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Role of Globalization on SMEs Business in Pakistan Written By Sehrish Soomro & Batool Pirzada Students of Sukkur Institute Of Science & Tech: With the profound guidance of Mr. F. M. Shaikh Assistant Professor, Department of Agri: Economics SZABAC-Dokri-Larkana-Sindh ABSTRACT This research explores the impact of globalization on SMEs business in Pakistan. The Small and Medium Scale Enterprises (SMEs) are playing very significant role in almost all the economies around the world irrespective of the countries’ development stage.
Most of the developed countries like Japan, China, Malaysia, Taiwan, have developed through SMEs business, in many aspects such as employment generation, export, tax, income, innovation, competitiveness. Recent wave of Globalization has influenced overall business of the world. SMEs grew more in this wave of Globalization. Particularly in Pakistan, there has been a significant impact on income distribution, social stability, domestic resources utilization technique and structural and regional development.
There is a wealth of economic evidence that demonstrates that globalization brings great benefits as well as costs. It offers the opportunity for a higher rate of??sustainable growth – growth that translates into longer, healthier lives and improved living standards. But, if we look at another side of picture then it has been proven that some of the competitive obstacles often faced by the little fish in the big ocean.
Compared to larger firms, small and medium-sized enterprises (SMEs) are generally less well-equipped to face increases in international trade. As a result of their lower productivity, many have found it difficult to compete. Also, given their limited resources, they have found it more difficult to take advantage of the removal of tariff barriers. For this paper, data were collected from 100 SME owners by using random sampling. Questionnaires have been formulated as an instrument for measuring the impact of globalization.
It was revealed that overall impact of globalization on SMEs business grew by only 10%, and hampered due to the lack of technology, non-availability of technical labor, government irregularities like loan and other facilities, limited access to credits and markets, lack of infrastructure and competitive threats from foreign products etc. Inspire of assistance offered by successive government in Pakistan, and assistance from Private sector, NGOs and donor agencies; SME sector is still less dynamic and underdeveloped against large scale enterprise in the national economy.
It was further revealed that if government takes positive measures then SMEs can grow up to 50% in the Global scenario and export to SMEs increased by 40%. INTRODUCTION “Economic Growth is a wild horse; it needs to be tamed to serve the real interests of the society. If the horse misbehaves in some societies, leading to deprivation of many human lives, then the fault is not of the horse but the rider. Economic growth is essential in poor societies ??? but even more is its structure and distribution. ” Dr. Mahbub ul Haq (Late)
Pakistan is a mixed economy consisting of a public sector domination of major sectors of the economy, which is changing very quickly under the free market agenda of WTO making the role of government to minimum level under the globalization policies guided by World Bank and IMF. Today the great challenge facing political leaders is to persuade the public that continuing to liberalize trade will bring more benefits than costs. Distrust of globalization has probably never been higher in the past 60 years. There is widespread fear that globalization means job losses and lower wages as the export power of huge nations grows.
The evidence of this situation is Chinese products domination on the Pakistan market which has made many SMEs out of business. So people are becoming more protectionists, more unwilling to deal with change and make adjustments. There are a lot of stories in some media that discuss how Globalization is challenging [difficult and painful] for small and medium sized enterprises because they are being forced by the competitive environment to sell product and services to their customers, at lower prices; because – if they don’t, some vendor in another part of the orld will steal away their customers. However with every challenge, there are also opportunities in some situations, the consequences of globalization can be a benefit for SME’s because the “shrinking world” [facilitated by the developments in the technological environment] can bring more opportunities to SME’s that previously they could not deal with. The first part of current research paper highlights the various aspects of SMEs in terms of Globalization and their impact on the growth of SME business and their contribution to Pakistan economy, by suing various data indicators.
Finally there are tentative conclusions and suggestions about the SMEs business growth and possible solution on export oriented products which can be marketed in Globalize world of business. DEFINATION OF SMEs IN PAKISTAN Pakistan’s economy is an economy of SME’s. The Pakistan SMEs are engaged in wide range of business activities in agriculture, mining, fishing, manufacturing, construction, retailing, whole selling and also in the service sector covering both, rural and urban areas, servicing local and international.
They are active in most of the industry sub sectors such as agricultural inputs/outputs business, food and beverages business and even in the more advanced engineering sectors such as computer and chemical machinery usually run by a person or few individuals as a partnership. The personal stakes of Pakistan SMEs in their business are much higher than those of corporate executives in their companies. This enhances the attendant and commits entrepreneurs even more strongly to the success of their enterprises.
The government of Pakistan keeping in view the importance of SME’s has adopted multi pronged approaches at the regional, sub regional and national levels. Initiatives at the national and sub regional levels include efforts to strengthen economic integration and cooperation. At the national level, structural adjustment programs have been inauguration along with attempts at restructuring and diversifying the production base, integration the informal sector into the economic mainstream and stimulating increased participation at the enterprise level.
At the provincial level government has formed these institutes: a) Punjab Small Industries Corporation (PSIC) b) Sindh Small Industry Corporation (SSIC) c) Small Industries Development Board (SIDB) d) Directorate of Industries Balochistan (DIB) In order to meet this financing requirement, a number of institutions have been formed. These are: I. Small Business Finance Corporation (SBFC). II. Youth Investment Promotion Scheme (YIPS). III. Regional Development Finance Corporation (RDFC). IV. Industrial Development Bank of Pakistan (IDBP).
SMALL & MEDIUM ENTERPRISE DEVELOPMENT AUTHORITY (SMEDA) The government to promote the cause of SME development in the country has established SMEDA. Given the mandate of SMEDA, it was not possible to work in the absence of definition for the target segment. At a broader level SMEDA’s objective is not only limited to catering to the financial requirements of the SME’s whereas its mandate encompasses all other aspects such as marketing, human resource development etc. SMEDA went one step ahead and used two variables to define SME’s in Pakistan.
Following are the definitions of the SME’s: Micro: ??? Less than 10 people employed ??? Productive assets limit of 2 million rupees. Small: ??? Between 10-35 people employed. ??? Productive assets limit of 20 million. Medium: ??? Between 36-99 people employed ??? Productive assets limit of 40 million. In addition to this, various banks, financial institutions, donor agencies, NGOs industry related task forces; trade and industry chambers adopted their own definitions for SMEs for their convenience and objectivity of studying SMEs. DATA ANALYSIS ON PAKISTAN’S SMEs
Data were collected from 100 SMEs business owners by using simple random technique and structural questionnaire has been formulated as an instrument for the measuring the impact of globalization. These survey data shows that in geographical location of enterprises industries 65% enterprises are located in Punjab, 18% in Sindh, 14% in NWFP and other 3% in Baluchistan and Islamabad. In concentration of enterprises, 53% are in wholesale retail, restaurants and hotels 22% are in community social and personal services and 20% are in manufacturing.
More than 96% of establishments belong to less than 5 employee categories. This may be a good to further research to see that most Pakistan establishments are micro level SMEs Another interesting fact is that 90% of SMEs are less than 20 years old. Very young SMEs have many obstacles to access to finance and credit markets. In analyzing ISIC, a large proportion of industries are concentrated on few categories: 47% industrial establishment are in textile apparel and leather, 20% in food, beverages and tobacco, 10% in wood and wood products, 10% in metal and fabricated metal sector and 8% in handicrafts.
In terms to employment status more than 70% of employees are unpaid family workers, Partners and self employed people; it is clearly visible in Pakistan’s house hold level enterprises. In gender ???wise female participation is very less even in paid or unpaid partnerships and self-employed areas. The overall female labor participation is 7/% and 3% of it belongs to unpaid partnerships and self-employed areas. As far as the premises are concern, more than 58% enterprises are running their business in rented buildings and this is true in urban areas but rural sector, majority of businesses are being operated in their own premises. 9% establishments employ capital (Not included land and buildings) less than one million PK Rs. More than 97% of Pakistan enterprises are earning less than 20 million PK Rs. per years. Although no accurate data is yet available, it is estimated that there are approximately 220,000 SMEs in Pakistan, which: ??? Provide employment to over 80% of the labor force since artisans, workshops, and household units, craft industries, vendors and agro based businesses that cluster around the townships and population centers have a tremendous capacity to provide employment. Contribute more than 50% to GDP by manufacturing products to meet the demands of local and regional markets. ??? Contribute more than 50% towards export earnings through both, direct and indirect exports. Have a default rate that is far less than that of large-scale enterprises. ??? 15% for SMEs, as against 65% for LSEs. Avail credit to the tune of only 12% from the formal financial sector, which indicates the wide gap between the lenders and SMEs. ??? The SME sector also provides both rural and urban women to utilize their vocational skills while staying within residential premises.
In urban areas, many female entrepreneurs have introduced product lines uniqueness has created a strong demand in the market. ??? Today, the SME sector is the lifeline of the big industrial establishments due to its direct contribution and support towards value addition and exports. For the past three decades, the fastest growing export industries have been dominated by SMEs. Of all, cotton weaving and textile rank between the top two exporting sectors. Others include sports goods, surgical instruments, carpets and footwear etc. SME exports dominate low value added sectors and rely on traditional technologies.
FUTURE RESEARCH DIRECTIONS FOR PAKISTAN’S SMEs 1) Research must be conducted to analyze the harmful effects of globalization on SMEs in Pakistan and on the basis research conclusions strategies must be formed to minimize those effects to save the economy from being damaged. 2) Research is necessary to identify training needs of SMEs which may support the institutions. Moreover, at the same time case study should be promoted to see effectiveness of regional programming strategy of key aid agencies, working in Pakistan and make a catalogue of rural SMEs development in Pakistan. ) Research is necessary to identify and make recommendations for priority sectors and sub sectors of SMEs that could be supported and promoted with potential for employment creation and growth in exports. 4) Research agenda needs to analyze the activities of financial institutions particularly banks that are serving rural areas by defining range of financial products. 5) Research is necessary to design operational guidelines providing standards and performance indicators that the Donors, NGOs and Government interventions/program in rural areas should comply with. ) More empirical research is necessary to frame national policy framework strategies, operational guidelines, institution set-up and support network building initiatives for network and support instructions to support strategy. 7) How far we can use ICT related various E-Commerce applications and tools to promote and develop various aspects of SMEs. Especially the SMEs competitiveness improved by using ICT, can be a good area to research. 8) Research on productivity differences in small, medium and large scale enterprises and their various implications are necessary in Pakistan context.
Especially better to explore why is it that small firms still dominating the economic structure even in more developed economies? What is there competitive advantage? Does the dominance of small firms really help in poverty reduction? Or is there a way to enhance productivity growth in small and medium enterprise. 9) The political instability and recent economic recession in all over the world has put impact on SMEs. Research is necessary to find out reasons for this failure area . and to find new framework and model to implement for SMEs rehabilitation. 0) More research can be promoted to see the technology management issues in important SME sub sectors or industry clusters in Pakistan. Especially various business incubator models can be experimented to Pakistan looking at the best practices around the world 11) An applied research project can be promoted to see and effectiveness Pakistan SME apex bodies operational strategies in terms of costs/benefits or impact centers may be right start point for research. REFERENCES Journal article by Pierre-Andre Julien, Andre Joyal, Laurent Deshaies; Journal of Small Business Management, Vol. 2, 1994: Pakistans Small industries entrepreneurs Gallup/BRB World Bank survey Small and Medium enterprises development (A recipe For development and just distribution) A research paper by SMEDA Research cell Small and medium enterprise development( A visionary action in Saudi Arabia) by Ismail Radwan & Jamal al-Kibbi( World Bank Institute) Federal Bureau of Statistics (2004), Economic Census ???2000, Pakistan. Federal Bureau of Statistics Economic Survey 2007???08 Pakistan. World Bank/SMEDA (2007) Investment Climates Survey, Pakistan. World Bank (2007) Survey for SMEs Policy Note, Pakistan.