SME: Not a Small Potential

Small & Medium Enterprises (SMEs) are generally considered the backbone of any economy. The reason to call SMEs a major support to uphold the financial structure is their contribution to the overall economic arrangement of any given country. Sometimes SMEs outnumber large businesses by extensive financial margins and also employ much larger number of people. For instance, 98% of all Australian businesses come from SMEs, and the Australian SMEs produce one-third of the total GDP and provide employment to 4.7 million people. Likewise, in China there are more than 40 million small and medium-sized enterprises which account for more than 99.6% of the total number of enterprises in China. As far as an economic contribution, in last few years SMEs input was around 59% into GDP. The tax revenue paid by the SMEs also account for more than 48% of the overall tax collected by the government of China in recent years. In Indonesia 57.8 million SME units were recorded at the end of 2017, employ more than 114 million people and offers undeniable support to the Indonesian economy. Similarly, small and medium-sized enterprises are the mainstay of the US economy and are key contributors to her economic growth. The 28 million American SMEs account for nearly two-thirds of net new private-sector jobs in recent decades. In one of the economic reports of 2014, 98.5% of the firms were classified as SMEs in Chile. There are more than 6.2 million SMEs in Russia as of May 2019, accounting for about 22.3% of GDP and employing around 26.3% of the workforce. In congruence to the global phenomenon of SMEs, there are more than 3.3 million small and medium enterprises in Pakistan. These include manufacturing units, service providers, and startups operating on various levels. SMEs in Pakistan employ 80% of the non-agricultural labor force, and contribute over 40% into the GDP of Pakistan.

The term SME is commonly used by the European Union (EU), the United Nations (UN), and the World Trade Organization (WTO), whereas some countries use different terms, like in the United States these firms are frequently referred to as Small & Mid-size Businesses (SMBs). In Kenya, for example, they go by the name MSME, short for micro, small, and medium-sized enterprises, and in India, it is MSMED, or micro, small, and medium enterprise development. Despite the differences in nomenclature or terminology, countries share the commonality of separating businesses according to employment size, revenue output, or structure. SMEs are indeed businesses that maintain revenues, assets or a number of employees below a certain threshold. The SMEs are defined on the bases of said criteria like number of employees, value of assets, sales and volume of output, saying that it is to be understood that definition and conceptual clarity of SME is an important step for any country. There is a variety of definitions available of what constitutes an SME. For example, the European Union (EU) characterizes a small-sized enterprise as a company with fewer than 50 employees and a medium-sized enterprise as one with less than 250 employees. In addition to small and mid-size companies, there are micro-companies, which employ up to 10 employees. Canada, Japan, France, Germany, Hong Kong, Italy, Korea, Spain, Sweden and many other countries follow the criteria of number of employees to distinct SMEs in their countries. In the US, SMEs businesses are classified according to its ownership structure, number of employees, earnings and industry. For example, in manufacturing, an SME is a firm with 500 or fewer employees. In contrast businesses like mine copper ore and nickel ore can have up to 1,500 employees and still be identified as an SME. In Indonesia any business that owns net assets worth 200 million rupiahs or less; exclusive of land or buildings, a business that has annual sales of 1 billion rupiah (net) or less, and a business owned by a citizen of Indonesia, falls under SMEs.

The earlier definition of SMEs in Pakistan lies on the number of employees up to 250 people, paid-up capital up to PKR.25 million and annual sales up to PKR.250 million. An SME policy document; that is available on the website of Small and Medium Enterprises Development Authority (SMEDA) explains that the said definition was an outcome of a consultative process that spans over two years followed by scrutiny and refinement at various levels of government before its finalization and approval by the Federal Cabinet in 2007. Generally one of the imperfections in this definition was the absence of segregating line between small and medium and among manufacturing, trade and service sectors. In Pakistan SMEs were defined differently by other institutes such as Pakistan Bureau of Statistics (PBS) and State Bank of Pakistan (SBP). Strangely, these institutes used to conform to their own definition and understanding of SMEs. The current Governorof SBP Mr. Raza Baqir claimed in June 2020 that the issue related to definition of SMEs has been resolved. Thanks to COVID-19, in fact this problem is resolved in process of providing stopgap arrangement by SBP while offering refinance scheme that are launched as a risk-sharing initiative to facilitate SMEs during the ongoing difficult times and minimize the negative impact on numerous SME businesses caused by the outbreak of coronavirus. So this year, policy document was circulated amongst provinces and relevant ministries for comments before submission to the federal cabinet and finally Mr Raza Baqir’s claim turned out to be true.

Besides providing conceptual clarity, Federal Minister for Economic Affairs Hammad Azhar also demonstrates the interest of his Govt. in uplifting the SMEs in Pakistan. He displays his hope that new policy by PTI will address the challenges in the way of growth of the SMEs, for instance the Securities and Exchange Commission of Pakistan (SECP) approved Growth Enterprise Market Listing Regulations to enable small and medium enterprises (SMEs) etc. But is this enough? To strengthen the SMEs in Pakistan there is a lot more effort required to be done, such as, unlike large enterprises in the formal sector, a small and medium enterprise is constrained by financial and other resources. This inherent characteristic of an SME makes it imperative that there should be a mechanism through which it may get support in different functions of business including technical up gradation, marketing, financial and human resource training & development. Small and Medium Enterprises Development Authority (SMEDA) being flagship organization of Pakistan claims to offer services like, creation of a conducive and enabling regulatory environment, development of industrial clusters, and the provision of Business Development Services to SMEs in all areas of business management, but can anyone produce a statistical data that since October 1998; the inception date of SMEDA, what presentable uplift in SMEs is caused by the services of SMEDA? Yes, it is important to evaluate the performance of public organizations. Moreover, it is imperative to give special emphasis on ease of doing business, although Pakistan has jumped twenty eight points in the World Bank’s Ease of Doing Business Ranking during the present Govt. but this is just the scratch point, we have to bring in more ease i.e. one window operation etc. Furthermore, the poor national performance on the Human Development Index of the UN has its consequences for SMEs in Pakistan. These include inadequate and generic education and insufficient, poorly focused and under-serving training infrastructure. As SMEs mostly draw their human resource, including the owners, from either the higher education institutions or the technical training infrastructure, both of which are not attuned to the SME needs nor are they equipped to address them. This situation limits the capacity and ability of SME’s to innovate. Therefore Govt. has to pay attention in redesigning the university curricula; application oriented, and facilitate technical or vocational institutes. Likewise, entrepreneurship is usually undertaken by those belonging to the existing business families. As a result the economy witnesses a small number of new enterprises being created and that too in traditional areas of business, overcrowding the supply/product base and their markets. To ensure progression in the SMEs sector, business ventures, especially the ones initiated by the youth, are imperative and to achieve the purpose, maximum government support and a focused strategy is required. Though HEC and some other institutes funded Business Incubation Centers (BICs) in universities but their performance is still questionable. Secondly, as students are encouraged for entrepreneurship, the Govt. should also design a policy to encourage faculty members to initiate their own enterprises; but on the contrary university faculty is legally restricted not to have their own business venture. There should be BICs for faculty members. Rationally, if university faculty is not having entrepreneurial mindset, how can one expect students to be entrepreneurs?