This article is the 11th edition of the ‘Smart Future’ column, which originally appears in the Daily Mirror Business on 6th May (Wednesday).
When nearly 90% of firms in Sri Lanka are SMEs, it is no surprise that the future prosperity of the country will depend on the extent to which the SME sector can produce high value-added goods and services that are competitive abroad and also meets the needs at home. But today, too many SMEs are producing relatively simple goods and basic services, and solely for our small domestic market. As I meet with SMEs across the country, it is becoming increasingly clear that many of the country’s small firms are not ready for the shifts in the competitive landscape that the economy will go through in the coming years and decades.
SMEs and the Middle Income Trap
As Sri Lanka begins a middle-income transition, boosting the competitiveness of this wide segment of our private sector becomes a critical part of avoiding the middle-income “trap”. Sri Lanka will find it increasingly difficult to compete against cheap labour in low-income economies, on the one hand, and with the technology and innovation driven high productivity of more advanced economies, on the other hand. I discussed this challenge with an international expert on innovation and private sector development, Dr. Nicholas Miles, recently. He has worked a lot on technology and innovation in the SME sector in Sri Lanka as part of a GIZ project. He argued that, “several countries that successfully tackled the challenge of escaping the middle income Trap – like Chile, Indonesia, Malaysia, Mauritius, Taiwan, and Thailand – provide useful lessons for Sri Lanka”. Technology and innovation have enabled these countries to make the transition from an economy based on the simple exploitation of natural comparative advantages (e.g. raw materials, low wages, etc.) to one based on the competitive advantage of its businesses. Nicholas argued that, “The technologies and innovations used by SMEs have added value to existing production and service activities and have allowed ‘business stretch’, – the development of new businesses related to existing activities through the increased product and service differentiation and sophistication”.
Technology Providers Can Accelerate Change
This transformational process can begin by supporting firms and sectors with the greatest potential for growth and scaling in the global marketplace, through a rigorous application of known technologies and incremental innovations. In this process, technology providers are crucial in accelerating change in the SME sector. But in Sri Lanka, their role seems to have been neglected so far. Nicholas observes that, “the early stages of the transformation of ‘trapped’ economies by importing and absorbing technologies and developing local innovation, improvements can be accelerated by involving foreign and local technology providers.” It is clear that a wide variety of low cost and user-friendly technologies are now available and accessible through international networks of technology providers, research and development institutes, and companies operating across the globe. Sri Lanka must find a clever way to help SMEs latch on to these networks.
Salmon Industry Transformed by Fundación Chile
We talked about several examples of successful technology transfer models in the developing world, particularly the Fundación Chile model of which he is a strong advocate, having seen it work on the ground. It is particularly relevant to Sri Lanka as it demonstrated how to transform the competitiveness of agricultural exports. Fundación Chile (FCh) is successfully supporting technology in order to upgrade SMEs in target-priority sectors, and contributed to Chile’s economic transformation. FCh was created in 1976 as a public private partnership between the Government of Chile and the company, ITT, with the aim of ‘increasing Chile’s competitiveness through innovation’. Initial funding was through an endowment of US$50 million (half from ITT and half from the Chilean Government). FCh focused on strengthening SMEs that used and demonstrated technologies that were new to Chile. Some of the successes of FCh have been remarkable. For example, FCh played a pivotal role in transforming the salmon farming industry in Chile. They sourced appropriate technologies from Scotland and Norway, and provided business mentoring and technical assistance to those SMEs receiving the new technologies. The salmon industry once small, fragmented and generating little profit become one of the successes of Chile commanding a 14% global market share of the smoked salmon business. FCh has worked with SMEs in other priority sectors of the Chilean economy (such as fruit juice and wine); most with notable success. FCh is credited with creating over US$1.3 billion in social benefits for the country.
SME Technology Upgrading – An Urgent Need
Around the country, SMEs I meet with continue to highlight their lack of access to technology. Often, the solutions they seek could be available in government research institutions and private technology providers – but these are based mainly in Colombo. Sri Lanka needs a mechanism that provides both finance as well as related technical and business support to help SMEs, especially in priority sectors and supply chains, to upgrade the technologies that they use in their business, and introduce product and process innovations. A Fundación Chile type model would work well here. It will need to be accompanied by a serious re-look at the existing institutions and technology transfer eco-system. How can institutions like ITI, SLSI, NERD Centre, etc., be re-oriented to this new approach? This must get underway soon. Having such a large segment of our private sector remaining unproductive and unsophisticated harms Sri Lanka’s overall competitiveness. The country needs ‘smart SMEs’ and we need to introduce clever institutional mechanisms to make it happen.
This is the 11th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.