Policy Brief Strategies for Entrepreneurship Development in Bangladesh: Unleashing the Potentials of SMEs Prepared by: Khondaker Golam Moazzem Senior Research Fellow, CPD 28 July 2008 B A N G L A D E S CENTRE FOR POLICY DIALOGUE (CPD) a c i v i l s o c i e t y t h i n k - t a n k House 40/C, Road 11, Dhanmondi R/A, Dhaka 1209 Tel: 9141734, 9141703, 9145090; Fax: 8130951 E-mail: [email protected]; Website: www.cpd-bangladesh.org
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Policy Brief
Strategies for Entrepreneurship Development in Bangladesh:
3. SMEs in Bangladesh: Composition, Trends, Policies and Institutions 6
Composition
Trends
Gross Output, Value Added and Profitability
Policies for the Development of SMEs in Bangladesh
Institutional Set Up for SME Development
4. Major Challenges Confronting SMEs 16
5. Entrepreneurship Development in Bangladesh 21
6. Actions to be Taken for Entrepreneurship Development 26
Actions to be Taken at Domestic Level
Actions to be Taken at Regional Level
Actions to be Taken at International Level
7. Conclusion 32
2
1. Introduction
The economic development of Bangladesh in the last three decades is the resultant effect
of structural change in the economy leading towards considerable growth of the
manufacturing and service sectors, various reforms of domestic economic policies,
changes in international policies, and in this process the emergence of a group of
entrepreneurs. During this period, GDP growth doubled from a mere 3.7% in the 1980s to
more than 6% after 2000, with Bangladesh now ranked 33rd out of 191 countries (in terms
of GDP). However, because of its huge population (150,448,340), Bangladesh is ranked
8th out of 191 countries (in terms of population), and is consequently regarded as one of
the poorer countries (150th out of 191 countries in terms of per capita GDP). On its path
towards economic reform, the economy has gradually been liberalized over the last three
decades, and it has been integrated into the global economy - in 2007, the degree of
openness (international trade as % of GDP) reached 43.3% compared to 16.8% in 1991
and 13.5% in 1981. The degree of global integration, as measured through the external
sector including FDI and debt accounts in relation to GDP, was 55.6% in 2007 compared
to 21.2% in 1981. Global market forces therefore affect most economic activity, which
needs to be taken into consideration when formulating policies and action plans.
Against the backdrop of a huge population, an abundance of low and semi-skilled
workers, and large-scale unemployment, the government’s major development objective
is to create more employment in order to secure incomes and thereby reduce poverty.
Because of the structure of small and medium enterprises (SMEs) in Bangladesh, which
are mainly labor-intensive and low-skill, the development of SMEs is considered to be
the most effective contribution to the eradication of poverty. 1 According to BBS, there
were about 78,300 SMEs operating in Bangladesh in 2003, in which roughly 3.5 million
workers were employed. However, despite their broad dissemination, SMEs in
1 According to SME Policy 2005, an enterprise with capital (replacement of plant, machineries etc. and associated technical services excluding land and building) up to Tk.15 million (about US$215,000) is regarded as a small enterprise, and with capital up to Tk.100 million (US$1,433,000) as a medium enterprise. In the case of non-manufacturing units, enterprises with less than 25 workers are considered to be small, while those employing between 25-100 workers are considered to be medium sized enterprises. In view of reducing the variations in operational definitions applied by other organizations including banks, the government has recently announced a new definition for all operational purposes.
3
Bangladesh could not fulfill the critical role of entrepreneurship development and thereby
contribute to the faster industrialization of the country. The objectives of this policy brief
are to identify the major challenges confronted by SMEs; to explore possible
explanations for entrepreneurship development in the case of successful SMEs; and
suggest an action plan for unleashing the potential of SMEs.
2. Literature review
Small and Medium-sized Enterprises (SMEs) play a pivotal role in terms of economic
growth, employment generation, and industrialization (e.g. through entrepreneurship
development). Although the role of SMEs varies at different stages of economic
development, their role is particularly important in developing countries and LDCs. Beck,
Kunt, and Levine (2005) have found a strong correlation between SME development and
GDP per capita, but the relationship between growth and the overall business
environment for SMEs overshadows the former relationship.
SMEs need low capital investment per unit of output and give rise to greater
opportunities for direct or indirect employment. In a positive environment, SMEs offer
sustainable business solutions that simultaneously fight poverty and accelerate economic
growth (Agbeibor, 2006). In developing countries, SMEs traditionally play an important
role with respect to poverty alleviation, while at the same time contributing significantly
to economic growth as the development initiatives targeted at them create jobs and
increase productivity (Agbeibor, 2006).2 For developing countries or LDCs, the problem
of rural unemployment, which results in an unhealthy rural-urban migration, can be
solved through SME development in rural areas.3 Rural SMEs generate significantly
more jobs than urban SMEs. This indicates a different relationship between SME growth
and employment generation in different geographical environments (North and
Smallbone, 1996). 2 SMEs are also considered as the backbone of the European economy and are the best potential source of job creation and economic growth (Verheugen, 2006). In Japan, some 70 per cent of Japanese workers are employed by SMEs and half the total value added in Japan is generated by SMEs (Lichiro, 2006). 3 Carl Liedholm, Michael McPherson and Anyinna Chuta (1994) showed that the percentage of job growth coming from enterprise expansion in rural areas is significantly higher than that of urban areas in Africa.
4
Small and Medium-sized Enterprises are the seeds for a vital entrepreneurial economy. In
many economies, SMEs nurture large-scale industrialization through entrepreneurship
development. One of the hypotheses on the role of SMEs in the course of economic
development is their vertical and horizontal expansion over time in large-scale
industrialization by fostering entrepreneurship (Juneja, 2000).
Global experiences show that an efficient SME sector is conducive to fast industrial
growth (Hill, 2001). Llyod (2002) analyzed the South African SME sector over the 1980
to 2000 period and found that expanded small businesses were playing an increasingly
important role in the manufacturing, construction and trade sectors in South Africa, but
their role was declining in the agriculture, transport and storage sectors.
However, the poor performance of SMEs in terms of growth, product diversity, and
expansion of markets, indicates that SMEs could not reach the expected level. More
importantly, unlike in many economies, SMEs in the current environment lack the
capacity to nurture the process of large-scale industrialization through vertical and
horizontal expansion by fostering entrepreneurship (Hal Hill, 2001). It is extremely
important to analyze the possible reasons for this lack of entrepreneurship development
through SMEs and investigate successful entrepreneurs and the possible causes of their
success in order to provide policy suggestions for the development of the sector.
Although SMEs play a vital role in any economy, they are very vulnerable to the effects
of globalization in the absence of some economic criteria. For example, under the
avalanche of low priced Chinese product’s imported in Japanese, Korean and Taiwanese
markets, the SMEs of these countries adopted different strategies: some firms relocated
plants to the Chinese mainland, some exited the market, others protected their market by
switching to more capital intensive technology so as to produce more differentiated high-
tech products (Croix, 2006). These countries have the capacity to overcome their
vulnerabilities by adopting different strategies while developing and least developed
countries often lack the capabilities to facilitate such transformations.
5
The degree of vulnerability is very high in most developing countries and LDCs in the
absence of sound business environments and the existence of weak business strategies.
Moreover, SMEs in developing countries are vulnerable to international trade due to their
comparatively low productivity and lack of competitiveness (Deshaies and Julien, 1994).
The countries that are better prepared in terms of solid business environments and
strategies can reap the benefits of globalization by scaling up their SMEs to large-scale
industries.
One of the positive implications of globalization on SME expansion in developing
countries and LDCs is the possibility of FDI inflows and soaring export opportunities:
there is a powerful relationship between internationalization and SMEs. In investigating
the linkage between internationalization and SME growth, Lu and Beamish (2002)
examined the impact of exporting products and FDI on SME growth. They came to the
conclusion that FDI is more effective for SME growth. In India, a very big economy with
a large number of consumers, trade liberalization and investment liberalization gave an
impetus to the development of SMEs, which in turn led the Indian economy towards
large-scale industrialization. Juneja (2000) further demonstrates that small industry
growth rates have increased rapidly compared to the growth rate of the total industrial
sector of India since 1991. Juneja also shows how Maruti–Suzuki’s capacity building in
India’s automobile industry attracted FDI from Japan, South Korea, Germany, UK, and
USA.
6
3. SMEs in Bangladesh: Composition, Trends, Policies and Institutions
3.1 Composition: According to BBS Census of Enterprises, 2001/2003, there were some
78,440 SMEs in Bangladesh, which comprises 93% of all industrial units, and these
enterprises employed about 3.5 million workers (i.e. 44% of all industrial workers).
Among these enterprises, 60% of the units were in urban areas and 40% in rural areas.4
However, urban enterprises employ relatively more workers compared to rural
enterprises (Figure 1). Liedholm, Mcpherson and Chuta (1994) showed that the
percentage of job growth coming from enterprise expansion in rural areas of Africa is
significantly higher than that of urban areas. Because of low levels of job growth in rural
enterprises in Bangladesh, rural SMEs have a lesser impact on the reduction of rural-
urban migration.
According to SEDF (2006), food, textile and clothing units accounted for over 60% of
registered SMEs (Figure 2). In rural areas, textile manufacturing, food, tobacco, and
banking (especially by NGOs) covered the major share of small enterprises, while in
urban areas the major share of small enterprises were found in transport and banking
(Figure 3). Within the medium enterprise category, non-metallic mineral products and
textile constituted the major share of rural enterprises, whereas textile, banking, and food
and beverage that of urban enterprises. However, SMEs have undergone significant
structural changes overtime in terms of product composition, degree of capitalization and
market penetration in order to adjust to changes in technology, market demand and
market access brought about by globalization and market liberalization (Ahmed, 2001,
ADB 2001). Industries such as light engineering, readymade garments, printing and
publishing, wood and wood products, plastic products, electrical goods, electronics,
artificial jewellery, wooden and steel furniture, television and radio assembling, and
soaps and detergents have emerged as major industries in recent years.
4 Average employment per establishment for small enterprises was 17-20 workers, while for medium enterprises the range was 65-69 workers.
7
A total of 103,858 micro-, small-, medium-, and large enterprises were headed by female
entrepreneurs, of which 71 per cent were located in rural areas. Most of these are micro
enterprises where less than 10 workers are employed. It appears that most of the rural
based female-headed enterprises operated at small scale. In proportionate terms, these
enterprises constituted 3 per cent of total enterprises in the country. Women
entrepreneurs are found in self-employment, enterprise ownership, manufacturing, family
trade, agricultural activities, subcontracting, partners in businesses, traders, contractors,
and large and medium industry owners. Despite many barriers, women entrepreneurs
were found to take on work and entrepreneurial challenges in a male-dominated,
competitive and complex economic and business environment.
Figure: Share of Different Types of Units and Employment under Different Categories
0
20
40
60
80
100
Sm
all
Med
ium
Larg
e
Tot
al
Sm
all
Med
ium
Larg
e
Tot
al
Sm
all
Med
ium
Larg
e
Urban Rural Total
Per
cen
tag
e
% of total number of units
% of total employment
Source: BBS Census of Enterprises, 2001/2003
Figure 1
8
0
10
20
30
40
50
60
70
80
90
%
Small M edium Large
Figure: Share of Units and Employment in Different Types of Enterprises
Education/Healthcare
Various personal services
Mining & Manufacture
Fabricated goods, electrical andmeans of transportNon-metallic mineral products
Chemicals & Plastics
Wood, leather & Paper printing
Ready-to-w ear apparels
Textile Manufacturing
Food and Tobacco
0
1020
30
4050
60
7080
90
%
Small M edium Large
Figure: Share of Units and Employment in Different Types of Enterprises
Education/Healthcare
Various personal services
Mining & Manufacture
Fabricated goods, electrical andmeans of transportNon-metallic mineral products
Chemicals & Plastics
Wood, leather & Paper printing
Ready-to-w ear apparels
Textile Manufacturing
Food and Tobacco
Source: BBS Census of Enterprises, 2001/2003
Figure 2
Figure 3
9
0
20
40
60
80
100
120
%
Proportion ofsmall
enterprises in the total
Proportion ofmedium
enterprises in the total
Proportion ofsmall
enterprises in the total
Proportion ofmedium
enterprises in the total
Rural enterprise Urban enterprise
Figure: Proportionate share of SME Units Located in Rural and Urban Areas Real Estate
Finance & Banking
Transport & Comm..
Eateries
Trade
Construction
Utility services
Mfg. transport equipment
Electrical equipments
Fabricated products
Non-metallic mineralproductsChemicals & plastics
Paper & printing
Tanning, etc
Wood products
Source: BBS Census of Enterprises, 2001/2003
3.2 Trends: The comparative dynamics of growth of establishments between 1986 and
2003 for different enterprise categories in urban and rural areas reveal that small and
medium enterprises grew at a relatively slower pace than large enterprises. However
employment growth for small enterprises evolved at a relatively higher rate (Table 1 and
2). Interestingly, medium enterprises were being marginalized both in terms of
employment and the number of establishments. The number of small enterprise
establishments and employment increased simultaneously while medium and large
enterprise growth rates for these two indicators did not evolve at the same pace, to the
extent that in large enterprises employment growth in rural areas was negative. This
indicates that there is an agglomeration in the number of establishments and employment
in urban areas.
A huge number of enterprises established during and after the 1990s were mainly in
wholesale and retail trade, manufacturing, hotels and restaurants, health and social work.
This implies that a large number of enterprises established during this period emerged in
Figure 4
10
the period of faster trade liberalization as well as in the regime of quota phase out under
the Agreement of Textile and Clothing (ATC).
Table 1: Changes in the number of establishments between 1986 and 2003
1986 2001 and 2003 Growth Rate
Total Urban Rural Total Urban Rural Total Urban Rural
items) need to be provided and ensured at the border points.
Under the SAFTA accord Bangladesh is currently enjoying duty free market access for a
number of products, but most of these products are not major exportable items. India has
provided a tariff rate quota (TRQ) facility to Bangladesh for clothing products under the
S&D treatment facility. Under the TRQ arrangement 8 million pieces of readymade
31
garments will be exported to India every year. In spite of these arrangements, Bangladesh
is facing various types of non-tariff barriers in the export of products to the Indian
market. These are mostly technical barriers that are related to standards, quality, and
sanitary and phyto-sanitary requirements. The mutual recognition of standards could
reduce the barriers to trade. India is currently in a situation of integration with ASEAN
and partial integration with China, where Bangladesh is perceived as a regional hub for
trade and investment.
k) Energy cooperation between South Asian Countries: In view of the growing
demand for energy in the country, Bangladesh should put a strong emphasis on the
development of domestic energy resources, especially gas and electricity. However, in
consideration of the country’s long-term energy security, the government should lay
stress on regional cooperation in energy resources; essentially the development of
resources and supply through a regional grid. A regional power grid could be established
in which additional amounts of electricity could be generated by and for member
countries. Energy generation in Nepal and Bhutan, for example, could be transferred onto
a regional grid for consumption in other countries like Bangladesh.
6.3 Actions to be taken at the international level
l) Get SMEs voice heard at the international level: There should be one-voice for
SMEs, which should be heard at international forums in order to get support from the
international community. The responsibility of raising the voice of SMEs is not only that
of government, but also that of major stakeholders including various associations and
institutions. The expectations of SMEs should be properly articulated and their demands
and challenges should be accumulated. National trade policy debates should ensure that
entrepreneur representatives are heard as inclusively as possible. It is important to create
mechanisms that ensure SME participation in national and international policy-making
processes so that the local and international communities hear their voices.
32
m) Improve the image of the country: In order to help increase the inward flow of
investments,5 international efforts could be taken to raise the image of the country by
highlighting the country’s potential, its achievements in human development, GINI
index, stable growth, and the development of the readymade garment sector for example.
Run a promotional campaign (like “Incredible India” & “Malaysia truly Asia”),
underlying the dynamism, reliability, resilience of the Bangladeshi people, which could
include testimonies of managers (both locals and expatriates) praising their Bangladeshi
employees, and interviews of enlightened Bangladeshi individuals.
n) Harness foreign aid towards SME promotion: In order to promote development and
associated business opportunities “…larger aid project should focus on supporting the
economic reforms, laws and policies that will stimulate development from the bottom up.
It is therefore in the interest of entrepreneurs that aid organizations themselves take a
more entrepreneurial approach to development ….” (Global Entrepreneurship Monitor,
2007 Executive Report, p. 49)
o) Encourage policy coherence: One effective tool towards fostering an enabling
environment is to highlight the issue of trade facilitation in the WTO negotiations. With
the gradual liberalization of the trade regime, the development of trade facilitation could
be the most important mechanism for countries to enhance their trade. The outcome of
trade negotiations at the WTO has to be coherent with other international policies,
especially foreign aid. It is important to ensure a unified donor approach for initiatives in
specific sectors.
5 Anecdote of a billionaire from HK approached by a Bangladeshi Diplomat to invest in the country who publicly declared that a lot should be done to improve the national image of Bangladesh which is only linked to poverty, corruption and natural disasters.
33
7. Conclusion
The development of SMEs is to be considered a major policy objective of the
government. Unfortunately, the goals and targets related to SME development as
mentioned in the policy document (the first Poverty Reduction Strategy Paper) were not
achieved because of various limitations and constraints including financial,
administrative, monitoring, and the commitment of donors. The challenges confronted by
SMEs are not new. They are well known by all stakeholders including the government
and international development partners. Because of various limitations, the growth of
SMEs has been relatively slow compared to that of large-scale enterprises. However,
there are successful enterprises that have achieved commendable progress in different
sectors over the years by overcoming all the challenges and limitations. The reasons for
their success according to entrepreneurs who operate small businesses are hard work,
product development, marketing, and customer based operations. During the period of
initial establishment entrepreneurs were constrained by small amounts of capital. The
scarcity of capital was also found to be a problem for these enterprises when they
embarked on expanding or upgrading their ventures. In the case of relatively large
enterprises, success depends on the positive outcome of a complex web of relationships
between different factors. The factors include: the pattern of ownership based on a
strategic partnership in terms of sharing resources; know-how on the one hand and
sharing market information and the reputation of the local firm on the other; access to
tangible and intangible resources including financial support; setting strategic objectives
in relation to the social commitment of the firm; special skills in accessing and working
with the poor, mainly those working in management positions; providing complementary
services beyond major services; the identification of new products and processes in order
to mark a differentiation with the products and processes available in the market; good
networks with government and other agencies in order to garner the support of tangible
and intangible resources. It seems that enterprises need to clearly assess their
shortcomings in the case of network development, taking joint initiatives to reap the
benefits of strategic components or the development of new products and processes.
34
At the regional level, the government should work on developing customs services,
especially the simplification of customs documents and a reduction in the number of
forms. Trade facilitation measures at the border point needs to be improved in order to
speed up the process of bilateral trade between Bangladesh and India. There are a number
of potential export areas where Bangladesh has comparative advantage over other South
Asian countries. In some products Bangladesh enjoys unique potentiality, while in other
products Bangladesh has complementarity with other countries. The government has to
take the initiative to attract more FDI from South Asian countries by exploiting the
comparative advantage of the country. In order to secure the long-term sustainability of
the energy sector, the government should take the initiative, along with other regional
partners, to develop a regional grid that will ensure electricity supply for the industrial
sector’s growing demand. Entrepreneurs should express their concerns and expectations
in one voice, which should be heard at the international level in order to ensure a better
commitment of the international community towards the development of the country’s
SMEs. There needs to be a harmonization of national and international policies on trade
and investment in developing countries, as well as development initiatives in order to
guarantee more effective results.
35
References
Ahmed, M.U. et al (2001) Impediments to Rapid Industrial Growth in Bangladesh,
Report Prepared for FBCCI, Dhaka.
ADB (2002). Bangladesh: Strategic Issues and Potential Response, Small and Medium
Enterprise Development and Export Expansion, Asian Development Bank, Dhaka.
ADB (2001) Technical Assistance for Expanding the Strategy for SME Development in
the East ASEAN Growth Area. Asian Development Bank.
Bangladesh Bank (2008) Equity and Entrepreneurship Fund (EEF): A Note.
Bangladesh Bureau of Statistics (BBS). Economic Census 2001 and 2003, National
Report.
Beck, Thorsten; Asli Demirguc-Kunt and Ross Levine (2005) “SMEs, Growth, and
Poverty: Cross-Country Evidence”, Journal of Economic Growth, Volume 10, Issue
3, pages 199-229.
Carl Liedholm, Michael McPherson, Anyinna Chuta (1994) “Small Enterprise
Employment Growth in Rural Africa,” American Journal of Agricultural