Understanding the characteristics of small business contribution at the local level and its impact on overall economic growth is crucial. The term SME originated in The Economist’s world, referring to a company that is rated based on a range of criteria including the size of its workforce and the value of its assets. Size classification varies within regions and across countries in relation to the size and endowment of the economy. It is important to note that there is a minimum and maximum size for an SME.
Small and Medium Enterprises (SMEs) play a very important role in the well-being of any economic system. Still, this role becomes more important if the economies are in transition or belong to developing countries. According to a report by the Economist Intelligence Unit Survey, economic growth (averaging 4.6% annually) is largely due to small and medium enterprises. While there can be a long list of benefits that small and medium businesses offer, the heaviest is the freedom that a small business provides an entrepreneur to experiment, innovate and take risks. Hence, it generates the entrepreneurial enthusiasm and desire for personal achievement that motivates small investors and professionals. According to the same Economist report, nearly half of those surveyed have engaged in business to achieve their personal goals. This drive to fulfill then paves the way for the success of these SMEs which in turn provides a boost to the overall growth engine of any economy.
The benefits of small and medium enterprises are not limited to the developing world only but are most evident in the developed world as well. Small and medium industries and the small business community are the backbone of the European economy. There are over 23 million SMEs in the European Union, accounting for 99% of European enterprises, and they are responsible for 60% of Europe’s GDP. They are also the main job creators in Europe employing more than 100 million people.
For any economy, small and medium enterprises with high turnover and adaptability play a major role in reducing sectoral imbalances in that economy. Moreover, the easy entry and exit of SMEs makes economies more resilient and more competitive. Due to the ease of entry and the resulting increase in the number of small and medium enterprises, competitive market pressure is created which relieves monopolies and helps to increase the quality of products and services.
Interestingly, most of the current large companies have their origins in small and medium-sized companies, but downsizing, layoffs and mergers have made jobs in large companies more risky and less attractive to employees. The beneficiaries of this are small businesses as the more creative talents are usually more keen to join the smaller outfits where they can stand a better chance of tapping and exploring their potential.
Smaller businesses also tend to have closer relationships with customers and meet customer needs more effectively and quickly. Small businesses also offer their owners a better position to make quick decisions about innovation, pricing, and other business strategies that offer a beneficial competitive advantage.
Small and medium enterprises tend to employ poor and low-income workers and are sometimes the only source of employment in poor and rural areas. They are usually widely spread and reach a large number of population in a country even in remote areas. This role of small and medium enterprises is especially important in developing countries where there is a lot of poverty.
Pakistan is one such country whose economy has benefited a lot from small and medium enterprises. According to a report by the Small and Medium Enterprises Development Authority (SMEDA), Ministry of Industry, SMEs make up nearly 90% of all firms in Pakistan, employ 80% of the non-agricultural workforce, and have a share in annual GDP of 40%, approx. With these statistics, it would not be unfair to say that small and medium enterprises are the backbone of the Pakistani economy as well. The Ministry of Industry has helped the Government of Pakistan on the SME issue to a great extent, but there are problematic areas that require continued attention from the Government.
Financing is one of the many problems small businesses face. For small and medium-sized companies, financial resources are often limited, which often forces companies to choose solutions that seem cheap at first, but later hidden costs appear during the various stages of implementation, which leads to financial crises. High costs of R&D (research and development) and training are issues in which SMEs find particular difficulties in the face of limited development and production capacity.
Because of their small size, small and medium-sized enterprises usually lack management capacity, and their ability to access and analyze information is particularly weak. They cannot afford costly support services such as financial, human, legal, training, etc. On a more strategic level, small and medium-sized companies do not have the ability to influence the overall business environment in their favor the way larger companies do. In addition to the assistance provided by SMEDA, the SMEs themselves have to take measures to address the problems. They must develop strong management teams and embrace a culture of learning and sharing knowledge with other SMEs. For financial assistance, SMEs have to rely on banks and find ways to overcome the shyness of banks in financing small businesses.
Many studies have been conducted over the past two decades on the role of small and medium enterprises in national development. Everyone has proven that the role of small and medium enterprises in national development, job creation and poverty eradication is undeniable.
(By Mohamed Ahmed Sheikh (Freelance Broadcaster/Journalist/Incharge R&D, Sheikhupura Chamber of Commerce and Industry)