Defining SMEs, and SME Product Promotion Policy: Why Outsourcing?


Dr. Sikder Md. Anowarul Islam

Definition of SMEs is not same in all countries. It depends on the size of the economy and structural development of a country. But the impact of SEMs in economic development in both developing and industrialized countries is almost same. We can’t ignore the SMEs sectors development for large scale employment generation and poverty reduction process, since large scale industrialization in a country can’t absorb all the surplus labors from rural sectors.

It is not very difficult to say, why a government emphasized SMEs for development process? But the debate for the size of the SMEs is still continuing. Because the financial sectors are providing more attention to the SMEs finance and accordingly the local government are boosting these SMEs sectors for quick mobilization of human resources and productivity as well as macroeconomic stabilization. In view of this, a discussion is necessary for the definition of SMEs and its academic implication.

Small and medium-sized enterprises (SMEs; sometimes also small and medium enterprises) or small and medium-sized businesses (SMBs) are business activities, whose personnel numbers fall below certain limits. The abbreviation “SME” is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO). Small enterprises outnumber large companies by a wide margin and also employ many more people. SMEs are also said to be responsible for driving innovation and competition in many economic sectors.

In July 2011, the European Commission stated it would open a consultation on the definition of SMEs in 2012. In Europe, there are three broad parameters which define SMEs:

  • Micro enterprises have up to 10 employees
  • Small enterprises have up to 50 employees
  • Medium-sized enterprises have up to 250 employees.

The European definition of SME follows: “The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.

EU member states have had individual definitions of what constitutes an SMEs. For example, the definition in Germany had a limit of 255 employees, while in Belgium it could have been 100. The result is that while a Belgian business of 249 employees would be taxed at full rate in Belgium, it would nevertheless be eligible for SMEs subsidy under a European-labelled programme.

Petrakis and Kostis (2012) explore the role of interpersonal trust and knowledge in the number of small and medium enterprises. They conclude that knowledge positively affects the number of SMEs, which in turn, positively affects interpersonal trust. Note that the empirical results indicate that interpersonal trust does not affect the number of SMEs. Therefore, although knowledge development can reinforce SMEs, trust becomes widespread in a society when the number of SMEs is greater.

In the United States, the Small Business Administration sets small business criteria based on industry, ownership structure, revenue and number of employees (which in some circumstances may be as high as 1500, although the cap is typically 500).Both the US and the EU generally use the same threshold of fewer than 10 employees for small offices (SOHO).

The Government of India enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 including definitions of micro, small and medium enterprises as follows:

(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs.5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722(E) dated October 5, 2006.

(b) Enterprises engaged in providing services are defined by their level of investment in equipment as follows:

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

We can define SMEs in many ways as per the country rules and regulations, and the scope of the entrepreneurial process. Why size of the SME sector development is limiting to 40-45 percent success rate in the developing countries is now a research question? Entrepreneurship development is an over exciting innovative process in a limited size of capital and product development structure. They have limited resource to boost attention to the prospective customers. But in a formulated marketing process, we need huge promotional budget to penetrate a new product to get attention to the ultimate customers. Even, a new branding process needs continuous research and development to sustain the product life cycle in long run.  It is very difficult to say how much promotional cost is required to penetrate in SMEs product promotional activities for successful product promotion of SMEs sector, but we can conclude the assumption with a promotion cost analysis of SME and LSI to expand their sales activities in market development process.

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In long run average promotion cost of Large Scale Industry (LSI) will decrease as the quantity of sales increase over time. In this stage, LSI will gain substantial profit as long as the new technology and product invented. But the SME promotion cost is very high in initial stage of product development and marketing. About 60% SMEs are getting stuck when they offer their product in competitive market, and according they gradually drops their market share due to high cost of production in initial stage.

Then, what to do for SMEs product marketing? Best option is outsourcing or contract production where the promotion cost is very low and affordable as per the demand and supply of the market price. The practice of having certain job functions done outside a company instead of having an in-house department or employee handle them; functions can be outsourced to either a company or an individual is called outsourcing. In many developing countries, this process is effective and efficient for SMEs sector development, but insecure  for sustainability of SMEs product in long run market development, except agricultural production in some extent.

References:

  1. E. Petrakis, P.C. Kostis (2012), “ Τhe Role of Knowledge and Trust in SMEs”, Journal of the Knowledge Economy, DOI: 10.1007/s13132-012-0115-6.
  2. European Commission (2003-05-06).” Recommendation 2003/361/EC. SME Definition” Retrieved 2012-09-28.
  3. Enterprise and Industry Publications: The new SME definition, user guide and model declaration, Extract of Article 2 of the Annex of Recommendation 2003/361/EC
  4. Hans-Heinrich Bass: KMU in der deutschen Volkswirtschaft: Vergangenheit, Gegenwart, Zukunft, Berichte aus dem Weltwirtschaftlichen Colloquium der Universität Bremen 101, Bremen 2006(PDF; 96 kB)
  5. Walczak, G. Voss, New Possibilities of Supporting Polish SMEs within the Jeremie Initiative Managed by BGK, Mediterranean Journal of Social Sciences, Vol 4, No 9, p. 760-761.
  6. United States Small Business Administration. “Size Standards”. Retrieved 2011-08-21.
  7. “Micro, Small and Medium Enterprises”. Reserve Bank of India. Retrieved 30 December2013.
  8. “T2 Corporation – Income Tax Guide – Chapter 4: Page 4 of the T2 return”. Canada Revenue Agency. Retrieved 27 April 2014.
  9. Equicapita May 2014 – Who Will Buy Baby Boomer Businesses?
  10. “SMEs in New Zealand: Structure and Dynamics 2011”, Page 10-11, Ministry of Economic Development
  11. Wikipedia: ‘Small and medium-sized enterprises’.
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