India Development Solutions

This paper looks at the concept of SMEs, their place in an economy and the kind of challenges faced with in the globalised and liberalised environment and at the nature of development services SMEs need to grow on sustainable basis.

I.  Small and Medium Enterprises: Engines of Economic Growth

Each country has its own definition of a Small and Medium Enterprise (SME), some basing it on the number of employees, while others on monetary measure (capitalisation, investment turnover and sales) or a combination of two or more. However, the World Bank Group SME Department has adopted the following definition of SME for its programmes:

Measure	Micro Enterprise	Small Enterprise	Medium Enterprise
Employees	10 or less	Between 10 and 50	50 to 300
Total Assets	$100,000 or less	$100,000 to $3 million	$3 million to $15 million
Total Annual Sales	$100,000 or less	$100,000 to $3 million	$3 million to $15 million

 

II. Role and Place of SMEs

Wide variations in definition of an SME notwithstanding, it is well known that SMEs, generally, account for bulk of the enterprise population in a country, irrespective of its level of economic development. They, comprising manufacturing facilities, trading entities and service providers, have been contributing substantially to the Gross Domestic Product, employment generation and exports .  They have been the prime mover of industrial development in many developed economies. SMEs’ role in building a solid industrial base can be gauged from the fact that they not only represent bulk of the industrial enterprises of most countries in the world but are also nursery of entrepreneurs.

 

In Japan - one of the most industrially advanced nations of the world - around 99 per cent of seven million units are SMEs. They account for about 80 percent of total employment of around 55 million persons.  Around 52 per cent of the Japanese total exports emerge from this sector.  SMEs are a most dominant form of business organisation in the U.S. They constitute around 99 per cent of all businesses, employ over half of the US workforce and generate 54 per cent of the sales revenues.  Around 94 per cent of total Italian firms are reportedly SMEs and they contribute about 40 per cent of total GDP and 43 per cent of total employment. Similarly, they constitute over 95 per cent of the units and more than half of the total employment in economies like Australia, Canada, Germany, United Kingdom, France, etc.

 

The entire industrial base in many of developing countries is virtually composed of SMEs.  They, along with micro enterprises, have been identified as a high potential sector for employment generation and provision of livelihood to millions of people in African countries like Swaziland, Malawi, Kenya and Ethiopia, in South East Asian nations like Bangladesh, India, Sri Lanka and in Latin American countries.

 

Contribution of SMEs

Select Developed Countries

Source: EU and Country Reports

Select Developing Countries

Source: UNCTAD

 

SMEs, thus, serve both economic and social objectives: while the economic contributions of the sector are its role in total (a) industrial base, (b) employment, (c) manufacturing output, (d) exports, (e) GDP, etc., the social contributions include promoting employment, social harmony, cultural integration, regional balance, empowerment of poor, especially women. Besides, it has also been clearly established that SMEs:

• swiftly adapt to changes;
• require relatively less capital;
• are innovative;
• are able to take quick decisions;
• are capable of developing niche markets;
• are nursery of entrepreneurs;
• have a demonstrative effect/impact, encouraging others to be entrepreneurs; and
• protect and promote local crafts.

 

Consciously Promoted

If one looks at the present status of SMEs, it would be clear that they have come to occupy such an indispensable position in an economy mainly due to the conscious and deliberate efforts made by national governments.  In fact, the first oil shock of 1974 and the subsequent economic fallouts such as inflation, unemployment and slowdown in investments in many countries compelled economic thinkers to re-look at SMEs as answer to these problems in view of their adaptability as noted earlier.  Besides, the then technological developments such as emergence of computer aided manufacturing (CAM), computer aided designs (CAD) and flexible management system (FMS), resulting in several large corporations vacating areas of manufacturing and concentrating more on marketing, technology development and diffusion, have favoured SMEs.

 

In addition, recognising the positive contribution that SMEs could make to the overall economic growth, several developed and developing countries, have deliberately promoted, nurtured and developed the sector. USA and Japan, to name just two among highly industrialised nations, have not only ensured necessary growth-enabling environment but have also established necessary physical and institutional infrastructure to cater to the requirements of SMEs.   Korea has also adopted similar approach.

 

India, because of its financial constraints and local socio-economic compulsions, has made the development of small scale industries (SSI) sector as an integral part of the over all economic planning.  Several other countries, including Arab nations, have also established their own programmes for the development of SMEs.

However, until recently, SMEs did not receive any specific assistance and support from the authorities in the Gulf countries and they had to survive amidst keen competition from low cost imports. In fact, they were not considered as a priority area for development as developmental needs related mainly to the creation of economic infrastructure. But because of their potential to generate employment, SMEs are now being accorded an important role in the promotion of private sector. Saudi Arabia, for instance, has put in place a programme to establish business incubators and technology parks. In addition, Small and Medium Enterprises Development Centre (SMEDEC) of Eastern Province Chamber of Commerce and Industry (EPCCI), kingdom of Saudi Arabia has initiated new measures to train and educate employees and entrepreneurs of SMEs.

 

The Dubai Department of Economic Development (DED) assigned a major role to SME sector and expects a substantial contribution from the sector to the projected 8 per cent annual growth in the non-oil GDP.  It has instituted several programmes to help young entrepreneurs. Jordan, the host of this important conference, is according high priority to the development of entrepreneurship and small businesses.

 

III. Business Development Services

Consistent with the national programme of socio-economic development, almost all countries have instituted various kinds of supports (other than financial) for their SMEs - termed business development services (BDS) – that would ensure smooth growth of the sector.  The guidelines developed by the Committee of Donor Agencies for Small Enterprise Development defined BDS as those “services that improve the performance of the enterprise, its access to markets, and its ability to compete. ……… BDS are designed to serve individual businesses, as opposed to the larger business community.”

 

BDS are especially required and relevant for SMEs because of their lacking ‘in-house’ expertise and specialisation to provide the required services and, thus, must obtain these from external sources owing to their size and financial limitations. Provision of the required BDS has been greatly helping SMEs improve their overall performance at economical cost. It would not be exaggerating to say that most SMEs owe their growth in many countries to the availability of such services.

 

While some countries, such as India, Japan, and the Philippines have established several specialised institutions to provide a variety of the needed services, others like USA and Israel, have set up a centralised support system. Besides State and State-sponsored institutions, BDS providers include a range of organisations in the private and non-governmental sectors, agencies in UN system such as International Trade Centre, UN Industrial Development Organisation, International Labour Organisation, inter-governmental organisations like European Commission, Organisation for Economic Cooperation and Development, and Association of south East Asian Nations and Donor agencies. These international agencies have evolved SME-specific programmes to build their capacities.

 

At a national level, the State and its sponsored institutes continue to be the major service providers, though private sector service providers have come up in many countries, rendering cost and time-effective specific support to SMEs.  In addition, Industry associations and trade and industry chambers also have been providing a variety of services.

 

The dominance of State could be traced to the fact that in most developing and under developed countries the governments have been devising SME policies and programmes to achieve social and economic objectives with a very limited role for private sector.  The private sector, consequently, has been operating primarily on commercial lines which, often, were at variance with the social objectives.

 

A perusal of services rendered by various types of agencies reveals that their efforts were concentrated on provision of such support that primarily addressed internal and external constraints of an enterprise, which included:

Illustrative list of BDS

SERVICE	ACTIVITY
Training	Entrepreneurship development; skill development; and marketing, financial, inventory, etc. management.
Product-Oriented	Identification; proto-type development; modification, etc.
Technical Services	Information on technologies including sources and cost; identification of appropriate technology (ies); technology acquisition; modernisation of technologies; quality improvement; improving cost and energy efficiency; reducing environmental impact; technology tie-ups.
Marketing Support	Market information; market/ marketing research; brand promotion; bid intervention; facilitating participation in trade fairs and exhibitions; organising buyer-seller meet; logistics; preparation of publicity literature; assessing credit worthiness of importers and providing marketing outlet.
Information	Government policies and programmes; training opportunities and facilities; trade fairs and exhibitions, etc.
Guarantees	Performance, payment, obtaining counter guarantees from credit guarantee companies.
Networking	Financial and other SME support institutions; interacting with SME support organisations in other countries, R&D institutions, international agencies; forging linkages with large corporations, TNCs and between and among SMEs; liaisoning with government departments, industry associations and chambers of commerce.
Consultancy and Counselling	Specialised service to address the specific issue(s)
Advocacy	At Government departments, international organisations for creating conducive policy and growth environment.

 

Though a wide range of support services are available for SMEs, their reach, however, are not to the desired extent, mainly owing to many SMEs not even being aware of the availability of these and to institutions’ own financial and manpower limitations. This problem is not peculiar to developing or under-developed countries’ SMEs alone but even the SMEs in developed world are similarly placed. A Study by the European Commission, DG Enterprise in April 2002 on ”Support Services for Micro, Small and Sole Proprietor’s Businesses” revealed that over 75 per cent of the micro, small and medium enterprises in Europe were not even aware of the availability of various kinds of support services to enterprises.

 

One of the important reasons for such ignorance about the availability of various kinds of services could be attributed to the most of them being based on the traditional ‘supply-driven’ approach which is at variance with the market requirements. Often, a SME may not find it useful any more.  Other problems relate to bureaucratic hassles and unprofessional approach to various issues.

 

What is needed today is the provision of ‘demand-driven’ services. Adopting such an approach also becomes all the more important to ensure optimal utilisation of scarce financial resources. Unlike in the past, no government today is in a position to dole out large amounts without concomitant results owing to their respective budgets being under pressure.  No longer, countries can accord preferential treatment to the SMEs nor, at the same time, can they ignore them and leave their fortunes to be determined solely by the inter-play of market forces.

 

IV. The Competitive Edge of SMEs

Thus, the SMEs are in predicament, not knowing which direction they should go. Compounding their existing woes, the recent past developments, such as the establishment of World Trade Organisation (WTO) in January 1995 and the globalisation and liberalisation of economies, coupled with transformation in information and communication technologies, have completely changed the rules of the entire business game. The WTO requires all signatory-nations to:

• Remove import restrictions and quotas;
• Lower import tariffs;
• Offer national treatment for imports;
• Grant ‘most favoured nation’ status to all member countries; and
• Establish a mechanism to protect intellectual property of products and processes.

The implications of these are varied and complex. Nevertheless, the new economic order has opened up new vistas of growth and development to SMEs amidst challenges. What is needed today is to identify the competitive strength of SMEs so that they can convert the challenges into an opportunity to be a part of the global supply chain.

Challenges before SMEs

Increasing market integration and rapid technological advances are integral part of the globalisation effects and together with the lowering of protective tariff and non-tariff walls these have lead to an environment where SMEs cannot rely anymore on the domestic market alone; they have to prepare for the global market. This implicates that they, generally, have to sharpen their competitive edge, i.e. they have to create a fit between both their available resources and their environment and also that they either act on a transnational level through linkages with major global players or internationalize themselves. Respecting environmental norms have also become important now.

Without going into details - which are too well known now, the major challenges to and constraints of SMEs are briefly enumerated below, juxtaposed to their capabilities/limitations

 

Challenge	Capabilities/ Limitations
Use of state-of-the-art technology	Mostly obsolete technology Lack of information on sources and cost of technologies Size limitations Lack of labour skills to work on new technologies Raw material constraints Infrastructure limitations Financial limitation Quick decision taking process
Use of Information and Communication Technology	High cost of installation Lack of skills/ knowledge Connectivity problem
Competition from imports due to opening of the economy	Mostly low and middle range quality products Have been working mostly in a sheltered market and little exposure to international market Small size of operations, resulting in relatively high cost of roduction Consumer preferences Inability to clearly establish dumping in some cases Ability to orient production
Increased role of FDI	Technical limitations to act as suppliers to foreign investors Inability to internationalise and transnationalise their operations owing to limited capacities to penetrate, analyse and segment the foreign market
Appreciate implications of WTO Agreements	vGeneral ignorance Lack of knowledge and skills
Exploit global market	Lack of market information and commercial intelligence Inability to network Inability to forge linkages to meet large demands Uncompetitive product – price and quality wise Inability to create brand loyalty Inadequate institutional support and backing
Adoption of modern business strategies	Lack of knowledge about new strategies Inability to spare time and manpower to acquire new management skills Lack of knowledge to profitably use E-commerce Inability to hire appropriately qualified and talented people

The foregoing, however, does not mean that SME sector has no future. But, on other hand, the new economic order has opened up several opportunities for a discerning SME to expand its business beyond the national borders. In addition, SMEs today have an opportunity to modernise their entire business operations with easy access to all needed inputs, including the imported ones.

The challenges noted above, in fact, are also the opportunities for SMEs to exploit. At the cost of being termed repetitive, opportunities thrown open by the globalised and liberalised world are summarised below.

• Exploiting global export market;
• Enhanced scope for partnership and alliances;
• Easier communication with customers and suppliers;
• Scope of becoming local suppliers to industrial giants;
• Access to state-of-the-art technology; and
• Scope to attract investment.

 

V. New Dimensions of BDS

But to exploit these opportunities and become integral part of the fast emerging global production system, SMEs need to be competitive in broader sense, capable of competing with foreign companies both in the domestic and international markets. The term ‘competitiveness’ is no longer limited to price and quality of the product but includes several other aspects.  Consequently, an SME can be termed as ‘competitive’ if it is able to service the required demand on time in desired quality, price and place and is prepared to address the consumer concerns, resulting in consumer satisfaction.

 

Instituting SME-friendly policies and programme, with a very effective delivery mechanism can go long way in strengthening SMEs. Since the governments are beset with several other responsibilities, and also have their own limitations, the private sector can be roped in to provide the needed support to SMEs, including building and managing industrial infrastructure in the form of industrial estates or parks, electricity generation and distribution, etc.

 

A competitive SME could become a sub-contractor or an ally of TNCs, which are increasingly transnationalsing their production operations by siting facilities in different countries to take advantage of the locally available resources. In these circumstances, a technologically and managerially sound SME has an opportunity to become a dependable ally of a TNC.

 

Such capacities and strengths in SMEs could be built by extending innovative, market-driven and cost-effective services, which, in any case, has to be more focussed and targeted.  Since cost of a service is a major concern of most SMEs, the pricing could be maintained at affordable level by adopting a bunching/group approach, both in services and in targeting beneficiaries.

 

Because of the limitations of national governments, as noted earlier, industry analysts and donor agencies favour development of an effective BDS sector. The Committee of Donor agencies for small enterprise Development had developed a set of guidelines for BDS providers. SME-oriented NGOs, including Industry Associations, could be an effective instrument to provide the required service to the sector, and the governments must encourage and promote them. The new economic environment also has greatly widened the market for BDS.

 

Service providers, however, need to be supported by the governments, which has the primary responsibility of promoting and developing the country’s SME sector and by donor agencies.  .

 

Irrespective of the type of BDS providers (government or private or NGO or international), they have to re-orient the traditional form and mode of services to enable SMEs build capacities in the specific areas. Strengthening SMEs assumes additional importance now because of shrinking employment opportunities in the corporate sector and increasing trend of outsourcing of products and services, mainly from SMEs by TNCs.

The main objective of BDS should be to develop the needed skills and expertise among SMEs and not make them dependent on others. A mechanism also has to be built to monitor the effectiveness of a service.

 

Some of the new forms of BDS that could help in improving the competitive strength of SMEs are briefly presented below:

 

Training/ HRD:

Þ    Capacity building in specific areas

Þ    Technical skill development in identified industries

Þ    E-business application

 

Technical Assistance:

Þ    Assisting in quality improvement

Þ    Adopting international standards

Þ    Helping introducing cost and energy-effective technologies

Þ    Productivity improvement

Þ    Providing common facility centres which might as well act as knowledge exchange bureau.

Marketing:

Þ    Help forging TNC-SME linkages

Þ    Help identifying Niche markets

Þ    Help developing Common brand / consortium approach

Þ    Hosting inter-state or inter-country conferences or trade-fairs to establish personal contacts, supply databases, or issue journals.

 

Information:

Þ    Market - Trade Barriers; trends; competitors

Þ    Technology sources and prices

Þ    Help creating awareness for the possibility of joint ventures

Þ    Providing information about new product developments or the need for change according to environmental influences.

Þ    Providing an appropriate second-hand market to acquire machines for helping those in need of such machines. This could be done by establishing contacts with TNCs which are disposing machines due to new purchases.

Awareness Building:

Þ    WTO agreements

Þ    Use of IPRs

Þ    Environmental issues and quality management

Counselling/ Consultancy:

Þ    To properly introduce new products and technologies and assess their fit with the immediate organisational environment.

Þ    Help develop joint venture partnership by providing micro level services such as:

-          Identification of joint-venture objectives and needs

-          Identification of potential joint-venture partners

-          Evaluation of the partner as well as the technology offered

-          Evaluation of other offers such as equity and marketing support

-          The legal aspects of the joint venture

Advocacy:

Þ    Growth enabling environment at national and international level

 

Combining many of these non-financial services with provision of finances would be beneficial to both SMEs and financial institutions.  Consequently, financial institutions should consider developing capacities to: provide information on markets and training facilities commercial intelligence; evaluate joint venture proposals; prepare business expansion plans, extend guarantees; guide on financial and taxation matters; and advocate the cause of SMEs at appropriate forum; etc. Such an approach would obviate the avoidable visits by a SME to several agencies.

 

Conclusion

In addressing the problems that SMEs are facing in developing the required capacities, the government, private institutions and NGOs should conduct benchmarking for the real effectiveness of service provided to assess its impact. This would help in devising appropriate mechanism to reach the service to the maximum SMEs so that they continue to grow and develop, contributing to both the economic and social goals of a nation.

 

Taking in account the present state of SMEs, the service provider should first create awareness among the SMEs about the problems they face by focusing on professionalism, product-, and market diversification.  Furthermore, existing institutional infrastructures should be strengthened and not new ones created and necessary resources such as technical infrastructure, access to information, and management training should be provided to SMEs. SME-related NGOs have a great role to play in this.

 

The service provider, therefore, should initiate programmes, training sessions and implement a support system that would yield the desired results. However, those initiatives should focus on supporting self-employment or should facilitate the currently running business; and avoiding eternal dependency on private/government institutions’ help.  Such an approach would develop the required competitive strength among SMEs.

References

1. 1. Enhancing SME Competitiveness, The OECD Bologna Ministerial Conference 2000, OECD
2. 2. Business guide to the World Trading System, International Trade Centre and Commonwealth Secretariat, 1999
3. 3. Various papers of UNCTAD
4. 4. 2002 review of Small Business Activities, Small and Medium Enterprise Department, International Finance Corporation and World Bank Group
5. 5. Emerging Good Practices in Business Development Services, The First Annual Seminar Turin Italy, 4-8 September, 2000, BDS Seminar Reader, By Mary McVay and Alexandra Overy Miehlbradt, International Labour Organization & International Training Center, Boosting Employment through Small EnterprisE Development
6. 6. Support Services for Micro, Small and Sole Proprietor’s Businesses, Results from the Study on “Support Services for Micro, Small and Sole Proprietor’s Businesses” on behalf of the European Commission, DG Enterprise, April 2002, Vienna
7. 7. The Future of Entrepreneurship and SMEs in Bahrain by Husain Al Rabeei, Head of Entrepreneurship Training Unit, Bahrain Training Institute
8. 8. www.jordanembassyus.org
9. 9. Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention, 2001 Edition, Prepared by the Committee of Donor Agencies for Small Enterprise Development, Secretariat: SME Dept., MSN F2K-207, World Bank Group.

10. Report of 12th WASME International Conference on SMEs in Antalya, Turkey, April, 2001

11. Report of 13th WASME International Conference on SMEs, Gibraltar, April, 2002.

12. Report of World Convention on SMEs 2002, Changzhou, China, September 2002

13. Proceedings of Gulf First SMEs Symposium, October 1999

14. Various issues of WASME Magazine – “World SME News”. \

(This is an edited version of the paper presented in an international conference on’ Competitiveness’  Key to the SME Development Agenda, 7-9 December 2003,  Aqaba, Jordan.)

 

Mr. V. N Prasad was formerly Economic Specialist with American Embassy, New Delhi; External collaborator with ILO projects; Senior Economic Advisor, World Association for Small and Medium Enterprises. A Post-Graduate in Economics and have specialised in Economic and Marketing Research. Have over 38 years of experience in studying industrial sector, particularly the issues related to SME development, identifying business opportunities and conducting research studies and preparing reports. Has been associated with over 18 economic and market research studies (field-based) while working with Indian Institute of Foreign Trade, New Delhi and World Association for Small and Medium Enterprises (WASME), Noida, Uttar Pradesh. These included Export potential surveys, Demand studies, Overseas market surveys, Institutional framework for exports, status and capabilities of specific sectors and policy-related aspects. Have had represented WASME at various national, including then SSI Board, and international meetings

Consultancy Assignments: Labour Regulations for SMEs in India for Institute for studies in Industrial Development, New Delhi, 2005-06.

External Collaborator to Sub-regional Office in Asia of ILO: Project on Review of Policy and Regulatory Framework for SMEs in Uttar Pradesh, India (job involved preparation of an Integrated Report) 2004.

Research Studies: Directed three field-based studies on SSI sector in India for developing appropriate policies and programmes.

Papers at International Conferences:

• Fostering Growth of SMEs: Some Recent Initiatives in Select Countries, XVth WASME International Conference on SMEs, Abuja, Nigeria, July 2004
• Strengthening Policies through International Cooperation at International Roundtable on Enabling Growth and Innovations in SMEs in Helsingborg, Sweden, International Network for SMEs (INSME), Italy, February 2004.
• Improving the Competitiveness of SMEs through Business Development Services, Competitiveness Key to SME Development Agenda, Aqaba, Jordan, December 2003.
• Building a Cadre of Rural Entrepreneurs WASME Experience, XIVth International Conference on SMEs, Tel-Aviv, Israel, September 2003.

Also delivered lecture on Role of NGOs in Promoting SMEs at International Course on Comprehensive and Integrative Public Support Systems for SMEs A Central Factor of Development Policy organised by NISPED - InCep-SME, Israel.
Publications: Edited World SME News a WASME Magazine and several Reports of WASME Conferences.

Email: vnpj@yahoo.com, vnpj@samadhanfoundation.com