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CHAPTER-1 1.1 Introduction The topic of my thesis is Performance of Small & Medium Enterprises on Pakistan’s Economy. Small and Medium Enterprises (SMEs) are present in majority in all economies of the world and playing a significant role world over in the economic development of various countries. SMEs are dynamic, innovative and most importantly, significant contributor of employment generation, and output of their economies. SMEs can be very helpful in employing the ever-growing workforce of an economy that cannot find employment in Government or in large-scale industry. The sector is a breeding ground for entrepreneurship. Developing as well as developed economies have spent large amounts of money for the promotion of SMEs. Small and Medium Enterprises play an important role in the development of the country. However, these industries face difficulty in accessing adequate finance for their businesses. Apart from the traditional modes of financing like banks and money lenders, newer sources of financing such as venture capital investment, can take care of their financing requirements. In the case of Pakistan, the government has taken several initiatives both at the national and the international levels to improve the availability of finance. But there are still certain impediments that the SMEs face that are required to be addressed by the government. SMEs encourage entrepreneurial development and dispersal of the industries throughout the length and breadth of the country. It also generates a lot of employment opportunities and the capital cost per employee is very low. With the service sector contributing a major share to the GDP and as this sector relies on the SMEs, the scope for SME finance by the commercial banks has increased tremendously. The government is also committed to give a fillip to the sector through infrastructural development, skill developmental effort, technological up gradation and by expanding the role of Small and Medium Enterprises Development Authority in SME development. 1.2 Statement of the problem SMEs are suffering from several problems which hamper their growth. Lack of availability of credit to the entrepreneurs is the single most important impediment to the growth of SMEs. This study will mainly reveal the contribution of SME sector in achieving various socio-economic objectives: access to finance, employment generation, contribution to national output and exports, fostering new entrepreneurship & to provide depth to the industrial base of the economy. 1.3 Significance of the study The SME sector has become very important for many economic activities in developing countries because of its special features of capital sparing and labor intensiveness. Govt. took several measures for the promotion and smooth functioning of this sector. Besides these, Government carefully planned the development of small and tiny industrial sectors in the country. It was spent millions of rupees for their development during the plan periods. But to the dissatisfaction of many, including Government agencies, the sector

has not been working well owing to different problems faced by them both at the promotional and operating stages. They are generally seen as labor intensive capital saving and capable of helping to create most of the on billion new jobs, the world will need in the neat future. Their adoptability and flexibility are considered desirable attributed in adjusting to a fast changing technological landscape. My study specifically focuses on the performance of small and medium enterprises in Pakistan, the factors which are hampering and facilitating the growth of SME and why people in Pakistan are reluctant to establish their own SME’s. It is a descriptive type of research. 1.4 Objectives The objective of this research study is to assess the overall SME sector of Pakistan in an attempt to identify the shortcomings and weaknesses of this sector and thereby to suggest such measures that would resolve the problems. The performance of various Government agencies like SMEDA etc will be analyzed. Particular emphasis will be laid on the performance of SME Bank in particular and an in-depth analysis will be carried out. The objectives of this research work are: • To check the performance of SMEs on the economy of Pakistan. • To discuss the credit facilities offered to the SMEs • To analyze government’s support in obtaining credit facilities • To find out the reasons why people feel reluctant in Pakistan to establish their own SMEs. • Finally, to suggest suitable measures based on the identified gaps in the problem areas to resolve the major financial problems of the small and medium industrial units. 1.5 Methodology Information will be congregate for the research purposes from the following mediums:      2Libraries Articles Research material Internet Financial Magazines CHAPTER-2 2.1 Review of literature

Small and medium enterprises have been a subject of interest for the past many years. The reality is that “small business” plays an important role in the economies of many nations has also been recognized. Moreover, the ability of small and medium enterprises (SMEs) to participate in international trade has also been the subject of interest to researchers in recent years.

Small and medium enterprises There is no single, uniformly acceptable definition of a small firm. Firms differ in their levels of capitalization, sales and employment. Hence, definitions that employ measures of size (number of employees, turnover, profitability, net worth etc) when applied to one sector could lead to all firms being classified as small, while the same size definition when applied to a different sector would lead to a different results. The first attempt to overcome this definition problem was by Bolton Committee (1971) when they formulated “economic” and “statistical” definition. Presented in the following table is a summary of alternative definitions. Table 2: Alternative Definitions of SMEs World Bank since 1996 Grinde et al. (1989:9-10) USAID in the 1990s Firms with fixed assets (excluding land) less than US$ 250,000 in value is a small scale enterprise. Small scale enterprises are firms with less than or equal to 25 permenant members and with fixed assets (excluding land) worth upto US$ 50,000. Firms with less than 50 employees and atleast half the output is sold.

UNIDOs definition for Developing Large Firms with 100+ workers. countries Medium Firms with 20-99 workers Small Firms with 5-19 workers Micro Firms with less than 5 workers UNIDOs definition for Industrialized Large Firms with 500+ workers countries Medium Firms with 100-499 workers Small Firms with < 9 workers From the various definitions above, it can be said that there is no unique definition for a Small and medium scale enterprise. In a study carried out by International Labor Organization (ILO), more than 50 definitions were identified in 75 different countries, with considerable ambiguity in the terminology used. The enormous variety of criteria applied includes size of workforce or capital, form of management or ownership, production techniques, volume of sales, client numbers, levels of energy consumption etc.

Definition of SMEs in some Asian Countries SMEs play a key role for economic development of any country, be it a developed or a developing country because of the fact that they provide most of the employment opportunities for the general public of the country and as a result, they prosper in these conditions. SMEs have wide ranging definitions, varying from country to country. Some employ net assets, some turnover and some the number of employees. The general definitions of small, medium and large enterprises in non-Asian countries are given below: Table 3: Definitions of SMEs in non-Asian countries Country United States European Union Canada Number of Revenues Employees < 500 < USD 5 MM 10 < X < 250 < USD 50MM < 500 < USD 4 MM manufacturing < 50 services 10 < X < 500 > 10-20 < 100-200 Pakistan Asset Base

< USD 34 MM

Mexico South Africa

> US$ 0.05 MM > USD 0.07 MM

< USD 1 - 8 MM < USD 0.3 – 3 MM < 250 <USD 4 MM < USD 1.35 MM manufacturing manufacturing < 50 services <USD 0.7 MM services

0-14 staff MICRO

10 < X < 200
15-49 staff SMALL 50-199 staff MEDIUM > 200 staff LARGE

Countries do not use the same definition for classifying their SME sector. Nor does universal appear to be necessary. The definition in use depends on the purposes. These definitions are required to serve and the policies, which govern the SME sector thus defined. The three parameters can generally be applied by most countries, singly or in combination are:  Capital investment in plant and machinery

 

Number of workers employed Volume of production or turnover of business

Despite the lack of universal quantitative norms, the SMEs as a class are clearly distinguishable in any country, developed or developing. The factors that set them apart are essentially qualitative and comparative. On the qualitative side are their internal management structures, decision making process, financial practices, trading styles, attendant risks factors etc. Most SMEs are 1 person shows or are run by 2-3 individuals, usually relatives, friends or business partners, who take most of the decisions. There is no distinction between private and business assets and subjective and personal factors play a large role in decision making. The personal stakes SMEs have in their businesses are much higher than those of corporate executives in their companies. This enhances the attendant risk and commits entrepreneurs more strongly with a success of their ventures. A comparative factors have to do with a way SMEs are situated vis a vis large enterprises in the corporate sector. They are small and medium sized in comparison with the large entities with which they share a given economic space. SMEs therefore in come in varying sizes and SMEs in one country may well be larger than the “BIG” companies in another. The interesting feature is that, not withstanding their absolute sizes, the problems confronting SMEs appear to be similar to most countries – whether developing or developed. It is these features, which set them apart as a distinct group and it is these factors and not the quantitative definition which are common and have universal applicability. Need for Definition: The countries with such definitions are also the countries that have seen a faster growth of the SME sector. It appears the more precise the definition, the more effective has been the transaction of policies intended to benefit the sector into actual results. In countries where no definition exists, the enterprises feel they are in a disadvantageous position and empathetic in their demand for such a definition. In some cases, the definition seems to lend itself to differing interpretations, thus opening up the scene for disputes and dissatisfaction. Given below are SME definitions in use by some Asian Countries: Bangladesh The government’s industrial policy of 1991 defines “cottage” and “small”-enterprises. While large scale enterprises are also defined, there is official classification for medium sized enterprises. This can however be inferred. The Bangladeshi authorities use amount of fixed investment including initial working capital but excluding the cost of land, expenses on inland transportation, commissioning of machinery, and duties and taxes, as a classifying criteria. For cottage and small scale businesses an informal definition based

on number of employees also exits. A “small enterprise” is defined as an industrial undertaking engaged either in manufacturing or in service activity and whose total fixed investment including initial working capital but excluding the cost of land, expenses on inland transportation, commissioning of machinery, and duties and taxes (does no exceed takka 30m). An investment for “balancing modernization, replacement and expansion” (BMRE) would not entail a change in category. However, the investment on BMRE should not be more than the 50 percent of the total investment limit. The term “cottage enterprise” is used for an industrial unit engaged in manufacturing or servicing that is essentially run by family members, on a full time or part time basis, and whose total investment does not exceed Takka 500,000. Under the aforementioned policy, any enterprise whose fixed investment exceeds takka 30m is classified as a large scale enterprise. However, it is fairly common to consider those with a fixed investment not exceeding Takka 100 million as a medium scale enterprise. Small units and cottage industries had originally been defined in terms of the number of workers employed, though this definition is not in vogue. But still it provides readily accepted criteria for purposes of comparison. According to this definition a small scale unit is on with between 10 and 20 workers, if it uses mechanical power and between 20 and 150 workers if it does not. Along the same lines, a cottage industry is allowed upto 10 workers if it uses mechanical owe, and upto 20 workers if it does not. China Following the planned economic system over a relatively long period, China has classified enterprises into large, medium and small enterprises based on production capacity and size of fixed assets. Different criteria have been set in accordance with the characteristics of different sectors, whereas there is no strict requirement regarding the employment and sales volume of each enterprise. Those factors constitute the major difference between China and western countries, at present China is still using the criteria set by their State Economic and Trade Commission in 1998 to classify enterprises and there are no clear and unified criteria for enterprises of other types. Table 4: Sector-specific SME definitions in China Industrial Sector Small Enterprises Medium Enterprises Construction Small Enterprises : 300 employees 2000 30 -300 M Yuan 40-400 M in sales Asset size Yuan

>2000 employees : 600 employees

>300 M Yuan in >400 M Yuan Asset sales size Yuan

3000 30 -300 M Yuan 40-400 M in sales Asset size

Medium Enterprises Wholesale Small Enterprises Medium Enterprises Retail Small Enterprises Medium Enterprises Transportation : Small and Medium Enterprises Posts : Small and Medium Enterprises Hotels and restaurants : Small and Medium Enterprises 1.0.1 India

>3000 employees : 100 employees

>300 M Yuan in >400 M Yuan Asset sales size

200 30 -300 M Yuan in sales >300 M Yuan in sales

>200 employees : 100 employees

500 10 -150 M Yuan in sales >150 M Yuan in sales >30 M Yuan in sales >30 M Yuan in sales >30 M Yuan in sales

>500 employees >500 employees

>400 employees

>400 employees

The definition used by the Indian authorities is based on the level of investment in plant, machinery or other fixed assets whether held on an ownership, lease or hire purchase basis. It seeks to keep in view the socio economic environment in India, where capital is scarce and labor is abundant. However, a definition exist only for tiny and small units, medium sized enterprises are not defined either technically or legally. Industrial undertaking in which the investment in fixed assets in plant and machinery, excluding land and building, whether held on ownership terms or on lease or on hire purchase, does not exceed Rs. 1 Crore. An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and undertaking supplies or proposes to supply or renders not more than fifty percent of its production or services, as the case may be, to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery, whether held on ownership terms or on lease or on hire purchase, does not exceed rupees one crore. All Small Scale units wherein investment on plant and machinery (excluding land and building) upto Rs. 25 lakhs are classified as tiny industries.

All small scale units which exports more than 50 percent of their output is classified as Export Oriented Units. Industrial related service/business enterprises with investment on plant and machinery upto Rs. 10 lakhs excluding land and building is registered under Small Scale Service Business Enterprises (SSSBE). Indonesia According to Undang-Undang (Regulation) No 9 Tabun (year) 1995, small businesses have a maximum net worth (excluding land and building) Rupiahs 200 million or maximum sales of Rupiahs 1 billion, are owned by Indonesian citizens and are independent i.e. not a subsidiary of, or owned by, or affiliated directly with, medium size or big enterprises. 1.0.2 Japan

The Small and Medium Enterprise Basic Law (1999) of Japan qualifies small enterprises as being enterprises with a regular workforce not in excess of 20 people (or five people for enterprises that are principally engaged in commerce or the service industry). Table 5: Definition of SMEs in Japan A. Small and Medium Enterprises Mining, manufacturing, transportation construction industries <300 or : Employees <300 million Invested Capital yen Wholesalers :Employees Invested Capital Retailers, Services : Employees Invested Capital B. Small Scale Enterprises Manufacturing and other Industries : Employees Commerce and Services :Employees <20 <5 <100 or <100 yen 50 or < 50 million yen million

Based on most recent data obtained (2002), more than 99 percent businesses in Japan are classified as SMEs and of the total work force, 81 percent are employed by this sector. At the same time, 51 percent of shipped manufacturing goods are produced by SMEs; in the

wholesale industry, this figure is 62 percent, while in retail, it represents 73 percent1. Percentages/Figures have not changed very much in the past thirty five years with the enforcement of the Small and Medium Enterprise Basic Law. SMEs assume a very important role in the Japanese economy, comprising 98.8 percent of total establishments in Japan and contributing 77.6 percent to total employment in 1996. In terms of market share, the SMEs contributed 51.0 percent of total shipment value of the manufacturing sector in 1996. In 1994, SMEs contribute 61.4 percent of the total amount of wholesale and 76.8 percent of retail sales. Japanese SMEs continue to perform well, demonstrating their unique flexibility and creativity, even at time of recession experienced by the Japanese economy. The Law has the following objectives: • • 1.0.3 Promoting the growth and development of SMEs, and Enhancing the economic and social well-being of entrepreneurs and employees of SMEs Malaysia

The definition of SMEs in Malaysia is tied to Industrial Coordination Act of 1986. It states that SMEe are those companies that employ less that 75 full time workers or with a shareholders’ fund of less than M$ 2.5 m (US$ 1m) The small scale industries (SIs) refer to manufacturing establishments employing between 5 and 50 workers or with shareholder’s fund of up to M$ 500,000 (US$ 200,000). Medium Industries (MIs) are those manufacturing establishment with a share holders fund of more than M$ 500,000 and up to M$ 2.5 million or employing 50-75 full-time staff. 1.0.4 Thailand

On September 11th 2002, the Ministry of Industry introduced the definition of Thai small and medium-sized enterprise (SME). This definition is based on the number of salaried workers, and fixed capitals. An enterprise is categorised as an SME since it has employees less than 200 and fixed capital less than baht 200 million, excluding land and properties (3). SMEs in Thailand are classified in three sections: production, service, and trading (2). Table 6: Definition of SMEs in Thailand Type Small Employees Capital (million baht) Not more than 50 Not more than 50 Medium Employees 51-200 51-200 Capital (million baht) 51-200 51-200

Production Not more than 50 Service Not more than 50

Wholesale Retail

Not more than 25 Not more than 15

Not more than 50 Not more than 50

26-50 16-30

51-100 31-60

In business practices, the definition of SMEs can be extended including number sharing holdings by parent companies, enterprise structures and independence. The principle criterion for SME is an enterprise’s independence. This characteristic indicates that not more than 25 percent of SME capital should be owned by one large or many large companies (1). At present, there are many multinational companies in the form of franchise companies and joint-venture between Thai and overseas companies. Some of these companies should not be classified as Thai SMEs. In this study, Thai SME definitions are as follows: 1. 2. 3. 4. 1.0.5 Employee size is not more than 200. Fixed capital is not more than 200 million baht. Less than 25 percent owned by one or jointly several enterprise(s). Less than 50 percent owned by foreigners. Pakistan:

Different agencies define SMEs in their own way and there is no single nationally accepted definition. The Punjab Directorate of Industries (PDI) defines a small unit as one fixed assets worth Rupees 10 million of less, excluding the cost of land. The Punjab Small Industries Corporation (PSDI) sets this limit as Rupees 10 million. According to PDI, all enterprises with assests excluding land, valued between Rupess 10 million and Rupees 100 million are medium scale units. PSDI defines medium scale units as enterprises with assets excluding land valued between Rupess 20 million and Rupees 100 million. All enterprises employing less than 10 persons are categorized as small or medium sized enterprises. 1.0.6 Philippines

In the Philippines, an SME is defined as any business activity or enterprise engaged in industry, agri-business and/or services whether a single proprietorship, cooperative, a partnership or a corporation with a value of total assets inclusive of those arising from loans but exclusive of the land on which the office, plant and equipment of a particular business entity are situated, coming under one of the following categories:   3Micro (upto P 150,000) Cottage (over P 150,000 to P 1.5 million)


Theoretical framework shows the relationship between different variables. In this research, access to finance, employment generation, contribution to national output and exports, fostering new entrepreneurship, impact of SME entrepreneur’s education on quality of doing business in Pakistan, to provide depth to the industrial base of the economy are the independent variables which effects the dependent variable i.e. performance of SME’s on economy. There can be a positive and negative relationship between the variables. In this research there is positive relationship between the independent and dependent variable. It means that if performance of SME’s is outstanding which shows that finance is easily available to entrepreneurs, new jobs are being created by SME’s, exports and output of the economy has been enhanced by SME’s, entrepreneurship has been flourished, industry has been strengthened, then all these factors have a positive impact on the economy. Moderating variable which have the strong contingent effect on the relationship between dependent and independent variable Intervening variable of this research study is the overall economic situation of the country which impacts the growth of SME’s. Important intervening variable is the energy crisis and law order situation of the country.

Fostering new entrepreneurship Access to finance Employment generation
Performance of the Economy

Contribution to national output and exports Growth of the Industry

Independent Variable

Dependent Variable

Fostering new entrepreneurship

Access to finance Employment generation
Performance of the Economy

Contribution to national output and exports Growth of the Industry

Independent Variable

Government Facilitation Recognition

Dependent Variable

Moderating Variable

Fostering new entrepreneurship

Access to finance Employment generation
Performance of the Economy

Contribution to national output and exports Growth of the Industry

Independent Variable

Energy Crises & Poor Law and Order Situation SSituationnGove rnment Facilitation Recognition Intervening Variable

Dependent Variable

Tools for data collection
Data for literature review was collected from secondary sources.