MGT601 - SME Management - Lecture Handout 37

User Rating:  / 0


Definition and Role in Economy

The small and medium-sized sector is a varied one and plays a predominant role in the economies of most developing countries. It comprises factories, workshops, traders and other service facilities. It ranges from the most modern and up-to-date to the simple and traditional, from independent enterprises to ancillaries and subcontractors, and from units mainly catering to the domestic market to exporters.

Small and medium-sized enterprises (SMEs) are a key component in economic life, not only because of their number and variety but because of their involvement in every aspect of the economy, their contribution to regional development, the complementary role they play in support of the large sector, and their role as proving ground for innovations and adaptations. They can be seen as a kind of industrial breeding ground, a source of constant renewal of industry and commerce, and a wellspring of competition and dynamism.

There is no universally accepted definition of an SME. One study has identified more than 50 definitions in 75 countries. Frequently, criteria defining as SME in a country may be based on the purpose for which the identification is required.

Again it is possible notionally to group manufacturing SMEs in three broad categories:

  • Cottage or Artisan Units.( less than 10 employees)
  • Small Scale Units.( up to 50 employees)
  • Medium Sized Industries.( Between 50 and 200)

These would not be watertight compartments and such a grouping would be arbitrary. SMEs play a significant role in the economies of most countries, industrialized as well as developing. Organized small and medium-scale industries in many African countries are relatively smaller in number and their contribution to GNP more limited.

Public Policy Approaches to the SME Sector

Small and medium-sized enterprises play a predominant role in the economies of most developing countries. For valid socio-economic reasons relating to employment creation, income distribution, dispersion of industries etc. many govt. and specialized SME development agencies have long been engaged in providing assistance for the establishment of SMEs and for their growth and development. The range of assistance has included training and entrepreneurial development activities, pre-investment feasibility surveys, finance arrangements, facilities for raw materials and other inputs, infrastructural facilities, product and design advice, domestic marketing assistance, etc. However, few SME development programmes have incorporated and export dimension into the assistance package until recently.

SME support programs have been in place in many developing countries for a number of years. Framework legislation and articulated government policies also exist in many countries. Observers have generally concluded that even when there is no policy bias in favor of large units, the operational systems and the well-known difficulties of SMEs in gaining access to support institutions for their inputs-finance, raw materials, approvals, etc.—render the policy framework biased in favor of large units. SMEs have an inherent handicap in dealing with institutions because of their smallness. thus, even in industrialized countries the need for special intervention in favor of SMEs has been acknowledged. Even proponents of laissez-faire policies concede these needs.

Public policy in developing economies typically includes recognition of the importance of the sector and measures to stimulate the establishment and to encourage the growth of this sector.

Commonly Seen Assistance Programme

Some commonly seen assistance programs, implemented with widely varying degrees of efficiency and success, relate to establishment of;

  • Institutional Support Infrastructure (Like Small Industry Boards or Small Industry Corporation).
  • Physical Infrastructure Facilities( Like Industrial Estates, Common facility centers)
  • Initiative in Field of Financing (Creation of Small Industry Finance Programme, Credit guarantee Scheme, Preferential financing Rates).
  • Entrepreneurship development Programme and so on.

However, in SME promotion programme of most of the countries potential markets are assumed to exist and thus a marketing dimension is not taken into consideration. However, growth of SME sector is possible only when the SMEs are assisted in entering existing markets or in new market creation. In certain situations an individual SME or a production sector can create new markets.

New market creation is generally not in the hands of the individual SME or groups of SMEs.

A Favorable Climate is Required, Which Depends on.

  • A variety of Macro-Economic Factors
  • International Factors
  • Government Policy

Conscious government policy approaches are required to assist SMEs to create markets. For this, SME groups have to organize into powerful lobbies to be in a position to create the ground swell required to influence national public policy. if new markets do not exist or cannot created nationally, encouraging the establishment of SMEs may be counterproductive.

Levels of Exports from SMEs in Developing Countries

The products of SMEs find their way to export markets through three different channels:

  • Direct Export
  • Indirect Export through agencies acting as middlemen such as merchant export and trading houses.
  • Physical Incorporation of SME produced components/ subassemblies in exports by larger manufacturers.

A series of workshops conducted recently by the International trade centre UNCTAD/GATT (ITC) in seven developing countries concluded.

  • Only a very small proportion of their manufacturing SMEs participate in the export trade.
  • It was estimated that in India not more than 5% of all registered small units participate in export trade directly or indirectly regularly or sporadically.

Information compiled by ITC on the shares of SMEs in exports of some developing countries is given for a sample of countries:

  • In Pakistan over 30% exports of manufacturers are by small manufacturing units (World Bank Studies, 1982) (Figure does not include contribution of medium scale units).
  • In Thailand, Sri Lanka small locally-owned traders and manufacturers account for approximately 35% of total national exports.
  • In India number of registered small units 526,035 (1981) (only a very small proportion of these is participating in exports).and 46% of total national exports were accounted for by organized small-scale units and by the cottage industry sector.
  • In Republic of Korea the share of small units in total exports is39% in 1983.
  • In Singapore between 1973 and 1981, the average annual increase of direct exports from small firms was 48.5% as against 25% for large firms during the same period.

On the above information some general observations can be made:

  • Statistical data on the role of SMEs in the economics of developing countries are generally available in many cases, and relate to numbers, production, employment etc.
  • Available information suggests that only a small percentage of SMEs engage in export, but their contribution to total exports is considerable.
  • Appreciation of the inpo9rtance of domestic marketing mechanisms in channeling SME production to export markets is generally inadequate.
  • It would appear that there is a correlation between the successful exporting by developing countries/ areas and the role played by SMEs in their economies.
  • There appears to be a need for systematic research to establish the role played by SMEs in exports from developing countries and to facilitate formulation of public policy.

As a general conclusion, it can be stated that the contribution of the SME sector to the export trade in developing countries is substantial, despite the fact that only a small minority of SME units participate in export activities. The experience of successful SMEs in some developing countries demonstrates that there is considerable untapped potential for greater participation of SMEs in export activities.

Related Content: MGT601 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of SME Management