The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB),
its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use.
Terminology used may not necessarily be consistent with ADB official terms.

Small vs medium vs large firms in Nepal:

Internationalization and participation in global value chains

Paras Kharel, PhD

Research Director
South Asia Watch on Trade, Economics and Environment (SAWTEE)

Presented at Conference on
Trade, Global Value Chains and Small and Medium-Sized Enterprise, Asian
Development Bank Institute (ADBI), Tokyo, 6-7 February 2020
What the research does
• Characterizes Nepali SMEs
• How do small, medium-size and large enterprises in Nepal differ from one
another?
• How do they differ from their counterparts in other developing countries?
• Differences in terms of exposure to international trade, and their
characteristics, behaviour and perceptions in a range of areas that could have
a bearing on their ability to participate in and benefit from GVCs
• Examines relationship betwn. firm size and firm performance in Nepal
• Examines Nepal’s trade and industrial policy regime
• Generates insights through three case studies
A portrait of SMEs
Contribution and general characteristics
• Share in sales of manufacturing sector: large firms 52.4%, small firms
25.6%, medium-size firms (22%)
• Share in manufacturing exports: large 75%, medium 21.7%, small
3.2%
• Share in permanent full-time manu. employment: medium 36.4%,
small 35.6%, large 28%

• SMEs more likely to have female ownership than large firms

• Small firms more likely to have female manager than medium-size
and large firms
A portrait of SMEs
Production/sales
• SMEs have lower labour productivity than large firms
• Nepali SMEs lower than have lower productivity than SMEs elsewhere
• Smaller firms have lower propensity to have international quality
certification
• Nepali SMEs as well as large firms have lower propensity to have
international quality certification than counterparts elsewhere
• Small firms in Nepal keep more days of inventory of most import
input than small firms elsewhere
A portrait of SMEs
International linkages
• Only 0.3% of firms in sample have foreign investment, with SMEs having
lower propensity than large firms. Small and medium firms in Nepal less
likely to have foreign investment than large firms
• Medium-size firms have a higher propensity to export (~ 24%) than small
firms (6%). (Overall average export propensity: 10%)
• No difference among firm-size groups: 1/3rd of exporters only export
indirectly, and those who export directly export at least 10% of their sales.
7.3% of non-exporters report considering exporting to the international
market in the next 12 months
• Nepali small and large firms have lower export propensity than their
counterparts elsewhere
• Firms in Nepal, including SMEs, have lower export intensity than firms
elsewhere
A portrait of SMEs
International linkages
• Medium-size firms take more days than large firms to clear direct exports through
customs (7.5 days versus 2.5 days)
• Propensity to use imported material inputs/supplies increases with firm size, as
does share of imported stuff in material inputs/supplies
• Among firms that use imported material inputs/supplies, large firms have a
significantly higher propensity to import them directly (89.1%) than small (39.8%)
and medium-sized firms (52.8%).
• While Nepali large and medium-size firms are significantly more likely to use
imported material inputs or supplies than their counterparts elsewhere (by at
least 23 percentage points more), small Nepali firms are significantly less likely to
use such imported stuff than small firms in other countries (by 12 percentage
points less).
• Large and small firms in Nepal are less likely to use technology licensed from a
foreign-owned company than their counterparts elsewhere
A portrait of SMEs
Human capital
• A significantly lower proportion of workers in Nepali firms, across all size
groups, have completed secondary school compared to firms in other
countries (by 19.6 percentage points to 26.6 percentage points).
• Small firms in Nepal have 10.2 percentage points higher share of skilled
production workers than small firms elsewhere.
• On average production workers in Nepali firms, whether small, medium-
size or large, have fewer years of education than firms in other countries
(by 2.6 fewer years to 4.4 fewer years)
• About 16.5 percent of firms had a formal training programme for their
permanent, full-time workers in the most recent fiscal year, with no
statistically significant difference among the firm-size groups
A portrait of SMEs
Innovation
• At 52.6%, large firms have a significantly higher propensity to introduce new or significantly improved
products than small firms (8.2 percent)
• Large firms introduced a higher number of products (4.7) compared to small firms (1.7) and medium-size
firms (2.3)
• About 26.5% of firms said the innovative product is new to the local market, 8.3% said it is new to the
national market, but none said it is new to the international market. There is no statistically significant
difference across the three firm-size groups
• About 23% of firms reported having introduced an “innovative process”, with no statistically significant
difference among the three size groups
• None of the firms said the innovative process was new to the international market
• None of the firms said the development of the innovative process entailed cooperation with a foreign
academic or research institution
• Small firms less likely to introduce an innovative marketing method than medium-size and large firms
• Only 2.4 percent of firms conducted internal R&D in the last three years, with no statistically significant
difference among the three size groups
• Small firms less likely than medium-size firms to purchase new equip., software for innovation
A portrait of SMEs
Finance
• Small firms are less likely to have a bank account than medium-size and large firms
• Small firms having a significantly higher collateral-to-loan ratio (437.4%) than medium-size firms
(270.7%) and large firms (267.7%)
• The proportion of small firms that had applied for loans in the last fiscal year was 19.7%,
significantly less than the proportions for medium-size firms (40%) and large firms (50%)
• Among firms that had not applied for any loans, small firms are significantly more likely (15.3%) to
identify high collateral than medium-size firms (3.9%) and large firms (3.3%)
• Small firms in Nepal are significantly more likely to identify high collateral requirement as the
main reason for not applying for loans (by 10 percentage points), compared to small firms in
other countries
• Smaller firms more reliant on internal funds and less on bank loans for purchase of fixed
assets/working capital
• A significantly lower (higher) proportion of financing for working capital comes from banks
(internal funds) for small firms in Nepal than for small firms in other countries (by 10 and 11
percentage points)
A portrait of SMEs
Finance (Findings from a central bank study (NRB 2019) )
• Mismatch between the term of loans that SMEs get and what they want: about two thirds of loans are short
term, while most SMEs need loans of medium to long term
• Procedural complexity, high interest rates (12.51% interest rate plus additional 1% service charge), and
collateral requirements are identified as major problems in obtaining loans from banks and financial
institutions
• During the period 2015/16 to 2017/18, loans to SMEs made up about 11.5% of the total outstanding loans of
an average commercial bank
• Most banks and financial institutions do not have their loans to SMEs guaranteed by the Deposit Insurance
and Credit Guarantee Fund. Although the SME Loan Guarantee Scheme was launched in 2009/10,
participation is lacklustre, with only three banks part of it by 2017/18, involving 530 borrowers and loans
totalling NPR 810 million (~ 8 mn USD)
• SME financing-related policies and programmes are scattered across different agencies
• The majority of SMEs are not aware of the SME Refinancing Programme, announced in 2007/08. As part of
the Programme, in an initiative launched through the Monetary Policy for the year 2018/19, there is a
provision for a refinancing facility, as project loans, for SMEs at an annual interest rate of 3 percent against a
collateral of good loans they have taken from banks and financial institutions, not exceeding NPR one million
• Potential for venture capital but full legal framework not in place. Loans from BFIs account for 16% of start-
up capital on average
Firm size and employment in Nepal
Firm size and labour prody growth in Nepal
Firm size and performance in Nepal:
Alternative specifications (with firm size dummies)
Issues in trade and industrial policy regime
• Policy provisions broad/vague; non-implementation or poor implementation
• Industrial Policy specifies various measures to assist SMEs, but not put into practice
• Concessions provided by Industrial Enterprise Act 2016 to incentivize industrialization do not particularly
favour SMEs except for registration fee and income tax exemption of five years for micro-industries
• Manufacturers face severe difficulty in claiming the incentives provided in the form of tax concessions,
export cash incentives, and duty drawback, and in most cases they remain unrealized
• Unpredictability: many of the facilities offered are revoked by each edition of Finance Act that is renewed
every year (Weak coordination among ministries)
• Tariffs on crucial intermediaries in Nepal are still high
• Effectiveness of Industrial Enterprise Act compromised by lengthy and costly procedures associated with
Environmental Impact Assessment, non-implementation of provisions like One Stop Service until recently,
lack of infrastructure (e.g., digital signature) impeding some provisions (e.g. electronic application), etc.
• One SEZ has opened (60% export requirement; tax/duty incentives), but problems to be addressed:
infrastructure, human resources, one-window unit, institutional arrangements (authority of ED)
• Potential: There are provisions that could making sourcing from domestic SMEs attractive for firms in SEZ
Insights from case studies
• Even relatively successful SMEs have inadequate capacity to meet the demands of big commercial buyers
abroad
• Attractiveness of small ‘fair-trade’ buyers
• Indirect exports by selling to domestic bigger players/handicraft outlets
• Possible to give suggestions on design (which have been heeded) to direct foreign buyers, but not to domestic
intermediaries
• Realization that dependence on a single commodity is risky (e.g., felt item producer also producing textiles from bamboo
fibre)
• Lack of skilled human resources (e.g., felting)
• Concern among handicraft producers about competition from mass-produced products. Mulling collective
trademark registration
• Domestic market a partial cushion for shock to direct/indirect exports
• Constraints to seeking out new buyers/expansion
• Participating in international trade fairs beyond one’s means
• Finance
• Managers/proprietors may not be well-versed in e-commerce to establish contact with potential buyers via such platforms
• Increasing the workforce is difficult
Insights from case studies
• Constraints facing aspiration to produce/export under own label/directly
• Finding buyers
• Sourcing consistent quality materials
• Inadequate knowledge of export procedures
• High tariffs on raw materials used to produce some handicraft products
• Dearth of skilled artisans
• Poor implementation of credit schemes/incentives
• Inadequate testing/certification infrastructure
Thank you!