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Small and Medium Scale Enterprises abbreviated as SME’s face a vast number of problems in all the aspects of the economy such as social, technological, legal, political, environmental, and ethical aspects. In a growing economy, this sub-sector contributes a lot to the Gross Domestic Product (GDP). This implies that sufficient solutions proposed raise the countries’ GDP. In all dimensions of development, the Small and Medium-Sized enterprises play a major role in economic development generally and in particular the industrial development in both developed and developing countries.
It falls under the private sector and research shows that it contributes to 90% of the enterprises in the world and creates 50-60% job opportunities (Hobohm, 2010). This paper covers a brief history, status, and the significance of SMEs in developing countries by citing examples from different countries. The first section provides a general overview of the problems facing the sector before giving details of the three main problems.
Small and Medium Scale Enterprises in Developing Countries
In almost all the developed and developing countries, Small and Medium-Sized Enterprises rely on local skills and technology and contribute to the establishment and maintenance of entrepreneurship. They also promote innovativeness, invention, and the growth and development of industrial linkages. They are relatively higher labor-intensive. The main economic importance of SMEs is the fact that they act as a source of new business innovation and creation and a platform for employment opportunities.
Small and medium scale enterprises fall into three main classifications based on their specific capabilities and success in solving the challenges they face. The first category is of the SMEs that have the ability to compete on the international front and can benefit from the regionalization. The second category is of the SMEs that are vulnerable to globalization. Such SMEs have lower chances of surviving through sufficient conformance to international standards, training, and employing the skilled personnel to compete internationally. The last category encompasses SMEs that are protected by the governmental policies and structures from the effects of globalization (Muhammad, 2010).
Despite the immense contribution of the Small and Medium-Scale Enterprises to the country’s economy, this sector faces many problems. In this paper, the writer assumes the problems facing Malaysian SMEs in the global business environment are also affecting all the other developing countries. The challenges commonly faced include lack of support from the state governments, global sourcing effects, effects of economic downturn, poor relationship between the Multi-National Corporations and the SMEs, unprotected intellectual property and bankruptcy, unsupportive legal frameworks and policies, poor decision-making processes, and the lack of branding of their products in the global market (Muhammad, 2010).
Problems in the Sector
This sector faces the challenge of the poor policies and frameworks that govern them. In most of the developing countries, established legal and regulatory framework and standards supporting SMEs do not exist. This leads to the poor leveled ground for the establishment and maintenance of SMEs. Government policies do not directly aim at SMEs. This puts them at a disadvantage because they cannot access the human, technical, and financial resources to support their establishment and productivity (Hobohm, 2010).
An example is the fiscal policies in developing countries that do not protect high-interest rates levied on the small upcoming entrepreneurs. Banks and money lending institutions need government control in relation to the rate of interest charged to the small traders. This problem is both economical and political. Other examples of the policies that can be formulated to support the SMEs in developing countries include the protection laws of the sector from the effects of globalization, policies governing the employees, policies governing the marketing of the products, policies governing the processes involved and the technological integration into those processes among other supportive policies.
The second problem facing SMEs in developing countries relates to the people involved. It falls under the category of social and environmental problems. Many SMEs in developing countries produce similar and complementary goods (Hobohm, 2010). Small entrepreneurs lock themselves in a narrow profit margin by operating in routine businesses copied from someone else. The players in the SME sector do not change their businesses. They do not adapt to technological innovations and inventions that can boost their products and processes to facilitate entry into the new markets. This problem relates to the environment through which an entrepreneur operates and the kind of businesspeople they interact with daily. This limits collective learning, innovation, and invention (Hobohm, 2010).
The problem of concentrating on one-business area arises from several factors. These factors include the high transaction costs needed to identify suitable network partners and establish mutual long-term business relationships with the external factors (Hobohm, 2010). Another factor is the lack of a supportive legal framework for the establishment of joint ventures and standards that supports innovation and invention in developing countries.
The third problem facing small and medium-sized enterprises in developing countries relates to technological transfer. There is a problem in planning and implementing the technological transfer due to the size. They lack the policy initiatives, schemes, and programs geared towards the adoption of the new technologies. Technological innovations are important in a growing economy to ensure technological competitiveness, product, and process improvement.
India for example faces the problems of globalization and ever-increasing international technological and economic competition. SMEs face the challenge of technology transfer to cope up with international competitiveness. In the last few decades, SMEs have been utilizing technology transfer as a way of strategizing to compete with global businesses. This is however constrained by their small size and the lack of skills to effectively plan for and implement these new technologies (Ramanathan, 2011).
This problem faces SMEs in developing countries because there are no adequate plans and strategies to improve the sector’s processes. In the event of an introduction of new technology, SMEs lack adequate expertise and funds to incorporate the technology into the existing system. This forces the potential customers of the SME products to seek other alternatives or complements within the market because the products do not meet the international current standards.
Small and Medium-Scale enterprises play a significant role in the economic development of developing countries. However, SMEs face a vast number of problems in its establishment and continuity. The problems range from the social, economic, technological, legal, environmental, ethical, and political aspects of nature. Being a private sector, SMEs experience negligence and sabotage from the state government and this is why all the problems revolve around the lack of adequate legal, regulatory frameworks, standards, and policies that are supportive of the sector. With the state government’s support, a number of the problems facing the sector get an automatic solution.
Hobohm, S. (2010). Small and medium-sized enterprises in economic development: the unido experience. Viena: The United Nations Industrial Development Organization.
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Muhammad, M. (2010). Small and medium enterprises (smes) competing in the global business environment: A case of Malaysia. Labuan: Universiti Malaysia Sabah, Labuan International Campus.
Ramanathan, K. (2011). Technology transfer and small and medium enterprises in developing countries. New Delhi: NAM S&T Center Publishers.