - although most businesses are SMEs we do not want to show favouritism. However we are developing a more long-term strategy of policy in helping them," he said.

Many other economies have an SME policy but this is not a good enough reason for Hong Kong to have its own. Also, it is not clear whether these so-called SME policies elsewhere are products of politics rather than of economics?

SMEs consist of a great diversity of industries and sectors; the only common factor is that they are small. Is size a justifiable cause for a government policy? The answer is that in smallness lies a dynamic nature, which serves an important economic function. Like 'export' or 'investment' which drive the economy, 'small' implies the prospects of becoming big.

According to a report on SMEs by the United Nations Conference on Trade and Development (UNCTAD), SMEs contribute much of the growth in employment and income for many economies. By comparison, the contribution of large enterprises tends to be stable.

Mr Charles Li, Associate Professor of Economics at City University, believes since SMEs are such a major employer and involved in export, China trade and cross border activity, they will play a major role in the recovery of Hong Kong's economy.

"Despite the fact that many SMEs have relocated their industry across the border they are on the frontline and have the initiative to solve Hong Kong's economic problems. Hong Kong's problem is very much a structural one and the downside is many SMEs won't survive unless they have new channels in terms of new industry or lines of production," he said.

By the time enterprises become successful, they are no longer small or medium-sized; but that is irrelevant. They are the fastest growing when they are small and as a group become a growth engine for the economy.

But according to UNCTAD only 10 per cent of SMEs are fast growing ?the majority are simply ordinary businesses that spring up and perish every day. Most never aspire to fast growth.

Prof Li said that many SMEs are just surviving and may not be aggressive enough to boost Hong Kong's economy. But, he said, that the strength of Hong Kong's SMEs lies in their flexibility.

"Hong Kong is an open free-market economy so SMEs have the ability to be very flexible. This makes them very dynamic - in the 80s they were mainly involved in clothing and textiles now they have adapted to the market needs and are more service oriented," he said.

From another perspective, there is a justifiable case for policy to help the growth-oriented SMEs realise their potential, and to encourage others to be among their ranks. Under such a policy, the beneficiaries will not be any predetermined industry or sector, but businesses of any nature which have a potential to grow.

The Special Finance Scheme for SMEs

One of the Government's short-term policies in helping SMEs was the $2.5 billion Special Finance Scheme launched in August 1998 during which many SMEs were facing a credit crunch because of the economic crisis.

This has since been revised in May 1999, as promised by Chief Executive Mr Tung Chee-hwa in his 1998 Policy Address, but many critics (mostly SMEs themselves) say that it does not do enough to help them and is merely a cosmetic band aid.

Ms Fanny Lai of Fanny P Lai & Co Certified Public Accountants, an SME owner, said that although the two year guarantee period, which had been extended in the revision, was good it still may not be enough for most SMEs as their business may not be able to pick-up during that time.

"The banks are generally non-cooperative, there is no support and they don't want the extra administrative work that the scheme generates," she said.

Mr Benny Tse, Senior Executive of Commercial Banking at HSBC, who is in charge of granting SMEs loans under the scheme, disagrees: "Our practice is to base lending on actual business viability. If the underlying business is not sound we cannot lend. It has nothing to do with what sort of collateral an SME can offer. So far we have had no complaints from SMEs on our lending policy."

Mr Denis Lee, Chairman of the Chamber's SME Committee, however, said that in reality the bank's are still very cautious: "It is very difficult for SMEs to get trading finance from banks - they still need adequate collateral - and this is usually property."

There have been improvements made to the scheme since the revision (before the amendments only $117 million had been used from the fund) making it easier for SMEs to apply and get the money.

Mr Tse, from HSBC, said that since the risk-sharing ratio between Participating Lending Institutions (PLIs) and Government has been revised from 50:50 to 30:70, banks are now more willing to loan to SMEs under the scheme.

"When the scheme first came out it was underused. Now four months after the revision it has been fully utilised - however whether it's a success is still too early to tell," he said.

Mr Lee, Chairman of the Chamber's SME Committee, said that at present 5,327 guarantees have been issued with 99 per cent going to small businesses.

"Ninety-one per cent of the loans went to enterprises that employ less than twenty people," he said.Mr Lee said before the revision when SMEs were required to payback loans after one year there have been 18 default cases.

"I expect many more to come in the next few months. October 1998 to February 1999 was a very bad time for SMEs as there were a record number of closures," he said.

Mr Lee said that most companies (48 per cent) applying for the loan were from the manufacturing sector, the second biggest group (20 per cent) was from the trading sector.

Mr Lee believes the Government has done a good job in helping SMEs.

"I believe the scheme has been a success and now that the Government is setting up the Growth Enterprise Market (Hong Kong's second board) many medium-sized businesses will be able to raise capital from this source," he said.

Other ways the Government is helping

Mr Chan, from the Industry Department, said another way for SMEs engaged in the hi-tech sector to get money is through the Applied Research Fund.

"The Government provides the money and then venture capitalists act as the fund managers determining who should get the money. There are also incubation programmes at the Industrial Technology Centre whereby selected incubatees can receive free management consultancy advice and technological support," said Mr Chan.

One problem faced by SMEs is information flow. While large companies may be able to afford a research department, small businesses have often had to leave it to chance.

Ms Vicky Kwan, CEO of the Development Support Division, Industry Department, said that many SMEs do not use computers and do not know how to use the Internet and engage in e-commerce.

"Information gathering is a problem. To help them become more productive and competitive we have set up the SME Centre in April and our virtual information centre on a Web site to act as a one-stop information service with hyper links to other SME helping organisations," she said.

Mr Chan added that one of the ways Government can help growth-oriented SMEs is to have a more long-term approach to SME policy.

"We started this in 1996 when we established a Government SME Committee comprising of SMEs which acts as a forum for them to express their views and interests. In February 1999 we held the SME week and in April 1999 we set up an SME Office - the aim of this is to develop a new service policy to assist SMEs and coordinate activities of government departments and organisations that help SMEs," he said.

Mr Chan said that the SME office is currently drafting an SME Development Support Plan, which will be a stocktaking exercise collecting data from all SME support agencies. This will be compiled into categories and then analysed to see if there are areas that are not covered and if there is any overlap between different functions.

"This should be finished at the end of the year, and we will be better equipped to allocate resources in the appropriate place" he said.

Mr Tse, from HSBC, said that in the old days SMEs concentrated too much on the stock market and property investment, now is the time for them to focus on their core competencies to battle through this time of hardship and come out stronger.

"When China gains entry into WTO there will be plenty of new opportunities for SMEs. The recovery of the Hong Kong economy will be dependent on our engine of growth - the SMEs. If they can overcome this period of hardship their competitiveness will be improved and there will be no stopping them," he said.