Innovations Of Chinese Small And Medium Enterprises Economics Essay
China’s phenomenal growth over the past few decades has raised many questions and some of which critics argue include that if China is to succeed as a superpower of the world, then it must innate a way out of a global recession.
This project aims to discuss the transformation of the Chinese Economy after 2008 with comparison to before 2008 and makes an effort to understand the fundamental questions of the innovations used by China’s SME’s after the financial crisis.
After analysing the various innovations and provide a critical evaluation based on empirical evidence, the project will conclude by offering an opinion and raise some of the insights and challenges for SME in China from when the crisis began.
What are the Innovations of Chinese SMEs after Financial Crisis?
The market-oriented reform included the state-owned enterprises (SOEs) changing into the small and medium non-SOEs which stopped in 2004. In the meantime, the small and medium enterprises (SMEs) in China emerged quickly and the number of SMEs increased fast with the non-SOEs encouragement policy.
Firstly, it will give the definition of SMEs in China. Secondly, it will show the SMEs play an important position of Chinese economy. Thirdly, it will review the difficulty of Chinese SMEs have faced and what innovation SMEs have carried out before the global financial crisis takes place.
Then, it will analyze the effect of the financial crisis on export-oriented SMEs and the financing problem of Chinese SMEs and apply the PEST framework to this project. Next, it will show the recent the innovative promotion of technology. Fifthly, it will show the recent innovation and actions of Chinese SMEs after the global financial crisis occur. Finally, this project will indicate the Chinese SMEs do not have too much different in doing innovation before and after the financial crisis.
The transformation of the Chinese economy after 2008 has triggered us to focus on the innovations of China’s SME’s after the financial crisis as this will enable us to understand the scope of the transformation.
1. The Definition of SMEs in China
The number of employment in SEs was between 100 and 500 people. Nevertheless, around 70 percentages SEs employed no more than five people or operated by self-employed (Liu, X., 2007).
Similarly Stokes and Wilson (2008) support this but state that an SME has less then 250 employees. This is important as Entrepreneurship and SME’s are responsible for helping most economies out of recession. Many world leaders including Obama and Brown have argued for more investment in SME’s to boost the economy out of recession. This is because entrepreneurs can introduce new innovations that can rescue economy and boost economic growth; this can build confidence in investors and turn the economy around.
In 2003, China government accorded to the SME Promotion Law of China established the Interim Categorizing Criteria on Small and Medium-sized Enterprises. The medium size enterprises the maximum number of employment and the revenue were 3000 people and RMB 300 million per year (See Table 1) (Liu, X., 2007).
Table 1: The Definition of SMEs in China
Source: PRC, 2003.
2. The SMEs Play an Essential Role in China’s Economy
The result of compared SMEs with large firms could prove the saying “small is beautiful”. SMEs were flexible because they could alter or modify their category and quantity of products.
SMEs gave China government a favor they sucked up superfluous labour and offered 75 percentages city employment opportunities (PAPPER.WENWEIPO.COM, 2008).
The medium size and the small size companies accounted for 1.78 percentages (42,291) and 98 percentages (2,327,969) of total registered enterprises in China individually in 2007; however, the large companies only took 0.19 percentages (4,459). Chinese enterprises accounted for over 99% of SME’s (Liu, 2007).
In addition, the SMEs paid 50 percentages taxes of total taxes revenue to China government and contributed to over half percentages of the gross domestic product (GDP) in China (PAPPER.WENWEIPO.COM, 2008). The SMEs accounted for 60.42 percentages of total business revenue and 66.28 percentages of industrial earning. Moreover, the SMEs provided almost 82 percentages of China’s employment opportunities. The growth of china’s SMEs has taken an essential role of economic development in China (Liu, 2007).
Table2: The Quantity and Employment of SMEs in China (2007)
Small size enterprises
Medium size enterprises
Total amount (number/percentage)
Note: The statistics of this table were made from ERIA RESEARCH PROJECT REPORT.
Source: Liu, X., 2007.
3. Problems and Innovations have existed in Chinese SMEs before current financial crisis
3.1 The connection of outside market
China’s small enterprises (SEs) did not have strong link with external market. According to the China Statistics Yearbook SMEs contributed 62.3 percentages to the total exports of China and the SEs took 5 to 10 percentages of 62.3％ (All-China Federation of Industry and Commerce and the China Private Economy Research Society, 2007). This meant that SEs concentrated on internal market.
3.2 The technological innovation
Many SMEs involved in the light industrial sector; in the service sector, SMEs focused on retailing, food servicing and advertising.
China’s SMEs accustomed to produce low value added products by Original Equipment Manufacturer (OEM) and sold products to domestic customers (individuals and large firms) in early stages (PAPPER.WENWEIPO.COM, 2008). Furthermore, SMEs in China execute technological innovations through the internal research and development (R&D), R&D led by university and institution, imitation and consign; especially, the way of innovation through imitation made much more profits than others. Thus, the technological innovation could not go forward quickly (Liang, 2007)
Figure 1: Technology Innovation of small enterprise
Source: China SME online, 2006.
3.3 The insufficient financial support of Chinese SMEs
SMEs suffered from the short of financial support from bank and financial institution, guarantee system, necessary banking information and fair opportunity of finance and so on (See Table 3).
Additionally, there were specific banks doing finance for SMEs in Taiwan which lent money to SMEs with good business ideas and development potential. On the contrary, there was not SME Bank in China to help SMEs to finance. SMEs in China only had commercial banks which preferred making loan to big firms rather than SMEs because SMEs did not have mature accounting system and administrative management. According to Chan Shan-ho, Hong Kong GRE  experience could be a good lesson for China to establish more efficient financial channels and system to support SMEs. Moreover, the venture fund was a good measure to finance for SMEs in China. However, the investment of venture fund was not active (PAPPER.WENWEIPO.COM, 2008). Thus, the insufficient financing had been a big problem for SMEs in China.
Table 3: Difficulties of SEs Financing
Source: China SME online, 2006.
4. The Impact of Current Financial Crisis on Economic Development
The growth rate of Chinese GDP in 2008 (9.0％)compared with 2007(11.9％) decreased 2.9％. The lowest GDP growth rate showed in the first half year of 2009 which was 6.1％ (See Figure 2) (NBSC, 2009).
In addition, the growth rate of export declined considerably. There was a significant increase of export growth rate in 2007 which was 23.5 ％ compared with 2006 then again the export growth rate in the end of 2008 dropped to -2.8％ (PRC, 2009). Meanwhile, the high unemployment rate provoked hard financing environment for Chinese SMEs to raise capital (Li, 2008). This partly affected the economic development of China.
Figure 2: Real Growth Rate of GDP in China (%)
Source: National Bureau of Statistic of China (2003–2009)
4.1 The recent development of SMEs in China
The number of enterprise, people in employment and registered capital declined gently from 2005 (See Figure3 & Figure4).
It was a turning point in 2007 because Chinese government proclaimed new policies to control inflation such as the central bank and the People’s Bank of China increased the interest rate of loan, deposit and modified required reserve ratio several times.
Additionally, the reduction of export concession for specific or polluted and low added value industries resulted in the high operating costs (See Figure 3 & Figure 4). However, the export rate of SMEs did not decline too much which compared with the export rate of total private enterprises in China (See Figure 5) (Liu, 2009).
Figure 3: Growth Rate of Related Economic Index of Small and Medium Private
Source: PRC Industry and Commerce Association (2009).
Figure 4: Growth Rate of Related Economic Index of Micro-Small Private
Enterprises in the PRC (%) 2005–2008
Source: PRC Industry and Commerce Association (2009).
Figure 5: Export Growth Rate of Small and Medium Private Enterprises
Source: PRC Industry and Commerce Association (2009).
4.2 The impact on export-led SMEs – external demand shrank
The current global financial crisis resulted in deflation and affected the international import and export trade market. China’s SMEs confronted with the decline of external demand caused by the export orders were cancelled or postponed.
The number of export orders from Europe and USA dropped dramatically triggered by the current financial crisis because they were major import countries to China. Besides, the decrease of export not only affected the export-led SMEs but also the domestic supply chain such as upstream and midstream industries. Therefore, some export-led SMEs changed target market that developed toward to domestic market.
Nevertheless, export-led SMEs had to establish own brands and sale channel before entered domestic market (Ding, 2001). Chinese Academy of Social Sciences announced a SMEs development report which indicated around 67,000 SMEs stopped produce in the middle of 2008 (Chen, 2009).
Some SMEs had altered production places and manufactured goods; however, there were 60,000 SMEs which located alongside the coast folded up. Around 20 million (15.3％ of total itinerant labour force) employees who worked in cities got demission in 2008. Furthermore, according to the statistics, there was 5％ increase in unemployment rate in the beginning of 2009. (Chen 2009).
4.2.1. PEST Framework
Deng Xiaopings reforms after 2005 halted privatisation, and adopted loose
monetary policy, which led to the formation of a US style property policy
Recession after 2008 had a huge impact on SME’s and forced many to become
Disposable income fell from consumers affecting growth of the economy
Chinese consumer lifestyle change very quickly and therefore SME’s have to
focus on innovative techniques more regularly
Although Technology advances are evident in China, many SME’s behave like
price takers and imitate foreign technology rather than innovating themselves
4.3 The Financing Difficulties of Chinese SMEs
Chinese government implemented a CNY 4 trillion project which aimed to encourage the China’s economic growth in 2009 and 2010.
According to a 2009 statistic, there was a CNY162 million funds in banks which prepared to finance new projects; however, only 5％ of this fund flowed into SMEs. SMEs in China raised funds by issuing bonds and equities and made loans from banks which accounted for 1％ or less and 20％ respectively because most funds financed from the owners of enterprises and inner revenues around 50％to 60％. In addition, SMEs financed more than 70％ interim funds from non-government institutions. The shortage of funding sources led to many SMEs was going into bankruptcy (Chen 2009).
The financial crisis increased the SMEs costs of financing even though Chinese government decreased the benchmark of bank interest rates in 2008. There were still many bank supplying loans to SMEs with interest rates between 20％ and 60％ which exceeded the benchmark interest rates and asked for collateral and consulting fees (Chen 2009).
In general, the interest rates which banks lent to SMEs were above 1 percentage added to asset evaluation, financial and caution fees. The costs of SMEs finance rose by 40％ to 50％ since the financial crisis. There was an increase in input costs resulted from the rising price of raw material which rose around 11％ to 15％. SMEs could not get too many profits or suffered from loss due to these significantly increased costs.
4.4 The development of high-tech industry
According to Yizhong Li saying in May 2010, China will enhance the integration of industrialization, urbanization and informationization.
There are three measures to carry on this plan. First of all, establish state-wide network, increase communicating speed of rural areas and hasten the development of internet, computer industry and telecommunication. Secondly, in order to promote the development of 3G, e-business, electronic industry, software industry, and vary internet products and services that china will strengthen the integration of informationization and urbanization.
Thirdly, accelerate the development of information technology can advance long-established industries since it quicken information update speed and circulation (China SME online, 2010).
5. Recent innovation and actions of Chinese SMEs
There were three main innovative directions for Chinese SMEs. First of all, SMEs changed the target market from international to domestic and transformed into Own Branding and Manufacturing (OBM).
Chinese government announced several laws to support and accelerate innovation of SMEs which included the Innovation Fund for Technology-Based SMEs, the SME Promotion Law, and the Notice of Improving SMEs Loan and Credit Insurance System.
Besides, in order to help SMEs establish own brand and promote to domestic and international markets that the Ministry of Commerce raised the Foreign Trade Development Fund. In addition, the China Banking Regulatory Commission (CBRC) provided more channels to get venture capital by publishing the Guidance on Bank Loan Business to Small Enterprises. Moreover, the China Association of Small and Medium Enterprises (CASME) offered 3-billion-yuan venture investment fund to SMEs which was helpful for SMEs during the global economic recession period. Thirdly, the technological innovation was an important role for SMEs. China has already initiated sixteen main state technological innovation schemes until now (PRO INNO Europe, 2009).
The only apparent change is technology innovations that recently concentrate on developing high-tech industry and accelerate the update speed of technique. To recapitulate, there are three main direction of recent innovation. Firstly, SMEs expand internal demand due to the shrink of external demand. SMEs transform from OEM/ODM to OBM and promote their own brand to international and domestic market.
Secondly, Chinese government supports SMEs continue to do technological innovation by offering concession to science and technology industries. Thirdly, to solve the financing difficulty of SMEs, Chinese government provides huge number of funds and expands access to venture capital to support SMEs.
Actually, there exist some drawbacks behind these policies. Most innovations are led by government and the government support may go to state-owned sectors. SMEs may do not have equal opportunity and protection compare with SOEs. Although, some innovations may arise other problems, these state-led innovation advance the development of Chinese SMEs and increase the economic growth of China.
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