SME and SSE Across the World

• Small scale enterprise, SSE and Small Medium Enterprise, SME

Small scale enterprises speed up the rate of social economic development of many countries, particularly developing countries. They served as system for attainment of national objective in terms of employment generation at low investment cost and also the development of entrepreneurial capabilities and indigenous technology (Omar, Arokiasamy and Ismail, 2009).

It also reduce the flow of people from rural area to urban area, henceforth, it can be easily established by the relatively less skilled labor force of a developing country, Small Scale Enterprises contribute substantially to the gross domestic product, export earning, and development opportunities of the countries. After the attainment of independence much emphasis has been laid on growth of small scale industries as means of reduce the incidence of poverty and employment in the country.

Furthermore, the vital role of small scale enterprise (SMEs) as the only authentic foundation for accelerated industrialization, growth and development, as witnessed in all the Newly Industrialized Countries of South East Asia, referred to as Asian Tigers, is recognized for its accelerating effect in achieving macro-economic objectives such as full employment, income distribution, development of local technology and stimulation of indigenous entrepreneur ship, mitigation of rural-urban migration, support and linkage of the entire industrial sector by training of semi-skilled and non-skilled manpower as well as the manufacturing and supply of spare parts and raw materials to large scale industries.

 Economic Growth, Development and Unbalanced Growth

SMEs are defined by number of workers employed, capital employed and sales turnover. SMEs are thus classified by the number of employees and/or by the value of their assets. The classification of SMEs by size is relevant to sector. A firm of a given size could be small in relation to one sector where the market is large and there are many competitors; whereas a firm of similar proportions may be considered large in another sector with fewer players and/or generally smaller firms within it. It may be appropriate to define size by the number of employees in some sectors but more appropriate to use turnover in others. Across governments, it is most usual to measure size according to numbers of full-time employees or their equivalent.

Performance Appraisal, Importance and Organizational Effects

Small Scale Enterprises (SMEs) as defined by the National Council of Industries (2009) refer to business enterprises whose total costs excluding land is not more than two hundred million naira ($500,000) only. Although, there exists no consensus among policy makers and scholars concerning the point at which a business firm is deemed to be small or medium. Indeed, there is no universally or even nationally acceptable standard definition except that the scale of business needs to be defined for a specific purpose.

The definition of the size of the enterprise and their classification into micro, small, or medium has been generally based on criteria such as volume of sales turnover, number of workers in employment, or value of assets and investments. Ayaggari, Beck, and Demirgue-Kunt (2003) assert that the definition of small scale enterprises varies according to context, author and country. Classification in USA, Britain and Canada is defined in terms of annual turnover and the number of paid employees whereas in Japan, it is conceptualised as type of industry, paid up capital and number of employees.

It appears that the multiplicity of definitions ‘of SMEs may not be unconnected with the fact that they are substantially heterogeneous. However, they have often been classified or defined in terms of quantitative and/or qualitative variables or characteristics. The quantitative indicators include the number of employees, sales, and capital employed, while examples of the qualitative indicators are legal status, ownership structure, factor intensity and technology .

Different countries define SMEs differently for example; in Canada the term SME refers to businesses with fewer than 500 employees. They further define a small business as one that has fewer than 100 employees (if the business is a goods-producing business) or fewer than 50 employees (if the business is a service-based business). A firm that has more employees than these cut-offs but fewer than 500 employees is classified as a medium-sized business.

Generally in Canada an SME is any business establishment with 1 to 499 employees and less than $50 million in gross revenues. In Germany an SME has a limit of 250 employees, while, in Belgium it has a limit of 100 employees. In New Zealand a small business has 19 employees or fewer. In the United States (U.S.A) a small business refers to those with fewer than 100 employees, while medium-sized business refers to those with fewer than 500 employees.

The European Union (EU) definition is based on the parameters of development, turnover and asset size and Organization for Economic Cooperation and Development (OECD) on employment and sales turnover.

This implies’ that they play a vital role in alleviating poverty and increasing employment attributed to their promotion of competition and dynamism, since they augment “government efforts in rural and urban areas thereby improving the household incomes which enables them to access various items for daily use at affordable costs. It is from this perspective that Small Scale Enterprises (SMEs) are dubbed as the small scale establishments since they operate at the least levels investment.

In Latin America, Small Scale Enterprises are characterized by the dependence on family labor and limited technical and managerial skills. They are commonly not registered, maintain no business records and do not have access to credit from formal credit institutions. They are relatively small, flexible, require low capital needs, modest educational requirements with informal structures that are high labor intensive and do depend on local raw materials.

The Small Scale Enterprises, SSE in India has been accorded as a priority sector of the national economy by the national decision makers since it is protected and promoted in various ways by government policies and measures to enhance their growth potential.

Small Scale Businesses generate employment at relatively small capital costs, mobilize resources at micro levels and meet the rising demand for various goods and services required by the economy. To the decision makers, Small scale businesses constitute nearly 40% of the total output in the private sector. Much more significant was the employment generation capacity of 70%.

In Ghana, Small Scale Enterprises are officially considered together. Small enterprises are defined as business units that employ a labor force of not more than 9 persons (Mensah et al, 2007, Kwasi Bruks et el, 2005; OECD, 2005).

This is so because they augment government efforts to achieve economic growth and reduce poverty in the rural and urban areas through the promotion of competition and dynamism to enhance the development of low and middle income economies and individual.

In China SMEs have been defined using various criteria, such as number of people employed, volume of sales or output, and value of assets (Zheng, O’Neill & Morrison, 2009).

In the EU, a business with fewer than 250 employees is classified as medium-sized; a business with less than 50 employees is classified as small, and a business with fewer than 10 employees is considered a micro business. The European system also takes into account a business’s turnover rate “and its balance sheet.

In Nigeria, there have been different definitions of SMEs by different institutions. These institutions include the Central Bank of Nigeria (CBN), the Small Industries Equity Investment Scheme (SMIEIS), the Nigerian Institute for Social and Economic Research (NISER), Federal Ministry of Industry (FMOI), the National Association for Small Enterprises (NASME), and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

For instance, an SME has been defined by CBN as an outfit with a total capacity outlay (excluding land) of between 2000 and 13000 USD while SMIEIS recognizes an SME as any industry with a maximum asset base of 500,000 USD, excluding land and working capital, and with the number of staff employed by the enterprises not less than 10 and not more than 300.

Small scale enterprise drives mainly from their characteristics and as such that development is usually regarded as a viable option for sustainable economic growth and development of any given economy.

The proliferation of small medium enterprises (SMEs) through the contribution of the banking industry will serve as a viable tool for stimulating development and growth of growing economies as they will generate employment, development entrepreneurship and manager, prevent small rural-urban drift, develop technology, create various associated industries, and improve equality in income distribution.

Small Scale Enterprises are  seedbed of innovations, inventions and employment since they assist in promoting the growth of a country’s economy. Hence at all levels of government policies which promote the growth and sustenance of small scale businesses have been emphasized to enhance economic development.

Defining International Organizations and Relations

Small Scale Enterprises are characterized by the unique feature of labor intensiveness. The importance of small scale businesses increases manifold due to immense employment generating potential that is accompanied by fast decision making due to less staff and more control of an entrepreneur, availability and dependence on local raw materials leads to innovation of products which cater for the needs of individuals in a particular region hence their significance.

Small   scale   business,   small   scale   industries   and   small   scale entrepreneurship are used interchangeably to man a small scale industry   firm.   Its   deliberation  was   to   refer   to   the   operational definition worldwide, there seems to be no specific definition   of   small   business.

Different   authors,   scholars,   and schools have different ideas as to the differences in capital outlay, number   of  employees,   sales  turnover,   fixed  capital  investment, available  plant   and  machinery,   market  share   and  the  level  of development, these features equally vary from one country to the other.

Small and Medium Enterprise have been considered as the engine of economic growth, and that the major advantages of the SMEs is their employment potential at low capital cost. This is because the SMEs are relatively more labour-intensive than large enterprises. Furthermore, the role SMEs play in any country is always in consonance with the country’s level of development. Adeyemi and Badmus (2001), in agreement with Aremu (2004) that there is high incidence of poverty in developing countries, argued that only adequate financing of small scale enterprises will reduce unemployment level. On the belief that jobs can be massively created through the development of SMEs, Gunu (2004) posit that finance to small Scale Enterprises will provide more income, savings and employment.

Moreover, in develeping countries with  adverse Balance of payment situation, the growing contribution of the small scale industrial sector in export portfolio goes a long way in generating foreign exchange and smoothing out the adverse balanced of payment situation.

This is important to the economy in that large percentage of their production inputs are sourced locally thus, reducing the pressure on the limited foreign exchange earnings and helping to eliminate some of the deficit in the balance of payment.

SME and SSE constitute the very basis of the national and global economies in terms of development of local technology, stimulation of indigenous entrepreneurship, mobilization and utilization of domestic savings, employment creation, structural balancing of large and small industry sectors in both rural and urban areas, supply of high quality intermediate products thereby strengthening the international competitiveness of manufacturer’s goods, stimulate technological development and innovations, provide the capacity to expand export possibility and substitute import effectively.

Discovery has also shown that the expected role contribution by the large scale enterprise to the economy in terms of improvement in the GDP, employment generation, increasing local value added, technological development among others are been resolved by SMEs across the world.

• The Role of SMEs in Nation’s Development

Recently, the role of SMEs in economic development and employment creation has occupied most of the discussions among government, policy makers, academicians/ researchers/ scholars and economists in many  countries. A study by Kongolo 2010) established that small business owners globally have the same characteristics, face the same obstacles but differ in their understanding of how small businesses assist in economic growth. SMEs have ability to fuel economic growth because they create new jobs, expand the tax base, and are drivers of innovation.

According to Beck and Levin (2005), SMEs enhance competition and entrepreneurship hence have external benefits on economy wide efficiency, innovation and aggregate productivity. They are the primary vehicles by which new entrepreneurs provide the economy with a continuous supply of ideas, skills, and innovations (CACCI, 2003). Globally there is an agreement that MSMEs hold the key to economic growth based on the fast growth of enterprises and the role of SMEs in generation of employment. According to Normah (2007), the concentration of SMEs has a close relationship with the dominant economic activities. SMEs dominate the world economies in terms of employment and number of companies, yet their full potential remains remarkably untapped (Schlogl, 2004; Omar, Arokiasamy & I small, 2009). This is due to a number of reasons (e.g. legal_; institutional, cultural, societal etc.) which make the role of SMEs on economic development different across countries.

Research has shown that new firms formation is an important indicator of entrepreneurial activity and economic development (Fritsch & Mueller, 2004, Venesaar 85 Loomets, 2006). In Nigeria the rate of formation of new firms has stagnated for long and besides that most new firms do not grow to maturity since they collapse before the fifth year. SMEs contribute to economic development by virtue of their sheer numbers and increasing share in employment and Gross Domestic Product (GDP).

In recent years the SME sector has consistently registered higher growth rate compared to the overall industrial sector globally. There is a general agreement among scholars and policy makers that the major advantage of the sector is its employment potential at low capital cost. According to EU, Micro, Small-sized enterprises are socially and economically important, since they represent 99 % of all enterprises in the EU. They provide around 90 million jobs and contribute to entrepreneurship and innovation. However, SMEs face particular difficulties which the EU and national legislation try to address by granting them various advantages. In the Netherlands, SMEs account 98.8% of all private sector companies, contribute 31.6% to Gross Domestic Product (GDP), and employ 55% of total workforce (Indarti, & Langenberg, 2004). In Australia Small businesses account for approximately 97 percent of all private sector businesses, and 51 percent of private sector employment (Australian Bureau of Statistics 1996; Wijewardena, & Tibbits, 1999). In Italy, SMEs contribute to USD 35 million in exports and absorb 2.2 million of national labors (Patrianila, 2003; Indarti, & Langenberg, 2004).

Recent evidence shows that SMEs contribute to 32 percent to Gross Domestic Product, 56.4 percent to employment opportunities and 19 percent to export in Malaysia (Omar, Arokiasamy & Small, 2009). A survey conducted in Malaysia, in 2010 to assess the performance of SMEs, established that more than three-quarters (76%) of the SMEs across all sectors of the economy experienced better performance in 2010. Indicators such as production and profit margin also showed an increase of up to 5% (Malaysia Government, 2010).

In India, the Micro and Small Enterprises (MSEs) sector accounts for about 39% of the manufacturing output and around 33% of the total export of the country. It is estimated that in terms of value, MSME sector in India accounts for about 45%.of the manufacturing output and around 40% of the total export of the country (India government, 2007). In Thailand the number of SMEs is increasing at a very fast rate. Thai SMEs are increasingly seen as creators of new jobs (Swierczek & Ha, 2003) and Vietnamese SMEs employ 64% of industrial workforce. According to Indonesian statistics, in 2003, the number of Indonesian SMEs was 42.4 million and they contribute to 56.7% of GDP, account 19.4% of total export, and employ 79 millions of work force (Indarti, & Langenberg, 2004).

Economic growth in developed countries such as Japan, Korea, Taiwan and many others, was significantly generated by SME activities. The percentage contribution of SMEs to Gross Domestic Product (GDP)/total value added ranges from 60.0 percent in China, 57.0 percent in Germany, 55.3 percent in Japan and 50.0 percent in Korea, compared to 47.3 percent attained by Malaysia. SMEs have also played a very important role in the economic development of China. At present, there are more than 10 million of SMEs comprising 99 per cent of the total number of enterprises in China. SMEs contribute 60 per cent of industrial output volume and 40 per cent of the total taxes and profits realized by enterprises in China. The contribution of SMEs in output in Japan is 65 percent, Germany 48 per cent while in USA its 45 percent. SMEs in the US generate more than half of the nation’s gross domestic product (GDP) (Ngui, 2014).

SMEs are important drivers  of innovation  and  competition.  The SME sector has remained very innovative and adaptable in order to survive the economic downturn. Empirical fstudies show that new firms play a significant role in employment generation (Baptista et al, 2005; Stel & Suddle, 2005), innovation (e.g. Fritsch & Mueller, 2005), economic growth and reduction of unemployment (Garikai, 2011). There is a high correlation between the degree of poverty hunger, unemployment, economic well being /standard of living of the citizens of countries and the degree of j vibrancy of the respective country’s SMEs.

In most economies, SMEs occupy the greatest proportion of enterprises. The SMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In the EU, SMEs comprise approximately 99% of all firms and employ between them about 65 million people. In China SMEs provide 75 per cent of the total township and urban employment and as such they play an important role in releasing the employment pressure and maintaining social stability. A study done by the Federal Office of Statistics shows that 97% of all businesses in Nigeria are SMEs. According to Ariyo (2011) the SME sector provides, on average, 50% of Nigeria’s employment, and 50% of its industrial output.

SMEs account for between 55 per cent and 80 per cent of total employment in Western Europe, Japan and USA. There are approximately 23 million SMEs in the US which employ more than 50% of the private workforce, and generate more than half of the nation’s gross domestic product (GDP). According to Muragia (2008) entrepreneurs in America are respected for their role in creating new jobs, providing competition to existing businesses, improving product quality, reducing prices, introducing new goods and services through innovation and technology advancement. In the European Union, SMEs are seen as largely essential for European employment. Each year, one million new SMEs set up in the European Union. SMEs account for 99.8% of all companies and 65% of business turnover in the European Union.

In the UK at the start of 1997, 99% of all businesses were SMEs. In India, the SMEs play a pivotal role in the overall industrial economy. Recently the sector has consistently registered higher growth rate compared to the overall industrial sector. In India the SME sector employs an estimated 31 million persons spread over 12.8 million enterprises and the labour intensity in the SME sector was estimated to be almost 4 times higher than the large enterprises in 2003. Currently this sector employs an estimated 59.7 million persons spread over 26.1 million enterprises (Ngui, 2014).

In the European Union, SMEs are economically important with 98% of an estimated 19.3 million enterprises defined as SMEs, providing around 65 million jobs. The average European business provides employment for four people, including the owner/manager. SMEs account for roughly two thirds (66%) of employment within the EU, with micro enterprises accounting for 34%, small enterprises accounting for 19% and medium-sized enterprises accounting for 13%. Ninety three percent (93 %) of all European enterprises have less than 10 employees. There are 20.5 million enterprises in the European Economic Area (EEA) and Switzerland, providing employment for 122 million people. Two thirds of all jobs are in SMEs, so only one third of all jobs are provided by large enterprises (Ngui_;2014). . i

In Pakistan, SMEs provide employment to about 65 per cent of work force in the industrial sector. According to the economic survey of 1998-99, SMEs with a mere 20 per cent investment and resource to less than 10 per cent of the total formal credit generated 80 per cent of the total employment in Pakistan. They contribute to the GDP around four times as much as the large scale industries. The share of micro enterprises in total employment is 48 % in Italy, and 57 % in Greece. On the other hand, the share of large enterprises in total employment is over 45 % in Ireland and the United Kingdom. SMEs in Kenya employed some 3.2 million people in 2003 and accounted for 18 per cent of national GDP. In Kenya 90% of all enterprises are SMEs providing employment to over 60% of the total employed population. Micro and very small businesses in South Africa provided more than 55 per cent of total employment and 22 per cent of GDP in 2003. Small firms accounted for 16 per cent of both jobs and production and medium and large firms 26 per cent of jobs and 62 per cent of production (Ngui, 2014).

In Zimbabwe 15% of the total formal employment is in the SME sector. On a global scale, small-sized enterprises provide some 66% of jobs in the European Union (EU) – a percentage which is rising as SMEs face challenges and utilise the opportunities associated with increased globalisation, largely through e-commerce and greater internet usage by entrepreneurs. In the last decade, SMEs were the principle creators of new jobs, whilst on average; big industries downsized; retrenched employees and reduced employment. EU SMEs currently generate 56.2% of the private sector turnover. However the role of SMEs in generation of employment has in most cases been temporary since most new businesses die out before their fifth birthday further contributing to unemployment. SMEs have been criticized for their high rate of bankruptcy. While they create many jobs, they also destroy a lot of jobs. SMEs have also been criticized on the grounds that they provide low value added goods and services and have short life.

 

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