Lessons from China

Human talent is often trapped by Bureaucratic restrictions. We must devise our policies to reap the benefit of human talent in more entrepreneurial ways. The paper aims to focus on the pressing challenges faced by the Small and Medium Enterprises (SME) sector of Bangladesh. The objective of the paper is to find an answer to the question "What lessons can we take from Chinese SME development for that of Bangladesh?"
Definition of SME: The definition of SME varies from country to country. This paper takes the definition put forth by the National Industrial Policy 2010 into consideration. Any firm employing more than 10 but less than 25 workers is considered a micro-enterprise. On the other hand, if the number of employees remains between 25 to 99, the enterprise is regarded small. A medium enterprise is defined as the one which employs 100 to 249 workers in Bangladesh [1].
Current Status of SMEs in Bangladesh: According to Bangladesh Bureau of Statistics, SME is a substantial component of the manufacturing sector (with 10 or more workers) in Bangladesh comprising 35.5 per cent of employment, 50.9 per cent of the establishments  and 47 per cent of gross value added. Bakht and Basher (2015) argues that "SMEs have been the more dynamic component of the manufacturing sector during 2005/06-2010/11 and accounted for about 4.5 per cent of total employment (i.e. 35.5 per cent of total manufacturing employment) and 12.4 per cent of GDP (i.e. 69.9 per cent of total manufacturing value-addition) in FY11. However, the demonstrated dynamism conceals two important factors.  First, the heterogeneity of the sector. Available research shows that there are significant inter-industry variations in productivity growth within the sector. While some are growing by taking advantage of the liberalised trade regime, some are struggling to thrive in the growing competition. Secondly, despite the demonstrated dynamism during 2005/06-2010/11 the SME sector is facing a number of constraints, which need to be taken care of. Some of these constraints are generic in the sense that they are common to the manufacturing sector while some are specific to the SME."
Government's support structure for SMEs: The government of Bangladesh has taken multiple initiatives to support the SME sector. In 2004, National Task Force on SMEs was formed. A document for policy strategies was for SMEs in 2007. In order to render institutional support for SME as suggested by the National Task force, SME Foundation was established in 2007. SMEs Foundation is now working dedicatedly along with the SME cell of industry ministry to the promote SME sector. With the advent of SME Foundation the, Ministry of Industry, Bangladesh  Small  and  Cottage  Industries  Corporation  (BSCIC) and SME Foundation are now making concerted effort to bolster the SME sector through a multi-institutional approach. Though its inception was in 2007, the SME Foundation is yet to make remarkable progress in promoting SME.  
Lessons from Chinese SME experience: The Small and Medium Enterprises, in other words "Township and Village Enterprises" (TVEs) in the context of China, has shown stellar performance in boosting Chinese economy. China's performance in reducing poverty has intrigued the researchers on understanding the dynamics of growth. The remarkable ascent of China as a global economic superpower has been fuelled by multiple factors.  Economic reform complemented by broad changes in Chinese politics and legal framework expedited the growth.
Though a large number of people are still mired in poverty, China's performance in poverty reduction since 1978 has been outstanding. Yasheng Huang makes a compelling argument that, "the economic growth of China in late 1970's and its poverty reduction for the next couple of decades was a function of rural developments in general." The rural industry, spearheaded by the upswing of township and village enterprises, has contributed to China's takeoff as an economy. Huang (Huang, 2012) also argues that, "Rural private entrepreneurship and financial reforms correlate strongly with some of China's best known achievements: poverty reduction, fast GDP growth driven by consumption (rather than by Corporate Investments and government spending), and an initial decline in inequality."
Along with China's reform and opening-up, China's SME development phase can be characterised in three stages. In 1978, China's initial rural reform propelled the economic growth instantaneously. Between 1978 and 1984, rural per capita income more than doubled and rural per capita consumption registered a 51 per cent increment. Within the first decade of reform China experienced a sharp decline in rural poverty.
Industry information database: The first lesson, we can take from China, is identifying the underdeveloped rural regions and the regional demand for goods and services to explore market opportunities. Identification of regional demand for goods and services will help create required policy support for the specific area. Bangladesh is already working on cluster development for SMEs which has gained much prominence lately in different countries like China, France, the USA.
An essential element of development strategy to boost the SME sector is: collect and analyze the relevant industry-related information. A comprehensive database will enable the SME Foundation to devise and implement policies efficiently. Bangladesh lacks such digitised database both from the perspectives of consumers and providers. SME Foundation can mobilise its resources along with the help of the relevant ministry to prepare a comprehensive database for region-specific information.
Taxation policies: Bangladesh can learn from the preferential taxation policies of China. Like China, the government can design a differentiated tax rate for SMEs to reduce the tax burden from SMEs. Government can also reduce the value added tax (VAT) for small enterprises depending on the annual sales revenue. Such measures require the government to have a clear trace of the annuals sales revenue which will not be easy at first.
l Taxation policies to promote unemployment: China promoted employment through taxation policies. Chen (2006) states: "If a new urban job agency in its first year of operation is able to find jobs for urban residents, of which more than 60 per cent are unemployed workers, the agency is eligible for exemption from business income tax for three years; after the exemption period expires, if the agency is able to find jobs for unemployed workers that exceed 30 per cent of its total jobs found, then it gets 50 per cent discount on the enterprise income taxes for two years."
l Preferential taxation policies: The government can also design preferential taxation policies for enterprises in poor and underdeveloped areas. This will require the government to officially identify poor and underdeveloped areas.
l Taxation to promote welfare enterprises: To promote employment opportunities for disabled people, the government of Bangladesh can also follow it by granting preferential taxation policies to welfare enterprises.  
l Taxation policies for high-tech enterprises: Through taxation policies, China promotes high-tech enterprises which are located in the state-level high-tech industry development zones. Such high-tech enterprises are exempted from enterprise income tax for two years from the year they go into operation. After two years the enterprises enjoy a preferential income tax rate of 15 per cent.
Fiscal Policies: The China government promoted SME industry by taking up various fiscal policies. Especially in 1990's, several fiscal funds were set up with SMEs as targeted beneficiaries. Innovation Fund for Technology-based SMEs, Commercialisation Fund for Agricultural Research Findings, Fund for International Market Exploitation by SMEs etc. are praiseworthy initiatives taken by the Ministry of Finance of China to promote the SME sector.
The SME Foundation of Bangladesh needs such support to boost the SME development. The Ministry of Industry and the Ministry of Commerce and other concerned authorities can work on a detailed plan to imitate such policies to support the SME sector. SME Foundation cannot work independently until it gets the necessary budgetary allocation from the government. Furthermore, resource mobilisation will be a daunting challenge too for Bangladesh.
Capacity Building: Over the time, former State Economic and Trade Commission (SETC) took various steps to bolster the SME industry. From credit guarantee scheme to SME financing, training and development, SETC issued several "Opinion Papers" to elevate the status of SMEs across the society (Chen, 2006).  The SME Foundation of Bangladesh is already imparting training in various arenas. Capacity building and human resource development must be focused as a vehicle to boost the SME sector. Different training programmes should be designed on various aspects of an entrepreneur like business plan writing, account management, tax management, quality supervision etc.  
Technology Innovation: The present government of Bangladesh has created a buzzword named "Digital Bangladesh" in its election manifesto. The government is already embracing the digital revolution taking place around the globe and trying to implement it in public affairs widely. Bangladesh has a lot to learn from China when it comes to science and technology. By the end of 2003, China took a handful of supportive measures to boost the SME sector. China's bold steps to establish over 10 service centres for SMEs and more than 500 productivity promotion centres have provided institutional support for the technological innovations of SMEs. (Xiwei, 2007)
Conclusion: Schumpeter (1934) in "The Theory of Economic Development" underscores the role of entrepreneurs as a prime factor for economic development. Schumpeter (1934) also stressed this development to be achieved through innovation. As Bangladesh marches forward to step into the middle income grouping, it must look for productive employment opportunities for its growing pool of labour force. Government has to adopt an appropriately targeted-policy based on the nature of SMEs. "One size fits all" policy might not work well in the case of SMEs.
Besides, a conducive investment climate is a prerequisite to foster the SMEs. In accordance with legal and regulatory framework and appropriate macroeconomic policies, quality governance must be ensured to set the ground for an investment-friendly environment.
Evidence shows that without government support Chinese SME development would not have experienced such growth. The dominant reason for the accelerated growth of Chinese SMEs is considered as "they adapt themselves to the requirements of the market economy and adjust their development strategy and industrial structure to formulate a healthy mechanism of self-governance, self-determination and self-development, thus boosting their development initiative and dynamism."
Bangladesh can have a similar wave of positive transitions in the SME sector, if lessons are drawn from the Chinese SME experience. A precaution must be taken while drawing such lessons.
Md. Rabiul Islam Rabi is a Research Associate (Academic Wing), Lead to Live Foundation Dhaka, Bangladesh. [email protected]

S M Salim Reza is an Assistant Professor, Dept of ICT, Bangladesh University of Professionals (BUP), Dhaka, Bangladesh. [email protected]

S M Sazid Raihan is an MBA student of School of Business, North South University, Dhaka, Bangladesh. [email protected]

It is a slightly abridged version of the original paper which won the "Best Paper Award" in '4th International Conference on Advances in Economics, Management and Social Study' held in Malaysia in September this year.