Regional Financial Cooperation of SMEs' Financing in the Asia-Pacific: Lessons from the EU

The recent downturn in the global economy is demanding new growth models from APEC members, and SMEs are expected to play a crucial role in raising productivity and in sustaining economic growth by facilitating technological advances, as well as in job creation. Given that SMEs have generally limited access to finance due to information asymmetries and the riskiness of their businesses, public support by government such as credit guarantee schemes (CGS) are a very important tool for supporting SMEs. SMEs at early stages of development (or start-ups) have risk profiles that favor equity financing or financing through the capital market. For this to work, however, the "law of large numbers" must apply. This method of financing is not appropriate for small markets. Therefore it will work best in a developed equity market such as that of the US. When the conditions above do not hold, two alternatives are possible. The first option is to realize the law of large numbers in an inter-temporal way. This gives rise to the need for a policy lending program (or government credit) resembling a typical European-style policy financing scheme. Second option is to expand the financial market. For this to work, establishing universality of contracts through economic integration is necessary. Universality of contracts mean equal protection of property rights for incoming foreigners who enter into contracts in the host country. In this case, capital inflow is also needed from countries outside the integrated economic bloc. EIB (European Investment Bank) aims to implement the EU's SME Initiative through its SME support programs. The European Investment Fund is responsible for allocating SME capital to stimulate the SME sector, on behalf of the EC. The experience of the EU points to the necessity of non-bank financing programme to add to bank financing for SMEs. Thus EIF is also shifting its focus from provision of early-stage guarantees to development of various capital market-based instruments for SMEs. This study ends with suggestions for APEC regarding SME financing policies. First, PCGS (public credit guarantee system) is better in the very early stages of financial cooperation. Second, SME financing policy should include both CGS-style and market-based financing. Third, it is necessary to settle on a definition of SMEs based on unified criteria. Fourth, a PCGS-style support scheme is needed to develop within the APEC framework. Lastly, an equity market-based support system specialized for SMEs should be established. This report also suggests action plans to make an Investment fund centered on SMEs.