"Made in Gujranwala" Industrial Exhibition 2003

Development of Small and Medium Enterprises in Pakistan

by: Khalid Mehmood Chaddah (Ex Vice President GCCI)

In Pakistan, small medium enterprises (SMEs) consist of some format but largely informal organization, mainly centered around as individual with a particular vocation or skill. In Pakistan SMEs constitute 90% of businesses, providing 805 of industrial employment, contributing 30% to GDP and generating one fourth of the sector’s export earnings. Anecdotal evidence suggests that the bulk of such organizations are in the retail trade and transport sectors and they span the entire spectrum activities in the economy ranging from agriculture, quarrying through to manufacturing retail trade household and personal services.

The stall of engineering goods manufactured locally.

The success of SMEs in both developed and developing economies have contributed to the promotion of supported SME development have contributed to the promotion of employment and growth and in an effective tool to alleviate poverty.

Engineering Products presented at the exhibition attracted millions of visitors.

Empirical evidence exists that shows that some of the world’s best performing economies notably Taiwan and Hong Kong are very heavily based on small enterprises. Successful economies where SME has played a large role have also been outward oriented East Asian countries. These countries have been successful at hooking the SMEs into the export process, through some combination of direct exporting by smaller firms (often through relatively small intermediary agents, as is the case of Taiwan) or through subcontracting by SMEs with bigger firms, as in Japan over a long period and Korea with increasing intensity since the mid 1970s.

Considerable success can be achieved by the SMes if government policy is supportive and effective. With the trend towards specialization, SMEs will play an increasing role in the industrial structures of the future. The major role of SMEs in employment creation in Canada, the US, and in a number of European countries over the last couple of decades appears to support this view. Japan has been and remains the representation of an economy in which the SME sector plays a major role, principally via subcontracting with large firms, which tend to be engaged in international trade. On the other hand Taiwan plays a pivotal role by itself, without the huh level of dependence on large firms which characterizes the Japanese model.

Pakistan’s Experience with SMEs:
In Pakistan, small and medium enterprises play a significant role in the economy, and organizations like the Punjab/Sindh/NWFP Small Industries Corporation Have been involved in their promotion. They have however, failed in making any substantial dent in their promotion.

Development of SMEs in Pakistan have been constrained by the following factors:

• The precarious conditions in industrial estates and cocational institutions:
• Inadequate marketing:
• Non-availability of credit facility:
• Most of the small and medium entrepreneurs remain outside the formal economy:
• Most encumbered with outdated technologies:
• Management skills are poor because it is a family affair:
• because they are family run business they are high risk for financial institutions:
• They lack resources for research and development :
• They are low in productivity:
• Poor infrastructure-power outages, poor roads. Many small entrepreneurs:
• Spend al lot of time in meeting undue demands of officials.

In the recent years the government has given a new impetus to the economy through SME support program. In today’s age of specialization, large scale enterprises fined it more practicable, economical and therefore more profitable to sub-contract their ancillary production to small and medium size units functioning independently.

For instance in the Japanese auto industry, while final assembly is wholly done by large corporations, but the suppliers of parts and components are mostly SMEs. Some SMEs have grown into large corporations, but they were mostly small in the beginning. Moreover, each supplier is supported by second and third tier suppliers and they specialize in the production, because of which the industry gains international competitive strength.

In recent years, SMEs have been getting immense recognition due to their pivotal role in economic development. While announcing its economic revival program for the country the government had in December 1999 identified small and medium enterprises as an engine for economic growth. Measures have since been adopted to give the necessary impetus to the SME sector, which holds the promise of generating employment, alleviating poverty, diversifying the export base and building the private sector from bottoms up.

SMEs are critical to our economy and no business can operate without their support. They are rightly called the engines of economic growth for:-

• They provide low cost employment, since the per unit cost of persons employed is lower for SME than for large sized units:
• Assist in the development of rural industry by linking it with the organized urban sector:
• Contribute to export revenues because of the low-cost labour intensive nature of the products:
• By using indigenous raw material they have a positive effect on trade balance:
• They help in entrepreneurial development:
• They provide resilience to the economy from global economic fluctuations that the large bysuness enterprises are unable to respond to quickly.

With SMEs receiving more focused attention, the government in 1998 established the Small and Medium Enterprise Development Authority or SMESA. It has been established to function as the apex policy- formulation body for the SMEs. One of its objectives is to pursue an aggressive sectoral development program by recommending policy guidelines to the government for the development of SMEs.

The sectors have been selected on the basis of criteria like:-
• Growth rate
• Significant SME presence
• Labour intensity
• Sustainable competitive advantage
• High value addition and export potentioal

In the past, the government had failed to meet the specific needs of SMEs. No SME friendly policies were devised, which were conductive to business enviorment, supportive to infrastructure development, or developing marketing skills or made access to information and technology easy.

It is with the objective to create an SME awareness that the objectives of SMEDA’s work plan is based is on the following major activities:-

• Remove all regulatory retardants
• Assist SMEs with
• Technical up gradation
• Marketing support
• Human resource development
• Access to forml credit.

Why Support SMEs Small and medium enterprises are recognized the world over for their role in creating jobs, boosting export, disseminating the benefits of economic development among a larger segment and thus providing balanced socio economic development. Given Pakistan's rapidly rising population (it is the 7th most populous country in the world) the part that SMEs have played in providing job had received government focus that they deserved, they would have proved subsequent improvement in the economic conditions of many more. The labour force survey 1999-2000, shows that a large part (40%) of the employed persons are engaged as skilled agricultural and fishery workers, 15% as craft and related trade o\workers, 18% in elementary (unskilled) occupation, 3.3% as plant and machine operators and assemblers. It further shows that about two-thirds (65.8%) if the non-agricultural employed labour force is engaged in informal sector activities. Many of those working in the informal sector are engaged in family owned businesses which find it difficult to grow beyond a certain point constrained by a lack pf financial and management resources and reluctance to build partnerships to generate innovation and to invest in networks to improve market intelligence. With the setting up of the SME bank and new directions being given to SMEFS, structured to assist SMEs in their respective areas of need, be it financial, technical, marketing or management, a well designed SME support program is likely to emerge which will create more jobs in the economy and generate income. With a back which would cater specifically to SMEs financial needs and also provide businesses support and services, along with an institution SMEDA whose work plan is based on removing regulatory irritants, better conditions for SMEs operating in Pakistan are foreseen. A strong SME presence would provide low cost employment opportunities and improve the conditions of the existing SMEs in the areas of marketing human resource training, technological up gradation, product development etc. Labour market conditions are deteriorating in the urban areas. The government including the vast array of autonomous bodies, attaches departments corporations and public enterprises, traditionally constituted a major source of employment, especially for the educated. This source has more or less dried up in recent years due to the fiscal squeeze and the consequent recruitment bans that have frequently been announced. The fall in private investment has limited the expansion in employment opportunities. The process if downsizing in government organizations will further increase the process of labour displacement. With a large informal economy, where activities are mostly small scale, the development of the SME sector will go a long way in assisting poverty alleviation by providing job opportunities and increasing the income level of a large number of skilled and unskilled workers.

CONCLUSION:
Small and Medium enterprises now score high as a priority for Pakistan, Given their potential for ionnobation, SMEs can become the cornerstone for growth in an increasingly competitive market. Yoday, the sector receives support form both the government competitive market. Today, the sector receives support from both the government and the private sector. The government is working towards creating an enabling environment for the SMEs to flourish. Setting up of SMEDA and the SME Bank are government initiatives in this direction. With support from both SMEDA and the SME Bank, the small enterprises now have the opportunity to develop speacialization. The success achieved bthe sports goods industry in sialkot is an examp,le to be emulated by others. For instance, in soccer balls with R&D a major change occurred and now it is known the world over. Similar were the cases with hocjkey sticks, cricket balls etc. with investment in R&D and specialization, the Sialkot sports industry grew to a position where it can complete with the best in international market.