SME Development in Oman –2.Working with the Mighty

The Myth of the Mighty

As economies progressed through the phases of development (see 'The Case of the Missing middle, published in this paper last week) the perception grew that large corporations were the beacons of progress and public weal; culminating in the famous '50s' statement attributed to Charlie Wilson "What is good for General Motors is good for America". Yet nothing could be further from the truth; World Bank research reveals that over 50% of the GDP of High Income countries and 60% of the employment is generated by the Small and Medium Enterprises (SMEs).

The Achilles' heel

Oman over the past decade has rightly invested heavily in mega infrastructural projects and large industry. These have played an invaluable role in attracting capital, creating a number of aspirational jobs and diversifying the economy, however, large industry by itself has limitations in terms of employment generation. A comment by one of the Panelists at the Oman debate, 2011, that Sohar, where RO15 billion had been invested, saw the maximum public dissatisfaction raised a pointed question:was this merely a coincidence or had society's expectations from large industry been unreasonable in some way? Some issues for consideration are listed below.

Employment Generation

: Large industry, in the main, uses capital and technology as the key factor of production whereas SMEs, of necessity, use labour. Anecdotally, a billion dollars invested in a modern power plant generates less than 100 jobs, the same investment in a process plant could generate 400 jobs, a billion dollars invested in SMEs has the potential to generate not 400 or 4,000, but potentially 40,000 jobs; jobs the nation verymuch needs. Further, the investment elasticity of employment is low in large firms as increased investment is absorbed by efficiency enhancing technology. Thus as output is enhanced through increasing investment, employment increases less than proportionately.

Distributed development

Large firms are typically established near large cities, ports, or sources of raw materials as reflected in the development in Muscat, Sohar and Salalah. Consequently, economic development gets further skewed in favour of these locations and leads to migration of populations in search of work, with all the associated social consequences. SMEs on the other hand tend to be distributed geographically, coming up where people live, developing local communities, and creating jobs and economic development where they are most required.

Inclusive Development

Large enterprises, with their relatively sophisticated technology, generally require sophisticated employees. Thus a large petrochemical plant could create a few hundred jobs for highly educated, nationals. Desirable and much required jobs, however, Oman, in the main, needs jobs that can be taken up by the tens of thousands of ordinary school and college graduates that the country produces, each year. SMEs, potentially, create this kind of employment - some limitations in this regard are covered in the next article in the series 'Small is not Beautiful'.

Income Generation & distribution

SMEs are the major generators of income in developed countries. Even more importantly, unlike large enterprises which are formed by large corporations and overseas investors, SMEs are typically formed by middle class entrepreneurs with a good idea and the willingness to work hard. Thus, SMEs contribute to the equitable distribution of the fruits of economic progress.

Balance of Payments

Mega Corporations depend on large amounts of debt and equity which is often sourced from abroad. Thus for every large petrochemical project or port, the country or its private sector takes on large amounts of foreign debt or equity, with the liability for substantial outflows in future years. Similarly, much of the initial inputs, be they plant and machinery, technology or erection has to be sourced from abroad. Small business, on the other hand does not require overseas capital and most of the initial value added is local. Thus, all things being equal , a strategy based on the development of SMEs is advantageous on a balance of payments basis.

The Contribution of Large Enterprise

It must be pointed out that many large firms are significant exporters. These contribute to balance of payments and economic diversification, if they are not predicated on value destroying subsidies

While hi-lighting the benefits of SMEs, one must not take away from large corporations or ignore the limitations of SMEs. Large firms and mega investments constitute the infrastructural backbone of the nation and many earn valuable foreign exchange. Quite clearly large modern ports, refineries and the like cannot be implemented by SMEs nor can sophisticated oil exploration and deep oil fields be developed by them. Such investments need the technology, connections and the risk taking ability that transnational corporations best provide. Similarly large foreign direct investment and the associated inflow of technology and the hi-tech. jobs that are required for the more qualified of our youth are generated mainly by large firms. These firms also contribute the source of raw material and the market for SMEs. As the CEO of one of the oil majors put it"our multi-billion dollar investment will create quality employment; however, the real job crators will be our subcontractors and the large number of SMEs who will be their subcontractors".Therein lies the challenge from which emerges the opportunity. The Sultanate has invested heavily in creating the infrastructure and much more is underway. The successful large corporations have demonstrated their willingness to support SMEs. The country and now needs to encourage entrepreneurship among its youth and to work with the large corporations to support the SMEsin their supply chains. It also needs to remove obstacles in the way of small businesses. The SME Development Fund is being set up to encourage a culture of entrepreneurship and to supportSME developmentin cooperation with stakeholders.By Raphael Parambi, CEO of National Company for Projects & Management which is implementing the RO 100 mill SME Fund, which will, inter alia, work with large firms to strengthen value chains by developing SME

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