SMEs play critical role in a country's economy - WB Country Director

by Surekha Galagoda

Small and medium sized enterprises (SMEs) play a critical role in a country's economy be it job creation, entrepreneurship or income generation.

Country Director World Bank Ms Naoko Ishii, the Guest of Honour at the 49th Annual General Meeting of the National Chamber of Sri Lanka (NCCSL) in Colombo said that in almost all countries SMEs are critical for job creation, entrepreneurship and income generation.

She said in India, SMEs account for 45 per cent of all jobs, and contribute to 40 per cent of the GDP.

In the Philippines and South Africa, SMEs provide more than 60 per cent of all jobs. SMEs have also played a key role in propelling some of today's most advanced economies forward.

In my own home country, Japan, for example, a rapid growth in the number of SMEs in the first few decades after the Second World War was a key factor behind the spectacular growth that Japan experienced in this period.

Similarly in Taiwan an economy with approximately the same number of people as Sri Lanka, but with 10 times higher average incomes SMEs have been critical of modernisation and economic growth in the past five decades.

Ms Ishii said that SMEs are also important in Sri Lanka. In Sri Lanka, SMEs make up more than 80 per cent of all businesses, account for about 35 per cent of employment and about 20 per cent of total industrial value addition.

The World Bank's private sector arm, the International Finance Corporation last year conducted a survey of Sri Lankan SMEs. For the purpose of the IFC survey SMEs were defined as having a turnover between Rs. 5 million and Rs. 150 million in 2005. The IFC survey provided a rich picture of the characteristics of the SME sector in the country.

It showed for example that half of the companies have less than 20 employees; that half of the SMEs legally are sole proprietorships and that 25 per cent of the owners are less than 40 years of age.

What is special about SMEs, apart from the fact that they by definition are small? Perhaps the most important aspect of SMEs is that SMEs are at the heart of one of the most famous concepts in economic theory.

The concept was conceived by Joseph Schumpeter in 1942 and is called Creative Destruction. Schumpeter's fundamental insight was that better and cheaper products make previous products obsolete. This dynamism, created by the arrival of new products or new methods of production, is a critical factor behind economic growth and welfare.

The dynamism of SMEs in Sri Lanka is reflected in the IFC survey, which found that in 2005 a quarter of SMEs had turnover growth of more than 20 per cent, while at the same time 15 per cent of SMEs had negative turnover growth.

The survey also found, though, an astonishing resilience of Sri Lankan SMEs: 70 per cent of all SMEs had been in existence for more than 10 years.

Ms Ishii said that the experience of Korean SMEs provides some lessons and possibly inspiration for Sri Lanka. She said, "I don't have to tell you that Sri Lanka is right next to one of the most dynamic and the fastest growing economies in the world at present, namely India.

Like China, India has a competitive advantage from relatively low labour costs. Like China, India is also becoming gradually more open for foreign businesses.

And, also like China, consumer demand for better quality and a wider variety of goods and services in India are expanding rapidly.

If Sri Lankan SMEs can exploit these opportunities, the SME sector can be a true engine of growth for Sri Lanka in the 21st century".

She said, "I shall be the first to admit that the challenges are large, and that not all obstacles can be overcome by SMEs themselves".

For example, the World Bank's own research show that Sri Lankan SMEs suffer from difficulties in accessing finance. the IFC survey showed that only 29 per cent of SMEs managed to obtain a loan from a commercial bank. This makes it more difficult for SMEs to upgrade their production facilities and invest in new technology.

Sri Lanka's SMEs also tell us that they find it difficult to market their goods, both domestically and internationally and that they face serious difficulties in attracting staff with appropriate skills.

To overcome these challenges would require increased professionalism by SMEs, improved Government regulation and policies and a financial sector better equipped to support SMEs.

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