Introduction

Small and medium-sized enterprises (SMEs) are expected to benefit from the opportunities arising from increasing globalization and regional economic integration through greater participation in global value chains (GVCs) and global and regional production networks.1 The ASEAN Economic Community was established not only to create a single market but also to serve as a regional production base that will attract more foreign direct investment (FDI). Regional production networks are at the heart of intraregional trade and investment and are the key drivers of economic growth in ASEAN and East Asia. This phenomenon is characterized by the exports of parts, components, capital equipment and other industrial inputs to be assembled into finished goods for export.

MNCs have established these production networks with domestic firms, particularly SMEs, serving as potential suppliers of outsourced parts or services that have increasingly grown in sectors such as automotive, machineries, electronics, and garments. Participation in regional and global production networks provides SMEs with access not only to export markets but also to newer technologies. To increase their overall competitiveness in international markets, lead multinational firms provide their local affiliates and local suppliers with more rapid technological upgrading and greater attention to quality control, cost control, and human resource development.

However, participation in these production networks is not easy and there are many challenges that SMEs need to overcome in order to participate in GVCs and production networks. SMEs must be financially strong to carry out the necessary upfront investment, have the ability to comply with stringent standards and other international business practices, and are able to constantly upgrade and innovate in order to maintain their competitiveness. Given their small size and age, government support for SMEs is crucial to facilitate their productive participation in GVCs.

It is important to note that SMEs participating in production networks are different from non-participants and are often characterized by substantially higher growth and higher productivity (Aldaba et al. 2010). Given the large number of barriers that SMEs must face, making small and medium manufacturers internationally competitive is a major challenge that would require government support particularly by addressing financing, market information, business linkages, technology development, training and counselling and advice.