MODELING AND ANALYSIS OF GLOBALIZING MANUFACTURING SMES IN DEVELOPING ECONOMIES

Author Rafi Javed Qureshi

05-UET/PhD-ME-20
rafi.javed@uettaxila.edu.pk rajaqu2004@yahoo.com

Supervisor Prof Dr Iftikhar Hussain

Department of Mechanical Engineering Faculty of Mechanical and Aeronautical Engineering University of Engineering & Technology,(UET) Taxila Pakistan 2012

MODELING AND ANALYSIS OF GLOBALIZING MANUFACTURING SMES IN DEVELOPING ECONOMIES

Rafi Javed Qureshi

05-UET/PhD-ME-20
rafi.javed@uettaxila.edu.pk rajaqu2004@yahoo.com

A dissertation submitted in partial fulfillment of the requirement for the degree of Doctor of Philosophy in Industrial Engineering and Management

Research Monitoring Committee

Prof Dr Iftikhar Hussain Dr Khalid Akhtar Prof Dr Sahar Noor Prof Dr Shahab Khushnood

Supervisor Member Member Dean (FME&AE)

ii

rafi.javed@uettaxila.edu.pk

Acknowledgements

All praises to ALLAH who bestow on us His mercy and kindness. It is indeed a time of reckoning to remember all those who have given me thrust and support in my endeavor to work on this topic. I start with my supervisor Prof Dr Iftikhar Hussain who has endured with me over a period exceeding six years showing his patience with my intellectual follies and posing confidence in me to think always positive. My special thanks go to Dean Dr Shahab Khushnood who always provided the supporting environment to creatively induce and test new ideas keeping resilience intact. His push always worked wonders when thinking batteries seemed to be drying. It is time to pay homage to other members of my research monitoring committee to spare time and provide me conciliatory support. In this regard my gratitude goes to Prof Dr Khalid Akhtar and Prof Dr Sahar Noor for their thoughtful and constructive suggestions. At this moment, I would pay respect to Engr Aamir Hussain, CEO TESLA whose wonderful achievement for Pakistan as an entrepreneur inspired me to select SMEs as an area of research. I specifically want to thank him for my six months stay at his facility and experience the dynamics of entrepreneurship in a real time environment. My special thanks go to Mr Imtiaz Rastgar whose efforts for promoting the cause of entrepreneurship and SMEs in Pakistan as former Chairman EDB are laudable. I must also thank Prof Sarfraz Mian of State University of NewYork and Dr Arif Rana of LUMS for providing me support in the form of literature and SME Pulse in early days of research. There are a lot of entrepreneurs and academia persons who have helped my thoughts to grow and mature regarding entrepreneurship and SMEs in Pakistan. In this regard, I iii

pay thanks to Dr Shahid Qureshi (Associate Director Entrepreneurship at IBA Karachi), Dr Ali Sajid (Founder Director of IB & M, UET Lahore), Engr Asif Ali Shah (Director, Technology Incubation Center, UET Peshawar), Dr Ali Rizwan (UET Taxila), Engr Tallat Mahmood (CEO, Global Engg Services) and Engr Shoaib Qadri. I should avail this opportunity to pay homage to the individuals and institutions that have contributed vehemently to make ICT as an open source of information exchange and strengthened the cause of promoting knowledge sharing among the underprivileged educational communities of the globalized world. I have benefited a lot by online video lectures of Professor Andrew NG of Stanford University on Machine Learning through the courtesy of Professional Development Centre and, Professor David Mease of San Jose State University related to Statistical Aspects of Data Mining through the courtesy of Google Techtalk. I am also indeed thankful to global institutions like World Bank, Global Entrepreneurship Monitor (GEM), International Finance Corporation (IFC), World Economic Forum (WEF) and Global Edge of Michigan State University for sharing their datasets. There are so many other people and institutions who have aided me in this creative process. I pay my thanks to all of them. In this regard, efforts of HEC Pakistan are laudable to launch the Digital Library project thereby facilitating researchers access to international knowledge repositories. The websites of SMEDA and EDB have come a long way to infer knowledge about SMEs and state of Entrepreneurship in Pakistan. I like to thank officers and staff of ASRTD at the University of Engineering and Technology Taxila for helping and guiding me in procedural matters.

Finally, my heart goes to my family for their astounding support during all these years.

iv

Declaration

It is certified that PhD research work titled Modeling and Analysis of Globalizing Manufacturing SMEs in Developing Economies is my own work. This work has not been presented elsewhere for assessment. The material used from any other source has been properly acknowledged.

Author

Acronyms
ABM APS ANN ANOVA AUC BLR CHAID CR C&R CART DM ECI EDA EDB ES FDI GCI GDF GDP GEM GLM GNI Agent based Modeling Adult Population Survey Artificial Neural Networks Analysis of Variance Area under curve Binary Logistic Regression Chi-Square Automated Interaction Detection Categorical Regression Classification and Regression Classification and Regression Tree Data Mining Entrepreneurial Climate Index Exploratory Data Analysis Engineering Development Board Enterprise Survey Foreign Direct Investment Global Competitiveness Index Global Development Finance Gross Domestic Produce Global Entrepreneurship Monitor Generalized Linear Modeling Gross National Income

vi

GOSME GS GEDI GETI GUI HCA H&L ICT IFC KDD K-W LIC LMC LPI MAE MLR MNCs MSME NOC NRI OEC OECD PCA

Globally Oriented Small and Medium Enterprises Globalization Score Global Entrepreneurship and Development Index Global Enabling Trade Index Graphical User Interface Hierarchial Cluster Analysis Hosmer and Lemeshow Information and Communication Technologies International Finance Corporation Knowledge Discovery from Databases Kruskal-Wallis Lower Income Countries Lower Middle Income Countries Logistic Performance Index Mean Absolute Error Multiple Linear Regression Multi National Corporations Micro, Small and Medium Enterprises Non-OECD Member Countries Network Readiness Index OECD Member Countries Organization for Economic Cooperation and Development Principal Component Analysis

vii

QUEST RE ROC ROSE SME SMEDA SVM UMC UNCTAD VAM WDI WEF

Quick, unbiased and efficient statistical technique Relative Error Receiver Operating Characteristics Rough Set Data Explorer Small and Medium Enterprises Small and Medium Enterprise Authority Support Vector Machine Upper Middle Income United Nations Conference on Trade and Development Value added manufacturing World Development Indicators World Economic Forum % of firms engaged in exporting in ith economy and jth type of firm

EE ij

ETE(E)

Ratio of engineering sector exports and total exports % of high tech firms bearing strong international orientation in ith economy and jth type of firm

HSIOij

HMEEij

% of high tech firms engaged in manufacturing as well as exporting in ith economy and jth type of firm

HM Eij

% of high tech firms engaged in manufacturing in ith economy and jth type of firm

HWIOij

% of firms bearing weak international orientation in ith economy and jth type of firm

viii

ITI(E)

Ratio of engineering sector exports and total exports % of firms bearing intensive international orientation in ith economy and jth type of firm

IIOij

IIOij

% of firms bearing intensive international orientation at th export intensity range in ith economy and jth type of firm

LSIO ij

% of low tech firms bearing strong international orientation in ith economy and jth type of firm

LWIOij

% of low tech firms bearing weak international orientation in ith economy and jth type of firm

LM Eij

% of low tech firms engaged in manufacturing in ith economy and jth type of firm

LMEEij

% of low tech firms engaged in manufacturing as well as exporting in ith economy and jth type of firm

M Eij

% of firms engaged in manufacturing in ith economy and jth type of firm

M EEij

% of firms engaged in manufacturing as well as exporting in ith economy and jth type of firm

SIO ij

% of firms bearing strong international orientation in ith economy and jth type of firm

WIOij

% of firms bearing weak international orientation in ith economy and jth type of firm

Chi-Square Rank of ith economy for world manufacturing export share Average manufacturing exports per capita for the ith economy

i
ic

ix

 i, j

% of total manufacturing exports between ith and jth economy blocks

kj

Volume of manufacturing items exported to jth economy by kth economy

k
ij

Export intensity ratio of kth economy % of ith economy countries with jth level of VAM contribution to GDP

ji

% of countries in ith economy at jth contribution level of manufactures export to GDP

'j

ratio of foreign to direct sales

Abstract
The work undertaken in the dissertation is of pioneering nature integrating world databases to accrue knowledge about economies and enterprises around the globe. It is an endeavor to demonstrate the adequacy of applying data mining techniques in global databases concealing heaps of knowledge about enterprises engaged in manufacturing and exporting in the global context. A cohesive and coherent exploration of databases from repositories of World Bank, GEM, WEF and IFCs Enterprise Survey elucidates the patterns of internationalization of enterprises through manufacturing exports in developed and developing economies. We have followed inductive reasoning methodology using symbiosis of statistical modeling and data mining coupled with extensive data visualizations. The exploratory research has asserted the fitness of manufacturing exports as the core engine for economic health of a country. Both Kruskal-Wallis and Chi-square tests affirm that manufacturing export share level is not independent of economy type and, developed economy block shares 77% of world manufacturing exports matching to their share in world GDP. Manufacturing exports per capita for world five economies ranks them exactly analogous to their income-group ranks. The predictive MLR modeling reveals a positive relationship between GDP and manufacturing exports for LMC and UMC economies. LMC economy countries have the prospects of 14% increase in GDP share by unit increase in manufacturing export share. The findings from the global databases regarding economies and enterprises in these economies are in unison. The enterprises of the developing economies (LIC, LMC and UMC) have more inclination towards manufacturing than economies and enterprises of developed (NOC, OEC) block. However, the enterprises of developed economy block lead by a significant margin in terms of exporting and manufacturing exports. The enterprises of LIC economy block portrays an exorbitant despondency in all spheres of activities ranging from manufacturing to exporting with pathetic state of entrepreneurial climate culminating in extreme level of poverty. Enterprises in Pakistan portray a posture identical to other countries of LMC economy. K-means and HCA clustering identify LFE (Large, Foreign and Exporter) enterprises in Pakistan to form one group and align their practices benefiting from information and communication technologies (ICT) to boost and spearhead the internationalization through exports. Both statistical and data mining methodologies work in unison to identify characteristics of a Pakistani SME to be exportable. Registration with original equipment manufacturer (OEM) is a significant key determinant for an enterprise to acquire the exporting status. xi

Table of Contents

Chapter Page

Description

Title Page Title Page 2 Acknowledgements Declaration Acronyms Abstract Table of Contents List of Figures List of Tables 1 Introduction 1.1 1.2 1.3 1.4 1.5 1.6 2 Globalization Large Scale Manufacturing Small Firms Research Theme Aims and Objectives of Research Thesis Organization

i ii iii v vi xi xii xix xxvi

1 1 2 3 4 5

Literature Survey and Research Methodology 2.1 Literature Review 2.1.1 2.1.2 Employment Generation and SMEs Globalization 8 9

xii

2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.1.8 2.2

SMEs and Globalization Internationalization of Firms SMEs Exporting SMEs and Pakistan Entrepreneurship in Pakistan Five World Economies

11 13 15 16 17 20

Research Methodology 2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 2.2.7 2.2.8 Introduction Research Analytics Comparing Statistics and DM The Old and New Data Paradigms Inductive Reasoning Methodology Hypothesis-Driven Analysis Data-Driven Discovery Paradigm The Symbiosis of Statistics and DM 20 20 21 22 23 24 24 25 27 27 27 28 29 29 29 30 30 31 31 32 33 33 34 35

2.3

Analytical Methods Overview 2.3.1 Parametric Statistics 2.3.1.1 2.3.1.2 2.3.2 2 Test of Independence ANOVA

Nonparametric Tests 2.3.2.1 2.3.2.2 Mann-Whitney Test Kruskal Wallis (K-W) Test

2.3.3

Categorical Data Analysis 2.3.3.1 2.3.3.2 Binary Logistic Regression Categorical Regression

2.3.4

Machine Learning Techniques 2.3.4.1 2.3.4.2 2.3.4.3 2.3.4.4 2.3.4.5 Decision Trees Support Vector Machines Principal Component Analysis Clustering Techniques Performance Measures

xiii

2.4

Data Pools and Filters 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 World Development Indicators Globalization Indicators Doing Business Indicators GEM Entrepreneurial Indicators Enterprise Survey Indicators 2.4.5.1 2.4.5.2 2.4.5.3 SMEs Obstacles Trade Parameters Innovation/Technology Parameters

36 36 37 38 39

40 41 42 42 43

2.5 2.6

Choosing a Statistical Processor Research Issues and Ensuing Chapters

Manufacturing Exports and World Economies 3.1 Manufacturing Exports Share 3.1.1 Exports Share Levels 3.1.2 Statistical Significance Tests 3.2 Manufacturing Exports per Capita 3.2.1 Statistical Significance Tests 3.2.2 Share of Manufacturing Exports per Capita 3.3 Inter and Intra Economy Block Exports 3.3.1 Establishing Statistical Significance 3.3.2 Exporting Intensity Ratio 3.4 Value added Manufacturing and GDP 3.4.1 3.4.2 3.4.3 Levels of VAM Contribution to GDP Dynamics of VAM Contribution Levels Statistical Significance Tests

45 48 51 52 54 56 59 59 61 64 66 67 69 71

xiv

3.5

Manufacturing Exports & GDP 3.5.1 3.5.2 Testing Statistical Significance Dynamics of Manufactures Exports

73 77 80 83 87 88 91 92 92 95 98 99 102

3.6 3.7

GDP Correlation with Manufacturing Exports Globalization and World Economies 3.7.1 3.7.2 3.7.3 3.7.4 3.7.5 3.7.6 3.7.7 Exploring Globalization Parameters Kruskal-Walis Pairwise Tests Globalization and Manufacturing Exports Predictive Modeling Dealing with Multicollinearity z-Transformations & MLR Modeling Residual Analysis

3.8 4

Chapter Summary

Internationalization and Enterprises around the Globe 4.1 International Orientation in Economy Blocks 4.1.1 4.1.2 4.1.3 4.1.4 4.2 Exporting Intensity Technology Scales Manufacturing and Exporting Manufacturing and Technology Scales

106 107 111 114 116 120 122 124 126 128 132 134 135 136

Internationalization and World Economies 4.2.1 4.2.2 IO and Technology Scales Manufacturing Enterprises 4.2.3 4.2.4 Manufacturing and Exports Nonparametric Tests

4.3

Entrepreneurial Climate 4.3.1 4.3.2 Business Parameters Importing and Exporting xv

4.3.3 4.3.4 4.3.5 4.4

Taxation Contracting and Legal Aspects Entrepreneurial Climate (EC) and K-W Tests

138 140 141 145 145 147 150 154 155 159 162 164 166 169

Pathology of Enterprises 4.4.1 4.4.2 4.4.3 Obstacles in Entrepreneurship Economy specific Obstacles Internationalization and Obstacles

4.5

Trading Practices 4.5.1 4.5.2 Economy specific Trade Practices Internationalization and Trade Practices

4.6

Innovation and Technology 4.6.1 4.6.2 Economy specific Parameters Internationalization and Innovation

4.7

Chapter Summary

Internationalizing SMEs in Pakistan 5.1 Pakistan and Asian Economies 5.1.1 5.1.2 5.1.3 5.1.4 5.1.5 5.2 SMEs and Selected Asian Economies SMEs and Manufacturing Sector Exporting Trends Analysis of Export Indicators Entrepreneurial Climate

178 179 180 183 186 189

Analyzing Enterprises in Pakistan 5.2.1 5.2.2 Import/Export Scenario Pathology of Enterprises 5.2.2.1 5.2.2.2 5.2.3 Statistical Analysis Causality Analysis: Electricity And Corruption 191 192 195 197 198 200 202 204 204

Innovation in SMEs 5.2.3.1 5.2.3.2 Innovation and Enterprise Sectors Significant of Innovation Parameters

5.2.4

Trading Practices 5.2.4.1 Sales in Domestic Markets xvi

5.2.4.2 Sales through Exporting 5.2.4.3 K-W Tests of Significance 5.2.4.4 Direct Exporting Correlation 5.2.4.5 Supervised Learning Approach 5.2.4.6 Enterprise Comparisons 5.2.4.7 Enterprise Clustering 5.3 Characterizing Exporting SMEs 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6 5.3.7 5.3.8 5.3.9 5.4 6 Pilot Study Reducing Dimensionality Association Analysis: Two-way Table Association Analysis: Three-way Tables BLR Analysis CR Analysis CR Outputs Adequacy Supervised Learning Methodologies Analyzing DM-based Solutions

205 207 207 209 210 212 215 215 216 218 219 222 224 226 228 232 235

Chapter Summary

Research Findings and Recommendations 6.1 Research Findings 6.1.1 6.1.2 6.1.3 6.1.4 6.1.5 6.1.6 6.2 Manufacturing Exports in World Economies GEM Databases Entrepreneurial Climate IFCs ES Indicators Enterprises in Pakistan Concluding Remarks 244 245 247 249 249 251 254

Recommendations 6.2.1 6.2.2 6.2.3 6.2.4 6.2.5 Time Series Analysis Evolutionary Classification Rough Set Theory Graphical Taxonomy ABM and SMEs xvii 256 256 257 258 258

6.2.6 6.2.7 6.2.8

GEDI Ranking and SMEs Special SMEs Extending Scope of ES Indicators

259 259 260

References Appendices
A0 A B C D E F H I J Globalization Parameters and Manufacturing Exports Appendix A GEM Data Mining Doing Business attributes IFC Enterprise Survey: Obstacles Dataset Data Mining Streams for Internationalization & Obstacles IFC Enterprise Survey: Trading Practices Data Mining Streams for Internationalization & Trading Parameters MSME, SMEs and Pakistans Databases Outputs of Stepwise Categorical Regression MSMEs Databases of Seven Asian Developing Economies

261

274 281 287 292 294 297

302 305 315 318

xviii

List of Figures
Figure 2.1 A sample of Research articles about SMEs and Entrepreneurship till 2010 Figure 2.2 A Schematic Framework based on Platonic Idealism for Knowledge Discovery using Logic and Mathematics Figure 2.3 A Schematic Framework for Symbiosis of Hypothesis-Driven and Discovery-Driven Research reinforcing inductive reasoning approach Figure 3.1 Exporting Patterns of five classes of Exports in World five Economies. Figure 3.2 Share of Manufacturing Exports (%) of World Economies Figure 3.3 Levels of Manufacturing Export Share (%) among World Economies Figure 3.4 K-W Rank Test of Manufacturing Export Share for World Economies Figure 3.5 Difference Network Chart of World Manufacturing Export Share Figure 3.6 Distribution of Manufacturing Exports per Capita for Five Economies over 2006-2009 period Figure 3.7 Difference network chart showing ranks of Economies related to manufacturing exports per share Figure 3.8 Share of Manufacturing Exports per Capita over 2006-2009 period Figure 3.9 Box Plot for Inter and Intra Economy Manufacturing Exports Figure 3.10 K-W Test Statistics For Inter and Intra Economy Block Manufacturing Exports Figure 3.11 Distance Network Chart showing Ranks of Inter and Intra Economy block Manufacturing Exports Figure 3.12 Distribution of Exporting Intensity Ratio For World Five Economies Figure 3.13 Value added Manufacturing (VAM) contribution to GDP at Low, Moderate and High Levels Figure 3.14 Levels of VAM Contribution to GDP in World Economies

19

25

26 46 49 51 53 53

56

58 59 62

62

63

65

66 67

xix

Figure 3.15 Distribution of levels of VAM Contribution to GDP in World Figure 3.16 Levels of VAM Contribution to GDP over 2006-2009 periods Figure 3.17 Difference Network Chart for VAM Contribution to GDP Figure 3.18 Levels of Manufacturing Export Intensity across World Five Economies Figure 3.19 Difference Network Chart showing Ranks and Significant Relationships for Manufacturing Export Contribution to GDP Figure 3.20 Distribution of Manufacturing Exports Contribution to GDP across World Economies over the Years 2006-2009

68 70 73 77

80

81

Figure 3.21(a) The K-W Test statistics for Manufacturing Export (as % of GDP) over the period 2006-2009 82 Figure 3.21(b) The K-W Test results affirming that Manufacturing Export (as % of GDP) over the period 2006-2009 is statistically similar Figure 3.22 Scatter Plot of World Shares of Manufacturing Exports and GDP for year Figure 3.23 Revised Scatter Plot of World Shares of Manufacturing Exports and GDP for year 2009 excluding USA, Germany and China Figure 3.24 Boxplots of Globalization Parameters for World Economies Figure 3.25 Network Difference Charts and Globalization Parameters For World Economies Figure 3.26 Distribution of Manufacturing Exports, (a) Raw data, (b) Log-Transform 7 Figure 3.27 Standardized Residual Plot showing outliers on Left Tail Figure 3.28 Normal P-P Plot showing the accuracy of Predictive Modeling Figure 3.29 Regression Plot showing a genuine predictive modeling for Globalization Parameters Figure 4.1(a) Ranks of Economy Blocks for Weak International Orientation Figure 4.1(b) Nonparametric Tests output for Weak International Orientation Figure 4.2 Weak and Strong International Orientation among TEA type Low and High Technology Manufacturing Enterprises

82

84

85 90

91

95 100 101

101 109 109

114

xx

Figure 4.3 Percentage of TEA and EB type enterprises engaged in Manufacturing, Exporting and Manufacturing Enterprises engaged in Exporting related to Manufacture in Developing and Developed Economies 117 Figure4.4 Distribution of Low and High Technology Manufacturing Enterprises in Developing and Developed Economy blocks 120 Figure 4.5 Box Plot of Weak International Orientation of World Five Economies Figure 4.6 Results of Krukal-Wallis Test to validate the Null Hypothesis regarding Weak International Orientation of World Economies Figure 4.7 Distribution of Enterprises bearing weak internationalization (WIO) 122 123 123

Figure 4.8 Distribution of Weak and Strong International Orientation in Low and High Technology Manufacturing Enterprises of World Economies 124 Figure 4.9 Percentage of TEA and EB type Manufacturing Enterprises using Low and High Technology in World Economies

127

Figure 4.10 Percentages of TEA and EB type Manufacturing Enterprises engaged in Exporting using Low and High Technology in World Economies 129 Figure 4.11 Deviation of Business Entry Rate from World Averages Figure 4.12 Deviation of Business Startup Cost from World Averages Figure 4.13 Deviation of Export/Import Characteristics in World Economies Figure 4.14 Deviation of Taxation Characteristics in World Economies Figure 4.15 Deviation of Legal Aspects in World Economies Figure 4.16 Frequency charts showing ranks of economies for 17 EC attributes Figure 4.17 Ranking of Entrepreneurial Obstacles in Percentages across Developing Economies Figure 4.18 Territorial Map of Developing Economies f for Critical Inhibiting Factors Figure 4.19 Distribution of Impact of Obstacles on Internationalization in LIC Economy Figure 4.20 Distribution of Impact of Obstacles on Internationalization in LMC Economy Figure 4.21 Distribution of Impact of Obstacles on xxi 135 135 137 139 140 143

146

149

151

152

Internationalization in UMC Economy Figure 4.22 Distribution of Enterprises engaged in trade related activities in Developing Economies Figure 4.23 Territorial Map for Three economies with regard to significant Export related activities (1=LIC, 2=LMC, 3=UMC) Figure 4.24 Territorial Map for Three economies with regard to significant Innovation and Technology related activities
(1=LIC, 2=LMC, 3=UMC)

153

155

158

165

Figure 4.25 A Schematic of Data Mining Stream for Internationalization & Innovation/Technology Policies Figure 5.1 Sector wise distributions of SMEs in Eight Asian Economies Figure 5.2 Sector wise distributions of Micro Enterprises in Four Asian Economies Figure 5.3 Micro Enterprises, SMEs and MSMEs (Millions) in Manufacturing sector of selected Asian economies Figure 5.4 Domestic Sales as % of Total Sales in seven Asian economies Figure 5.5 Ratio of Export and Domestic Sales in seven Asian economies Figure 5.6 Exporting Characteristics of seven Asian economies

167 181 181

183 184 185 185

Figure 5.7 Entrepreneurial Climate in Pakistan and other Top Economies in Asia 190 Figure 5.8.Exports and imports from Engineering sector as a % of total exports and imports, (EDB, 2009)

191

Figure 5.9.Total Export/Imports Ratio vs Engineering Sector Exports/ Imports Ratio (EDB, 2009) Figure 5.10 Average Severity Perception of Problems by Enterprise Owners in Pakistan Figure 5.11 Electricity vs Corruption perception among Nine Enterprise Sectors Figure 5.12 Summary Distribution of Enterprises with regard to Six Obstacles Figure 5.13 K-W Test to ascertain that Obstacles are affecting Enterprises with different severity Figure 5.14 Difference Network Chart with average sample ranks of obstacles xxii

192

193 194 195

196 196

Figure 5.15 Severity Levels of Corruption and Electricity Shortage: Biplot Correspondence Map Figure 5.16 Innovation and Enterprise Sectors of Pakistan Figure 5.17 (a) Kruskal Wallis Test ascertaining that Enterprise size is significant to effect Innovation activities Figure 5.17 (b) Pairwise Comparison and difference network chart Figure 5.18 Summary Statistics (Boxplot) of Innovation Related Figure 5.19 Kruskal-Wallis Test for Significant Innovation Related Parameters Figure 5.20 Average Sample Ranks of Innovation Related Parameters Figure 5.21 Comparison of Acquisition of Technology License in and around Figure 5.22 Strong positive correlation between Domestic Sales & Domestic Inputs Figure 5.23 Domestic and Export Sales in nine Sectors of Enterprises in Pakistan Figure 5.24 K-W Test for Trade Characteristics of Large, Exporter and Foreign type Figure 5.25 K-W Test for Trade Characteristics of Small, Non-Exporter, Domestic, Manufacturing and Service type enterprises Figure 5.26 Correlation graphs between Exporting Firms and Export Figure 5.27 A data mining stream for predictive modeling of Sales through direct Exports Figure 5.28 Importance of Trade Related Parameters and Categories of Enterprises Figure 5.29 Segmentation of Enterprises using Hierarchical Cluster Analysis (HCA) Figure 5.30 Graphical Output for Cluster Formation using K-Means. Figure 5.31 Conditional Associations between XPT and XREG Figure 5.32 Step wise procedure of Categorical Regression model

198 199

200 200 202 202 203 203

205

206

207

207 208

209

210 212 214 220 225

xxiii

Figure 5.33 Variation of Adj-R2 and Prediction Error in Categorical Regression Model Development Figure 5.34 Distribution of Variance Inflation Factor in Categorical Regression Model Development Figure 5.35 Distribution of Importance of Predictor Variables during Categorical Regression Model Development Figure 5.36 A Data Mining Stream for Modeling Export Behavior of SMEs Figure 5.37 ROC Curve of Machine-Learning based Models for SMEs Exporting. Figure 5.38 Rule Sets For Classifying Exporting and Non-Exporting SMEs Figure A0-1 Globalization Score and Manufacturing Exports in Five Economies Figure A0-2 Global Enabling Trade Index & Manufacturing Exports in Five Economies Figure A0-3 Logistic Performance Index & Manufacturing Exports in Five Economies Figure A0-4 Networked Readiness Index & Manufacturing Exports in Five Economies Figure A0-5 Inward Foreign Direct Investment and Manufacturing Exports in Five Economies Figure A0-6 Global Competitiveness Index and Manufacturing Exports in Five Economies Figure D4.1 Data Mining Streams for Internationalization & Obstacles in LIC Countries Figure D4.2 Data Mining Streams for Internationalization & Obstacles in LMC Countries Figure D4.3 Data Mining Streams for Internationalization & Obstacles in UMC Countries Figure F4.1 Data Mining Stream for Internationalization & Trade Policies in LIC Countries Figure F4.2 Data Mining Stream for Internationalization & Trade Policies in LMC Countries

227

227

228 229

231 234

275

276

277

278

279

280

294

295

296 302

302

xxiv

Figure F4.3 Data Mining Stream for Internationalization & Trade Policies in UMC Countries Figure-H.5.6.2 Entrepreneurs Perception about Second Most Serious Obstacle with Electricity Shortage as Prime Obstacle Figure-H.5.6.3Entrepreneurs Perception about Second Most Serious Obstacle with Corruption as Prime Obstacle Figure-H.5.6.4 Correspondences of Levels of Severity between Corruption and Electricity Shortage Figure H5.7(A): Foreign Sales and Inputs as Percent of Domestic Sales

303

312

312

313 314

xxv

List of Tables
Table 2.1 Jobs Creation Capacity of SMEs Table 2.2 Manufacturing Exports as % of Total Exports in selected Countries Table 2.3 Basic Indictors and Filters for Global Manufacturing Exports Table 2.4 Derived Indicators for Global Manufacturing along with Source Filters from World Bank Data Table 2.5 Globalization Parameters and Data Sources Table 2.6 Indicators of Doing Business along with Filters [83] Table 2.7 Basic Indicators for Entrepreneurial firms engaged in Manufacturing and Exporting [84]. Table 2.8 Derivation of Indicators pertaining to Manufacturing and Exporting of Enterprises in GEM data pool. Table 2.9 Obstacles in promoting the cause of Entrepreneurship [85] Table 2.10 Attributes related to Trade Practices [85] Table 2.11 Attributes related to innovation/technology parameter in Enterprise Survey [85] Table 3.1 Average Manufacturing Exports Table 3.2 Manufacturing Exports Share of Top 10 countries in the World Table 3.3 Manufacturing Exports share of lowest 9 countries in the World Table 3.4 Tests of Independence between Manufacturing Export Share Level and Type of Economy Table 3.5 Manufacturing Exports per capita: Top 10 Countries Table 3.6 Manufacturing Exports per capita: Lowest 10 Countries Table 3.8 Grand Average of Manufacturing Exports per Capita for Five Economies Table 3.9 Inter and Intra Economy Manufacturing Exports for year 2006-2009 Table 3.10 Pearson Correlation between Manufacturing Exports and Economy Block Table 3.11 K-W Tests of VAM Contribution to GDP for Pairwise Comparison of Economies xxvi 9 16 36 37 37 38 39 40 41 42 42 48 50 50

52 54 55

57 60

61

72

Table 3.12 Distribution of Levels of Manufacturing Export Contribution Intensity to GDP Table 3.13 Mean aggregate values of Manufacturing Export (as % of GDP) Table 3.14 ANOVA Test Results for the Significance of Contribution Table 3.15 K-W Tests of Manufacturing Exports Contribution to GDP for Pairwise Table 3.16 Year Wise Mean values of Manufacturing Export (as % of GDP) Table 3.17 List of Top 50 Countries with GDP Share along with Share of Manufacturing Exports Table 3.18 Linear Regression Model Parameters for World Shares of Manufacturing Exports and GDP among Five Economies Table 3.19 Statistical Characteristics of Globalization Parameters in World Economies Table 3.20 Correlation between Manufacturing Exports and Globalization Parameters Table 3.21 Features of Regression Models for Globalization Parameters Table 3.22 Correlation Matrix for Globalization Parameters Table 3.23 Correlation of z-Transform of Globalization Parameters Table 3.24 Factor Analysis outputs: (a) Anti-image correlations, (b) Sphericity Test output Table 3.25 Variance Distribution of Component Loadings in PCA Table 3.26 Loading of Globalization Parameters on Components Table 3.27 Statistical Outputs From ANOVA Table 3.28 3-Sigma Outlier Countries in Globalization Studies Table 4.1 Statistical Significance of Strong International Orientation among TEA type Enterprises in Developing and Developed Economy blocks on yearly basis. Table 4.2 Distribution of Intensive International Orientation of Economy Blocks

74 77 78

79 80

83

86

89

93 93 95 96

96 97 97 99 100

110

111

xxvii

Table 4.3 Statistical significance of export intensity of TEA type enterprises in Developing and Developed economy blocks on yearly basis. Table 4.4 Statistical significance of export intensity of EB type enterprises in Developing and Developed economy blocks on yearly basis. Table 4.6 Mean Sample Ranks of World Economies and Kruskal-Wallis Test Table 4.7 Kruskal Wallis Tests for Average Sample Ranks of Entrepreneurial Parameters of World Economies Table 4.8 Relative Frequency for rankings in EC attributes of five world economies Table 4.9 Entrepreneurial Climate Index For World Economies Table 4.10 ANOVA Tests on Obstacles in Three Developing Economies

112

113 132

142

144 144 147

Table 4.11 Structure Matrix for Inhibiting Factors (Obstacles) for Developing Economies Table 4.12 Models for Investigating Impact of Obstacles on Internationalization of an Economy Table 4.13 Average Sample Ranks of economies with Chi-Square Significance Tests Table 4.14 Tests of Equality of Group Means For Trading Practices

148

150

156 157

Table 4.15 Structure Matrix showing Correlations between discriminating variables and Discriminant functions F1 and F2 157 Table 4.16 Significant Correlations between Trading parameters and Exporting Levels

159

Table 4.17 Predictor Models for Exporting Level relative to Trading Parameters 160 Table 4.18 Significant Trading parameters and Data Mining methodologies Table 4.19 Group statistics related to Technology parameters in three developing economies Table 4.20 Group means test for significance of technology related parameters Table 4.21 Structure matrix for Technology related parameters in Developing Economies Table 4.22 Significant Correlations between Innovation parameters and Exporting Levels xxviii 161

163 164

164

166

Table 4.23 Predictor Models for Exporting Level relative to Trading Parameters 167 Table 4.24 Significant Innovation parameters and Data Mining methodologies Table 5.1 A Two-way Difference Test for Pakistan and Top Economies in Pakistan Table 5.2 Manufacturing Export Leverage of jth Country over Pakistan Table 5.3 The cluster centers for export characteristics, (a) Initial Cluster, (b) Final Cluster Table 5.4 Allocation of seven Asian economies to Two clusters Table 5.5 Kruskal Wallis Test output for testing the significance of exporting characteristics. Table 5.6 A Two-way Difference Test for Pakistan and Top Economies in Pakistan Table 5.7 Data on Obstacles in nine enterprises of Pakistan Table 5.8 Chi-Square Test of Independence between Corruption and Electricity Shortage Table 5.9 Significance Test and Distribution of Inertia (Variance) 168 178 179 187 187 188

189 192 197 197

Table 5.10 Innovation Related Parameters in Nine Enterprise Sectors of Pakistan 199 Table 5.11 Innovation related nonparametric Tests for Four Categories of Enterprises Table 5.11 Trade Parameters across nine sectors of Enterprises in Pakistan Table 5.12 Significant Correlations between Direct Sales Exports and input Factors Table 5.13 Adequacy of Supervised Learning algorithms for Modeling Sales through Direct Exports Table 5.14 Importance of Trade Related Predictor Variables when target variable is Sales through direct export Table 5.15 K-W Tests for Pairwise Comparison of Enterprises for Trade related attributes Table 5.16 Segmentation of Enterprises using K-Means Analysis Table 5.17 Anti-image Correlation Matrix Table 5.18 MO and Bartlett's Test xxix 201 204 208 208 209 211 212 215 215

Table 5.18 Extraction Sum of Squared Loadings on Three Components Table 5.19 Rotated Component Matrix Table 5.20 Logistic Regression for Sub Problems using H&L Criteria Table 5.21 Testing the Adequacy of Machine Learning Algorithms Table 5.22 Results of applying All- variant Machine Learning Algorithms approach Table 5.23 Influencing Effect of Predictor Variables on target variable XPT Table 5.24 Comparison of Classification Accuracy Level of Methodologies Table A4.1 Strong and Weak International Orientation and Technology Scales Table A4.2 % of TEA and EB Type Enterprises engaged in Manufacturing, Exporting and Exporting related to Manufacture Table A4.3 Percentage of Low and High Tech Manufacturing Enterprises In Developing and Developed Economy blocks Table A4.4 Weak and Strong Levels of International Orientation in Low Technology and High Technology Enterprises Table A4.4 Distribution of Manufacturing Enterprises of TEA and EB type Engaged in Exporting in World Economies Table A4.6 Percentage of TEA and EB type Enterprises engaged in Low And High Technology Manufacturing in World Economies Table B4.1 Business Entry Rate (% of Total Enterprises) Table B4.2 Cost of Business Start-Up Procedures (% of GNI per Capita) Table B4.3 Cost to Export (US $ per Container) Table B4.4 Cost to Import (US$ per Container) Table B4.5 Average Number of Export Documents Table B4.5 Average Number of Import Documents Table B4.7 Average Lead Time to Exports (Days) Table B4.8 Average Lead Time to Import (Days)

214 215 218 226

227 228 229 281

282

283

284 285

286 287 287 287 287 288 288 288 289

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Table B4.9 Average Number of Tax Returns Table B4.10 Total Tax Rate as a percent of Profit Table B4.11 Time to prepare returns and pay taxes Table B4.12 Time to resolve insolvency in years Table B4.13 Time to enforce a contract in days Table B4.14 Average Number of Procedures to enforce a contract in days Table B4.15 Strength of Legal Right Index ( 0 = weak, 10=strong) Table C4.1 Percentage of Enterprises considers ith parameter as Biggest obstacle Table H5.1 Distribution of Large Scale and SMEs in seven economies Of Asia Table H5.2 MSME sizes, Distribution, Density and Employment in Nine Economies of Asia Table H5.3 (a) Sector wise SMEs Density in Eight Asian Economies Table H5.3 (b) Sector wise Micro Enterprise Density in Four Asian Economies Table H5.4 Distribution of Micro Enterprises and SMEs (in Millions) in Prominent Asian Economies Table H5.5 (a) Home market Sales Features in seven Asian Economies Table H5.5 (b) Exporting Features of seven Asian Economies Table H5.6 Doing Business Indicators for Nine Economies of Asia Table H5.7 (A) Foreign Sales and Inputs as percent of Domestic Sales Table H5.7 (B) ANOVA tests for Foreign Sales and Inputs as percentage of Domestic Sales

289 289 290 290 290 290 291

292

304

305 306 306

307 308 309 310 311

315

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Chapter 1

Introduction
1.1 Globalization Globalization is a process that connotes the ever increasing interdependence and closer integration of national economies. From social perspective, it is the instant interaction of people and societies in the background of virtual world made possible through internet and social networking. On the political front, it is more and more homogenization of governing systems with democratization of societies. In its ideal form, globalization process aims to remove physical and psychic barriers between nationalities and transform the world into one country; the united states of the planet earth. However, it is the manufacturing activity that has been profoundly affected by the globalization. Prior to globalization era, manufacturers were trying to accomplish all their functions within the confines of the organization. The distribution function was constrained to local and domestic market. All that changed with the arrival of ICT inspired technologies coupled with loosening of restrictions on trade. Manufacturing strategies drastically changed by relocating production facilities near to emerging markets. Manufacturing enterprises are now executing core competency tasks in-house, and awarding the support tasks to the efficient vendors around the globe in terms of cost, quality and competency. This globalization of production and distribution functions is manifested by the huge trade volumes between economies. 1.2 Large Scale Manufacturing Since the start of manufacturing as a segment of economy to create wealth of a nation, large scale production organizations have been in the lime light. This large size factor has been important because of mass production capability facilitating all important
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economies of scale. The large size of manufacturing organizations has been a competitive advantage by default. The huge resource base of these organization equip them to indulge in strategic management, securing consultancy services, carry out market intelligence, launch R&D activities and execute logistic operations. The large structure has drawbacks also. The responsiveness to adapt to a changing environment is slow and often lethargic. The lengthy administrative channels make these organizations highly inflexible. Entrepreneurial spirit dies down as the age of the organization prolongs. The biggest question on the viability of the large organizations is their inability to create new jobs over a period of time. During last thirty years or so, size factor of an organization has been critically reviewed and small size firms have been successful to attract the attention of academia because of astounding success of these organizations. Microsoft Corporation and Dell Computers are one of those glaring examples that have turned the world. 1.3 Small Firms Is small size a stigma for an organization? The answer is dependent on the mindset of the owner. If owner has entrepreneurial mindset, there are few solid arguments in favor of being a small size firm. Small size firms have highly coherent structure like a spider-web enabling the organization to react and adapt to the changing environment. The instant responsiveness capability of these organizations makes them ideal for customized solutions. These organizations are highly flexible because of the absence of nonbureaucratic working. Small firms have traditionally survived in isolation prior to the emergence of internet enabled e-commerce and e-business era. These firms were operating in restricted business sphere often confined to their home markets. The protections implanted by national governments created an environment of safe home markets where routine and standardized products were offered in a low intensity competitive backdrop. However, all that has changed drastically during the start of second decade of 21st century. Protectionism has been replaced by liberalism where every organization views the entire
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world as one market. Reaching unexplored markets with competitive advantage is a thorny challenge to every enterprise be it a large or small. However, this challenge is particularly daunting for small enterprises in developing economies where the firms have acutely feeble resources with scant support from their governments and live under the fear of extinction every day. 1.4 Research Theme The research work is aimed at exploring and discovering the patterns of economy-centric manufacturing activity in small and medium enterprises (SMEs) of developing economic block through a symbiosis of techniques from Database Management, Data visualization, Statistics, Machine Learning and Data Mining. In the process, exploration of parameters influencing manufacturing exports is pursued at global level. The work has been carried out with a commitment to shed light on the manufacturing affairs in least developed countries as these economies are largely untouched by research community in the developed world. Whereas, research on manufacturing activity is highly documented in OECD countries, a selective and narrow approach is followed by research community in developing economies. This work aims to bring in spotlight the state of manufacturing activity in developing economies in an exhaustive manner and contrast it with manufacturing activity in developed economy block. The economic dividend of manufacturing activity accruing from exporting levels is the prime target and occupies the central place in this research. Three levels of exploring manufacturing activity are specified for research purpose. At the top and global level, the economic impact of manufacturing activity is viewed from the perspective of developed and developing economy blocks. At the intermediate level, enterprises are explored segmenting these firms among developed and developing economy blocks. At the lowest level, enterprises are explored at country level. For the purpose of this research, Pakistan is picked up for exploration.
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1.5 Aims and Objectives of Research The aim of this research is to explore the impact of manufacturing export activity on small and medium enterprises in the developing economies. There are a number of vistas to be addressed in this research work. What is the state of affairs related to manufacturing activity in developing economies? How is developing economy block performing in comparison to developed economy block with regard to manufacturing? Is manufacturing activity beneficial and a ray of hope for creating wealth in developing economies? How manufacturing export is helping to enhance the economy of developing economy countries? Is there any space left by the developed economy block for the developing economy block to reap fruits of development? How is globalization influencing the manufacturing in developing and developed economy blocks? At second stage, research focus is on manufacturing enterprises in developed and developing economies. In particular, what is the pattern of manufacturing activities in born global and established businesses in developed and developing economies? How entrepreneurial activity with regard to manufacturing is distributed along the two types of economy blocks? What is the pattern of exporting activities of the young and old enterprises in the two blocks of economies? What are the attributes of enterprises that influence the exporting capability of these economies? How pathology of enterprises in developing economy hamper the exporting efforts? What is innovation and trade related parameters and how do these help to enhance manufacturing exports in developing economies? At third stage, enterprises in Pakistan are explored. What are the severe obstacles impeding enterprises in Pakistan? What are critical parameters related to obstacles, innovation and trade in Pakistan? How entrepreneurial climate compares with neighboring countries of Pakistan? What are contrast and similarities in nine enterprise

sectors? What are enterprise and entrepreneurial parameters that influence exporting stature of a Pakistani SME? Novelty of the intended research is to investigate and thus find the significance of manufacturing exports on the economic growth of developed as well as developing countries in the global context. In particular, the role of SMEs is probed by integrating global databases in a cohesive manner from repositories of World Bank, GEM and IFC. The investigations are conducted by grouping SMEs according to their significance in world five economies. A myriad of inhibiting and enabling attributes of these SMEs are selected for exploration. Causal linkages are established between SMEs propensity for manufacturing exports and a host of factors surrounding SMEs. These include trade patterns, scale of technology levels, entrepreneurial climate and ICT practices. Major portion of this detailed analysis pertains to SMEs in the three developing economies that include lower income, lower and upper middle income countries. Finally, strenuous efforts are expended for analyzing exporting propensity of SMEs in Pakistan. The research efforts are unique with an aim to enhance the potential of competitiveness of Pakistani SMEs on global horizon. Data mining has been conventionally employed in exploring databases aiming at business intelligence and fraud detection. This is the first attempt to apply the concepts embedded in data mining and machine learning techniques for modeling and analysis of internationalizing SMEs in global context. In particular, the specificity of economy blocks has been modeled and analyzed by a combination of supervised and unsupervised learning techniques. Symbiosis of statistical inferential techniques and data mining methodology is the prime characteristics of this work in exploring world databases to discover patterns and structures in internationalizing SMEs of developing economy block in global context.

1.6 Thesis Organization This chapter introduces the research topic and allied intended objectives in brief. Chapter 2 provides an expanded literature review on SMEs. The chapter also includes impact of globalization on SMEs and internationalization through exporting. An inductive reasoning methodology based on a hybrid of techniques from Statistics and Machine Learning is devised combining hypothesis and data-driven analysis. The chapter also lists down the main global databases to be used as prime source. The pertinent filters are indicated to extract reduced data set for pattern identification. In Chapter 3, the WorldBank data set is explored and reduced data set is formed by applying relevant filters from Chapter 2. The patterns of manufacturing and manufacturing-exports are identified using data visualization and correlation techniques. The parametric and nonparametric multinomial techniques are used to test the adequacy of relationships with regard to manufacturing between developing and developed countries. Globalization parameters are tested for veracity in the context of developing and developed economy. In Chapter 4, the internationalization aspirations of manufacturing enterprises in developing and developed economies are explored through extensive Data visualizations and attested by confirmatory hypothesis. The classification of born-global and established enterprises is investigated to seek knowledge about manufacturing and international orientation. The specificity of attributes related to a particular economy blocks are explored. Both supervised and unsupervised learning algorithms are applied to investigate the adequacy of parameters in the context of manufacturing exports. Chapter 5 is about role of SMEs in Pakistan to enhance the manufacturing led exports. Pakistan being one of the most populous countries has sizable manufacturing SME sector. However, these SMEs target domestic markets for acquiring input resources and
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sales of their produce. The issues related to SMEs operating hindrances are probed by combining the statistical and knowledge discovery techniques. The emphasis is on explanatory and exploratory search to extract knowledge in totality. Chapter 6 contains main findings related to patterns visualized in reduced data sets obtained through mining global databases. The results of efforts expended in pattern evaluation by formulating and testing hypothesis are summarized. The adequacy and future applications of applying data mining approach to the realm of manufacturing as an engine of economic growth are proposed. The appendices accommodate a large number of reduced data sets particularly useful for future research in manufacturing data mining integrally coupled with economy. A special section in the end provides a detailed account of SMEs and micro enterprises (MEs) in prominent economies of Asia.