The dilemma of SMEs

Small- and medium-sized businesses (SMEs) are the heroes of modern capitalism. Most economists and political strategists today agree that SMEs are a key driver of economic progress and growth. Pakistan is no different. Pakistani SMEs are a reflection of our nation’s entrepreneurial spirit and constitute a vibrant part of our economy. According to the Small and Medium Enterprises Development Authority (SMEDA), SMEs constitute nearly 90% of all enterprises in Pakistan, employing nearly 80% of the non-agricultural labour force and contributing approximately 40% of the annual GDP. As such, they continue to generate thousands of jobs and new opportunities for the talented Pakistani youth.

Yet despite being such a large part of the economy, the majority of Pakistan’s SME sector continues to be made up almost entirely of small and micro enterprises, with few scaling to become mid-sized or large businesses. The SMEDA defines small enterprises as those employing between 10-35 people, and with productive assets up to Rs20 million; medium enterprises are those employing between 36-99 people and with productive assets ranging between Rs20 and Rs40 million. Micro enterprises are those employing less than 10 people and with productive assets of up to Rs2 million.

Given the current economic and political climate, Pakistan needs a new growth model for SMEs, which will hopefully boost the financial health of middle-income families, raise consumption and address the social and structural problems that threaten the nation’s long-term prospects. To move forward, Pakistan needs to build up those sectors and institutions that have not been developed. Additionally, attention must be paid to non-tradable sectors that are essential for generating domestic demand and job creation, but which have not benefited from consistent and well-executed government policy. The nation can no longer afford to have a service sector that is heavily dominated by low productivity of local businesses, nor can it depend on millions of tiny enterprises to provide jobs for middle-income families.

With this scenario at hand, sustainable economic development should be at the top of the political agenda in Pakistan. In 2018, the aim should be to absorb the influx of new, young job seekers. The private sector, particularly micro, small and medium-sized enterprises (MSMEs), can be a key driver here. The MSME sector has enormous economic, social and environmental impact. However, the sector faces several challenges, including strong international competition, pressure to use key resources like energy, water and raw materials more efficiently, and to implement more environmentally sustainable production processes. By modernising and adopting innovations, Pakistan’s MSME sector can create new economic opportunities and strengthen its long-term competitiveness.

In contrast to developed countries, enterprises with innovative ideas in Pakistan often work in isolation. Cooperation with research and technology institutions or with academic establishments is virtually non-existent. Furthermore, support for MSMEs in key areas such as technology transfer, resource efficiency and sustainability management has been either poor or inadequate. The Pakistani government needs to build a platform and friendly policies that can enable the Pakistani masses to transform their dreams into reality through successful businesses. These businesses will form the backbone of the country’s economic progress, creating even more employment opportunities and revolutionising the economy with innovative ideas. Cooperation between the industry, the academic community and government bodies remains weak, thus hindering the innovative capacity and sustainability of MSMEs, including social enterprises and start-ups.

To this end, government-sponsored programmes could be the solution. Programmes that support institutions which promote economic development — such as business chambers and associations — in developing a range of innovation-enabling services for MSMEs. In addition, focus could be on providing methods and instruments that can be used to identify opportunities for improving business operations and the supply chains of large companies. Here, the programme could draw on the knowledge of international and national experts in the field of innovation. The programme could also produce training materials on innovation management and establish new mechanisms to support start-ups.

Another real challenge for SMEs is to counter the rapid technology-driven changes that are apparent on the horizon. The advent of 4G has created a new boom of data, which will further have a direct impact on the domains of online shopping and social technologies which are constantly reshaping Pakistani consumer mindset. We continue to see the exchange of information sparking new demands and behaviour changes in our society in the form of technological disrupters, such as, Uber, Careem, Daraz.pk, and so on. As the Pakistani public starts using more dynamic tools, such as their computer and mobile devices to access information, SMEs will have to redefine the consumer journey across various channels and learn to integrate business-to-consumer sales channels and capitalise on new opportunities. These could include Fintech and merchant’s payment solutions, which could further enhance new areas of sales growth and loyalty.

Another struggle for SMEs in Pakistan in particular is due to the legacy generation of their current businesses. In most cases, the heirs lack the ability to manage and reshape their current businesses, which in turn means stunted growth and losses. The solution to this conundrum lies in reshaping the business bureaucracy and getting rid of internal politics which have riddled many of these organisations for decades. The transformation of processes and rethinking the fundamentals of business to compete in the modern world era is required to grow and expand.

The SMEs are the entrepreneurial hope of Pakistan and deserve our full attention. In the last decade, the consumer preferences of Pakistan have led to the growth of various sets of industries, especially within the service and lifestyle sectors, where we continue to see different local brands emerging and gaining much market traction. Despite growing sales volumes for these sectors, increased competition will likely usurp the profit margins of these SMEs and will eventually constrain the growth if they do not make the structural changes required to increase their productivity and efficiency as well as develop end-to-end supply change management processes.

Published in The Express Tribune, January 16^th, 2018.

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