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Factors That Impact the Development And Advancement of SMEs

Abstract

SMEs are of immense importance as they are the cash generators, which can give rise to the economic structure, and proves to be innovative and prosperous to the developing countries or cities. Even Karachi also have many of these SMEs which are experiencing severe crisis nowadays. Present research study discusses that how some of the macroeconomic factors affects the SMEs in Karachi. In order to carry out this research we have make a survey to all of these Small and Medium Enterprises.

By distributing the questionnaires throughout Karachi we have collected, recorded and analyzed data that yielded best possible elucidation about the factors which has been affecting these enterprises or the entrepreneur.

Introduction:

Small and medium enterprises abbreviated as SMEs, plays a vital role in framing an economy of the country. They are supposed to be the cash generators which can give rise to the economic structure, and proves to be innovative and prosperous to the developing countries.

Karachi- being the backbone of Pakistan’s economy has many of these new or old small and medium sized enterprises, among which some are those that are serving the nation for many years.

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Nowadays, these enterprises are in severe crisis due to many factors that greatly hinders the growth of these SMEs which in turn effects the economy of Pakistan.

Our present research will fall the light on all those factors that are responsible for limiting the growth of SMEs in Karachi-Pakistan which includes Competition, Corruption, Government policies and Shortage of electricity

The definitions of SMEs and their theoretical approaches: Literature review

The word SMEs have vast meanings and broad range of definitions.

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According to the World Bank: SME as enterprises have a maximum of 300 employees, 15 million dollars in annual revenue and 15 million dollars in assets. Meanwhile the definition of the European Union states: “Micro, small and medium enterprises are those that employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million and / or an annual balance sheet not exceeding 43 million Euros”. In this way small and medium enterprises are defined as enterprises with 10 to 250 employees, more than EUR 10 million turnover or EUR 10 million annual balances. This definition is more inclusive, especially in terms of turnover, compared with some other definitions. [1]

Small and Medium enterprises has been greatly affected in Pakistan during the recent years. Uncontrollable, Macroeconomic factors are the real cause that affects the growth of enterprises. These may include all the social, economic, political, legal, technological, demographical and environmental factors.

Among these main external factors that affect the development and growth of SMEs is access to finance, development of giants, corruption, competition, government policies, shortage of electricity etc.

Measuring the growth of SMEs

Different indicators are used to detect or measure the growth and development of SMEs which may include profits generation by SMEs, outputs, asset values, market shares, increased employment or rate of employee turnover, growth turnover, sales etc.

Effects of external factors on the growth of SMEs

Enterprises are affected by external macroeconomic environment that cannot be controlled such as political, economic, social, technological, environmental and legal factors (Morrison (2006). These factors can rarely be affected by management decisions because they are external factors beyond the control of SMEs. [1]

Corruption

The first challenge that SMEs face in Karachi is corruption. Pakistan is the 117 least corrupt nation out of 175 countries, according to the 2017 Corruption Perceptions Index reported by Transparency International. Corruption Rank in Pakistan averaged 108.68 from 1995 until 2017, reaching an all-time high of 144 in 2005 and a record low of 39 in 1995. Pakistan Corruption Rank is projected to be 125 in 2018 according to a Trading Economics poll. According to the TE survey, 57% of users expect the value to be higher than the previous release while 43% of participants foresee a decrease (Trading economics). This shows that Pakistan is really and high in corruption and this effects the growth of businesses.

Competition

By entering the competition, the company tries to find competitive advantages that greatly affect the success of the enterprise (Walley, 1998). SMEs are usually not very competitive in terms of market knowledge, innovation, prudent investment, business operations and good management, which are important factors in improving the quality (OSMEP, 2007). Developing countries compete with other countries as a result of globalization and increased trade however barriers and other restrictions generally favour these countries (Lind, 2009). Competition is increasing by international companies as a result of the Free Trade Agreements (OSMEP, 2007). A survey of SMEs in developing countries was carried out by the World Bank. According to the findings of research competition represents a risk for survival for individual enterprises. Although competition represents high risk, it is the one who pushes companies towards higher productivity which actually results in their growth and development. During the last decade many researches have been carried out regarding the barriers faced by SMEs in Pakistan. The main barriers have been “Unfair competition” that includes tax system, the informal economy and public services, barriers which continued with the same intensity throughout the period. (WB, 2010). [1]

Government policies

The importance of SMEs to the economy of a country indicates how important it is to have government policies that support SMEs, including regulations that enable them to operate efficiently and regulations that reduce their administrative costs (Harvie and Lee, 2005). Although there have been initiatives by governments to promote and support SMEs in order to enhance their development and reduce poverty, there is still a lack of laws and genuine administrative procedures such as accessibility to assistance from the government agencies (Harvie, 2005). According to World Bank research, complex tax systems, low level of trust in the judicial system, and the need to pay bribes to access public services, represent major barriers (WB, 2000) [1].

Role of SME sector in globalization

SME sector is the backbone of the economy in countries with high income, but this sector is less developed in countries with low income [2]

Organization for Economic Cooperation and Development (OECD) reports that more than 95% of enterprises in the OECD area are SMEs. These enterprises employ about 60% of the total employees in the private sector, and provide a major contribution in the field of innovation, supporting regional development and social cohesion. Also, SMEs in most countries with low income give significant contribution to GDP and employment. [1]

Research Methodology

A sample of 46 employees from SMEs located in Karachi was collected. Data collection was accomplished by a questionnaire survey. The population of the study consisted of managers and owners of SMEs in the areas of Karachi. A self-designed questionnaire was used to gather the research data. The questionnaire consisted of various factors that play their parts in SMEs. The respondents were asked to fill the questionnaire which gave us an understanding about the factors that affects the growth of SMEs. A total 10 sets of questionnaires were distributed among managers of SMEs, all participants were responded [2].

Small and medium enterprises in Karachi

  • Some of SMEs in Karachi are:
  • Adsmess Software TM
  • Al Sharqi logistics private limited
  • SME promotions private limited
  • Dusky Solution
  • Crypto coast
  • Hayat Enterprises

SME contribution in the economy of Pakistan

According to the estimation the SME sector in Pakistan contributes 30% in the GDP. It also provides 90% jobs in the agricultural sector, along with adding 35% value in the manufacturing industry. It also generates 25% export earnings which are about up to US$ 2.5 billion, (SBP 2009). The survey which was conducted by SMEDA (Small and medium enterprise development authority) revealed that the SME enterprises in Pakistan are 72% sole proprietors, 12 % are partnership which are registered by government, 9% are partnership which are not registered by government, 6% are private companies and 1% are other enterprises.

The SME sector is considered as a lifeline of Pakistan’s economy constituting almost 99.06 percent of all economic establishments, according to the ESP (2009), out of which 53 percent of the establishments relate to Wholesale and Retail Trade, and Restaurant and Hotel sectors, 20 percent are part of manufacturing sector and 22 percent fall in the Community, Social, and Personnel Services sector. SBP (2010a) provided very latest statistics and according to it, 90% of the total SME loan portfolio is concentrated in Punjab and Sindh, 64.22% in Punjab and 25.93% in Sindh, while only 10% share is taken by Khyber Pakhtunkhwa, Baluchistan, Gilgit Baltistan, and Azad Jammu and Kashmir. The State Bank of Pakistan (SBP) report reveals an overall decline in SME financing was observed, which fell 20% to Rs.348 billion in 2009 from Rs.437 billion in 2007, as a consequence of loan defaults and slowing economy. It was also reported that 89% of the loan disbursements by SMEs were for working capital requirements, which reflects banks’ reluctance for providing long-term financing and venture capital needs. According to one of the recent article on the same issue, the three major cities in Pakistan which are Lahore, Karachi and Faisalabad account for more than 50% of total SME financing in the country. It also states that top 20 cities altogether make 85% of the total SME financing. This report was stated in Dawn newspaper on May 17, 2010. The share of SME financing in total lending portfolio in Pakistan is only 10% (Daily Times: May 6, 2010).

According to State Bank of Pakistan (SBP 2010) in 2009 about 89% of the SME financing was received for meeting working capital needs, This shows the unwillingness of the banks to finance for long run projects. According to another publication by SBP in December 2008, at the end of fourth quarter of 2008, the total outstanding credit of SME sector stood Rs383 billion. About 48% of this amount has been availed by manufacturing SMEs, followed by 36.4% by trading SMEs, and the rest i.e. 15.6% by service SMEs. The share of short-term loans (up to 1 year) constitutes about 70.9%, long-term loans (exceeding 3 years) up to 19%, and the rest was the share of medium-term loans (1 to 3 years), i.e. 10.1%. As per SBP review on, the total non-performing loans up to 31- 12-2007 stood Rs41.3 billion, which constitutes 9.5% of the total financing to the SME sector in 2007. The SME sector contributes 60% of GDP and over 70% of total employment in low-income countries (LIC); while they contribute over 95% of total employment and about 70% of GDP in middle-income countries Surprisingly, more than 90% industrial units in the country are small SMEs. 84% of the SMEs have annual revenue of less than Rs0.5 million (DFR 2008) [3].

Table 2.1: Contribution of SMEs in Pakistan in the Economy of Pakistan

  • Total Numbers of Economic Establishments 3.2 million
  • Total Numbers of SMEs 99% of all enterprises
  • Average No. of Employees in 99% of SMEs 1-10 persons
  • Share in Export Earning 25%
  • Share in Gross Domestic Product (GDP) 30%
  • Share in Manufacturing Industry 35%
  • Source: Data tabulated from reports of SBP (2009); Federal Bureau of Statistics (09); & Economic Survey of Pakistan 08-09
  • Table 2.2: Distribution of SMEs by Sector, as % of GDP

Sector Share in GDP

  1. Services 17%
  2. Manufacturing 30%
  3. Trade & Hotels 53%

Competition:

One other factor that affects the growth and development of SMEs in Karachi is the competition. As it can be seen from the data gathered, that 80.4% of the sample thinks that competition is a major obstacle in the growth of SMEs. Procedures and costs of starting a business presses entrepreneurs to avoid investments or to join the informal economy. These barriers result in weaker competition, unfair competition and adversely affect investments (World Bank 2010). Surveyed enterprises have assessed unfair competition as an obstacle to the development of SMEs in Karachi [4]. Some of the Enterprises in Karachi which give completion are SipCloud Solutions, Creative duos, The Project Lab etc. All these are IT sector SME’s which are in competition with one another [7].

Corruption:

In many socio-economic areas there are problems and one of them is corruption. Long-term consequences of corruption in transition economies and developing countries can be very harmful. Karachi still faces numerous challenges in infrastructure and economic development policy. Our research results shows that people working in SMEs strongly agree that corruption is a hindrance in the growth of SMEs. As a consequence of corruption, the SMEs are not provided with a chance of growth.

Government policies

Besides corruption and unfair competition there are problems with the judicial system and the implementation of laws and regulations by governmental bodies which adversely affect the business of the enterprise. These are seen as obstacles to doing business according to the World Bank Report, where Karachi is listed at the 9th rank among 13 cities suitable for doing a business. When our research was conducted, it was found out that 78% of the people think that government policies are a barrier in the growth of SMEs.

As per Daniel Isenberg, professor of entrepreneurship practice at Babson College, the ecosystem consists of hundreds of elements but for convenience they are grouped into six major elements, namely: an encouraging culture, empowering policies, access to finance, quality human capital, accessible and vibrant markets for products, and a range of institutional and infrastructural supports [5].

The role of the government is imperative in creating this ecosystem. For starters, they need to be much more involved in understanding the existing dynamics and challenges of new start-ups, keeping their finger on the pulse, promulgating regulations and policies that help new businesses to breathe and for existing businesses to sustain.

Shortage of Electricity

285750148463000As electricity is a major problem in Pakistan, it also effects the growth of small and medium enterprises. The shortage of electricity is a hindrance in work. The same work which could be completed in an hour would now take double time. Even if there are generators present in the enterprises, the time which it takes to shift to generator is wasted. In our research, more than half of the people think that shortage of electricity affects the growth of SMEs [6].

Conclusion

The reason for this study was to recognize factors that impact the development and advancement of SMEs in Pakistan with particular emphasis on external factors.The conclusions are determined on the basis of survey conducted among various small and medium enterprises in Karachi.Various components influencing the development and advancement of SMEs in Karachi-Pakistan have been recognized in this research. The data collections shows that corruption, competition, government policies, and shortage of electricity are some of the factors that are a hindrance in the growth and development of SMEs. For the purpose of comparing and measuring the weight of the funding or access to finance as a factor, the look into included different factors too, for example, rivalry, defilement and government strategies. According to the research, rivalry isn’t considered as a negative, but instead, the unjustifiable rivalry is viewed as a boundary to big business.

References

  1. E-ISSN 2039-2117 ISSN 2039-9340 Mediterranean Journal of Social Sciences MCSER Publishing Rome-Italy Vol 4 No 9 October 2013 704
  2. ArbianaGovori, 2013. “Factors Affecting the Growth and Development of SMEs: Experiences from Kosovo,Mediterranean Journal of Social Sciences, Vol 4
  3. International Journal Of Business And Management Studies Vol 5, No 2, 2013 Issn: 1309-8047 (Online) Factors Affecting The Performance Of Small And Medium Enterprises (Smes) In The Manufacturing Sector Of Cairo, Egypt Menna Allah Ahmed Fouad
  4. Kasetsart Journal of Social SciencesVolume 38, Issue 3, September-December 2017, Pages 204-211 Factor affecting innovativeness of small and medium enterprises in the five southern border provinces
  5. MAGNT Research Report (ISSN. 1444-8939) Vol.3 (8). PP: 118-123, 2015 (DOI: dx.doi.org/14.9831/1444-8939.2015/3-8/MRR.03) Internal Factors Influencing the Growth of Small and Medium Enterprises: Evidence from Pakistan Dr. Umara Noreen.
  6. Indus Journal of Management & Social Sciences, 4(2):30? 44(Spring 2011)        The Role of Small and Medium-size Enterprises (SMEs) in the· Jawed Ahmed Qureshi 30 The Role of Small and Medium-size Enterprises (SMEs) in the Socio-economic Stability of Karachi Javed Qureshi1 and Gobind M. Herani 2

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Factors That Impact the Development And Advancement of SMEs. (2019, Nov 21). Retrieved from http://studymoose.com/factors-that-impact-the-development-and-advancement-of-smes-essay

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