Tuesday, January 8, 2008

SMEs - opportunities and challenges

Small and medium enterprise
Small and medium enterprises or SMEs, also called small and medium-sized enterprises and small and medium-sized businesses or small and medium businesses or SMBs are companies whose headcount or turnover falls below certain limits.
The abbreviation SME occurs commonly in the European Union and in international organizations, such as the World Bank, the United Nations and the WTO. The term small and medium-sized businesses or SMBs has become more standard in a few other countries.
EU Member States traditionally had their own definition of what constitutes an SME, for example the traditional definition in Germany had a limit of 500 employees, while, for example, in Belgium it could have been 100. But now the EU has started to standardize the concept. Its current definition categorizes companies with fewer than 50 employees as "small", and those with fewer than 250 as "medium".[1] By contrast, in the United States, when small business is defined by the number of employees, it often refers to those with less than 100 employees, while medium-sized business often refers to those with less than 500 employees. However, the most widely used American definition of micro-business by the number of employees is the same of that of European Union: less than 10 employees.


As of 2005, Germany will use the definition of the European Commission.
Business enterprises of fewer than 10 employees often class as SOHO (for Small office/home office).

In most economies, smaller enterprises are much greater in number. In the EU, SMEs comprise approximately 99% of all firms and employ between them about 65 million people. In many sectors, SMEs are also responsible for driving innovation and competition.
Providing SME finance and support is thus an important area of economic policy.

See also
National Federation of Independent Business

References
^ European Commission (2003-05-06), Recommendation 2003/361/EC: SME Definition, <http://europa.eu.int/comm/enterprise/enterprise_policy/sme_definition/index_en.htm>. Retrieved on 2007-05-24

External links
Small Business at the Open Directory Project
OECD Centre for Entreprenuership, SMEs and Local Development
SMB Segmentation White Paper

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Micro and small enterprises (MSEs) constitute an important segment of the Indian economy. contributing around 39% of the country's manufacturing output and 34% of its exports in 2004-05. It provides employment to around 29.5 miilion people in the rural and urban areas of the country according tothe Ministry of Finance.

ortu i' hallenges for SMEs in India,Major policy reforms aimed at substantially deregulating the industrial sector and liberalizing foreign investments as well as technology imports have enhanced opportunities and challenges for the small industries sector. The following factors put Indian SMEs in a favorable position:
'-ji9h contribution to domestic production Significant export earnings ~ow investment requirements ·""""'---Operational flexibility '-""Location wise mobility '---{ow intensive imports ·-.../'Capacities to develop appropriate indigenous technology .Jmport substitution r-Contribution towards defense production '----Technology-oriented industries vCompetitiveness in domestic and export markets


By the very nature of their operations, industrial units in the small-scale sector enjoy certain inherent advantages over their larger counterparts. The free economy ushers in accessibility to bigger markets, greater linkages for SMEs with larger companies and marketing outfits, improved manufacturing techniques and processes. Various measures adopted by Government of India, Reserve Bank of India and SIDBJ have attemptecl to alleviate the problems of SME sector. These initiatives, coupled with other developments in the economic environment, are expected to enhance the prospects of SMJ;.s.

With increasing globalization and entry of multinationals, immense opportunities have been created for outsourcing, sub contracting and ancillarisation of the products manufactured by corporates, particularly in non-core sectors like automobiles, engineering and consumer
Employment I Exports in lakh (Rs crore
86,013 (20.7) 97,644 (13.5) 1,24,417 (27.4) N.A.

Entrepreneur
electronics. A vibrant SME sector can drive maximum benefit of these developments.
However, the SMEs in India. whi 90% of the total number of indws~ enterprises and form ---u=le backbone of industrial deve;c:~er:' continue to be in technological backwaters vis-a-·.s ac .·a~ces in science and technology. These suffer fror- :-;:;: ers of sub optimal scales of operations and techno,~ ::a :=50'esce~ While 'most large corrtpames, even Il"'CS:S ::'-; countries, have financial as well as techr::.G ::.G::::::':-J to identif' technological sources and eva~a:= =. ==-=':5 ~echnologi,--s for their requirements, this CG:.c:ii~ 5 :xnspicuously missing in most SMEs. It is this 's.a=-= := ~' '::5 ::.a: makes them an ideal target fouec:hno'o: :,GJ C::C'~:=~~ :,....rough technoloqical cooperation with I;:;-:=~ ~J".:.,r-:-~s "'''':.~ R&D institUtTOns-l. academic institutions a::: D=..:.":", =5 '::= ==:.-~ology
~


Limitations of SMEs vLow capital base ~Concentration of functions in or.e ~"'::, p '-./ Inadequate exposure to internat:c-.a~ ,=-----Inability to face impact of WTO r&; -...':' --inadequate contribution towards::; s..::......-Lack of professionalism
Besides these, the mostformidace :-:.::2.:-..has been it) accessing techr-::'=~ ;= comp'etitive~s. The reasons identify their technology needs a
......... Poor financial situation and low Ie. s ~ -:f ,=- ,/ Poor adaptability to changing trace ;:2-t"./ Desire to avoid risk ..- Non-availability of technically tra::-&: ....-/Emphasis on production and no ~Lack of management skills t./lack of access to technologica consultancy services \../I'solation from technology hubs


In order to enable SMEs overcome :.- S :::i enhance their access to new teer - : :3';:'= their competitiveness in the in:e-:::::::---imperative to give them a cond..,c .:: I?includes:
./ (1) Formulation of appropriate na-, .programmes;<>-12) Building up technological capeCL", /(3) Knowledge flows and technOlO;-!'-:=~= <./(4) R&D and inter firm linkages. The potential of SMEs is often ~:;, [problems commonly related to s~::opportunities, standards/ quality, s_:::_ and technology innovation. To prese-. = margins, small-scale entrepreneurs - ::do not opt to innovate products an tactics that deters their growth in April, 2001Opportunities and Challenges for Hong Kong SMEs in the Chinese Mainland Content provided by:
China's accession to the World Trade Organization is bound to usher in a new development stage for Hong Kong economy and especially, for Hong Kong companies' operations in the Mainland. However, for most Small and Medium Enterprises (SMEs), a double-edged sword scenario has loomed up.
SME's Pivotal Role
The economic ties between Hong Kong and Mainland China have been greatly strengthened in the recent decades. As of 1985, Chinese Mainland has become Hong Kong's largest trade partner, accounting for nearly 40% of its total trade. In particular, the growth of re-export has been most spectacular. Nowadays, Hong Kong is the next-to-none entreport for the Chinese mainland, which handles about 40% of the mainland's foreign trade. While on the other hand, 95% of Hong Kong's total re-exports (US$ 160 Billion in 2000) are either originated from or destined for the Chinese mainland. At the same time, Hong Kong has become the most important source of foreign direct investment (FDI) of the Mainland. By the mid-2000, the cumulative capital flows from Hong Kong had amounted to US$ 162 Billion on the utilized basis, accounting for nearly on half of the national total inbound FDI.
A salient feature of Hong Kong's economy is the existence of a large multitude of SMEs. There are more than 300 thousand SMEs in Hong Kong, representing over 98% of the total establishments and providing job opportunities to over 1.4 million persons, about 60% of the workforce.
Hong Kong SMEs have played the lead in exploring the Mainland market. Since the mid-1980s, an increasing number of Hong Kong SMEs have established operations in the hinterland, mainly in the form of Foreign-funded Enterprise (FFE) or Outward Processing Trade (OPT). According to a latest survey conducted by the Chinese Manufacturers' Association of Hong Kong, about 86% of CMA members have investments in the Mainland, of which more than 80% are SMEs.
By making use of Mainland's advantages in respect of land, manpower and other resources, Hong Kong SMEs have managed to reduce operating costs, greatly enhancing their competitiveness in the world marketplace. On the other hand, they have contributed to foster an externally-oriented economy and increase job opportunities in the mainland, thus serving as a bridge integrating China and the world economy. More recently, Hong Kong SMEs have begun to set foot on areas other than manufacturing, including services sectors like catering, hotel, transportation, and tourism. It is self evident that SMEs have not only constituted the backbone of our local economy, but also acted as a catalyst for Mainland's economic take-off.
Opportunities Arising from China's WTO Accession
China's membership with the World Trade Organization will uncover a new page in the annals of economic cooperation between Hong Kong and China. By virtue of their flexibility, agility and efficiency, as well as the experience and connections accumulated in the long-time exposure to the Mainland market, Hong Kong SMEs should not fail to take a head-start and achieve unprecedented development.
Trading Opportunities
To meet the requirements of WTO, China has promised to reduce tariff and other trade barriers. Such moves will greatly conduce to the growth of imports, while enabling FFEs to save the expense on imported materials and parts. As of the start of this year, the Central Government has trimmed the tariff on 3,462 goods items, making the general tariff level drop from 16.4% to 15.3%. Two other immediate benefits of China's entry to WTO are the entitlement to multilateral, extensive MFN (Most Favored Nation) treatments and the availability of a well-functioned arbitration mechanism for settling trade disputes, whereby China can somewhat ward off the rampant discriminations imposed by some industrialized nations. This will pave the way for products made in China, including those churned out by Hong Kong SMEs, to make inroad into the developed markets. Beyond doubt, with the accelerated expansion of China's external trade, Hong Kong's established status as international trade center and transportation center will be further strengthened and SMEs specializing in trade-supporting businesses, e.g., I&E, banking, forwarding, warehousing and insurance, will be greatly benefited.
On the other hand, in its run-up to WTO entry, China is pressing ahead with the liberalization of domestic markets. Recently, the Foreign Investment Enterprises Laws have been revised and the stipulations on export obligations have been abolished. These changes allow for a greater degree of autonomy for Hong Kong SMEs to extend their sales outlet to Mainland's market.
Investment Opportunities
Hong Kong services SMEs are renown for their internationalization experience and professional competence. Capitalizing on China's new initiatives in liberalizing services sector, these SMEs will have bright prospects of expanding business scope into the Mainland, especially in retailing, wholesales, international trade, telecommunication and Internet industries. The increasing presence of Hong Kong-based services firms could, in turn, bodes well for manufacturers, enabling them to upgrade efficiency and maximize synergy.
China's regulatory system towards foreign investment has often invited complaints because of its ambiguity, inconsistency, lack of transparency, red tape, and onerous sub-charges and levies. WTO has provided a strong incentive for China to come up with institutional arrangements that are rule-based, in line with the international practices, and more friendly to foreign investment. It is reported that more than 700 Chinese laws are now under review in regard to the compliance with WTO rules, and such institutional realignment is being translated into a boost on Hong Kong SMEs' confidence in China's investment environment. According to the CMA's survey, most Hong Kong manufacturers are expecting a sounder regulatory framework in the Mainland, and they have rated this as the most important benefit that they are expecting from WTO. Much noteworthy is that 47% of the respondents have indicated interest in expanding investment scale, with another 41.9% choosing to stay put. Needless to say, China's accession to WTO will set a new stage for the division of labor between Hong Kong and its motherland, enkindling a new round of tide wave of cross-border investment.
Techno-economic Cooperation
China's accession to WTO will inexorably put a lot of indigenous enterprises under increasing pressure of international competition. In particular, many SOEs (State-owned Enterprises) and traditional industries, e.g., agriculture, automobile, chemicals, will bear the brunt. These local companies, in their struggle to re-structure, are in desperate need of capital, technology, managerial skills and market channels __ in which Hong Kong SMEs generally have an edge. Based on complimentaries, there is vast room for Hong Kong SMEs to develop various collaborations with Mainland companies, so as to join forces in taping the integrating domestic and international markets.
Hong Kong SMEs could also establish partnership with Western MNCs (Multi-national Companies) and Taiwanese enterprises that have an eye to China business. For instance, tripartite alliances consisting of Hong Kong SMEs, international venture capitalists and Mainland research institutions can be forged to facilitate the development and commercialization of high-end technologies.
Challenges Ahead
As often as not, challenge is the twin of opportunity. Now that China is speeding up its pace in market liberalization, it is bound to turn into a battlefield teemed with market-seeking players from all over the world, including Western companies, which are generally superior in size, strength and technology. Thus far, Hong Kong SME have mostly been confined to labor-intensive, relatively low-end and export-oriented Outward Processing Trade in the Mainland, and many of them are still short of the right ability and motivation as well to pursue technologic innovation and to snatch domestic market share. With more and more big players flocking into Mainland and domestic enterprises picking up, Hong Kong SMEs could be thrust into deep water. For instance, they might encounter graver difficulties in scraping up market outlets, and also have to brace up for fierce competition when securing operational resources, e.g., raw material and especially, high-quality manpower in the Mainland.
The Mainland is now in the process of implementing National Treatments on FIEs, which have resulted in the reduction or phasing out of some preferential treatments previously enjoyed by Hong Kong enterprises, such as tax holiday, tax refunds, trading rights for import and export goods. Owing to their meager profit margin, Hong Kong SMEs have generally exhibited a higher degree of dependence on tax or fiscal incentives and are relatively sensitive to related policy changes. The implementation of National treatment, though beneficial in the long run, could cause backfire among some SMEs in the short term.
In the recent years, the priority of China's foreign investment policy has shifted form the growth of quantity to the quality of investment. While MNCs and hi-tech investors are gaining importance, SMEs have seen erosion in their bargaining position in relation to the Chinese Governments. This trend, very likely, will become even palpable in the post -WTO Era.
Moreover, since China has adopted a gradual, selective approach to pursue its liberalization initiatives, SMEs investors might not be benefited to the same degree as their bigger counterparts could. For example, the Pilot Scheme for Foreign-funded Commercial Firms, which was promulgated in 1998 to relax restrictions on foreign participation in China's distribution business, still stipulates rigorous requirements on the qualification of the applicants. For instance, foreign companies with an intention to invest in retails should have the tack record of over US$ 2 billion average annual turnover in 3 consecutive years before the filing of application, and their asset value should not be less than US$ 200 million. These criteria could be sky-high, if not prohibitive, for Hong Kong SMEs, and similar phenomena have also been found in other arenas, such as finance and international trading. Owing to exorbitant thresholds of market entry, many Hong Kong SMEs have factually lost to their big competitors at the starting post.
Implication and Suggestions
In order to rise to the challenges ahead and to maximize the opportunities available, Hong Kong SMEs should, first of all, keep up the "first-mover" advantages. Along with branching out into newly-opened investment areas, Hong Kong SMEs could also consider venturing into the Great West, where a far-reaching development campaign is now unfolding.
Meanwhile, it is imperative for Hong Kong SMEs to gear towards activities of higher value, thereby upgrading the division of labor between Hong Kong and Mainland China from the vertical pattern to horizontal paradigm. For example, by capitalizing on Mainland's fast growing domestic market, SMEs can step up their efforts to build up their own brand-names or even cultivate world-class labels; and by leveraging on China's strength in research forces and talents, Hong Kong SMEs can improve R&D ability, so as to move up the ladder of value adding from OEM stage (Original Equipment Manufacturing) towards ODM (Original Design Manufacturing).
Another strategy that deserves of pursuit is inter-firm collaboration. Hong Kong SMEs, especially those engaged in correlated product lines, can team up under certain kind of networking arrangements. Such team working could not only enhance synergy and efficiency, but also enable SMEs to conduct group investment so as to be eligible for the participation in some projects in the nature of capital-intensiveness, long payback period or high entry barriers.
Like Hong Kong, SMEs also dominate Mainland's economic landscape. There are 398 million SMEs in the Mainland, a growing portion of which are private enterprises, the pioneers of China's market economy. On the basis of complementarities and to mutual benefits, Hong Kong SMEs can establish partnership and strategic alliances with their Mainland counterparts. In particular, they can work hand-in-hand to explore domestic market, promote brand names, develop and commercialize new technology, and even take part in the reform of Mainland's State-owned Enterprises (SOEs).

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