Reading Time: 4 minutes Around 90% of Pakistan's enterprises are small-scale businesses, employing 80 % of non-agricultural human resources and contributing almost 40 % to the country's GDP. According to SMEDA's annual report, there were approximately two million SMEs in Pakistan in 2013, employing fifteen million people, excluding sole proprietors and micro-firms.
Pakistan’s Small and Medium Enterprises Development Authority (SMEDA) governs the country’s small-scale businesses. This independent government institution is administered by the Ministry of Industries and Production, established in October 1998.
SMEDA’s purpose is to encourage and facilitate the development of small and medium business establishments in Pakistan. This state body not only serves as a policy advisory for local enterprises but also enables stakeholders to strategize their expansion, growth, and success.
SMEs are crucial for economic development, especially in developing states. Apart from self-employment, small-scale enterprises accurately depict the business population in countries like Pakistan.
Around 90% of Pakistan’s enterprises are small-scale businesses, employing 80 % of non-agricultural human resources and contributing almost 40 % to the country’s GDP. According to SMEDA’s annual report, there were approximately two million SMEs in Pakistan in 2013, employing fifteen million people, excluding sole proprietors and micro-firms.
If we analyze the long-term benefits, SME’s output, human development index, and SME sector’s expansion are the vital driving force for economic advancement. However, the country’s export rates are most beneficial for the economy in the short run. Therefore, policymakers and institutions like SMEDA need the empirical results of both cases to create the best-fit framework for SME growth.
These statistics show that SMEs are the backbone of Pakistan’s economy, especially in the competitive market. SMEDA supports these micro enterprises by acting as a bridge between financial institutions and businesses. This platform offers mentoring and training programs for e-commerce and traditional production. Additionally, SMEDA provides special incentives for historically valuable enterprises with a unique heritage value.
Regardless of their importance for economic development, local businesses face many challenges that prevent them from success in Pakistan.
Pakistan’s SMEs have performed weakly; therefore, the failure rates of such enterprises are very high. According to (Sherazi et al., 2013), SMEs have a higher failure rate in developing countries than in developed ones. Moreover, most start-up local enterprises fail within the first five years of business operations.
Various studies explored the SME status in Pakistan to identify the reasons for such high failure rates. This extensive research shows that SMEs collapse in the early stages, with detrimental loss to the owners. Such loss means that the sustainable development of local businesses in Pakistan is under threat.
Further research has uncovered various factors that contribute to the fall of SMEs. Hassan et al. (1998) found that most local businesses cannot master new technology, leading to low productivity and weak performance. This issue is a direct product of a lack of training and mentoring. If a company cannot utilize the latest advancements that maximize productivity and profit, it cannot succeed.
Additionally, Nishat (2000) and Ali and Sipra (1998) uncovered that inadequate financial assistance and capital cause poor business performance. Moreover, SMEs in Pakistan also suffer from unfavorable government policies and a lack of skilled labor and managerial training. Apart from labor and management, these studies show that Pakistan’s underdeveloped infrastructure hinders local enterprises’ success.
In 2006, the CEO of SMEDA, Shahab Khwaja, claimed that SMEs in Pakistan are in critical condition because most enterprises did not upgrade their technology. Furthermore, due to tough competition, Pakistani SMEs face various obstacles when entering international markets. SME exporters find it difficult to perform in overseas markets due to foreign consumer patterns, product features, business practices, and advanced production methods.
In addition to these obstacles, local Pakistani businesses do not have access to entrepreneurial specialists who can help them establish their operations. Lack of commercial business networks and inadequate managerial capabilities further impact SME’s performance.
Taking the local enterprises’ recession into account, Pakistan’s government has devised a framework for SME development. Overall, the legislative and general business operational environment for production improved, but the SME sector is facing numerous issues to this day, damaging the market’s competitiveness.
At the moment, Pakistan lacks a Regulatory Impact Assessment system. The absence of this regulatory body means that creating a sustainable and dedicated environment for local operations is much more difficult. The first step to improving these conditions should be an assessment of the existing legislation. This analysis can identify areas that require improvement, like the regulatory burden of compliance costs on SMEs.
The Small and Medium Enterprises Development Authority (SMEDA) is currently the only public platform addressing SME needs in Pakistan. The government should focus on expanding this platform to reach underdeveloped small-scale businesses suffering from limited skilled labor and financial capital. SMEDA can start focusing on district-level SMEs and provide these businesses with appropriate resources for development.
Financial assistance for SMEs has been a primary concern for Pakistan’s government and SME aid platforms. These institutions are utilizing traditional methods of formal financing like product leasing and commercial loans to provide local enterprises with capital. On the other hand, SMEs depend on informal sources of business capital like internal credit and lending for their fixed costs.
A popular misconception about SMEs in developing countries is that they fail due to their small size. However, one of the most vital issues with local enterprises is that they are isolated in the business environment. This seclusion leads to minimized access to local and global markets, limiting SMEs’ exposure to information, technology, and finance. Therefore, the best approach for SME development platforms is to facilitate schemes that endorse equity support programs and reject commercialized loans.
Local businesses fuel a majority of Pakistan’s GDP. Pakistan’s government must be prepared for a halt in foreign investment and business operations due to inflation, economic recession, and import ban. Pakistan can survive this downturn by rejuvenating and supporting small-scale businesses that don’t need imported raw materials.
Furthermore, if Pakistan can make its local enterprises successful and sustainable, it may never need to import any products or resources, balancing its exports and imports. The government can start this process by creating more platforms dedicated to SME development, especially in industrial areas and business hubs like Karachi.
Moreover, small-scale businesses can generate employment for skilled and unskilled workers, improving the country’s employment rates.
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