MGT601 - SME Management - Lecture Handout 05

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SMALL ENTREPRENEUR IN PAKISTAN AND ROLE OF SME IN GLOBAL AND REGIONAL LEVEL

This lecture will introduce the small entrepreneur in Pakistan the activities of SMEs in global and regional level. It will also reveal the role of SMEs in a developing economy.

Salient Features of Small Entrepreneurs in Pakistan

  1. Single Owner Entrepreneur
    He works with his own hands, combines the entrepreneur function of initiating the business making investments, taking decisions and performing managerial functions.
  2. Age Pattern
    The mean age of entrepreneur was found to be 42 years and of their enterprises 12 years. It is comparable to the Korean age pattern (46).
  3. Educational Level
    Differing from industry to industry 60% have school education and 30% have college or better education only 10% have professional or graduation level.
  4. Social Background
    Caste played an important role in certain industries and on the other hand heritage is dominant. But overall it is much diversified.
  5. Sizes and Investment
    Majority started in a small way with less than 10 workers and 1/2 to 2/3 of the firms started with less than 50,000 investments.
  6. Growth
    The growth was fast in case of small firms than in large firms.
  7. Profitability
    Rate of profit is higher in case of small industries in comparison with the large industries.

Role of SMEs in a Developing Economy

Unemployment and under employment are the prevailing economic diseases in most of the Asian countries and they are result of a fundamentally disproportionate relationship between population and the use of available land resources. Rapid and continuing increase of population, in the last half century have led to a situation in which there are far too many people engaged in agriculture this situation is further aggravated by an antiquated system of land tenures, by poor standards of health and malnutrition by the use of primitive and inefficient techniques on small un-Economical holdings and by an uncertain climate for rains, weather changes etc. among the classical remedies suggested for tackling the problem of poverty and underemployment, large scale industrialization is perhaps the most important. This has no doubt, resulted in a phenomenal increase in the production of useful goods and have brought movement in living standards as well as in lowering the rate of population growth. But in many Asian countries large-scale industrialization has been slow particularly for the shortage of supply of capital.

Under the circumstances, the problem of unemployment and underemployment can be tackled by the expansion and modernization of the existing small-scale cottage industry and the introduction of new industries capable of raising the level of production and improving the present depressed standard of living. The large-scale industry has been slow to develop and has succeeded to a very limited extent in absorbing the surplus population of the countryside. SMEs are still the most extensive tools for controlling unemployment.

In Ceylon (Sri Lanka) as early as in 1949 nearly 286,000 persons were engaged in small industries, in China in 1949 approximately 10 million workers were responsible for 80% of the total industrial output by working in SMEs. In India more than twenty five million people are engaged in cottage and small industry.
In countries like Germany, Switzerland and France there exists today a large group of industrial workshops and units side by side with the large factories. Japan furnishes the most striking example of the survival and growth of small-scale industries. This phenomenal development is due to careful planning, the integration of industries with agriculture and not the least important.

Cottage and small industries have a very important role in the national economy, offering as they do, scope for individual, village or cooperative enterprises and means for the rehabilitation of the displaced persons.

National Approaches
South Africa

In South Africa there are about 80000 small medium sized and micro enterprises in addition to the two to three million persons carrying different self-employment activities.

Country Index Share
United States Less than 100 employees 34% employment and 32% sales
Japan Less than 300 99% of all employees’ establishments.
71.9% of all employees. 55% of all value added. 51.8% of all shipments.
Federal Republic of Germany Less than 10 employees 85%% of all companies.
France Less than 9 employees 99.9% of all firms.
Chile Less than 9 employees 99% of all firms.
39% value addition.
Republic of Korea Small industry 38.4% value addition.
Brazil Small- scale sector 43.6% employment.
29.6% production share.
Philippines Small scale manufacturing 90% of all establishments.
50% of employment.
About 33% value addition.

Pakistan

SMEs are considered as engines of economic growth in both developed and developing countries. They provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units.

  • Assist in regional and local development since SMEs accelerate rural industrialization by linking it with some organized urban sector.
  • Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities.
  • Contribute significantly to export revenues because of the low cost labor-intensive nature of its products.
  • Have a positive effect on trade balance since SMEs generally use indigenous raw materials.
  • Assist in fostering a self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancements schemes.
  • Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency.

Although no accurate data is yet available, it is estimated that there are approximately 220,000 SMEs in Pakistan, which:

  • Provide employment to over 80% of the labor force since artisans, workshops, household units, craft industries, vendors and agro based businesses that cluster around the townships and population centers have a tremendous capacity to provide employment.
  • Contribute more than 50% to GDP by manufacturing products to meet the demands of local and regional markets.
  • Contribute more than 50% towards export earnings through both, direct and indirect exports. Have a default rate that is far less than that of large-scale enterprises.
  • 15% for SMEs, as against 65% for LSEs. Avail credit to the tune of only 12% from the formal financial sector, which indicates the wide gap between the lenders and SMEs.
  • The SME sector also provides both rural and urban women to utilize their vocational skills while staying within residential premises. In urban areas, many female entrepreneurs have introduced product lines uniqueness has created a strong demand in the market.
  • Today, the SME sector is the lifeline of the big industrial establishments due to its direct contribution and support towards value addition and exports. For the past three decades, the fastest growing export industries have been dominated by SMEs. Of all, cotton weaving and textile rank between the top two exporting sectors. Others include sports goods, surgical instruments, carpets and footwear etc. SME exports dominate low value added sectors and rely on traditional technologies.

Saudi Arabia

  LARGE FIRMS SMALL FIRMS
Sales per employee SAR 486,000 SAR 158,000
Gross Margin to Sales % 14.2 4.4
Return on Assets % 18.7 5.4
Saudization* 14.3 8.5
Jobs created per million SAR invested 1.0 28.3

* Saudis as a share of total employees.

The erroneous view of SMEs all-scale industry, which is persisting in many developing countries, is that they constitute only a transitional phase in development and that small industry development is a temporary expedient or a “second best” alternative. This seems to base on the assumption that as a country moves from a traditional to a modern economy, it will have no more need or place for small-scale industries. But experience of some of the most industrially advanced countries clearly shows that while some industries start as small and grow into large establishment in terms of capital, output and employment, small scale industries as such continue to constitute a fairly large and important sector of their industrial structure. In the United States, Germany, the United Kingdom, the Netherlands and Japan industrial enterprises employing less than 100 persons account for the overwhelming majority of small- scale industrial enterprises. Employing less than 100 persons need not necessarily be small. Because in capital-intensive industries in advanced countries generally small number of workers may be evidence of automation rather than smallness in size. However, in a majority of cases, enterprises employing less than 100 persons may be taken as relatively small in the scale of operation as well. The contribution to total output in manufacturing ranges from about one quarter to one third, and to total employment in manufacturing from about one quarter to one half in some industries.

Small establishments have a predominant position, in the United States for example, they contribute more than 75% of total value added in certain branches of foodstuffs and clothing industries. Small industries can coexist successfully with large industries because of certain inherent advantage of small-scale production or of small industries which functions complementarily with large industries as producers of components and supplies for them. Experience in advanced countries has established the fact that in certain circumstances, in manufacturing certain products by small industries cannot only coexist with large industries, but also even out compete them. Similarly, experience in developed countries has proved that the subcontracting system by which a large numbers of small firms supply components and parts of large industries have not only stabilized and strengthened the small firms, but also contributed substantially to the efficiency and economies of the big industries. One of the major tasks of the small industries promotion should be to identify the industries where production on small-scale basis offers the maximum advantages and give direction and lead to potential entrepreneurs into such fields. In fact, we would consider this as the first and most important step in small industry promotion. It is true that some small industries require some more measures of protection. This incidentally is true also of many large-scale industries as well. If care is taken to promote sustained capacity, it will be possible to build up a truly balanced industry structure where small and large industries will coexist to their mutual advantage. Given adequate encouragement, this sector has greater potential of growth with spin of benefits. An investment in small enterprises is alone synonymous with investment in human resource.

References

  1. Small and medium enterprise development( A visionary action in Saudi Arabia) by Ismail Radwan & Jamal al-Kibbi( World Bank Institute)
  2. Small Entrepreneurs in Developing Countries by Dr Asghar Nasir
  3. Unit 2 -What is an SME (A UNIDO Publication)

Book recommended

Small Entrepreneurs in Developing Countries by Dr Asghar Nasir

Key terms

  1. Antiquate
  2. GDP (gross domestic product) the annual total value of the goods produced and services provided by a country)
  3. Default rate (The rate of failure to pay back the loans/credits)
  4. Value added (The worth placed on a product by a particular stage in the production process)

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