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.
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
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
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.
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
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
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
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
Need for achievement
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.
Desire for Responsibility
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.
Preference for Moderate Risk
Seeking high level of performance consistent with the possibility of achievement.
Perception for the Probability of Success
This consists in collecting and analyzing facts and thereafter falling upon his own self-confidence for
accomplishing the task.
Future Oriented:
He plans and thinks in the future. He anticipates possibilities that lie beyond the present.
Stimulated by Feedback
Irrespective whether the signals about his performance are good or bad, he draws his inspiration
from the feedback.
Energetic Activity
He exhibits a high level of energy than an finding out novel ways of getting task done.
Skill in Organizing
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.
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.
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
National Approaches
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.
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
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.
GOVERNMENT’S EFFORT TOWARDS SME DEVELOPMENT
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.
Financial sector organizations also are of great importance to the SME development in the country.
The government has also established some institutions,
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.
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.
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.
ISSUES / PROBLEMS IN SME DEVELOPMENT
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.
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.
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
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.
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
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.
LONG TERM ISSUES
There are issues, which are beyond the scope of our current interventions. They are partially rooted in
the multiple cultural structures of our society, frequently exacerbated by our geo-political situation. We,
nevertheless, recognize their importance and therefore point them out here. However, it is not
recommended to attempt to solve these questions by ways of an SME policy Initiative.
Literacy
The evidence reveals that SME find it extremely difficult to grow because of their inability to delegate to
soundly trained staff. The day the small businessman feels comfortable to delegate, SME start progressing.
The low literacy level also determines the potential of our labor force. Higher literacy rates are essential to
enhance the quality of production can be enhanced by multiple factors which is what we need to be able to
effectively compete in the international economy which is being extended to our local markets by the effects
of opening up and WTO accession.
Law and Order
Law and order situation in Pakistan has always been regarded as worrisome. One survey reports that one in
five respondents report that the business was the target of at least one crime during 2002. Another
assessment suggests that the businesses in NWFP spend 4.5%, Sindh and Punjab 1-2% of their revenue on
security. One in four SME consider law and order to be a severe problem.
Law and order problems weaken property rights and as a result weaken investor’s decision to invest. These
problems are clearly linked to the manner in which the law enforcement and criminal justice system
functions. The high time cost involved in seeking legal resource together with lack of access to both
effective informal and formal enforcement mechanisms, increase the costs associated with contract
enforcement.
Intellectual Property Rights
Intellectual Property Rights (IPR) is a vital issue that needs to be looked into. It has been observed that
many developing countries with the help of a change in their IP systems and laws are able to attract Foreign
Direct Investment (FDI) in the Research and Development(R&D) especially in the industrial and the
scientific field. Therefore, promotion and protection of the intellectual property spurs economic growth,
creates new jobs and industries, enhancing the quality and enjoyment of life.
Another benefit for Pakistan in properly adopting IPR culture is that it will protect the indigenous products
such as rice, kinno, traditional knowledge, pottery etc. the owners of the IPRs has the most valuable assets
which can be utilized in commercial transactions, whether IP licenses, joint ventures, manufacturing,
purchase or distribution agreements, or mergers and acquisitions. Licenses to use patents, trademarks and
copyrights are often combined with transfer of know how in the form of training and are increasingly an
important term in such transactions.
Infrastructure
Basic physical infrastructure is a prerequisite to growth and development. Power outages and access to the
connections are considered an irritant, which significantly affects the productivity of firms in Pakistan. It is
estimated that a typical business in Pakistan loses 5.6% in annual sales revenue due to just this single factor.
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