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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.

Impact of Global Value Chains (GVCs) on Performance


of Small and Medium Enterprises (SMEs) in Sri Lanka

N.P. Ravindra Deyshappriya


Senior Lecturer, Faculty of Management, Uva Wellassa University of Sri Lanka.

B.C.H. Maduwanth
Lecturer, Faculty of Agriculture, Uva Wellassa University of Sri Lanka
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Content
 Introduction
 Problem Statement
 Literature Review
 Methodology
 Results & Discussion
 Conclusions & Recommendations

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Introduction
What is Global Value Chain (GVC)?

GVC refers to the full range of cross-border, value-added business


activities that are required to bring a product or service from the
conception, design, sourcing raw materials, and intermediate
inputs stages to production, marketing, distribution, and
supplying the final consumer (ESCAP, 2009)

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Introduction
What is Global Value Chain (GVC) Cont.

 GVC means a value chain that operates in more than one


economy (APEC. 2010)

 GVC indicates a fragmentation of production process and the


international dispersion of tasks and activities within them
have led to the emergence of borderless production system
(UNCTAD, 2013)

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Introduction: The Process of GVC

Figure 01: The process of Global


Value Chain
Source: Abe (2015)

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Introduction
Small & Medium Enterprises (SMEs)
 The term SME is used to denote micro, small and medium
enterprises

 Different countries use different definitions for SMEs based


on different dimensions
 The commonly used yardsticks are
– total number of employees
– annual turnover and
– total investment
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Small & Medium Enterprises (SMEs)
 In the Sri Lankan context, SME classification based on the
number of employees and annual turnover.
Table 01: Defining SMEs in Sri Lanka
Manufacturing Sector Service Sector
Company category Number of Annual Turnover Number of Annual Turnover
Employees (Million) Employees (Million)
Micro 1-10 ≤ LKR 15 1-10 ≤ LKR 15

Small 11-50 ≤ LKR 16-250 11-50 ≤ LKR 16-250

Medium 51-300 ≤ LKR 251-750 51-200 ≤ LKR 251-750

Source: National Policy Framework for SME Development, Ministry of Industry and Commerce, Sri Lanka

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Problem Statement Global Value Chain

 National policy towards SME development has considered five key


dimensions of sustainable SME development
However, impact of linking with GVCs has not been addressed
6/02/2020 8
Objectives of the Study
1. To recognise and profiling the SMEs in the Uva and Central
provinces of Sri Lanka

2. To examine the economic impact of GVCs on the performance of


SMEs in the Uva and Central provinces of Sri Lanka

3. To recognize potential local business sectors and their intention


on linking with GVCs

4. To identify key challenges and key success factors in relation to


linking with GVCs.

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Literature Review
Challenges face by SMEs in Sri Lanka
 Key challenges face by SMEs in Sri Lanka are lack of access to finance
(Nanayakkara (2011) and non-financial barriers such as lack of technology and
managerial skills (Abeyratne (2006)

 According to Esim (2001) lack of access to market opportunities, suffer from


lack of know-how to market their products in domestic and international
markets are some of challenges

 The lack of business development services, inadequate research and


development facilities, quality certification at district level and the linkage to
export markets not being readily available are another set of challenges.
Athukorala (2017)

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Literature Review
Impact of linking with GVCs on SME Development
 Participation in GVCs produce various benefits allowing superior
performance in their own markets by combining national and international
intermediate inputs, and by creating economies of specialization and
benefit from knowledge and technology spillovers (OECD, 2012)

 According to Yuhua & Bayhaqi (2013) SME sectors identify one of positive
and influencing factors in economic growth specially in fast growing
economies

 Consequently GVCs provide solid platform to sustainable economic growth


and development of local economies and businesses through SME sector
participation
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Methodology
Study Area
– Uva and Central Province of Sri Lanka
– Four districts - Badulla, Monaragala, Matale and Nuwara Eliya

Data collection
– Enterprise survey with 329 SME holders (Snowball Sampling
Technique)
– Focus Group Discussions (FGDs) - 4
– Key Informant Interviews (KIIs) - 8

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Conceptual Framework
Dependent Variable Independent
(Y) Variables(Xs)

X1 - Global Value Chain (GVC)


SME Performance X2 – Sales Revenue
(Profit of the firm) X3 – No of trained employees
X4 – R&D Expenditure
X5 – Total Capital
X6 - No of workers
𝒍𝒍𝒍𝒍𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝒊𝒊 = 𝜷𝜷𝟎𝟎 + 𝜷𝜷𝟏𝟏 𝑮𝑮𝑮𝑮𝑮𝑮𝒊𝒊 + 𝜷𝜷𝟐𝟐 (𝑮𝑮𝑮𝑮𝑮𝑮𝒊𝒊 × 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 ) + 𝜷𝜷𝟑𝟑 (𝑮𝑮𝑮𝑮𝑮𝑮𝒊𝒊 × 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 ) +
X7 –Level of education (SME holder)
𝜷𝜷𝟒𝟒 (𝑮𝑮𝑮𝑮𝑮𝑮𝒊𝒊 × 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 ) + 𝜷𝜷𝟓𝟓 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 + 𝜷𝜷𝟔𝟔 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 + 𝜷𝜷𝟕𝟕 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 +
X7 – No of years in the industry
𝜷𝜷𝟖𝟖 𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 + 𝜷𝜷𝟗𝟗 𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 + 𝜷𝜷𝟏𝟏𝟏𝟏 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 + 𝜷𝜷𝟏𝟏𝟏𝟏 𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒍𝒊𝒊 + 𝜷𝜷𝟏𝟏𝟏𝟏 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝒊𝒊 + 𝑼𝑼𝒊𝒊
X8 – Type of SME

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Research Method
Data Analysis
Employed both Econometric and Descriptive Analysis
Table 02: Dependent and Independents variables of the study
Variable Name Explanation Expected Sign
Profit Annul profit of the firm
GVC Dummy variable for Global Value Chain Positive when GVC = 1
GVC=1 for SMEs who are engaged in GVC
GVC=0 for SMEs who are engaged in GVC
lnSL Log of annual sales revenue Positive
lnTR Log of number of employees who are trained annually Positive
lnRD Log of share of R&D expenditure in total revenue Positive
lnK Log of total capital of the firm Positive
lnL Log of number of workers Positive
lnHC Log of the level of education of SME holder Positive
lnAGE Log of number of years in the industry Positive
TYPE Dummy variable for Type of SME Negative when TYPE = 1
TYPE=1 for Small
TYPE=0 for otherwise (Medium and Large)
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Source: Developed by authors based on literature survey
Results & Discussion

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Profiling the SMEs: Gender composition of SME holders
On average, female entrepreneurs are lower than that of males and this
trend is more pronounced in the Nuwara Eliya district. (20% female)
Figure 02: Gender composition of SMEs in four districts
90 84 85
81 79
80
68
70

60
Number of SMEs

49
50 46
42
39
40 35 33
30

20 17

10

0
Badulla Monaragala Matale Nuwara Eliya
Female Male Total

6/02/2020 Source: Created by authors based on enterprise survey 16


Profiling the SMEs : Age structure of SME holders

It is apparent from the table that the average age of SME holders is
between 40 – 49 years for any type of SME
Table 03: Age composition of SME holders in four districts
Age
Districts Type of SME Mean Mode Maximum Minimum

Agriculture 40.65 29 61 20
Badulla Industry 44.33 39 72 24
Service 44.67 52 55 28
Agriculture 44.68 31 76 25
Matale Industry 41.77 36 69 22
Service - - - -
Agriculture 45.61 32 66 21
Monaragala Industry 43.00 39 73 26
Service 48.80 31 67 31
Agriculture 42.78 50 57 22
Nuwara Eliya Industry 42.60 54 59 23
Service 40.44 43 59 28
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Source: Calculated by authors based on enterprise survey
Profiling the SMEs: Educational attainments of SME holders
The average years of schooling is between 10 – 14 years for any
type of SME
Table 04: Years of schooling of SME holders in four districts
Districts Type of SME Years of Schooling

Mean Mode Maximum Minimum

Badulla Agriculture 13 14 19 8
Industry 13 12 19 0
Service 13 14 15 11
Matale Agriculture 14 14 19 12
Industry 12 14 15 4
Service - - - -
Monaragala Agriculture 10 14 15 0
Industry 12 12 18 5
Service 11 12 14 7
Nuwara Eliya Agriculture 10 12 18 0
Industry 10 12 18 0
Service 12 12 14 7
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Source: Calculated by authors based on enterprise survey
Profiling the SMEs: Average income of SME holders
The highest income was recorded in industrial related SMEs in the
Monaragala district while lowest from agriculture related SMEs Matale
Figure 03: Average income of SME holders

Service
Nuwara
Monaragala Eliya

Industry
Agriculture

Service
Industry
Agriculture
Matale

Service
Industry
Agriculture
Badulla

Service
Industry
Agriculture
0 50000 100000 150000 200000 250000 300000 350000 400000 450000 500000
6/02/2020 Source: Created by authors based on enterprise survey 19
Profiling the SMEs: Average income of SMEs by type of business
Table 05: SMEs’ average income by type of business

Type of business Mean Income


(Monthly) Hotels and homestays account for
the highest average monthly income
Agriculture, farming and livestock 224,904.88
(Rs.973,077) followed by food and
Arts and crafts 86,006.94
Apparel and bags 298,193.88
beverages (Rs.552,422)
Auto parts and maintenance 68,750.00
Food and beverages 552,422.22 In contrast, businesses such as
Hotels & Homestay 973,076.92 making household items have the
Cement and metalwork 87,295.45 lowest monthly income (Rs.39,143)
Furniture 182,727.27
Salons and spas 79,714.29
Household items 39,142.86
Other 273,408.33

Source:
6/02/2020Calculated by authors based on enterprise survey 20
Impact of GVCs on the performance of SMEs
Variable Name Model 01 Model 02 Model 03
Number of Observations = 329
GVC 0.8091*** 0.7863*** 0.7231***
(0.1321) (0.2314) (0.2256)  Three models were estimated by adding different
lnK 0.7732*** 0.6352** 0.6733**
(0.2124) (0.2931) (0.3167) independent variables gradually in order to check
lnL 0.2341*** 0.2031** 0.2122** the robustness of the relationship between GVC
(0.0814) (0.0987) (0.0923)
lnHC 0.0813** 0.0736** 0.0675 and profit of SMEs
(0.0387) (0.0352) (0.1064)
lnSL 0.8056** 0.7863**
(0.2787) (0.3848)
 Estimated coefficients for GVC in all three models
lnTR 0.0245** 0.0271 are positive and statistically significant at 1%
(0.0109)
0.0223*
(0.0324)
0.0127
level. this relationship is consistent even when the
lnRD
(0.0116) (0.0267) models are controlled by other characteristics of
lnAGE 0.8201
(0.8971)
0.7861
(0.9171)
firms.
TYPE -0.1897*** -0.2787**
(0.0621) (0.1072)  Apart from the direct, indirect effects of GVC
GVC x lnSL 0.2018**
(0.0827)
(both interaction terms (GVC x lnSL) and (GVC x
GVC x lnTR 0.0626 lnRD)) have positive coefficient and also
(0.7871)
0.0876**
statistically significant at 5% level
GVC x lnRD
(0.0372)
Constant 12.7161*** 8.8971*** 6.6371***  The estimated models are statistically significant at
(0.9781) (0.8181) (0.8761)
R2 0.4582 0.5672 0.7762 1% level and also have higher R2 value in model 03
Prob on F 0.0000 0.0000 0.0000 (0.7762) representing higher level of goodness of
6/02/2020 fit. 21
Recognizing Potential Local Business Sectors for GVCs
Potential local business sectors According to KIIs, five main business
Figure 04: Recognized potential local business sectors to be linked with GVC sectors such as information technology,
apparel, gems & minerals, tea, other
Information Technology
agricultural products and handcraft
73 18 6 21
were recognized as the most potential
Apparel 73 17 2 5 3
sectors.

Both information technology sector


Gems & Minerals 68 15 9 3 5 and apparel sectors are seemed to be
the sectors with highest potential for
Tea 62 24 5 7 2 GVC (73%)

Other Agriculture Products 58 15 12 7 8 68% and 62% of the respondents have


mentioned both gems & minerals and tea
Handcraft 40 35 11 9 5 sectors respectively have higher potential
to link with international market
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Higher Potential Moderate Potential Neutral No Potential No Potential at all
Only less than 5% indicated ‘no potential’
Source: Created by authors based on KIIs and Survey
for linking with GVC.
6/02/2020 22
Recognizing Potential Local Business Sectors for GVCs
Intention of potential business sectors on linking with GVC
Figure 05: Level of intention business sectors on linking with GVC
69% of information technology related
Information Technology 69 20 2 4 5
SMEs and 67% of apparel related SMEs
reported that they have ‘higher
Apparel 67 18 3 7 5
intention’ related to linking with GVC

Gems & Minerals 65 21 3 5 6


65%, 62% and 60% of SME holders
Tea 62 23 3 7 5
respectively in gems & minerals, tea
and other agricultural products sectors
have reported higher intentions to link
Other Agriculture Products 60 22 6 10 2
with GVC
Handcraft 45 32 5 15 3
Comparatively lower but still 45% SME
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% holders in handcraft producers have
Higher Intention Moderate Intention Neutral No Intention No Intention at all intentions to link with GVC
Source: Created by authors based on KIIs and Survey
6/02/2020 23
Challenges related to Linking with GVC
Figure 06: Key challenges that SMEs face when expanding their business globally
Lack of access to finance 42 34 18 4 2
Lack of technology 40 28 15 11 6
Lack of information 34 23 20 15 8
Unable to meet quality standards 32 36 18 10 4
Unable to produce quantity required 28 28 23 15 6
Current product is not popular in global market 16 24 30 14 16
Lack of government support 20 34 16 18 12
Lack of infrastructure 23 35 23 12 7
Lack of skilled labour 18 37 27 12 6
Legal barriers related to international market 17 29 23 22 8
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Severe Challenge Challenge Neutral Not a Challenge Not a Challenge at all

Source: Created by authors based on KIIs and Survey


 The current study recognized 10 main challenges  Apart from that, both outdated technology and lack of
that SMEs face when they attempt to link with information essentially restrict SMEs participation in GVC
GVC
 Among these challenges, unable to meet the quality
 lack of access to finance, lack of technology and
standard and also demanded quantity by the international
lack of information can be recognized as the
market are also mainly due to lack of technology
three key challenges
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Key Success Factors related to Joining with GVCs
Figure 06: Key success factors which promote SMEs’ link with GVC
Ensuring Quality of Products 64 28 4 22
Availability of Skilled labour 62 13 10 12 3
Better access to finance 62 23 5 5 5
Access to better technologies 58 23 9 7 3
Ability to produce at low cost 53 25 15 4 3
Access to Business Development Services 51 34 10 3 2
Awareness related to international trade procedures 51 32 12 3 2
Ability of doing innovations 48 31 12 7 2
Better access to information related to global market 46 27 12 5 7
Availability of institutional support 42 23 17 13 5
Networking with foreign partners 42 28 17 5 8
Networking with reputed local partners 32 26 23 12 7

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Very Important Important Neutral Not Important Not Important at all

Source: Created by authors based on KIIs and Survey


Current study recognized 12 success factors which Access to better technologies and ability to produce at low cost are also
every SME should focus in order to ensure linking recognized as ‘Very Important’ by 58% and 53% of respondents respectively
with GVC
Ensuring higher level of quality, availability of skilled In addition to above highlighted success factors, awareness related to
labour and access to better finance have become the international trade procedures, ability to doing innovations, better access to
most crucial success factors which can push SMEs information related to global markets, institutional support, networking with
into GVC6/02/2020 both local and international partners are also recognized as ‘Very Important’
25
factors by more than 30% of the respondents on average.
Conclusion
 The current study focuses on the impact of GVCs on the
performance of SMEs in Uva and Central provinces of Sri Lanka
 Majority of entrepreneurs are male. The average age of SME
holders is between 40 – 50 years of age
 Highest income generating SMEs are related to industry sector
while business type records as Hotels and homestays
 SMEs which are linked with GVCs have higher level of profit
compared to the SMEs which are not linked with GVCs

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Conclusion
 Information technology, apparel, gems & minerals, tea, other
agricultural products and handcraft are the most potential
sectors for link with GVCs

 lack of access to finance, lack of technology, lack of information


are most critical challenges to link with GVCs

 Ensuring quality of products, availability of skilled labour, better


access to finance are key success factors that enable SMEs to link
with GVCs

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Recommendations
 Strongly recommend to government, non-government organizations
and policy makers to encourage SMEs to participate GVCs by allowing
them to grow as internationally competitive entrepreneurs
 Ensure solid public-private partnership in order to inculcate
entrepreneurial culture in the society
 Provide advanced technological know-how, better financial facilities,
symmetric and efficient information and awareness on GVCs and
production networks, required infrastructures, appropriate BDSs,
training programs to develop human capital capabilities to enhance
the SMEs’ potential of linking with GVCs.

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• Thank you
• Ayubowan

Thank you
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