Different secular trends in Asia are benefiting entrepreneurs and making the region a compelling destination for growth-oriented investors, according to Matthews Asia’s Sharat Shroff.
Shroff, who is the lead manager of the $778.2m Matthews Asia Pacific Tiger fund, said Asia’s progress on several fronts is increasingly supportive of entrepreneurs.
This, he said, is fuelling the team’s belief the region is likely to remain a preeminent source of growth over the coming years.
“In fast-growing economies, entrepreneurs play a key role in generating durable and inclusive growth,” said Shroff. “Asia's entrepreneurs can be found at the helm of start-ups, as well as companies with billions of dollars in market capitalisation.”
Despite the sources of economic growth are often assumed to be driven by top-down factors such as geography, demographics, natural resources or official policies, the manager believes the role of entrepreneurs and businesses cannot be overstated, as these look to invest and innovate, creating growth in their process.
According to Shroff, small- and medium-sized enterprises (SMEs), in particular, tend to be more entrepreneurial in nature, employing a nimble approach to pursuing and occasionally creating new markets. He said businesses that start small may also evolve into mega-cap names with dominant roles in their respective markets.
As such, he noted those investment strategies that include companies of all sizes can capture the growth potential of Asia's entrepreneurial businesses at every stage of development, from upstart to market leader.
To thrive, Shroff said entrepreneurs require basic physical infrastructure as well as a regulatory environment that tries to address market failures and encourages fair and robust competition.
He noted there are five secular trends seen in Asia that are supporting those setting up businesses across the region.
The rise of the private sector
The first trend highlighted by Shroff is the continuing trend towards greater deregulation across the region, that he said is helping to support entrepreneurs.
Private sector contribution to capital expenditure
Source: Matthews Asia
“Deregulation of labour provides SMEs with an opportunity to build more flexible cost structures,” he explained. “Deregulation of ownership structures provides more flexible arrangements for raising capital and bringing on equity partners.
“Deregulation of natural resources means that commodities now trade in a more open marketplace and are priced based on demand and supply. And the start of liberalisation of financial markets means that Asian businesses can attract both local and international capital.”
As the Matthews Asia manager noted, policymakers in Asia are increasingly recognising the role of the government should be to facilitate a healthy private sector and at times budge it in the right direction.
One example is the creation by several governments of economic policy frameworks that are designed to foster efficiency-driven and innovation-led growth.
“We believe the private sector does a better job of allocating capital than the public sector, so we are encouraged by the rise of the private sector's contribution to capital expenditures,” Shroff added.
“Capital expenditures represent a company's spending to acquire, upgrade and maintain physical assets, which could include property, industrial buildings or equipment.”
Easier access to capital
Second on Shroff’s list of secular trends is an easier access to capital following the onset of the global financial crisis of 2007-2008.
He said the crisis was another reminder for policymakers across Asia to build better institutions to manage financial risks.
One example in the right direction was the Bank of Japan’s decision to establish collateral agreements with many central banks in the region aimed at avoiding liquidity issues.
These agreements included Thailand in 2011, Singapore and Indonesia in 2013 and the Philippines in 2015, with several other efforts underway.
“Such initiatives mean that the trend of financial intermediation, particularly for dollar credit, is increasingly diversifying with Asian institutions playing a bigger role,” Shroff explained.
Credit to emerging Asia
Source: Matthews Asia
“The onset of the global financial crisis also highlighted the need for policymakers to continue to enhance the availability of capital for the most productive parts of the economy, including private businesses,” the manager added. “This has taken the shape of encouraging banks to focus on SMEs, deregulating capital markets and relaxing foreign ownership norms.”
A rise in ways to be competitive
Whilst Asian workers and companies used to be mainly known for their competitiveness on cost, Shroff noted entrepreneurs in the region are increasingly competing in other areas such as superior intellectual property, quality of product/service offering, trust and convenience.
“The ability to attract and retain skilled workers is a differentiating factor. This is evident in the kinds of skills that are in short supply in many parts of Asia, most notably in China,” said Shroff.
“Skilled talent is becoming scarcer than capital in many respects, and organizations that are able to internalise the solution to this challenge end up creating distinct advantages.”
Other intangibles such as business culture and the skill of management teams are also coming to the fore, Shroff noted.
A stronger foundation for innovation-led growth
As Asia's economies move toward greater growth in service-based sectors, Shroff said another trend is the number of new industries and business models that are emerging.
“Across Asia, we see examples of a rising wave of innovation in a broad range of categories: in 2016, Asia outpaced North America in patent filings by more than three-to-one,” he said.
According to the Matthews Asia manager, this flurry of activity signals a larger innovation boom across Asia, where businesses are developing products that meet the region's distinctive tastes and needs.
“Between 2006 and 2016, Asia's share of new patent filings grew to nearly 65 per cent of all new patents worldwide, while North America, Europe and Latin America all saw declines in their share of new patent filings,” he said.
Patent applications by region
Source: Matthews Asia
One area where evidence of innovation-led growth is visible, Shroff noted, is the healthcare sector, where businesses can capitalise on emerging trends and market opportunities.
Greater consumer buying power
The fifth trend supportive of Asian entrepreneurs is the greater level of consumer buying power, according to Shroff.
“Consumers worldwide have different tastes but remarkably consistent behaviour,” the manager explained. “As incomes grow, consumers buy nicer things.”
Although global macro issues will have some impact on the region, he said important trends for successful entrepreneurs are developing in Asia itself.
In the past entrepreneurs had to attract businesses and consumers from the Western world, now Asian consumption is becoming dominant globally.
Indeed, entrepreneurs are now more understanding of competitive dynamics and keeping up with the rising aspirations of the consumer.
“Having observed the behaviour of consumer-oriented businesses across the region for more than two decades, we believe that concepts such as brand, product quality and service standards are starting to matter more than factors such as strength in distribution,” the manager concluded.