Concept of Small and Medium Enterprises - Literature review Example

A literature review of the dissertation Contents Introduction 3 Concept of small and medium enterprises 3 Importance of small and medium enterprises 5 Financial support for the SMEs in Saudi Arabia 5 Development role of SMEs in the Saudi economy 7 Conclusion 8 References 10 Introduction The small and medium enterprises (SMEs) are the major segments of business in the economies all over the globe. The small and medium enterprises grow in the economies due to the lesser volume of requirements of capital and infrastructure as compared to the establishment of large business. The small and medium enterprises are also formed in order to cater to the needs and demands of the economy. In case of Saudi Arabia, the small and medium enterprises form a large part of the business segment and employs huge volume of workers in the industries. It has been estimated that the small and medium enterprises form a large section of the business sector constituting 92% of the business in the economy. In terms of employment, the small and medium enterprises employ about 80% of the people of the Kingdom of Saudi Arabia (Achoui, 2009, p.45). It has also been found that although the presence of the small and medium enterprises have been overwhelming, the SMEs have exhibited limited capacities in terms of their contribution to the development of the economy of Saudi Arabia. The SMEs have historically contributed about 30% to the growth and development of the economy of Saudi Arabia. This has emerged the scope of reviewing the literature on the SMEs of the Saudi economy, the financial support received by those small and medium enterprises and the role played by these SMEs for the growth and development of the Saudi economy. The review of literature on the topic as presented below reviews the concept of the small and medium enterprises, the importance of the SMEs in the economy, the financial support and the strategies for the SMES in context to the Saudi economy and the developmental role played by the SMEs in the growth of the Saudi economy. Concept of small and medium enterprises The small and medium enterprises could be witnessed all over the globe in every economy in large numbers. There is, however, no standards definition of the SMEs. The SMEs are classified in various economies according to the parameters set by the governments (Burke and Jarratt, 2004, p.126). The companies are characterized as small and medium enterprises according to the number of employees or the size of the assets of the company. The number of employees of a small enterprise varies from 5 to 100 workers and the number of employees of a medium enterprise is 100 to 250 workers. However, the label of SMEs could be fixed on a general basis but depends on the market size of the economies in which they operate. For example, a small enterprise treated in Venezuela may not be treated as a small enterprise in US. The small and medium enterprises are classified on the basis of the number of employees and their turnover in economies like UK (Barney, 1991, p.116). The enterprises with an employee base of not higher than 50 employees and turnover not greater than 3.26 million pounds are classified as small enterprises and firms with an employee base of not more than 250 employees and a turnover not greater than 25.9 million pounds are treated as medium enterprises in the economy of UK. In the countries like Saudi Arabia, the small and medium enterprises are classified on the basis of the guidelines set by the eastern Province Chamber of Commerce and Industry (Shalaby, 2004, p.75). The firms with an employee base less than 20 workers are classified as small enterprises while the firms with an employee base of 21-100 workers are classified as medium enterprises. The General Investment Fund in Saudi Arabia has classified the small enterprises as firms that have less than 60 employees and medium enterprises as firms that have employee base of less than 100 workers. Another classification of the SMEs by the Industrial Development Fund has also been recommended as per the annual sales figures. The World Bank has suggested the financial institutions of the criteria for classification of the small and medium enterprises. The entities that have an employee base of 2 to 49 employees with an annual sales of SR 1 million to SR 5 million are categorized as small enterprises and the entities with an employee base of 50 to 200 employees with an annual sales of SR 5 million to SR 50 million are categorized as medium enterprises (Baron and Armstrong, 2007, p. 28). Importance of small and medium enterprises The small and medium enterprises are significant from the point of view of generating employment and enhancing the income level in the economy. The small and medium enterprises form about 80% of the business sectors in the economy. The SMEs are the sources of innovation in various sectors of the economy. The small and medium enterprises play a major part in stimulating the growth and development of the economy. However, SMEs are generally of smaller size in terms of their employee base, asset size and turnover. Out of the total number of SMEs in the economy, most of the entities have employee base of less than 10m people and have limitations to the increase in operational efficiency (Boswell and Boudreau, 2001, p.852). Thus, the capacity of the SMEs is limited in driving the growth of the economy. The contribution of the SMEs in the growth and development of the economies are limited mostly to less than 10% of the overall contribution of the business segments. This is also attributed to the lack of appropriate policy formulation and the lack of implementation of the support strategies that could lead to the development and growth of the SMEs in the economy (Chaharbaghi and Lynch, 1999, p.45). Financial support for the SMEs in Saudi Arabia The strategies developed for the SMEs are aimed at enhancing the capabilities of the entities in order to increase its efficiency of operations and contribute to the growth and development of the economy. The strategies are designed in order to enable the SMEs to survive as well as excel in the economies that are dominated by large businesses (Galvin and Haidar, 2007, p.84). The review of literature on the economies of Saudi Arabia indicates that these entities face several challenges and the financial support for the SMEs in the economy is an important area of concern for meeting the challenges of capacity enhancement and contribution to the growth of the economy. Due to the small size of operations of the small and medium enterprises, the project feasibility to the financial institutions for lending to SME projects is very low. The commercial banks tend to avoid the aspect of lending in case of small and medium enterprises. It has been estimated that the amount of lending to the small and medium enterprises in the Saudi economy is about 2% of the total debt capital provided by the financiers in the economy of Saudi Arabia. The small and medium enterprises are of large numbers in the economy of Saudi Arabia and hence they face the limitations of increasing their innovation and business management and planning skills (Hong and Jeong, 2006, p.292). The small and medium enterprises also have limitations in the area of marketing, operational efficiency and the use of advanced technologies. The limitations faced by the SMEs in Saudi Arabia are mainly due to the financial drawbacks for which financial support is an important factor in this context. The small and medium enterprises have also faced severe limitations over the years in terms of fund requirements for financing the needs of manpower training and development (Motwani, Levenburg and Schwarz, 2006, p.492). The economic reforms introduced by the government and its measures towards privatization have opened horizons for the SMEs in order to obtain finances required for expansion of their capacities, growth and development. The Saudi government as well as the private financiers have realized the importance of supporting the SMEs with adequate financial support and services for their growth and development (Sharma, 2011, p.194). The government as well as the private banks in the Saudi economy have set up the Kafalah system which has the objective of providing the SMEs with a loan amount of SR 200 million with the loans guarantees covering 75% of the total borrowings of the SMEs. The review of literature provides the information that the support to the SMEs in the Saudi economy is concentrated only to financial support while the aspect of development of the owner’s expertise is ignored. This has led to the reduction in the number of SMEs from the Saudi market which has a negative impact on the growth and development of the economy of Saudi Arabia. Development role of SMEs in the Saudi economy The Governor of the Saudi Arabian Monetary Agency, Muhammad Al-Jasser has suggested that it would not be right to think that the large businesses rather than the small and medium enterprises are the primary contributors in the growth of the economy of Saudi Arabia. The SMEs on the other hand play a significant part in the growth and development of the Saudi economy. It is believed that the SMEs in the Saudi economy have a major role to play in the development of the economy (International Monetary Fund, 2012, p.17). The aspect of unemployment is a major concern in the economy of Saudi Arabia. Considering the large volume of manpower present in the kingdom, the small and medium enterprises have been able to tap the opportunity of the availability of the manpower resources. The employment of the manpower resources have been supported by the financial support by the commercial banks to the SMEs which was aimed at enhancing their capacities and business turnovers (Espinoza, Fayad and Prasad, 2013, p.37). The improvement in the efficiency of operation of the SMEs has led to the distribution of the supply of goods and services in order to meet the economic demand of Saudi Arabia. The small and medium enterprises that have grown in large numbers in the Saudi economy as well as other countries have been started easily due to the simplicity in the organizational structure, administrative set up, regulatory requirements, etc. The SMEs require relatively smaller amount of capital for start-up stage and the financial support by the commercial banks have helped them to increase their production of goods and service and enhance the capacities of revenue and profit earnings (Ramady, 2010, p.82). The Kafalah program implemented by the Saudi government has served the cause of increasing the level of liquidity of the SMEs that have provided the SMEs with the flexibility of investing in new business opportunities. Thus, the SMEs have played the role of a facilitator in the growth of socio-economic environment in the Saudi economy. The employment level has increased that has led to a rise in the income level, purchasing power, demand enhancement and economic growth driven by the economic demand (Information Resources Management Association, 2013, p.28). Thus the SMEs have played the developmental role in the economy of Saudi Arabia. Conclusion The small and medium enterprises are the largest business segments in the economy. The small and medium enterprises are being considered with high priority by the economies as they have the potential to contribute largely to the growth of the economy. The small and medium enterprises basically have an entrepreneurship structure for which the enterprises are resilient to the fluctuations in the global economy. In the Saudi economy, the SMEs have supported by the government with appropriate policies on financial support. This has provided funds to the SMEs for enhancing their business operations. The SMEs has increased their manpower resources and invested in business opportunities. The financial support to the SMEs in the Saudi economy has enabled them to enhance their business efficiency and increased the production volumes. This has helped in the reduction of poverty and unemployment in the kingdom. The SMEs have played the development role in improving the socio-economic environment of the kingdom. The increase in employment, income level and demand in the economy has led the path of economic growth of Saudi Arabia which is reflected in the rise of GDP in the economy. References Achoui, M. 2009. Human resource development in Gulf countries: an analysis of the trends and challenges facing Saudi Arabia. Human Resource Development International. 12(1), pp. 35-46. Burke, G. and Jarratt, D. 2004. The influence of information and advice on competitive strategy definition in small- and medium-sized enterprises. 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