Reforming Mindsets

The fourth industrial revolution now marks global operations with Big Data, AI and 5G paving the way forward. Over the years, as technology has progressed, the role of SMEs has been extremely significant; they account for 90% of all businesses and over 50% of total employment worldwide.

The state of SMEs varies among regions – for example, the micro, small and medium enterprise (MSME) sector constitutes as high as 99.94% of all enterprises in both the US and Spain, although the employment created is 48.03% in the US and a high 72.26% in Spain. Countries including Belarus, Kazakhastan and Tanzania present an interesting case, with the MSME sector constituting 100% of all enterprises and employment generated. Or consider the example of Europe for a more nuanced look at the impact of SMEs. In Europe, they represent more than 99% of all non-financial corporations, besides generating close to 60% of the total gross value added; they also employ over 90 million people.

Many variables play an active role in the status of the SME sector across the world. As research shows, they include the size and development status of the economy, although macroeconomic indicators cannot be seen in isolation to analyse the contribution (or lack of it) to a country. They are to be viewed as interlinked for a comprehensive understanding of the SME sector’s impact.

In the case of Pakistan, currently almost nine out of every 10 enterprises are classified as MSME, constituting approximately 99% of all economic enterprises. Collectively, the sector contributes an estimated 40% to the GDP, over 40% to exports and generates employment for about 80% of the non-agricultural workforce. As is evident, the SME sector plays a significant role in employment generation in Pakistan. Yet, its contribution to the GDP is limited to 40% compared to the world average of 55%. Though the sector is growing, it is not acting as an impetus for economic growth as it did in China; neither is the employment generation by the sector at an accelerated pace to match the employment gap nor are the SMEs making it big.

Multiple factors are attributable to this situation. Foremost is the absence of an updated policy framework (the last was the National SME Policy 2007), which has resulted in a missing roadmap for the sector (the draft of National SME Policy 2019 is pending approval). Consequently, efforts are not coherent and lead to sector’s challenges intensifying. The core challenges identified on a larger level are limited financing channels, restricted technological adoption and economic competitiveness.

Globally, the formal MSME finance gap amounts to $6.2 trillion, with the figure valued at $337 billion for South Asia. As per the International Finance Corporation, 65 million firms, or 40% of formal MSMEs in developing countries, have an unmet annual financing need of $5.2 trillion, which is equivalent to 1.4 times the current level of global MSME lending. Furthermore, about half of formal SMEs do not have access to credit and the financing gap widens when micro and informal enterprises are taken into account. In the context of Pakistan, facilitative measures have been taken by the State Bank of Pakistan for credit facilities to SMEs. In addition, financing facility is also offered to SMEs through the recently launched Kamyab Jawan Programme and funding by Karandaaz Pakistan. Although the economy is stabilising, the current inflation and exchange rate have further reduced the global competitiveness of local SMEs and therefore negatively affected its economic contribution.

SME density is another factor that has limited the economic impact of the sector. Pakistan has a low enterprise density of less than 19 per 1,000 people compared to India and Turkey (19-50). Australia, Indonesia and the US, for example, have a high enterprise density valuing above 50 per 1,000 people. The key to this is the promotion of entrepreneurship and innovation. With mushroom growth in the number of business incubators, the number of start-ups and financial investment raised is increasing yearly. However, there is a persistent need for innovation where SMEs work in collaboration with start-ups. Whereas start-ups are initially nurtured by incubation facilities, setting up an SME requires capital (usually personal finance) the amount of which varies with the sector, a higher opportunity cost (the start-up rule of ‘if you have to fail, fail fast’ is not applicable to SMEs) and risk factors.

This links to the micro-level factors of the SME sector. SMEs, also referred to as the seth industry in Pakistan, have specific connotations and a general perception – they are family-owned, passed from generation to generation and adhere to fixed conventional ways of operations.

Given the intergenerational management based on social culture, it is the seth who ‘instructs’ in operational matters. As ways have been set and practised, any suggestions are sidelined citing associated risk. A kiryana store owner who aims to earn a livelihood for the family will do just that. How often have you heard a neighbourhood store owner saying that the store will emerge as the largest retail brand? Or a local manufacturer may continue with old practices as they are seen as linked with family traditions that must be upheld. Stability is given preference to scalability. It is a rare combination where a SME aspires to scale, build a brand and also maintain traditional company values – and which lead to a SME making it big. In short, the main hurdle to SMEs becoming an impetus for economic growth is a closed, change-resistant and risk-averse mindset that leads to a lack of innovation and restricted openness in adopting technology for efficiency, scalability and growth.

The SME Business Climate Index 2019 conducted by Euler Hermes assessed the business environment for SMEs in 13 selected economies. Canada was ranked at the top, followed by Hong Kong and the US in terms of conduciveness. These economies have in common a flexible labour market, low levels of red tape and favourable tax policies. In Pakistan’s context, on a macro-level, there has been improvement in the business environment; on the World Bank’s Ease of Doing Business Index, Pakistan jumped 28 places in one year to 108. This, added with improving financing facility, is evidence of the business environment becoming more favourable to the SME sector.

The current government recognises the economic potential and significant role of the sector. In pursuit of this, it is investing in skill development, financing facilitation and creating bilateral trade channels. Additionally, the fast-progressing CPEC promises opportunities for the SME sector.

The macro-indicators are being shaped to support and facilitate the SME sector in Pakistan. For SMEs to make it big and actually become contributors to economic growth, parallel efforts must be made to advance greater economic ownership and inclusion among the sector community and encourage innovation by leveraging the potential of start-ups. Together, we need to take our share of risk for an economically strong Pakistan.

Nabeel Qadeer is CEO, InfinIT Global Labs, Co-Founder, Innovation District 92 and host/content producer of Idea Croron Ka. nabeel.akmal@gmail.com