ENTREPRENEURSHIP

6/28/2011

FINAL ASSIGNMENT:
The areas covered under this assignment are y y y y Definition of SME Scope of SME Financial and Marketing Problems of SME Managers of SME

SME: AN INTRODUCTION
Small and Medium enterprises is an acronym for SME. SME are a major source of entrepreneurial skills, innovation and employment. One of the significant characteristics of a flourishing and growing economy is a booming small and medium enterprises (SMEs) sector. Small and medium enterprises play a significant role in the economic development of a country in a number of ways namely: y y y By creating employment opportunities for growing labor force Providing desirable sustainability and innovation in the economy as a whole A large number of people rely on the small and medium enterprises directly or indirectly.

DIFFERENCE BETWEEN LARGE ENTERPRISES AND SMEs

Most of the current successful larger enterprises have their origin in small and medium enterprises. SMEs are different from large scale enterprises in three main aspects y y y Uncertainty Innovation Evolution

The SME sector itself can be classified into micro enterprises, small enterprises and medium enterprises. SMEs are the starting point of development in the economies towards industrialization. SMEs have a propensity to employ more labor-intensive production processes than large enterprises. Consequently, they contribute significantly to the provision of productive employment opportunities, the generation of income and, eventually, the reduction of poverty.

SME SECTOR IN PAKISTAN

As stated earlier, SME is the backbone of a flourishing economy. The economy of Pakistan is also largely dependent on its SME sector. In Pakistan, SME come under the authority of SMEDA which can be traced back to the period of 1998. A brief overview of SME sector in Pakistan is given below:

ESTABLISNMENT OF SMEDA
The Small and Medium Enterprises Development Authority (SMEDA) was established in 1998 SMEDA is the flagship organization of Pakistan which is providing the necessary services to help SMEs overcome the weaknesses that are endogenous to their very nature. It is an autonomous body working under the umbrella of the Ministry of Industries & Production and contributes towards the growth and development of SMEs in Pakistan. Government of Nawaz Sharif established SMEDA with great fanfare and pledged to provide Rs. 250 Billion for SMEs in three years. It is a public-private partnership, its board comprising members from each sector. Its functions include facilitating policy making, research and evaluation of matters related to SMEs, monitoring and evaluation, and protecting SME interests.

To get an insight of SMEs, it is necessary to learn some main aspects of SMEDA.

SMEDA: MISSION STATEMENT

To Function As The Promoter And Facilitator Of SME Sector In Pakistan By Creating A Conductive And Facilitating Environment As Well As Providing And Facilitating Service Delivery To SMEs For Enhancing Their Capacities And Competitiveness The mission statement of SMEDA clearly states how it helps SME to bloom in the economy and the services that they intend to provide to them.

SMEDA OBJECTIVES
The main objective of SMEDA is to provide an all time available aid to the SMEs and benefit them where possible. These objectives have been summarized in the following points:

1. Policy formulate to encourage the growth of SMEs in the country and to advise the
Government on fiscal and monetary issues related to SMEs. 2. Facilitation of Business Development Services to SMEs. 3. Facilitate the development and strengthening of SME representative bodies associations/chambers. 4. Set up and manage a service providers database including machinery and supplier for SMEs. 5. Conducting sector studies and analysis for sector development strategies. 6. Facilitation of SMEs in securing financing. 7. Strengthening of SMEs by conducting and facilitating seminars, workshops and training programs. 8. Donor assistances for SME development of SMEs through programs and projects. 9. Assist SMEs in getting international certifications (such as UL, CE, DIN, JIS, ASME, KS, etc.) for their products and processes. 10. Identification of service opportunities on the basis of supply/demand gap.

SMEDA SERVICES
SMEDA is currently offering following services to promote regulate and enhance SMEs in Pakistan. y Consultant Services y y y Training Services Business Plan Division Financial Services

y y y y

Information Resource Centre (IRC) Intellectual Property for Business Success Legal Services Policy and planning

DEFINITION OF SME
SME is stands for Small and Medium Enterprises .However, what exactly an SME or Small and Medium Enterprise are depends on who is defining it. There is no single official definition of SMEs in use in different organizations, both nationally and internationally. In particular, the world of small and medium enterprises is a grey area. Depending on the regulatory authorities or the economic conditions, different countries have defined SME in their own context. In a single market with no internal frontiers, it is essential that measures in favor of SMEs are based on a common definition to improve their consistency and effectiveness, and to limit distortions of competitions. Listed below are some of the definitions of SME in reference to Pakistan.

SME: AS DEFINED BY SMEDA

As approved in SME Policy 2007, Small & Medium Enterprises are defined as follows: Enterprise Category Small and Medium Enterprise (SME) Employment size Up to 250 Paid up capital Up to Rs. 25 Million Annual Sales Up to Rs. 250 Million

This is definition is a revised version of the definition of SME as stated in the SME Policy 2005. Depending on the economic conditions of Pakistan the Federal Government, May further modify this definition from time to time in the light of criteria that define it. All providers of services receiving funding from the Government may define more narrow scopes for specific targeting purposes.

In terms of investment in productive assets (excluding land and building), SMEDA defines SME as:

Enterprise Category
Small Medium

No. Of Employees
10-35 36-99

Productive Assets
Range of Rs. 2-20 Million Range of Rs. 20-40 Million

SME: AS DEFINED BY VARIOUS PAKISTANI INSTITUTIONS

INSTITUTION
SME Bank Punjab Small Industries Corporation Federal Bureau of Statistics Punjab Industries Department Sindh Industries Department

SMALL
Total assets of Rs. 20 million Fixed Investment up to Rs. 20 Million (excluding land and building) Less than 10 employees

MEDIUM
Total assets of Rs. 100 million N/A

N/A

Fixed assets with Rs. 10 million excluding cost of land Entity engaged in handicrafts or manufacturing of consumer or producer goods with fixed capital investment up to Rs.10 million including land & building An entity, ideally not being a public limited company, which does not employee more than 250 persons (manufacturing) and 50 persons (trade / services) and also fulfills one of the following criteria: (i) A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million. (ii) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. (iii) Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

State Bank of Pakistan (SME Prudential Regulations)

SME DEVELOPMENT POLICY STATEMENT

The Government of Pakistan is committed to develop the SME sector for achieving higher economic growth leading to creation of jobs and poverty alleviation. SME development will be achieved by providing conducive business environment, greater access to formal financing and

through provision of support in technical up gradation, human resource development, marketing and innovation. The Government will facilitate establishment of new businesses by developing policies that help in unleashing the entrepreneurial potential of the people of Pakistan

CLASSIFICATION OF SME IN PAKISTAN

SMEs are generally concentrated in selecting activities such as y y y y y y y y Metal working Furniture Agro-based Sports goods Fisheries Poultry Gems and jewelry Food and catering

SME: PRIORITY SECTORS

y y y y y y y y y y y y Gems & Jewelry Marble & Granite Dairy Sports Goods Furniture Fisheries Light Engineering Textile Horticulture / fruits & vegetables Agriculture Business development services Industry and engineering

SCOPE OF SME IN PAKISTAN

The scope of SME is far too vast to be covered. Focusing on some characteristics of SME, its scope may be defined in terms of characteristics, significance, objectives and future prospects.

SME: OBJECTIVES
Objectives are the targets that an organization wants to achieve. Following are some broad objectives of SMEs. y Economic Growth y Economic Development y Poverty Reduction y Employment y Social and economic sustainability

SME: CHARACTERISTICS
SMEs form a world of R&D and innovation that is very much alive and energetic. Successes create instant highs and mistakes are costly. Still, mistakes are inevitable. Turning them into sustainable successes, however, is what matters. SMEs have a certain charm that larger firms do lack. They are personal and owners are passionate about their products and/or services. In larger firms that kind of enthusiasm is usually confined to the R&D department. Although there is no one universally accepted definition of what constitutes a small business, there are several common characteristics: 1. OWNERSHIP: Owned independently SMEs are privately owned by an individual or partners, typically registered as sole proprietorship, partnership as private limited company. 2. MANAGEMENT: Operated independently The business is managed and operated by the owner(s). The entrepreneur or founder of the business leads the company, and acts as both manager and worker. The development of the business is determined by the owner. Decision making is mostly done by the owner. 3. RESOURCES: Relatively small investment, production, sales, dealings etc. A small business often has limited resources. This is especially true for new starts-up due to a lack of track record on the business to convince potential investors and bankers. Thus, it is highly dependent on the ability of the owner to generate resources.

4. ORGANIZATIONAL STRUCTURE: Flat and Informal For a small business, the structure is often flat and informal. The owner has to do almost everything and the workers are normally expected to be able to function as generalists since there is no clear demarcation of tasks.

5. FLEXIBILITY OF CHANGE: The business has more flexibility to adapt to changes in the environment due to its size and informal structure. It is also vulnerable to develop in the business environment. For instance, any changes in technology or government policy might have a great impact on the business because immediate changes normally require additional capital or resources. This might become a constraint to the business to compete and sustain itself in them market. 6. OPERATIONS: No relationship with other firms or parties for   Investment Management, finance, tax, accounting

SME: SIGNIFICANCE
SME produces the income stream for masses located in the countryside and the capitalists associated with this activity that is generally medium or small as the name suggests. Working with SMEs calls for a high levels of discipline and organizational skills. The role and significance of SMEs cannot be neglected. In a country like Pakistan, SMEs are benefiting and supporting both the economy and the labor force in diverse dimensions. Following are some points which will reveal the importance of SMEs. y y y y SMEs are more labor-intensive than large enterprises. SMEs are as efficient as LEs or more efficient than large enterprises. SMEs are more likely to play a higher role than large enterprises. The significance of SMEs is associated primarily with their role in stimulating economic growth. SMEs create employment opportunities as they are labor-intensive. SMEs enhance regional development and create more equitable income distribution. SMEs play a complementary role in relation to larger firms--as suppliers and distributors. SMEs serve as a training ground for developing the skills of workers and entrepreneurs. The presence of SMEs curbs the monopoly power of larger firms. A country can reduce its vulnerability to financial crises by strengthening its SMEs.

y y y y y y

y y

SME s are the backbone of a national economy, particularly in developing countries. SME provide the platform for small & medium entrepreneurs to work as an arm taking of economic and social indicators of a country.

STATISTICAL FACTS RAGARDING SMEs

In Pakistan SME sector is not only the minor sharer till yet, reality is that Pakistans whole economy is highly dependable on the pace and productivity of SMEs. The importance of SMEs can be further highlighted by the following statistical values:

1. PROVINCE WISE DISTRIBUTION OF SMEs

Names of areas
Pakistan Punjab Sindh Khyber pakhtunkhwa Balochistan

SME units
2.96 M 65% 18% 14% 3%

2. DISTRIBUTION OF SMEs ACCORDING TO THE NO. OF EMPLOYEES

Total SMEs units

SMEs employing 1-15 persons SMEs employing 6-10 persons SMEs employing 11-50 persons SMEs employing over 50 persons

2.96 M
2.85M 79,000 26,000 1617

(100%)
(96.6%) (2.67%) (0.87%) (0.054%)

3. ECONOMIC CONTRIBUTION OF SMEs

Employment GDP Value Addition Exports

78% 40% 35% 25%

4. SMEs Share in Sub-Sector

Sub-sectors Cotton weaving Other textiles Metal products Carpets Art silk Grain milling Jewelry Wood and furniture Others % shares of SMEs 13% 6% 7% 4% 5% 16% 4% 10% 35%

SME: FUTURE PROSPECTS:

Adhering to a clear mandate and a logical path to achieve quantitatively verifiable targets, SMEDA carries out comprehensive analyses of international trends, national policies and other macroeconomic factors affecting SMEs in Pakistan for a gradual progress towards the creation of a favorable business environment for its key clients the SMEs of Pakistan. Following is the list of major projects undertaken by SMEDA to be completed in near future:

TEXTILE INDUSTRY
MAJOR PROJECTS

      

Ginning Technology Up-Gradation Program Lending For Power Looms Computer Aided Design Centre (Common Facility Centre-Sialkot) Designing Institute for Garments (Peshawar) Accessories Sector Study Development of Handloom Cluster TEXTILE VISION 2050

TEXTILE VISION 2050 A long term Textile Vision has been created to serve as a broad target to revamp the textile industry of the country. The defined objective is: An open, market driven, innovative & dynamic textile sector which is: * Internationally Integrated * Globally Competitive * Fully equipped to exploit the opportunities created by the MFA phase out And which enables Pakistan to be amongst the top five textiles exporting countries in Asia.

FISHERIES
Major Projects     Program Lending Boat/Engine Modification, Gwadar District Establishment Of Shrimp Farms Fish Processing Facility In Gwadar (Feasibility Study) Joint Ventures and Technology Transfer Arrangements (NWFP)

GEMS
 Five New Gem Mines To Be Operationalized (NWFP)

      

Lapidaries Program Lending (NWFP) Glass & Ceramics Ceramics Kiln Up-Gradation: Common Facility Centre, Gujrat Sanitary Ware & Pottery Sector Kiln Up-Gradation Bangles Kiln Granite & Marble Export Warehouse Marble (Azakhel NWFP) Establishment of Model Quarry and Training Institute Marble Up-Gradation (Hyderabad)

AGRICULTURE/ HORTICULTURE
Major projects  
     

Agri-Mall One Stop Shop for Agriculture Inputs Support Services for Agricultural Credit (SSAC) Establishment of 3 Private Sector Warehousing & Trade Promotion Facilities in Afghanistan
Establishment of Cool-Chain Agriculture Export Processing Zone Fruit Processing Facility (NWFP in Collaboration with EPB) Assistance to Set Up Horticulture Export Board Revitalization of Sunflo Cit-Russ for Citrus Cluster Development Apple Treatment Plant in Balochistan (Co-Ordination with EPB)

ENGENEERING & TECHNOLOGY

Major Projects             Auto parts Design & Development Center, Lahore Light Engineering Services Center, Faisalabad Chilies Processing Facility, Kunri Fruit & Vegetable Processing Unit, Multan Glass Products Design & Development Center, Hyderabad Leather Footwear Center, Hyderabad Foundry Design Center, Lahore Composite Material Development Center, Sialkot Sports Products Design & Development Center, Sialkot AHAN Engineering vision-2020 SMEDA and JICA (Japan International Cooperation Agency) have initiated an Industry Support Program in Pakistan.

SMEDA-JICA INDUSTRY UP-GRADATION PROGRAM

y y y y y Program started in November 2003 Five Senior Japanese Experts working in Textile sub-sectors 49 Factories Visited in Evaluation Phase 147 Factories Covered in Implementation Phase Total Target is to Up-grade 185 Factories in Two Years

PROBLEMS FACED BY PAKISTANS SME SECTOR

Every firm small or medium requires access to capital, better skills, product design, technology and market. But every firm, irrespective of its size, may not have full access to these inputs for various internal and external factors which act as virtual barriers on its working. Another critical issue is that the firms input requirements differ in various phases of entry, survival and growth. Obviously, the nature and extent of inputs required in different phases will vary and would be industry and product specific. So there is a need to identify and analyze the problems faced by SMEs. Some of the major problems faced by SME's in Pakistan are as follow:

1. Access to institutional finance

Pakistan has a fairly developed financial system spread over most of the urban and rural areas of the country. There were 6974 branches of commercial banks, in December 2004. On top of these a number of specialized financial institutions working in support of SMEs: (i) The SME Bank, (established 2002); (ii) Khushali Bank, (established 2000); (iii) The First Micro Finance Bank; and (iv) Network Micro Finance Bank and Rozgar Micro Finance Bank (established 2001). The three types of Micro Finance Banks have the mandate to work nation- wide, province-wide or district-wide with minimum capital of Rs. 500/=, Rs.250/= and Rs.100 million, respectively. All commercial banks have the mandate to provide credit to SMEs and they have their special schemes in place for this purpose. Nonetheless, SMEs are generally found to be short of institutional credit. Financial Problem (lack of Finance) stood out as the major problem of SMEs in Pakistan that requires thorough consideration of concerned counterparts. So they have to rely on their own credit for a number of activities such as upgrading of technology, increase in production, purchase of inputs and better quality materials. In many cases the SMEs rely on personal savings, including financial help of family and friends. Their working capital and investment needs are met from their profit or from purchases or credit and advance from customers. This is particularly true of small businesses which may not even approach centers of financial credit for fear of rejection.SME Policy cannot be successful or properly implemented without cheap and readily/easily available financing. Banks shy away from lending to SME and

as result have put in place strict credit criteria requiring a lot of detail and documentation. The biggest stumbling blocks are the State Bank of Pakistans (SBP) Prudential Regulations and documentation requirements, which the MSEs are just unable to meet. Loaning criteria are very strict besides having a condition of provision of collateral. Banks also demand accounting financial statement before considering application for loan. Thus, the lack of access to capital and credit schemes and the constraints of financial systems are regarded by potential entrepreneurs as main hindrances to business innovation and success in developing economies.

WHY SMES FACE FINANCIAL PROBLEMS?

The difficulties that SMEs encounter when trying to access financing can be due to an incomplete range of financial products and services, regulatory rigidities or gaps in the legal framework, lack of information on both the banks and the SMEs side. Banks may avoid providing financing to certain types of SMEs, in particular, start ups and very young firms that typically lack sufficient collateral, or firms whose activities offer the possibilities of high returns but at a substantial risk of loss. SMEs tend by their very nature to show a far more volatile pattern of growth and earnings, with greater fluctuations, than larger companies. Their survival rate is lower than for larger companies. Thus, SMEs are at a particularly severe disadvantage when trying to obtain financing relative to larger and more established firms. This is a very different set of financial circumstances than that faced by banks when dealing with large well-established firms, so the whole risk assessment is different. Banks and other traditional sources of credit may decide that SMEs represent a greater risk than larger companies, and respond by charging higher interest rates. This makes it more difficult for SMEs to borrow than for bigger companies, and may make it effectively impossible for many SMEs to borrow money at all because the price of credit is too high. If entrepreneurs cannot gain access to finance through the regular system, they may not start up a business or simply go out of business, a potential loss to the economy. But the other danger is that they will abandon the formal system altogether and operate in the informal economy, sidestepping taxes and regulations, and thus not making a full contribution to economic growth and job creation.

SOLUTIONs TO THE PROBLEMs

Pakistans SMEs are still unable to achieve their maximum potential and are in dire need of business support services that can solve their major problems. Following are some solutions in this regard. FINANCING POLICY OF BANKS FOR SME

The banks should facilitate businesses through lending money on easy terms & conditions. This aspect required much more attention because businessmen having small setup deserve facilitation in this respect to run their business operations. The State Bank of Pakistan should formulate a prudential regulation to facilitate the SME sector rather than issuing an advice to banks for providing loans to SME sector without clear instructions. There is a need to make suitable monitory & regulatory policy for SME sector. It is suggested that Banks should provide good financial assistance according to the business requirements besides providing mere facilitation to the SME sector.

ROLE OF SBP AND COMMERCIAL BANKS y The recently established SMEs Division in the SBP should be made responsible for provision of credit to the small firms by including SMEs in the Annual Credit Plan and also apportioning a share for the small within the SME quota. The SBP should monitor the distribution of credit to the SME sector so as to ensure that this facility does not go to the unintended group. The staff of commercial banks should be trained in SMEs operations with a focus on sensitizing them about the contribution of this sector to the economy. They should be trained for SME lending to meet their credit needs on cash-flow basis. The SBP and Commercial banks should develop collateral-free products for the small firms who often fail to avail this facility for lack of assets to serve as collateral. Special financial institutions like SME bank, Agha Khan First Micro Finance Bank and Khushali Bank should be strengthened in terms of increased access to funds and operational effectiveness to ensure credit supply at low interest rate. Financial institutions need to design various tools for the sector's development (e.g. Program Lending Schemes, Credit Scoring, Venture Capital Financing, etc.). Banking institutions, running on Islamic principles, should also provide incentives with interest free financial instruments (e.g. Mudarabah, Murabaha, Ijarah etc.) to this sector. The provincial Small Industries Corporations should not be a part of the financial network for the SME sector as their performance does not justify this role. These organizations should preferably focus on advisory services for the small businesses. Banks to re-focus their financing activities towards the SME sector In loan sanctioning process, banks should put private sector preventatives/stakeholders on board before making any decision.

y y

RECOMMENDATIONS: y y y y y y y y y There is a need to create a favorable business environment for SMEs by eliminating unnecessary obstacles in order to reduce cost of doing business. Government laws which affect small businesses need to be reformed or repealed by policymakers. Introduction of Bankruptcy Laws for SME complaints. There is a need to create a guarantee fund for SME Sector. Awareness for formal financing and good accounting practices amongst SMEs. Need for creating awareness of desirability for and availability of financing facilities. Proper packaging & marketing of SME financing proposals & developing SME financing schemes / products. Making finance available conveniently and speedily. Government has to clearly define the small and the medium on a permanent basis.

2. Marketing constraints
Access to market is one of the problems faced by SMEs in Pakistan as most SMEs still operate along traditional lines in marketing. 48 percentage SME owners found difficulties in marketing and selling their products. This is due to limited knowledge of the SMEs owner about the marketing activities & the marketing strategy developed by non professional people. Mostly SMEs were reluctant higher professional people for marketing activities. No wonder that SMEs do not manage to get a direct share in the export market. One reason Pak SMEs fail to enter export market, and in some cases even upper segments of the domestic market, is their inability to match products with the new trends in demand. Successful marketing of SMEs output is influenced by a number of factors like y y y y y quality of design finished goods skill level raw materials after-sales service

EXPORT BARRIERS FACED BY SMES IN PAKISTAN

There is a need to identify and analyze the problems faced by exporters in conducting product export. There are many challenges that an SME exporter has to face and which influence export performances. Basically two types of main export barriers exist which can be classified as

i. ii.

Internal export barriers External export barriers

Studies show that the 68% of barriers are internal whereas external barriers are 32%. As the weight age of internal export barriers is relatively larger than that of external export barriers for Pakistani small and medium enterprises, it reveals that SMEs in Pakistan face more internal problems as compared to external problems. SMEs have opportunities for export in foreign markets but there are plenty of barriers within the country. Although internal barriers are more controllable as compared to external barriers but all stakeholders should play their roles to minimize these internal barriers in order to magnify the SME exports. This shows that internal barriers are more dominant and influential than external barriers. i. INTERNAL EXPORT BARRIERS Internal export barriers are related to company and product characteristics. Internal barriers include: y energy crises y environmental barriers y marketing barriers y functional barriers 1. ENERGY CRISES contain shortage and high charged prices of electricity, gas and other energy components. An energy crisis leaves industry unable to fulfill orders. High rates of electricity, gas and oil increases the production cost. 2. ENVIRONMENTAL BARRIERS comprise political, economical, social and technological problems of exporting country i.e. Pakistan. Economic problems include poor economic conditions in the country and fluctuating currency exchange risks. In poor economic conditions it is very difficult for exporters to invest as SMEs are always facing lack of funds. Political problems include political instability in exporting country or strict exporting rules and regulations and high tariff, non tariff barriers these issue can shake the confidence of importers and they hesitate to sign a contract. Socio cultural barriers include unfamiliar local business practices and lack of foreign verbal, non verbal languages. Dissimilarity between cultures of host country and export country causes inability to adapt exporting process. 3. MARKETING BARRIERS include problems related to product, price, distribution and promotion.

Barriers related to product include barriers concerned with product like developing new product for foreign markets, adapting exporting product design and style, meeting exporting product quality standards/specs, meeting export packaging/labeling requirements, offering technical/ after sale services. Product which is not according to the customer demand and specifications will cause a failure and less future ordering. Pricing problems include offering unsatisfactory prices to customers, lack of granting credit facilities to foreign customers. In such a competitive scenario, difference in price will eliminate the exporter from competition. Distribution problems includes problems such as difficulty in supplying inventory abroad, unavailability of warehouses, unreliable foreign representations and less access to export distribution channels. Product making is not only the last thing but product should also be delivered to customer otherwise it can impose a bad exporting impression. Promotion problems contain lack of adjusting export promotional activities whereas lack of promotional activities can create unawareness for customers which finally leads to fewer exports. 4. FUNCTIONAL BARRIERS are related to the capacity of SMEs i.e. lack of working capital, production capacity, inadequate personnel. These include lack of managerial time to deal with exports, inadequate/untrained personnel for exporting, lack of excess production capacity for exporting and shortage of working capital to finance export. Due to functional barriers, exporters would not be able to meet the requirements of the buyer. ii. EXTERNAL EXPORT BARRIERS

External export barriers are related to distinctive foreign consumer preferences, unusual business procedures and practices, the imposition of tariff barriers and regulatory import controls by overseas governments, severe competition, exchange rate fluctuations and limited hard currency for international trade. External barriers include y y y Competitive barriers Environmental barriers Procedural barriers

1. COMPETITIVE BARRIERS are the main external barriers. SMEs have to face tough competition from other countries like China, India, and Bangladesh etc as these countries are providing the export product on cheaper rates. So it includes barriers such as severe competition, low prices offered by other countries and good quality products of other competitors. Competitive barriers keep the exporter out of competition and other competitors start dominating. Mostly competitive problems are related to price and quality. Provision of low prices from customers create price competition problem whereas quality problems include provision of high quality products by competitors.

2. ENVIRONMENTAL BARRIERS include political, economical, social and technological problems of host country. Pakistan has been suffering from political and economic instability for the last two decades. This is the major hurdle SMEs are facing in Pakistan with respect to the export activities. 3. PROCEDURAL BARRIERS consist of slow collection of payment from abroad, problematic communication with overseas customers and unfamiliar exporting documentations/paperwork. This can cause dejection in exporter and he will be less inclined towards exports due to the complicated exporting procedure. So our country faces procedural barriers like documentation, quality clearance, late payments etc.

SOLUTIONS TO THE PROBLEM

y Export Finance Scheme: Although in operation since 1972, this scheme was improved to make it accessible to the medium-sized firms with more resources. It provides finance to the exporting firms at two levels: (i) working capital and (ii) loan equal which is provided at a low (subsidized) rate of interest. Effective measures to take the benefits of this scheme to the small firms are highly recommended. SMEs have an option of acting as linkage-partners of the large firms gradually building up their own resource base before becoming direct exporters. Stiffer competition in the market should be responded proactively by SMEs by doing market development Encouragement in establishment of SME sector specific export marketing companies. Grants for developing world-class trade and product directories for major SME clusters. Establishment of SME quota in trade delegations supported by EPB. Compilation and dissemination of data on local markets using manufacturers, distributors and retailers data. Provision of support to SME associations in exploiting local market opportunities by holding domestic product exhibitions. Establishment of Annual SME Awards for recognizing outstanding performance in domestic and International markets, technology innovation, HRD practices, etc.

y y

y y y y

OTHER PROBLEMS: 3. Access to technology

The SME, in particular the small industries of Pakistan, are known to rely on low and obsolete technology. Associated with this is the lack of technical skills needed for producing quality products. There is a general absence of information on opportunities for technological up gradation. This drawback acts as a major barrier on road to knowledge-based modern economy. A part of the problem is linked to the inability of SMEs to acquire sophisticated equipment and

R&D facilities. This is manifested in adoption of labor-intensive production methods associated with lower productivity levels and overall economic efficiency. A typical Pakistani small firm used indigenous machines of old-vintage and relies on traditional productions methods for survival. They end up producing low-quality, low-priced products and sell it accordingly.

4. Shortage of skilled labor

Like all less resourceful firms, the SMEs typically have skill deficiencies and are unable to compete with larger firms better-qualified manpower. Inter-firm transfers of skilled labor is a usual phenomena directly influenced by relative wage levels. In this game the larger firms have advantage over SMEs, especially in a situation of skill shortages as is occasioned in Pakistan as a result of out-migration of labor to Middle East and other countries. It is worth nothing that, contrary to the common perception, there is a hierarchy of skills within each category e.g. (mason, plumber, and electrician) as per the skill level and they are paid accordingly. As a matter of fact, an excellent worker would get a premium wage from a larger firm which a SME may not find it feasible to pay. So a smaller firm may be out competed because of limited funds despite its need for high skilled workers.

5. Lack of Managerial expertise

Management skills and organizational structure are closely linked across all sizes of firms. The managerial ability influences the performance of the firms. It has been recorded in a number of studies that the economic performance of SMEs of Pakistan is being negatively affected by the insufficient managerial skills, especially of the small firms. The foremost cause of low management skills of SMEs is the low educational and professional training of the business managers. In particular, SME managers are found deficient in bookkeeping, marketing, cost accounting, stock management, production scheduling and quality control. The managers are unaware of the importance of assets valuation and in some cases even adopt personalized management style, all resulting in low economic efficiencies. So the lack of trained higher management and qualified managerial personnel acts as a binding constraint.

6. Adverse government policies:

The problems of dealing with government regulations and tax authorities weighed more heavily on smaller firms in the shape of higher compliance costs i.e. fixed costs of complying with import/export and tax regulations, labor market regulations and licensing and price controls. There are there areas of regulation that impose binding constraints on SMEs growth which are y y y Taxation Trade policy and procedure Law and order

7. Inadequate infrastructure:

Pakistans underdeveloped physical and social infrastructure creates a binding constraint on SME growth. SMEs rely heavily on inefficiently provided state infra-structure and cant afford the fixed cost of developing any alternatives. The main constraints faced by SMES in manufacturing include: y y y The high cost, poor service quality and unreliable supply of power An inefficient transport network that is unreliable and costly to use Corruption

MANAGERS OF SMES:
The creation and development of SMEs are fundamental to create employment and to further economic growth. This means ensuring the competitiveness and growth possibilities of already existing enterprises as well as supporting the creation of new ventures. We thus need to ensure that SME managers are equipped with the skills they will need to successfully run and develop their companies in a complex world. SME managers have access to quality programmes, having a direct positive impact on the profitability of the firm. Thus management training is required to develop the skills of managers.

MANAGEMENT SKILLS:
Creativity ability to search and find new solutions Intuition be able to predict future development from own experience without analysis Goal-oriented be able to set real goals and respect the goals hierarchy Responsibility sense for achieving set goals and objectives Self-confidence belief in own strength and ability to achieve goals Initiative an effort to look for new possibilities and solutions for reaching set goals Independence the courage to make decision based on own judgment Cautiousness be able to make decision under stress and unsure conditions Scrupulosity - support social values and norms Discipline self-control and regulation of own behavior Persistence tenacity needed to overcome barrier when achieving goals Optimism orientation towards positive goals and things in connection with faith in success Fantasy creation of visions and imaginations about future.

Every man has hidden potential of certain kind inside. It is important how one can utilize this potential. SME manager needs to use and influence behavior of people around to reach the goals of the enterprise. In doing so SME manager use the managerial functions planning, organizing, leading and control; while playing the following roles in the enterprise:
INTERPERSONAL ROLES Figurehead, Leader, Liaison INFORMATION ROLES Monitor, Disseminator, Spokesperson DECISION MAKING ROLE Entrepreneur, Disturbance handler, Resource Allocator, Negotiator.

In fulfilling their duties managers use managerial skills. These skills directly affect the results of the manager, but they can be learned and gained by training. The criteria for dividing the skills can vary but these are considered to be the basic managerial skills, which are needed for an effective managerial work:

TECHNICAL ability of SME manager to use specific methods and techniques in doing the
managerial work. However these technical skills are not related to technology, such as skills of engineer. The technical skills for managers represent the usage of methods like break even analysis in planning or ability to prepare for and conduct a structured interview. INTERPERSONAL people are most valuable resource of any enterprise and SME manager needs to know how to lead people. Abilities include motivation of workers, solving work conflicts, communication and working with people. Therefore interpersonal skills are essential on every level of management.

CONCEPTUAL

these skills are must for middle or top manager. This is the ability to

grasp the whole picture. See the organization as one whole intertwined with the surrounding environment with the relevant priorities and important issues.

COMMUNICATION SME manager needs information for decision making. Ability to

disseminate and receive information is thus important tools for manager. It is not only verbal communication, but the manager should be able to distinguish non verbal signals, mood and feelings to filter the right information.

MANAGEMENT TRAINING:
Upgrading the skills of all types of workers, including managers, is central to firm performance in knowledge-based economies. The quality of management is particularly important for small and medium-sized enterprises (SMEs), which must be able to adapt quickly to evolving markets and changing circumstances, but which often have limited resources. Such constraints also put limits on their ability to engage in training, even though studies indicate that there is a positive correlation between the degree of management training and the bottom-line performance of an

SME. There is preliminary evidence that formal management training can reduce the failure rates of small firms, which are far more likely to fail than larger firms, particularly in the early years. For a variety of reasons, smaller firms are less likely than larger enterprises to provide external training to all grades of workers, including managers. In addition to financial constraints, information gaps make smaller firms less aware of the benefits they would obtain from management training and few see training as a strategic tool. Due to higher turnover in managerial staff, small firms may not realize the same benefits from training investments as larger firms. And since training providers must group a number of SMEs together to realize scale economies, such generic training may be of more limited value to a small firm than to a larger firm receiving more targeted courses. For these reasons, and to realize the social benefits from high-performance SMEs, SME management training must be enhancing.

OBJECTIVES OF MANAGEMENT TRAINING:

The objectives of management training can be listed as: 1. Knowledge acquisition 2. Change in attitudes 3. Problem solving skills 4. Interpersonal skills 5. Participant acceptance

RECOMMENTATIONS FOR MANAGEMENT TRAINING:

Differentiate between training for start-ups and counseling for established SMEs. Teach management skills such as flexibility and teamwork needed in the current business environment. Target training to specific groups of managers, such as new entrepreneurs exporters. Provide training at local levels and reasonable times for small-firm managers. Make greater use of electronic delivery of training through the Internet. Foster entrepreneurship through the general educational system.

TRAINING PROVISIONS FOR SME MANAGERS:

There is a low level of management training directed specifically at SMEs. This is particularly the case for micro firms. Training provision suffers from defects of content, access, flexibility and cost. Trainers often lack experience in SMEs. SMEs are also concerned about quality of training and getting information about training. In terms of delivery of training, the majority of managers want training at their request. They has preferences for short courses, group work and one to one advice or mentoring. However, there is a variety of demand determined by the nature of the firm and the character of the manager. A variety of provision needs to respond to this. There is a lack of use of ICT for training among managers. There is also a lack of appropriate material available in ICT form. Furthermore, there are concerns over quality and relevance of existing material. Managers have some negative opinions about ICT for training and there is a lack of knowledge about the technology and techniques of ICT based learning. This is partly a reflection of the still undeveloped state of ICT supported training, where good practice has yet to be fully developed. Recognized good practice in training of all groups with ICT support involves a balance of human interaction and ICT elements. The former has been underestimated in the entire domain. This element is particularly important to the SME manager, and has been a major reservation in taking up ICT supported training.

METHODS OF TRAINING:
Selection of training depends on the job and its skill requirements. Therefore choosing a training program depends on the nature of operation. 1. In house type methods such as those which place the trainee to work closely with someone who is more experienced in the job or place the trainee on someone else position to do his job. 2. Outside type methods such as lectures, seminars, workshops, conferences, and participation in management games and role play.

WHAT TYPE OF TRAINING MUST BE GIVEN TO THE SME MANAGERS:

1. Training must be strategic in nature. 2. Training must be relevant to the specific needs of the organization. 3. Training must be problem based. It must be designed to fill the gaps between what people can do and what they need.

4. Training must be action oriented and enables the trainees to make things happen immediately. 5. Training should be directly related to the performance requirements. 6. Training is not something that is provided to the people by the organization at the start of their career. It is a continual process with less emphasis on formal instructions and increased requirements for the trainees to be responsible for their own learning.