Thursday, July 24, 2008

SME scenario around the world*


In developing nations, mobilising SME viability has attained significant positions among many strategies of economic development. In the scenario of global, knowledge-based economy, these nations are now looking to make use of Information and Communications Technologies (ICTs) to support and facilitate SME development. ICTs have proven to be vital tools in improving the efficiency and expanding the out reach of SMEs to global market in a more innovative way. There is no universal definition of SMEs since the sector is diverse and flexible that resists any narrow categorisation. SMEs are generally defined on the basis of annual turnover, number of employees, investment in plants and machineries, assets etc.

SMEs in Asia

The contributions of SMEs to employment and the countries' gross domestic product (GDP) are by no means trivial. As of July 2006, close to 140 million SMEs in 130 countries employed 65 percent of the total labour force. SMEs already contribute bulk of growth, and SMEs could make a much bigger contribution to the Asian regional economy if efforts were made to address impediments to SME internationalisation. This could add as much as $1.18 trillion in trade over a 5 year period. It is without a doubt that ICT has enabled the Micro, Small and Medium Enterprises (MSME) networks to become more integrated, and more effective across longer distances, operating with more efficiency and conducting transactions in greater volume. However, it must be noted that in reality the small businesses that constitute the bulk of developing economies have yet to reap these benefits evenly as obtaining such opportunities rest largely upon the ability of its SMEs to engage in the regional and global economic business networks which, in turn, demands provision of a pre-requisite level of access to and use of ICT. China is regarded by all SME leaders as having the most competitive SMEs. This is followed by North Asian markets including Japan, Hong Kong, Korea and Singapore. There is a lot of scope in other regions to enhance the competitiveness of the SMEs. East Asian SMEs for example provide about 70 percent of employment in the region. However, it can be noticed that the average number of people employed per SME is more in developing countries when compared to the developed economies. This means there are fewer start-ups, and the pool of SMEs from which high grown SMEs can emerge is much smaller. This makes a strong case for a major thrust on micro-enterprises to push up employment rates.On a broader scale, within and among countries in the Asia Pacific region there are growing rural-urban disparities in terms of policy support, access, affordability, and absence and relevance of practical content. The rural-urban digital divide is widening because of geographic locations, lower literacy, and lack of knowledge and awareness. Urban populations seem to be benefiting more than the rural areas from new infrastructure, applications, and services. Supporting MSME as a vehicle of self-empowerment, capable of working in both the urban and rural environment, can effectively act to connect the two environments together, facilitate knowledge transfer and encourage collaboration.

The top 10 barriers

(i) Shortage of working capital to finance exports; (ii) identifying foreign business opportunities; (iii) limited information to locate/analyse markets; (iv), inability to contact potential overseas customers; (v) obtaining reliable foreign representation; (vi) lack of managerial time to deal with internationalisation; (vii) inadequate quantity of and/or untrained personnel for internationalisation; (viii) difficulty in matching competitors' prices; (ix) lack of home government assistance/incentives; (x) excessive transportation/insurance costs.

SMEs in Africa

SMEs comprise over 90 percent of African business operations and contribute to over 50 percent of African employment and GDP. SMEs sector has shown positive signs in South Africa, Mauritius and North Africa. In South Africa, SMEs constitute 55 percent of all jobs and 22 percent of gross domestic product (GDP) in the year 2003. SMEs constitute 95 percent of formal manu-facturing activity in Nigeria. Senegal and Kenya have provided conducive environment for SMEs. Subcontracting is uncommon in Africa, but has grown in South Africa since the year 1998. Clusters of SMEs are little developed in Africa and are concentrated mainly in South Africa, Kenya Nigeria, Tanzania and Zimbabwe. In Angola, Novobanco provides loans free of bank charges, without a minimum deposit and informal guarantees (property assets and a guarantor), as well as permanent contact with loan managers. During 2005, the UN Year of Microfinance, the international spotlight was firmly on SME development in Africa. Some of the initiatives for the SMEs sector in Africa are:

• UK Commission for Africa: It advocated the creation of an African Enterprise Challenge Fund , to be backed by US$ 100 million of investment, and is designed to support private sector initiatives targeted at SME development.

• African Development Bank: AfDB launched a Small and Medium Enterprise Facility in Africa (SMEF-Africa) to complement its existing franchisee to support SMEs development programme.

• International Finance Corporation: It published the work of its Africa Project Development Facility (APDF) to support SMEs and, in collaboration with other donors, established the Private Enterprise Partnership for Africa (PEP-Africa) to build on the work of the APDF in establishing a strong private sector in Africa.

• United Nations Industrial Development Organisation: UNIDO established a Cluster/Network Development Programme so as to provide access to training, information and advice on business management for SMEs.

Problems faced by SMEs

(i) Political and economic instability; (ii) limitations in absolute market potential; (iii) informal or non norganised ( Bringing the SMEs into the formal sector is expected to generate increased revenue through taxation and Formalisation can help the SMEs to get protection under legislation.); (iv) standardisation and benchmarking, (v) lack of a coherent regulatory framework and a legal/policy environment which is conducive to business; (vi)small local markets and undeveloped regional integration; (vii) access to formal finance is poor because of the high-risk of default among SMEs and due to inadequate financial facilities; (viii) micro-credit institutions remain fragile and modest in size etc.

SMEs in Latin America

Studies pertaining to Latin America reveals that clustering has helped local enterprises to overcome the growth constrains if attention are to be paid for the factors like external linkages and significance of global market, imbibing specialised skills, and getting access to technology, information and credit facilities. Recent changes in system of production, channels of distribution and financial markets, accelerated by the globalisation and the spread of Information and Communication Technologies too suggest more attention needs to be paid for the external linkages to upgrade the clusters to boost nations' economy. The nature of the industrial sector also plays a role that affects the SMEs' upgrading prospects (upgrading as innovating to increase value added). Enterprises may achieve this in various ways, as for example by entering higher unit value market niches, by entering new sectors, or by undertaking new productive (or service) functions.

Obstacles for small businesses

(i) Lack of data and definitional understanding, (ii) inadequate government support hindering the competitiveness; (iii) access to funding and working capital; (iv) lack of conducive legal systems for their countries (iv) market intelligence and streamlinsing the supply chains; (v) transportation infrastructure etc.Key issues in this broad study include perceptions around business climate, economic and employment forecasts and specific business practices. It also examines the importance of international commerce, the impact of free trade agreements and the influence of China.

Facts about SMEs in Africa

• Around 80 per cent of firms in Congo have fewer than five workers. Congo has 2,100 firms in the formal and 10 000 in the informal sector.

• A 1997 survey in Benin showed that of the 666 SMEs counted, half were in commerce and the rest were mostly in construction, or were pharmacies and restaurants. Only 17 per cent were in manufacturing.

• SMEs in Kenya employed some 3.2 million people in 2003 and accounted for 18 per cent of national GDP.

• SMEs in Senegal contribute about 20 per cent of national value-added.

• SMEs in Nigeria account for some 95 per cent of formal manufacturing activity and 70 per cent of industrial jobs.

• In Morocco, 93 per cent of all industrial firms are SMEs and account for 38 per cent of production, 33 per cent of investment, 30 per cent of exports and 46 per cent of all jobs.

• Micro and very small businesses in South Africa provided more than 55 per cent of total employment and 22 per cent of GDP in 2003. Small firms accounted for 16 per cent of both jobs and production and medium and large firms 26 per cent of jobs and 62 per cent of production.

Source: African Development Bank and OECD Development Centre, African Economic Outlook (2004-2005).

• Lifting of trade barriers and the establishment of free trade agreements within Latin America t for promoting greater prosperity, according to 92 percent of SME executives

• 72 percent anticipate greater trade with China • 53 percent of SME leaders have plans to expand their payrolls.

• To sustain the success and competitiveness, 87 percent of the region's executives want government to provide more support and 86 percent want greater access to financing.


It is expected that the presence of global companies can help the establishment and growth of SMEs, through the use of local suppliers and distributors. Innovative initiatives for encouraging and stimulating new businesses by providing seed funding, training, capacity building and business opportunities in their supply chains provide not only social but micro economic and macro economic advantages. In both developed countries and emerging markets, franchising has been effective in ensuring business growth with private ownership and skills transfer. To help SMEs emerge, there is need for a better investment climate, improved capacity to cope with banks' requirements, and more diverse sources of financing from financial institutions and the existing large enterprises. Business cooperatives in Africa are also keen on forming SME support network to share best practices and to cross-guarantee each other's funding. In order to encourage investment in SMEs, there is the need to reduce SME project financing risk.

(* The article has been written by: Ajitha Saravanan, Prashant Gupta and Shambhu Ghatak)

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