Promoting MSMEs For Development

Sheikh Morshed Jahan
smj@iba-du.edu
copyright: Sheikh M Jahan, IBA, Univ. Dhaka
Promoting
SME for Development
Three key issues

1)
2)
3)
SME
SME promotion
SME promotion for development
Basics:
MSME stands for Micro, Small and Medium Enterprises
MSMEs are the smaller species of business enterprises often

includes micro or cottage enterprises (also labeled as industries)
In most economies, MSMEs play a pivotal role in terms of

Employment
National output
Distribution of income (huge number of enterprises/entrepreneurs)
Case Example 1: Contribution of SME in around the world

..\..\UNESCAP - SME Policy Guidebook\UNESCAP SME Policy Guidebook - ch 2.pdf
Characterization of SMEs: Similarities
Popular indicators/measures are size-driven

Employment size
Investment/asset/equity size
Sales turnover (annual revenue) size
However, other commonalities are there as well
Ownership (mostly family-owned)

Legal formation (mostly informal or quasi-formal)
Management style (mostly owner-managed)
Operation (mostly enjoy operational flexibility)
Specialization (usually serves a niche market)
Power (low bargaining power)
Business type (depends on primarily owners skill, expertise and/or
convenience and local availability of inputs))
Characterization of SMEs: Dissimilarities

SMEs are NOT homogeneous because, the definition varies/may vary from
1.
Country to country, based on the stage of economic development and the structure of the
economy (agriculture, manufacturing, service)
In Bhutan employment of 100 persons makes an enterprise Large, China considers a manufacturing
enterprise employing up to 1,000 persons SME
Industry to industry e.g. Manufacturing, Service, Trading (wholesaling/retailing), Others (e.g.

mining, construction)
In Japan, a manufacturing enterprise employing less than 300 persons may be considered SME, while a
retailing enterprise with 50 or more employees cannot be considered so.
Bangladesh uses replacement cost of assets other than land and building for manufacturing enterprises
(up to BDT 15m small, 100m medium), but number of employees for non-manufacturing enterprises (up
to 25 employees small, 100 employees medium).

SMEs are NOT a homogeneous group because, the definition is quite
broad
2.
SMEs constitute enterprises that fall under three categories
micro (in Bhutan, 1-4 employees+ investment size),

small (in Bhutan, 5-19 employees + investment size) and
medium (in Bhutan, 20-99 employees + investment size)
and, they have their internal size-driven dynamics
SMEs are NOT a homogeneous group because, they operate at

different stages of life cycle and therefore are of different maturity
3.
Nascent industry SME vs. matured industry SME

Start-up SME vs. established SMEs

4.
SMEs are NOT a homogeneous group because, their

missions/business goals vary
Livelihood enterprises
Traditional, believes in imitation and business as usual

Not so eager to become Large
Calculative/Low risk taker
Subsistence is the major driving force
Entrepreneurial enterprises
Innovative, believes in excellence in breakthrough

Eager to grow big
Aggressive/High risk taker
Impact is the major driving force
Characterization of SMEs: Conclusion

1.
SME dynamics, and therefore SME needs, are

different, depending on the Size of the enterprise (employment, capital, turnover)
Nature of industry in which the enterprise belongs (e.g.
manufacturing, service, trading, mining, construction, etc.)

Maturity of industry and/or enterprise (nascent industry vs.
matured industry, start-up vs. established firm)
Business goals of the enterprise (livelihood vs. entrepreneurial)
2.
Because needs are different, so should be the purpose

and design of interventions (for SME promotion)
In short, understanding SMEs involves 1.
Comprehending the context in which they operate
2.
Internalizing the dynamics in terms of
3.
size variability of the enterprises

the nature and maturity of the industry
business goals that they pursue
Understanding the purpose of a definition e.g.

offering incentives - fiscal (e.g. tax) and financial (e.g. access to
credit/capital)
making BEE sound
10
Four key questions
What does SME promotion mean?

Why is SME promotion necessary?
How may SME be promoted?
Who should promote SMEs?
11
What: SME promotion means

Incentivizing new/budding enterprises
Supporting fragile enterprises

Helping SMEs excel and grow, and become large
Helping SMEs survive and sustain, but stay smaller
Encouraging SMEs to offer market solution to private goods
Assisting SMEs to become competitive - locally, regionally and/or
globally
12
Why: SME promotion is necessary
To create employment?
To increase GDP/national output?
To increase national revenue?
To distribute economic wellbeing?
To diversify economic activities?
To attain flexibility in economic activities?
To absorb unforeseen economic shocks?
To support large enterprises?
To augment export?
To create an equitable and inclusive society?
To promote entrepreneurial culture?
To reduce poverty?
To reach unreachables?
To balanced regional development?
To contribute to GNH Gross National Happiness?
13
How: SMEs may be promoted by creating such an environment that

facilitates access to
Finance (credit/capital)
Market (local/global)
Technology (home-grown/transferred)
Information (knowledge/skills)
Business development services (technical, legal, functional)
Public goods (resources natural/created)
dismantles excesses in
Legal and regulatory measures
Bureaucratic and procedural formalities
supports business and entrepreneurship development through

Policies and programs
Institutions and infrastructure (soft and physical)
14
Who: SMEs promotion is a task of

Government?
Agencies/departments/ministries?
Local governments?
SME Chambers?
Large Enterprises?
Others?
Market players (e.g. banks)?
Educational institutes (e.g. business schools)?
Media
???
15
SME promotion for development entails a new

perspective
Poverty reduction
Social safety net
Sustainable employment
Market-led economic development
Wider, equitable distribution of income
Balanced development regional, ethnic, challenged
(economically, physically, by nature)
16
Case Example 2: SMEs in Japan (2006)
Number of enterprises: 4.21 million

small 87%, medium 12.7%, Large 0.3%
Number of employees: 40.13 million

small 23.2%, medium 46.2%, Large 30.6%
Manufacturing value addition: 101.3 trillion yen

small 9.1%, medium 38.6%, Large 52.3%
Case Example 3: Marketization in Bangladesh (1972-2002)

Private sector manufacturing role from 1972-73 to 2001-02
Employment 35% 94%
Gross value addition: 46% 93%
Number of firms: 93.2% 99.5%
17
In Bhutan, of the 21,008 industrial

enterprises, excluding construction contractors
(2010 stat.)
Only 114 are Large (with 100+ employees and/or Nu.
100 million+ investment)

The rest (99%+) are MSMEs/CSMIs
201 medium (with 20-99 employees and/or Nu. 10-100
million investment)
2,878 small (with 5-19 employees and/or Nu. 1-10 million
investment)
17,815 micro (with 1-4 employees and/or less than Nu. 1
million investment)
18
1. CSMIs constitute 98%+ of total industrial enterprises
2. CSMIs are considered to
Promote pro-poor economic growth, with equity and inclusion

Create employment and thus fights jobless growth
Foster entrepreneurial spirit and innovation
Support balanced regional development
Strengthen rich cultural heritage
3. The success of CSMIs is tagged with realization of the noble goal of Gross National
Happiness (GNH)
4. RGoB is pursuing a package initiative in promoting CSMI:
Bhutan Vision 2020
Economic Development Policy 2010
Cottage, Small and Medium Industries (CSMI) Policy 2012
CSMI Development Strategy 2012-20
CSMI Development Action Plan 2012-14
Bhutans Five Year Plans
19
Bhutan Vision 2020 and Economic Development Policy 2010 identifies CSMI as a
priority sector. (RGoB CSMI Policy 2012)
The development of the CSMI sector in Bhutan is considered by both the RGoB
and the wider CSMI stakeholders as a high priority activity that will help promote
sustainable and inclusive growth towards reducing poverty and enhancing
employment. (RGoB CSMI Development Strategy 2012-20)
The principal role of government (with respect to supporting CSMI

Development) is to provide an enabling policy, legal and regulatory environment
for CSMI and Business Development Service (BDS) providers, as well as investing
in public goods such as basic infrastructure, education and information services.
(RGoB CSMI Development Strategy 2012-20)
Government has a role in correcting or compensating for market failures, but

not in the direct provision of private goods that can be more efficiently provided
by the market (RGoB CSMI Development Strategy 2012-20)
20
Quick participant survey:
What are the major constraints faced by SMEs in

Bhutan?
List top 3
Tabulate and present in percentage
21
Source: CSMI Dev Strategy 2012, ES 2011

Courts
Crime
Political instability
Electricity
Telecom
Corruption
Access to Land
Tax administration
Series1
Tax Rates
Labor regulations
Custom & Trade regulations
Rival's business practice
Workers' low education
Transport infrastructure
Hiring Foreign Workers
Access to Finance
0
10
15
20
25
30
35
22
Source: Modified from CSMI Dev Strategy 2012, ES 2011

Access to Land
Transport infrastructure
Tax regime
Series1
Access to Market
Access to Finance
Human resources
10
20
30
40
50
60
23
Quick participant perspective:
What should be the role of SME development agencies in

Bhutan?
How may these be organized systematically?
24
Intervention
Facilitation
Role
Providing
Leadership
Providing
Service
Policy, Instit
ution, infras
tructure
The Grid of
Mandate
for Chambers & MSME

Promotion Agencies
Knowledge
Management
Providing
BDS
Networking
Impact
Targeted
Source: Jahan, S. M.
(forthcoming)
Wider
25

Promoting MSMEs For Development

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Sheikh Morshed Jahan

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

SME for Development

Three key issues

MSME stands for Micro, Small and Medium Enterprises

MSMEs are the smaller species of business enterprises often

In most economies, MSMEs play a pivotal role in terms of

Case Example 1: Contribution of SME in around the world

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

Characterization of SMEs: Similarities

Popular indicators/measures are size-driven

However, other commonalities are there as well

Ownership (mostly family-owned)

Characterization of SMEs: Dissimilarities

Industry to industry e.g. Manufacturing, Service, Trading (wholesaling/retailing), Others (e.g.

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

Characterization of SMEs: Dissimilarities

SMEs constitute enterprises that fall under three categories

micro (in Bhutan, 1-4 employees+ investment size),

and, they have their internal size-driven dynamics

SMEs are NOT a homogeneous group because, they operate at

Nascent industry SME vs. matured industry SME

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

Characterization of SMEs: Dissimilarities

SMEs are NOT a homogeneous group because, their

Traditional, believes in imitation and business as usual

Innovative, believes in excellence in breakthrough

Characterization of SMEs: Conclusion

SME dynamics, and therefore SME needs, are

manufacturing, service, trading, mining, construction, etc.)

Because needs are different, so should be the purpose

In short, understanding SMEs involves 1.

Comprehending the context in which they operate

Internalizing the dynamics in terms of

size variability of the enterprises

Understanding the purpose of a definition e.g.

Four key questions

What does SME promotion mean?

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

What: SME promotion means

Supporting fragile enterprises

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

Why: SME promotion is necessary

How: SMEs may be promoted by creating such an environment that

supports business and entrepreneurship development through

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

Who: SMEs promotion is a task of

SME promotion for development entails a new

Case Example 2: SMEs in Japan (2006)

Number of enterprises: 4.21 million

Number of employees: 40.13 million

Manufacturing value addition: 101.3 trillion yen

Case Example 3: Marketization in Bangladesh (1972-2002)

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

In Bhutan, of the 21,008 industrial

100 million+ investment)

1. CSMIs constitute 98%+ of total industrial enterprises

2. CSMIs are considered to

Promote pro-poor economic growth, with equity and inclusion

The principal role of government (with respect to supporting CSMI

Government has a role in correcting or compensating for market failures, but

copyright: Sheikh M Jahan, IBA, Univ. Dhaka

Quick participant survey: