A Brief Report on MSMEs in the Developing World and Strategies for the promotion of MSMEs

Context Back ground and Need for Promotion of MSMEs & Current Scenario Strategies for Promotion of MSMEs

A BRIEF REPORT ON MSMES in the DEVELOPING WORLD and STRATEGIES for the PROMOTION of MSMES CONTEXT:
MSMEs (Micro Small and Medium Enterprises) are a fundamental part of the economic fabric in developing countries, and they play a crucial role in furthering growth, innovation and prosperity. It is estimated that 365 million to 445 million formal and informal MSMEs in the developing world. The term MSME encompasses a broad spectrum of definitions. Different organizations and countries set their own guidelines for defining MSMEs, often based on headcount, sales or assets. While Egypt defines SMEs as having more than 5 and fewer than 50 employees, Vietnam considers MSMEs to have between 10 and 300 employees. The World Bank defines SMEs as those enterprises with a maximum of 300 employees, $15 million in annual revenue, and $15 million in assets. The Inter-American Development Bank, meanwhile, describes SMEs as having a maximum of 100 employees and less than $3 million in revenue. The European Union definition: The category of micro, small and medium-sized enterprises is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro. Small and medium enterprises are thus defined as firms with 10 to 250 employees, and more than 10 million euro turnover or annual balance sheet total. This definition is more encompassing, and much larger, especially with regards to turnover, than some others. The precise definition however, does not impact the overall conclusions and findings of this report Enterprise Category medium-sized Small micro Head count < 250 < 50 < 10 Turnover 50 million 10 million 2 million Balance sheet total 43 million 10 million 2 million

Table.1 Definition of micro-, small- and medium-sized enterprises

BACK GROUND AND NEED FOR PROMOTION OF MSMES and CURRENT SCENARIO
SMEs include a wide range of businesses, which differ in their dynamism, technical advancement and risk attitude. Many are relatively stable in their technology, market and scale, while others are more technically advanced, filling crucial product or service niches. Others can be dynamic but high-risk, hightech start-ups. Researchers and practitioners agree that SMEs are crucial contributors to job creation and economic growth in both high and low-income countries It is acknowledged worldwide that Micro small and medium enterprises (MSMEs) are the engines of economic development and industrial growth, solving the twin problems of unemployment and poverty. They are said to account for approximately 95 per cent of all the companies in the world. In most countries, the contribution of micro small and medium manufacturing, service and business enterprises is significantly greater than that of large enterprises when it comes to innovations, productive employment including self-employment and optimum utilization of latent resources.

Fig.1 Number of SMEs by segment and formality

Fig.2GDP contribution by sector

Fig.3 Employment contribution

Most MSMEs are either owned by individuals or run by families. They play a great role in generating employment and harnessing local resources. Because of their essentially local nature, they have emerged as one of the most effective sources of employment globally. Barriers to Entrepreneurship and MSME Growth The World Bank Enterprise Surveys dataset was used to identify the biggest obstacles for firms worldwide. According to The World Bank Enterprise Surveys dataset, firms are divided into the following categories: small (5 to 9 employees), medium (10 to 99 employees), and large (100 or more employees). Although this categorization may not match the country-level definitions used in the MSME Country Indicators database, the information presented in Enterprise Surveys can still be indicative of the key obstacles facing small and medium-sized firms. Electricity Access to Finance Practices of the Informal Sector Tax Rates Political Instability Corruption Their local approach, however, also means that MSMEs may not have access to the skilled manpower needed to sustain them in an increasingly competitive global environment.

SMEs also lose out to bigger businesses when it comes to: Efficiencies of cost Structured processes Management skills needed to survive, and win, in a competitive environment

The SME sector suffers from inherent weaknesses largely because of its inability to furnish suitable security for obtaining adequate credit. The sector is also hamstrung by the inability to hire skilled and technically qualified personnel for management, marketing and other crucial functions. The challenge for small enterprises is to survive in a highly-competitive business environment and adapt to the rapid changes which globalization and advances in technology are bringing about. It is imperative for them to have access to the latest information about market conditions and new technology so that they can seize an opportunity when it presents itself. STRATEGIES FOR PROMOTION OF MICRO MEDIUM AND SMALL ENTREPRISES With the global youth population reaching an historical high of 1.5 billion, economies world-wide are increasingly unable to provide young people with jobs. The situation has reached critical proportions in developing countries where 1.3 billion youth reside. As youth employment grew by only 0.2 percent over the past decade while the global youth population grew at a rate of 10.5 percent , the world is experiencing a employment crisis and the challenges surrounding youth livelihoods have become increasingly complex. Innovative and sustainable approaches are therefore necessary to ensure these young people are able to lead healthy and productive lives that contribute to socioeconomic development in their communities. Governments, international organizations, support agencies and an increasing number of training and research organizations have begun focusing on the need to address these issues and find effective solutions to ensure the sustainable development of the MSME sector. The following strategies can be adopted for their promotion and development of MSMEs.

Strategic 1: Improving the business environment

Comprehensive reform of regulations. Creation of a more favourable business environment Assessment of the effects of regulations on the business of SMEs Peace and stability is a key requirement for the development of SMEs and for attracting foreign investment. Studies show that war and crime are main deterrents of private investment, in particular for foreign investors. SME development requires a crosscutting strategy, (i.e. its success depends on the ability of governments to implement sound macroeconomic policies, the capability of stakeholders to develop conducive microeconomic business environments, and the ability of SMEs to implement competitive operating practices and business strategies). Good policies come in clusters. Thus, SME development strategy must be integrated into the broader national development strategy

and/or poverty reduction and growth strategy of transition and developing countries.

Strategic 2: Strengthening Financial Support

Improve access and availability of loans and strengthen capacities of SMEs to manage finances Establish a system for issuing credit guarantees Improve access to grants Facilitate access to credit by creating a stimulative regulatory framework Stimulate the use of available financial instruments
Initiation of programs that aims to identify challenges and issues in an area/industry/cluster and its solutions based on technological interventions and innovative approaches. Identified solutions needs to be further aligned with entrepreneurial opportunities to generate socio-economic development and must aim to demonstrate better avenues for creation of sustainable enterprises, and generation of jobs connected with the proposed technological solutions. The projects would also target to demonstrate sizeable impact creation in five year time frame. Ex: i-STED (innovation , Science and Technology based Entrepreneurship Development) initiative of National Science and Technology Entrepreneurship Development Board(NSTEDB) of the Department of Science and Technology (DST) in India. Credit Link Capital Subsidy Scheme for Technology Upgradation: The Schemes aims at facilitating technology upgradation by providing upfront capital subsidy to SSI units for modernisation of their production equipment (plant and machinery) and techniques.

Strategic 3: Strengthening SME competitiveness and promoting entrepreneurship

Establishing the necessary institutional support for development of SMEs Education and consulting services for SMEs Strengthening innovation within SMEs Stimulating exports from SMEs Dialogue and partnership between public and private sectors Statistical monitoring and promotion of SMEs and entrepreneurship Dialogue and partnerships between the stakeholders is essential (public sector, private sector and civil society) Dialogue and partnership foster ownership of SME strategies, engenders them more implementable (by better addressing SME needs), politically more credible, and more sustainable. Enhancing womens ability to participate in SME development should be taken into account at every stage and level, as women account for an important share of private sector activity and contribute most to poverty reduction. Gender dimensions need to be mainstreamed throughout SME development strategies and programs, with additional specific, targeted initiatives directed at critical roadblocks.
Initiation of Marketing assistance schemes: Marketing, a strategic tool for business development, is critical for the growth and survival of micro, small & medium enterprises. Marketing is the most important factor for the success of any enterprise. Large enterprises have enough resources at their command to hire manpower to take care of marketing of their products and services. MSME sector does not have these resources at their command and thus needs institutional support for providing these inputs in the area of marketing. Cluster Development Programme: cluster development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) and their collectives in the country. Clustering of units also enables providers of various services to them, including banks and credit

agencies, to provide their services more economically, thus reducing costs and improving the availability of services for these enterprises.

Strategic 4: Support for beginners in business - start-ups

Strengthening institutional infrastructure to support start ups Improving the quality and availability of the financial support Improving the quality and availability of the non-financial support Investments in physical infrastructure and business services and the implementation capacity of policy makers, local level administrators and support structures determine success. Access and integration of SMEs into local, national, regional and global markets require substantial investments in sustainable physical infrastructure development and business service delivery to SMEs in all areas, including those that are rural and/or remote. Continued dialogue and partnerships between stakeholders into implementation and review of supportive measures, particularly, those related to capacity building in institutions at all levels, yields improved outcomes.
Incubators An incubation facility is always a blessing for SMEs due to its various advantages. For starters it helps to promote newbie ventures of young entrepreneurs, provides a wide range of entrepreneurship development initiatives such as training, nursery incubator space during the initial gestation period, central common machining facilities, systems and networking support, catalogue library, funding schemes etc. As a result of these facilities there is considerable reduction in the initial investment commitments of the entrepreneurs thereby reducing his risk quotient to a large extent. Other usual but useful facilities such as workshops, computer networks with internet facilities etc., have proven to be a boon for upcoming enterprises. The instant availability of common facilities for new ventures motivate the entrepreneurs to confidently set-up their own ventures and relieves them of start up tensions thereby enabling them to focus their full attention on core competency development. Moreover, most entrepreneurial incubation centers have ready availability of on-line consultancy in the form of a team of management professionals, to analyze various business propositions. This team helps to develop suitable business strategies and providing newbie entrepreneurs greater impetus.

MSME Density across the World

Sources: MSME Country Indicators. Note: Name of region [#] signifies the number of economies from the region included in the analysis. The figure uses the most recent data available after the year 2000. The figure use data for 116 economies .

Sources: 1. Report on Support to SMEs in Developing Countries Through Financial Intermediaries, November 2011. 2. Review of the most recent literature on Entrepreneurship and SMEs 3. Promoting Entrepreneurship And Innovative SMEs In A Global Economy: Towards A More Responsible And Inclusive Globalisation 4. http://www.nasme.me/eng/documents/SME%20Development%20Strategy%202011-2015.pdf 5. Micro, Small, and Medium Enterprises, Khrystyna Kushnir, Melina Laura Mirmulstein, and Rita Ramalho,2010