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Small and Medium Enterprises (SME)


  • Small and Medium Scale Enterprises (SMEs) make up a large part of Sri Lanka's economy, accounting for 80 per cent of all businesses.  These are found in all sectors of the economy, primary, secondary and tertiary and provide employment for persons of different skills, skilled, semi-skilled and unskilled. There are SMEs in the agri-business sector engaged in growing spices, fruits and vegetables and in the manufacturing sector engaged in numerous industrial activities accounting for about 20 percent of industrial establishments. In the service sector SMEs accounts for more than 90 percent of business establishments. SMEs are an essential source of employment opportunities and are estimated to contribute about 35 percent of employment. The SMEs play an important role in promoting inclusive growth. The focus on SMEs in policy discussions emanates also from their role in developing entrepreneurial skills, innovation and promoting economic growth. These are also seen as useful in promoting social cohesion. It is therefore considered essential that the environment these SMEs operate in be improved.
  • Several important points of policy relevance regarding employment in SMEs are noted below:
    • There is a gender bias in SME employment. Workers employed in SMEs are predominantly men. Good equal employment practices are needed to correct the above bias and to attract, recruit, retain and promote women in SME employment.
    • SME entrepreneurs do not have sufficient knowledge and experience of personnel management practices. Most entrepreneurs do not like to provide training, health and welfare facilities for employees due to the resulting increase of cost of production.
    • A common feature found in SMEs is the high degree of absenteeism among SME workers. This causes losses in productivity and in staff morale. Attendance improvement policies and programs require to be implemented.
    • SMEs suffer from a lack of information exchange, leading to conflict, dissonance and other industrial relations issues. More systematic cooperation and consultation with stakeholders is promoted under the new SME policy.
  • The key policy documents of the government clearly recognize the role of SMEs. Proposed measures for their promotion include subject areas like skills development, tax concessions, entrepreneurship development, sub-contracting, marketing and access to finance. Focus on SMEs is usually guided by their usefulness for raising employment numbers as the capital investment needed in this sector to provide an additional work place on average is normally substantially less than in large enterprises. On this account an issue being extensively discussed is the fact that prevailing laws and practices governing recruitment tend to deter SMEs from raising the number of persons employed. There is furthermore, the need to improve the quality of employment in the SME sector and the rate of earnings.
  • SMEs are very diverse, and consequently have different needs. Some are active while some are essentially dormant. There are issues of defining the size of enterprises. High and rising unemployment rates in the 1980s and 1990s and have moved the employment question to the centre stage in the policy debate. The SMEs are considered to offer the potential to drive substantial employment growth as well as wealth creation in the economy, contributing greatly in the area of poverty alleviation as well.

Problems and challenges

  • The growth and expansion of SMEs are constrained by problems emanating from product and factor markets and the regulatory system they operate in. These problems fall into broad areas of access to finance, physical infrastructure, level of technology, regulatory framework, access to information and advice, access to markets, business development services, industrial relations and labour legislation, intellectual property rights, technical and managerial skills, linkage formation and environmental issues. High interest rates and the emphasis on collateral by lending institutions are the most frequently cited constraints affecting SME development. The inadequacy of skills in product development, packaging, distribution and sales promotion are further areas of weakness.  Difficulties in accessing information and markets are also highlighted. Compounding these difficulties, the prevailing business and regulatory environment raises costs and creates unnecessary hurdles. It has been argued that existing labour laws prevent micro enterprises from graduating up to the level of small scale enterprises and from small scale to medium scale enterprises. The negative effects of these laws on work ethic and productivity are also noted.

Proposed Policy Action

  • Action will be taken to address the labour skill constraints faced by SMEs because of high labour turnover, and institutional and organizational factors. Measures will be devised to enable SMEs to hire appropriate workmen in terms of skills by working toward building up a pool of suitably-skilled and suitably-motivated workers in the country. The Government will take action to invest sufficiently in the country’s science base. Action will also be taken to promote SMEs to give up their informal systems of recruitment and the selection of personnel on personal considerations ignoring required skills and competencies. Policy measures to promote decent work practices and social protection of micro and SME sector employees will help recruitment of workers correct skills and attitudes. With such workers, these SMEs could be empowered with ICT capabilities to network and to improve efficiency and productivity of their businesses.
  • As proposed in Science, Technology & Innovation Strategy for Sri Lanka (2011 – 2015), a mechanism should be introduced to support SMEs to innovate and transfer technologies, giving priority to high end technologies through Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) schemes. Taking full advantage of the IP system would enable SMEs to profit from their latent innovative capacity and creativity, which would encourage further innovation. The capacity of relevant public, private and civil society institutions, such as business and industry associations, to provide IP-related services i.e. provide comprehensive web-based information and basic advice on IP issues to SME support organizations.
  • Considering the complaint of SMEs about the compliance with administrative regulations, action will be taken to simplify the regulatory and administrative framework surrounding SMEs. Unnecessary and burdensome red tape harms job creation and productivity. Revision of these regulations will give the businesses greater confidence to create more jobs. The disciplinary and dismissal procedures relating to errant and underperforming staff will also be streamlined.
  • A strong package of support in respect of credit, intermediate inputs, technology and marketing should be devised to promote SMEs considering their capacity to create jobs and reduce poverty.
  • Education and training play an essential role in a knowledge-based economy as they support growth and employment by encouraging the emergence of a qualified and adaptable population. New training methods and settings that are more flexible should be adopted by SMEs in place of the traditional models of training. Promoting entrepreneurial skills, reducing the skill gaps and providing support to particular categories of entrepreneurs also need attention.  Existing entrepreneurship development programs have not brought out the expected economic changes in empowering rural women, establishment of Community Based Organizations (CBOs) through Self Help Groups (SHGs). Hence, there is a need to review and revisit strategies advocated in entrepreneurship development programs and introduce new strategies.
  • Promoting economic growth through a strong, flexible, effective, fair and efficient labour market policy on SMEs should create a more coherent and pragmatic  framework for these enterprises. Promoting entrepreneurship, developing an environment favourable to SMEs, measures to facilitate the transfer of new technology to existing SMEs and the creation of new SMEs using modern technology will make them more competitive and dependable sources of employment.

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