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Comparison of SMEs in India and the UK

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Chapter 1: Introduction:

Background of study:

Small businesses have been the soul of every economy in the world. India and UK have also been thriving on the performance of this sector. The performance of the sector is highly influenced by the government policies and the availability of finance.

Purpose of Study:

In this study, the author investigates the performance of the Small and Medium Enterprises in India and UK. The contribution of this sector to the society on the whole. This study focuses on the importance of the SME sector in both the countries from the point of view of its contributions to the economy. This study evaluates the importance of financing activities and the Government policies in order to support and nurture the growth of this very powerful sector.

Overall Aim and Objectives of Research:

The overall aim of this study is to evaluate the role of Government and financial institutions in the development of the small and medium enterprises in India (Developing country) and UK (Developed country.)

Objectives:

  1. Problems faced by the SME sector in India and UK.
  2. Role of Government policies in India and UK.
  3. Role of financial institutions in providing better financing options to the sector.

Background of SMEs:

Small and medium sized enterprises (SMEs) are one of the principal driving forces in economic development. This sector has been recognised as growth engine around the globe. A healthy and vibrant SME sector contributes in a high and sustainable economic growth. They encourage private ownership and entrepreneurial skills, they are flexible and can adapt quickly to changing market demand and supply situations. They provide employment opportunities to the masses, help diversify economic activity and make a significant contribution to exports thereby increasing foreign trade.

Small and medium enterprises have been defined in various ways in different countries. In India, it is known as the Micro, Small and Medium Enterprises (MSMEs) which is defined in terms of investment required. The MSMEs include all the enterprises in which the total investment does not exceed more than Rs. 50 million. The European Commission defines SMEs on the basis of the work force employed, total turnover of the business and the balance sheet total. In the US, the criteria for recognition is based on the work force employed. The main factors which give a firm the status of SME are employment and investment in fixed assets.

Many economies have acknowledged the need for growth and development of SMEs for industrial restructuring and have formulated national SME policies, programmes and enterprise development policies. Enterprise helps boost productivity, increased competition and innovation, thereby creating employment and prosperity, and revitalizing the communities.

SMEs contribution to the foreign trade has been ever increasing. During the last decade, there has been a considerable increase in the foreign trade arising from the products of these SMEs. The open trade policy has been a great success. The policy makers in developing countries like India, Sri Lanka, Pakistan, and many other South Asian countries have been continuously reviewing their policies to help the functioning of these SME units.

Chapter 2: Research Methodology:

Research is defined as "an activity which is undertaken in order to find out things in a systematic way, thereby increasing knowledge" (Saunders, et al, 2003). As the definition says, it is important that the study is carried on in a systematic ways which means the study should be logical and should be carried by systematic interpretation of data. (Ghauri and Gronhaug, 2002).

According to Saunders, et al, (2003) the research should highlight the following features:

  • Data used for study should to be collected systematically.
  • Data should be interpreted systematically.
  • The research should be carried out with the intension to draw a conclusion.

According to Williman (2001), research is not merely collection of facts or information without any purpose. The research should relate to collection of facts and information with a specific purpose. The reassembling or restructuring of facts and figures without any interpretation also is not termed as research. A proper research should be a mixture of facts and figures being interpreted and should provide an answer to the research question.

The data is of two types depending on the source from where it is obtained. Primary data is the data which is obtained by the researcher for some specific questions. It includes interview of the object of study. The answers are then observed closely to draw a conclusion. Secondary data is the data which is obtained from literature review and the internet.

The gathering and analysis of primary data adds value to the dependability of the results of the research, in my chosen topic of study there are not enough opportunities within the time and reach of the researcher to resort to research methods of interviews or survey through questionnaires, since the firms are widely scattered and the small and medium enterprises in India don't disclose their secrets to anyone.

Hence, the data used is secondary data which is available through internet and through various government publications. There is a lot of literature on the selected topic; they can be treated as trusted source of data to carry on the research. The essential research principles while using the secondary sources are Qualitative and Quantitative approach to research, out of which this research paper uses the qualitative and descriptive approach to conclude the research question. Therefore the secondary research has been used for completing the study.

Limitation of Study:

I have tried my level best to produce this report to be as fruitful as it can be but there are some serious limitations that this study suffers.

There is a lack of study and not many scholarly articles are available on the problems faced by the Small and Medium Enterprises in India and UK. There are many articles which describe the importance of this sector. I had to take the use of various print media and internet sources of government portal in order to draft down the problems faced by them. Also, the grants and government policies that are provided are in exhaustive; hence the study focuses on only the main grants and policies which have contributed largely to the sector.

The small and medium enterprises sector is very huge and widely scattered, which comes as a constraint to collect primary data for the study.

Chapter 3: Literature Review

Role of Small and Medium Enterprises (SMEs):

SME have an important role in a country's economic development and growth and also have been achieving the same kind of progress over the last couple of years. India as an example shows the importance of SME's towards the growth of the economy and the employment generated with the help of labor intensiveness and thus, bringing efficient distribution of resources through labor intensive production. This segment also helps in lightening poverty and sustaining growth. Equal distribution of income also comes into picture thereof. And all this happens when the scarcity of capital exists. (Das, K. (2006))

Some of the characteristics of this typeof policy include formation of multi-storied and flatted industrial estates for micro industries, liberal floor spaces index in plotted development of 1.5 to 1.75 for industrial sheds and 2.5 for multi-storied industrial units, 50% rebate on stamp duty and registration charges for micro and small enterprises in industrial estates and industrially backward areas.

Globalization has made possible the fragmentationof all forms of production of goods and servicesacross countries and enterprises. Where large players go for a different form of business models which includes bringing alongtheir traditional partners, suppliers or distributors at a different level, SME's are experiencing a new form of functioning in the value chain byevolving from a traditional manufacturer in the domestic market to that of an international partner. SME's undergo the effects, both positive and negative, of outsourcing led restructuring of production at the international level. Because of the advantage of their flexible nature of operations, SME's face lot many opportunities in the form of the demand for new products and services. But the things get a little nasty when theinadequate availability of managerial and financial resources, lack of working capital, innovation and personnel training come into picture. (Das, K. (2006)).

The Indian Small Scale Sector- An Overview:

A SSI in India is defined as a unit where investment in plant and machinery, either in the terms of ownership or lease, does not exceed Rs. 10 million. In the same way, micro enterprises or the so called tiny units does not have investment in them to be exceeding more than Rs. 2.5 million. The Small Scale Industries of India have a fortune of have been built through enterprise, dynamism and renewal. Since the end of the colonial rule, India has re-established itself and has transformed itself from 80,000 units to 3.3 million. The last decade of the 20th century showed steadiness. This sector of SSI's alone contributes 7 % of GDP in India. (Sahu, P.P. (2005)).

Market liberalization and de-regulation are the two forces behind SME'schanging their business strategies for survival and growth. These changes have particularly been in the terms of acquiring quality certifications, creation of e-business modules, diversification to meet competition, etc. SME's involvement in the foreign trade has to be supported by Globalization, Liberalization and WTO for the benefit of access to markets, technology, skills, finance infrastructure and tax-friendly environment. (Ecotec Research & Consulting (2004)).

Production and Investment in SMEs:

There has been an extraordinary 18% growth in the production at current prices of SME'sin FY07 as compared to the previous year's15.8% thereby bringing a rise to India's GDP to 15.5% during the year. The growth in the production has been there because ofconducive policy measures, growing domestic consumption, export market, improving production methods, technology, etc. SME's did maintain equal growth rate in respect of the industrial sector during the FY03-07 with a growth of CAGR of 17%. (Sahu, P.P. (2005)).

The SME sector has also reported growth higher that the overall manufacturing sector. The sector does not only provide output in the form of final goods but also capital goods which further form the input to heavy industries. The table below is indicative of the growth of SME's in the Indian economy.

The SMEs in India: Present Scenario:

As quoted by Business World, Jan. 2007, small companies seems to have been performed much better as compared to their larger equivalents as between 2001-06, net companies with net turnover of Rs. 1 Crore - 50 Crores had a higher growth rate of 701 per cent as compared to 169 per cent for large companies with turnover of over Rs. 1,000 Crore. (1 Crore Rupees is equal to 10 Million USD). The all time high of Rs. 1, 89,200 Crores of total SSI production reached in 1989-90 dramatically dropped in the next 10 years and increased later only 2001-02. After that, the production growth increased at a much greater pace in terms of units, production, employment and exports. (Ecotec Research & Consulting (2004)).

Currently, some of the SME's, mostly ancillaries and export-oriented, are acquiring companies abroad as part of the Globalization process, catering to the needs of global manufacturers and suppliers like in Auto Industry. Some of these units have also invested in R&D globally and taking help of outsourcing, in the fields of manufacturing and services, to emerge as a global leader because of the factors such as labor-intensive manufacturing, lower transport costs, lenient labor policies of the small scale sector. The next step to this would be a government initiative providing a risk-free environment, start-up capital, technology and training updates. No matter the Micro, Small and Medium Enterprises Act, 2006, which has been passed by the Government with the help of 300 industrial associations, many government departments and lot many stake holders, is a legal framework for providing capital investment to this sector, but the implementation of it involves a lot many agencies to come together and achieve it jointly. (Government of India (2005)

The Micro, Small and Medium Enterprises Act, 2006:

The Government of India passed "The Micro, Small and Medium Enterprises Development Act" in June 2006 after wide consultation with more than 300 industry associations, different government departments and multiple stake-holders across the country. The Act is geared towards promotion and enhancing the competitiveness of Micro, Small and Medium Enterprises. The Act tries to accomplish many long standing demands of multi stakeholders in the MSME sector. Another issue was the lending facilities to SME's but as the mindset of the banks seems to change because of entry of large no. of private banks, which in turn led to increased competition and multiple financial options, the increased lending to the SMEs is actuated because of the compulsion from the market and the expansion of the companies. The lending to SMEs from the banks grew by 69% between 2000-01 and 2005-06. (Government of India (2005)).

The UK SME Sector:

The UK's SME sector forms the business backbone no matter it may be the restaurant or the web designer, by providing over 33% of the GDP and over 50% of employment. There are 3.6 million SMEs but 99.5% employ less than 200 people. Every year around 175,000 businesses register themselves for VAT and most of them survive by the end of the first year but, then onwards mortality rate takes hold and by the end of the third year approximately one third have failed.

As per R3, the association of Business Recovery Professionals, as on one case, the worst places to start business would be Peterborough, Sunderland, Manchester, Bolton and Belfast with the highest failure rates, on the other hand, Llandrindod Wells, Truro, Southwest London, Guilford and Carlisle had the lowest failure rates. The failures occur because of the management failing to protect margins thus increasing its responsibility to 50%. Because of this Academy of Business Consultants believe that the founders of these businesses need the best assistance. (Sandesara, J.C. (1993)).

The Qualitative Challenge:

The World Bank's `Doing Business 2007' Report places UK in the ninth position out of 175 in the world for starting a business. But when it comes to enforcing contracts, employing workers, and dealing with licenses, then it is not a rosy picture, as they are ranked as 22nd, 17th and 46th respectively. This led for a need of change in the current status of SMEs. (Kondaiah, C. (2007)).

SME growth: the stylized facts:

The international data available also claims that smaller and younger businesses experience wider variations in growth as compared to their larger and mature counterparts. However, only a bunch of these smaller and younger businesses account for bulk of employment, output or sales and producing spectacular growth fighting through the competitors.

Keeping a sense of proportion:

Apart from all this, the factors like innovation and economic activity still forms to be a disadvantage for the SME's side. In the European Union it has recently been estimated that the mean share in activity of the largest four enterprises across a large sample of industries and countries was 20% with a maximum of 87%. These ratios appear to have been rising rather than falling in recent decades. (Kondaiah, C. (2007)).

SMEs are generally backbone of the Industry. Napoleon said that British are a nation of shopkeepers. He was right much as Britain and a nation small and Medium sized enterprises.(Sandesara,J.C 1993)

In the UK the Large enterprise consist of 1% and the rest 99% is small enterprises. If we consider the total working population that is 30million out of that 14.3 million is employed by SMEs. The GDP growth of U.K is 7.4% which would be impossible without the growth of the SMEs as disclosed by BERR. U.K SMEs account for 1.8 trillion pound GDP despite being half the picture of the whole industry. The UK Public sector which contributes up to 1/3rd of the total UK economy attracts strong political focus. This makes the UK SME sector to be considered as fragmented and also at times ignored. But the SME sector is of vital importance as it provides to be the stepping stone for the other large enterprises to be. According to the BERR statistics for 2007, the Small and Medium Enterprises which employ more than 100 employees but fewer than 200, employs 4.4% of the total working population but contributes 5.6% of the total UK GDP. The small enterprises are outperformed by the medium enterprises in this context. Also, the enterprises that employ more than 50 employees but less than 100 also employ 4.4% of the workforce with an overall contribution of 5.7% to the total UK GDP.

There is a lot of evidence that proves that the UK economy thrives on the performance of the SMEs and that with an improvement in the performance of this sector will benefit the improvement of the UK economy on the whole. There is a need for the Government to work closely with the sector to develop the sector and also for rapid growth of the UK economy.

The SME's, mostly ancillaries and export-oriented, are acquiring companies abroad as part of the Globalization process, catering to the needs of global manufacturers and suppliers like in Auto Industry. Some of these units have also invested in R&D globally and taking help of outsourcing, in the fields of manufacturing and services, to emerge as a global leader because of the factors such as labor-intensive manufacturing, lower transport costs, lenient labor policies of the small scale sector. The next step to this would be a government initiative providing a risk-free environment, start-up capital, technology and training updates. No matter the Micro, Small and Medium Enterprises Act, 2006, which has been passed by the Government with the help of 300 industrial associations, many government departments and lot many stake holders, is a legal framework for providing capital investment to this sector, but the implementation of it involves a lot many agencies to come together and achieve it jointly. (Government of India (2005)

Measuring innovation:

Any attempt to assess innovative activity and performance must begin with the definition of suitable metrics. These usually fall into the two categories of input and output measures. Inputs usually include expenditure on R&D, and measures of the staff employed in R&D. Output measures include patents and measures of the incidence of product, process and logistic innovations. Distinctions can also be drawn between innovation new to the firm, (which may be diffusing from a de novo innovation activity in another firm), and more novel innovation which is new to the firm and to the industry.

Each of these may lead to measures of innovation intensity in terms of innovation counts, as well as measures based on the distribution of sales by novelty of product or service innovation. Broadly speaking there are two approaches to obtaining data on innovation outputs. There is evidence to suggest that the object approach underestimates the innovative activity of smaller firms, in particular diffusion or incremental activity which the object approaches may overlook (OECD (1992)). The CBR has pioneered the subject approach in relation to UK data for SMEs and consequently its work directly complements UK Office for National Statistics data collected for CIS2, which has along with many EU countries limited coverage of the smallest firms (Cosh, Hughes ands Wood (1998)).The discussion in the rest of this paper draws on data based on the subject approach.

Innovation in the EU In reporting innovation activity in the EU this paper relies on the results of the second Community Innovation Survey (CIS2), of 1997/1998, from which charts 1 to 6 are drawn (Cosh and Hughes (2001)). Twelve European States took part in the survey (all EU Member States except Denmark, Greece, Italy and Portugal, plus Norway). The survey was intended to cover allenterprises in manufacturing with 20 or More employeesand all service enterprises with 10 or more employees. These can be split into three size bands small (10 to 49 employees), medium (50 to 249 employees) and larger (250 or more employees). This allows a comparison of innovation activity by broad sector and size over the three-year period 1995-7. The results of CIS2 reveal that innovation activity rises with enterprise size in the EU as a whole which also shows that the result holds for both Manufacturing and Services. In the specific sense that the proportion of enterprises reporting one or more product or process innovations rise with size classes it seems that bigger is better.

These results are at an aggregate EU level; it is instructive to disaggregate them by country, as well as size. To do this and to illustrate the relative innovative activity of the small firms in the UK the following charts 2-6 rank countries in terms of innovation performance of small firms, weaker countries are at the left and performance rises as we move to the right. Successive charts report on the proportion of product or process innovating enterprises in manufacturing, and the proportion of product innovators in manufacturing. The same measures are then shown for services, and then the final two charts report on the proportion of novel product innovators in manufacturing, and the proportion turnover due to new or improved products. Taken together these charts reveal that UK small firms are ranked in the top 4 in Europe in Manufacturing, and in the top 5 in Europe in Services. Moreover an inspection of the column pattern for medium and larger firms also reveals that UK small firms do better relatively than UK large firms and especially better than medium firms. In that comparative sense smaller is better.

Analysis of innovation constraints and the innovation/ performance link using CBR survey results In order to probe behind these results and in particular to examine patterns of innovation constraints and the innovation/performance link we can use the results of the regular CBR biennial survey of SMEs in the UK. These cover 2500 enterprises in Manufacturing and Business Services employing between 1 and 500 employees. The latest results are based on the 4th survey of 1999. The surveys generate subject-based data on innovation inputs and outputs and over 200 company specific variables on enterprise structure and performance. (A full discussion of the dataset and the results summarized here can be found in Cosh and Hughes (1998) and Cosh and Hughes (2000a)).

To conclude, we have substantial matter to prove that UK economy is supported by SME and that encouraging them and working with them will bring a positive effect on the UK economy.

Chapter 4: SMEs: An Overview

Contribution of SMEs:

SMEs are the backbone or the key drivers of the industrial economy. They can also be described as the engines of growth of the industrial sector. Although they are individually small, collectively they play a multiplayer role in the development of an economy. They have a multiplayer impact in developed as well as developing economies. The main USP of SMEs is low cost production i.e. the ability to manufacture low volumes profitably, meet niche requirements, capitalize on local skills and resources, provide outsourcing opportunities and most importantly create jobs.

The sector has been consolidating over the years. What is new is the articulation and recognition of this process and its pump priming role. Therefore national SME policies, programmes and enterprise development policies have been formulated to support smooth working of SMEs and to overcome major obstacles such as lack of legislation, promotion and infrastructure. This can be done in the form of promotion programmes, positive discrimination hand holding and advocacy. Policy initiatives seek to highlight basic SME skills in low cost production.

SMEs have an impressive presence in service industry ranging from the simple and traditional organisations to the most modern and hi-tech ones. SMEs contribute not only in terms of quantitative factors such as output, employment, income, investment or exports but also in terms of qualitative factors viz the synergies they promote with large industry, their contribution towards balanced regional growth, their contribution in nurturing entrepreneurial spirit, innovation and in providing a nationwide pool of skilled and trained manpower.

While the comparative advantage of SMEs are well acknowledged, SMEs also have their share of pros and cons which prevent them from realising their full potential. They have to face some problems such as lack of proper guidance in the initial stages, lack of funds in the times of crisis, lack of proper marketing strategies, stiff competition from big players, lack of access to latest technology, no proper infrastructure etc.

Therefore, although new SMEs are emerging very rapidly worldwide, the number of SMEs closing down every year is also very high. Also because of the twin forces of globalization and free trade policy of WTO, there is a serious threat to the SMEs sector. It will have to reorient and reinvent itself to overcome these challenges. This can be done by restructuring the small scale organisations, and if nothing works, they have to be closed down. Closures are undesirable but sometimes they are advisable from the resource allocation point of view. Thus the high rate of entries and exits reflect the dynamic nature of this sector and also explains why it is seen as an industrial incubator.

As mentioned earlier, SMEs play a very important role in the development of an economy, especially from the employment point of view. They are very effective for the generation of employment for both skilled as well as unskilled workers. Therefore labour extensive countries should opt for SMEs. Even the underdeveloped or developing countries which are capital intensive and labour extensive, SMEs can be a great help. There has been increasing growth of SMEs worldwide in the recent past. The government of the developed and developing economies have been formulating policies which promote smooth working of the SMEs. SMEs have contributed significantly in the developed as well as developing countries.

In the European Economic Area (EEA) and Switzerland there are more than 16 million enterprises; of which less than 1% comprise large companies while the rest are SMEs. Two thirds of the job opportunities are provided by SMEs in this region and the remaining one third of the job opportunities are by large companies. SMEs are considered the backbone of Asia Pacific region as they account for 90% of enterprises. They provide around 32% - 48% of employment and their contribution to Gross Domestic Product is around 60% - 80% in individual Asia Pacific economies.

Even in the United States, SMEs contribute greatly. It contributed at around 43% of the net employment opportunities from 1990 - 1994.SMEs are considered the engine of economic growth in both developed and developing countries not only because of low cost production but also because of low unit cost of persons employed as compared to large scale enterprises. Thus they provide a significant share of overall employment. Also SMEs assist in local and regional development by regional dispersion of economic activities, thus helps achieving fair and equitable distribution of wealth. SMEs not only contribute towards the GDP but also towards the export revenues.

Although SMEs are at a disadvantage in terms of finance, technology, human resource development and networking; SMEs involved in foreign trade are very dynamic. This may be due to its low-cost labour intensive nature of its products; and since these units generally use indigenous raw-materials; they have a positive effect on the trade balance. For example, SMEs in OECD member states produce about 26% of OECD countries' exports, and about 35% of Asian exports. Also SMEs increase flexibility in the provision of services and the manufacture of a variety of consumer goods and competitiveness of the market place and thereby curb monopoly of large enterprises. All this leads to fostering of self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes. Thus SMEs not only enables an economy to maintain a reasonable growth rate but also imparts resilience to withstand economic upheavals.

Chapter 5: India's SME scenario:

The Indian Small and Medium enterprises sector formally known as the Small Scale Industries (SSI) has had a notable importance since the period of Mahatma Gandhi. SSIs were set up in the rural parts of India with a view to inculcate the habit of self reliance amongst the people. Later on, after independence, the SSI units were an important source of income to the people of India. Indian policy makers had noticed the importance of this self reliant industry and had always been striving hard for their progress.

After achieving independence in 1947, India drafted and adopted the Industrial Policy of 1948 which meant that the government would act as both an entrepreneur and also as a governing body. With the beginning of the planning of a free India in 1951, the role of SMEs has been earmarked specially.

In its industrial policy, the government started announcing special schemes for the growth of the SMEs in India. It was in 1956, during the Second Five Year Plan that the government announced the Second Industrial Policy, clearly stating the importance of the SME sector. This gave an impetus to the development of SMEs in a manner that made it possible for them to achieve the objectives of:

  • High contribution to domestic production.
  • Significant export earnings.
  • Low investment requirements.
  • Operational flexibility.
  • Low intensive imports.
  • Capacity to develop appropriate indigenous technology.
  • Import substitution.
  • Technology-oriented industries.
  • Competitiveness in domestic and export markets

Today, small and medium enterprises (SMEs) are the ladder of progress for a nation's economy, especially in case of developing countries. They contribute handsomely to the exports, the industrial base, the Gross Domestic Product (GDP) and the Gross National Product (GNP) of the nation. Small and medium enterprises help provide employment and various facilities to the society.

In 2006, the Government of India passed an Act known as the Micro, Small and Medium Enterprises Act (MSMEDA), 2006 to define SME sector of India. This Act defines micro, small and medium enterprises in India on the basis type of sector namely manufacturing and the service sector. In case of manufacturing sector, the size of the enterprise is decided on the basis of investment in plant and machinery. In case of service sector enterprise, the size is decided on the basis of investment in equipment required to set up the industry.

Strategic Importance of Indian SMEs:

In Indian economy, the SMEs occupy a place of strategic importance due to its contribution to the overall output, exports and employment. The total number of SMEs has been increasing rapidly. The total number of registered enterprises has been around 3million and has been increasing at an even faster speed. They contribute about 50% of the total industrial output and constitute 42% of total exports. These units produce approximately 8000 units which range from very basic to highly sophisticated products. By providing employment opportunities to nearly 29.4 million people, this sector takes the credit for employment to the largest number of workforce.

Role of Indian SMEs:

The role of SMEs in the overall economic growth of the country has been fundamental and has been achieving steady progress over the last couple of years. With a view from the industrial development of India and the overall economic growth, SMEs have to play a vital role since their labour intensiveness helps to generate employment opportunities. In a developing country like India, the SME sector is of utmost importance in order to eradicate poverty and hence to drive sustainable growth. In case of countries where the capital resources are scarce, and an abundant supply of labour, SMEs help in the efficient allocation of resources by implantation of labour intensive production process.

Performance of Indian SMEs:

In the late 1940s, there were around 80,000 units. Today, the total number of units has increased tremendously and the total number of units is approximately 13 million units in 2006-07. Of the total 13million units, around 55% are in the rural India and the rest in cities and urban regions.

The contribution of the SSI sector to the GDP was approximately 13% in 2000-01; this figure has grown to a 15.5% in 2007-08. The performance of the SSI sector in terms of economic parameters such as number of units, production, employment and export during the last decade is indicated in the table below:

The SME has not only been successful in increasing its contribution to the GDP, but it has also outperformed the organized sector to a great extent in terms of production and also in employment creation.

Employment:

The employment opportunities created by the SMEs is considerable. It is evident from the table below that for every 10 million rupees invested by the SMEs', more than 4 times of employment opportunities are created; more than any other sector in India. It is clearly seen that in the year 2006, for every 10 million rupees invested in SMEs, generated employment opportunities for around 151.4 persons, whereas, the same amount invested in the other sectors would create employment opportunities for around 37.4 persons only.

Exports:

The SME sector is a major contributor to the total exports of India. Of the total exports by India, approximately 50% exports are contributed by this sector. SMEs are responsible for 35% of the total direct exports and 15% are contributed by its allied activities. The indirect exports may be in the form of export orders of other large units or in the form of production of various parts and components for the making of the finished product. The major trading houses, merchant exporters and the export houses play a vital role in the export development. The SME sector witnessed a CAGR growth of 25% to the total exports during the year 2003-04 with an overall increase in exports at CAGR 24% during the same year.

The non traditional products account for more than 95% of the exports. The exports from the SME sector have increased tremendously during the last decade. The growth of the garments, leather, gems and jewellery units in the recent past is the reason for the increase in the exports by the SME sector. The SME sector dominates the sports goods, readymade garments, woollen garments and knitwear, plastic products, processed food and leather products industry. The table below indicates these segments and the corresponding SME contribution. (Table 7)

Problems Faced by Indian SMEs:

The SMEs in India have been facing lot of issues that hinder the performance and the survival of this sector. The government has been striving hard to provide with policies that would help the smooth functioning of the SMEs. The main problems that have been faced by the SMEs are:

Finance:

Micro, Small and Medium Enterprises, especially the micro enterprises have been facing the problem of inadequate access to finance. This is mainly due to the lack of information on financing activities and also due to the traditional business style. In India, there is also a lack of private equity, venture capitalists and business angels entering the MSME sector which would provide easy financing options to businesses which have unique ideas.

The availability of finance has been a major problem for the SME sector. The SMEs have not been able to have easy access to the loan offered by the various commercial banks and other financial institutions. This is despite the Reserve Bank of India (RBI) and the Ministry of Finance having laid down instructions to the banks and financial institutions to encourage easy financing options to the SMEs. According to Morris et al., 2001:11; "there are strong structural underpinnings to the inadequate flow: the organisational structures of banks, and processes within them, have taken them far from task orientation and have created a specific bias against small loan portfolios." The government has been constantly seeking new ways to make access to loan funds an easy process for the SMEs.

The small industries sector has been worst hit by the problem of financing. These units have not been able to understand their financial situation and also they haven't been able to maintain transparency in their financials. The banks and financial institutions have been hesitant with regards to providing financing solutions by means of loans to these small units. This is because in the recent past, the loans that have been offered to some of these units have been transformed in to non-performing assets and hence, the banks have been trying to avoid this high level of risk. The banks and other financial institutions have been in fact extending more of their loans to the medium industries sectors in order to comply with the RBI regulation of financing for the 'priority sector.'

Infrastructure:

After finance, availing good infrastructural facilities has been a topic of concern for the MSME sector. The infrastructural facilities that are available in the rural parts of India differ substantially with those available in the cities and the urban parts of India. There has been growing concern towards the supply of power at affordable rates to these units. In the rural parts where the rates are comparatively lower than the urban parts, the adequate supply of electricity has been an issue.

The lack of newer technological knowhow has been growing. There has been a huge difference in the technique used in the towns to those used in the villages. Those in the urban areas have now been able to make use of computers and other computer operated machines whereas in the villages, the traditional methods of production are still being used. The transport facilities have not been developed very well. In spite of so many highways being constructed, there has not been ease of transporting facilities for the SMEs at affordable rates. This hinders the rural and semi-urban markets to access new and larger markets in the other parts of India.

Lack of skilled labourer:

Lack of skilled labour hampers the productivity of the SME unit. The skilled labour can make better use of resourced and could also be able to handle computers. Skilled labourers can be of great help with means of management and marketing.

Product Reservation:

For the purpose of good productivity, there has been product reservation which means around 800 products are being reserved to be produced only by the SMEs. The list is being revised on a regular basis but under political influence. The main purpose of product reservation was to create local employment by means of using locally available resources. But due to increased political influence, the main purpose of the reservation has been lost. The SMEs are at times not informed that they produce the reserved product.

Role of Government for SME development in India:

The Government of India has recognised the role of MSMEs in the overall development of the country's economic situation. The MSMEs are of utmost importance in terms of employment generation, share to the GDP, share to the industrial output, foreign exchange generation, etc. The Government of India has implemented various policies in conjunction with the state government, the RBI and various NGOs for the betterment of the MSMEs in India.

As a stepping stone towards MSME development, the Ministry of Small Scale Industries (SSIs) was combined with the Ministry of Agro and Rural Industries to form the Ministry of Micro, Small and Medium Enterprises (MSMEs). This helped to formulate policies on a national basis bringing all the enterprises whether rural or urban under one cabinet. The main purpose of the Ministry of MSMEs was of drafting policies, programmes, development projects and schemes and also to keep a check on the implementation of these policies.

The Government of India's has launched a landmark initiative by the introduction of the MSEMD Act, on 2nd October, 2006. It is due to the enactment of this Act that there has been an increase in the SME competitive strength. The issues related to the growth of SMEs had been surfaced and thus, the SME had been able to accept challenges and reap the benefits of large scale economies. The co-ordination of policies at both the state and the national level has helped strengthen the role of SMEs not only at the lower but also at the higher level. A recent policy introduction by the Tamil Nadu government to encourage the agro-based industries by means of providing a wide range of incentives, support for infrastructure development, subsidies for investing in industrially backward areas, capital investment and technology development with an aim to sustain a growth rate of over 10% in the food and agro based sector.

The Government of India has set up various institutions at both national and state level which are both a governing as well as a support body for the SMEs in India. The Ministry of Micro, Small and Medium Enterprises, Small Scale Industries Board, Small Industries Development Organisation (SIDO), National Small Industries Corporation (NSIC) Limited, The Khadi and Village Industries Commission (KVIC) and Coir Board work in co-ordination with the various institutes and assist the SMEs at both national and state level.

Today, the working of the Ministry has lead to the existence of various SME governing bodies which help the smooth functioning of the SMEs. The Industrial Development Bank of India (IDBI), the Small Industries Development Bank of India (SIDBI), National Small Industries Corporation (NSIC), the SME Rating Agency of India (SMERA), etc. all play a convincing part in the development and smooth functioning of the SMEs in India.

Policies implemented by the Government:

The Government of India has been reviewing its policies for the SMEs. The various organisations set up in coordination with the Ministry of Micro, Small and Medium Enterprises look after the formulation and implementation of the various policies for the SMEs.

Finance:

The Government of India in co-ordination with the Reserve Bank of India (RBI), the countries apex bank has been striving hard in order to create policies for making available easy financing options to the SMEs. The RBI has been issuing directives for every bank and financial institution to maintain a quota of funds to be made available to the Micro, Small and Medium enterprises.

The Government of India has set up special financing institutions that provide easy finance options to the SMEs at very nominal interest rates. The Government has taken many initiatives to make finance readily available to the SMEs:

Industrial Development Bank of India:

Industrial Development Bank of India (IDBI) was instituted in 1964 as a wholly owned subsidiary of the RBI as the top institution for providing finance to the SME sector. The Government of India in 1975 passed a law for de-linking IDBI from RBI and making it the principal financial institution for

  1. co-ordination of the working of institutions engaged in financing, promoting or developing industry;
  2. assisting the development of such institutions; and
  3. Providing credit and other facilities for development of industry and for matters connected therewith.

IDBI has brought about a revolution in industrial growth by means of providing finance for medium and long term projects in co-ordination with the national policies. The range of products offered by IDBI has been increasing in every field of industrial need be it manufacturing or services sector. IDBI has been empowered to provide financial assistance to all types of small enterprises.

Small Industries Development Bank of India:

The Government, in April 1990, established the Small Industries Development Bank of India (SIDBI) as a fully owned subsidiary of the Industrial Development Bank of India in order to promote financing activities for the Small and Medium Enterprises on a nationwide basis. In March 2000, the government amended the SIDBI Act and de-merged it from IDBI. The amendment led to the change in the capital structure, shareholding pattern, business and borrowing provisions.

The SIBDI has two subsidiaries namely SIDBI Venture Capital Fund and SIDBI Trustee Company Limited. The Credit Guarantee Fund for the Small Industries and Technology Bureau for Small Enterprises are the two associate organizations that work in co-ordination with SIDBI.

Since its foundation, the SIDBI has been assisting the micro, small and medium sector (MSMEs), providing them with suitable schemes which are tailor made to suit the need of individual organizations. It assists in the setting up of new projects, expansion, diversification, modernization and rehabilitation of existing units. After the de-merger of SIDBI from IDBI, it has introduced several new schemes and products in order to meet the need of both new and existing SME units. It has been maintaining its policies and revising them from time to time keeping them in line with the policy plans of the Government and RBI.

Competitiveness:

The Government has been striving hard in order to provide a competitive edge to the units in the global environment. In order to increase the productivity of the MSME sector so as to overcome the competition that these units can face in the global markets and also to face the competition from the multi-national companies in the local Indian markets, the Government of India has introduced the National Manufacturing Competitiveness Programme (NMCP) in the year 2005-06.

The NMCP programme was implemented to shift the focus of the SMEs from the production to the competitive side of business. There was a need for the SMEs to introduce some structural changes and therefore this programme was introduced. The programme was initiated to increase the competitiveness at the individual firm level and not at industry or sector level.

The need of the hour was to address issues such as technology up gradation, cost reduction, in time delivery, total quality management (TQM) and to enhance the customer service. The NMCP worked in co-ordination with the SMEs and helped attain an environment for the accomplishment of these issues.

National Commission for Enterprises in the Unorganised Sector:

The National Commission for the Enterprise in the Unorganised Sector has been set up to improve the productivity of the unorganised sector. It acts as an advisory board and a supervisory body for the informal sector for generation of large scale employment opportunities on a sustainable basis, particularly in rural areas.

Reservation:

The policy of product reservation had been started in the year 1967 with the government's objective of attaining socio-economic development by reserving the manufacturing of products solely by the SME sector. The Government introduce this policy with a view to improve the productivity of the SMEs especially in the rural areas which would in turn help to increase employment opportunities and also initiate the people to take up self employing business opportunities.

The Government of India had reserved some products to be manufactured only by the SSI sector. In 1984, the list contained as many as 843 products to be manufactured only by the SME sector. But in the recent years, due to the lack of technological up gradation and competitiveness on the part of SMEs, the figure has been reduced to as low as 21 products. The de- reserving of the products has been progressive for the re introduction of the SMEs in the main stream.

Simple Process:

The registration of the SMEs was earlier a very painful and lengthy process. This system has now been replaced with the much simpler Entrepreneur's Memorandum (EM). The introduction of the EM has been the most valuable achievements of the MSMED Act, 2006.

SME Rating:

The Small Industries Development Bank in association with Dun & Bradstreet Information Services India Private Limited (D&B) has set up the SME Credit Rating Agency of India Ltd. along with other major banks in India. The credit rating was started with a view to provide a complete and transparent rating of the SMEs in order to facilitate easier flow of finance from the banks to the SME sector.

The Need of Credit as a Lifeline of Business:

Finance or credit is of crucial importance for any business to grow and survive. If adequate finance is not available, even the best plans need to be put to halt. In case of MSMEs, credit is needed at every stage be it start up, diversification, technological up gradation, survival and expansion. If finance is not readily available, there is every possibility that the best performing unit can fall sick thus leading to the closing down of the unit.

Thus, the need for a focused credit policy for the MSMEs was recognised by the Government of India. Hence, a credit policy with the following terms was laid down:

Priority Sector Lending:

Providing of credit to the MSME sector has been made compulsory by the government under the Priority Sector Lending Scheme. The priority sector includes agriculture, small enterprises and businesses, retail trade, etc. Under this scheme, the government has instructed banks to ensure that a specified percentage of their lending is made to the priority sector. At present, the limit set by RBI under the priority sector lending for a domestic commercial bank is set at 40% of the net bank credit and for foreign banks at 32% of the net bank credit.

Institutional Arrangement:

Small Industries Development Bank of India (SIDBI) is the principal financial institution for promotion, financing and development of the MSE sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services. The commercial banks are important channels of credit dispensation to the sector and play a pivotal role in financing the working capital requirements, besides providing term loans (in the form of composite loans). State Financial Corporation's (SFCs) and twin-function State Industrial Development Corporations (SIDCs) at the State level are the main sources of long-term finance for the MSE sector.

With the liberalization of the Indian economy, greater emphasis was placed on meeting the credit needs of MSMEs. This was manifest through the following initiatives:

  • Earmarking of credit for micro enterprises within overall lending to micro and small enterprises.
  • Opening of specialized SME branches.
  • Enhancement in the limit for computation of the aggregate working capital requirements on the basis of minimum 20% of the projected annual turnover.
  • Enhancement of composite loan to Rs.1 crore (Rs.10 million).
  • No collateral security for loans up to Rs.5 lakh (Rs.0.5 million) [Banks may on the basis of good track record and financial position of the units, increase the limit of dispensation of collateral requirement for loans up to Rs.25 lakhs (2.5 million)]

Credit to MSE sector from Public Sector Banks

Chapter 6: The UK SME Sector:

Napoleon once rightly said that the British are a nation of shopkeepers. Small and Medium sized enterprises have been the backbone of British economy since the ancient times.

The SME sector in the UK is defined differently for various institutions. For instance, for the Department of Trade and Industry (DTI), it is defined on the basis of the number of employees in the unit.

Since the UK is a part of the European Union (EU), it also has to follow the EU definition of the SMEs. According to the definition of the European Commission, there are approximately 23 million SMEs that fall within the European Union. The European Commission defines the SMEs on the basis of turnover, balance sheet figures and the number of employees employed. In order to qualify, the enterprises must fulfil the limit for the maximum employs that can be employed and either the turnover limit or the balance sheet limit.

The Small and Medium Enterprise sector is widely spread in the United Kingdom. The off license shop, the corner shop, the restaurant, the accountant, the web designer, the engineering business or the hairdresser, are the different types of SMEs in existence in the United Kingdom forming the backbone of the UK businesses.

Significance of UK SMEs:

The UK SMEs contribute around 33% of the total GDP. They provide employment opportunities to more than 50% of the total employment in the UK. They contribute to 37% of private sector turnover. The SMEs in the UK as in the other developed and the developing nations are a strong support for the overall growth of the economy, creating more and more employment opportunities year after year.

In the year 2007, there were approximately 4.7 million enterprises in the UK which saw an increase of 4.8% over the previous year. This increase has been the highest increase in a year since 1994, the first time since the time series began. An estimated 22.7 million people were employed by the SMEs. The SMEs contributed to nearly 99.9% of all UK enterprises which contributed to approximately £ 2800 billion of the total production. The SMEs contributed to 59.5% of total private sector employment and 51.5% to the total private sector turnover. According to the data, around 175,000 businesses register for VAT every year.

The most important feature of the UK SMEs is that a large number of the businesses are dominated by enterprises which have no or very few employees. Around 73% of all UK businesses consist of self employed businesses accounting for only 7.4% of the GDP around 24% employees which have less than 10 employees. There is a huge concentration of the SMEs in the service sector. Approximately 72% enterprises with employees are into the service sector whereas 17% are engaged in the production activities and around 8% in construction. . The UK SMEs contribute approximately £ 1.48 trillion towards the total UK turnover and GDP.

Only 22% of SMEs are involved in exporting activities. Exports don't form a major part of the SME business. Most of these perform their export activities in countries close to the UK. In the UK, women entrepreneurs are actively involved in business owning 17% of the total businesses. The minority ethnic group (MEG) makes up for around half of the owners. Despite having such huge contributions, the UK SME sector has always been overshadowed to the large UK corporate houses and has been considered to be fragmented and often ignored.

Employment:

The UK SMEs employing one or more person in all employ approximately 14.23 million people out of the total working population of 30 million. Around 1.1 million enterprises operate in the Business Services sector recognised in Section K by the Standard Industrial Classification 2003 (SIC 2003). This sector represents approximately 24% of the total UK private sector enterprises. This sector employs around 4.3 million people approximately 19% of the total private sector employment. The turnover of this sector amounts to £421 billion of the total UK private sector turnover.

With regards to employment, the wholesale, retail and repairs sector (SIC2003 Section G) has been the biggest employer. With 562,000 enterprises, this sector provides employment to 4.8 million people which amount to 21% of the total UK private sector employment.

At the beginning of 2007, small enterprises (0-49 employees) contributed 47.5% of the total private sector employment having varied between various sectors according to the Standard Industrial Classification 2003 (SIC2003).

Off the total employment provided by small enterprises, 94.3% were engaged in agriculture, fishing and forestry (SIC2003 section AB). In mining, quarrying, electricity, gas and water supply (SIC2003 section CE), 12% of employment was provided by the small industries.

Obstacles to achieving business success in UK:

The businesses in the UK have been facing a number of obstacles that hinder their growth and performance of the businesses. The Department of Trade and Industry (DTI) and the British Chamber of Commerce have assessed the business members with regards to the common problems faced by SMEs in the UK.

Access to finance:

Financing of the business for the purpose of start up and also for expansion has been a major obstacle for the SMEs in the UK. There is a huge financing gap in the UK with regards to financing SMEs. The business units prefer informal sources of finance over debt and equity finance.

One of the most attractive options for the businesses is the debt finance. But businesses are reluctant to introduce any kind of debt finance in the business. They rather are dependent on savings from family and personal sources. The businesses are unwilling to introduce any kind of external sources of finance whether large or small which hinders the growth options for the businesses.

The small businesses do not have access to the equity markets and cannot easily access equity capital like the large business houses. Since the small businesses cannot easily access equity they have to turn to debt financing made available by the commercial banks and financial institutions.

The small firms have been facing problems in raising finance even after decades of policy reforms by the government. The small businesses cannot avail financing at affordable rates and also need to provide collateral for the loans which makes it difficult for these businesses to acquire finance through other sources that is through personal savings, savings from friends and relatives, etc.

According to the Natwest SERTeam survey of Quarter Two 2005, there are just 1% of businesses which have had problems for accessing finance. But there is lack of evidence for the fact that there exists problem within the UK economic structure. There are problems faced by the women entrepreneurs, entrepreneurs from the Minority Ethnic Group (MEG) and high technology business due to the various social and economic reasons, risk being one of them.

Competition:

Competition has always been another important barrier for business growth. In the UK, the small businesses have to face huge competition from large retail outlets. The large units have high level of influence and financing options as compared to the small and medium enterprises. This unfair competition from the large companies is a great threat to the Fast Moving Consumer Goods (FMCG) sector.

Government Regulation:

Regulation has been a barrier to growth for both start ups and also for growing concerns. The UK regulations cost approximately £100 billion per year. The government has recently been paying increased attention to the regulatory burden. There is increased regulation as the UK has to keep up with the European Union's Six Presidency Agreement.

The Association of Chartered Certified Accountants (ACCA) has been constantly opposing the regulations and demanding simplified government regulations. The ACCA has recognized the fact that some regulations are of importance for the growth of businesses and also to protect the rights of the employees. The understanding of the various regulations needs a sophisticated approach in order to avoid the complex impact. The small businesses are laden with excessive regulatory requirements. Even the individual employment regulations affect the businesses with regards to the size, sector and the composition of the personnel.

Tax:

The government needs to review the tax system in the UK. A low tax burden which is simpler and easy to understand should be introduced. There is a constant change in the tax structure which makes it difficult for the businesses to cope with it. UK is the second country after India which is increasing the amount of tax legislation.

According to a poll conducted by the British Chambers of Commerce in 2007, it showed that approximately 69% of the people surveyed felt that the tax system for business needs to be rationalised.

Labour:

There are strict labour laws followed in the UK. Also, the employers' contribution to the National Insurance of the employees is also an additional tax burden to the employers. The level of skilled labour is relatively lower in the UK as compared to other nations like France and Germany. A lot of time and money needs to be spent on the training of the staff even for skills that the employees should have grasped during their education.

An overview of SMEs Finances in the UK:

The small and medium enterprises have been playing a key role in the motivation, facilitation, and industrial restructuring in the developed nations (Birch, 1979 and Birch et al., 1993). They played a key role in the creation of employment, wealth and economic growth not only in the developing nations but also in developed nations (Story, 1994).

The UK SMEs played a crucial role in the economic development and industrialisation in the UK. The strategic importance of the SME sector has impacted the UK in the various aspects such as government, financial institutions, academics and practitioners' practices and thinking. The stakeholders agree to the fact that the SMEs play a vital role in the economic development of an economy (Deakins, Logan and Steel, 2000). It is the lack of government intervention for the problem of market failure that has bad effects on the performance of the country's economy.

In the UK, the entrepreneurs, like in the developing country tend to rely on the informal sources of finance and savings. The main cause of the failure in the UK markets to supply finance to SMEs was the liberalization and globalization of trade and economy. The emergence of global free trade policy had many advantages over and above the traditional small industries.

The economic restructuring in the UK, increasing poverty and unemployment are the issues that helped government intervene into the SMEs and hence minimize the impact of the failure of capital markets. The government has been implementing various strategic policies in order to support the entrepreneurs in the country in order to eradicate poverty and increase employment opportunities. The SMEs in the country have been facing problems to access finance and support for capital investment. According to Deakins and Hussain (1994), the banks readily provide financing options for short term period but are hesitant for providing long term financing thus hindering the SMEs growth on long term basis. Hence, the UK SMEs are inclined with an increased level of debt than the large firms and have to rely on the short term financing means (Holmes and Kent, 1991). This in indicative from the imperfections of the capital markets which thwart the small business


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