Tackling An ‘F’ and Two T’s in Sri Lanka’s SME Development Drive

Sri Lanka has been talking about SME development for a long time. And trying to do something about it for most of that time too. Yet, the focus is too narrow, and a lot more refinement in the strategy is needed. Since leaving IPS I don’t work on SME issues as much as I used to, but still actively keep up with research and reading on the topic. So, a forum this week gave me the opportunity to link back to some of that work. The Konrad Adenauer Stiftung and the Pathfinder Foundation organized a one-day roundtable on ‘Social Market Economy in South Asia: German Experience and Fostering Small and Medium Enterprises in Sri Lanka’.

In my presentation to the group, I drew on several pieces of published research I was involved with on growth and competitiveness of SMEs and challenges faced. I focussed on 3 main issues – access to finance, taxation, and technology transfer.

My main messages were:

  • Finance: The role of ‘availability’ is overemphasised, while the role of ‘bankability’ is underemphasised. There has been an over reliance on rounds and rounds of concessionary loan schemes refinanced by donors as a ‘magic bullet fix’ for all SME problems. I argued that we need to a) focus more on addressing what I call SMEs’ ‘intrinsic weaknesses’ that hurt their access to finance, and b) improve banks’ SME lending competencies and products

 

  • Taxation: While it is a relatively under explored topic, some issues are becoming clear. Tax compliance among SMEs is low for multiple reasons (explained in the slides). The Government may need to consider revising tax-free threshold or at least make tax registration compulsory. Meanwhile, VAT needs better messaging among SMEs to help them understand the benefits of VAT registration (e.g. input credit). Compliance procedures/costs were found to be  burdensome and need fixing.

 

  • Technology: There is a dire need to support to access technology (primarily tech transfer) for SMEs, even before focussing on R&D (which takes more time and money). In this, both access to an ecosystem and access financing need addressing. I advocated for setting up a ‘clearing house’ for SME technology access like Steinbeis in Germany.

 

View the full slide set below:

What does a global logistics CEO think about Sri Lanka?

The global CEO os DHL shared his take on Sri Lanka in a recent interview published in the DailyFT. Very revealing, coming from someone who sees the growth trajectory, economic performance, and strengths of countries around the world. For me, these four points stood out in terms of what he thinks of Sri Lanka:

  1. He believes that Sri Lanka’s high literacy and English skills will help to attract more FDI
  2. He is impressed with the infrastructure like the airport expressway and advocates for more infrastructure investments
  3. He called for more opening up of the market (possibly referring to trade liberalisation) and easing up+digitalisation of border processes
  4. Sri Lanka’s geographic location makes it a “good gateway to India or as a stopover port to Europe or Africa”

I particularly love his comments on streamlining border processes, which is very much in line with what we, at the Chamber, have been pushing on trade facilitation reforms.

People see border processes sometimes as income streams for the government, which is wrong. It’s complex, which leads to compliance issues, which are often unnecessary. At the end of it, it all generates costs. If you do these things from a business sense, where you have a good port, good development to renew the runway successfully at the airport, that’s important.

The full interview can be read here – http://www.ft.lk/article/612896/Deutsche-Post-DHL-Group-CEO-s–things-to-do–list-for-Sri-Lanka

In reading his interview, I also got to know about an interesting index that I never knew existing – the DHL Global Connectedness Index; an annual look at global trade connections. In a sense, its also a proxy review of the state of globalisation. It has great infographics (like this one below) on the ‘most connected countries’ in terms of trade flows and also ‘globalisation hot spot cities’. If Sri Lanka is to be a serious contender as a regional Hub for business and trade, we should look at what made these countries and cities become ‘hot spots’ and align our policies and action plans accordingly.

The full 2106 report is available here.

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Turning point for retail?

According to a new report on the US retail sector, brick and mortar stores are haemorrhaging money as e-commerce dominates the retail scene more than anticipated by big retailers like Macys and Sears. Apparently, “the US retail industry is on pace to close more stores this year than the 6,200 shuttered during the Great Recession in 2008“. This is yet another symptom of the tectonic shifts taking place in nearly every industry on account of technology. It’s no surprise that e-commerce, probably one of the most basic manifestations of the shifts driven by technology, is causing upheaval in basic sectors like consumer retail.

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Despite the flux in the sector, I feel that rather than an outright end of brick and mortar retail, what would happen is a proliferation of different models of brick and mortar retail  and diverse in-store experiences that complements, not competes with, e-commerce. Immersive tech-driven stores, stores that help personalise the shopping experience, in-store virtual fitting rooms together with a shopping advisor that is then connected to an e-commerce shopping basket, etc….

The full article is at Quartz here – “US retailers are on pace to close more stores in 2017 than in the 2008 Great Recession”

Meanwhile, large format retailers like Walmart are also feeling the pinch, not only due to low cost competitors like the hugely successful German chains Aldi and Lidl that have made inroads in the US, but also due to online retailers like Amazon. Operating profits for US supermarkets have declined by about 5% last year, according to Moody’s Investor Service. Walmart’s strategy to compete has been based on aggressive cost and price cutting. Wolfe Research recently found prices for a basket of grocery items at Philadelphia area Walmart stores were 5.8% lower than a year ago, while those in Atlanta and Southern California were 4.9% and 2.7% lower respectively.

This is part of a larger trend; groceries in the US fell by 1.3% annually last year – apparently the steepest decline since 1959. This is of course good news for US consumers, as consumer surplus widens and Americans can enjoy a higher standard of living for a lower cost. But it puts huge pressure on brick and mortar supermarket firms, and by extension their employees, who are likely to get squeezed on the wages side. With President Trump likely to toughen his stance on Chinese imports – which have been a primary contributor to low costs at supermarkets for American consumers – it will no doubt be a few years of flux for any firm engaged in retail – both from a technology perspective as well as from a trade policy perspective.

Public funds to spur science-industry collab?

There’s a lot of discussion right now in the econ policy circles about how to strengthen the innovation eco-system in Sri Lanka to boost export competitiveness. In this, a particular focus is on better research-industry, or science-industry, linkages with the right mix of incentives. A new World Bank paper that studied the effect of government subsidies on spurring science-industry collaboration found that government support did help and that it did spur new discovery and did not “just pay firms and researchers to do what they would have done anyway”, an important principle called additionality.

As a blog article on the paper notes,

Efforts to foster collaboration between science and industry have long been a part of innovation policy in many countries. Firms stand to benefit from accessing the specialized infrastructure and expertise available in universities. Researchers gain access to practical problems that can provide greater relevance for their research, and to industrial capabilities for manufacture and assistance in commercializing their ideas to take them to market. Yet, there are barriers that inhibit collaboration, including financing constraints, information asymmetries, and transaction costs in negotiating collaboration agreements. Government subsidies may foster increased interaction between firms and scientific units. 

The full paper can be accessed here.

A new World Bank project, funded by the Australian government, aims to strengthen the innovation eco-system to improve trade and competitiveness of the country’s private sector. More info about it here.

I have studied the university-industry interaction system of University of Moratuwa and found some remarkable best practices that can, and should, be replicated across the public university system in Sri Lanka. In a previous post on this blog, I highlighted three ways in which we can do this.

University-Business Linkages: 3 Ideas for Taking them Beyond Moratuwa

 

Industry 4.0: Beyond a Name

There’s been a lot of writing on the ‘Fourth Industrial Revolution’ or ‘Industry 4.0’. Nearly a year ago, I wrote about how this technological shift is ‘changing the world of work’.

This new article debates whether this is all hyperbole or what it really means for business. The article argues that for businesses to truly leverage on the fourth industrial revolution, the “devil is in the details” and the focus needs to be on the ‘mechanics’ of making it work, not just the big ideas at play…

The future is very promising and certainly there is value in Industry 4.0, but each company has to decide what it wants and find the most cost effective route to get there. In my experience a series of small incremental steps will be far more effective than trying to get to the destination in one leap.

World Economic Forum founder and Chairman Klaus Schwab has been one of the foremost champions of the ‘Fourth Industrial Revolution’ as a force for good if managed right. I’ve read his book (same title) where he reviews the biggest technological shifts taking place today and likely to take place in the future and discusses how it will shape business, society, culture, governance and humanity as a whole. Do try and get a copy, or read this well-written summary authored by him, here. Schwab has argued for a truly collaborative and multi-stakeholder approach to making Industry 4.0 work for good. In the book he argues,

[…] we must develop a comprehensive and globally shared view of how technology is affecting our lives and reshaping our economic, social, cultural, and human environments. There has never been a time of greater promise, or one of greater potential peril.[…] In the end, it all comes down to people and values. We need to shape a future that works for all of us by putting people first and empowering them. In its most pessimistic, dehumanized form, the Fourth Industrial Revolution may indeed have the potential to “robotize” humanity and thus to deprive us of our heart and soul. But as a complement to the best parts of human nature—creativity, empathy, stewardship—it can also lift humanity into a new collective and moral consciousness based on a shared sense of destiny. It is incumbent on us all to make sure the latter prevails.

Read ‘The Fourth Industrial Revolution: what it means, how to respond’

PM Says Apparel Exports Are No Longer Viable. I Disagree.

If a recent Daily Mirror news report is anything to go by, and has accurately reported his speech, the Prime Minister has stated that Sri Lanka has no future in apparels exports. The article cites a speech made by the PM at a school science exhibition, in which he has drawn from a Harvard University study done for the GoSL that has come to this conclusion.

“We asked the University of Harvard to carry out a study on Sri Lanka’s economy. The university in turn informed us that Sri Lanka should not rely on importing* apparels any more. This is a correct assessment as Sri Lanka cannot compete with countries such as Bangladesh, where the wages are lower. Therefore we need to concentrate on new export items such as electronics. We can even start manufacturing parts for mobile phones or robotic machines,” the Prime Minister said.

*seems like a mistake, and meant to be ‘exports’

I think this is an ill-informed and inaccurate statement to make. A strong cohort of Sri Lankan apparel firms are demonstrating unique and groundbreaking new capabilities in the apparel industry. True, Sri Lanka is no longer (and for a while now) competitive in the low value apparel exports (simply, ‘stitching’ operations). These are now done by Bangladesh, Cambodia, Vietnam, Laos, etc. But Sri Lankan apparel exporters have evolved substantially to be holistic service providers in the apparel industry; to be design- and technology-led apparel firms; and to co-create new products, including with wearable technology and smart fabrics. Successful apparel exporters are understanding how the retail arena in the industrialised West is shifting sharply, and are catering to that. Many are embedded deeply in supply chains, which are sticky on prices and so Sri Lanka is shed that easily. Lankan apparel firms are innovating in new product spaces of fast fashion and ‘athleisure. Sri Lanka’s leading apparel manufacturers are linked into those brands and supply chains, as I noted in a speech at the British High Commission shortly after Brexit. Ultimately it all depends on which partnerships Sri Lankan firms have – good brands that are on the right trends, and in this, Sri Lankan firms are doing well. So, the PM’s remark about Sri Lanka losing out to Bangladesh, might be true only of a few firms still pitching at a lower level, but certainly not true of the more innovative apparel exporters.

He has also said that, according to Harvard, we should ignore apparels and shift to electronics. Just because electronics exports sounds more value added, a ‘cool’ sector to engage in for the economy to, and is indicative of ‘going up the value chain’, Sri Lanka should be more concerned with more meaningful metrics – for instance, how much value is getting captured in Sri Lanka? are we able to latch on to lucrative production networks (also known as supply chains); what are the multipliers? Because then, high-value, innovative apparel exports could prove to be as value capturing as electronics. And even in electronics, theres a whole spectrum – from low value to high value. Simply saying “Sri Lanka should focus on electronics exports” is not good enough. We don’t want to end up doing simply assembly – which we probably couldn’t compete in anyway, given labour and other input costs that make us less competitive than others in the region.

Of course, there are a host of electronics manufacturing firms producing high quality exports for the international market. We need to look at what they do, why they find SL attractive to operate in, and how we can attract more such firms and growth that industry. But there is no reason why it cannot sit alongside apparels exports, at the higher value end of the spectrum.

Very few Sri Lankan firms do simply stitching operations anymore. I hope the Prime Minister visits some of these industries and learns about the super-innovative things that our apparel exporters are doing – they truly are trailblazing. This insight will help complement the information he is getting from the Harvard studies. Then he may change his belief that ‘apparels is no longer a viable export industry’ and not do injustice to the tens of thousands of folks in this sector in Sri Lanka today, working hard to export millions of dollars of exports for the country.

Discerning, and Supporting, ‘Transformative Subsistence Entrepreneurs’

At a recent conference organised by Monash University and Institute of Policy Studies, a fellow panelist in my session – Prof. Srinivas Sridharan – made a presentation that changed my understanding of informal entrepreneurs. Srinivas, an Associate Professor at Monash University’s School of Management presented his research on micro-entrepreneurs and subsistence entrepreneurs in 3 countries, including in India. He spoke of a new framework through which to think about these entrepreneurs. I found it compelling, and can help change how we think about bottom of the pyramid customers.
The main takeaway for me was that we have to identify the ‘transformative subsistence entrepreneurs’ from the rest, and help them grow. The main point Srinivas made was that identifying this particular type of subsistence entrepreneur isn’t simply by their income alone – other metrics that determine/predict their success, come into play.
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Srinivas argued that subsistence entrepreneurs are a heterogeneous marketplace. There are:
a) ‘Ordinary’ subsistence entrepreneurs
b) ‘Stability-seeking’ subsistence entrepreneurs
c) ‘Transformative’ subsistence entrepreneurs
It is c) who we need to take a closer look at. He noted that there are 3 characteristics of ‘Transformative Subsistence Entrepreneurs’
1. They experience an income spike (as they are able to move beyond ‘stability-seeking’)
2. They have personal agency – i.e., they have more control of their activities, their business, and are more aware of their rights and ability to navigate processes
3. They contribute to community growth – they employ more people, they have stronger local supply links with other micro-entrepreneurs in the community
The transformative story of these entrepreneurs isn’t so much about income at all, it is more about the increase in their personal agency and increase in community links/community growth.  They have ‘embedded assets’ – not from outside, but from within (i.e., inherent strengths)

In Conversation with Shanaka Fernando, a trailblazing social entrepreneur in Australia

Today I had the pleasure of moderating a session with the trailblazing social entrepreneur, Shanaka Fernando at the ‘International Conference on Social Enterprises & SMEs for Sustainable Development and Poverty Reduction’. Shanaka is Lankan-born and grew up in Australia, and is the Founder of ‘Lentil As Anything’, a unique social enterprise that now spans seven restaurants in Australia and beyond. He has been recognised as an ‘Australian of the Year – Local Hero’ in 2007. As the awards honour roll mentioned, Shanaka has shown that “a commercial enterprise can operate in a socially responsible and altruistic way. ‘Lentil as Anything’ is a bold social experiment that respects difference, promotes trust and defies a consumerist society.”. His model is based on a commercial enterprise with a people-centric ethos, where goodness, generosity, dignity, and business savvy come together to form a unique venture.

In our conversation (audio embedded below), we talked about Shanaka’s personal journey that brought him to where he is today and work on what he is working; his people-focussed philosophy and how that translates into his business; what ‘Lentil As Anything’ is and how the model works; and what top messages he has for Sri Lankan social entrepreneurs. He was a treat to speak with, and it was a refreshing and inspiring post-lunch session. I started with something that had been written about him, and then we took it from there,

“He’s been declared bankrupt, had his business liquidated, and been taken to court by the Australian Taxation Office. He’s had his passport suspended and his bank accounts frozen. He’s even been threatened with jail over unpaid parking fines. In some eyes, all of that would make Shanaka Fernando an inveterate troublemaker, a man who acts as if he is somehow exempt from the laws that most of us live by. But in his own view, and in the view of many others, he’s just trying to shake things up a little, for the good of us all.”

For the audio recording of the full conversation, click play below.

(image courtesy Chandula Abeywickrama, Lanka Impact Investing Network)