Productivity and technology enhancement are viewed as key drivers of successful integration with the production networks of multinational corporations in Southeast Asia. Small and medium-sized enterprises are considered to perform better when they are allied with other SMEs or with large enterprises, including multinational corporations (ASEAN, 2015[1]). Business development services can also support this process, enabling SMEs to compete on a more equal footing with large enterprises, access new markets and increase their profits and efficiency (OECD, 2016[2]). The development of industrial clusters and business development services could help SMEs to enhance productivity and foster innovation.

Concerns about environmental degradation, quality of life and climate change are driving the global consensus on the need to ensure that economic growth is environmentally sustainable. Support for the greening of SMEs is an important component of that. Although the environmental footprint of individual small businesses may be low, their aggregate impact is significant. In the OECD area, SMEs account for approximately 99% of all enterprises and two-thirds of employment (Calogirou et al., 2010[1]). In Europe alone, SMEs account for 60-70% of industrial pollution (Miller et al., 2011[2]). Improving the environmental performance of SMEs is vital for shifting to greener economic growth.

An extensive literature supports the principle that barriers to accessing formal external finance prevent all firms from reaching their optimal size, and that greater access to a broad range of financial products can also aid innovation (Ayyagari et al (2017[1]; Aghion, Fally and Scarpetta, 2007[2]). Well-functioning financial markets that allow firms to access alternative sources of financing, outside informal finance and retained earnings allow competitive firms to invest further in tangible assets, to select more efficient organisational forms (Demirguc-Kunt, Love and Maksimovic, 2006[3]), and to ride out periods of stunted or volatile cash flow (Siedschlag et al., 2014[4]).

For most of human history, production and consumption have been tightly bundled together, as the prohibitive cost of moving goods resulted in a geographic clustering of production and people (Baldwin, 2006[1]). Baldwin and others argue that this situation was disrupted by two great production “unbundlings” that precipitated a significant expansion in global trade. The first of these unbundlings was highly aggregative, and had the effect of substantially increasing income disparities between countries – disparities that became persistent as firms in higher-productivity countries continued to innovate, scale and increase their productivity, and thus the price and quality competitiveness of their goods, via agglomeration. The theory posits that the “first unbundling” took place in two waves between 1850 and the 1980s, with a hiatus from 1914 to the 1960s, while the “second unbundling” began in the 1980s and continues to the present day. The first was triggered by a decrease in transportation costs, which allowed for a spatial separation of factories and consumers as productive firms increased the price competitiveness of their products and thus reached new customers. The phenomenon led to an agglomeration of production as competitiveness began to hinge on specialisation and achieving the critical mass required to realise economies of scale as well to develop and diffuse innovations. The second unbundling, dated to the 1980s, was initiated by huge strides in ICT adoption and sophistication that significantly reduced communication and co‑ordination costs. The net result was the ability to spatially unbundle factories and offices (Baldwin, 2006[1]) and outsource labour-intensive activities to lower-wage countries, thereby increasing price competitiveness. The second, brought about by a reduction in communication and co‑ordination costs, allowed firms in industrialised countries to take advantage of productivity-adjusted wage gaps in lower-income countries (Baldwin, 2006[1]) by unpacking their operations and beginning to “trade in tasks” (Grossman and Rossi-Hansberg, 2008[2]). This second unbundling affords firms in lower-income countries the opportunity to trade competitively Mainly on labour cost in labour-intensive activities. on global markets, with trade in turn acting as a competitive pressure to incentivise the firm to boost its productivity over time.

The institutional framework for SME policy shapes the scope and efficacy of interventions. It defines the segment of enterprises that can benefit from targeted policies and how interventions are organised. Institutions, and the laws, regulations and policies they produce, define the “rules of the game” that influence the actions and behaviour of economic actors (North, 1990[1]; Williamson, 2000[2]) and policy makers.

In a well-functioning market economy, policy makers develop rules to govern the market and maximise public welfare. These rules are designed to maintain competition and to promote positive spill overs from economic activity, for instance by supporting public investment in common goods such as infrastructure, law and order, and education (through the payment of taxes), or by mitigating negative externalities such as risks to public health and safety or adverse effects on the environment. The rigidity of these rules may vary, ranging from soft tools, such as implicit or explicit signals and communications, to progressively harder instruments, such as direct and indirect incentives or mandatory rules and regulations.

In many countries, policy makers are increasingly looking at ways to stimulate entrepreneurship in order to boost economic growth. This interest is underpinned by a theory of entrepreneurship elaborated by Kirzner (1973[1]) and Hausmann and Rodrik, among others: that the entrepreneur is a critical agent in driving the discovery process required to generate growth and equilibrate markets. Kirzner’s entrepreneur plays a role in equilibrating markets – s/he picks up on the profit opportunities that exist when markets are at disequilibrium until competition picks up and returns the market to equilibrium. Hausmann and Rodrik (2003[2]), meanwhile, have shown how, through experimentation, lone entrepreneurs can spawn entire industries. They cite the examples of garments in Bangladesh, cut flowers in Colombia and information technology (IT) in India. This theory underpins the idea that entrepreneurship generates growth by creating new economic opportunities, stimulating competition and driving productivity improvements in an economy.

The ASEAN Economic Community (AEC) has increasingly pursued an inclusiveness agenda as it steps up integration efforts, attempting to reduce subnational and regional income disparities and thereby to spread the gains of enhanced economic integration. In particular, it advocates for policies to stimulate entrepreneurship among commonly marginalised groups. This commitment is demonstrated under the equitable pillar of the AEC Blueprint, which highlights the value of targeting poverty alleviation and protecting vulnerable segments of the population through business creation and self-employment (ASEAN, 2012[1]).