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Banking > features> Small & Medium Enterprises                                      click here for Part II of the feature



Small and Medium Enterprises (SMEs): Issues in the changing global economic environment
- Dr B. Yerram Raju

[Dr Raju is Dean of Studies & Senior Faculty Member at Administrative Staff College of India at Hyderabad. He is foremost authority on Development Banking in India & is in advisory group of banknetindia.com]


Introduction

There is a growing recognition worldwide that small and medium enterprises (SMEs) have an important role to play in the present context given their greater resource-use efficiency, capacity for employment generation, technological innovation, promoting inter-sectoral linkages, raising exports and developing entrepreneurial skills. Their locational flexibility is an important advantage in reducing regional imbalances. The future of SMEs is of major policy concern given their strategic importance in any discussion of reshaping the industrial sector. This is more so in the case of India, which has one of the longest histories of government support to the small-scale industrial sector since independence compared to most developing countries.

Definition

In the Indian context, we have not so far defined medium enterprises clearly. What is neither small nor large is being loosely defined as medium. Further, enterprise encompasses businesses, services and industries. In the broadband of ' small', the discussion extends to medium as well. Another possible connotation for the SMEs is the small manufacturing enterprises.

Small and medium enterprises, both in size and shape, are not uniform across the globe. This asymmetry comes in the way of any effort of their integration. The way they are defined depends on the stage of economic development and the broad policy purposes for which the definition is used. According to a World Bank study, there are said to be more than 60 definitions of small and medium industries used in 75 countries surveyed (cited in Kim Seung Jin and Suh Jang-Won, 1992, 9). The most commonly used definitions relate to either size of employment and/or quantum of capital investment /fixed assets. As the process of economic development leads to changes in industrial sector shares in GDP and the contribution of sub-sectors within industry, the definition is extended to include not only manufacturing industries but all enterprises which fall within or below the defined cut-off point. In the ASEAN countries in general, the definition is restricted to SMIs in the manufacturing sector only, whereas in the OECD group, the definition is broadened to include all Small and Medium Enterprises.

In India, small-scale industries (SSIs) were given due importance in the process of industrialization as far back as 1951 when post-independence economic planning was initiated. The Industries Development and Regulation Act legislated by the Centre in that year, became the framework for the small-scale industrial sector's development. The Act determined licensing policies for the sector and the reservation of products, among several other important provisions. The definition of small-scale industries is mainly in terms of investment ceilings which have changed over the years to keep pace with economic development. Though employment and turnover are also used to define small industries, as these indicators are implicit in the requirement for registration under the Factories Act, the core definition of SSIs in India remains based on investment limits - "historical costs of plant and machinery."

Therefore, the contribution of SME sector to the GDP in different countries is not on comparable parameters. Still, in both developed and developing economies, they were accorded special status, specific dispensations and particular attention. Although the broad canvas of "enterprise" suggests that we look at the contribution of both industry and trade, more particularly exports, in the growth of GDP, lack of separate data on SME's contribution in the developed economies like the US, Canada, Japan and Germany restricted the scope of this paper to having a look at some policy interventions in ASEAN and OECD economies.



In second part of this feature
, read about scenerio of the Small Scale Industries (SSI) Sector in India. This is six part feature and will also cover problems facing SSI, impact of WTO & future outlook.


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