Small and Medium Enterprises
Small and medium enterprises (SMEs) form a considerable portion of a nation’s economy, mainly because of their unique objectives, which involve satisfying the specific needs of people in various industries. While SMEs can be found in every country around the globe, their classifications are dependent on individual states. Some nations categorize their SMEs depending on the value of their assets, while others use the number of employees. These attributes are dependent on various factors including the market size, and the size of the economy in which they are based.
According to Motwani, Levenburg & Schwarz (2006), small enterprises can have a personnel of five to ten persons, with an upper limit of up to 100 workers, while that of medium enterprises is often set at 250 personnel. For instance, a firm with fifty employees in a developed country can be described as a small enterprise, compared to a similar firm in a developing country, in which case it could be considered as a medium enterprise based on the size of the economy. Some nations, such as the UK, have definite descriptions of their SMEs. According to the UK Companies Act of 2006, any company with a turnover of less than £3.25 million and fewer than 50 employees is termed as a small enterprise. A medium company, on the other hand, is defined by a workforce of up to 250 employees and a turnover of less than £25.9 million (Statistic of SMEs for the UK and Regions, 2009).
Sharma (2011) suggests that small and medium enterprises involve the application of strategy in order to attain specific targets with regard to penetration of the market, engagement of business rivals, and enhancement of personal and entrepreneurial networks. According to Hong and Jeong (2006), the business strategies assumed by an enterprise are dependent on the competitive nature of the industry. Bryman and Bell (2011) support this claim by suggesting that businesses can penetrate a market by focusing on the needs of a specific market by segmenting based on a product line, type of customer, or geographical region.
SMEs provide employment opportunities and a source of income for both skilled and unskilled workers in every economy. The competitive nature of small and medium enterprises also fosters innovation and the development of multiple industries. According to the OECD (2009), SMEs are necessary to boost the performance of economies. The success of the European Union (EU) States, for instance, can be attributed to small and medium enterprises. While more than 95% of the enterprises in the EU are SMEs, more than 90% of these businesses are micro-sized, with a workforce of fewer than 10 employees. A study of the business establishments in the UK reveals that close to 5 million enterprises have approximately 50 employees. This accounts for over 99% of SMEs in the UK (Mark Ware Consulting Ltd, 2009). Another study by Sharma (2011) revealed that SMEs provided close to 10% of India’s gross domestic product (GDP).
SMEs in Saudi Arabia
As stated above, different countries have diverse descriptions of small and medium enterprises. The definition of SMEs in Saudi Arabia varies from one organization to the next. According to the Small and Medium Enterprises Development Centre at the Eastern Province Chamber of Commerce and Industry, businesses with less than 20 employees are classified as small enterprises, while medium-size enterprises have 21-100 employees. The Saudi Arabian General Investment Authority, in turn, classifies small businesses as those with less than 60 workers and medium enterprises have less than 100 employees (Eu-Gcc Chamber Forum, 2010). The Saudi Industrial Development Fund also proposes a different means of categorizing SMEs. The organization uses annual sales to identify small and medium businesses, whereby such enterprises are required to have annual sales of less than SR 20 million for the sake of financing. Saudi Arabian commercial banks also have varied classifications for SMEs. The majority of the banks classify small enterprises as those with annual sales in the range of SR 100 thousand to SR 5 million and a workforce of 2 to 49 individuals, while medium-size businesses have annual sales in the range of SR 5 million to 50 million, and between 50 and 200 employees (Saudi Arabia Monetary Agency, 2010).
Saudi Arabia is regarded as one of the biggest economies in the GCC. Over the last ten years, the countries’ budgetary allocation has grown tremendously from about $70 to almost $180. Yet, in this expansive growth, experts have observed that SMEs have only contributed 26% of the total employment and a paltry 34% of the economies’ GDP. Analysts contend that SMEs should provide over 50% of any economy’s GDP. According to Ahmed (2012), SMEs in Saudi Arabia are faced with many problems that obstruct the effective and sustainable growth of the sector. The lack of ongoing assistance and finances has shortened the life cycle of SMEs in Saudi Arabia, with an average survival period of 8 years.
One of the biggest challenges facing SMEs in Saudi Arabia is funding (Ahmed, 2012). This is mainly due to the fact that commercial banks shy away from financing SMEs. Research shows that debt financing is less than 3% of what commercial banks in Saudi Arabia extend in total credit (Saudi-US Relation Information Service, 2011). This is a minute figure compared to the amount spent in other economies whereby commercial banks finance SMEs to the tune of up to 15% of their total credit. Banks have cited the lack of information about MSEs as being one of the factors that have discouraged them from lending.
Another problem facing SMEs in Saudi Arabia is the lack of a reliable legal support system to support the use of collaterals in borrowing. In addition, there are no laws to discourage defaulters. Some SMEs have lack credible and audited financial information that can boost their credit rating. A combination of these factors increases the risks posed by financing institutions, which discourages them from lending to SMEs (Ahmed, 2012). If financial institutions were to offer credit to these SMEs in their current state, it would require them to devote a lot of time and assets in servicing the loans. This would increase their costs of operation.
Ahmed (2012) claims that many SMEs in Saudi Arabia lack innovation and comprehensive business plans, and suffer from mismanagement. In support of these claims, Ahmed suggests that it is not uncommon to find many similar outlets established in the same vicinity, a big pointer to their lack of innovation. SMEs’ notion of business is simply that of purchase and resale of goods and services. With no innovation, the SMEs post-minimal profits, which significantly reduce their growth prospects. SMEs are unable to specialize and diversify because they lack the needed marketing expertise. SMEs equally do not have the needed technology and the right managerial strategies to execute their business agenda. Furthermore, the lack of finances means that SMEs cannot train their human resources to equip them with the right skills needed for business management (Ahmed, 2012).
The government of Saudi Arabia has stepped up support for the SMEs in conjunction with other bodies such as commercial banks, the Ministry of Finance, and the Saudi Industrial Development Fund. Measures are being implemented towards providing finances, training, and business support to the SMEs (Ahmed, 2012, pp. 1-13). Attempts are also being made towards launching a national SME Authority to support the growth and development of SMEs in Saudi Arabia.
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