Published in Mar-Apr 2020
We are experiencing interesting times. The last decade has seen massive macro trends shift in the way we live, shop and interact. Moving away from the hyper changes evident at the societal level, we realise how much globalisation, the emergence of knowledge led economies, the shift from natural resources to human capital, the ordering of the world into the physical and the virtual, and the new impetus led by technological advancements have changed the business plan of nations.
In the past, successful economies were those that were able to successfully adjust their economic productivity mix from agricultural to manufacturing to services to ITC in order to achieve continued sustainable economic growth. However, in each case, the unsung heroes behind these achievements were the SMEs, accounting, in some cases, for 90% of a given country’s economic activity.
The enormous role of SMEs as economic drivers is a region-agnostic fact, as witnessed in China, India, Sri Lanka and recently Bangladesh. In light of this, one would assume that Pakistan too is leveraging the economic arsenal of its SMEs in the competitive commerce landscape. However, this is not the case; in fact, Pakistan’s SME sector (potentially the country’s growth engine) has weakened considerably.
Pakistan is a major exporter of textiles, rice, cotton, chemicals, pharmaceuticals, leather and fruits; crucial industries to economic activity include textiles, cement, fertiliser, steel, electric goods, mining and IT. Pakistan’s GDP growth depends on the agriculture industry and services sectors. While the industrial sector delivered growth of only 1.4% due to decline in large-scale manufacturing, the services sector recorded a provisional growth of 4.7% and SMEs account for almost 70% of export activity in textiles, although a significant proportion of exports in the pipeline were diverted to Bangladesh. There can be no doubt that given today’s global outlook, SMEs competitiveness is crucial to survival. Yet, in Pakistan, SMEs are far from realising their full potential due to a number of interrelated reasons and include the following.
1. No Aligned Definition as to What Classifies as an Enterprise in Pakistan as an SME in Terms of Employment, Size and Turnover
Instead, there are multiple definitions with each stakeholder opting for their own. Yet, having a single definition is crucial in order to set a development framework and roadmap, formulate policy, initiate reform and assess performance evaluation. Let’s take the example of the UAE, where the government has dedicated a lot of resources into reaching a consensus on an SME definition. In the UAE, any enterprise that meets the thresholds of employee headcount and turnover in a particular sector (trading, manufacturing or services) is an SME. Furthermore, the classification for size (micro, small and medium), is based on unique thresholds applicable to each sector. Additionally, SMEs are registered as a business with a commercial registry or with a free or industrial zone authority. In essence, the SME definition serves as a common denominator that leads to convergence among multiple stakeholders engaged in SME development roles and activities. This definition is the stepping stone towards formulating a strategy as well as developing an implementation framework. In Pakistan, a large proportion of SMEs are informal and are not registered with the formal ecosystem. They are large in number, diverse in type and spread across geographies.
2. An Unfavourable Business Environment and Non-Holistic Government Policies
They have to contend with a scarcity of skilled human resources and run on outdated infrastructures. As it stands the present ecosystem is not designed to promote high sustainability. The cost of electricity and its shortage depletes competitiveness.
3. No Evidence of an Innovation First Mindset
Lack of orientation and the inability of SMEs to embrace new technology are the cause of low productivity and inefficient output. SMEs are lagging behind in human resources skills, capabilities and training. The status quo is evident as almost all global benchmarks including the World Bank Report on Entrepreneurship, the Global Innovation Index and the Global Competitiveness Report, paint the same story.
Here is what SMEs need to do to if they are to regain momentum and really start to drive economic growth.
1. Sustained and Converged Stakeholder Engagement
This is essential if SMEs are to face the challenges of globalisation in markets where traditional barriers to entry have been phased out and value creation is paramount to survival. Strong competition is coming from Bangladesh, China and India, further reducing the traditional export scope of Pakistani SMEs
2. Innovation and Agility and Access to International Corridors
Any renewed focus will be incomplete without the support of new age entrepreneurs who have the potential to create globally competitive businesses from Pakistan leading to growth in exports, import substitution and employment generation.
3. Cultivating a Spirit of Entrepreneurship
This is something that is not common in Pakistan. Being cautious can only go so far and taking a business to the next level requires prioritising human resources, infrastructure, equipment and technology as well as finding common ground and cutting through cultural barriers to promote collaboration and bring to market the right product in the most efficient and cost-competitive way. This requires taking a certain degree of risk, especially in a period of economic downturn. The new generation of digitally literate micro-entrepreneurs have the opportunity to create economic activity through the service delivery fulfilment of a distributed global value chain. The opportunity lies in tapping traditional industries and bringing these unstructured businesses digitally alive. A failure to embrace digitisation will have serious unintended consequences and a negative impact on employment and economic growth. There must be differentiation between what constitutes a start-up and an SME because they fall under different criteria when it comes to infrastructure, financing and business lifecycle.
4. Collective and Rigorous Development of an Ecosystem Through Public-Private Partnerships
Change must start at the grass root level: A ‘Skilled Pakistan’ programme should be initiated that focuses collectively on leveraging technology, introducing disruptive business models and thinking in the pursuit of efficiencies, higher productivity and product and service innovation. The programme should look at how to bridge entrepreneurial competencies and provide functional courses in entrepreneurial education. Entrepreneurial business networking beyond borders should be actively pursued by entities such as the Pakistan Business Council. An opportunity framework should be designed to leverage the potential of the expat community and channelise their much-needed expertise and resources. This should be accompanied by an employment generation programme, one window company registration, consultation programmes, sponsorships and participation in global expo events to facilitate the introduction to global market access through trade agreements. Furthermore, measures should be adopted (if not legislation) to encourage large-scale local national companies as well as multinationals operating in Pakistan to make procurements from Pakistani SMEs.
Overall, the picture is not all that gloomy. Last December, Moody’s raised Pakistan’s economic outlook to ‘stable’ and Pakistan’s rating in the ease of doing business index went up by 28 places to 108, a significant jump that should be leveraged to increase FDI in existing and emerging businesses and position Pakistan to meet their global market requirements. Furthermore, CPEC is a game-changer with a potential outcome that could well turnaround Pakistan’s economy, although the game plan as to how Pakistani SMEs can leverage this opportunity has still not yet been drawn up.
Khurram Mahboob is a tech marketer currently working in the Middle East for a leading fortune 500 company. firstname.lastname@example.org