Development of the Private Sector in South Asia: Addressing the Challenge for Building Competitiveness

Dr K G Moazzem
Additional Research Director, Centre for Policy Dialogue (CPD)

Professor Mustafizur Rahman

Executive Director, Centre for Policy Dialogue (CPD)

CENTRE FOR POLICY DIALOGUE (CPD) B A N G L A D E S H a c i v i l s o c i e t y think t a n k

Contents
1. Introduction and Objectives 2. Analytical Framework of Private Sector Competitiveness 3. Dynamics and Changes of the Private Sector in South Asia 3.1 Structure, Composition and Market 3.2 Policies Towards Competitive Private Sector and Their Weaknesses 3.3 Domestic Bottlenecks Impeding Private Sector 4. Supply Chains and Production Networks in South Asia 4.1 Structure of Export and Import 4.2 Major Production Networks in Operation in South Asian Countries 4.3 Challenges for Building Competitiveness in the Production Networks 5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia 6. Key Messages and Policy Suggestions

1. Introduction and Objectives

1.1 Introduction The private sector is considered to be a key player from the perspective of economic growth and development in South Asia (Figure). This is demonstrated in view of policies of deregulation and liberalization pursued by all the countries of the region In spite of the commendable growth, private sector in South Asia is beset with formidable problems and is confronted with major challenges The region remained as one of the least competitive regions Except India and partly Sri Lanka, other countries ranked at the lowest quarter.
900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 10 0 50 40 30 20
Exports of goods and services (% of GDP) Imports of goods and services (% of GDP)

Changes in Selected Macro Indicators of South Asia: 197170 2011

60

GDP per capita (constant 2000 US$) Employment to population ratio, 15+, total (%) Gross capital formation (% of GDP) Gross domestic savings (% of GDP)

1. Introduction and Objectives

At present, private sector in a number of South Asian economies are facing challenges due to slow down of domestic and global economies, political unrest and other issues
Indias economy has slowed down GDP growth rate decelerated to almost halved in two years Significant devaluation of Rupee during last 6 months Bangladesh has experienced with deceleration in GDP growth for last three years Domestic private investment (in terms of GDP) has decreased Slowdown in import of raw materials, intmediate products & capital machineries Registration of new investment projects decreased Sri Lanka's GDP grew at 6.0% in the first quarter of 2013 - slowing down from 8.0% last year and 6.3% in the 4th quarter of 2012 Pakistans GDP growth was only 3.59% in the fiscal year 2012-13

1.2 Objectives

The objectives of this study is to provide a state of affairs picture and structure of the private sector in South Asia To identify factors responsible for low level of competitiveness To put forward suggestions about possible ways to build competitive strengths

2. Analytical Framework of Private Sector Competitiveness

Private enterprises are observed mainly in manufacturing and services in South Asia Economic activities in the agricultural sector is still of subsistence nature and most such activities could not be termed as entrepreneurial ones (Ritson, 2008) Private sector covers a whole range of enterprises, ranging from those that compete globally and those that are of subsistence nature Entrepreneurship in developing countries has developed with the development of the private sector Schumpeterian entrepreneurs are those which feature the role of risk taking, managerial ability, having wealth and preferences for the control and flexibility. Enterprise level competitiveness: An ability of the entrepreneurs to offer goods and services which are competitive in price and quality, ability to respond to changes in demand quickly through offering diversified products and capacity to follow innovative marketing strategies Beyond comparative advantage to competitive advantage (Porter, 2000)

Source: Based on Porter, 2000

2. Analytical Framework of Private Sector Competitiveness

Porter (2000) delineates the Five Forces model for building competitiveness at enterprise level Given the situation of prevailing segmented markets in developing countries, Porters model could be differentiated into two segments- advanced and traditional. Development of supportive policies and institutions as a core force for building competitiveness.
Elaboration of Five Forces in the Domestic Market in Developing Countries
Potential entrants
Local Investment

FDI

Local Investment

External policies & institutions

Small

Medium

Large

Small

Medium

Local Suppliers Foreign

Domestic Industry competitors (1) Rivalry among existing firms

Small Medium Large

Domestic Industry competitors (2) Rivalry among existing firms

Small Medium

Local Buyers Foreign

National policies & institutions

Local

Imported Substitutes

Local

Source: Based on Porter, 2000

3. Dynamics and Changes in the Private Sector of South Asia

3.1 Trends in Investment in Manufacturing and Service Sectors Private sector investment has now emerged as the main driver of domestic investment in all the South Asian countries Peak in 2008 when South Asias domestic investment reached over 30% of GDP which declined afterwards mainly due to global economic slowdown after the global financial crisis Most South Asian countries have experienced rise in investment-GDP ratio Pakistan has experienced a decline in this ratio FDI has a limited share in domestic private investment
South Asia: Trends in Public and Private Investments Investment as Percentage of GDP in South Asia 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Gross fixed capital formation (% of GDP)

1990

2000

2011

Source: WDI Database, 2012

3. Dynamics and Changes in the Private Sector of South Asia

South Asian economies have experienced structural transformation Slow rise of manufacturing sectors share in GDP A growing debate relates to whether a servicesector led economic development is possible in South Asia (World Bank, 2009)?
Two group of services have been developed. Stagnant impersonal services where application of modern technologies (ICT) has tended to be lower Progressive impersonal services where modern technologies are being extensively used (World Bank, 2009). Rise of the service sector has come in the backdrop of deregulation and policy reforms. South Asias services sectors are yet to be functionally integrated with manufacturing sector to support advanced manufacturing supply chains.

Contribution of Service Sector in South Asias GDP Country 1981-90 1991-00 2001-10

Afghanistan

18.76

27.95

46.04

Bangladesh

56.27

58.86

60.54

Bhutan

30.71

40.52

53.24

India

46.48

51.79

60.99

Maldives

82.53

87.2

86.48

Nepal

48.09

52.64

55.38

Pakistan

54.03

54.14

54.84

Sri Lanka

60.95

62.03

64.54

Source: Raihan (2013)

3. Dynamics and Changes in the Private Sector of South Asia

3.2 Composition and Structure of Private Sector Enterprises Majority of enterprises are micro, small and medium enterprises. Horizontal expansion of enterprises has taken place in terms of number of establishments without major change in the pyramid-like structure Absence of vertical expansion of enterprises upgradation from micro and small enterprises to medium and large ones Rise of economic activity does not necessarily help emerging competitive manufacturing sector. Informal activity prevails both in manufacturing and services sectors.

Entrepreneurship Entrepreneurs who operate mostly small and medium scale enterprises have yet to emerge as so called Schumpeterian entrepreneurs. Indian small and medium entrepreneurs are struggling to build their entrepreneurship (Bhattacharya, 2008) Many features of developed entrepreneurship are evident in larger entrepreneurs Self employed firms are more risk-averse and less innovative (Moazzem and Kishore (2013). A large share of the enterprises operates on subsistence pressure.

3. Dynamics and Changes in the Private Sector of South Asia

Foreign-owned Enterprises in South Asia

Investment of foreign owned enterprises in South Asia has accounted for 2-3 per cent of total investment South Asia is the lowest recipient region of FDI in the world (USD 35 billion out of USD 1.5 trillion worth of global flow of FDI in 2011)
Other than India, none of the locations in South Asia are considered to be locationally advantageous to MNEs Intra-regional FDI is accounted for a miniscule share of FDI None of the country except India made a significant outward investment Despite having favourable policy environment FDI flow in the region has yet to get momentum Pre-entry treatment phase : Limited sectoral ban, different level of caps, screening, no minimum capital requirement Post-entry treatment phase: no employment requirement, limited performance requirement, allowing import of technologies, no restriction on repatriation of capital and profits, and provision of different tax incentives; repatriation of profit and dividend Consequences of tax incentives are not always positive.

3. Dynamics and Changes in the Private Sector of South Asia

Overall Observation
Lack of dynamism, expansion and upgradation of SMEs indicate that South Asian

economies have not experienced the structural changes that the developed economies have undergone.

Enterprises are yet to gain the characteristics of competitive firm as suggested by Porter (2000).

Mixed experience of economic liberalisation in the context of development of private sector enterprises in South Asia
A modern manufacturing sector is yet to emerge in South Asia. Most cater to the lower end of the demand curve, lack upgradation and integration with services sector.

Intra-industry linkages between different manufacturing industries as well as intrasectoral linkages between manufacturing and services sectors have yet to be established.

3. Dynamics and Changes in the Private Sector of South Asia

3.3 Performance of the Private Sector at the National Level Productivity of capital (C-O ratio) did not show any significant improvement in most of the South Asian countries Better in Sri Lanka, Bhutan and Bangladesh Growth in real output and employment have accelerated in the manufacturing and services sector in 2000-2006. Growth in service sector in most countries has slowed down in 2000-2006. Growth of Output/worker decelerated across the board in 2000s Indias output growth in manufacturing largely relied on growth of capital and, in services, on growth in total factor productivity; In case of Pakistan, both manufacturing and services were more dependent on growth in TFP (World Bank, 2009).
Capital-Output Ratio in South Asia
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 1981 1986 1991 1996 2001 2011 Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

3. Dynamics and Changes in the Private Sector of South Asia

Labour productivity in industrial and services sectors vary widely Labour productivity was higher in manufacturing and services sector higher than in the agriculture sector. Bangladesh has the lowest productivity in service sector Productivity differential among countries were found to be 2.5 times higher for the industrial sector (difference between highest and lowest was: US$17760) compared to the services sector (US$7170) Wide divergence in activities operates in these sectors. Productivity of service industry was higher in five South Asian countries indicating efficient and productive services over manufacturing sector.

3. Dynamics and Changes in the Private Sector of South Asia

3.4 Challenges for Developing Effectives Policies for the Private Sector

South Asian countries in general have pursued pro-private sector led development strategies backed by supportive policies and incentives. Major policies are: Industrial Policy, FDI Policy, Export-Import Policy, Competition Act, and SME Policy Major incentives include Duty waiver on import of raw materials and for export diversification Financial support for support services Provision for recruitment of foreign workers Support for international certification Subsidized credit, minimization of tax at investment stage, special scheme for export re-financing etc. A major thrust of various supports to private sector related to measures to Reducing production cost through various subsidies Providing advantages over imported products Facilitating employment generation particularly through support to SMEs Fiscal-financial support to encourage raising of productivity etc. Some support is provided at post-establishment stage. In contrast, support at pre-establishment phase for private enterprises particularly for SMEs has been rather limited.

3.4 Policies Towards Competitive Private Sector

Budgetary Support for the Private Sector A large part of budgetary support is targeted to domestic market oriented SMEs to ensure better access to capital, technological readiness, protecting their interest against imported products. Support to private sector was associated with addressing their special needs during times of emergency arising from internal and external shocks. Overall tax expenditures tend to vary widely across countries : Tax expenditures in India and Pakistan account for 4.5% and 0.4% of GDP in FY2005 respectively (Itriago, 2011; Mortaza and Begum, 2006). Competition Policy Major focus had been to contain anti-competitive practices in the form of building monopoly, price-manipulation and cartels to enable firms to operate in a levelplaying field (CUTS, 2003). Attempts have been made to address distortions in the domestic market by putting in place national competition policy Anti-competitive practices are common in international trade and these needs to be addressed through multilateral efforts. Bilateral, Regional and Multilateral Policies A number of South Asian countries which are LDCs have enjoyed preferential market access in developed and developing countries for most of their tradable products.

3.4 Policies Towards Competitive Private Sector

Challenges for Ensuring Private Sector Development through Policy Support Majority of support measures target formal enterprises only. Most of the enterprises which operate informally are often left out. Selection of preferential sectors is often found to be biased because of the pressure of different groups (Moazzem et al., 2012). Poor institutional linkages often create bottlenecks for SMEs in getting the intended support. Lack of coordination among the various involved Ministries and governments remain a major problem.

At bilateral levels often countries undertake policies particularly with a view to support domestic industries against competition of imported products or to support the domestic consumers. Non-tariff barriers are increasingly becoming an issue of concern in bilateral trade in South Asian countries. Long certification process, limited testing facilities, lack of human resource for fast trade facilitation at the border point, limited number of border points for trade etc. often increase the transaction cost of export at the regional level.

3.5 Domestic Bottlenecks Impeding Private Sector

Weakness in Macro Indicators

The bottlenecks that undermine private sector competitiveness include weaknesses relating to institutions, infrastructure, macroeconomic environment, education, skills, and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size and business sophistication and innovation Top three constraining factors which are often referred to by entrepreneurs are inadequate infrastructure, inefficient government bureaucracy, corruption, policy instability and government instability (Table) Key Constraining Factor at Micro Level Businesses face a wide range of problems which start from starting the businesses and its operation (Table) Over time significant improvements have been observed in starting a business in South Asian in terms of reduction of procedures, time and related costs. For most of the activities the experience was not found to be encouraging. Dealing with construction permit, registration, access to credit and paying taxes and undertaking trading operations involving export-import costs.

A better advantage of easier entry into business could not be fully realised because of operational difficulties faced by enterprises.

3.5 Domestic Bottlenecks Impeding Private Sector

Top-3 Major Constraints Confronting Businesses in South Asia: 2007-2011
2007 2009 2011

Country
Bangladesh

Top 1

Top2
Inadequate supply of

Top 3
Inefficient government bureaucracy Restrictive labour regulation Inefficient

Top 1
Inadequate supply of infrastructure Inadequate supply of infrastructure

Top2

Top 3
Inefficient government

Top 1
Inadequate supply of infrastructure Inadequate supply of

Top2

Top 3
Inefficient government

Corruption India Inadequate supply of infrastructure Nepal Government instability/coups Pakistan Inadequate supply of infrastructure Sri Lanka

infrastructure Inefficient government bureaucracy

Corruption Inefficient government bureaucracy Inadequate

bureaucracy

Corruption

bureaucracy Inefficient government

Corruption

infrastructure

Corruption Inefficient

bureaucracy

Policy instability Inefficient government bureaucracy

government bureaucracy

Government

supply of Corruption

Government

government

Policy instability

instability/coups infrastructure

instability/coups bureaucracy

Government Corruption Inefficient government instability/coups

Policy instability Corruption

Government instability/coups Corruption

Policy instability

Access to Tax regulation financing Tax rates Tax rates

Tax regulation Inflation

Policy instability

Inflation

bureaucracy

3.5 Domestic Bottlenecks Impeding Private Sector

Severity of Constraints according to Various Factors

Custo
Busine Acces ss Crime ms , theft and and trade

Inadeq
uately educat ed Labor Politica l

Practic
es of the Tax Transp

s to Acces licensi

inform admi al

financ s to ng and Corrup Cou disord regula Electr workf regul instabil Country
South Asia Afghanistan Bangladesh Bhutan India Sri Lanka Nepal 2008 2007 2009 2006 2011 2009

nistra Tax ortatio n

2.6 0.6 0.1 9.1 2.5 3.1 2.4 0.5

Year

e
15.7 16.8 34.9 21.7 6.5 14.1 2.5

land permits tion

5.5 12.2 4.1 2.8 3.5 9.8 0.5 2.4 0.4 0.3 7.3 1.0 6.4 0.0

rts

er
5.2 20.0 0.1 3.7 0.8 2.1 0.0

tions icity
1.5 1.1 0.5 3.3 2.5 2.7 0.4 27.6 17.9 42.7 0.6 35.2 11.4 26.5

orce ations
3.3 0.2 0.5 10.5 4.5 6.4 1.6 3.2 0.2 0.0 9.7 4.0 6.6 2.6

ity
15.4 16.4 11.4 0.2 1.5 1.0 62.1 1.2

sector tion rates

4.5 3.4 0.4 6.5 1.6 16.0 0.3 0.3 2.8 2.4 0.3 4.8 0.0 0.6

5.0 0.5 8.4 0.0 4.3 0.0 3.5 1.8 10.7 0.5 2.0 0.5 0.3 0.0

6.9 12.6 8.5 16.8 6.1 11.9 0.6 0.7 0.3 3.7

Pakistan 2007 3.9 3.6 0.0 11.7 0.5 5.5 0.9 66.7 0.7 0.1 Source: Enterprise Survey, World Bank, Different Years (available at: http://www.enterprisesurveys.org/

4. Supply Chains and Production Network in South Asia

4.1 Major Supply Chains in South Asia and Their Competitiveness Participation in the global value chain is rather limited About 51% South Asian firms used 35% of inputs of foreign origin for manufacturing output; this is indicative their moderate linkage of the global production process Major exporters are still export more resource-based and low tech manufacturing products. A considerable proportion of large firms of Bangladesh, Sri Lanka, Pakistan and India export a major share of their products in international markets Participation of small firms in the GVCs is rather limited Expansion and upgradation of value chains in South Asia has contributed to rise social upgrading related to workers rights, work place safety and security etc.
100 80 82 68 52 36 40 36

GVC participation rate

56 37

60
40 20 0

4. Supply Chains and Production Network in South Asia

4.1 Major Supply Chains in South Asia and Their Competitiveness Services export in the form of remittance sent by temporary migrant workers constitute major export of services for most of the South Asian countries 30.8% in India, 81.6% in Bangladesh, 59.3% in Pakistan and 58.3% in Sri Lanka A number of non-traditional services are also getting into services export baskets in some countries Computer services in case of India and Sri Lanka, profession and technical services in Bangladesh, Pakistan and Sri Lanka, financial services in India, sea transport freight for India and Sri Lanka, air transport for Sri Lanka. Some non-traditional services cater to the need of manufacturing sector value chains in the region. Transport, logistics, banking, insurance and ICT etc. South East Asian countries are well ahead in terms of participation in the global value chains compared to that of South Asia. Participation rate of major countries of South East Asian region is double compared to that of South Asian region. South East Asias major exporters export more of mid-level and sophisticated manufacturing products.

4. Supply Chains and Production Network in SA

4.2 Major Obstacles for Building Supply Chains in South Asia Operational Challenge Trade related barriers including tariffs continue to undermine intra-regional trade and discourage development of regional supply chains. Large number of products continues to remain in the sensitive lists of member countries in spite of the SAFTA Accord and these are traded at MFN tariffs. These lists ought to be pruned in a speedy manner based on an acceptable methodology (Moazzem, 2013). NTBs including complicated customs procedures, problems of product standardization, requirement of time consuming testing and expensive and poor border trade facilitation etc.
Logistic Challenge Poor state of trade facilitation at border points increases the lead time in

regional trade and thus undermine competitiveness of producers. A large part of intra-regional trade in South Asia is carried out through land, whilst trade with outside world is carried out mainly through waterways.

4. Supply Chains and Production Network in SA

Infrastructural Challenge

Most of the countries have experienced improvement in physical

infrastructural facilities over the years in terms of better road, port and air infrastructures. Further improvements will need to be made, particularly in terms of labour and capital productivity.
Challenges in the Business Processes Business enabling environment in South Asia is often in a poor state in South

Asia, specially in the weaker economies. Cost of business start ups is still high particularly for small and medium scale suppliers. Complex and burdensome customs procedures have also constrained these economies in participating more extensively in the GVCs (Bhattacharya and Moazzem, 2013).

5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia

South East Asian economies have advanced in the backdrop of strong growth both in manufacturing and services over the last decades Manufacturing sector contributes the major share of value added in a number of Southeast Asian economies including Brunei, Indonesia, Thailand and Vietnam. Traditional services are the major sources of value added in Cambodia, Lao and Myanmar Non-traditional services are the major sources for Malaysia, Singapore and, to some extent, in Philippines. Manufacturing sectors share has increased over time in most of the economies except Singapore, Timor-Leste and Philippines.

Sectoral Value Added in GDP

60 50 40 30 20 10 0 1990 2000 2005 Industry 2009 2010 1990 2000 2005 Services 2009 2010 ASEAN SAARC

5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia

Strong regional integration under the ASEAN Free Trade Area has significantly contributed to raising intra-regional export and import. South East Asias major services export originated from transport and travel whereas in case of South Asia major services export related to ICT (mainly India). Unlike South Asia, a considerable share of firms is owned by foreign entrepreneurs (about 10%). Large presence of the multinational companies (MNCs) in South East Asia contributes to development of production networks within and outside the region

There is a wide prevalence of corporate practices in the operation of businesses.

Strong regional value chains are in operation for a number sectors as intra-regional export of non-oil goods, manufactured goods and parts and components accounted for over 50 per cent share of total trade The share has increased over the past years.

5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia

Labour productivity in South East Asian countries are much higher compared to that of South Asian countries A well-developed manufacturing sector, which is in large part export-oriented, was able to ensure higher labour productivity both in manufacturing and service sectors. Growth of labour productivity has experienced considerable improvement in number of countries such as Indonesia, Malaysia and Thailand

Labor Productivity of Selected South Asian and South East Asian Countries, 2005
60,000

50,000
40,000 30,000 20,000 10,000 0 Total Industry

Services

Sources: World Bank (2009)

5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia
5.2 Factors Behind Better Performance of South East Asian Enterprises Favourable Macroeconomic Performance

Strong performance of the private sector in South East Asia is reflected in their sound macroeconomic indicators (De Mel and Jayaratne, 2009).
Most of the countries of Southeast Asia maintain better price stability compared to that of South Asian countries Average rates of inflation in most countries of South Asia is higher than those of South East Asian countries. In general try to keep the interest of the private sector in the purview on managing the interest rates. Several Southeast Asian countries (such as Thailand and Malaysia) follow a coordinated exchange rate policy in order to stabilize the currency against external shocks

5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia
Supportive Policies for Private Sector Development in Southeast Asia
National Policies South East Asian countries promote private sector through various kinds of incentives and supports. These incentives have been provided to different kinds of industries. The structure of incentives and supports in East Asia, from the point of view of prioritisation of particular sectors and instruments used, are significantly different compared to what is observed in South Asia. Preferential support is provided targeting more on activities than on sectors In case of sectors, number of sectors which are considered for support is rather limited. Taking into account the level of development and domestic requirement, facilities are provided more to machinery industries which are more valueadded and capital intensive industries. Enterprises operate their businesses in the backdrop of a good benchmark condition where enhancement of efficiency is the key consideration.

5. Competitiveness of the Private Sector of Southeast Asia:

Lessons for South Asia
Regional Policies Development of the private sector of Southeast Asian countries has been facilitated through a number of regional policies. Intra-regional trade has been facilitated through ASEAN Free Trade Area It has contributed to the rise in trade in goods and parts and components etc. Regional initiatives have been further extended to reduce NTBs by signing agreements for product certification and standardization. Intra-regional investment has been facilitated through a number of agreements at regional level which include Agreement on the ASEAN Investment Area (AIA). To integrate trade, investment and production-related activities within the region, it has put emphasis on three core integration schemes ASEAN Investment Area (AIA) ASEAN Free Trade Area (AFTA) and ASEAN Industrial Cooperation (AICO) Such integration of investment related schemes under strong trade integration between countries could facilitate greater regional integration and make the regional production networks more competitive.

5. Competitiveness of the Private Sector of Southeast Asia: Lessons for South Asia

Policies on SMEs ASEAN Policy Blueprint for SME Development : Strategic work programme, policy measures and indicative outputs. Mission: to develop a culture of entrepreneurship and innovation; outward looking enterprises; collaboration and networking among SMEs within ASEAN.; enhance competitiveness by facilitating programmes; strengthen the resilience of ASEAN SMEs Timeframe: Short term (3 years), medium (5 years) and long term ( over 5 years) Focus Programme and Activities 1) Human Resource Development and Capacity Building: Entrepreneurship development programme, enhancing skills in management and organisation on self-reliant basis, fostering SME capabilities for inter-firm networking, tracking and benchmarking capabilities 2) Enhancing SME Marketing Capabilities: setting up regional networks, enhancing SME capabilities in ICTs and e-commerce; tracking and benchmarking SME readiness as sub-contractors 3) Access to Financing: Capability to access to finance; financial institutions capacity building for SME financing; deepening SME access to credit 4) Access to Technology: SME technology upgrading 5) Creating Conducive Policy Environment: Simplification, streamlining and rationalisation of the procedures for SME registration

6. Suggestions for Overcoming Constraints

Suggestions Revisiting the policies targeting private sector development Policies should support development of value chains, promoting entrepreneurships and development of SMEs and corporate sector Policies should be developed for horizontal and vertical expansion of enterprises Policies should promote services which facilitate manufacturing activities Favourable macro-policies are required: exchange rate, inflation adjustment and interest rate Access to credit, policy stability, less corruption, improvement of supply of electricity and gas and other physical infrastructure Formalisation of informal enterprises in order to ensure their access to various incentives and support Strategic trade policy could be promoted with a view to achieve the targets Strong institutional linkages are required for implementing policies Participation of SMEs in the GVCs should be increased Programme for entrepreneurship development with a view to develop more Schumpeterian entrepreneurs in South Asia FDI policies should be revisited: Put more focus on pre-establishment phase SAARC countries to open up their capital accounts on a limited scale/selective basis for allowing investment in regional investment projects

6. Key Messages and Suggestions for Overcoming Constraints

Suggestions

A major constraint for prospective regional investment is very limited knowledge about investment potentials in different SAARC countries. A major area of interest of the SAARC Chamber should be to provide support to develop an institutional framework for investment cooperation.
Taking precedence from ASEAN, effective operation of SAFTA is highly important for regional value chain development Initiatives should be taken for formulating South Asia Investment Area Introduction of Industrial Cooperation Schemes Identification of regional value chains

Policies for upgradation of GVCs - product, process and social upgradation should be ensured National and global policies/measures on GVCs should be revisited Corporate structure in South Asia should be strengthened with incentives for corporatisation of firms. Corporate sector should follow market principles, basic code of conduct, business ethics and corporate social responsibility. Major chamber bodies of South Asia have an important role to play in this transformative venture.

Thank you.