Asia's attempts to rebalance growth towards domestic sources will in part depend on the development and growth of the region's business sector, says a new report from the Asian Development Bank (ADB).

The report, published in a special chapter of Key Indicators 2009, the flagship annual statistical publication of the ADB, says a return to rapid regional growth will require stronger domestic demand, for which the emergence of a large and rapidly growing urban middle class is key. The health of Asian enterprises, especially small and medium-sized enterprises (SMEs) – where most Asian workers are employed – will be important in this regard.

The special chapter, titled "Enterprises in Asia: Fostering Dynamism in SMEs", looks at the actual and expected impacts of the current global economic crisis on workers and enterprises and discusses how to make SMEs more innovative and productive once the crisis has played out.

"In view of the weak outlook for the major global economies, it's unlikely that Asia can export its way out of this slump, as they did after the 1997-98 Asian financial crisis," said Jong-Wha Lee, ADB Chief Economist. "Consequently, some economies need to accelerate the rebalancing process to increase domestic demand, and to assist that process they need to take steps to unleash the constraints to growth on SMEs, which so many Asians rely on for their livelihoods."

Many of the region's most dynamic and export-oriented enterprises have been forced, as a result of the crisis, to scale back operations, cut production, and lay off workers. In seven out of eight East and Southeast Asian countries tracked in the report, manufacturing employment has declined by about 2% to 7% between the first quarters of 2008 and 2009.

Smaller enterprises, which tend to be more domestically-oriented, have been less affected, but the credit crunch and a slump in demand are now beginning to hurt.

Many governments have taken steps to support economies through fiscal stimulus and the easing of monetary policies. Some have directly assisted enterprises through credit guarantees, subsidized loans and fiscal incentives, among other programs.

The report says public policy has a key role to play in helping SMEs grow and become more productive. Governments should work with commercial forces to correct existing market failures, particularly in the provision of finance. Policy needs to help smaller firms raise their levels of productivity and employment through innovation, which includes adopting new technology and diversifying into new markets. Governments can assist firms by providing information services on technology and markets, vocational training, and technical support services, and by fostering linkages between SMEs and large enterprises.

A key challenge for public policy is to understand, within individual country contexts, which specific factors constrain the growth of SMEs and their diversification from traditional low-productivity activities to modern, higher-productivity activities, and how to design and implement interventions that are truly effective.