MGT602 Entrepreneurship GDB 2 Solution Fall 2013

Case: The Small and Medium Enterprise (SME) sector transmits countless expectations and great loads in the development of market economies. The SME sector is the backbone of the economy in high-income countries, and a fundamental part of the economic fabric in developing countries, they play a crucial role in furthering growth, innovation and prosperity. Under these conditions, SMEs can develop the country by creating different opportunities for its public. SMEs play an important role in the growth of economy. One of the important features of a successful financial system is having flourishing SMEs sector. SMEs develop the economy through various means. It generates employment in country, provides sustainability and improves the output of economy as a whole. In this way, SMEs support large number of people directly or indirectly. Constant and vigorous growth of this sector is apparently essential, as it is hard to imagine growing overall living standards and societal harmony without such a development.
Small & Medium Enterprises are foundation of country’s progress and especially for the success of people having low income. SMEs produce income for people located in countryside and the commercial area linked with this activity. Pakistani market rely on pace & productivity of SMEs. They are considered as engine for economic growth all over the world. Globalization has provided the SMEs many opportunities to work in line with large scale organizations. From a theoretical viewpoint, SMEs have several advantages and series of barriers that raise their operating costs and creates hurdles in Small and Medium Enterprises.
Point of discussion
Despite of the all the advantages offered by SMEs mentioned above, it has been observed that the pace of SMEs growth is still low in Pakistan. In your opinion what are the leading causes that has restrained the growth of SMEs in Pakistan till today? 20 Marks (mention at least 5 points)

Role of SMEs in Pakistan

Pakistan has emerged as the second rapidly growing economy in Asia after China in 2004 – 2005, as claimed by government and well accepted by international raters and financial institutions. According to Economic Survey 2004-05 this increase in real GDP is the courtesy of robust performance of large scale manufacturing and services sector. Even though the large scale manufacturing registered 15.4% growth but small and medium enterprises (SMEs) is the core issue in the country’s progress and especially for the prosperity of masses that are surviving with low scale income due to which Pakistan ranks 135th out of 174 countries on Human Development Index.

When we think about SMEs, we consider it as one person manufacturing enterprise but according to SMEDA Small Enterprises should possess ten to thirty five employees with two to twenty million rupees capital intact in equity. Medium Enterprises should possess thirty six to ninety nine employees with twenty to forty million capital intact in equity. Here we have to see the role SMEs have in the progress and well being of masses in Pakistan.

The assessment of the role of SMEs in Pakistan is of vital importance. Sometimes we have shinny figures and data regarding economy like GDP growth or per capita income but these can be misleading because the earners of these massive growth are not masses but the capitalists in the country. SME produces the income stream for masses located in the countryside and the capitalists associated with this activity that is generally medium or small as the name suggests.

In Pakistan SME sector is not only the minor sharer till yet, reality is that Pakistan’s whole economy is highly dependable on the pace and productivity of SMEs. Out of Pakistan’s 3.2 million enterprises 95% are those who possess 99 employees in private industrial sector and employ about 78% of non agriculture labor force. SME contributes 25% export of manufacturing goods and 30% of GDP is the outcome of business efforts of SMEs.

The vital question is not “what SMEs have produced?” But, what they are capable to produce? The simple answer is if they produce on their full potential and capacity Pakistan would be way ahead on economic racetrack of the world. They can produce billion of dollars worth items that is why SMEDA is quite right in stating its mission as “Turning potential into profits”. Turning potential into profits gives us a truer and fair picture of the role of SMEs in Pakistan. Now we will see what potential we have and the threats associated with it and how we can turn potential into profits by overcoming existing threats.

Firstly we have to talk about the main potential we have to boost the progress and efficiency of SMEs. The real potential of SME growth in the country is the deprived people of this country who are quite keen to raise their standard of living. It simply means the future of SMEs is associated with the temptations of highly talented but deprived masses of Pakistan and their will to turn their dark days in to glittering ones. But the real problem associated with their will and dreams is finance and technical assistance. Financing concerns have two issues; first is availability of finance and second is the rate plus the terms on which the finance is available.

Financing SMEs in heavy liquidity period for banks is not a burden but an opportunity because bank can utilize their liquidity by advancing finances to SMEs. By advancing to SMEs they can have two advantages. First when they advance to many small and medium enterprises as compare to large ones, their lending amount will be distributed to a number of clients that will increase the probability of recovery. Secondly, the contribution in national economic growth via utilizing their liquidity that is excess due to great activity in economy in the period after 1999 and especially after 2001 that will further expand the activity in banking sector in near future.

Exploring a specific niche product is another way to boost SMEs sector. Niche is a unique product that we can produce at low cost with an absolute advantage. In Pakistan we are producing Niche from Wazirabad by producing the international quality surgical instruments and Saialkot is there for sport goods. SMEDA and other concerns like EPB have to come up to explore more niches that are sure available in this country of highly skillful workforce. In this regard Prime Minister’s program of ONE VILLAGE ONE PRODUCT is of high importance. Even we could not achieve economy of scale through this niche but available glittering demand in international market can offset the cost burden and causes the inflow of foreign exchange.

The movement of masses from rural to urban areas is another hot slot of the time. While developing a well integrated SME sector in the country, it is the clear cut advantage that we can stop this mobilization that certainly is creating the urban problems and increasing the urban development overheads and cost of maintaining big cities like Karachi. Even it will be a factual probability that through SMEs we can convert our villages into new towns and sources of revenue and progress.

Stock markets in the country are in deprivation of number of newly listed companies; I think it is for the sake of well being of stock markets and SMEs that SMEs should be authorized to get listed in shape of a venture of 3 to 5 SMEs on stocks on relatively smaller amount of capital that is how the SMEs could muster the very capital and while becoming a part of corporate culture that can give way for them to have good management. In early stages the board of SME companies (as they would not be able to pay handsome amount to experts) should consist of experts of Federal, Provincial governments and specialized financial institutions and the small and medium enterprises. Small and medium entrepreneurs should possess the majority shares and the shares of these stakeholders have to be to the extent of their support and inline to compensate nominal through the profitability of the companies.

SMEs will be the main source of poverty reduction in Pakistan that will create the value and innovation for the country in the days to come. The thing that really needs serious attention is to remove the unnecessary bureaucratic procedures. It is essential to make it possible that the opportunities for small entrepreneurs should not be wasted through excess processing of finance applications or other official terms. Assistance to SMEs is not enough; the government and specialized financial and technical institutions should stand as partners of small and medium entrepreneurs, this is the only way that the financial institution can recover their funds with yield. Government could achieve its goal for poverty reduction, economic progress and above all the value creation process by promoting the culture of SMEs. This is the only way that can make sure the poor masses of Pakistan shall not live poor anymore.