The present government in the current National Budget reaffirmed its commitment to boosting the role of the Small and Medium Enterprises (SMEs) within the economic periphery of Bangladesh. In particular, it aimed to provide VAT exemptions to firms whose annual turnover remains below Tk70lakh (Tk7m). This is a positive initiative, given SMEs can play an instrumental role in the economic transformation of nations. Thus, in this note I aim to discuss some of the key insights that emerged from a recent research at the Policy Research Institute (PRI) of Bangladesh on the state of manufacturing SMEs, so that policymakers can better understand the issues pertinent to the development of a strong SME sector in Bangladesh.
To start with, lack of data and quality research is a serious constraint to evaluating the performance of SMEs in the manufacturing sector of Bangladesh. The findings reported here are based on the best available information, which (nonetheless) remains outdated and needs serious revisions before one can pinpoint policies that can be of any use. The best available data on this sector is derived from the Economic Census of 2001/03, which is detailed out in Table 1. The manufacturing enterprises reported here is all-inclusive; especially it includes all micro-enterprises (employing less than 10 workers) in the manufacturing sector.
From Table showed in picture, a number of interesting results emerge:
I) the bulk of total manufacturing enterprises (over 93%) are micro-enterprises employing less than 10 workers. A mere 5% are small, 0.5% are medium and 0.8% are large.
II) Of the total manufacturing sector employment in 2003, 40.4% were employed in micro-enterprises, 13.1% in small enterprises, 4.2 % in medium enterprises, and 42.3% in large enterprises. This is an interesting result in the sense that large enterprises accounting for less than 1% of total manufacturing enterprises still employ 29% of the manufacturing labour. On the whole, Table 1 highlights that for us to adopt an economic strategy that is capable of promoting inclusive growth, fiscal and monetary policies must be tailored to the needs of SMEs in Bangladesh, given the sector accounts for approximately one-fifth of all employments available within our economy (some estimates also suggest that the sector employs 70-80% of the non-agricultural workforce).
The question that then emerges as important is how can current and future policy makers pinpoint exact economic policies that can be instrumental in fuelling the growth of SMEs in Bangladesh? In this context, it must be stated that a two-fold approach is required if we intend to undertake a meaningful intervention. First, we need to:
• Develop a proper baseline data on the structure of SMEs. As a minimum, this baseline data must include such important characteristics as output, product mix, value added, capital stock, employment, product market (domestic versus exports), investment and technology.
• The baseline data must be updated on an annual cycle.
• Undertake a solid diagnostics of the key constraints based on the baseline data.
• Explore possible ways to link SMEs with domestic and international manufacturing value-added chain.
• Analyse the role of regulatory policies, trade policies; financial sector policies; technology; skills, infrastructure supply, etc for aiding the sustained growth of SMEs.
• Explore options for attracting direct foreign investment in the SME sector.
• Conduct research on sound institutions for supporting SMEs.
These measures will allow both knowledge creation and policy formulation essential for a dynamic SME sector in Bangladesh.
Second, policymakers must pay attention to the lessons that one can draw from international experiences. Our research at the PRI suggests that the performance of SMEs in terms of contribution to GDP, exports and employment is far below those achieved in the dynamic East Asian economies. A detailed review of cross-country experiences as well as case studies shows the potential of SMEs for development. The potential of SMEs in economic development is best demonstrated by the examples of Japan, Korea, Taiwan, Malaysia and China. SMEs have contributed admirably to employment, investment, value-addition and exports in these countries. Importantly, they have played a profound role in helping the emergence of a modern manufacturing sector in the concerned countries.
Taiwan is perhaps the best example of fostering industrialisation and development through SMEs. The SMEs made up 98% of manufacturing in 1997 and provided most of the manufacturing employment. In particular, the Taiwanese bicycle sector has been cited as an industry that has been dominated by SMEs and has been relatively successful. The sector began to grow under the import substitution policy of the ‘70s and in response to large export orders from the US around 1972; various SMEs were able to start up and emerge. As such a network of bicycle assemblers and parts producers were established due to the economies of agglomeration. The industry has been further assisted by government industry-promotion policies such as setting up and checking product and export standards and subsidising R&D among other things. The bicycle industry is a good example of what a SME-dominated sector can achieve, when there are a right mix of policies and circumstances allowing a sector to flourish.
In Japan, some 26.7% of exports originate from SMEs, which make up 99% of manufacturing sector. In addition, SMEs in Japan have played an important role as subcontractors, whereby large firms rely on SMEs to supply parts and other components. These linkages are predominant in the manufacturing sector. Existing research points out that the competitiveness of Japanese automobile, electronics, and other machinery production can be credited to some extent to an efficient sub-contracting system involving the SMEs. Efficiency for industries such as textiles, general machinery, electric machinery and automobiles has also increased.
Within the economic domain of Malaysia, SMEs accounted for 89.3% of all firms in the manufacturing sector in the year 2000 and contributed 29% of total manufacturing output, 26% of value added, and 32.5% of employment in 2003. Furthermore, the value-added production from SMEs is projected to reach around 50% of total production in the manufacturing sector by 2020. Malaysia has faced a significant increase in total output due to an increase in local and export demand for electrical and electronic products and for machinery and equipment.
Finally, as of 2006, China had around 39.8m SMEs, accounting for 50% of the country’s asset value, 60% of the turnover and a remarkable 60% of its exports. They further accounted for 40% of the country’s GDP. China has also witnessed the development of SME clusters, which maximises regional accessibility in production and marketing through joint ventures, cooperation and alliances. A specialised division in the cluster can help the enterprises to supply the consumers with diverse products and also reduce business expenses by creating a commercial network and using greater regional access to the SMEs advantage. Most of the enterprises combining together in the SME cluster are manufacturing enterprises. Higher economies of scale result from this venture – provinces of Zhejiang and Guangdong are instances of areas whose growth has been fuelled by such clustering. This, to an extent is reflected in concentration of SMEs by region (see Figure 1).
These data are illustrative of the much more dynamic role of SMEs in these countries as compared to Bangladesh.
To sum up: what are the main lessons for Bangladesh that one can draw from international experience? In view of the definitional differences where a small enterprise in one country is a large enterprise in another, it is difficult to aggregate all experiences for use in Bangladesh. Nevertheless, there are areas of experience where the policies and principles are applicable to Bangladesh’s context. Seen from this angle, several important lessons emerge. These include:
• The production sharing partnership agreements between large and small enterprises in Japan, Korea and Malaysia suggest a pattern of manufacturing development that merits serious attention of policy makers in developing countries including Bangladesh. This partnership has been particularly helpful in supporting the exports of SMEs.
• SMEs have been a fertile ground for learning and technology transfer, especially in China and Malaysia through strategic production sharing agreements with international firms. This is a major finding that has important policy bearing for Bangladesh. Getting connected to the international vertical production chains can provide a major impetus to upgrading SMEs in Bangladesh. This will also allow Bangladesh to entertain a diversified export base, which is fundamental for creating a resilient economy.
• A range of targeted support programmes (bicycle sector in the case of Taiwan) could be helpful in developing SMEs. These include programmes for financial support, technology transfer, skill development, industrial zones, and fiscal incentives.
• Institutions are very important to foster the growth of SMEs. These include dedicated government agencies and supportive legal framework. Japan’s experience is particularly illustrative of how strong institutional support can guide the development of SMEs.
• Monitoring and evaluation of performance of SMEs is essential. This is necessary in order to understand the constraints and gear public policy accordingly. It is also necessary to evaluate if the support programmes are achieving their intended objectives. Again, Japan’s experience in this regard is particularly instructive. Updated database on basic structure of SMEs and performance indicators is necessary to determine how SMEs are performing.
On the whole, the review of international experience with SMEs suggests that these enterprises have the capacity to boost inclusive development, especially in labour-intensive low income countries. Nevertheless, this requires sound policy and institutional support, and is unlikely to occur in an automatic or accidental manner.
The experience with SMEs in Bangladesh reveals that the country, till date, has fallen short in exploiting this avenue for fostering economic development. Moreover, given there is an acute shortage of a proper diagnostic research about the nature of the sector in Bangladesh and its major constraints, primarily due to the lack of availability of data, it remains beyond the scope of policymakers to pinpoint exact policy framework capable of creating supportive conditions for this sector.
In the absence of such knowledge, a prudent strategy is to meticulously isolate international experiences, some of which are summarised above, that can in principle transfer over to the Bangladesh situation.
Dr Ashikur Rahman is Senior Economist at Policy Research Institute.