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The Way Forward
SME policymaking process
A digression on the real issues
Dr. Momtaz Uddin Ahmed
The recent exuberance noticed all around for SME development in Bangladesh is indeed gratifying for an academic and a passionate researcher like me on the subject. However, this makes me a little nervous at the same time as overenthusiasm may lead to unsolicited situations.
Having been in oblivion for quite sometime both as an area of research and study and as an element of national policy agenda, a sudden burst of interest in SME development has brought the issue on to the centre-stage of academic discourse as well as of governmental policy making process, especially backed by very pro-active donor support. Examples include formation of a National Task Force on SME development, constitution of an Advisory Panel (myself being incidentally involved in both the bodies, while the opinions expressed here are strictly personal), formulation of a separate SME development policy, and priority attached to the sector in the PRSP document, etc. accompanied spate of popular writings in the print media, deliberations in the seminars by the academics, and the GO-NGO promoters and activists and some of the private sector actors emerging overnight as the self-styled SME experts.
All these make me apprehensive of an impending danger that of mishandling of the SME policy making process based on the considerations of the wrongly propagated peripheral issues at the neglect of the real issues. What real issues deserve careful consideration while formulating and implementing a pragmatic SME development policy in Bangladesh forms the subject matter of this write-up.
Plenty of good leather for high quality shoes
An extensive array of writings emphatically argue for promoting SMEs in the developing countries like Bangladesh. The oft-cited economic, technical and social arguments put forward in favour of SME promotion include: creation of large-scale, low-cost employment opportunities, use of locally available inputs and technologies, mobilization of small and scattered private savings, development of industrial entrepreneurship, promotion of linkages through subcontracting and dispersion of industries and reduction of income inequalities. A careful scrutiny of these arguments would reveal that the underlying justification for emphasising SME development in the developing countries is derived from the factor proportions disequilibrium (i.e. scarcity of capital and abundance of labour) facing these countries. What is more disturbing, the arguments for the SMEs are always presented in a small versus large context, ignoring thereby the merits and advantages intrinsic and specific to smallness per se. It is this bypassing of the characteristic benefits and advantages of small-scale operations which gives rise to a lot of meaningless debates and controversies regarding economic merits of SMEs and relative economic and technical efficiencies of the large and small-scale enterprises in generating employment and output. This point may be substantiated by discussing the organizational and functional characteristics which are uncommon to the large-scale industries but are intrinsic virtues of the SMEs which enable them to grow and flourish not only in the developing but also in the developed countries.
Resurgence of small business in the developed countries
The SMEs are known to have staged a resounding come-back through their significant revival in the industrialized countries of the OECD and in the U.S.A. since mid-1970s. Their contributions are reported (OECD survey of SMEs, 1997) to have been particularly important in net job creation, value added and exports overtime. While the relative contributions of the SMEs varied across countries depending on the levels of their industrial and technological development, these industries (employing between 100 to 200 employees) were found to contribute between 30 and 70 per cent of employment, 25 and 60 per cent of value added in the OECD member countries during early 1990s. Their contributions in the employment and value added in some of the Non-OECD newly-industrialised countries were found to range between 40 and 80 per cent and 20 and 40 per cent respectively. The share of SME exports to total national manufactured exports varied from 20 to 30 per cent in the OECD countries during the same period. Available evidence also suggests that SMEs employing less than 100 employees created between 60 and 90 per cent of all new jobs in the OECD countries during 1997-1998. These statistics confirm that the SME existence is a universal phenomenon in the developed and developing countries alike. Hence, contrary to the popular belief that the SMEs are a “vanishing breed” and are liable to wither away with progress in industrial growth, they have not only survived and grown, and have made a remarkable resurrection even in the citadels of the industrialized world.While the resurgence of the SMEs began in the 1970s, the trend continued well into the 1990s and has been maintained ever since. As noted earlier, these industries increased their relative shares in job creation, value added and exports overtime. At least four important factors are commonly identified (by Julien Pierro-Andre et.al. 1998) as important reasons (interpreted at times as “new theories”) underlying re-emergence and potential future continuation of small business as important forces even in the mature economies. These are:
- the role of entrepreneurial spirit that guarantees systematic and continued renewal of industrial structures;
- the presence of market niches suited to SMEs;
- increased uncertainty wipes out the traditional aversion of the business leaders to risks; and
- the pursuit of flexibility in production required to adapt quickly to external charges.
As opposed to the conventional contingency reasoning, these four factors are regarded as four fundamental theories which are put forward in support of the notion that the re-emergence of the small business since 1970s will continue to persist in the future. Yet another strand of thought seeks to place the re-emergence of small business in the industrialised nations in the economic transformation process of the last two decades which puts limits to big business on the one hand and facilitate the use of innate capabilities (i.e. competitiveness and innovativeness) and flexibility of small businesses on the other hand.According to the “theory of entrepreneurship”, the acceleration of economic changes and dynamism is provided by the emergence of systematic renewal of entrepreneurship which becomes evident through the creation of thousands of small businesses. These vast majority of the new small business not only remain small, their owner-managers seek and tend to actively support and maintain this trend.
The concept of “market niches” explained by Edit T. Penrose in 1959 suggests that the economy generates different types of market spaces, some of which are not suited to large-scale production. The small market segments may be created by local customs (i.e. religious practices), luxury requirements (i.e. Rolls Royce), highly specific uses (i.e. racing yachts) or locational considerations (isolated populations etc.). Such markets may be inaccessible to large corporations, or demand a type of production that is too specialized or at least not profitable enough to the big business.
The multiplication of “niches” in the economy is associated with the increasing speed of economic changes and growing difficulties faced by the firms in reducing uncertainty especially through industrial concentration. On the contrary, such uncertainties and associated risks compel the firms to operate in groups or constellations or in systems that are more flexible and hence quickly adaptable to changes. The SME operations are better suited to these conditions.
Next comes the “pursuit of flexibility” which refers to the speed with which internal management and technology can be adapted to external changes. It requires business organizations characterized by compatibility with change, divisibility and reversibility of production etc. which are possessed by small business. Carlson (1989) and Schuman et. al. (1985) claim that the SMEs compensate for the absence of economies of scale by grater flexibility, especially in periods of rapid and at times sudden and unpredictable changes.
All these four elements would tend to constitute an economic theory of SSIs which puts the concept of “Fordism” based on the coherent model of mass production, market expansion, Keynesian-type demand management and income stabilization schemes and Taylorist type work organization to questionable validity and applicability in the context of the need for constant change, renewal and reorganization of the giant corporations for their survival and profitable operations. Thus flexible specialization and dynamic and innovative entrepreneurial traits of the SMEs are gradually taking over as the productive conduits in the constantly changing market atmospheres.
Special features
There are many intrinsic virtues and merits of smallness which need to be reckoned as their inherent strengths while designing SME promotion policies, especially in the developing countries like Bangladesh. Some of such major characteristics of the SMEs are briefly outlined:The SMEs are eminently viable in the industries where the products produced are not uniform in quality and cannot be standardized or traded in bulk. This is true by and large of those industries (i.e. apparels, textiles, timber and wood products, plastic products etc.) which produce light and artistic products and cater to individual tastes and desires.
In response to diverse consumer tastes and needs, products of countless variations in size, quality and design are manufactured by these industries. As this prohibits standardization and continuous flow operation on a large-scale in manufactured many of the items produced by such industries, small-scale producers fare comparatively better in them. In other words, the SMEs are most dominant in the product groups which cater to the specialized needs and tastes.
Even where a particular product is mass-produced, small producers may still prove effective manufacturers of the same item if isolated markets exist. This is specially true in areas which lack well-developed communication and transport networks. Weight-losing and perishable products with local markets and relative high transport costs (i.e. bottled and canned soft drinks, wooden containers, brick and structural clay products and canned fruits and vegetables) generally favour establishment of small-scale industries near the consuming centres.
Thus an interaction of product-mix and market influences is favourable for production on a small-scale basis in different lines of economic activities in both the industrialized and the transitional economies.
SMEs and Economies of Scale
While some of the small enterprises retain their existence as sub-contractors or suppliers of large firms, meeting ancillary requirements of the latter and are known as “satellites”, there exists another category of small firms which compete directly with their large counterparts and are described by H.E. Lydall as “marketers”. The existence of the marketers is attributed primarily to different production techniques they employ or the absence of technical economies of scale in the industries in which they operate. Plants and equipment of low output capacity may be justified in certain industries where the absence of technological economies of scale makes large-scale operations unsuitable. The industries in which relatively simple technical processes account for the existence of SMEs at all stages of development are bread and biscuits, hosiery, wood and cork, printing and publishing, metal coating and allied products and furniture and special tools and fixtures. These are industries where the dictates of the scale of operation and technological rigidities are less stringent.SMEs and technological change
Technological change is another important explanation that may be offered for the emergence of small-scale enterprises in many branches of modern technology-intensive industries. Development of new techniques and products appears to have facilitated the entry and growth of small enterprises into certain specific fields of manufacturing activity. An eminent example is plastics industry where a range of products is now produced from plastics materials (through injection moulding and vacuum forming techniques) rather than that from steel which requires heavy and costly equipment for both fabrication and subsequent finishing operations.The other important fields where diffusion of modern technology has spawned a new generation of small enterprises are scientific and engineering instruments and electronics. In such industries, the equipment incorporates electronic rather than mechanical devices and frequent changes in product design which dictate batch rather than mass production on a large scale. All these scientific and technological innovations have facilitated the growth and entry of new smaller enterprises.
Small beginnings, big hopes
Flexible specialisation
The recent surge of SMEs especially in the developed countries is attributed by Piore and Sabel (1984) to a large extent to “flexible specialization” as opposed to the notion of “mass production”. Mass production relied significantly on stable and growing markets and reduced units costs associated with production by large hierarchical firms. But recent slowed growth, greater international competition, and increased uncertainty in both product and factor markets have made specialized goods and more flexible techniques preferable to the mass production system. The final demand pattern also changed significantly as ever changing consumer tastes favoured customized goods and services better produced under the batch production systems used by the SMEs.Bangladesh perspectives
This brief discussion of the special merits of the SMEs has important implications for policy making for SME development in Bangladesh. Quantitatively, the SMEs are in super abundance in Bangladesh and also characterized by extreme heterogeneity in terms of size, product-mix, technology market links and market competitiveness. It is thus imperative that the SMEs which usually have an inevitable tendency to multiply in number should not be promoted indiscriminately. As market competitiveness is the name of the game under the globalised and liberalised market economy paradigm, our emphasis should be on promoting the dynamic segments within the SMEs which have better prospects for long-term growth and survival in both domestic and international markets. A selective promotional policy based on the intrinsic merits of the SMEs may not also need much special support and incentives which create market distortions. Only a level playing field non-discriminatory to the SMEs may be good enough to encourage development of an economically equitable SME sector.The SME policy-making process in Bangladesh is historically supply-oriented with the demand and market promotion aspects receiving relatively less attention. This supply-bias needs to be corrected and market-directed policies should be formulated.
A core institutional network consisting of those providing finance, skill development training, technological capacity building and market promotion services should be developed as part of a comprehensive and pro-active policy package for accelerated and sustained growth of a modern and vibrant SME sector in Bangladesh.
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Formerly Professor and Chairman, Department of Economics, Dhaka University, the author is currently Research Director, CIRDAP.