Virtual University Of Pakistan: SME Management (MGT-601)

SME Management (MGT-601) VU

Lesson 1

This lecture will give a clear concept of history, definition and regional concepts of SMEs. A student should

be able to understand the concept of small business, its characteristics, definitions, kinds and an overall view

of its comparison with large business.

THE HISTORY:

Recent years have seen a major resurgence of small business throughout the developed world. The countries

like divided Russia and Eastern Europe are prizing such skills very high.

The first piece of writing about the small business discovered was of about more than 4000 years ago. This

writing is about loaning from a Bank for a small business with terms and conditions. Since then, the small

business people have been the backbone of most economies providing products and services to the

consumers.

Small business flourished in almost all ancient cultures. The Egyptians, Arabs, Babylonians, Jews, Greeks

and Romans contained a substantial population of small business. Their products and services, however,

were often of poor qualities. Consumers were cheated and degraded. The result was that small business

became object of contempt. To protect the customers from such unscrupulous traders, HAMMURABI, the

king of Babylon introduced the first business laws.

Despite many successes the Greek and Roman historians virtually ignored the role of small business and

talked more about the other things. Yet it was largely through small business that the traders by doing

business in other countries spread law, religions, and philosophy and basic sciences.

In the centuries that followed the small business, the religions held small business people in low esteem.

Although now held in the higher esteem than ever before, small business remains overshadowed by

professions such as medicine and law.

When Adam Smith published “Wealth of Nations” in 1776, he was describing an economy in which local

small business was virtually being the only economic entities. Indeed, the era of local economy was the

heyday of small business.

In the undivided subcontinent if we look at beginnings of the known history of small business, the cottage

industries thrived through the period when society was organized more or less into self sufficient and selfcontained units. The sub-

Continent industry, whether small or large scale, suffered a serious set back Page during British rule. Indian

industries including small and cottage did not receive any patronage during the period before Second World

War. It was, however, since independence that a positive policy for the industrial development could be

formulated and implemented.

The best model of small industries in our region is considered to be of India. This model is defined the

SMES development through the development of infrastructure. In the year 1938 national planning

committee “NPC” was set up and its general secretary Mr. K.T. Shah made the definitions of cottage,

village and small-scale industries. The various definitions since then are in practice having different variables

as manpower, capital, assets value etc. The definitions are as under

DEFINITIONS

Cottage Industry:

The cottage industry or small scale industry may be defined to be an enterprise or series of operations

carried out only by a workman skilled in the craft on his own responsibility, the finished products of which

he markets himself. He works in his own home with his own tools and materials and provides his own

labor. These workers are mostly hand labors and having personal skills with little or no aid from modern

technology and machinery they work in accordance with the traditional technique.

In the year 1940 another Indian definition came which had a more pragmatic approach where it was

divided small industry into following categories. SME Management (MGT-601) VU

1: No mechanical power and no hired labor.

2: No mechanical power and hired labor fewer than 10 persons.

3: No mechanical power but hired labor of over 10 persons.

4: Mechanical power under 10bhp but no hired labor.

5: 3 and 4 are treated here as small industries.

6: Mechanical power under 10bhp and hired labor

7: Mechanical power over 10bhp and hired labor.

Here 6 and 5 were considered as the medium size industries

Different countries defined these categories in their own way. In USA the small industry was defined as “a

business qualifies a small if does not dominates its industry and less than 100 employees”

In the United Kingdom small firms were defined in 1969 as “entities having less than 200 employees. It

should be run by its owner and should have a relatively small share of its market”.

In France, it was defined as “ a company with less than 10 employees, representing over 90 percent of all

businesses and employing one sixth of the total work force and they categorized it as follows:

I. Less than 10 employees (very small enterprise)

II. 10 to 40 employees (small enterprises)

III. 50 to 500 employees (medium enterprises).

IV. Over 500 employees (large enterprises)

In Denmark, a small business is one with under 49 employees; a medium one has 50 to 199 employees and

large business employees over 200 people.

In Japan which is considered to be a landmark in the history of SME’s the term small industry is used in a

much wider context. The term “smaller enterprises refers to such companies with a capital of not more than

five million yen, companies with not more than two hundred personnel regularly employed.

In the West Germany, Australia and Norway the definitions were made for the legal purposes and different

deciding factors were kept as landmarks.

Nowadays, a generalized definition is in practice and it says an SME entity is defined as a business with an

investment in productive assets (not including land and building) ranging between rupees 2 to 40 million

and employing among 10 to 99 workers.

SMALL: among10 to 35 employees and productive assets ranging 2 to 20 million,

MEDIUM: among 36 to 99 employees and productive assets range of rupees 20 to 40 million.

CONCEPT OF SMALL BUSINESS:

Clifford Baum back regards small business as one that is

Actively managed by its owner

Highly personalized

Largely local in its area of operation.

Relatively small in size within the industry and

Largely dependent on the internal resources of capital to finance its growth.

According to the “Committee on Economic Development” a business is small

if it meets two or more of the following criteria.

1) Management of firm is independent in the sense that owners themselves are managers.

2) Capital is supplied by ownership and is held by an individual or a small group.

3) Area of operation is local.

4) The size of the firm in the industry is small as compared to the highest unit in its field.

CHARACTERISTICS OF SMALL BUSINESS

1: Privately held small business is again subdivided into two categories.

a: Very small where chief worker is the owner like jewelry shops, shoe stores and grocery

shops etc. SME Management (MGT-601) VU

b :The Large Small business where the proprietor mainly directs the work of its employees.

2: No or few management layers

3: Style of management is personalized the owner has first hand knowledge of every move in the

business at all levels he is the main decision maker.

4: Limited resources: a small business is unlikely to have sufficient resources to dominate the market.

5: Independence: the owner has ultimate authority and effective control

6: Scope of operations: small enterprises serve a limited segment of local or regional market.

7: Scale of operation: they occupy a limited share of given market.

8: Labor: they are low in capital and high in labor, as they cannot afford capital-intensive machinery.

9: Technological innovation if available small business does well

10: Specialized skills: The small enterprises normally have specialized skills for certain specific

clients. The small business does well in small, isolated, overlooked and imperfect market.

11: Small business does well in developing markets as it can easily absorb the changes

12: Small business survives well in a bad business condition due to having quick and clever capability

of bringing changes in cost and labor.

TYPICAL SMALL BUSINESS

1: RETAILING: It’s a traditional business where normally the owner is the boss and owner

2: SERVICES: such as legal and accounting, courier services and beauty parlors etc.

3: CONSTRUCTION ACTIVITY.

4: WHOLE SALE BUSINESS.

5: FINANCING, INSURANCE AND REAL ESTATE.

6: TRANSPORTATION COMMUNICATION AND PUBLIC UTILITIES.

7: MANUFACTURING.

LARGE VS. SMALL BUSINESS

1: They foster changes differently: small business fosters changes through a cycle of birth and death

whereas the large business cycle changes through expansion and contraction

2: The risk, reward and investment decisions are assessed differently in case of small business it is

personal while in the cases of large business it is made by the employee managers without livelihood

stake

3: Their economic power is different: the small business is in no position to influence its immediate

economic involvement but big business does.

4: They utilize different resources in the economy small business may use secondary resources but the

big business use most of the primary resources

5: They serve different markets in the economy: small business serves markets which big business

does not wish or cannot serve.

KEY TERMS:

1: MERCHANDISING: BUYING, SELLING AND PROMOTING GOODS.

2: ENTERPRISE: A COMPANY OR BUSINESS PROJECT OR THE COURAGE AND

WILLINGNESS TO UNDERTAKE BUSINESS PROJECTS OR A BUSINESS ACTIVITY

3: RETAILING: THE SALE OF GOODS TO THE GENERAL PUBLIC.

4: WHOLESALE: BUYING AND SELLING THE GOODS IN LARGE QUALITY FROM

MANUFACTURERS.

BOOKS RECOMENDED

1-Entreprenership and small industries by C.L. BANSAL

2-Small industries and the developing economy in India by RV RAO

3-What is an SME (UNIDO) SME Management (MGT-601) VU

Lesson 2

This lecture will throw light on the relationship between small and big business ,concept of SME’s in our

region i.e. South East Asia and in Pakistan. It should give a student a clear idea about its definitions in these

areas and will help him in differentiating the variable factors of labor, investment and production volume of

our region in comparison with developed countries of Europe and USA.

THE RELATIONSHIP BETWEEN SMALL AND BIG BUSINESS

Small businesses powerfully effected by developments within the big business sector this relationship serves

the interest of general economic disequilibria. Small business is less affected by economic disruptions and is

more or less self-adjusting. It tends to act as cushion for economy .The nature of interlink age between

small and medium business is as under

1: Job subcontracting i.e. the large business provides materials and components to small units who process

the same into finished goods

2: purchase subcontracting i.e. in this case the material is procured by small unit who manufactures a

specific part or component needed by a particular large unit

3: Complementary: in this case the product manufactured by small company is purchased by a big unit as

accessory like plastic dust covers for video recorders, electronic passive components, packaging etc.

4: Merchandising or commercial trading: in this case the small units manufacture the goods and big units on

the strength of their financial power market it with their own brands like fans, washing machines,

refrigerators etc.

5: Maintenance and repair services: many large enterprises give the operation and maintenance contract to

the small companies due to being more economical and helpful

6: Social benefits: employment generation, decentralization of industrial benefits etc.

THE REGIONAL CONCEPT OF SME’S

The countries generally try to identify their SME sector in order to target it for special assistance. Yet,

the definition of an SME depends to a greater extent on local conditions. An enterprise considered an SME

in one country might well be bigger than many large countries in another. In some cases, the SME sector is

further broke down in to two separate groups

A generic definition is not easy to find, any definition of classification of SME can thus be considered

specific to the country in question. Countries have widely different definitions of SME’s for example, in

India; the criteria for determining SME status are based on investment while in South Africa SME eligibility

depends on the number of employees and turn over. There are nevertheless three parameters that are

generally accepted, either signally or in combination, in defining SME’s in most countries, these are

‰ Number of workers employed which is the most widely used criteria

‰ The level of capital investments or assets

‰ The volume of production or business turnover.

In many countries, medium scale industry is not defined and is understood to include those that fall

between small and large industries

Table 1 criteria used to define SME’s in south East Asian countries

Employees

(Number)

Capital

(US $ ‘000)

Turnover

(US $ ‘000)

Brunei

Darussalam

Small 1-10

Medium- sized 11-100

Indonesia SME’s <100 SME’s <84

(Total assets)

SME’s < 1,000 (sales)

Lao PDR Small < 10

Medium- sized 10-29

Depends on the

number of

establishments in

sector

Malaysia SME’s < 76 Small < 198

Medium-sized 198-

939

Myanmar Small <50 Small <167 Small 417 SME Management (MGT-601) VU

Medium-sized 50-100 Medium-sized

167- 835

Medium- sized 17-

1,670 (production)

Philippines

Small 10-99

Medium-sized 100-

199

Small <570

Medium 570-2,282

Singapore Services sector

SME’s <100

Manufacturing sector

SME’s < 8570

Thailand Labor-intensive

industries:

Small <50

Medium-sized 50-200

Capital intensive

Industries- fixed

assets:

Small 781

Medium-sized 781-

3,905

Viet Nam Small < 50

Medium-sized 50-100

Small <4

Medium-sized 4-18

Source (United Nations, Small industry bulletin for Asia and Pacific (No, 30 page 44)

The SME’S in Pakistan

Pakistan’s economy is an economy of SME’s. Policies in the past have given a general perspective,

direction and defining broad parameters of activity within the macro economic framework, but efforts have

focused on the large enterprises, neglecting SMEs which are at the heart of our economy while SME’s are

being mentioned in some of our socio-economic strategies and policy documents, measures are not

sufficiently specified and prioritized for us to be able to speak of any coherent SME policy or approach. SME

promotion is an important issue for many government departments and central offices. However, there is an

existing lack of coordination and regular information exchange mechanism among institutions that constrains

their collective ability to deliver in the SME development process.

The Government’s Effort towards SME Development

The government of Pakistan keeping in view the importance of SME’s has adopted multi

pronged approaches at the regional, sub regional and national levels. Initiatives at the national and sub

regional levels include efforts to strengthen economic integration and cooperation. At the national level,

structural adjustment programs have been inauguration along with attempts at re structuring and

diversifying the production base, integration the informal sector into the economic mainstream and

stimulating increased participation at the enterprise level. The development process was initiated in the 60’s

and the concept of development derived its origin from within, “Indian model” of small enterprise

development. The basic idea behind this model is to develop infrastructure facilities such as industrial

estates, common facility centers and vocational training institutes which would to a great extent the

problems faced by SME’s. Based on this model numerous provincial level organizations were setup mostly

with the help of foreign assistance in the shape of grants and soft loans. The definitions thus depend upon

the criteria set out by such provincial or federal institutions.

DEFINITIONS BY PROVINCIAL LEVEL INSTITUTIONS

a) Punjab Small Industries Corporation (PSIC):

b) Sindh Small Industry Corporation (SSIC):

c) Small Industries Development Board (SIDB)

d) Directorate of Industries Balochistan (DIB)

These organizations defined the small industries as under:

An industrial undertaking with fixed investments up to 20 million excluding the cost

of land and no limit of people employed. SME Management (MGT-601) VU

DEFINITION BY Small Business Finance Corporation (SBFC)

Small:

• No limit of people employed.

• Productive assets limit of 20 million

Medium:

• No limit of people employed.

• Productive assets limit of rupees 100 million.

Youth Investment Promotion Scheme (YIPS)

According to the concept paper on SME’s in Pakistan, developed by YIPS, small-scale industry was defined

as industrial enterprise with fixed assets of up to rupees 10 million. (Excluding the cost of land and

building).

It is pertinent to note that majority of the definitions have been formulated either by the national

institutions themselves or with the objective of meeting the financial requirements

The State Bank of Pakistan:

MICRO:

The State Bank’s federal credit scheme (small loan scheme) for micro and small scale enterprises, defined

their target group in year 1972 –1973 as enterprise with assets of less than rupees one million (excluding the

cost of land and building). This limit was redefined in the year 1992 and increased to rupees 20 million.

SMALL:

• Assets up to rupees 20 million (excluding the cost of land and building)

SMALL & MEDIUM ENTERPRISE DEVELOPMENT AUTHORITY (SMEDA)

The government to promote the cause of SME development in the country has recently established

SMEDA. Given the mandate of SMEDA, it was not possible to work in the absence of definition for

the target segment. At a broader level SMEDA’s objective is not only limited to catering to the financial

requirements of the SME’s whereas its mandate encompasses all other aspects such as marketing,

human resource development etc. SMEDA went one step ahead and used two variables to define

SME’s in Pakistan. Following are the definitions of the SME’s:

Micro:

• Less than 10 people employed

• Productive assets limit of 2 million rupees.

Small:

• Between 10-35 people employed.

• Productive assets limit of 20 million.

Medium:

• Between 36-99 people employed

• Productive assets limit of 40 million.

Definitions of SME’s in Pakistan

The definitions of “small” and “medium” sized enterprises differ from one country to another. Each

country has adopted different criteria for defining SME’s. such as the number of workers employed the,

volume of output or sales, the value of assets, etc. As far as the case of Pakistan is concerned no

concentrated efforts are observed at a macro level to define SME’s. Numerous efforts have been made

to formulate basic policy guidelines limited to the small-scale industry while ignoring a vital component,

the medium sized enterprises.

As a result, inconsistent policies have been formed from time to time without taking into

considerations the overall importance of SME sector. The need for a uniform definition is crucial for

the successful development of this sector. Various organizations follow different definitions of SME’s SME Management (MGT-601) VU

according to their needs. Mainly these definitions are based on one variable, the fixed assets; key motive

is to cater the credit requirements of the small-scale sector.

References:

1-Pakistans Small industries entrepreneurs Gallup/BRB World Bank survey

2-Resarch cells LCCI (Lahore chamber of commerce and industry)

3-SMEDA (research Cell)

4-Small Enterprises in developing Countries By Dr. Asghar S. Nasir

5- State Banks circular for Micro credits

Book Recommended

Small Enterprises in developing Countries By Dr. Asghar S. Nasir

KET TERMS

1-Multi pronged (with many tips, branches)

2-generic (Belonging to a class or group)

3-Soft Loan (A loan with very low interest)

4-Grant (A non returnable helping money or commodity) SME Management (MGT-601) VU

Lesson 3

THE ROLE OF ENTREPRENEURSHIPS IN SMEs:

This lecture will define the modern concepts of enterprise, entrepreneurship and will establish the

relationship between an enterprise and an entrepreneur. It will also relate the SMEs advancement

with entrepreneurship.

The modern civilization is the industrial system and the directing force that animates this framework is

the business enterprise. In the current economic theory “the businessman” is called entrepreneur.

History

A French baker Cantilon identified the first definition of entrepreneur function in the mid-18th

century

to mean, a person who is “uncertainty bearer” the same term appeared in Adam Smith’s writings but not

very clearly. J.B Say regarded entrepreneur to be an organizer who combines various factors of production

to produce a viable project. The famous economist Joseph Schumpeter defined the theory of

entrepreneurship with a new perspective and regarded the entrepreneur as an innovator who has the

potential of doing things in a new way. He subdivided this innovation process into following five forms.

1. Introduction of new goods

2. Introduction of new methods of production

3. Finding of new product

4. Discovery of new sources of supply of raw materials.

5. The organization of industry in a new way.

But, the concept of innovation has been criticized by the developing countries who need “imitating

entrepreneurs” capable of implementing innovation made in the developed countries. According to

Peter Kilby, an entrepreneur in an underdeveloped country performs a wide range of activities including

perception of market opportunities, combining and managing factors of production, introduction of

production techniques and products etc

This conflict was solved by defining innovation entrepreneur as “independent entrepreneur” and the

person who carried out new combinations in order to meet perceived opportunity “ corporate

entrepreneur”

The concept of entrepreneur was referred to a generic type of operator who bought at fixed prices in order

to sell at prices, which were uncertain at the time of purchasing. Entrepreneurship was defined by Cole

(1959) “a purposeful activity (including an integrated sequence of decisions) of an individual or group of

associated individuals who undertake to initiate, or organize a profit oriented business unit for the

production or distribution of economic goods or services”. In the year1959 her bison and Meyers replaced

the terms with “management” and “organization” for entrepreneurship.

The entrepreneurship played a very vital role in the small and medium sized industries. The new

innovations, courage to face the risk of uncertainties and qualities of entrepreneur to act as a leader gave rise

to more than seventy percent of new innovations and new combination of skills like Microsoft, Yahoo, and

Linux etc. The major developments in the computer industry, bio- informatics, medicine, electronics,

telecommunications and hundreds of other things are the result of such entrepreneurships in the medium

and small industrial sector.

Sources:

Aitken, Huge J.(ed.), Exploration in Enterprise, Cambridge, Harvard University Press, (1965)

p. 46.

The Theory of Economic Development; Harvard University Press (1959), pp. 89-105.

Mc Clelland, David C., The Achieving Society, collier Mac Millan, N.Y. (1967) SME Management (MGT-601) VU

Entrepreneurship

By Reggie Aggarwal and Mark Esposito:

Entrepreneurship is a way of life. It is a driving force that compels you to do more, move

Faster, and go farther than anyone else, even in the face of high risk and uncertain

Outcomes. Unmistakably, the rewards of entrepreneurship, especially in the technology

Arena can be great. But it is not an easy road to travel. Consider the following five facts:

1. Only 1 in 6,000,000 high-technology business ideas wind-up in an IPO;

2. Less than one percent of business plans received by venture capitalists get

Funded;

3. Founder CEOs typically own less than 4 percent of their high tech

Companies after an IPO;

4. 60 percent of high tech companies that are funded by VCs go bankrupt.

And

5. Most high tech companies that succeed in having an IPO take between

Three and five years to get there.1

Clearly, it is not easy to be a technology entrepreneur. Many successful entrepreneurs have failed at one

point or another. And most have experienced a healthy dose of frustration, burnout, and sorrow along the

way.

So why become an entrepreneur? For the true entrepreneur, that is a rhetorical question.

For the emerging entrepreneur, there are at least three major reasons.

First,

Objective of creating something novel and useful. “To be on the cutting edge” is a

necessary mantra. A technology entrepreneur generally seeks to solve a problem that exists in the market.

Whether that means developing a better communications resource tool, a better optical switching device, or

a better bioinformatics system, a void is always identified and then attempted to be filled.

To many people confuse this process with the process of identifying hot technology companies in the

market and building new companies that mimic them. The hot technology companies are hot because they

seek to solve a

problem. Those that mimic them neither identified a problem nor created a solution; they simply found a

new trend that they wish to follow.

The ability to maintain a sustainable competitive advantage over others is what brings rewards to the

entrepreneur. The reason for taking risks fundamentally is tied to this concept. That is why being on the

cutting edge is so critical to the entrepreneur.

Reggie Aggarwal is the CEO of Cvent, Inc., a premier online registration, e marketing, and data analysis

company dedicated to maximizing the return on meetings and events. He also is the co-founder of the

Indian CEO High Tech Council, the largest and most influential CEO organization on the east coast. Mark

Esposito is the Vice President of Global Sales and Business Development for the NASDAQ Stock Market,

the

most influential stock exchange in the technology world

Second,

a second objective of the technology entrepreneur is to build long-term value.

Sustainability is crucial. The would-be entrepreneur often confuses this concept with building “valuation.”

Those who build companies for the primary purpose of attracting investment dollars at high premiums are

opportunists, not entrepreneurs. The entrepreneur always is focused on creating something of lasting utility.

This does not mean that the entrepreneur is not concerned with attracting investment dollars or creating

wealth. Rather, the entrepreneur’s strategy is to create long-term value and thereby ensure wealth. The trick

is to not put the proverbial cart before the horse. Concentrating on long-term value can create wealth;

concentrating on wealth typically creates neither value nor wealth.

Third,

a third objective of the entrepreneur is to have freedom. Being your own boss has definite appeal. Glass

ceilings cease to exist and achievement is limited only by imagination. Entrepreneurs are motivated by SME Management (MGT-601) VU

having control over their work and the flexibility to pursue their dreams. But freedom always has a price.

With greater personal freedom, comes greater uncertainty about the future, particularly in relation to

finances. Greater personal freedom also means a less structured environment, in which greater selfdiscipline is required in order to thrive. Entrepreneurs are willing to accept these risks, though, because of

their absolute conviction that they have what it takes to overcome any odds.

If achieving these three objectives is not of basic interest, then the very thought of becoming an

entrepreneur should be extinguished. If a big personal cash payout seems to be glaringly missing from the

list of major objectives, it is because it is not a primary motivating factor. These three major goals are not

objectives to be self-evident should embrace entrepreneurship. But what makes an entrepreneur special,

besides believing in major common objectives?

There are several characteristics that define the entrepreneur. For example,

Entrepreneurs always have passion. Entrepreneurs live and breathe their business enterprises. They are

zealots about their business models and are evangelical about their products or services. They have to be. If

they weren’t, the stress and financial pressures of running a fledgling business would completely wipe them

out. The sheer magnitude of the odds that are stacked against entrepreneurs requires a special kind of

irrational exuberance to overcome.

Entrepreneurs have unshakable confidence in and enthusiasm for their business ventures that contagiously

spreads to their business team. Laser focus is another feature of entrepreneurs. There are many people that

are creative, but lack discipline. Entrepreneurs, on the other hand, have both qualities. An entrepreneur

identifies a path towards a solution and follows that path, notwithstanding the frequent temptation to take

side roads leading to seemingly newer, more exciting destinations. The entrepreneur knows that most of the

journey down the chosen path is checkered with drudgery, yet continues down the path unswervingly,

confident that there will be a reward at the end. The entrepreneur also knows that the side roads

encountered along the way may appear appealing at their start, but will quickly become as checkered with

drudgery as the originally chosen path and likely lead to a dead end.

Focus and Perseverance Guide the Entrepreneur

Courage is a defining trait of entrepreneurs. To understand the odds against success and still

forgeahead, knowing that many battles will be lost along the way, requires a certain amount of

fearlessness. Entrepreneurs are purposeful in their tactics and can think on their feet. Yet they

regularly face daunting challenges whose failure to overcome will spell certain disaster for their

business ventures. Their ability to face these challenges without fear enables entrepreneurs to

succeed where others cannot.

Entrepreneurs also are leaders. Contrary to the popular belief those entrepreneurs are

Mavericks who prefer to be lone wolves, entrepreneurs are visionaries that can inspire and lead their

colleagues. There are few things more compelling than people who are Passionate about their work, have

the discipline to achieve success, and are fearless in their outlook. An entrepreneur builds teams and instills

confidence in others.

Finally, an entrepreneur always is thinking ahead, perpetually in motion towards well-defined goals. In the

end, entrepreneurs can best be described as ocean waves, existing only so long as they move forward.

CHARACTERISTICS OF ENTREPRENEURS

Studies have established the existence of some common personal characteristics amongst entrepreneur like

high level of energy, desire to pursue innovation goals, desire for achievement, a deep involvement in work,

optimistic believe in work etc.

Let’s discuss the resume some of the important studies relating to characteristics profile of entrepreneur by

David Mecleaaland

1. Need for achievement

2. It is the prime psychological derive that motivates the entrepreneur it brings behavior motivation

towards accomplishment, i.e. in achieving a goal that possesses reasonable challenge to an individuals

competence such an entrepreneur is energetic but not a gambler. His motivation is the product of a

scientific assessment of his energies and the challenge. SME Management (MGT-601) VU

3. Desire for Responsibility

4. Entrepreneur prefers to use his own resources and to be personally responsible for the results. He

can perform well in groups particularly when he can influence the results in some specific way.

5. Preference for Moderate Risk

6. Seeking high level of performance consistent with the possibility of achievement.

7. Perception for the Probability of Success

8. This consists in collecting and analyzing facts and thereafter falling upon his own self-confidence for

accomplishing the task.

9. Future Oriented:

10. He plans and thinks in the future. He anticipates possibilities that lie beyond the present.

11. Stimulated by Feedback

12. Irrespective whether the signals about his performance are good or bad, he draws his inspiration

from the feedback.

13. Energetic Activity

14. He exhibits a high level of energy than an finding out novel ways of getting task done.

15. Skill in Organizing

16. Entrepreneurs have remarkable skill in organizing work and people. They make objective

selection of individuals in conformity with their skill in solving a specific problem.

17. Attitude Towards Money

His attitude towards money is cavalier, i.e. money is not a principal obsession. He values

money but not for itself. Money acts as a measure of his accomplishment, a token of his

achievement rather than a commodity to be hoarded.

Qualities of an Entrepreneur

1. Mental Ability: it consists of :(a) overall intelligence, (b) creative thinking, i.e. the ability to adapt

to various situations, (c) analytical ability, i.e. ability to systematically analyze the business problems.

2. Human Relation Ability: it is demonstrated by emotional stability, skill in interpersonal relations,

sociability, tactfulness, empathy (to put oneself to another’s place).

3. Communication Ability: it is the skill in conveying information to others so that understanding is

created.

4. Technical Knowledge: the expertise in such areas as personal selling techniques, operating a

complex piece of equipment, analysis and interpretation of financial records etc.

5. Decision Making Ability: the skill in selecting satisfactory course of action from among various

alternatives.

6. Conceptual Ability: the ability to comprehend the organizational structure and how each units fits

into the whole. It enables him to recognize opportunities.

REFERNCES

1-ENTREPRENEUSHIP by Reggie Aggarwal and Mark Esposito MIT (Massachusetts institute of

technology, Harvard USA) center for entrepreneurial skills.

2-The theory of leisure class by T.Veblen

3-Entrepreneurship and small business management by C L BANSAL

(This is also the recommended book.)

Key Terms:

Bio-informatics (The branch of electronics dealing with life or biology)

IPO (A public issue of shares on stock exchanges)

Venture Capital (VC) Money invested in a business or firm but with high risk factor

NASDAQ (National association of dealers in securities automated quotations)

Mavericks (individualists) SME Management (MGT-601) VU

Lesson 4

The lecture is about the kinds of entrepreneurs, their role and functions in an enterprise. It also

explains the hurdles they encounter. The overall general profile of Pakistani entrepreneurs and

their importance in enhancement of progress.

Kinds of Entrepreneurs

Innovating entrepreneurs

“He is the one who introduces something new into the economy or employs a new technique of

production”.

Imitating Entrepreneur

“They lap up innovations originated by the innovative entrepreneurs. They are suited to developing

countries which are not able to take up expensive research”

Fabian Entrepreneurs

“They are very cautious and skeptical in adopting and implementing any change. They are lazy and shy

and lack the will to adopt new methods. They follow the old traditions and avoid risk taking”.

Drone Entrepreneurs

“Inert and traditional, they are hurdles in economic development. They struggle to exist, not to grow”.

Role of Entrepreneurship or Entrepreneur

It may be noted that an entrepreneur is a combination of two skills viz, “an idea person” and “a manager”,

He is either the originator of the new business venture or a manager who tries to improve organizational

effectiveness by initiating productive changes.

His role consists of the ability to take up the factors of production and employ them in the production of

new goods ad services. He perceives opportunities, which others does not see or do not care about. As

rightly pronounced by Jule Buckman, “basically an entrepreneur sees a need and then brings together the

manpower, materials and capital required to meet that need.” Akio Morita [the president of Sony], for

instance, adopted the company’s production to create Walkman personal-stereo. Gulshan Kumar of Tseries skimmed the audiocassette vast Indian market.

Introduction of Change

An entrepreneur’s role lies in introducing the following five broad types of changes:

a) Initial launching, i.e., original production of goods.

b) Subsequent expansion i.e. increase in quantity.

c) Factor innovation, i.e., increase in the supply or the productivity of the factors mentioned below:

___ Financial (procuring capital from a new source or in a new form).

___ Labor (upgrading existing labor).

___ Material (procuring old material from new source or use of new material).

d) Production innovation i.e., hinges in the production process.

e) Market innovation comprising changes in the size or composition of the market, e.g., production of

new goods, change in the quality or cost of existing goods, discovery of new markets etc.

Essentially, the entrepreneur always searches for change, responds to it and exploits it as an

opportunity.

Increasing Productivity

Entrepreneurship has a role in increasing productivity. The keys to higher productivity are : (a)

Research and development, (b) investment in plant and machinery and human resources, (c)

resource allocation from areas of average to above average rate of remuneration of capital and

labor, and (d) realization of internal and external economies of scale.

Innovation

Entrepreneurship plays an important role in promoting innovative technologies, products and

services. Invention of zipper, titanium, operation of spinning jenny from foot to steam engine,

invention of power loom etc., owe to the spirit of entrepreneurship. SME Management (MGT-601) VU

Functions of Entrepreneurs

1. Determination of the objectives of the enterprise.

2. Development of the organization.

3. Securing adequate financial resources.

4. Requisition of technological; equipment and its revision consonant with the technical

change.

5. Development of market and devising new products to meet anticipated consumer

demand.

6. Maintenance of good relations with public authorities and society at large.

7. Management of human relations.

8. Financial management.

9. Production management.

Barriers in the Path of Entrepreneurship

Vesper has listed 12 common barriers in the path of entrepreneurship. These are:

1. Lack of viable concept.

2. Lack of market knowledge.

3. Lack of technical skills.

4. Lack of seed capital.

5. Lack of business know-how.

6. Complacency (lack of motivation)

7. Social stigma attached to certain vocations.

8. Job “ Lockins”, “Golden Handcuffs” or attachment with the job.

9. Time Pressures, Distracter.

10. Legal constraints.

11. Monopoly- Protectionism.

12. Inhibitions Relating to Patents.

References:

1-Aitken, Huge J (exploration in enterprise, Harvard University press page46

2-The theory of economic development, Harvard University press page 89-105

3-Mc Cleland, Davis C (The achieving society) Collier Mac Millan New York.

4-The displaced uncomfortable entrepreneur (Psychology today) 1975

5-Peter F Drucher (Innovations and entrepreneurship) Page 27-28

6-World Bank Sponsored study by Etal.

Book Recommended

Entrepreneurship and Small business Management by Dr C L Bansal

Key terms:

1-Titanium (an element use to make non corrosion alloys)

2-Stigma (Disgrace) a sign of.

3-Monopoly (Exclusive control of trade, business, etc)

4-Protectionism (A system of controls set set up by government to protect countrys`agriculture or industry

from foreign competition)

5-patent (An official document that gives the holder right to protect his product from others copying it)SME Management (MGT-601) VU

Lesson 5

This lecture will introduce the small entrepreneur in Pakistan the activities of SMEs in global and

regional level. It will also reveal the role of SMEs in a developing economy.

SMALL ENTREPRENEURS IN PAKISTAN

Salient Features:

1.Single Owner Entrepreneur

“ He works with his own hands, combines the entrepreneur function of initiating the business making

investments, taking decisions and performing managerial functions”.

2: Age Pattern

“The mean age of entrepreneur was found to be 42 years and of their enterprises 12 years. It is

comparable to the Korean age pattern (46)”.

3. Educational Level

“ Differing from industry to industry 60% have school education and 30% have college or better

education only 10% have professional or graduation level”.

4. Social Background

“ Caste played an important role in certain industries and on the other hand heritage is dominant. But

overall it is very diversified.”

5. Sizes and Investment

“ Majority started in a small way with less than 10 workers and 1/2 to 2/3 of the firms started with less

than 50,000 investment”

6. Growth

“ The growth was fast in case of small firms than in large firms”.

7. Profitability

“ Rate of profit is higher in case of small industries in comparison with the large

industries.”

Role of SMEs in a Developing Economy

Unemployment and under employment are the prevailing economic diseases in most of the Asian countries

and they are result of a fundamentally disproportionate relationship between population and the use of

available land resources. Rapid and continuing increase of population, in the last half century have led to a

situation in which there are far too many people engaged in agriculture this situation is further aggravated by

an antiquated system of land tenures, by poor standards of health and malnutrition by the use of primitive

and inefficient techniques on small un-Economical holdings and by an uncertain climate for rains, weather

changes etc. among the classical remedies suggested for tackling the problem of poverty and

underemployment, large scale industrialization is perhaps the most important. This has no doubt, resulted in

a phenomenal increase in the production of useful goods and have brought movement in living standards as

well as in lowering the rate of population growth. But in many Asian countries large-scale industrialization

has been slow particularly for the shortage of supply of capital.

Under the circumstances, the problem of unemployment and underemployment can be tackled by the

expansion and modernization of the existing small-scale cottage industry and the introduction of new

industries capable of raising the level of production and improving the present depressed standard of living.

The large-scale industry has been slow to develop and has succeeded to a very limited extent in absorbing

the surplus population of the countryside. SMEs are still the most extensive tools for controlling

unemployment.

In Ceylon (Sri Lanka) as early as in 1949 nearly 286,000 persons were engaged in small industries, in

China in 1933 approximately 10 million workers were responsible for 80% of the total industrial output by

working in SMEs. In India more than twenty five million people are engaged in cottage and small industry.

In countries like Germany, Switzerland and France there exists today a large group of industrial workshops

and units side by side with the large factories. Japan furnishes the most striking example of the survival and

growth of small-scale industries. This phenomenal development is due to careful planning, the integration

of industries with agriculture and not the least important. SME Management (MGT-601) VU

Cottage and small industries have a very important role in the national economy, offering as they do, scope

for individual, village or cooperative enterprises and means for the rehabilitation of the displaced persons.

National Approaches

South Africa

In South Africa there are about 800,00 small medium sized and micro enterprises in addition to the

two to three million persons carrying different self-employment activities.

Country Index Share

United States

Less than 100 employees 34% employment and 32%

sales

Japan Less than 300 99% of all employees’

establishments.

71.9% of all employees. 55% of

all value added. 51.8% of all

shipments.

Federal Republic of

Germany

Less than 10 employees 85%% of all companies.

France Less than 9 employees 99.9% of all firms.

Chile Less than 9 employees 99% of all firms.

39% value addition.

Republic of Korea Small industry 38.4% value addition.

Brazil Small- scale sector 43.6% employment.

29.6% production share.

Philippines Small scale manufacturing 90% of all establishments.

50% of employment.

About 33% value addition.

Pakistan

SMEs are considered as engines of economic growth in both developed and developing countries. They

provide low cost employment since the unit cost of persons employed is lower for smes than for large-size

units.

• Assist in regional and local development since SMEs accelerate rural industrialization by linking

it with some organized urban sector.

• Help achieve fair and equitable distribution of wealth by regional dispersion of economic

activities.

• Contribute significantly to export revenues because of the low cost labor-intensive nature of its

products.

• Have a positive effect on trade balance since SMEs generally use indigenous raw materials.

• Assist in fostering a self-help and entrepreneurial culture by bringing together skills and capital

through various lending and skill enhancements schemes.

• Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate

since being indigenous is the key to sustainability and self-sufficiency.

•

Although no accurate data is yet available, it is estimated that there are approximately 220,000

SMEs in Pakistan, which:

• Provide employment to over 80% of the labor force since artisans, workshops, household

units, craft industries, vendors and agro based businesses that cluster around the townships

and population centers have a tremendous capacity to provide employment. SME Management (MGT-601) VU

• Contribute more than 50% to GDP by manufacturing products to meet the demands of

local and regional markets.

• Contribute more than 50% towards export earnings through both, direct and indirect

exports. Have a default rate that is far less than that of large-scale enterprises.

• 15% for SMEs, as against 65% for LSEs. Avail credit to the tune of only 12% from the

formal financial sector, which indicates the wide gap between the lenders and SMEs.

• The SME sector also provides both rural and urban women to utilize their vocational skills

while staying within residential premises. In urban areas, many female entrepreneurs have

introduced product lines uniqueness has created a strong demand in the market.

• Today, the SME sector is the lifeline of the big industrial establishments due to its direct

contribution and support towards value addition and exports. For the past three decades,

the fastest growing export industries have been dominated by SMEs. Of all, cotton weaving

and textile rank between the top two exporting sectors. Others include sports goods,

surgical instruments, carpets and footwear etc. SME exports dominate low value added

sectors and rely on traditional technologies.

SAUDI ARABIA

LARGE FIRMS SMALL FIRMS

Sales per employee SAR 486,000 SAR 158,000

Gross Margin to Sales % 14.2 4.4

Return on Assets % 18.7 5.4

Saudization* 14.3 8.5

Jobs created per million SAR

invested

1.0 28.3

* Saudis as a share of total employees.

The erroneous view of SMEs all-scale industry, which is persisting in many developing countries, is that

they constitute only a transitional phase in development and that small industry development is a temporary

expedient or a “second best” alternative. This seems to base on the assumption that as a country moves

from a traditional to a modern economy, it will have no more need or place for small-scale industries. But

experience of some of the most industrially advanced countries clearly shows that while some industries

start as small and grow into large establishment in terms of capital, output and employment, small scale

industries as such continue to constitute a fairly large and important sector of their industrial structure. In

the United States, Germany, the United Kingdom, the Netherlands and Japan industrial enterprises

employing less than 100 persons account for the overwhelming majority of small- scale industrial

enterprises. Employing less than 100 persons need not necessarily be small. Because in capital-intensive

industries in advanced countries generally small number of workers may be evidence of automation rather

than smallness in size. However, in a majority of cases, enterprises employing less than 100 persons may be

taken as relatively small in the scale of operation as well. The contribution to total output in manufacturing

ranges from about one quarter to one third, and to total employment in manufacturing from about one

quarter to one half in some industries. Small establishments have a predominant position, in the United

States for example, they contribute more than 75% of total value added in certain branches of foodstuffs

and clothing industries. Small industries can coexist successfully with large industries because of certain

inherent advantage of small-scale production or of small industries which functions complementarily with

large industries as producers of components and supplies for them. Experience in advanced countries has

established the fact that in certain circumstances, in manufacturing certain products by small industries

cannot only coexist with large industries, but also even out compete them. Similarly, experience in

developed countries has proved that the subcontracting system by which a large numbers of small firms

supply components and parts of large industries have not only stabilized and strengthened the small firms,

but also contributed substantially to the efficiency and economies of the big industries. One of the major

tasks of the small industries promotion should be to identify the industries where production on small-scale

basis offers the maximum advantages and give direction and lead to potential entrepreneurs into such fields.

In fact, we would consider this as the first and most important step in small industry promotion. It is true

that some small industries require some more measures of protection. This incidentally is true also of many SME Management (MGT-601) VU

large-scale industries as well. If care is taken to promote sustained capacity, it will be possible to build up a

truly balanced industry structure where small and large industries will coexist to their mutual advantage.

Given adequate encouragement, this sector has greater potential of growth with spin of benefits. An investment in small

enterprises is alone synonymous with investment in human resource.

References

1-Small and medium enterprise development( A visionary action in Saudi Arabia) by Ismail

Radwan & Jamal al-Kibbi( World Bank Institute)

2-Small Entrepreneurs in Developing Countries by Dr Asghar Nasir

3-Unit 2 -What is an SME (A UNIDO Publication)

Book recommended -Small Entrepreneurs in Developing Countries by Dr Asghar Nasir

Key terms

1-Antiquate

2-GDP (gross domestic product) the annual total value of the goods produced and services

provided by a country)

3-Default rate (The rate of failure to pay back the loans/credits)

4-Value added (The worth placed on a product by a particular stage in the production process) SME Management (MGT-601) VU

Lesson 6

This lecture is about the history of industrial growth in Pakistan and its related factors; the factors for

adopting an SME based industrial system, the institutional support of government in the shape of long term

and short-term policies.

THE DEVELOPMENT OF SMES IN PAKISTAN

The Industrial History of Pakistan:

Pakistan’s industrial history has been dominated by a single-minded emphasis on industry and

that too of large-scale enterprises.

The fall out of that development strategy was formally adopted in the 60’s as conscious policy step in the

start of second policy plan period (1960-1965) has been large scale industrial holdings, accounting for much

of the country’s assets and capital. The feeling among the masses that a few families control 70 to 80

percent of the country’s assets, led to political rebellion. That rebellion also culminated in the

dismemberment of the eastern part of the country. The primary causes for that tragedy, were basically

economic in nature.

The upheaval also generated a parallel economic thought, exclusive to the peculiarities of

Pakistan’s economy. That economic thought advocated across the board nationalization of economic assets

as a vehicle for ensuring social justice in the society.

The fall out of that strategy was two pronged:

• Inefficient labor

• Shaken Business Confidence.

The reaction to that policy mix in the early 1980’s was a revert back to the Ayubian model of economic

development.

The model was characterized by:

1. Promotion of large-scale units.

2. Expansion of large-scale enterprises.

3. Banking sector turned to cater to large loans.

The IMF conditions and poor recovery rate of huge borrowings played a major role in creating

a negative point for the progress curve. These constraints further pushed the economy towards

recession, industry towards sickness and individual units towards default.

All these factors precipitated the rethinking of a strategy to revive the growth of economy.

It was due to dis-involvement that medium scale and small-scale enterprises has got the

attention of the stakeholders i.e. the economic managers and the private sector. The

development of SMEs suits the current situation on account of the following factors.

1. Low overhead cost, low level of financing.

2. Lesser pressure on the banking system.

3. Employment generation.

4. Entrepreneurial development.

5. Vendor based development.

6. Development of large-scale industry on firm basis.

7. A more just distribution of resources and profits.

The pre-requisites for the development of SME sector rest heavily on an infrastructure

tuned to support such development that includes:

‰ A banking system customized for SME development.

‰ One window operation.

Currently, our banking system continues to be the large sector banker. Despite talk of SME

development under the auspices of SMEDA and development of SME Bank and Khushali Bank, the

financial sector’s general response has been influenced by the security issue, i.e. against which asset the bank

would be advancing loans to the small and medium scale business entity. In the absence of a customized SME Management (MGT-601) VU

banking setup, the development in the SME sector so far has been evolutionary and not the result of any

conscious activity.

The turning up of the system for development of the SME also includes an enabling

environment. Though the need for an enabling environment is not exclusive to the SMEs and is a prerequisite for all types of economic activity. That includes a one-window operation culture, where the

investor does not have to go from pillar to post to get his task done.

A conscious effort by the state to reform the banking setup and the attitude of the

government functionary and the bureaucracy will set into motion the mechanics of change in the

development strategy priorities of our economy.

The development of SME hold within its mechanics of expansion the growth of economy

coupled with a more just distribution of wealth. The social justice aspect of it ensures that the development

will not compromise the distribution of wealth issues.

To begin with, the SME development does not depends upon the expansion of the family

enterprises; rather, it is the outcome of the initiative of the single individual or asset of individual. Unlike the

development of family concerns, where the emphasis on the particular group’s interests, the SME never

seeks to totally control the market, rather, it only identifies its place in the market and sustains it. The

modus operandi of most of the vendors in the auto sector is like this. They do not control a major chunk of

the market. What they are doing is to maintain their share as a sustainable vendor. Thus the market is not

blocked for the new entrant unless there is saturation point already experienced by the industry.

The small overheads involved in fixed and running cost structure of a SME unit means that

each unit does not need excessive financing. As a result a large section of society benefits from the available

resources. There is no accumulation of wealth in few hands and the money circulates in a fashion, where

people are able to derive the needed benefit.

The availability of resources for the SME unit means that the opportunity to develop are not

confined to a restricted section of society, rather anyone with a idea and plan can create a place for himself.

The success of venture capital in the United States and the likes of Yahoo and Hotmail are indicative of

the development of SME as a vehicle for equal opportunity, besides technological development.

The other success stories like Microsoft, Linux owe their development to the practical

implementation of the idea, which was presented by individuals or a set of individuals with not so privileged

backgrounds. Yet they made it big. Bill Gates was not a Kennedy scion, but the opportunity to develop

from a SME allowed him enough room. Even today, developers jointly own Microsoft. In the process the

above-mentioned advantage of technological development as also been realized.

A more just distribution of wealth and prospects of technological development set

the pace for the growth of economy. New technologies generate economic activity on industrial scale. That

is not exclusive to developed countries. We have experienced in the context of the Information Technology

that it did generate economic activity in the affiliated sectors and provided employment opportunities to

many hardware engineers and software developers. The development of IT sector had a more egalitarian

character to its credit allowing professionals to prosper, without having to be a large enterprise or scions of

big families.

The recipe of SME development infects does two things. On one hand the processes are

developed at a grass root level. Vendors are identified and the production process takes off. As small-scale

vendors characterize most of the development, the profits are naturally divided according to the

contribution to the process. There are no new big families appearing in the process, rather, it is the matter

of fact stages of production line, which are identified. The Japanese and Italian economies are increasingly

modeled on the basis of SME development.

These societies are characterized by the dignity of work, not for the huge amount of sweat, the

worker sheds, but for the rewards, which are ensured in this setup. The vendor knows the respect he earns

and the rewards he is insured. For that very cause, peace and almost no records of militant trends have

characterized the developed societies like Japan.

The debate in the support of the SME can be unending. The prescriptions for the societies and

economies like Pakistan in the context of the best possible economic solution are simple. There is a need to SME Management (MGT-601) VU

retune the priorities of the state, if the results are to be realized, in the absence of which our efforts would

remain devoid of any tangible results.

Reference:

1-Small and Medium enterprises development (A recipe For development and just distribution) A research

paper by SMEDA Research cell

2-The A to Z of healthy small business by Amer Qureshi (international edition Australia)

3-50 years of Pakistans economy (traditional topics and Contemporary Concerns by shahrukh Rafi Khan

(Oxford Press)

Recommended Book

.50 years of Pakistan’s economy (traditional topics and Contemporary Concerns by shahrukh Rafi Khan

(Oxford Press)

Key terms

Modus operandi (the way in which something is done)

Overheads (a regular cost of running a business i.e. rent.wages, gas, elecric bill etc)

One window operation (provision of all facilities at one place) SME Management (MGT-601) VU

Lesson 7

GOVERNMENT’S EFFORT TOWARDS SME DEVELOPMENT

This lecture will throw light on the efforts of government towards SME development and the role of

institutions in public sector.

The government of Pakistan keeping in view the importance of SMEs has adopted multi -pronged

approaches at the regional, sub regional and national levels. Initiatives at the regional and sub-regional levels

include efforts to strengthen economic integration and cooperation. At the national level, structural

adjustment programs have been in operation along with attempts at restructuring and diversifying the

production base, integrating the informal sector into the economic mainstream and stimulating the

increased participation at the enterprise level.

Over the years the government has developed a wide network of numerous support institutions for the

development of small-scale enterprise in the country. The development process was initiated in the sixties

and the concept of development derived its origin from the “Indian Model” of small enterprise

development. The basic idea behind the model is to develop infrastructure facilities such as industrial

estates, common facility centers and vocational training institutes, which would, to a great extent the

problems faced by the SMEs. Based on this model numerous provincial level organizations were set-up

mostly with the help of foreign assistance in the shape of grants and soft loans.

Financial sector organizations also are of great importance to the SME development in the country.

The government has also established some institutions, which cater to the financing needs of the small

firms. Some of these institutions are meant exclusively for the small sector. Besides the efforts of the

Government the non-governmental organizations have also been actively participating in the micro and

small enterprise development. The role of these organizations is also discussed here. Some of these NGO’s

design programs to address social needs on a community basis which have a positive impact on

employment generation at a micro level, the functions of NGO’s have been discussed very briefly.

Provincial Level Institutions

1. Punjab Small Industries Corporation (PSIC):

In the province pf Punjab PSIC was established in 1962 as an autonomous body for the

promotion and development of the small-scale industries in the province. The PSIC covers the critical

areas of investment promotion and provision of credits for setting up new industries and

modernization of the existing ones. It also promotes the common facility center, technology transfer,

guidance, handicrafts development and design facilities.

(a) Financing and Loans:

PSIC is providing two types of loans to its clients, working capital and capital

investment loans. The maximum limit of loan is RS. 7.5 Lac. There are district officers

appointed for monitoring the loan recovery and in the case of unrecoverable loans, they are

transferred to the revenue authorities. PSIC has managed to recover 81.6% of all loans given

out. Disbursing Rs. 1768.537 million to 6339 units through its 8 regional offices ( till 31-02-

2001). The debt equity ration for loan up to Rs. 7.5 Lac is 70:30.

(b) Industrial Estates

PSIC has developed 14 industrial estates in various areas of the Punjab. The costs

of land within these industrial states have been subsidized to allow the development of the small-scale

sector.

PSIC has also launched “Rural Industrialization Program” to control

unemployment and strengthen the marginal household income through stimulation of

industrial growth in the urban and rural areas of the Punjab. SME Management (MGT-601) VU

PSIC has established various types of service centers e.g. metal industries development center,

Sialkot, Engineering service centers. Gujranwala, institute of pottery development, Shahdara etc

2: Sindh Small Industries Corporation (SSIC):

SSIC was established in 1972 having motives to indulge into promotional

activities of small-scale industries in Sindh. The objectives of SSIC include financial assistance,

education of craftsman, census and survey of cottage and small industries, procurement and

distribution of raw materials to artisans and craftsman. SSIC was also involved in the Prime

Minister’s self-employment scheme for the dispersal of the micro credits.

(a) Industrial Estates and Colonies:

The SSIC has established 17 industrial estates in Sindh. Total number of plots

developed there are 1938 and there are 302 units working utilizing 571 plots. There are six

different craftsman colonies established having 92 shops.

(b) Financing Schemes:

The SSIC also launched a credit scheme in 88,89. The rate of markup was 7% for

industrial estates and 11% for factories outside the industrial estates. The scheme was discontinued in 1993

due to shortage of funds although SSIC has created already 526 jobs and disbursed 20.6 million rupees. In

October 1992, a self-employment scheme was started for locally manufactured machinery (LMM). The loan

ceiling is 1 million with the markup rate of 14%. The total amount disbursed to 171 units is rupees 98

million. The recovery rate is 47%.

3.Small Industries Development Board (SIDB) NWFP

The SIDP was established in 1972. It is playing a promotional role to support and assist the

development of small and cottage industry in the province. The SIDB is an autonomous body, focusing

on manpower training, model projects and industrial infrastructure. It has 14 regional offices in the

different cities of NWFP.

(a) Training Centers:

SIDB has established carpet centers in five cities of NWFP and has trained 1327

number of trainees. The SIDB has established “Patti” training centers, textile training and

“gabba” training centers which has trained 151 trainees.

(b) Development Programs and Model Projects:

SIDB has also launched various women development programs, which has trained 2062

women trainees in a number of fields of work. The SIDB is also involved in establishing other various kinds

of model projects for wood working, leather goods, wool spinning, ceramic device etc The total number of

trainees trained is about 8000.]

Industrial Estates:

SIDB has established 9 industrial estates. There are a total of 1620 plots and the total

jobs created are 4405.

Financial Assistance:

SIDB is also managing different credit schemes for small industries. To date, a total

number of 198 million rupees have been disbursed to 452 enterprises. SIDB is also disbursing credit under

the self-employment scheme.

4. Directorate of Industries (Balochistan)

The directorate of industries was formed in 1976 and it looks after all the promotional

schemes for SMEs. Further more, the directorate is also involved in providing various kinds of advisory

and consultancy services.

(a) Training Centers:

The directorate operates sixty-three training centers in various trades, one service center, 5 sales

and display shops and one small-industries estate. Of the 63 training centers, about third are carpet centers,

seven are embroidery centers and the others cover areas like tailoring, wood work, marble work, mazri and

durree production. SME Management (MGT-601) VU

5. Financial Institutions

In order to meet this financing requirement, a number of institutions have been formed. These are:

I. Small Business Finance Corporation (SBFC).

II. Youth Investment Promotion Scheme (YIPS).

III. Regional Development Finance Corporation (RDFC).

IV. Industrial Development Bank of Pakistan (IDBP).

A few commercial banks such as Allied Bank Limited and First Women Bank Limited have also started

schemes to provide loans to low-income clients who are generally not able to access the formal source of

financing.

(a) Small Business Finance Corporation (SBFC):

It was established in 1972 as a federal entity. The main aim was at the time of establishment, to assist small

entrepreneurs for self-employment and setting up cottage industry. The mark up was kept lower; the

majority lending was towards self-employment leaving only 2% for small industries.

Restructuring SBFC:

The management took over in year 2000 and restructured the entire corporation.

The restructuring was based on the facts that SBFC has deviated from its main aim resulting in a weak

balance sheet. 70% of its credit portfolio was infected by non-performing loans. Usage of information

technology was non-existing and the management was ineffective. There were 1400 employees at 96

branches. The internal control and management was highly ineffective with poor quality of human

resources, poor work ethics, poor infrastructure and non-existence of training and development culture.

Restructured SBFC:

The total number of branches has been reduced to 63 around 270 people opted for golden

handshake. Separate human resource department has been setup, a separate information technology

department was established to spread IT knowledge among SBFC employees, and a treasurer division has

been setup in Karachi, which is responsible for management of cash and surplus funds.

Financing Programs:

SBFC is financing various types of projects such as Gem Stones, cotton ginning, textile apparel, and

marble processing etc. currently SBFC can disburse up to rupees 1.5 million for a project having total cost

of five million and lend up-to 50% of the total project cost of small businesses but for that total project cost

should not exceed 50 million. It can also share up to 30% of total projected cost for a medium sized

industry where the total project cost does not exceed rupees 100 million.

Regional Development Finance Corporation

The Regional Development Finance Corporation was established in 1985 having paid up capital of Rs.

172,500 million and with the specific objective of promoting the industrialization of the less developed areas

of the country. RDFC is a multi-product financial institution. It participates in money market, capital market

and micro credit delivery. The head office of RDFC is located at Islamabad and a network of 14 branches

carries out its operations across the country. Besides financing of medium to large sized industrial concerns

RDFC has been involved in disbursing micro and small sized loans. However, over the last few years the

organization has restrained from forwarding long-term project loans and currently is in the process of

recovering loans from the borrowers.

Financing Programs:

Various schemes have been initiated with credit lines from local as well as foreign sources. It has also

started a micro credit scheme called the Credit for Rural Women (ICRW) under which small loans ranging

from Rs. 25000 to Rs. 200,000 are disbursed to women entrepreneurs on subsidized interest rates of 10%.

The total disbursements under the scheme stand at Rs. 2.5 million. RDFC was allocated a credit line of Rs.

167 million for the self-employment schemes out of which a total of Rs. 80 million was disbursed. SME Management (MGT-601) VU

Industrial Development Bank of Pakistan

IDBP is Pakistan’s one of the oldest development financing institution created with the primary objective of

extending term finance for investment in the manufacturing sectors in the economy. Over the years

however, the bank has emerged as an institution fostering the growth and development of SME sector

stimulating industrial progress in the rural or less developed regions of the country. As a part of its services

the bank offers business development assistance through providing information on potential small-scale

investment projects. In this regard numerous pre-feasibility studies have been developed for identification

of viable sub sectors.

Key Terms

1-Muti-pronged (Having different branches)

2-Revenue authorities (The provincial authorities normally act through TEHSILDAR under the Punjab

revenue act for the recovery of Punjab revenue taxes like malya, abyana, takavee etc)

3- Gabba (Usually the terms is used for a thick traditional carpet knit with local spun and dyed wool)

References

1-reseach cells SMEDA/LCCI

2-Small industries and the developing economy in India by R.V.RAO

3-The essence of small business by ADRIAN BUCKLEY

Book recommended

Small Enterprises in developing coutries By Dr. Asghar s . Nasir

Small industries and the developing economy in India by R.V.RAO SME Management (MGT-601) VU

Lesson 8

THIS LECTURE DEFINES THE ROLE OF NGOS AND SMEDA

The Role of NGOs

The NGOs are working on socio-economic sector in the development of SMEs. They are privately owned

organization registered under the social welfare act. They normally work through grants, aids or donation

based finances. They are having a very constructive role in the SME development. The special property of

this sector is gender development. They at some places tried to replicate Grameen banks model.

NGO Non-governmental Organization, a non-for-profit agency not affiliated with any government or

private sector entity, devoted to managing resources and implementing projects with the goal of addressing

social problems. May receive some public funding.

NGO is a community based organization with it's own management structure. The organisation may receive

some or all of its operating funds through a government department known as the funder, however it is

accountable or answerable to its stakeholders - the people who stand to benefit or lose by its actions. The

funder is one of those stakeholders.

NGOs play a vital role in development of SME. NGOs helps to reduce poverty , NGos creats awareness

in women of rural areas to develop small business in the their own premises .

The NGO Business

Non-governmental Organizations (NGOs) have become involved in international trade in

recent years in two different ways. The first is to establish fair trade cooperatives to

facilitate the export of goods from developing to industrialized countries directly from the

producers. Their underlying operating principle is to ensure that more of the profits from

the sales of diverse products go to the producer and less to middlemen. Often these

products are slightly more expensive than similar goods in the market and these

businesses rely on the social conscience of its customers to ensure a steady market for

their products.

Another less well known NGO business strategy is for the NGO itself to take on the role of

designer, marketer and distributor of specific products and to work with particularly

disadvantaged groups, primarily women, as sub-contractors who are taught to produce

the goods that the NGO sells. Thus the NGO, in effect becomes a private sector actor.

How they differ from standard private sector producers is in their selection of subcontractors

and the fact that all profits are invested back into the organization to ensure

organizational sustainability and to expand their base of sub-contractors. Their subcontracting

role also serves to empower their sub-contractors as opposed to setting up

an exploitative piece work arrangement. It provides a viable means of poor women to set

up their own home-based enterprises. The key to the success of this particular strategy

is the fact that the NGO takes on the responsibility for the development of the internation market for the

product produced.

SMEDA

Small and Medium enterprises Development Authority

Introduction

Premier institution of the Govt. of Pakistan under Ministry of Industries, Production & Special initiative,

SMEDA was established in October 1998 to take on the challenge of developing Small & Medium

Enterprises (SMEs) in Pakistan. With a futuristic approach and professional management structure it

has focus on providing an enabling environment and business development services to small and medium

enterprises. SMEDA is not only an SME policy-advisory body for the government of Pakistan but also

facilitates other stakeholders in addressing their SME development agendas.

Growth of globally competitive SME sector through a conducive and facilitating environment and support

services as an engine of growth and sustainability to national economy. SME Management (MGT-601) VU

Mission Statement:

To function as the promoter & facilitator of SME sector in Pakistan by creating a conducive and facilitating

environment as well as providing and facilitating service delivery to SMEs for enhancing their capacities and

competitiveness.

SMEDA Objectives

1. Policy formulate to encourage the growth of SMEs in the country and to advise the Government

on fiscal and monetary issues related to SMEs.

2. Facilitation of Business Development Services to SMEs.

3. Facilitate the development and strengthening of SME representative bodies associations/chambers.

4. Set up and manage a service provider’s database including machinery and supplier for SMEs.

5. Conducting sector studies and analysis for sector development strategies.

6. Facilitation of SMEs in securing financing.

7. Strengthening of SMEs by conducting and facilitating seminars, workshops and training programs.

8. Donor assistances for SME development of SMEs through programs and projects.

9. Assist SMEs in getting international certifications (such as UL, CE, DIN, JIS, ASME, KS, etc.) for

their products and processes.

Identification of service opportunities on the basis of supply/demand gap.

References

1-reseach cells SMEDA/LCCI

2-Small industries and the developing economy in India by R.V.RAO

3-The essence of small business by ADRIAN BUCKLEY

Book recommended

Small industries and the developing economy in India by R.V.RAO

Key terms

NGOs (Non Governmental organizations)

Autonomous (Self governing)

Debt equity ratio (The ratio of money participation by the borrower and lender)

Subsidize (Helping money given by government to the producers)

Portfolio (A group of different investments held by a private investor) SME Management (MGT-601) VU

Lesson 9

This lecture is concerned with the different issue and other obstacles faced by the policy makers while

forming an SME policy for Pakistan. This includes both long term and short term issues.

ISSUES AND POLICY DEVELOPMENT FOR SME

Pakistan’s economy is an economy of SME. Policies in the past have given a general perspective, direction

and defining broad parameters of activity within the macro environment framework, but efforts have

focused on large enterprises, neglecting SME, which are at the heart of our economy.

Our SME suffers from variety of weaknesses, which have constrained their ability to adjust to the

economic liberalization measures introduced and to take full advantage of the rapidly expanding markets of

the world. But SME importance and contribution in the economic activity suggests that there is a significant

potential to enhance their growth through appropriate regulations and promotion.

While SME are mentioned in some of our socio-economic strategies and policy documents, measures

are not specified and prioritized for us to be able to speak of any coherent SME policy or approach. The

SME Sector Development Program seeks to improve the situation by inviting all concerned stakeholders to

draft Pakistan’s future SME policy.

SME promotion is an important issue for many government departments and central offices. However,

there is an existing lack of coordination and regular information exchange mechanism among institutions

which constraints their ability to deliver in the SME development process.

The responsibility for facilitating the SME policy development lies with SMEDA, attached to the

Ministry of Industry and Production. One of the major reasons for the lack of coordination is that SMEDA

has not been provided with a mechanism to initiate, coordinate, monitor and evaluate initiatives of SME

development outside of its own scope of activities.

Therefore, cross departmental and stakeholder consultations, resulting in the preparation of our

national SME policy are our key to success. A network of institutions stimulating the growth of SME is also

being proposed.The issues highlighted in this lecture give a retrospective view of things while giving a

current picture of the SME business environment in Pakistan. There are issues we may only solve in the

long term and which therefore are beyond our current scope. And there are issues we may solve in the short

to medium term. These issues should become the focus of our SME policy.

Short to medium term issues revolve around three major topics:

Business Environment

Creating a favorable business environment for SME in Pakistan’s economy and eliminating

unnecessary obstacles, which obstruct their development. This concerns the relationship between

Government and SME as well as specifically taxation and labor.

Delivery of Assistance and Access to Resources

Improving the delivery mechanism for assistance and the access to the resources for SME in Pakistan,

inter alia finance, business development services, qualified human resources and technology, so as to improve

their productivity and capacity for employment generation. Market driven support programs are important

to attain substantiality, maximize the potential for cooperation with the private sector, and minimize the

distortions in the economy. Yet the structures for such a system still need to be mutually agreed and

implemented in Pakistan.

Monitoring Developments

Harmonizing enterprise size categories for Pakistan of what are to be considered micro, small, medium

and large enterprises. Furthermore, the establishment of a sound mechanism by which their development of

the SME sector and the effectiveness of the assistance provided the SME can be monitored. What is at

stake is that we forego the benefits of learning from one another in order to continuously improve our

support structures to meet the needs of the target groups, SME. SME Management (MGT-601) VU

There is also ample scope to make use of SME promotion channels to achieve major aims related to

equitable and sustainable socio-economic development which we have not only yet exploited. Cases in point

are gender development and environmental issues.

Implementing change requires the formulation of a policy for SME development and assigning specific

responsibilities for its implementation and continuous improvement.

A fair number of countries have opted for legislation on SME promotion. The appropriate format of the

SME policy for Pakistan is to be decided by the Task Force.

Background

Basic Situation of SME And Their Support Structures

Current Status of SME

It is fair to say that our economy is an economy of SME. The significant role of SME is clearly

indicated by research and statistics. Enterprises employing up to 99 persons constitute about 90%1

of all

private enterprises in the industrial sector and SME employ some 78% of non-agriculture labor force2

. they

contribute over 30% to GDP, PKR 140 billion to exports, and 25% of manufacturing export earnings

besides sharing 35% in manufacturing value added3

Stability of policy is a necessary condition for achieving and sustaining high levels of economic

development. A desirable mix of various other policies can insure the stability in the economy. In Pakistan,

policies in the past have given a general perspective, direction and defining broad parameters of activity

within the macro environment framework. However, efforts have remained limited focusing on the large

enterprises, neglecting SME, which are at the heart of our economy. For example, institutions established to

facilitate business activity, like Board of Investment (BOI), Export Promotion Bureau (EPB), Central Board

of Revenue (CBR), to name a few have been concentrating their efforts on large scale industry.

The adverse influences of legal affect all economic agents. The evidence suggests small firms are

discriminated against relatively large firms4

. and while large enterprises and established holding structures

possess the necessary economic and human resource potential to cope with and overcome these difficulties,

SME, due to their size and due to their resulting peculiarities, are far less capable of adjusting and carrying

on successful business5

. While spared direct statutory or administrative discrimination, SME remain

Pakistan Country Association Strategy, World Bank Report, Annex 2, page 3.

Census of Establishments-1998.

Economic Survey of Pakistan 2002-03.

SME policy Note, the World Bank; ILO SMEDA Study 2001 on MSME, LUMS study on SME

Constraints.

LUMS in its study on “Barriers to SME Growth in Pakistan: An Analysis of Constraints” compared the

growth rates of Large v.s Small scale manufacturing and established that during 1970’s both were growing at

a comparable rate of over 4% whereas in 1990’s during the period of economic downturn small scale

manufacturing growth dropped to 2.6% against large scale growth rate of 3.6%.

________________________________________________________________

Remain subject to unequal treatment, which distorts the competitive environment for business. The

economic significance of this bias is apparent. Such an environment does not cater well to innovative

activities which come from newly founded, small firms, and the new job creation potential of the economy

is thus constrained while the informal sector tends to grow6

Our SME suffer from a variety of weaknesses, which have constrained their ability to adjust to the

economic liberalization measures introduced by the Government of Pakistan and to take full advantage of

rapidly expanding markets of the world. But SME importance and significant potential to enhance their

growth through appropriate regulations and promotion.

More recently, the importance of SME has been realized, with the Government’s efforts focusing on

the hitherto neglected informal sector. The reason behind the increased stress on the SME sector is that

SME promote entrepreneurial culture, create a wider base for employment generation and are a primary

vehicle for poverty eradication. SME Management (MGT-601) VU

Government’s Socio-economic Strategies and SME

SME are a distinct pillar of the economy that needs to be given due attention. It requires specific policy

and regulatory space to turn SME into an effective tool for driving the economy and increasingly contribute

to economic growth and employment.

The Government of Pakistan has developed a number of strategies for socio-economic development.

• Poverty Reduction Strategy Paper (PRSP)

• Micro Finance Sector Development Program.

• SME Sector Development Program.

• Education Sector Reforms 2001-05.

• Reform of Financial Sector.

• Reforms in Tax Administration.

While SME are being mentioned in some of these important socio-economic strategies and policy

documents, including even very specific measures for their promotion, these measures are not

sufficiently specified and prioritized for us to be able to speak of any coherent SME policy or approach.

The SME Sector Development Program seeks to improve this situation by inviting all concerned

stakeholders to draft Pakistan’s future SME policy.

Although SME policy is a sector specific policy, it should be noted that the task of formulation is not a

simple exercise. SME are a cornerstone of our economy. Many changes in the existing legislation may

have direct or indirect effects on SME, e.g. in labor law, financial law, export regulations, banking

system regulations, tax regulation etc. SME promotion therefore comes close to a crosscutting issue.

Non-Linear Model to estimate underground economy in Pakistan, SBP Research Department.

Under PRSP government is following a five point strategy which includes 1) Macro-economic stability

and fast growth. 2) Investment in Human Resources 3) Government’s involvement in particular sectors

(including SME). 4) Expansion in social security system and 5) Good Governance.

________________________________________________________________

Furthermore, the environment for SME is constantly changing, in particular with an increased exposure

to world markets due to the opening up of the economy. Therefore, SME policy within a socio- economic

development strategy cannot be a one-off exercise. Only a process of regular review linked with predictable

behavior by all stakeholders will ensure successful outcomes in the long run.

Coordination and Institutional Support

The role of government as a facilitator of business and its interaction with business support institutions

is imperative for the establishment of a mutually beneficial relationship for the growth of the sector. SME

promotion is an important issue for many government departments and central offices.

For example, the Ministry of Labor plays an important role in shaping the labor market policy of the

state. Similarly, in order to gather information on the health of the SME population the role of Federal

Bureau of Statistics, the Ministry of Finance, and planning division is pivotal. Other ministries and divisions

such as Ministry of Local Government and Rural Development, and the Ministry of Science & Technology

also influence the situation of our SME. Provincial and local governments also take their share in

responsibility.

However, there is an existing lack of coordination and regular information exchange mechanism among

institutions, which constrains their collective ability to deliver in the SME development process. As a result

of the Government’s recent efforts, two institutions Small and Medium Enterprise Development Authority

(SMEDA) and SME Bank were created.

The responsibility for facilitating SME policy development now lies with SMEDA, which is attached to

the Ministry of Industry and Production (MOPI). SMEDA is responsible for creation and coordination of SME Management (MGT-601) VU

Government policy for the SME sector. Parliament, naturally, is responsible for monitoring policy and its

implementation.

One of the major reasons for the lack of coordination is that SMEDA has not been provided with a formal

mechanism to initiate, coordinate, monitor and evaluate initiatives undertaken for SME development, which

fall outside of its own scope of activities.

Therefore, cross-departmental and stakeholder consultations, resulting in the preparation of our

national SME policy are our key to success. Regular information exchange mechanism and networking

needs to be developed amongst our public and private sector institutions. There is a strong need to devise

such an information exchange mechanism and redefine the role of institutions, specifying their functions in

order to avoid duplication of efforts and allowing the best possible usage of resources.

Under the SME Sector Development Program it is expected that SMEDA

• Prepares Government documents on policy regarding SME.

• Drafts relevant laws and regulations.

To form a collective view of all stakeholders, the SME task force has been established at the MOIP,

SMEDA will serve as the secretariat.

A network of institutions stimulating the growth of SME is being proposed. The institutions in this

network cover all stakeholders involved in SME promotion; Regional Development Agencies, Business

Support Centers, Chambers of Commerce as well as other organizations, which are established as an

initiative of local communities.

Reference:

The reseach cell SMEDA/LCCI

50 years of Pakstans economy by Shahrukh Rafi khan (Oxford Press)

Unido unit 2 studies on SMEs

Book recommended

Small entrepreneurs in developing countries by Dr Asghar S. Nasir

Key terms

Retrospective (having effect in past)

MOIP (ministry of industries and planning) SME Management (MGT-601) VU

Lesson 10

This lecture deals with the policy-making issues on short and medium term basis. The importance of these

issues is self evident in this lecture

ISSUES IN SME DEVELOPMENT

Short And Medium-Term Issues

This lecture reflects issues where we feel we may achieve strong impacts in the short and medium-term, i.e. until 2011. They

should therefore become major topics of our deliberation and shape the formulation of our SME policy.

Business Environment

The large size of the SME sector limits the ability of the Government and business support institutions to

achieve competitive coverage by support programs. This is a fundamental reality in most countries of the

world and it is why policy framework and regulatory measures are of tremendous importance when SME

promotion is concerned.

It is agreed that only appropriate policy tools and regulations than with support programs can achieve much

more. Likewise, SME development is hampered more by inappropriate regulations than compensated by

means of appropriate support programs.

Most of the developed nations therefore have mechanisms in place to revert the biases against small firms.

For instance, the United Kingdom introduced the “Think Small First” initiative, which requires all

Government organizations to assess the impact of their actions on small business prior to implementation.

Furthermore, participation of small business in government procurement is being facilitated as a matter of

routine.

The result of such policies is that (unfortunate) surprises to small firms are less frequent. It is made sure that

businesses potentially affected are consulted and informed of any forthcoming policy shifts so as to avoid

negative impacts. They are also allowed an adequate grace period for the adjustment of economic activity

and there is no retroactivity of new regulations. Besides this, special attention is paid to minimizing the

room for bureaucratic discretion while developing policy rules or procedures.

All such mechanisms are missing in present policy or legal environment in Pakistan. The absence of a

specialized, uniform legal framework for the development of SME hampers SME operations1

Relationships between Government and SME

The relationship between government and SME seems to be fundamentally flawed. In many cases this

extends also to other large organizations and their interaction with smaller clients as SME.

Our compulsion of centralized control stems from the fear of the regulator to be misled by the

opportunistic profit-seeking entrepreneur. And our administration practice is characterized by rent-seeking

bureaucrats, who given the low level of their pay, take advantage of low literate entrepreneur.

________________________________________________________________

To this point, the Ten Year Perspective Development Plan 2001-2011 notes that there is a large range of

zoning and other regulations imposed by the federal, provincial and local governments and public sector

utilities which affect the functioning of SME hence, legislation similar to the US Small Business Regulatory

Enforcement Act of 1996, which includes Regional Small Business Ombudsmen, would be considered to

ensure fair and effective functioning of SME. Whatever the mechanism to enforce it, a “level playing field”

is one of the cardinal conditions for SME development.

________________________________________________________________

Of course, we all know there are many dedicated and honest professionals on both sides. But the fact of the

matter remains that there are severe attitude problems in the relationship between the two sides. The only SME Management (MGT-601) VU

way to break this discouraging situation is to face the problem squarely and seek solutions in a positive spirit

and entertain systematic dialogue between the two sides.

The present divide is, among others, reflected in a language gap. Part of the concern for local business

people is the inadequate business facilitation process in the local language, which includes laws, regulations

and business support material available in the English language only.

As a starting point, we propose to consider the increased usage of Urdu in our written documentation, in

our official deliberations and communications.

A second point is how we may increase the share of SME participating in the provisions of goods and

services to public sector, as it is common practice in many countries. A typical SME in Pakistan caters to the

domestic private sector. It is noted that fewer than 4%2

are supplying to the government sector. Some of

the issues are related to tough bargaining price (36%) and supplies on credit (34%) and other are related to

absence of rules on how to the public sector should increase its procurement for SME.

Further points may possibly emerge from the dialogue between Government, stakeholders and their SME

clients.

Taxation Issues

High tax rates are one of the major reasons for firms to drift into the informal economy. This holds for the

countries all over the world, including developed countries. These effects are compounded by high

compliance costs for small firms to deal with tax laws and other forms of government regulation. This is a

specific size-related disadvantage compared to large-scale firms, which have not only the necessary

accountants, but also frequently, also in-house tax and legal advisors. Compliance costs have monitory

implications (such as paying tax advisor fees or salary payments to personnel dealing with tax issues); time

cost implications (in the form of time spent by a taxpayer to handle tax issues), and physiological cost (in

terms of anxiety, stress and apprehensions related to possible mistake or a possible audit by the tax

authorities).

Firms in Pakistan’s SME sector, encounter an increasingly complex legal, tax and administrative

environment, both in starting up and developing their business. According to research, 67% of enterprises

termed tax regulations as most problematic. 56%3

of businesses reports a crunch of taxes, while 28% of

businesses felt that the taxes in the country are too high.

World Bank SME Policy Note 2001, the results of SMEDA-World Bank Investment Climate Survey 2003

also conform to the findings.

The 56% figure is an addition of the three tax related responses: High Taxes 28%, High sales tax 16% and

high income Tax Rate 12%.

______________________________________________________________________________

From SME point of view, the present tax structure and administration generally distort incentives and

discriminate against small firms who are harassed by the tax authorities. Smaller firms found tax related

issues more restrictive than larger firms, 69% of firms, whose size of assets was less than Rs.1million faced

the greatest of tax related problems. Many small firms claim it is not possible for them to maintain books4

As per law or hire a professional due to cost constraints.

The prevailing system is non-standardized and offers excessive discretion to the tax authorities. There is no

consolidation or rationale in current provincial or local tax structure either. Hence, there has been a

constant confrontation between tax authorities and the business communities resulting in very slow

expansion in tax base5

. Two sectors; retailers and small to medium sized manufacturers have already

propounded the idea of fixed taxation as remedy to this continuous ailment.

Cognizant of the change required to cater to the SME sector in its policies, there have been reforms in the

advance stage of implementation of Pakistan’s tax regime. But these reforms are focused on tax

administration and management, instead of addressing the aspects that directly affect SME. No incentives

are being offered to SME to enter the formal economy6

. There has been no consideration as such reviewing

tax law form an ordinary SME or even micro enterprise perspective. SME Management (MGT-601) VU

In Japan, after the war in 1949, old taxation system was replaced by new system to resolve the problem of

incomplete bookkeeping and fear of over taxation of SME. The new system allowed certain tax merits if a

tax return is made with a “ certain formula of quick bookkeeping.” This system resulted in not only the

improvement of financial accounting but also the strengthening of financing systems for SME.

There are 1.05million active tax filers in Pakistan. In 1999-2000 the number of salaried taxpayers was

440,000 and those filed under old self-assessment scheme were 275,000. Lowering tax rates may well lead to

substantial expansion of the tax base in compensation and be neutral for the government income. However,

without more profound improvements in the relationship between government and the enterprises, hopes

should not be raised high for tax rate changes to bring immediate tax base expansion.

A taskforce on the reform of tax administration, chaired by Mr. Shahid Hussain, was constituted by

government, which gave detailed recommendations in its report published in May 2001. Based on this

document and comments from the IMF and the World Bank a restructuring plan was drawn up by the

CBR. This restructuring plan is now being made operational with the World Bank support.

Reference:

.1 -As quoted above

2-SME sector By SMEDA

3-Developing SME policy in Pakistan By Policy planning and strategy department (SMEDA)

4-Small entrepreneurs in developing countries by Dr Asghar S. Nasir

Book Recommended

Small entrepreneurs in developing countries by Dr Asghar S. Nasir

Key terms

Arbitrary (dependent on will or pleasure)

Bilateralism (consist of both parties)

Inter alia (among other things) SME Management (MGT-601) VU

Lesson 11

We are dealing with the short and medium term issues for SME policy formulation. In fact this

whole issue is inter-related in lessons No 10,11,12,13 and14.

LABOR ISSUES

Likewise, the intensity of the regulations is the second most important reason for firms to drift into the

informal economy all over the world. Labour Laws and regulations in Pakistan7

are considered to be one of

the most complicated areas with which any business enterprise deals. The present set of the labor laws was

the result of checkered initiative of various governments to create a healthy business environment for the

labor. Consequently, enterprises have to deal with fifty six (56) labor laws with some of them being industry

specific. The existing plethora of labor laws has made compliance impossible for the enterprises due to their

inherent inconsistencies. Numerous labor inspections under these laws are yet another impediment that

retards the growth of SME.

The labor market dynamics have changed considerably over the years, a higher degree of adaptability and

flexibility along with Labor market security, including protection against arbitrary loss of employment,

reductions in income and healthy work practices are essential requirements of new environment. Besides,

the condition for compliance for international labor standards under the global economic system is another

issue.

Taking into account the need of labor market and employers, the Ministry of Labor and Manpower

introduced an employment security regime. The new labor policy initiatives is aimed at creating a favorable

environment for facilitating industrial promotion and revival along with legislative and structural changes to

bring in an environment to devoid of restrictive labor practices, but protecting the rights and interest of the

workers.

It was proposed that existing labor legislation be simplified and rationalized into six basic laws. In addition,

for promoting bilateralism among government employer and employees, government established a forum

Workers Employers Bilateral Council of Pakistan (WEBCOP). The government is also working in the

development of Labor Inspection Policy under the SME Sector Development Program to reduce the

interface of government officials with businesses without compromising on the unhealthy work practices.

The only issue highlighted thus far through direct interaction with SME is that of co-ordination. The

business and labor community at large has been supporting the reforms.

_______________________________________________________________

A committee on Reforms in Regulatory Legal and Policy Environment was established in the Ministry of

Industries and Production in 2000 with the purpose to co- ordinate, review, identify issues of concern and

formulate recommendations on several laws affecting businesses. Some of their efforts have resulted in the

consolidation of the labor laws as announced in the Labor Policy 2002 and proposed amendments in the

Factories Act 1934, Drug Act 1976, Boiler Act 1923, and Explosive Act 1884, and as such reviewed 101

commercial and labor laws that affect the industrial sector.

Delivery of Assistance and Access to Resources

Competitive advantage is determined by the productivity with which a country, region or cluster uses its

human, capital and natural resources. Pakistan’s international competitiveness markedly declined over past

few years1

. Part of the blame is shared by lower productivity of the workers. The evidence reveals that

median labor productivity, as measured by annual value added per worker, is 25 percent lower in Pakistan

than in India and 35 percent lower than in china2

Trade liberalization at the global and regional levels and the new information and communication

technologies have entwined to create rich opportunities as well as formidable challenges to all independent

countries and enterprises. Competition has become increasingly fierce among the global and regional

economies and enterprises. The structure of markets and their demand3

is increasingly complex. SME Management (MGT-601) VU

Despite operating locally, Pakistan’s SME need to be increasingly aware of the world market. They cannot

escape it even in their local economy. To meet this challenge, there is growing need for information on

global technology trends, rules and compliance cost including facilitation services regarding global issues.

An integrated program for improving competitiveness, promoting trade, and developing workforce can

help4

. Training, research and development, labor productivity enhancement, technology transfer and upgradation and support to business startup through business incubation and various other business support

services, including finance, are issues that need to be addressed separately by the SME policy.

What is important is that access to resources and services necessary to compete in this global environment

are being provided to SME because their size poses an effective limit on their capacity to assess world

market conditions and tap appropriate resources. Old policy tools of protection now require replacement

with promotional and facilitation functions. The roles of business development services, hence, become

imperative.

_______________________________________________________________

World Bank, Development Policy Review 2002, reveals that the annual manufacture exports of Pakistan

are barely 12 percent of those of Malaysia. 18 percent of Thailand’s and less than a third of Philippines----

countries whose combined manufacturing exports were lees than Pakistan’s in the mid 1960’s.

Investment Climate Survey of Pakistan- 2003.

Consumer preferences and market standards have become more sophisticated and exacting. Competitive

advantage is now determined bu several non-price parameters such as quality, health and safety, social

equity in employment and production and ecological compatibility of products and processes.

The Ministry of Science and Technology is preparing a National Quality Policy and Plan and another

initiative of the government is working on the development of National Productivity Policy.

The capacity to deliver such services by the public or private sector led institution is a major topic for

debate but also relates to the specifics of the service in question. However, market-driven support programs

are a cornerstone in any SME support system which strives for sustainability. This also maximizes the

potential for cooperation with private sector organizations and minimizes the distortions in the market

economy. Yet the structures for such a system still need to be mutually agreed and implemented in Pakistan.

Below we flag the important issues.

Finance

Access to equity and formal debt financing has repeatedly been identified as recurring constraint to SME

growth and development. Commercial bank apply conservative policies in lending to SME. More,

importantly the existing structure of financial sector was developed to serve medium to large enterprises

which are organized as a formal business. Most banks prefer to hold risk free-income generating assets and

lending to SME is unattractive due to a range of objective and subjective factors. These include high

transaction cost, inability to do away with tangible collateral requirement, no linkage of financial products

with sector needs and the inability to structure/ offer and manage risk-prone SME specific medium to long

term financing options.

It has been observed that 57% of new investment for small and Medium Enterprises and 67% of working

capital finance come from internal finance or retained earnings; only about 7% of funds for investment or

working capital come from banks or other financial institutions. Even suppliers’ credit rivals the

contribution of the banks as a source of working capital (4.5%) 5. Another survey6

concludes that SME are

indeed being rationed out of the credit market, rather than merely exhibiting a lower demand for credit.7

However, financing SME is one of the key pre-requisites for the future development of the national

economy and the achievement of economic growth. The government of Pakistan had originally responded

to the growing needs of the sector by introducing a Self Employment Scheme through Small Business

Finance Corporation (SBFC) in 1992. SBFC continued to grant loans to small business and disbursed 12

million by June 1998, catering to the needs of 157,162 unemployed persons. Other schemes for SME

development or employment generation included the Youth Investment Promotion Society, and Yellow SME Management (MGT-601) VU

Cab scheme. But all of these efforts lacked coherence across institutions, and, in the absence of any national

policy, resulted in disjointed efforts and even corruption

________________________________________________________________

5 SMEDA- World Bank Investment Climate Assessment Survey was conducted between May and

November 2002 by using SMEDA in collaboration with the World Bank covering a random selection of

965 mainly manufacturing businesses (90% being SME), drawn from 12 largest cities of Pakistan. To date it

represents the most comprehensive data set.

6 Faisal Bari, Ali Cheema, & Ehsan-ul-Haque; Barriers to SME growth in Pakistan: An analysis of

constraints, June 2003.

7 This finding is corroborated by the World Bank (2001) survey, which finds that over 50% of their sample

SME who had ever approached a bank reported difficulties in obtaining credit. SMEDA-ILO Study 2001

also reports a similar finding.

Previous efforts have therefore had limited results and were highly inefficient because the financial sector

accumulated a huge portfolio of non-recoverable loans under these schemes. The SME Bank will need to

undergo restructuring for next three years.

Furthermore, severe damage has been done because the financial sector has developed disinterest for any

such initiatives in future, and we need to basically start from a scratch. The banking industry in general is

also not venturing into the areas where new processes and procedures with a view to improve SME’s access

to credit are required. It is likely that market-led mechanisms will take some time to improve the access of

smaller firms to formal credit. In particular, outreach shall remain to be a problem for the due to the limited

presence especially in the rural SME market.

The government is seeking to facilitate the participation of commercial baks in SME leading by training

with the assistance of the ADB. The sooner commercial banks obtain the know-how how to successfully

engage in cash-flow based lending to small business enterprises, the better.

Finally, new prudential regulations increase the likelihood of viability and sustainability in the financial

sector. However, the broad definition of SME also bear a risk of upward filtering of the loan portfolio

towards the higher-end medium enterprises unless targeted programs for micro and small enterprises exist.

The creation of SME credit endowment fund may be one way of mitigating the effect.

REFERENCES

1-Gallup/BRB world bank survey

2-Policy issues papers by SMEDA

3-50 years of Pakistan’s economy by Shahrukh Rafi Khan

4-Reseasch cell LCCI

Book Recommended

Small entrepreneurs in developing countries by DR Asghar S. Nasir

KEY TERMS

Productivity (The rate amount produced by a worker)

Tangible asset (An asset that has physical existence and value at least equal to liability) SME Management (MGT-601) VU

Lesson 12

This lecture is a continuation of the lectures No 9&10 and 11 dealing with the short term, medium term

and long term issues. These issues are pre-requisites for forming a comprehensive SME policy.

HUMAN RESOURCE DEVELOPMENT

One of the major challenges that SME have to face is the emergence of the knowledge-based economy.

People must continue to innovate, change and upgrade. There is a need to nurture the entrepreneurial spirit

and skill development for adopting innovative technologies.

The low-literacy level of our population poses an immense challenge to our competitiveness. Yet, it is a fact

of life, which we will not overcome, in the short run. It is therefore imperative that we seek intelligent short

and medium-term solutions to bridge the literacy gap.

One aspect of the Government’s strategy is to strengthen non-formal skills and entrepreneurship

development, to better prepare workers for employment and to improve population’s general capacity of

self-employment. But are there other ways by which we can enhance the skills of our workforce in such a

way that we need not despair when facing external competition?

The government has established a number of institutions that impart training and skill development. These

institutions, Pakistan Institute of Management Science (PIMS), Provincial Vocational Training Councils

Authority, Technical Training and Vocational Authority (TEVTA) Government Universities and various

other support institutions have however remained rather passive regarding the shaping of human resource

development for SME.

A frequent complaint is the mismatch of the output of our human resource development institutions with

the demand of SME. There are also only limited options for the training of the middle management. Low

skills of workforce, inadequate vocational training facilities yet remain out of the scope of the reforms

agenda.

Are there any mechanisms by which we may achieve effective consultation between supply and demand

sides of our vocational training system so as to attain a maximum benefit for our economy?

Entrepreneurship does not breed in a vacuum. For a healthy, growing business environment, it is necessary

to foster entrepreneurial culture in Pakistan, which goes beyond the inclination to trade in goods.

Entrepreneurial skill development programs can boost this.

Technology Transfer and Up-Gradation

Developing SME based on local skills/resources has now been rightly recognized as a means of promoting

economic growth and a very effective tool for providing productive employment in a country. But up to

date technology also plays a vital role in the vertical integration of the firms, moving them up the ladder in

terms of firm productivity enhancement.

In our country, growth oriented export firms still have problems sourcing quality inputs due to the lack of a

network of reliable suppliers. This adds to their transaction costs. Likewise, the SME are not large enough

to furnish sufficient demand to be an incentive for a big high quality input supplier.

The government in its efforts to facilitate technology transfer for indigenous SME initiated a program with

the United Nations Development Program (UNDP) to promote Technical Cooperation between

Developing Countries (TCDC)

. The scope of Phase 1 remained narrow and focused on capacity building

of various public sector organizations through training programs. The intended final beneficiary, SME, has

not yet been able to benefit from the program.

In its other efforts, the government used to offer cash grants9

for ISO certification to those enterprises that

choose to be growth oriented internationalized SME. The government also set up a National Productivity

Organization as a resource center and a research institute to enhance industrial and labor productivity in

Pakistan. SME Management (MGT-601) VU

Similarly, other organizations like Pakistan Council for Scientific Industrial Research (PCSIR), Pakistan

Industrial Technical Assistance Center (PITAC), Ministry of Science and Technology (MOST) etc.

established to facilitate industrial growth still need to adopt an active approach to provide their services to

SME in an effective manner.

________________________________________________________________

A few countries (mainly China, Singapore, Indonesia, Sri Lanka) also shared their experiences and

expertise with Pakistan.

Discontinued since June 2003.

Major technology up-gradation obstacles include:

ƒ Inability to acquire sophisticated testing equipment and R&D facilities. (SME see it as a financial

problem).

ƒ Lack of skills/experience to operate high-tech machinery.

ƒ Insufficient information on technological cooperation opportunities.

ƒ Lack information on target market quality requirements and lack of knowledge on how to achieve

these quality levels.

ƒ Absence of appropriate metrology and testing equipment and related infrastructure as common

facility centers.

Market and Industry Information

Access to market and industry information is one of the keys to develop successful business strategies.

Frequently, business and trade associations are able to provide their members with such services. By

associating with like institutions in foreign countries, they are also able to establish links and obtain

information on foreign markets.

Over half of our SME belong to business and industry association. Their perceived role is limited to

lobbing and negotiation with the government. Yet very few SME (12%) perceive their associations to

be a source of information on new developments in their fields of business operation. How to increase

the service provisions by all types of stakeholders will become a fundamental issue when SME support

programs will be looking for deliver channels.

Monitoring Developments

Harmonizing Enterprise size Categories

Pakistan has no across the board legal definition of SME. This makes it extremely difficult to monitor

the development of our SME economy and to establish benchmarks against other countries in order to

devise areas of intervention and support.

Various government departments and public-sector agencies have adopted their own definitions. There

are, of course, various reasons for them to define SME, and there may even be discussion on just how a

strict and reasonable size standard could be defined.

A number of current definitions are based on capital standards since this influences the pattern of fund

raising in the formal and informal market by SME.

Many stakeholders consider enterprises with 100 or more employees as large, and enterprises with less

than 5 employees as micro. Yet our statistical system classifies enterprises with more than 10 employees

as large, and the State Bank of Pakistan considers those with more than 250 employees as large.

The reference to international practice also suggests differentiation among industrial, wholesale, and

retail10 and services related enterprises. This view also gets credence from various studies on the issue

for pakistan11. Again, this consideration is only visible in the SBP definition and missing in all others.

There are also rationales beyond the particular organizational motivations for defining specific size

classes, and it will therefore be useful for all stakeholders to review definitions on technical grounds.

For a national policy, it is extremely important to have a harmonized definition for, as it is also

important for the government to focus assistance as reasonably as possible for maximum efficiency. It SME Management (MGT-601) VU

is also imperative to adopt a definition to foster the coherence of vision in the SME policy development

and for the better implementation of related support programs across institutions.

REFERNCES

1-SME Issues Paper by SMEDA (policy planning & strategy department)

2-World Bank survey (Gallop)

3-Financial issues &SMEs (paper read by Dr Ishrat Hussain)

4-Small Entrepreneurs in developing countries By Dr Asghar S. Nasir

Book Recommended

Small Entrepreneurs in developing countries By Dr Asghar S. Nasir

Key Terms

ISO certification (International Standards organization certification like ISO 9000 Quality certification)

R&D (Research and Development)

SBP (State Bank of Pakistan) SME Management (MGT-601) VU

Lesson 13

This lecture is continuation of defining the issues for making a SME policy; this lecture deals with the short

and medium term issues. The vital issues of gender development and environmental protection are also

discussed in detail

MARKET AND INDUSTRY INFORMATION

Access to market and industry information is one of the keys to develop successful business strategies.

Frequently, business and trade associations are able to provide their members with such services. By

associating with like institutions in foreign countries, they are also able to establish links and obtain

information on foreign markets.

Over half of our SME belong to business and industry association. Their perceived role is limited to

lobbing and negotiation with the government. Yet very few SME (12%) perceive their associations to

be a source of information on new developments in their fields of business operation. How to increase

the service provisions by all types of stakeholders will become a fundamental issue when SME support

programs will be looking for deliver channels.

Monitoring Developments

Harmonizing Enterprise size Categories

Pakistan has no across the board legal definition of SME. This makes is extremely difficult to monitor