Today, while SMEs are growing in significance in most emerging economies, SMEs remain under-represented in international trade, accounting for only one quarter to one third of manufactured exports and a very small share of foreign direct investment. By comparison, SMEs in the developed economies contribute about 50% of total value added. For SMEs that become increasingly knowledge based and technologically advanced, the opportunities exist to participate in international strategic alliances, to connect into global and regional supply chains, and to be part of a production network. These arrangements will require a transformation of existing business models, management and technological capability, and the innovative capacity of the SMEs. It will need to involve increased access to financial resources, collective research efforts, accelerated product development and wider distribution channels. The ability of SMEs to realise this potential depends critically on providing the necessary infrastructure and enabling environment for SMEs to enhance their capacity and capability to effectively participate and expand in the domestic economy and to venture into the international markets. The financial sector and Government support are an essential part of this enabling environment for SME development. Repositioning of the financial industry to meet the new demands of SMEs Banks are the dominant providers of financial services to SMEs. In the recent period, considerable advances have been made among APEC economies towards strengthening the scope and access to financial services to the SMEs.

The financial sector has become more broad based, competitive and efficient in providing entrepreneurs with alternative sources of investment capital, a diversified selection of new and innovative products, competitive rates, and more efficient services. This has been accompanied by increased ancilliary support services including business advisory services. These mutually complementary elements are in addition to access, choice of products, pricing and the quality of services to the SMEs. The more globalised environment however, requires new approaches and paradigm shifts are required for SME financing. First, there needs to be a recognition that SMEs are going to be increasingly specialized and diversified. Therefore, the traditional standard transactional and lending-based banking approach needs to shift towards more customized and differentiated financial products and services that are tailored to the size, profile and specific needs of the different SMEs. This in turn, requires a different approach in the way financial institutions manage their relationships with SMEs. As SMEs become more innovative and entrepreneurial, financial institutions will need to be able to form sound judgments about the business of the SMEs based on a broader range of credit information which go beyond the narrow traditional focus on collateral and historical financial information. Second, SMEs are likely to see a more pronounced shift towards more innovative and creative industries, such as green technology, medical sciences, information technology and computer animation. In such knowledge-based industries, the true value of companies is not  2  BIS Review 98/2010  measured in tangible assets, but in intellectual capital and specialist skills.