SME Development in Oman 3: Small is Beautiful

In the preceding articles 'SME Development in Oman' we have seen that SMEs are the main drivers of economic growth and employment creation and that large corporations do not produce employment in proportion to the capital invested in them; indeed, as large firms grow, incremental investment is usually made in productivity improving technology and equipment. As a result, the employment elasticity of investment is low – fewer jobs are created for every additional Rial of investment.

SMEs indeed are the drivers of GDP accretion and employment generation; they also operate in some of the most important sectors of the economy, as reflected in the graphic alongside. However, they definitely are not a homogenous set, uniformly contributing to the public veal, generating jobs and adding to GDP. In Oman, as per the Public Authority for SME Development (PASMED), 90% of all firms in the country are SMEs.Of these, based on a superficial review of Ministry of Manpower statistics, a vast majority are micro enterprises, employing 5 or fewer persons, this is anecdotally borne out in discussions with the PASMED as well.





The rocky path

The challenges that SMEs, particularly the younger and smaller ones (as prevalent in Oman) face are many. Less than two out of three small businesses survive two years, and less than a third reach the four year mark, as per Mowgli Foundation, UK. These findings are supported by the Nesta report of 2009 which found that, in the UK, only 38% of the SMEs survived for 10years. Anecdotally, this has been the experience of the major financiers of SMEs in Oman, all of whom have faced the challenges of the vulnerability of the sector.

With Apologies to EF Schumacher's 1973 book 'Small is Beautiful'

The reasons for this vulnerability are covered in an earlier article, 'The Case of the Missing Middle' that appeared in this paper. In essence, SMEs are, by their very nature, weak and unable to handle setbacks; they have difficulty attracting and retaining good management and entrepreneurs themselves are often not the best managers; SMEs find it difficult to obtain loans due to their weak financials; equity market are out of the reach of SMEs; multi-dimensional barriers to entry, including, not being invited to tender, in-ability to compete for orders, (where contacts often play a part); payment delays; government regulation, etc. are some of the reasons for the failure of SMEs.

Small is not always Beautiful

An analysis of the data from the Public Authority for Social Insurance (PASI) showed that of the employers reporting to it, 78% employed 5 or fewer Omani employees, the 'micro' firms (the word micro is being used in a generic sense. The ministry of commerce has created a definition of micro enterprise based on employment and turnover, however data is insufficient for meaningful analysis). These 'micro' entities, comprising 78 % of all enterprises, contributed less than 10% of all Omani private sector employment in the country. Clearly, Omani micro enterprises are not, today, the creators of significant employment. Low employment generation is the characteristic of 'micro' enterprises elsewhere as well. A survey in the US showed that firms employing 20 or fewer employees comprised 90% of all firms; they, however, accounted for only 20% of all employment (Eric Hurst and Ben Pugsley of the University of Chicago). To make matters worse, another survey found that in the case of small businesses in their second and subsequent years of operations, more jobs were lost because of small business closing down than were added because of additional hiring by the firms that remained in business.

Further, the vast majority of SMEs are not as innovative as they are madeout to be, merely offering a standard product or service to a niche market. Further, being unable to invest in technology that can leverage labour productivity, they can at best offer low paying low quality jobs which offer limited opportunity for advancement and training. The product quality of micro enterprises is often not of the highest standards and their cost structures result in higher product cost, particularly in products and services that lend themselves to economies of scale – typically mass production, bulk purchase or logistics driven operations.

The Dichotomy – horses for courses

Clearly, the micro and small, while constituting the vast majority of SMEs are not the creators of jobs and, by implication, economic growth .They however, provide a valuable safety net and self-employment opportunity, by providing specific employment opportunities that larger firms are unable or unwilling to provide. They also, constitute the overwhelming majority of all enterprises in the country and their importance must not be ignored and this will be covered in later articles in the 'SME Development in Oman' series of articles. However, if SMEs as a whole contribute most of the employment and economic activity and yet the vast majority clearly do not do so, which are the SMEs that do contribute? Research in a large number of countries, indicates that it is indeed a small proportion of the SMEs (6% as per one study in the UK) that contribute most of the growth. This is covered in the next article in the series, "Seeking the Snarks"-(the snark is a mythical and hard to find creature in Lewis Carol's poem by the same name). The challenge then would be to encourage the formation of SMEs in general, to create opportunities for growth of these SMEs and to identify and minimise the causes of failure. A separate challenge would be to seek to identify elusive 'Snarks' and actively support and accelerate their growth to maximize the benefits of employment generation, and economic diversification and growth. These issues will be covered in future articles.By Raphael Parambi, CEO of National Company for Projects & Management which is implementing the RO 100 mill SME Fund, which will, inter alia, seek to boost SME formation and mitigate the causes of failure while actively seeking out and supporting the 'Snarks'

There is pressing need for a study of both aspects, in the Omani context, and the SME Development Fund would consider conducting some, once it is operational.

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