Non-subsidiary and independent companies,whose turnover falls below a defined amount, are termed as Small MediumEnterprises (SME). They employ between 10 to 250 workers. They account for morethan 95% of the manufacturing enterprises in a country, and generate two-thirdsof the private sector employments. In most of the developing countries, SMEsconstitute the industrial base and contribute significantly to the countrysexports and simultaneously the GDP and GNP. SMEs account to 48% the totalemployment in Germany, 65% in Japan, and 45% in USA. A recent survey statesthat SMEs having a mere 20% of investments and 10% of formal credit generatesapproximately 80% of the countrys total employment. According to the WorldBank estimate, SMEs contribute to an average of 51.5% of GDP in high income and15.6% of GDP in the low income countries.
Inability of SMEs to Compete/ Challenges:
The ratio of SMEs to otherbusinesses is 6 times higher in developed countries comparatively with emergingones. Despite its strategic importance and potential for employment generation,there are many significant barriers for SMEs.
- Poor financial situations and Investment Capital:
This is the biggest problem and ahurdle for the development of SMEs. It creates inability for technologicaladvancements, and other growth possibilities. Financial institutions arereluctant to finance SMEs due to perceived risk and high transaction costs. Asper the World Business Environment Survey (WBES), more than 10,000 SMEs in 80countries worldwide; are facing financial constraints and term this as thebiggest obstacle of their growth. SMEs in Latin America, South Asia, Africa,Eastern Europe and Soviet Union are affected more likely. Managing costsbecomes difficult, when loan size is small and operating costs do not fall withthe loan size.
- Unavailability of Technically Trained Human Resources:
Mostly, employees of SMEs holdingsupervisory and managerial positions would have been working with othercompanies for many years, and grew up by experience. They may lack ITknowledge. IT personnel are more in demand are hence seek mostly MNCs due totheir attractive remuneration. As the company grows, people in SMEs arepromoted according to rank and file. They may lack leadership and managementskills. Uneven skill set of the managers will cause conflicts during theoperation. Furthermore, employing technically trained, efficient personnel andsustaining them as the process becomes costlier.
- Lack of access to Technological Information, Upgradation and ConsultancyServices:
Many SMEs are not aware of thetechnological advancements in the industry. As the size of the companies issmall, they demand low price from the vendor for technological upgradations. Thevendor would not be in a position to honor such quotations, as it would affecthis return in costs. Since the numbers of SMEs are more than the number ofvendors, manipulation by vendors becomes possible. Due to this, sometimes, thecompanies might have to compromise in quality aspects also. A good consultantcan save their time, effort and money, but SMEs lack knowledge and experienceof hiring consultants. They believe consultant costs are high and attempt tohandle it with their own staff. When these staffs lack expertise, it only costsmore to the company; eventually.
- Weak Infrastructure:
Lack of adequate availability oftransportation and quality infrastructure can affect SMEs access to markets, industrialcompetitiveness, and ultimately their business revenue. Power, water, cost ofland, fencing, transportation, security and communication can be included inthis. They lack comprehensive and cost effective infrastructure. Further; costsof constructing adequate infrastructure are also high, which increases the costof investments that they will have to bear alone.
- Lack of Adaptability:
SMEs lack adaptability to change according to the changing trade trends. They try to avoid risks by not attempting new ventures. The people at the higher positions of the company would have reached there by their years of experience and hence might have a high resistance towards changes, and new practices. They do not want to give up the working processes, which they had been following for many years, and are comfortable with.
- Inadequate Research and Development:
To expand the market, it is necessary for a firm to research and develop new product ideas. SMEs are weak in product development. They lack both funds, and assistance for research activities, developing new ideas and further commercialization of these ideas. They cannot afford the budget for developing such facilities.
- Government Regulations:
This limitation can vary from taxation, reporting requirements for occupational health and safety, to discrimination in hiring practices. The cost of going along with national and international standards also proves to be highly expensive for small firms.
Key Points for Promoting SMEs:
- SMEs can be offered assistance to operate in cluster or in Industrial Estates, which will help them to reduce the cost of infrastructure.
- If the strategic planning for SMEs is established in a successful manner, middle level entrepreneurs will play an effective role in the countrys economic development.
- Banks can partner with NGOs and development agencies to assist the SME market. Provision of adequate funds will promote sustainable growth.
- Improve their capacity through localization of supply chains at both the operational and strategic levels.
- Governments can provide incentives for their financing, vocational training, etc. Registering and monitoring can be made simpler, and cheaper.
- Assist for the start-up, development, and management of SMEs through Government agencies like Enterprise Advice Bureau.
SMEs with their dynamism, flexibility and drives need to focus on increasing their production methods, penetrative marketing strategies and management capabilities to maintain their market and strengthen their performance. They should make optimum utilization of the latest technologies in various industrial fields. SMEs are critical for the economic growth and job creation of a country. Improvement in the performance and protraction of SMEs who represent the backbone of global economic activities will enable growth of the country.
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