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SMEs usually more productive than large enterprises

Published on 21st Sep, Edition 38, 2015

 

Small and Medium Enterprises are the biggest group in terms of a number of industrial units. They play a pivotal role in the rapid industrialization of the country and have a significant effect on the income distribution, tax revenue, and employment. According to the World Bank, the SMEs are generally more productive than large enterprises. In the developing countries, SMEs are performing a very positive role in the development of export-led industrialization.

Pakistan is recently facing a lot of problems like unemployment and slow growth in agriculture. In this critical time, we have to look seriously at different sectors of the economy that have the viability to provide employment to the million of unemployed. The higher employment growth possibility lies in the modern high technology industries, but it is also present in the labor-intensive industries of the traditional Small Enterprise sector and in the services that support it. There is an urgent need to promote SMEs in the country. In the past, successive governments in the country failed to invest a reasonable amount in SMEs and human resources development

Small and Medium Enterprises are now considered as a major tool of economic prosperity for the vast majority of people, specifically in case of developing and underdeveloped countries alike. They speed up economic activity; develop exports and create million of job opportunities in every sphere of life.

Recognizing the significance of SMEs, the USA, and European countries have formulated diverse policies and institutions to extend vast help to small businesses. The developing countries like China, Taiwan, India, and the Philippines have already taken various measures to accelerate the strength of the participatory development model by multiplying SMEs all across their boundaries.

A Good Example Of Taiwan

Taiwan has already accomplished the position of an industrialized advanced country while China is attaining the position of the recently industrialized country. Taiwan has to its economic advantage 97.8 percent of SMEs. Taiwanese SMEs contribute 85 percent to the country’s GDP by absorbing about 85 percent of non-agricultural labor force. SMEs have accelerated economic and social growth making Taiwan the one of the largest per capita ($16,400) earned in Asia and holder of one of the largest foreign exchange reserves in the world. Taiwan rapid economic development is due to the strategic development of SMEs. Here it may be particularly mentioned of its vast development in the early 1960s and 1970s. The government of Taiwan must be credited to its large support to the small enterprises for their growth and development

China represents the largest number of small and medium enterprises in the world. According to the statistics released by the State Administration for Industry and Commerce in 2012, there were 25.057 million registered small businesses in China. The country tops the world by having 99.6 percent SMEs of the total enterprises and 75 percent share in GDP by engaging 80 percent of non-agricultural labor force. With $3,774 per capita income, China became the second-largest economy of the world in 2010 by exceeding Japan.

China’s economic growth started in the late 1970s, by producing cheap goods and services and later moving up into modern technology and investment in large industries like steel and plastics. The spread of modest technology intensive new enterprises in China was the result of the government’s different policies and programs to promote research and invention in the SME sector.

There is roughly 3.2 million business project in Pakistan and the share of SMEs in industrial employment is estimated 78 percent. SMEs in Pakistan contributes 30 percent of national GDP. About 46.46 percent of the total exports and 80 percent of the total employments are being contributed by SME sector in the country.

The SMEs create high number of jobs with lowest investment for instance, the cost of job creation in a garment unit of about 200 workers, being an SME based sub-sector of the textile sector, is approximately Rs70,000 per job, whereas, the cost of per job in the spinning unit, being a large industry of the textile sector is about Rs1.1 million. 65 percent of the total SMEs in Pakistan is situated in Punjab, 18 percent in Sindh, 14 percent in Khyber Pakhtunkhwa, two percent in Balochistan and 0.6 percent in Islamabad. Over 40 percent of Pakistan’s total GDP; US$240 billion comes from the SME sector alone.

In Pakistan, SME sector is facing hurdles such as complications and fear of entrance in the global markets. Due to lack of capabilities, SMEs are not able to participate competitively in the national as well as international level. There is lack of proper training, better education. This is the key causes of the failure of SMEs in Pakistan.

SMEs should be redefined. Small and medium traders should be considered as two separate subjects. Like the Reserve Bank of India, the State Bank of Pakistan should redefine, and place small and medium businessmen in two separate categories of borrowers. In the present circumstances an enterprise with a turnover of up to Rs300 million come to SME Bank and gets a big amount of loan from the Bank; denying small traders of this financing facility.

Small and medium entrepreneurs generally do not share information and data about their businesses. Even they do not show audit reports of their accounts and the annual turnover figures. All this creates troublesome for SME Bank to lend to these businesses.

The five-year SME Development Plan chalked out by Small and Medium Enterprise Development Authority (SMEDA) last year has attracted government attention because of presenting a number of initiatives for job creation through development strategies of 13 potential sectors. The plan is targeted to generate 10 million new jobs by establishing 270,000 new SMEs to be resulted into an increase of about $ 120 billion in GDP and an addition of national exports worth US$36 million in next five years. SMEDA services and projects have mobilized a total investment of about Rs28 billion up till now.

The world economies were making heavy investments on their SME development institutions so as to provide a good environment to their SMEs for rapid and sustainable growth. For instance, the per capita investment made by Japan, Korea and Brazil on their SME development institutions is US$78.52, $70.12 and $7.24 per SME respectively.

Similarly, Turkey is investing on its SMEDA US$0.53 per SME and India is spending $0.09 per SME on its SME development department. As compared to the given facts, SMEDA, in Pakistan is currently operating with just 95 employees out of the 195 approved headcount and the per capita investment to be made by government, which is US$0.01 only.

 

More Part Of SMEDA

Small and Medium Enterprise Development Authority (SMEDA) should play its role actively to give the boost to the economy. It needs to focus on three areas including agriculture and livestock, food and fruits processing and pharmaceutical sectors that have huge growth potential. The areas need government’s attention for the growth is the SME sector.

It should develop projects, which are not heavily dependent on electricity and gas, as improvement in energy situation will take a minimum of two to three years. It is suggested to develop a mechanism to certify Halal products as they have a huge export potential and could be great source of foreign exchange earning

Studies should be conducted for setting up solar plants. India is indigenously developing its solar panels and inverters. They are manufacturing their own dry batteries whereas Pakistan is lagging behind in this area despite much need.

The Union of Small and Medium Enterprises have urged the government to include the SME development in Vision 2025 without fail as the vision would remain incomplete without the inclusion and sharpening of essential SME promotion and development tools.

They advised the government to facilitate, encourage, support and motivate the primary sector which is very big from grass roots level and facilitate the SMEs to modernize their farms, agricultural produce processing, manufacturing units and services. The best value addition could be done by SMEs provided they are facilitated.

There is the need for providing finance to SMEs at the affordable markup and with repayment facilities on pay as you earn schemes under leasing system and include commercial property leasing as an important tool in uplift of the sector.

There is also the great need for SME credit guarantee insurance without which the banks will not finance the sector as various schemes of the State Bank of Pakistan (SBP) have not achieved the desired results as banks are not prepared to take risk.

It is very much essential that industrial estates are established within house facilities alternate energy generation and the land is allotted to the SMEs at concession and on installments.

The taxation system needs to be revised; it should be based on lower taxes and higher collection and tax benefits for new entrants, innovative industries, import substitution industries and export industries based on the indigenous raw material.

The government must recommend duty free imports of energy generation devices, raw and packing material and income generation vehicles, farm equipment, tractors, harvesters and other modern farm machinery.

The government needs to examine the report of the International Finance Corporation (IFC) of World Bank regarding desired changes in SMEDA for making it a very effective body for SME promotion and development.

The Vision 2025 should include establishment of SME chamber of commerce, technological institute, export house, ombudsman for SME grievances, SME-specific fund or bank, setting up of dehydration units and cold storage units near farms and logistic systems including collateral management.

The SMEs need a good environment, educative information, technology, finance, incentives and marketing support for growth. The government is duty bound to cater to the SMEs requirements being the majority sector and the backbone of the economy. It is also the back forte of the large sector.

Approved Standards For SMEs

The Securities and Exchange Commission of Pakistan (SECP) has approved the adoption of International Financial Reporting Standards (IFRS) for Small and Medium Enterprises (SMEs) and Accounting and Financial Reporting Standards (ARFS) for small-sized entities (SSEs).The adoption of IFRS is effective from annual financial periods beginning from January 1, 2015.

The SECP has said that all the non-listed public limited companies, including SMEs, are required to file their annual financial statements in accordance with the IFRS for SMEs issued by International Accounting Standards Board (IASB).Similarly, all SSEs will be required to prepare their accounts, i.e. balance sheet and profit and loss accounts in accordance with AFRS for SSEs (Revised) issued by the Institute of Chartered Accountants of Pakistan (ICAP).

The adoption of IFRS for SMEs by the SECP shall enhance the credibility of information by giving additional useful disclosures and comprehensive information. In addition, the public non-listed companies, according to their category, shall either follow the IFRS or IFRS for SMEs only while preparing their annual financial statements.

SMEs in Karachi and Lahore have many problems like the energy crisis and difficulty in access to finance. One reason is the lack of professional management, which can be overcome by entrepreneurship development programs and training

Compared with the developing countries in general and China and Taiwan in particular Pakistan performance of SMEs is dismal. The backwardness in this sector has been particularly due to no availability training facilities, sufficient finances, technical assistance and R&D Support.

State Bank of Pakistan (SBP) undertook a thorough review of existing Prudential Regulations for SMEs in consultation with relevant stakeholders. The wider objective of the review was to create more focus on Small Enterprises, by defining them separately and formulating more specific and simpler regulations for them.

The revised SME PRs underline significance of cash flow analysis and other placeholders to assess the primary source of repayment and also emphasize on the greater use of technology and documentation for disciplined credit control for monitoring of credit quality.

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