A strategy for sustained SME development

The central focus of a strategy for SME development in Bangladesh should aim to facilitate emergence of a SME Sector that is entrepreneurial, innovative, outward-looking, competitive, and resilient. The SMEs (small and medium enterprises) should be able to transform themselves into world-class enterprises by building capacities to participate in the international production networks and/or global value chains. This requires SME upgrading in important areas such as managerial know-how, technology, and productivity. In the present Bangladesh context, this poses difficult challenges as the sector is characterised by extreme heterogeneity. At one extreme the sector is overwhelmingly dominated by micro enterprises operating in the rural areas as informally organised units with limited access to finance and markets. At the other extreme, there are SMEs that are keen to improve productivity and innovative capacities to meet increased competition in the national and global markets. Under the circumstances, the process of capacity building and upgrading of the SMEs to help achieve the national goal of faster and sustained growth has to be based on multidimensional approaches, reflecting diverse promotional needs of the wide spectrum of entities comprising the SME sector as outlined next.
BLUEPRINT AND ACTION PLAN FOR A HOLISTIC SME DEVELOPMENT STRATEGY: The general pattern characterising the size, structure, and functional characteristics of the SME sector in Bangladesh is dualistic. The majority of the SMEs are currently absorbing a great deal of employment, significant work sharing with low capitalisation, low productivity, low levels of technology and low competitiveness. On the other hand, there exists a relatively small but dynamic SME segment with higher productivities and greater capabilities to participate in production networking and compete for greater market shares and hence potential higher prospects for sustained growth.
In this backdrop, the national SME development strategy should be based on a twofold approach. The first is the "Competitive and Dynamic Pathway" where SMEs are poised to strengthen their competitiveness through technological upgrading, innovations, exports, and integration into regional and global supply chains.
The second is the "Inclusive Pathway" in which the SMEs increase their capabilities through greater access to financial and business support services to outweigh disadvantages resulting from restricted access to resources and markets. Typically, the entrepreneurs (existing as well as new start-ups) in the second category are relatively small, resource-strapped, and use low levels of technology. A key to SME development through the inclusive pathway is to create an enabling business environment for all sizes of enterprises. A combination of at least four integral factors must exist to make up for the relative disadvantages faced by the SMEs falling in this category:
a) Reduction of entry barriers (and related costs for new business)
b) Sufficient and smooth cash flow to SMEs
c) Strengthening of entrepreneurial growth through education and training
d) Strengthening of networking and information dissemination
The reduction of disadvantages faced due to scale barriers by the SMEs in accessing inputs such as financing, skilled labour, information, technology and management skills can also be further eased by SME cluster development. Cluster can be used as a handy mechanism for collective actions by the SMEs to achieve economies of scale in the service delivery provisions. Again, linkages with local and export markets can also be established at lower costs through desirable strategies for mitigating the problems of low productivity and low product quality and standards in the micro size structures of the SMEs.
MAJOR POLICY SUPPORT ASSISTANCE REQUIRED TO IMPLEMENT THE TWIN PATHWAYS: Government support policies can take broadly two forms: (i) direct support to facilitate SME capacity building and upgrading, and (ii) indirect support to create strong and sustainable institutional environments conducive to SME growth in both of the strategic pathways. Major policy support in the competitive and dynamic roadmap for SME development may include the following:
a) Develop technological and managerial human resources needed for SMEs to upgrade and modernise
b) Develop institutions to expand SME financing (including venture capital, angel investments etc.) to make necessary investments for technological breakthrough and strengthen innovative processes
c) Strengthen sustainable institutions to ensure SME access to various business development services
d) Reduce bureaucratic red tapes and costs in investments, taxes, customs, licensing, and other business development activities
e) Improve physical connectivity, transport and communication infrastructure, and logistic sources to reduce costs to perform delivery functions
In the inclusive SME development strategy, the central role of Government is to ensure level playing field for the SMEs. A favourable and neutral policy and regulatory environment is the key to success of this strategic roadmap. Detailed policy support measures may include the following:
a) Provide basic managerial support for the SMEs to enable them to have better access to credit
b) Develop institutions to reduce risks and to ease barriers to SME financing
c) Enhance supply of entrepreneurial human resources for SMEs, especially cheaper, faster start-ups
d) Promote collective actions (clustering, economic zones, etc.) by small enterprises in the rural and urban communities to help overcome the disadvantages of smallness
e) Enable SMEs to successfully bid for government procurement deals
f) Enhance SMEs' capacities to access wider and new markets at local, regional and global levels through promoting subcontracting, production networking, and value chain linkages
g) Encourage formation of various public-private and business to business partnerships within and between countries to enhance SME competitiveness
The two strategic approaches suggested are not mutually exclusive. Their successful implementation for sustainable SME growth in Bangladesh needs a cross-cutting strategy that touches upon six key areas, such as scale-neutral business environment, financing, technology and innovation, human resource development, business development services, and market access. An integrated policy mix such as this needs to be implemented by a strong, efficient, and sustainable institutional network. It is also important to draw lessons from "international best practices" used successfully by many of our neighbouring Asian countries such as India, China, South Korea, Vietnam, Malaysia, Thailand, and Philippines, especially towards promoting competitive, innovative, and resilient SME sectors as strong drivers of national economic growth.
Momtaz Uddin Ahmed, Ph.D. is Professor, Department of Economics, University of Dhaka.
 ahmed_1947@hotmail.com