Spread Knowledge

MGT601 - SME Management - Lecture Handout 02

User Rating:  / 0
PoorBest 

THE REGIONAL CONCEPT Of SMEs

This lecture will throw light on the relationship between small and big business ,concept of SME’s in our region i.e. South East Asia and in Pakistan. It should give a student a clear idea about its definitions in these areas and will help him in differentiating the variable factors of labor, investment and production volume of our region in comparison with developed countries of Europe and USA.

The Relationship between Small and Big Business

Small businesses powerfully effected by developments within the big business sector this relationship serves the interest of general economic disequilibria. Small business is less affected by economic disruptions and is more or less self-adjusting. It tends to act as cushion for economy .The nature of interlink age between small and medium business is as under

  1. Job subcontracting i.e. the large business provides materials and components to small units who process the same into finished goods
  2. purchase subcontracting i.e. in this case the material is procured by small unit who manufactures a specific part or component needed by a particular large unit
  3. Complementary: in this case the product manufactured by small company is purchased by a big unit as accessory like plastic dust covers for video recorders, electronic passive components, packaging etc.
  4. Merchandising or commercial trading: in this case the small units manufacture the goods and big units on the strength of their financial power market it with their own brands like fans, washing machines, refrigerators etc.
  5. Maintenance and repair services: many large enterprises give the operation and maintenance contract to the small companies due to being more economical and helpful
  6. Social benefits: employment generation, decentralization of industrial benefits etc.

The regional Concept of SME’S

The countries generally try to identify their SME sector in order to target it for special assistance. Yet, the definition of an SME depends to a greater extent on local conditions. An enterprise considered an SME in one country might well be bigger than many large countries in another. In some cases, the SME sector is further broke down in to two separate groups

A generic definition is not easy to find, any definition of classification of SME can thus be considered specific to the country in question. Countries have widely different definitions of SME’s for example, in India; the criteria for determining SME status are based on investment while in South Africa SME eligibility depends on the number of employees and turn over. There are nevertheless three parameters that are generally accepted, either signally or in combination, in defining SME’s in most countries, these are:

  • Number of workers employed which is the most widely used criteria
  • The level of capital investments or assets
  • The volume of production or business turnover.

In many countries, medium scale industry is not defined and is understood to include those that fall between small and large industries:

Criteria Used to Define SME’s in South East Asian Countries
  Employees
(Number)
Capital
(US $ ‘000)
Turnover
(US $ ‘000)
Brunei
Darussalam
Small 1-10
Medium- sized 11-100
   
Indonesia SME’s <100 SME’s <84
(Total assets)
SME’s < 1,000 (sales)
Lao PDR Small < 10
Medium- sized 10-29
Depends on the number of establishments in sector  
Malaysia SME’s < 76 Small < 198
Medium-sized 198-939
 
Myanmar Small <50
Medium-sized 50-100
Small <167
Medium-sized
167- 835
Small 417
Medium- sized 17-1,670 (production)
Philippines Small 10-99
Medium-sized 100-199
Small <570
Medium 570-2,282
 
Singapore Services sector
SME’s <100
Manufacturing sector SME’s < 8570  
Thailand Labor-intensive industries:
Small <50
Medium-sized 50-200
Capital intensive
Industries- fixed assets:
Small 781
Medium-sized 781-3,905
 
Viet Nam Small < 50
Medium-sized 50-100
Small <4
Medium-sized 4-18
 

Source (United Nations, Small industry bulletin for Asia and Pacific (No, 30 page 44)

The SME’S in Pakistan

Pakistan’s economy is an economy of SME’s. Policies in the past have given a general perspective, direction and defining broad parameters of activity within the macro economic framework, but efforts have focused on the large enterprises, neglecting SMEs which are at the heart of our economy while SME’s are being mentioned in some of our socio-economic strategies and policy documents, measures are not sufficiently specified and prioritized for us to be able to speak of any coherent SME policy or approach. SME promotion is an important issue for many government departments and central offices. However, there is an existing lack of coordination and regular information exchange mechanism among institutions that constrains their collective ability to deliver in the SME development process.

The Government’s Effort towards SME Development

The government of Pakistan keeping in view the importance of SME’s has adopted multi pronged approaches at the regional, sub regional and national levels. Initiatives at the national and sub regional levels include efforts to strengthen economic integration and cooperation. At the national level, structural adjustment programs have been inauguration along with attempts at re structuring and diversifying the production base, integration the informal sector into the economic mainstream and stimulating increased participation at the enterprise level. The development process was initiated in the 60’s and the concept of development derived its origin from within, “Indian model” of small enterprise development. The basic idea behind this model is to develop infrastructure facilities such as industrial estates, common facility centers and vocational training institutes which would to a great extent the problems faced by SME’s. Based on this model numerous provincial level organizations were setup mostly with the help of foreign assistance in the shape of grants and soft loans. The definitions thus depend upon the criteria set out by such provincial or federal institutions.

Definitions by Provincial Level Institutions

  1. Punjab Small Industries Corporation (PSIC):
  2. Sindh Small Industry Corporation (SSIC):
  3. Small Industries Development Board (SIDB)
  4. Directorate of Industries Balochistan (DIB)

These organizations defined the small industries as under:
An industrial undertaking with fixed investments up to 20 million excluding the cost of land and no limit of people employed.

Definition by Small Business Finance Corporation (SBFC)

Small:

  • No limit of people employed.
  • Productive assets limit of 20 million

Medium

  • No limit of people employed.
  • Productive assets limit of rupees 100 million.

Youth Investment Promotion Scheme (YIPS)

According to the concept paper on SME’s in Pakistan, developed by YIPS, small-scale industry was defined as industrial enterprise with fixed assets of up to rupees 10 million (Excluding the cost of land and building). It is pertinent to note that majority of the definitions have been formulated either by the national institutions themselves or with the objective of meeting the financial requirements

The State Bank of Pakistan
MICRO:

The State Bank’s federal credit scheme (small loan scheme) for micro and small scale enterprises, defined their target group in year 1972 –1973 as enterprise with assets of less than rupees one million (excluding the cost of land and building). This limit was redefined in the year 1992 and increased to rupees 20 million.

SMALL:

Assets up to rupees 20 million (excluding the cost of land and building)

Small & Medium Enterprise Development Authority (SMEDA)

The government to promote the cause of SME development in the country has recently established SMEDA. Given the mandate of SMEDA, it was not possible to work in the absence of definition for the target segment. At a broader level SMEDA’s objective is not only limited to catering to the financial requirements of the SME’s whereas its mandate encompasses all other aspects such as marketing, human resource development etc. SMEDA went one step ahead and used two variables to define SME’s in Pakistan. Following are the definitions of the SME’s:

Micro:

  • Less than 10 people employed
  • Productive assets limit of 2 million rupees.

Small:

  • Between 10-35 people employed.
  • Productive assets limit of 20 million.

Medium:

  • Between 36-99 people employed
  • Productive assets limit of 40 million.

Definitions of SMEs in Pakistan

The definitions of “small” and “medium” sized enterprises differ from one country to another. Each country has adopted different criteria for defining SMEs, such as the number of workers employed the, volume of output or sales, the value of assets, etc. As far as the case of Pakistan is concerned no concentrated efforts are observed at a macro level to define SME’s. Numerous efforts have been made to formulate basic policy guidelines limited to the small-scale industry while ignoring a vital component, the medium sized enterprises.

As a result, inconsistent policies have been formed from time to time without taking into considerations the overall importance of SME sector. The need for a uniform definition is crucial for the successful development of this sector. Various organizations follow different definitions of SME’s according to their needs. Mainly these definitions are based on one variable, the fixed assets; key motive is to cater the credit requirements of the small-scale sector.

References

  1. Pakistan Small industries entrepreneurs Gallup/BRB World Bank survey
  2. Research cells LCCI (Lahore chamber of commerce and industry)
  3. SMEDA (research Cell)
  4. Small Enterprises in developing Countries By Dr. Asghar S. Nasir
  5. State Banks circular for Micro credits

Recommended Book

Small Enterprises in developing Countries by Dr. Asghar S. Nasir

Key Terms

  1. Multi pronged (with many tips, branches)
  2. Generic (Belonging to a class or group)
  3. Soft Loan (A loan with very low interest)
  4. Grant (A non returnable helping money or commodity)

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