By Muhammad Ahmad Sheikh (Broadcaster/ journalist / Incharge R & D, the Sheikhupura Chamber of Commerce & Industry)
Understanding the characteristics of contribution of small businesses at local level and its impact on overall economic growth is a crucial factor. The term SME originated in the world of Economist, denoting firm categorized on the basis of a set of criteria including employment size and the value of their assets. The size classification varies within regions and across countries relative to the size of the economy and its endowments. It is important to note that there is a minimum as well as a maximum size for SMEs.
Small Medium Enterprises (SMEs) play a very significant role in the well being of any economic system. This role assumes still greater importance if the economies are in transition or belong to developing countries. As per a report by the Economist Intelligence Unit Survey sponsored by Citibank, much of Asia’s brisk economic growth (averaging 4.6% annually) has largely been due to the SMEs. While there can be a long list of benefits the SMEs offer, the weightiest is considered to be the freedom a small business offers to the entrepreneur to experiment and devise and take risks. It thus generates entrepreneurial zeal and a desire for personal achievement which motivates small investors and professionals. As per the same Economist report, almost half of those surveyed got into businesses for personal fulfilments. This urge for fulfilment then paves the way for the success of these small and medium businesses which in turn provide boost to the overall growth engine of any economy.
The benefits of SMEs are not confined to the developing world only but are predominantly visible in the developed world as well. As per a Handbook on Community State Aid Rules for SMEs on the European Commission’s web site, they are the backbone of Europe's economy. There are more than 23 million SMEs in the European , which represents 99% of European undertakings and are responsible for 60% of Europe’s GDP. They are also Europe’s main job creators as they employ over 100 million people.
For any economy, SMEs with high turnover and adaptability play a major role in reducing sector imbalances in that economy. Moreover, easy entry and exit of SMEs make economies more flexible and more competitive. Due to this ease of entry and the resultant increase in the number of small and medium businesses, a competitive market pressure is created which dilutes monopolies and helps increase quality of products and services.
Interestingly, most of the current larger enterprises have their origin in small and medium enterprises but downsizings, layoffs and mergers have made jobs in large corporations more risky and less attractive to employees. The beneficiaries of this are the smaller companies as more creative talent is usually keener to join smaller outfits where it can have a better opportunity to utilise and explore its potential.
Smaller businesses also tend to have closer customer relationships and cater to the client needs more effectively and promptly. Smaller businesses also offer better position to their owners to take quick decisions on innovation, pricing and other business strategies which render useful competitive advantage.
SMEs tend to employ poor and low-income workers and are sometimes the only source of employment in poor and rural areas. They are usually wide spread and reach out to a vast population of a country even in remote areas. This role of SMEs is particularly important in the developing countries where there is lot of poverty.
Pakistan is one such country whose economy has benefitted a lot from SMEs. According to the Small and Medium Enterprises Development Authority (SMEDA), SMEs constitute nearly 90% of all the enterprises in Pakistan, employ 80% of the non-agricultural labour force and their share in the annual GDP is 40%, approximately. With these statistics, it will not be unjust to say that SMEs are the lynchpins of Pakistan’s economy too. While the establishment of SMEDA has helped the cause of SMEs to a great extent yet there are problem areas which require constant attention of the Government. Financing is one of the many problems the smaller businesses face. For SMEs, financial resources are often limited which often force the companies to solutions which appear to be cheap initially but later the hidden costs surface during various stages of execution resulting in financial crises. Higher costs of R&D and training are issues where SMEs find difficulties especially in the face of limited capability of development and production. Due to their small size, SMEs usually lack management capacity and their ability to access and analyse information is particularly weak. They cannot afford costly support services like financial, human resource, legal and training etc. At a more strategic level, SMEs do not have the capacity to influence the overall business environment in their favour as larger firms possess. In addition to assistance provided by SMEDA, SMEs themselves have to take measures to address the problems. They must develop strong management teams and adopt a culture of learning and sharing of knowledge with other SMEs. For financial assistance, SMEs have to rely on banks and have to find ways to overcome banks’ shyness to finance smaller businesses.
From the above discussion, the importance of SMEs is quite evident in the economic growth of developing countries, accounting for over 90% of their business. SMEs’ zealous entrepreneurship, flexibility and responsiveness to change are essential driving forces of economic development. They help improve the livelihood of thousands of poor people by creating employment opportunities. Governments therefore must place special focus on eliminating impediments in their growth path to draw maximum benefits for their economies through these SMEs.
Many studies have been conducted during the last 2 decades on the subject of SMEs Role in National development. All proved that Role of SMEs in National Development, Employment generation and eliminating the poverty is undeniable.
References
http://viewswire.eiu.com/report_dl.asp?mode=fi&fi=1341521119.PDF
http://ec.europa.eu/competition/state_aid/studies_reports/sme_handbook.pdf
http://www.smeda.org.pk/main.php?id=34
