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Exploring SME development potential
***"A distinguishing characteristic of small business is their ability to meet competition. But rather than compete in terms of offering similar products or services, the real competition is the race to achieve improvement...''***
A chief strength of the Japanese economy is the creativity and flexibility of its small businesses. Though business prospects looked poor during the economic instability of the seventies, small enterprises nevertheless coped well. Their answer to the oil crisis was to reduce investment in basic fuels and to shift to alternative energy sources. In response to the increasing value of the yen, they rationalised production and developed products with extra added value. They diversified into new fields, capitalised on growing domestic demand and invested overseas.
Today, changes even more dramatic than those of the seventies are forcing small businesses once again to rely on their creativity in order to survive. In response, the Japanese government is taking measures to establish an environment in which these businesses better known as SMEs can most easily demonstrate their creativity and leadership in the Japanese economy.
As for Bangladesh, some donor agencies in collaboration with trade bodies and some other agencies have of late intensified their efforts to develop and promote SMEs. The government has also started to realise the growth potential of SMEs in the country and the important role it can play, although not much active policy support has so far been provided to assist the sector to flourish by overcoming financial, technological, management and market information constraints. A National Task Force has , in the meantime, been formed by the government with the principal secretary to the Prime Minister as its Head, and the Task Force is expected to meet soon to formulate strategies and action plan for future.
As a matter of fact SMEs occupy a crucial position in the economy of the country as they have a significant role in generating growth and creating employment. Of the manufacturing output forty percent is contributed by SMEs and this sector alone employs about eighty percent of the industrial workforce. SMEs operate in various sectors, most notably in the garments industry, which accounts for about seventy-five percent of the country's exports, directly employs over 1.5 million workers (mostly women) and indirectly supports employment of upto 15 million. SMEs generate employment and income directly and through backward linkages to microenterprise units and forward linkages to large industries. SMEs are also active in the service sector and agriculture, where they supply vital farm inputs and market agricultural produce. A growing number of SMEs are exporters, and many producers of export products use raw materials, components, and ancillary services supplied by or contracted to SMEs.
Development of market
Now comes the most crucial question of essential elements for development of SMEs. The availability of supply side services and facilities such as information, finance, skill and technology on the one hand and knowledge about and the development of the existing and potential markets (domestic and foreign demand) for the products on the other are some of the major prerequisites for development of SMEs. These are basically the core elements; but there may also be other services or facilities needed by a specific industry or geographical area or entrepreneur.
But above all, appropriate policies and programmes regarding the required services and facilities for SME development are essential specially for a developing country like Bangladesh. Proper and effective implementation of these policies and programmes are also equally important . Moreover, the services package should be handled by one or more efficient and professionally competent bodies preferably in the
private sector so that the entrepreneurs are offered need-based services and also those in proper time and appropriately.
SME development generally requires initiatives that will significantly improve the three main pillars of sectoral development that is an enabling environment, strong providers of business development and support services, and efficient and sustainable providers of long term debt and equity finance. Many think that SMEs in the country now lacks institutional, technical and business support to improve management, facilitate use of technology and help promote and market their product and services. They, as many complain, face special tax issues that impede their growth. And above all SMEs need assistance and advice in developing bankable projects so that funding agencies can easily come forward in their assistance.
Generally speaking growth potential of SMEs in Bangladesh has always been accepted by all and its vital role in the national economy has been officially recognised in the successive plan documents and other relevant policy pronouncements, although not much active policy support has been provided by the government to assist this sector to flourish by overcoming financial, technological, management and market information constraints. Whatever, little has been achieved, it is the initiative and drive of some private individuals. In recent years, in the new environment characterised by free market reforms, a change has been taking place in relation to
promoting industrial investments. The private sector has become more interested and active in industrial investments and the government has been assuming a more proactive role in facilitating such investments.
Unreliable electricity and lack of credit
In a country like Bangladesh specially in the context of SMEs in general, unreliable electricity and lack of access to credit are the most serious factors that increase the cost of doing business. Other constraints are the law and order situation, legal barriers, large scale smuggling across the border, inadequate technical and marketing support and high raw material prices. The main constraints for exporters are related to trade information and market intelligence, export finance, and transporting goods to foreign market. Their transaction costs increase because of transport problems including the dysfunctional customs and port operations at Chittagong Port and the illegal toll collection on highways
throughout the country. Complicated regulations and associated corruption, inefficient marketing channels and shortages of skilled labour also hamper exporters.
Regarding access to credit the SME sector in Bangladesh is starved of both term and working capital loans. In some cases many of the entrepreneurs who succeeded in securing term loans from bank or any other loan giving agency, sometimes fail to arrange loan for working capital and thus finding themselves in serious problems. It is thus extremely important for the SME sector to make progress that there are effective institutions providing term loans as widely as possible. At the same time it is crucial that the proposals are appraised objectively, critically and transparently. The experience and social standing of the individuals applying for loans should also be taken into account. Also it is necessary to ensure that the applicants have access to working capital so that they can infact run their busi-ness/industries without hassle on this account.
Credit guarantee scheme
A credit guarantee system may be introduced for helping the SMEs in conducting their business smoothly specially during the time of necessity. If any SME cannot obtain funds from financial organisations, because of inadequate guarantees or low credit worthiness, the body created under the provision of the proposed Credit Guarantee Scheme can come forward to help with financing. When a small SME borrows from a financial institution the proposed body can
issue guarantee for the loan. If an SME is unable to pay on a loan, the proposed body can make payment on its behalf. Moreover, government can also form an SME credit insurance body for issuing such guarantees. This link between guarantees and insurance will provide for a safely managed system.
Business and industrial growth depends crucially on skilful management, production and distribution for which properly trained, skilled and experienced people are needed in adequate numbers. Therefore, as in any other sector, in the case of SMEs, particular attention needs to be given to the human factor, its current status and future development. As such, the existing training facilities of Bangladesh Small and Cottage Industries Corporation, Bangladesh Institute of Management, the Department of Youth, Ministry of Women and Children Affairs and different chamber bodies should be expanded to cater to the needs of the expanding manpower requirements of SMEs. Such training
facilities can also be created in the private sector.
In this age of phenomenal technological advancement with the information technology leading the way and of globalisation putting competition at the fore-front of economic management nationally and internationally, there is no escaping from the urgent need to seek technological modernisation. Although there is a recent awareness about that in the country, not much progress has been made not only physically but also in terms of strategic planning for supporting and facilitating the process. In order to be able to compete successfully, the SMEs cannot but go for modernisation as appropriate so that their products can easily survive in the competitive world market.
As per the existing industrial policy the Bangladesh Small and Cottage Industries Corporation as the relevant promotional body is responsible for overseeing and extending support to these sectors. But practically the facilities provided by this organisation are not at all sufficient to cope with the expanding needs. In the private sector the existing association and trade bodies can provide limited facilities for promotional activities as they have funding constraints and other limitations including lack of professional hands and technical experts.
Market development initiative
A major focus of the trade associations and chamber bodies should gather information regarding existing and potential markets and advise entrepreneurs regarding products
and their qualities which are in demand now or can be in demand in future. What design and packaging charges and improvements would make particular products more attractive to customers, particularly abroad, should also be regularly assessed. Properly designed market development efforts such as negotiations, advertisements and exhibitions, both at home and abroad, that would be helpful towards expanding sales should be in the portfolio of their market development activities.
Like many other countries the SMEs of Bangladesh have been affected by the precipitous economic liberalisation in the early 1990s without first taking action preparatory to liberalisation. All kinds of foreign goods including ordinary consumer items have been coming into the country easily. The domestic industries, given their relative inefficiency, cannot compete with these imported items in terms of price and also, not infrequently, quality. As a result existing enterprises have been failing and possible new ones have not been coming up initiating a process of de-industrialisation.
Finally special care must be taken both by the entrepreneurs as well as by the relevant government agencies to ensure quality control and to make the products upto the international standard to remain alive in the competitive world market. According to Kiyonari Tadao, Professor of Hosei University, Japan, "A distinguishing characteristic of small business is their ability to meet competition. But rather than compete in terms of offering similar products or services, the real competition is the race to achieve improvement. Consequently, small businesses are always trying to keep one step ahead of their rivals".
Practically such efforts result in a process of gradual improvement in the know-how of small businesses. As new methods of business appear and as competition with foreign companies increase small businesses with their experience in innovation, appear to be positioned to do well. But success hinges on their ability to achieve ongoing improvement in several strategic areas, specially technology. The extent to which this happens will depend measurably on government policies and mainly on the entrepreneurs of SMEs in Bangladesh. In this respect the Ministries of Industries and Commerce specially the Export Promotion Bureau have a great role to play. Our missions abroad can also help in promoting the products of SME sector abroad.
Zahid Hossain, a retired government official, is now working at the Bangladesh Enterprise Institute as a Senior Research Fellow