The onset of globalization and increased regional economic integration has presented new challenges as well as opportunities for SMEs in South-east Asia. Despite the many barriers and capacity constraints they face arising from their relatively small size, they remain a vibrant and essential ingredient for the economic growth and employment generation of the region. To survive in an increasingly competitive environment requires a new growth paradigm and business strategy for SMEs that focuses upon knowledge and skill acquisition, technology upgrading, innovation and wealth creation. These are likely to be necessary attributes for SME participation in regional and global production networks, and in particular for the high value adding parts of such networks. The former have become very important in explaining the rapid growth of trade and investment flows in East and South-east Asia, where intra-regional and intra-industry trade now predominate. In this context this report: conducts an overview of the role and significance of the SME sector in the trade and economic development of South-east Asia; provides context for this and subsequent discussion relating to the development of production/distribution networks in East Asia; briefly discusses the potential opportunities and challenges facing SMEs from participation in production networks; and highlights key areas for capacity building of SMEs in South-east Asia if they are to achieve their full potential from this participation.