05/22/2003
China Daily

During a tour of northern Italy, Wang Jun visited many small towns but was almost oblivious to the sunny landscape. Hopping from one small business establishment to another, he spent every minute studying the secrets of their success.

Northern Italy is a shining beacon for small and medium enterprises (SMEs). The region produces some of the best suits and leather goods in the world.

Guangdong, half a world away, is also home to many SMEs. They are at present in the throes of transformation, and Wang Jun, a prominent economist based in Guangzhou, is trying to lend a helping hand.

Wang, vice-president of the Lingnan Institute of Sun Yat-sen University, was a fast-rising academic star when he was tapped by the Department of Science and Technology of Guangdong Province to work on a project for using different technologies to aid SMEs.

The government agency was faced with the daunting task of reviving the province's SMEs.

"Many towns in Guangdong, especially in the Pearl River Delta, have businesses that are often devoted to one industry, sometimes a single product category. These are small businesses, but they achieve economy of scale by forming clusters. One town can have hundreds of lock makers, another more than a 1,000 lamp manufacturers," Wang said.

"The concept of SME clusters is not new. It can be found in Italy, Japan and a dozen other countries. China's Zhejiang Province, south of Shanghai, is home to hundreds of these clusters, some of which are so specialized that they manufacture only buttons or zippers," said Wang, who single-handedly conducted another Pearl River Delta economic development project funded by Asian Development Bank.

Many of these SME clusters sprang up spontaneously. They prospered in the 1980s, but went into decline in the early '90s.

In Xiqiao of the Nanhai Township in the western suburbs of Guangzhou, initially there were 1,000-plus textile mills. By 1994, only 300 remained.

"The reason was lack of innovation. These SMEs did not have the financial muscle to develop their own products, so their designs became more and more generic. And their equipment was also outdated," observed Wang.

Wang, who did research at Harvard University from 1994 to 1995, says that in Zhejiang, the SMEs have formed trade associations, which coordinate research and development (R&D) resources.

In Guangdong, local governments play such a pivotal role that townships have taken over many of the functions of trade organizations.

"That's why we suggested that town governments step in and take over the role of innovator, which a typical SME is incapable of at this stage."

The provincial agency heeded Wang's advice and drew up a subsidy plan whereby they will commit 300,000 yuan (US$3,624), coupled with another 300,000 yuan from the township, to create an innovation center for each qualified town.

"But there are pitfalls in this approach," cautioned Wang, whose theses and books on economics and management have influenced many decision-makers.

Wang says there are different ways of stimulating the innovation process for a SME cluster. The first step is to help big companies that become the catalyst for SMEs; the second step is to set up non-profit organizations and provide new designs and other innovations as a public service; and thirdly, run it like a regular company.

The first option, requires an industry with a big company at its center and many smaller ones surrounding it. Many towns in the Pearl River Delta do not have such an industry structure, and even in those that do, it is hard for one company to serve the interests of all.

The second option sounds good but, without a profit motive, it may gradually run out of funds and fall into a bureaucratic quagmire.

Wang proposes the third option, but starting with government subsidies and gradually phasing into a corporate system.

"Free-market competition is the best way to enhance the capability for innovation, but since SMEs are often restrained either in vision or in access to the financial market, they need a little push from someone who intends to help them but at the same time can sustain its own operation," asserted Wang.

Government subsidies should be used for the most crucial purposes, according to Wang. Part of the investment can be recouped from technology transfers when innovations are passed on to SMEs.

But the pricing policy for the innovator is not necessarily profit maximization. Sometimes they are priced at cost, or even below cost, so that SMEs meant to receive help from this program can afford them.

In the long run, the ultimate purpose is to bring benefits to the whole cluster of businesses.

In the Xiqiao town case, the local government put up 2 million yuan from fees and tax revenues it had collected and imported a state-of-the-art computer design system from South Korea. It also hired a technical team.

This design company began operations in 1998 and has since produced tens of thousands of new designs. These are sold to the local textile SMEs, each for as little as 300 yuan. And each design can be sold to only one buyer.

On top of that, the local government also used an interest payment subsidy to help the textile-making SMEs buy high-speed twistless automatic roving machines to replace older models. The new models now account for 48 per cent of all roving machines in Xiqiao, much higher than the 10 per cent nationwide.

Productivity has risen by 20-30 per cent, and product prices have also seen a 20 per cent increase.

"The target of this program is not innovation for the government, but innovation for SMEs. That means whatever approach we take must be sustainable and must spread the benefits around the industry, not just to the few that you do business with. In other words, it must have spillover effects," clarified Wang.

This effect is evident in Xiqiao, where more and more SMEs have grown stronger through the government-subsidized innovation program and are now no longer content with the new designs churned out by the design center.

More than 100 of them have set up their own R&D departments to provide differentiation in product design.

Meanwhile, the original design center has broadened its services to include training, maintenance and information exchange, serving not only the 1,900 SMEs in the vicinity but also outside companies in the same industry.

Innovation has helped Xiqiao tide over the recession. From 1998 through 2001, its revenue from textile products went from 5.95 billion yuan to 15.34 billion yuan, making it the second largest textile manufacturing base in China, next only to Shaoxing in Zhejiang Province.

"There are 260 towns in Guangdong, and many of them are in the process of developing such a mechanism which can help SMEs overcome their growing pains. There are things that local governments should not meddle with, but there are also things that they can, and should, do -- little things that can make a big difference. And surprisingly, I didn't find this system in Italy. So you can say this is a Chinese characteristic," argued Wang.

The success of the program has caught the attention of other government agencies, who want to enlist Wang's services.

Even UNESCO, the United Nations agency, is interested and has entrusted Sun Yat-sen University, the institution with which Wang is associated, to organize a symposium on regional development and technology policy next April.

"When an SME is not downstream from a giant multinational corporation, it does not get any benefit from technological advancement and innovation. An innovation center initiated by the government can lower the barrier and give the gentle push SMEs need to get over that obstacle," concluded Wang.