SMALL AND MEDIUM ENTERPRISES

(SME’S)

IN DEVELOPING COUNTRIES

IMPORTANCE & CHALLENGES

A PERSPECTIVE

!he United States on the other hand takes into account 'Small business criterion' comprisin" type of industry o%nership structure# revenue and number of employees %hich is normally up to '(( .( employees %ere classified as Micro/ entities # up to '( employees %ere classified as Small companies and up to &'( employees %ere classified as medium si$ed enterprises. As per the European Union (EU an SME is defined as '!he cate"ory of micro # small # and medium si$ed enterprises # is made up of enterprises %hich employ fe%er than &'( persons and have an annual turnover not e)ceedin" '( million euros and*or a balance sheet not e)ceedin" +.What are SME's: SME's are basically small and medium enterprise. 3n 3ndia %hich is a developin" country# the 4overnment of 3ndia in &((5 passed an act called the Micro # Small and Medium Enterprise 6evelopment (MSME6 act .( employees the small business administration S0A uses the term S121 meanin" Small 1ffice 2ome 1ffice . .& %hereby companies comprisin" up to . For units consistin" of less than . million euro. broad parameters in &(. !he European -ommission set up . 7hen investment in plant and machinery is limited to 8s &' lac it is considered a micro enterprise. As per the act # the main parameter considered is type of enterprise %hich is then further scrutini$ed for various aspects . 7e first talk of enterprises %hich are involved in manufacture * production * processin" of "oods. For a company or firm to qualify as an SME the factors taken into consideration are number of employees it's turnover or balance sheet total.

!he second class en"a"es the 'Service Enterprises' %here investment is limited to 8s . !he above fact sho%s that different countries * re"ions have different criterion for definin" SME's. !hey are considered to be a ma. 7hen investment is more than 8s ' crore but limited to 8s . 3nvestment in equipment bet%een 8s .or"*%iki*small:and:mediumenterprises I !"rta#$e "% SME's &# De'e("!&#) C"*#tr&es SME's are a tremendous contributor to the "ro%th and economy of any developin" country. A number of people depend on SME's for their livelihood.or "enerator of employment in both rural and urban areas.( crore it comes under a medium enterprise . For instance in =akistan a study conducted by SME6A(Small and Medium Enterprise 6evelopment Authority in &((5 ackno%led"ed the e)istence of . Empirical studies sho% that the SME's make up more than 5( percent of 46= and about >( percent of total employment in countries %hich are less developed.3nvestment bet%een 8s &' lacs and 8s ' crore make the enterprise a small enterprise.( lac and 8s & crore makes it a 'Small Enterprise' .( lacs is labelled as 'Micro Enterprise' . !hey account for around >( percent of 46= and ?( percent of total employment in developin" countries. 8eference9%ikipedia. SME's have a presence across various sectors in developin" countries # be it a"riculture or industry they are e)tremely important for a market %hether domestic . <ot only do they create an en"ine of "ro%th# they also contribute to%ards reduction in poverty.& million enterprises .. A 'Medium Enterprise' attracts investment from 8s & crore to 8s ' crore .

tools*docs*library*+?&'5*fan.or"*. !here is a problem of securin" loans from banks or other lenders . !he rate of interest for acquirin" loans is also much hi"her for SME's as is the duration of loan .."% +&#a#$&a( Res"*r$es: Most SME's are faced %ith the recurrin" problem of shorta"e of finance . !hey are in a %ay the backbone of the country's economy yet there are numerous problems faced by SME's in most countries # more so in developin" countries .%orldbank.) La$.info. 1n the . 3t is said to be a ma. !hey are considered hi"h risk borro%ers and are vulnerable to market fluctuations . A number of enterprises fail to provide bank "uarantees %hich prevent them from "ettin" any or lo% financial aid. 8eference9%%%. 4oo"le bein" a classic e)ample . SME's play a key role in maintainin" re"ional and sectoral balance in an economy . SME's tend to be more active in rural areas %here they are a source of employment to unskilled %orkers of lo% income "roups # thus contributin" to reduction in poverty as also development of rural economy ..or international to increase efficiency and competitiveness . !his sector is said to be the bi""est provider of . Some do not even have access to local banks . SME's "ive rise to ne% entrepreneurs and plays a crucial role in the checkin" of income distribution .obs# in most countries # developin" as %ell as developed . Mentioned belo% are some of the issues that pose a challen"e to most SME's 9 .pdf Cha((e#)es +"r SME's I# De'e("!&#) C"*#tr&es SME's have al%ays played an important role in the development of a country . !his in turn makes economics especially for developin" countries more fle)ible and adaptable .or source of innovations and ne% start/ups .

!he consumer base is restricted because they are not able to promote or advertise their services on a much %ider scale .other hand # in some developin" countries banks lack sufficient kno%led"e on procedures to lend or financially support SME's .. 0esides this in certain developin" countries SME's are out of sync %ith the current business practices and are una%are of the latest business trends .delhibusinessrevie%..) A$$ess t" Mar-ets: 0ud"ets of numerous SME's are limited @ thus their reach to a la"er market is much smaller . A . . Accordin" to 1E-6 (1r"ani$ation for Economic -o/operation and 6evelopment report# SME's .indianfaculty.com*. !he current "lobal financial slo%do%n has also contributed to the constraints faced by SME's .. 3nsufficient capital adds to cost of operation and production * services provided . 0ut in many developin" countries # the inland and remote areas are still not easily accessible . !he financial crunch often pushes an SME to function belo% it's normal %orkin" capacity and in some cases may result in shutdo%n . Shorta"e of fund proved to be a hu"e barrier for SME's %ho %ant to promote their product * services . Access to "lobal markets in times of tou"h competition also proves to be a hindrance to the "ro%th and e)pansion of SME's ( 1f course one must mention here that %ith the advent of the 3<!E8<E! this issue has some%hat been resolved .ulty:articles*fa.??? study by -ollier @ 4unnin" in Aenya linked lack of financial support to e)portin" .pdf %%%. !hese conditions block the "ro%th as %ell as functionin" of most SME's in developin" countries. 8eference9 %%%.or"*e.

pdf . !heir kno%led"e of distribution channels is limited and they fail to identify proper routes of profitable options available to them .delhibusinessrevie%.net*ictbm*ictl %%%. 4ereffi (. !hey makeup '( percent of 46= and 5( percent employment . 3n 3ndonesia for instance # only &/. An avera"e %ould perhaps find it difficult to "et into minute details as they lack the internal resources to even develop a concrete supply chain .or"*e. 8eference9%%%.account for almost ?( percent of "lobal businesses ./' percent of SME's in developin" countries are actively en"a"ed in "lobal markets . SME's that utili$e correct information at the ri"ht time # only are capable of tacklin" this problem . 8eference9%%%.unido. percent of SME's are into e)portin" . !aken in totality # a minuscule . 3n spite of the above fi"ure representation of SME's of developin" countries is considerably lo% %hen it comes to international trade .??& in his study spoke of !ai%an %here the SME's lacked concrete distribution net%orks thereby hinderin" there operational and marketin" capabilities .or"*fileadmin /) Pr"$ess "% D&str&0*t&"#: Failure to establish proper marketin" net%orks is another challen"e faced by SME's of developin" countries .icmis.

!his problem not only curtails e)ports # in fact it prevents SME's from securin" competitive prices in the domestic*international markets . !his in turn directly impacts securin" any kind of price advanta"e . A study in . !hou"h the standards of quality control are different in various developin" countries # the problem remains the same across the board . !here is also the burden of maintainin" a stron" position financially . Settin" the achievable tar"ets as %ell as prices %hich are at par %ith the prevalent prices to ma)imi$e the enterprise profit is most of the time a difficult task for SME's in developin" countries .delhibusinessrevie%.1) Pr&$&#) Strate)2 : SME's in developin" countries find it difficult to set the ri"ht price for their product . !he main reason bein" i"norance or not havin" a proper idea of the prevailin" market prices .?B> of >' e)port manufacturers ( SME's of Cene$uela by Frances %as proof of this fact .or"*e. 8eference9%%%. Most of the time quality is considered the main criterion for doin" business in the market and also sustainin" it 3nsufficient kno%led"e %ith re"ards to characteristics of the product # manufacturin" technolo"y # etc are the main problems afflictin" SME's in .pdf 3) 4*a(&t2 C"#tr"(: =roduct desi"n # brand ima"e # suitable packa"in" and a hi"h standard of the product * service manufactured * provided are all features that describe quality .

8eference9%%%. Another problem further rises in retainin" the talented lot and providin" them a conducive business climate for "ro%th . Carious SME's do not have the means to conduct the research for methods to improve or maintain product*service quality . !his is a factor %hich may have an impact # "ood*bad on the performance of the enterprise ."% S-&((e6 H* a# Res"*r$es : !his is another challen"e SME's have to face. Employees in most SME's are habituated to conventional methods of functionin" %hich are not sufficient to take on professional level of conductin" business . For them it is much simpler to produce*e)port a standardi$ed product .pdf 5) La$. Studies conducted by Fi"ueirdo and Almeida in .or"*e. !his impedes their quest in maintainin" quality. 3t is also true that a product mi"ht sell %ell in the domestic market but fail to make an impact internationally . Absence of such skilled personnel tends to hamper creativity or uniqueness of the SME .delhibusinessrevie%.developin" countries.?BB talk of sub/standard products bein" manufactured by 0ra$ilian SME's %hich resulted in products bein" re. =resence of educated and skilled labour is a bi" asset to any business or"ani$ation . !his leads to competition from similar firms %hich are providin" the same standard*quality of product at competitive prices. SME's have a tedious task of attractin" talented*skilled manpo%er as most of them may not offer pay packa"es %hich are e)pected by the employees . Solvin" of . Unfortunately SME's in developin" countries often lack this asset .ected . !his is ma"nified by the fact that SME's are very often una%are of the demands*requirements of the market.

. =eckin" 1rder !heory9 3n . !hey tend to refrain from utili$in" 'E)ternal 8esources' basically because of t%o factors / Asymmetric information and transaction costs . !his theory states # DA firm's capital structure is driven by the firm's preference to finance %ith internally "enerated funds instead of %ith e)ternal financin". !ransaction cost come into play %hen an SME chooses to accept e)ternal finance . 1n identifyin" a source # the SME %ill after usin" internal resources opt for e)ternal 'debt financin"' and only later settle later for 'equity financin"' . 0oth strive to e)plain the capital structure of the SME's .or"*iosr/.iosr. 7hen SME's choose not to utilise e)ternal financial aid and in the process "ive up a lucrative business investment there is a rise in asymmetric information cost . SME's tend to avoid providin" trainin" to employees to cut do%n on e)penses .bm*full/issue*vol&/issue5 The"r&es That I#%(*e#$e SME's !%o theories %hich are most relevant to the financial policies of the SME's are the =eckin" 1rder !heory and the !rade 1ff !heory .?B+ # Myers propounded a capital theory called a =eckin" 1rder !heory .D Emperical evidence sho%s the main source of financin" of SME's are their '3nternal 8esources' . Accordin" to this theory 'SME's %ith a positive cash flo% use it to lo%er debt ratio' and . 8eference9%%%. !his further makes it difficult to retain employees %ho are not only skilled but can also 'multitask' .comple) business issues for initiatin" "ro%th oriented business policies becomes cumbersome .ournals.

8eference9%%%.efmaefm. !his model helps SME's ad. !he de"ree of effect above theories have on individual SME's depends lar"ely on these factors .ust to%ards it . Si$e # a"e # "ro%th opportunities # internal resources all tend to influence decision makin" process of SME's . SME's utili$e the principles of this theory by usin" the 'ta"et/ad. & !rade 1ff !heory 9 Accordin" to this theory of capital structure Dfirm's %ith a debt ratio belo% the tar"et ratio ad.ust 'tar"et debt ratios' by comparin" the previous and future (!ar"et period's ratios .or"*efma&(('*papers*&'(/s%innen:paper.ust their debt do%n%ards to%ards the tar"et debt ratioD .?B+ .ust their debt up%ards to%ards the tar"et debt ratioD and Dfirm's %ith a debt ratio above the tar"et ratio ad.pdf .ustment model'(!a""art #. !he above theory helps ma)imise the value of the enterprise . SME's have a set debt ratio %hich they tar"et and accordin"ly ad.'SME's %ith a ne"ative cash flo% increase their debt ratio in response to lack of internal resources' .?>> and Ealilband @ 2arris# .

a Ease in the process of settin" up of SME's . f Fle)ible labour re"ulations for protection of ri"hts of both labour and enterprise . 0riefly mentioned belo% are the same . b Availability of finance on lon" term basis %ith lo% rate of interest . 3t is for this very reason that it is important to discuss the viable solutions to the problems encountered by them . " =rovision of 0usiness 6evelopment Services (06S by public institutions . e !ransparent ta) system and ease in %ritin" of contracts . d Simplified system of re"istration and licensin" .S"(*t&"#s t" Pr"0(e s +a$e6 72 SME's: SME's are the very fabric of economic "ro%th in developin" countries . . c 0anks and 3nsurance companies reali$e the challen"es faced by SME's and introduce rules @ re"ulations accordin"ly .

n Special 6evelopment -enters for SME's %ithin 0usiness =arks*Special Economic Hones (SEH . m Settin" up a -redit 8atin" A"ency for SME's .h Assistance by public institutions in obtainin" information about market and distribution process . . . i =rovision of macro/economic frame%ork allo%in" SME's to operate in a fair manner . l A separate stock e)chan"e for SME's or the permission to trade at e)istin" ones . k 4overnment assistance at local and re"ional level to identify demand supply clusters as %ell as conductin" of %orkshops for trainin" labour . Fo"istics and Supply -hain Mana"ement pro"ramme like U<361's Sub/ contractin" and =artnership E)chan"es (S=G pro"ramme for SME's in developin" countries .

3ncrease in SME "ro%th has a direct impact on the 46= "ro%th of a nation due to it's increase in profits # value added services and output .pdf %%%.indianfaculty. !hey are a "reat "enerator of employment and contribute tremendously to income "eneration and e)port revenues . !hey are therefore a sector that should be actively promoted and encoura"ed in all developin" countries .?.or"*industry*smes*.ulty:Articles*FA.com*.. 8eference9 Self .?&>B.html C"#$(*s&"# Stron" SME sector can propel a developin" country for%ard by diversifyin" and e)pandin" it's domestic economy .oecd.*fall.o Market assistance from E)port =romotion -ouncil to identify international markets and assist in procedures of international trade .... 8eference9%%%.

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