Economy of Bangladesh · Small and Medium Enterprise (SME) · SME Cluster Development · SME Cluster Development in Bangladesh · SME Clusters in Bangladesh · SME Development

Role of SMEs in uplifting Asian economies

Role of SMEs in uplifting Asian economies

 

Md. Joynal Abdin

The Financial Express on December 26, 2016

 

The Small and Medium Enterprises (SMEs) are considered as the engine of growth throughout the world. About 97 per cent to 99 per cent of enterprises in Asian developing countries are SMEs. This scale could, however, be slightly different for various Asian countries. In the lowest side, about 97.3 per cent of enterprises in China are SMEs, 97.3 per cent in Malaysia, 97.5 per cent in Kazakhstan, 97.7 per cent in Vietnam. But on the higher side, 99 per cent of Bangladeshi enterprises are SMEs, 99.4 per cent in Singapore, 99.5 per cent in Sri Lanka, 99.6per cent in the Philippines, 99.7 per cent in Thailand, 99.7 per cent in Japan and finally, 99.9 per cent in the Republic of Korea.

SMEs are playing a vital role in employment generation in respective countries. For example, these enterprises are generating 87.7 per cent of employment in South Korea (Republic of Korea) and 80.3 per cent in Thailand. Seventy-five per cent of non-agricultural employment in Bangladesh are generated by SMEs while 71.8 per cent in Cambodia etc. Similarly, SMEs are contributing in promoting GDP growth and increasing export earnings of respective countries. For example SMEs are generating 60 per cent of Indonesian and Chinese gross domestic  return (GDP); similarly they are contributing 47.6 per cent of the GDP of the Republic of Korea, 45 per cent in  Singapore, and 43.7 per cent in Japan.

In Bangladesh, SMEs are contributing 25 per cent of GDP. In terms of export earnings, about 42.4 per cent contribute in India. Similarly 41.5 per cent of Chinese exports come from SMEs, 26.3 per cent in  Thailand and 20 per cent in Sri Lanka. The amounts are 18.8 per cent and 15.7 per cent for Republic of Korea and Indonesia respectively.

What is SME? It is a specific segment/class of enterprises in a country. These enterprises are defined with various indicators in different countries. Bangladesh considers the number of employment and replacement cost as indicators. A few countries consider revenue and asset as indicators. Definition of SMEs in different Asian countries is given in the following table:

Table: – 1 Definition of SMEs in different Asian Countries (Upper Threshold).

Countries Sectors Assets

(Local currency in million) 

Revenue

(Local currency in million)

Assets

($ millions)

Revenue

($ millions)

Japan Manufacturing and others 300 2.8
Wholesale 100 0.9
Retail 50 0.5
Services 50 0.5
Republic of Korea Manufacturing 8000 6.9
Primary / some services 20,000 17.2
Singapore All 100 73.0
China Heavy industry 400 61.3
Wholesale 400 61.3
Thailand General 200 5.7
Wholesale 100 2.8
Retail 60 1.7
Malaysia Manufacturing 50 12.4
Services and others 20 5.0
Kazakhstan All 5,200 15.7
Philippine All 100 2.1
Indonesia All 10,000 50,000 0.7 3.6
India Manufacturing 300 4.5
Services 150 2.3
Sri Lanka Manufacturing 750 5.1
Services 750 5.1
Vietnam General 1,00,000 4.5
Trade and services 50,000 2.2
Bangladesh Manufacturing 500 6.25
Services 300 3.75
Cambodia All 0.5

Source: Asian Development Bank Institute (2016). SMEs in Developing Asia: New Approaches to Overcoming Market Failures.

Governments of Asian countries have different policies to promote and develop SMEs. With some similarities, different countries have put emphasis on various incentives and supports to flourish these enterprises. Common policy supports include offering tax concession, providing repayable loan facilities, priority sector declaration etc. A few countries provide equity supports and grants to foster SME growth. For example, Thailand, Malaysia, Singapore and Taipei are offering credit guarantee scheme for SMEs whereas Bangladesh and Sri Lanka are missing this option. Besides, these internal and external R&D facilities, product innovation, process innovation, patent license, internal financing, external financing, public support, NGO and foreign institutional support have direct impact on SME development of a country.

There is a positive correlation between innovation and SME development. Innovation could be in terms of product innovation (inventing a new product), process innovation (inventing a new way to manufacture a product with minimum resources/higher quality), improving products quality and standardisation, ensuring efficient use of inputs to save resources, using alternative materials/substitute to produce goods, inventing new machines/technology, etc. Innovation could also facilitate increased volume of production, entry into new markets, improved quality and solving social problems or needs. Its outcome could increase production capacity, production flexibility, saving per unit cost, saving per unit resources, etc. Innovation is expected to be an outcome of internal research, national level academic research, acquisition of new companies, recruiting new human resources and formal research of government or foreign-funded projects.

BARRIERS TO INNOVATION: There are some specific barriers to innovation in Asian SMEs, especially in South Asia. Major barriers are lack of skilled/qualified manpower, scarcity of funding for R&D, absence of institutional environment, shortage of information, bureaucracy, infrastructural barrier and market factors. A recent study shows that about 80 per cent of the South Asian SMEs are depending on internal resources for innovation. Only 4-6 per cent of the SMEs purchase new ideas for fostering innovation. About 30 per cent SMEs have idea about use of journals, research findings and other sources of innovation. About 13 per cent of innovative small and medium firms use government funding for innovation. But sometimes various government policies and strict monitoring play a negative role for innovation in many South Asian countries.

Availability of long-term low-cost financing has a positive correlation with SME development of a country. Credit guarantee scheme is playing a significant role in SME development in many Asian countries. For example, 70-80 per cent risk of SME loan is taken by credit guarantee scheme and rest 20 – 30 per cent risk in lending banks in Indonesia. The Philippines provided about 1.6 billion local currency guarantee for lending to SMEs. The Thai Credit Guarantee Corporation guarantees 100 per cent of the payment stated in each letter of guarantee issued to participating banks when prosecuted. However, it is done under the condition that the non-performing guarantee does not exceed 16 per cent of the average guarantee outstanding in each portfolio that pools all guaranteed SME loans from the participating bank every year.

In Bangladesh, the National Industrial Policy 2016 has emphasised on SME development as a means of poverty alleviation and employment generation, more specifically SME Policy Strategy to guide SME development in the country. There are a good number of organisations working for entrepreneurship development and SME promotion in Bangladesh. But the above discussion indicates that Bangladesh still has to go a long way for  promotion and development of SMEs. Because, it does not have innovation. It is also lagging behind in terms of low-cost financing, credit guarantee facility so on and so forth.

It is now the most appropriate time for capacity building to foster promotion and development of SMEs. We have limitation in terms of human resources capacity, financing ability, innovation, standardisation of products, managerial and technological know-how both in public and private sector SME stakeholders of Bangladesh. The European Union funded a project (recently ended) titled INSPIRED which initiated a few capacity building activities for SME stakeholders. Hopefully, another EU funded project called PRISM will be started soon. This project could give emphasis on capacity building of human resources, establishing appropriate infrastructure, R&D capacity building, promoting innovation, facilitating financial access to SMEs, establishing testing laboratories, product designing and new product invention, focusing on target international market for fostering exports etc. Thus government and development partners could play a vital role to strengthen stakeholders’ capacity for promoting SME development in Bangladesh.

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