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Role of Small and Medium Enterprises (SMEs)
SMEs 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 type of 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 fragmentation of all forms of production of goods and services across countries and enterprises. Where large players go for a different form of business models which includes bringing along their traditional partners, suppliers or distributors at a different level, SME's are experiencing a new form of functioning in the value chain by evolving 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 the inadequate 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's changing 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's in FY07 as compared to the previous year's 15.8% thereby bringing a rise to India's GDP to 15.5% during the year. The growth in the production has been there because of conducive 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))
Small and medium sized enterprises (SMEs) are the backbone of Britain. Napoleon is said to have once remarked that the British are 'a nation of shopkeepers'. He was right in as much as Britain is a nation of small and medium sized enterprises. (Sandesara, J.C. (1993))
According to the Department for Business, Enterprise & Regulatory Reform (BERR)'s Enterprise Directorate Analytical Unit, in 2007, the UK economy is 99% SMEs. So out of a total of 4.8m UK businesses, less than 1% were large corporations (i.e. over 250 employees). Let's ignore one-man-bands who represent a huge 73% of all UK businesses yet only account for 7.4% of Gross Domestic Product (GDP). UK SMEs, employing one person or more, employ 14.23m people, out of a working population of approximately 30 million.
In terms of UK turnover and Gross Domestic Product (GDP) UK SMEs account for 1.48trillion sterling (British Pounds). Despite being only half the story and half the picture, large UK Corporations dominate the skyline, the news and the economy. Business news daily is full of stories about BP, Barclays, M&S, British Gas, BT, and the UK Government. There is a strong political focus on the UK Public sector, which is responsible for up to 1/3rd of UK's economy.
As a result the UK SMEs sector is largely overlooked considered fragmented and often ignored. Yet it is precisely this sector - UK SMEs - which provides the vital and fertile seed-bed from where tomorrows large corporations will emerge. Even among SMEs themselves, it is commonly believed that a thin slither of the sector is the one that outperforms all other sectors of the economy, including the large UK corporations, i.e. SMEs in the 100 employees - 200 category. According to BERR statistics for 2007 this sector employs 4.4% yet contributes 5.6% of total UK GDP, showing impressive productivity. However this is also true for the ALL SME sectors, with the preceding SME sector - companies with 50-99 employees employing 4.4% of the UK workforce yet delivering 5.7% of performance in UK turnover. (http://www.dnb.co.in/SME%20Awards/SME%20In%20India.asp)
Better still are SMEs from 20-49 employees who have employ a greater workforce 6.3% - and therefore a greater benefit to the UK economy, and still manage to produce an impressive 8% of UK GDP. In fact ALL SMEs (with at least 1 employee) outperform the large UK Corporations in terms of productivity despite having minimal resources, little support and being largely ignored. Large UK Corporations of 250 employees and over account for 52% of employment but less only 50.8% of UK turnover. It is fair to say that Central and Local Government accounts for 5.13m employees and may well distort the figures. This article is not about undervaluing the role of large UK corporations but an attempt to highlight the magnificent contribution of SMEs to the UK economy without the resources of a large corporation.
In conclusion, there is substantial evidence that the UK economy is supported by SME performance, and that improving performance will have a substantially positive effect on entire UK economy. I call on the UK Government to work closely with the sector, and most importantly with the independent business advisors and practitioners who work at the coal face in the daily struggle to deliver critical business support to SMEs.
To SME owners and senior business managers, in order to improve performance in the ever changing marketplace you need 'people in your corner', inspiring you, guiding you, empowering you, and supporting you to build a more consistent, stable and viable tomorrow.
Your local Regional Development Agency (RDA)'s will have a register of business advisers, or you can try a new service like a business service finder to put you in touch with experienced practitioners who have seen it, done it, been there.
As per UK turnover and GDP, SMEs account for 1.48 trillion sterling but still the large UK corporations dominate the economy. As a result SMEs are overlooked and often ignored. SME's themselves believe that a small part of the sector is the one that outperforms all other sectors of the economy, including the large UK corporations, i.e. SMEs in the 100 employees - 200 categories. According to BERR statistics for 2007, this sector employs 4.4% yet contributes 5.6% of total UK GDP, showing impressive productivity. However this is also true for the all SME sectors, with the preceding SME sector - companies with 50-99 employees employing 4.4% of the UK workforce yet delivering 5.7% of performance in UK turnover.
SME growth: the stylized facts
The extensive international data, which has emerged on patterns of business growth, reveal that smaller, younger businesses, which inhabit the tail of the size distribution, experience wider variations in growth rates than do larger, maturer ones. It also reveals that younger firms grow faster than other firms do and the very smallest grow faster than the rest. However only a handful of businesses will account for the bulk of employment, output or sales generated by a given cohort of surviving firms. It is not the case that the typical small firm generates more employment than larger firms do. Rather it is the case that a few small firms produce spectacular growth, which pulls the average up.
Keeping a sense of proportion Despite the growing importance of smaller firms it is important in discussing their contribution to innovation and growth to note that economic activity remains heavily concentrated in a few giant firms. 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.
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 all enterprises in manufacturing with 20 or more employees and 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 rises with size class 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 summarised here can be found in Cosh and Hughes (1998) and Cosh and Hughes (2000a)).
Better still are SMEs from 20-49 employees who have employ a greater workforce 6.3% - and therefore a greater benefit to the UK economy, and still manage to produce an impressive 8% of UK GDP. In fact ALL SMEs (with at least 1 employee) outperform the large UK Corporations in terms of productivity despite having minimal resources, little support and being largely ignored. Large UK Corporations of 250 employees and over account for 52% of employment but less only 50.8% of UK turnover. It is fair to say that Central and Local Government accounts for 5.13m employees and may well distort the figures. This article is not about undervaluing the role of large UK corporations but an attempt to highlight the magnificent contribution of SMEs to the UK economy without the resources of a large corporation. (Sandesara, J.C. (1993))
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.
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