Facilities Available To Small Medium Enterprises In Mauritius Economics Essay

Facilities Available To Small Medium Enterprises In Mauritius Economics Essay Small and Medium Enterprises have been given differing definitions around the globe. Some countries refer to the number of employees as their distinctive criteria, some to the amount of invested capital in the business, and others a combine the amount of annual turnover, capital employed and type of industry. The definition of SMEs in Mauritius has evolved throughout the past years. According to the Small Scale Industry Act of 1988, a Small Enterprise is one which is engaged in manufacturing1 and which uses production equipment, the aggregate CIF value of which does not exceed Rs 500,000. The Industrial Expansion Act 1993 defines SMEs as enterprises which : are engaged in manufacturing use production equipment, the CIF value of which does not exceed Rs 10 m With time, came the Small and Medium Industry and Development Authority Act (SMIDO Act 1993) according to which SMEs are defined in terms of the size of capital employed and was an extension to the SSI Act 1988 definition. SMEs are defined as enterprises engaged in manufacturing and using production equipment in their manufacturing process which includes transformation/conversion of raw materials, repair, packing, assembly of semi-finished parts into finished goods. The production equipment refers to equipment directly related to production. Such value of production should not exceed Rs 5 million (SMIDO Act 1993). A revision of this definition by the SMIDO Act 1998 altered the value of production of Rs 5m to Rs 10m. Worth pointing out in those definitions quoted above that they consider only the manufacturing sector. Thus for this study, the most appropriate definition found was that of the SMEDA Act, which includes enterprises in all economic sectors, and so as to avoid sector specific criteria, turnover criteria is being used across sectors. Therefore, the SMEDA Act defines : Small enterprises as those who have an annual turnover of not more than 10 million MUR, and Medium Enterprises as those with an annual turnover of more than 10 million MUR but not more than 50 million MUR. 1. Manufacturing : transformation for commercial purposes of raw materials or semi-processed materials into finished or semi-finished goods including the repair, packaging and assembly of inputs into finished or semi-finished goods. For the study, both small and medium enterprises will be considered. Contribution of SMEs SMEs are the largest group of industrial units in most developing countries and make a significant contribution to manufacturing output and employment (Wignaraja 2003, p.2). According to the Organisation for Economic Coorperation and Development (OECD), factors such as a countrys economic patterns, social and cultural dimensions are reflected though their SMEs. Storey (1994) points out that small firms, no matter how they are defined, make up the bulk of enterprises in all economies around the world. The latter half of the last century has witnessed widespread roles SMEs and this cannot, in any way, be understated (Bygrave, 1994;Timmons,1994). On the issue of job creation, Andrew Stone (World Bank, 1997, Facts About Small business 1997) said that SMEs create more employment than large enterprises and with a lower investment per job created. To the layman, it is clear that creation of a Small and Medium enterprise is synonymous to job creation and economic growth. This fact is indeed not false. The positive link between SMEs and employment creation, poverty alleviation, and economic growth is universally acknowledged (Beyenne, 2000). In several countries, particularly in East Asia, they are the driving force of the economy. For instance, in Hong Kong, SMEs account for over 98% of the total establishments and provide job opportunities to about 1.3 million persons, about 60% of total employment.4 According to the Strategic Industrial and SMEs Plan 2010-2013, the emergence of SMEs in the Mauritius has contributed significantly to employment, output and entrepreneurship development within the industrial sector. The last census of the Central Statistical Office carried in 2007 reveals that there are around 91 980 small enterprises operating in Mauritius, an increase of about 22% from the 2002 figure of 74, 928. The survey also showed an increase of 18.8 % in the number of persons engaged by these institutions, from 175, 791 in 2002, to 208,797 in 2007, representing approximately 40% of employment. Furthermore, contribution to the Gross Domestic Product was 20%. 2. Currently the body regulating SMEs in Mauritius replacing the SEHDA 3. Mauritian SME Portal 4. Mauritian SME portal 5. CSO survey 2007 SMEs which are registered with the SMEDA2 and which will be under scrutiny in this study are categorised into 12 sectors as at 2010, namely, Food and Beverages, Leather and Garments, Wood and Furniture, Paper products and Printing, Chemical, Rubber and plastic, Handicrafts, Pottery and Ceramic, Jewellery and Related Items, Fabricated Metal Products, Profession/Vocation/Occupation, Trade and Commerce, Business Support Service Sector, Others.3 These total to around 6421 enterprises. Objectives of the study Having explained the various definitions of Small and Medium Enterprises and pointed out their importance and contribution to the Mauritian economy, it is now clear that these institutions play a key role in our country. Enterprises in developing countries, including Mauritius are facing far more competitive environments in this fast moving technological world (World Bank,1999). They are offered various facilities to start their business as well as to continue and also expand. Among those facilities we find financing, training, business counseling, marketing, information technology and export incentives. These are available with a view of better performance from these enterprises and also to make them more cost effective, produce better products in terms of design, quality and reliability to thus be able to compete with not only larger companies on the local market but also on the foreign market. Now, with the creation of many support institutions such as the Small and Medium Enterpr ises Development Authority (SMEDA), National Women Entrepreneur Council (NWEC), Human Resources Development Council (HRDC), Enterprise Mauritius (EM), Mauritius Employers Federation (MEF), Development Bank of Mauritius (DBM), Mauritius Business Growth Scheme (MBGS) which see to it that SMEs lack in nothing to operate, the latter have to take full advantage of these conveniences and also make the best use of them and thus reduce waste of resources. The main aim of this study is to analyse whether these facilities are being given in the right amount, too much, or too little in assistance of SMEs. Other objectives are as follows: Assess whether SMEs are taking full advantage of these facilities. Consider whether proper use is being made of aid and there is minimum waste of resources Investigate which of these facilities are more important for the creation and sustenance of SMEs 2.0 Literature Review 2.1 A look at the need for facilities It is now recognised that Small and Medium-sized Enterprises (SMEs) make a significant contribution to the socio-economic and political infrastructure of developed and developing countries as well as the nations in transition from command to market economies (Matlay and Westhead 2005). Harper (1998) notes that the relative and absolute importance of small enterprises has grown enormously over the last twenty years; this real growth has been matched by appreciation of their role. SMEs were once considered as mere stepping stones to real business, but now they are being viewed as being a vital contributor to the income and development of people. It therefore follows that countries should be ready to help those businesses which come forward with viable projects in terms of providing aid such as finance, marketing, training, adoption of new technologies, export incentives and business counseling. Furthermore, it is also expected from these business units to make full use of such incentiv es being provided to them, usually at lower cost. A look at those incentives will show that while necessary, some are difficult to obtain and some are not used optimally even though they are available much easily. Below, is a detailed look at all the facilities that will be covered in the study. 2.2.1 Financing Importance of finance Financing is one of the most important success factors of any business, and Small and Medium Enterprises are no exception. Financing helps them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses are created by one or two people, who might start by investing their own money and/or taking loans from friends and family, or loans from financial institutions. After some time in operation, if they are successful, there comes a time when they will feel the need to expand (OECD, 2006). Therefore, finance being the backbone of all firms, it should be accorded much attention. SMEs are today considered by many countries to be of a key importance to the growth of their economy in terms of GDP contribution and also job creation. It therefore follows that these institutions should be having no difficulties in finding funds to not only start their enterprise, but also for sustenance and growth. However, according to the United Nations, the lack of financial assistance is a persistent problem and it is the most serious barrier to SME growth and expansion. Available funds are often diverted to the larger enterprises and only an insignificant number of SMEs seem able to attract bank financing (UN, 1993). Westhead and Wright (2000) state that the absence of adequate funding represents a major obstacle to the entrepreneurial process in a firm regardless of size, location or type of economic activity. Some life style entrepreneurs can satisfy their small firms financial needs by requesting loans from their families, friends or acquaintances (Hussain and Matlay, 2007). Typically, however, it remains a fact that the vast majority of growth oriented SMEs rely on long-term funding made available by banks, financial institutions or venture capitalists. Research has shown that banks hesitate in giving finance aid to small businesses. Pasadilla (2010, p.7) pointed out that banks, in both normal and crisis period, usually give priority to low-risk borrowers like large enterprises with profitable investments and sound collateral (ADBI Working Paper 2010, p.7). Banks may avoid providing financing to certain types of SMEs, in particular, start ups and very young firms that typically lack sufficient collateral, or firms whose activities offer the possibilities of high returns but at a substantial risk of loss (OECD 2006, p.3). The lack of collateral being a prime reason for SMEs not obtaining finance, another rationale is that banks might still prefer to grant loans to large and less risky companies rather than SMEs. Additionally information asymmetries and inappropriate business plans might also be considerable factors resulting in little or no access to finance.*(Asia Pacific Environmental innovation strategies APEIS 2004). However, as Cosh and Hughes (2003) point out, banks remain the main supplier of external SME finance, though there may be various financing constraints. The main source of finance to SMEs are bank loans. For example, in the UK, the most predominant way of financing small businesses remains bank loans (D.Irwin and J.Scott 2009, p.2) As a response to the lack of collateral issue, countries might come up with Loan Guarantee schemes by either public or private sector. The main aim of such a scheme is to encourage financial institutions to offer finance to SMEs. Under this scheme, the government provides a guarantee to the lending banks on specific types of loans to potentially viable SMEs (National Economic Research Associates, 1990). In return, SMEs pay a premium to the government. Moreover, there are also collateral free schemes to alleviate the problem of lack of collaterals. In this scheme, the SMEs are not required to provide any guarantee at all. In India, SIDBI, UNIDO and Indian Institute for Rural Development (IIRD) have successfully implemented this kind of scheme (APEIS, 2004) Leasing also shows up as an attempt to avoid collaterals. The lessor will remains owner of the asset and the lessee will be required to pay amounts at regular intervals for the use of the leased equipment, vehicle, or any other asset on lease. At the end, the asset can be sold at a minimum price to the lessee. Indeed, leasing is a very common way of financing assets in many countries. Other means of obtaining finance can be through Equity financing, that is issuing shares to meet long term capital need, Overdraft where SMEs will be allowed to withdraw money in excess of their actual bank balance, however they will be faced with rather high interest rates Mutual Guarantee Scheme which as stated the Commission of the European Communities, give a collective guarantee for appropriations provided to their members, who in return contribute to raise the equity and participate in the management of the mutual society 2.2.2 Training Training has been defined as a planned and systematic effort to modify or develop knowledge, skills and attitudes through learning experiences, to achieve effective performance in an activity or a range of activities (Garavan et al, 1997). It has been advocated as essential for every job (Tyler, 2005) and SMEs make use of training facilities to varying extents and varying success. Training certainly brings about learning experience which has for aim to improve a persons ability to perform a job. Traditionally, it focuses on technical knowledge, skills and abilities to complete current tasks (Treven, 2003). When trained, SMEs will attain a higher knowledge of not only the product they are developing but also about issues like how to be abreast to better technology, how to approach people for example suppliers, clients, employees with better tact through human resources training. Furthermore, training provided to employees will increase the quality of labour employed in the product mak ing. The British Chamber of Commerce (2007) points out that with proper training scheme, SMEs will be able to preserve their staff. Training to SMEs can be : For the potential entrepreneur For employees of the enterprise Geared towards product development Adoption of new technology, for example moving from manual system to computerized For owners on human resource management On financial issues, e.g. costing, investment appraisal, budgeting and forecasting How to market the product However, according to Stanworth and Gray (1992), there has been an identification of industry effects and size effects in responsiveness to training; with very small firms being least interested in providing employee training. Size and industry in which the SMEs operate can indeed play an important role in whether the SMEs train or not. Small sized companies will be least interested in providing training for factors such as financial issues, and also due to practical considerations. For example, as Kailer (1988) states, SMEs might be reluctant to release employees to attend training interventions. Furthermore, training provided may be too general and not of specific relevance to the SME, resulting in the sector providing fewer training interventions (Westhead and Storey, 1996). Other disincentives that SMEs might face into not providing training is the little potential that these enterprises have in offering higher pay, and they are less equipped to provide internal promotions for employees. As Westhead and Storey (1996) argue, such characteristics, when combined with the resultant increased risk that employees may be poached lead to lower instances of SME training. Moreover, SMEs are often not aware of the training needs of their enterprise. They do not have the proper staff to analyse such need and advise them into providing some training. As a result, SMEs provide more informal*refers to mostly on the job training, tutoring and mentoring than formal* training in a systematic approach, more like seminars, grouping targeted trainees under one roof. training. Many SMEs admit that their training provisions are informal but are of the opinion that only formal training is real training (Curran,2000). However, very often due to financial constraints, SMEs prefer other forms of training. A study* Training needs and human resource development analysis of SMEs in Mauritius by the European Commission for the Human Resources Development Council of Mauritius in 2008 showed that of the 300 SMEs which interviewed, only 35 % trained on a regular basis and were aware of the training grants operated by the HRDC, and of these, only 31 % have used it. These SMEs tended to adopt in-house training. Reasons stated for training were mainly for business development and because of the company policy and reasons not to train included the reluctance of specialised skills, and the fact that the employees were already qualified. It was also found that there were significant differences between those enterprises that provided training on a regular basis and those which did not. A positive link was found between the propensity to grow and propensity to train. To encourage SMEs to train more, government can provide incentives, such as free training or financial aid, help to cope with labour shortages and hiring difficulties and provision more information to create better awareness. In central and eastern Canada, an important tool to promote training in small businesses is the provision of information about the courses and setting up of additional government programs (Andreea Dulipovici, 2003) 2.2.3 Marketing Literature of marketing Marketing is a vital and indispensable business activity for all types of organizations that create and offer products of value Marketing in Mauritius 2.2.4 ICT and SMEs For countries in the vanguard of the world economy, the balance between knowledge and resources has shifted so far towards the former that knowledge has become perhaps the most important factor determining the standard of living more than land, than tools, than labour. Todays most technologically advanced economies are truly knowledge-based. World Development Report, 1999 As the global economy becomes increasingly reliant on information and communications technology (ICT) to receive, process, and send out information, small businesses do not have to be left out. Adoption of the latest technology or at least basic tools of ICT helps small enterprises to better merge with the developing economy, and operate more cost effectively. It can help SMEs create business opportunities, combat pressures from competition and improve their products through faster communication with their clients and marketing of products online. In 2000, an organization that used paper took on average 7.4 days to move a purchase from request to approval, but if done electronically, only took 1.5 days (Cassidy, 2002) UNESCAP and UNDP-APDIP have collaborated extensively to help formulate strategic policies and building the necessary environment to encourage SMEs take advantage of the Internet to create business opportunities in Asia and the Pacific. Many countries such as India, Republic of Korea, and Taiwan have created suitable environments to ensure that SMEs are well positioned to capture emerging business opportunities in terms of better technology. India, for example, offered relief from import duties for IT hardware, tax deductions for income earned form software exports, and tax holidays, and developed infrastructure in Software Technology Parks*A strategic review of the software industry in India 1998-1999. At the outset it is not necessary that all SMEs need to adopt ICT tools to the same degree of sophistication (UNDP,2007). The relationship between ICT and SMEs starts on a ground as simple as the use of a telephone to contact suppliers, clients. A fixed line or a mobile phone will do, whichever is more cost effective. Another most common tool used is of course the Personal Computers (PCs). The latter are very helpful for simple information processing needs such as producing texts, writing letters, keeping track of accounting items using basic software. PCs can also be used to access the Internet for more advanced communications capabilities such as email, file sharing, creating websites, searching for information, Voice over Internet Protocol (VOIP)* 30% of Skypes*VoIP programme used to communicate via the internet. Worldwide subscribers are primarily SMEs, and e-commerce. Electronic commerce has been defined as the process of buying and selling goods and services electronically through computerized business transactions using the Internet, networks and other digital technologies (Lauden and Lauden, 2000). It also encompasses activities supporting market transactions such as advertising, marketing, customer support, delivery and payment. ICT oriented SMEs might use advanced Information Technology software such as Enterprise Resource Planning*offers a single repository for information on all business functions. which can capture cost savings, or SCM software which helps increase productivity, efficiency of inventory controls, and increase sales through closer relationships and faster delivery times. These allow SMEs to better coordinate their business, especially if the latter is growing and diversifying. The extent to which ICT will be adopted in SMEs will depend on the size of the business, on the benefits its adoption is planned to bring, on the ICT capacity of the SME and its employees and also on the financing capabilities. Despite the advantages that adoption of ICT demonstrates, many SMEs do not make use of it. For example, 90% of Thai SMEs still use basic communication technology such as fixed phone line and fax, and only 1% use CRM software. In Malaysia, only 30% of the local SMEs have their own website, and not all of them are updated regularly. Fuller(1993) points out that despite the number of benefits to be gained from technology, based on the users perspective ,SMEs adopt technology according to their self assessments of how the new technologies will change bottom line profitability. 2.2.5 Business counselling and access to information 2.2.6 Export Incentives 2.3 Support institutions As Wignaraja and Oneil (1999) argue, for the size of the country and its stage of development, Mauritius has a particularly wide range of support services for the SME sector. The availability of such support is mainly ensured by the Government, parastatal bodies and financial institutions. Below is a deeper look at those institutions in Mauritius. 2.3.1 The Small and Medium Enterprises Development Authority Looking back at the historical background of institutions supporting SMEs in Mauritius, we find the creation of the Small Industry Unit (SSIU), established under the aegis of the then Ministry of Commerce and Industry. The SSIU became the Small Industry Development Organisation (SIDO) in 1983. 10 years later, the Small and Medium Industry Development Organisation was set up for further development of the SME sector in Mauritius. The SMIDO later merged with the National Handicraft Promotion Agency (NHPA) to form the Small Enterprises and Handicraft Development Authority (SEHDA), whose main aim was to provide support to potential and existing SMEs. More recently (date needed) the SEHDA was replaced by the Small and Medium Enterprises Development Authority. It is an agency of the Government that has aims like supporting and facilitating the development of entrepreneurship and SMEs in Mauritius. Apart from providing a range of services to the SME sector, SMEDA tries to sensitise the population, through workshops and seminars organized throughout the country, about The benefits of entrepreneurship Key issues/steps to consider and, procedures to follow when starting a business, and Facilities and resources provided by the SMEDA and other support institutions Services offered by the SMEDA Ease of Financing The SMEDA works in collaboration with the DBM to offer some financing aid to SMEs. In fact, DBM is the bank through which the Government provides finance at lower costs to SMEs. The SMEDA along with the bank provides a Booster (Micro Credit) Loan with a maximum amount of Rs 150, 000 at an interest charge of 9% per annum. No collateral is needed, but the entrepreneurs signing up for that loan need to provide a general floating charge as security. For this kind of loan, there is no need to submit a business plan. This amount is provided for the purchase of equipment and raw materials. The loan is repayable within 5 years and applies to enterprises in manufacturing, handicraft, trade, ICT and agriculture. Another loan is provided for an amount not exceeding Rs 40, 000, interest charge of 8.5 % per annum The SMEDA also provides grants under the Aegis of the Government Moreover DBM offers other financing schemes such as : The Business Development Loan scheme this applies to Manufacturing, Trade and Service, Transport, ICT, Tourism, Art and participation in overseas trade fairs and surveys. Business Counselling and Facilitation SMEDA helps potential entrepreneurs to prepare a business plan in order for them to secure financing from institutions, mainly the DBM. A Business Plan is one where the potential investor will lay down the description of his thought business and its plans for the next one to three years. It shows what the selected market of the product will be, and also indicates the finance available and what will be needed more to implement the project. As far as business counselling is concerned, potential entrepreneurs SMEDA provides advice about different issues such as discussing and finalizing their business idea. Also, not well-informed entrepreneurs obtain help on issues such as registering of the business, and other steps to follow in establishing their enterprise. Existing entrepreneurs are counselled about the difficulties they come up with, and how to take their business to the next level. SMEDA has also come up with an incubator system which helps entrepreneurs who lack physical space to carry on a project, given that the project is a viable one. The incubator is situated at the head office, in Coromandel. Information and Documentation A website has been recently created to help existing and potential businesspersons in their quest of running a business. This facility helps the cited persons to gather any information they need to set up a business, advice on market research, business plans, importance of financing and financing schemes, training schedules and locations, marketing and fairs organised, articles published by local as well as international bodies, online forms, support institutions are provided online. The site is as follows http://www.gov.mu/portal/sites/smeportal/index.htm. Furthermore, there is the Documentation Centre which gives access to entrepreneurs and the general public to a collection of books, journals, magazines, project files and reports on various sectors. Training 2.3.2 Chapter 3 : Research methodology