SMALL ENTREPRENEURS IN PAKISTAN:National Approaches

<< THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Kinds of Entrepreneurs

THE DEVELOPMENT OF SMES IN PAKISTAN:The Industrial History of Pakistan >>

SME Management (MGT-601)

Lesson 5

This lecture will introduce the small entrepreneur in Pakistan the activities of SMEs in global and

regional level. It will also reveal the role of SMEs in a developing economy.

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.

In Ceylon (Sri Lanka) as early as in 1949 nearly 286,000 persons were engaged in small industries, in

China in 1933 approximately 10 million workers were responsible for 80% of the total industrial output by

working in SMEs. In India more than twenty five million people are engaged in cottage and small industry.

In countries like Germany, Switzerland and France there exists today a large group of industrial workshops

and units side by side with the large factories. Japan furnishes the most striking example of the survival and

growth of small-scale industries. This phenomenal development is due to careful planning, the integration

of industries with agriculture and not the least important.

SME Management (MGT-601)

Cottage and small industries have a very important role in the national economy, offering as they do, scope

for individual, village or cooperative enterprises and means for the rehabilitation of the displaced persons.

National Approaches

South Africa

In South Africa there are about 800,00 small medium sized and micro enterprises in addition to the

two to three million persons carrying different self-employment activities.

Country

Index

Share

Less than 100 employees

34% employment and 32%

United States

sales

Japan

Less than 300

99%

all

employees'

establishments.

71.9% of all employees. 55% of

all value added. 51.8% of all

shipments.

Federal

Republic

of Less than 10 employees

85%% of all companies.

Germany

France

Less than 9 employees

99.9% of all firms.

Chile

Less than 9 employees

99% of all firms.

39% value addition.

Republic of Korea

Small industry

38.4% value addition.

Brazil

Small- scale sector

43.6% employment.

29.6% production share.

Philippines

Small scale manufacturing

90% of all establishments.

50% of employment.

About 33% value addition.

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.

SME Management (MGT-601)

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.

SAUDI ARABIA

LARGE FIRMS

SMALL FIRMS

Sales per employee

SAR 486,000

SAR 158,000

Gross Margin to Sales %

14.2

4.4

Return on Assets %

18.7

5.4

Saudization*

14.3

8.5

Jobs created per million SAR 1.0

28.3

invested

* Saudis as a share of total employees.

The erroneous view of SMEs all-scale industry, which is persisting in many developing countries, is that

they constitute only a transitional phase in development and that small industry development is a temporary

expedient or a "second best" alternative. This seems to base on the assumption that as a country moves

from a traditional to a modern economy, it will have no more need or place for small-scale industries. But

experience of some of the most industrially advanced countries clearly shows that while some industries

start as small and grow into large establishment in terms of capital, output and employment, small scale

industries as such continue to constitute a fairly large and important sector of their industrial structure. In

the United States, Germany, the United Kingdom, the Netherlands and Japan industrial enterprises

employing less than 100 persons account for the overwhelming majority of small- scale industrial

enterprises. Employing less than 100 persons need not necessarily be small. Because in capital-intensive

industries in advanced countries generally small number of workers may be evidence of automation rather

than smallness in size. However, in a majority of cases, enterprises employing less than 100 persons may be

taken as relatively small in the scale of operation as well. The contribution to total output in manufacturing

ranges from about one quarter to one third, and to total employment in manufacturing from about one

quarter to one half in some industries. Small establishments have a predominant position, in the United

States for example, they contribute more than 75% of total value added in certain branches of foodstuffs

and clothing industries. Small industries can coexist successfully with large industries because of certain

inherent advantage of small-scale production or of small industries which functions complementarily with

large industries as producers of components and supplies for them. Experience in advanced countries has

established the fact that in certain circumstances, in manufacturing certain products by small industries

cannot only coexist with large industries, but also even out compete them. Similarly, experience in

developed countries has proved that the subcontracting system by which a large numbers of small firms

supply components and parts of large industries have not only stabilized and strengthened the small firms,

but also contributed substantially to the efficiency and economies of the big industries. One of the major

tasks of the small industries promotion should be to identify the industries where production on small-scale

basis offers the maximum advantages and give direction and lead to potential entrepreneurs into such fields.

In fact, we would consider this as the first and most important step in small industry promotion. It is true

that some small industries require some more measures of protection. This incidentally is true also of many

SME Management (MGT-601)

large-scale industries as well. If care is taken to promote sustained capacity, it will be possible to build up a

truly balanced industry structure where small and large industries will coexist to their mutual advantage.

Given adequate encouragement, this sector has greater potential of growth with spin of benefits. An investment in small

enterprises is alone synonymous with investment in human resource.

References

1-Small and medium enterprise development( A visionary action in Saudi Arabia) by Ismail

Radwan & Jamal al-Kibbi( World Bank Institute)

2-Small Entrepreneurs in Developing Countries by Dr Asghar Nasir

3-Unit 2 -What is an SME (A UNIDO Publication)

Book recommended -Small Entrepreneurs in Developing Countries by Dr Asghar Nasir

Key terms

1-Antiquate

2-GDP (gross domestic product) the annual total value of the goods produced and services

provided by a country)

3-Default rate (The rate of failure to pay back the loans/credits)

4-Value added (The worth placed on a product by a particular stage in the production process)

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