SME'S IN ECONOMIC DEVELOPMENT

The role of Small and Micro Enterprises in job creation is well known and even in developed countries over 60% employment is in this sector.

By BEHRAM TARIQ
Sep 13 - 19, 2004

The Small/Medium Scale Industrial sector plays a pivotal role in the industrial development of Pakistan because it employs less fixed capital investment, generates more employment opportunities, uses indigenous technology and raw material. and helps reduce urban migration.

It is unthinkable to imagine how it will be if a country does not have small and medium enterprises in her economy. Without the services of small and medium enterprises, the populace will not get supplies of food and other essentials and manufacturing sector well not get cheap raw materials and supplies, and the whole economy will come to a standstill. A country may survive without large enterprises, perhaps at a less efficient level, but a country cannot survive without small and medium enterprises.

Pakistan is a labour surplus economy with scarce capital resources. In view of this factor, the development of medium and small industry has specific effects on the balanced and dynamic growth of the country. It has a number of advantages over large scale industries as it generates more jobs per unit of capital and is more capital efficient. Similarly it is also strongly integrated into the domestic economy. Small industries use a high percentage of local raw material. Most of local consumable products are produced by Small Scale Industries. It taps resources at grass root level. Lastly, promotion of Medium and Small Industry induces rapid growth of large scale manufacturing in the long run.

The role of Small and Micro Enterprises in job creation is well known and even in developed countries over 60% employment is in this sector. Therefore, in order to develop this sector expansion of infrastructure facilities, deregulation and liberalization of economy, fiscal and financial incentives are to be provided and promotional activities such as skill development, industrial estates, common facilities and marketing arrangements have to be made. The Micro and Small Industry is considered as the "back bone" in the economic development of a country. It plays a pivotal role in contribution towards GDP and job creation.

A large majority of the country's population lives well below the subsistence level and due to financial constraints the government lacks resources to improve the lot of poverty stricken people. A growth rate of 2.1% in population further deteriorates the situation. Due to these reasons the real income and employment level of our population is on the decline. In our peculiar circumstances, the only solution lies in the large network of small enterprises specially in the rural setting. It also proves the fact that the investment cost per job created in the case of small enterprise is many time less than that in the case of big business, SMEs not only create employment opportunity for entrepreneurs but to his family members and associates. On the other hand it generates cheaper goods and services to our population which will break the cycle of ever increasing price rise. The more employment and goods and services produced will increase our GNP tremendously and become a catalyst in breaking the poverty cycle.

In Pakistan big business does not have enough resources to invest large amount on research and development and large Government institutions which were established for this purpose have not contributed to innovation and invention expected of them. As small businesses are very flexible and operate near its consumer base, it has the ability to adapt according to the ever changing needs of the consumer. The contribution of SMEs in new inventions and adoption of improved technologies is much greater than in the large formal sector with its huge capital base. The role of SMEs in the development of rural areas is important on many counts. The aspect of employment creation and poverty alleviation has already been discussed above. The third important aspect is the migration of the rural work force to the large urban areas creating very severe civic problems for the cities. This unplanned urbanization can only be stopped by providing better job opportunities and living conditions at their rural base.

Small enterprises play a important role in the provision of services to our daily requirements. Supplies of food, transportation, daily necessities and personal services are all provided by small businesses. Small wholesalers help the manufacturers distribute the goods all over the country, and small retailers make it possible for the customers to purchase many different items in one shop. Without the services of small enterprises, our life will be hampered and very inconvenient.

Advantages of economy of scale can be achieved only through large-scale operations. Some business activities require large amount of capital and high level of technology which are beyond the capability of small enterprises. Hence large enterprises are also important to the national economy of a country. Like the small businesses, they also provide employment and training of skills. However, the large enterprises cannot survive on their own. They require the supporting services of small enterprises, in terms of supplies of raw materials, parts and components, semi-finished goods and distribution of finished products. Especially in some developing countries which try to attract investment, they must ensure the foreign investors of sufficient and efficient supporting services available locally. Subcontracting is becoming increasingly important both to small industries for survival and to large industries for supporting services. To large industries, the small enterprises can more economically provide essential parts and services which enabled the final products of the large corporations to be more competitive in the export markets. Some products or components and accessories do not require high precision work and can be produced at the required standard by small industries, freeing resources on the large industries to concentrate upon more important areas such as marketing, quality control, product design and research and development. SMEs provide the largest number of skilled labour to large industrial sector due to small number of vocational institutes in Pakistan. The majority of skilled labour are "Chothas & Shagirds" trained in SMEs.

SMEs contribute about 30% of our export of manufacturing sector. Export development in the small scale sector has been accorded high priority in the export strategy of the country as it results in creation of more employment opportunities, ensures utilization of capacity for capacity for production and improves the quality of products apart form bringing in foreign exchange. Small scale sector has to increasingly expire their products for earning incomes by exploiting export demand; augmenting purchasing power of their workers on and effective and self-sustaining basis for economic development in the country and for financing their import requirements, following an increasing sophistication and diversification of their production.

For maximizing export effort in SMEs sector, it is necessary to identify the selected products with production advantage in this sector and export market prospects in view of international trade conditions. Such and identification is to be followed by projecting export demand for the selected products, reviewing and planning production capacities, for the same to meet projected export demand.

A significant feature of the exports from the small industry sector is that the bulk of the exports are of nontraditional items like ready-made garments, sports goods, finished leather and leather products, woolen garments and knitwear, processed foods, marine products, drugs and pharmaceuticals and a host of engineering and electronic goods. The solution of Pakistan's major economic problems lies in the development and growth of SMEs which will help not only by providing employment opportunities to our ever growing population but also will become catalyst to break the vicious circle of poverty. This will go a long way in improving the quality of life of the people. The success of promoting small businesses are merely to be protected. Instead, they must be given an opportunity to compete in a rule-based free market. Government support is not effective when it is used to foster an appropriate business environment that produces fair competition. That way small firms can increase their competitiveness and viability. Mere protection and quick-fix measures would be counter productive in the long run.

Above all, strong entrepreneurship is the essential element of success in small businesses. They must fully commit themselves to the goal of competitiveness to survive. Small businesses must therefore, set their sights far beyond the horizon. To be more competitive in the present century, they must be highly globablized with well organized information infrastructures. In the business world of the future, only truly competitive, globalized companies will survive and prosper.