Lydia So, portfolio manager at Matthews Asia, says that with the next phase of Asia’s growth predicted to be driven by domestic consumption, one of the most direct ways to access the increasingly prosperous middle class in Asia is to invest in the region’s “growing universe of smaller companies”.

As small companies have grown and access to capital has increased, the importance of such businesses as a driver of innovation and employment has risen. Such companies are nimble enough to react quickly to the region’s changing patterns of domestic consumption, designing and developing products and services that appeal to local markets.

As their products and services become brands in their own right, this leads to more sustainable returns on equity and returns to shareholders, said So.

The universe of small companies in Asia has deepened, not only in pure numbers, but also in terms of breadth and diversity. So says that more companies from a wide range of industries are coming to the capital markets as a result of improved access to credit and capital, as well as deregulation in certain industries.

At the end of 2012 there were 3,572 small companies (with a market cap of $100 million to $3 billion) listed on the stock markets of Asia, excluding Japan, according to Bloomberg.  That compares to a small cap universe of 2,204 companies in Asia ex-Japan at the end of 2008. To put this into broader context, there are currently fewer than 3,400 small companies in the US, said So.

Smaller companies have been an integral part of Asia’s development over the past few decades and their ability to adapt to local consumers stands them in good stead for further success. As the region’s capital markets have deepened, the investment universe for small companies has also grown considerably, providing new opportunities.

Smaller companies are more reliant on domestic consumption and less influenced by the broader macro environment and by Western markets than their larger competitors, hence providing diversification for investors’ global portfolios, said So.