(MENAFN- Muscat Daily) Research shows that SMEs account for over 50 per cent of GDP in high-income countries, whereas, contrary to common belief, their contribution is much lower in middle- and low-income nations, Harvard University's Prof Lant Pritchett calls this gap the 'missing middle'
The emergence of organised commercial activity in an economy is typically marked by small informal ‘units' run by individuals, families or trade groups and those catering to neighbourhoods. As an economy ‘emerges,' products and services get more sophisticated, division of labour takes root, the market grows in terms of purchasing power, and the ‘units' grow and develop the ability to service not only local markets but also those farther away. This trend appears to continue through the various stages of evolution of the market, and ultimately results in the development of mega transnational corporations that straddle the globe. Such corporations become the flag-bearers of progress and the ‘holy grail' of developing economies.
The 'Missing Middle': Research shows that small and medium enterprises (SMEs) account for over 50 per cent of GDP in high-income countries, whereas, contrary to common belief, their contribution is much lower in middle- and low-income nations; Harvard University's Prof Lant Pritchett calls this gap the 'missing middle.' In Oman, much has been done to develop the sector, yet its contribution to GDP stands at just 13-14 per cent. The statistics are even more compelling on the jobs front, with SMEs generating over 60 per cent of employment in high-income countries and middle-income countries not far behind. Figures for Oman, however, are not encouraging.
While averages clearly have their limitation and a country's aspirations are tempered by its particular cultural, physical and economic circumstances, the numbers reflect the potential that can be unleashed. Considering Oman's GDP of over RO30bn, the ‘missing middle' represents an opportunity to add over RO10bn to the economy; the employment potential is likely to be even more compelling.
The reasons for the 'missing' SME sector are many and need to be studied carefully. They include:
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Vulnerability - Small businesses have low tolerance thresholds. Small setbacks lead to failures, impediments and delays, which are handled easily by large firms, but are enterprise-threatening for SMEs. The lack of ‘contacts,' size and stature expose SMEs to a disproportionate share of these obstacles.
€¢ Management and staffing - The issue has two dimensions. SMEs by virtue of image and scale are unable to attract or remunerate talent, especially local talent - which often requires expensive training. At the same time, owners often do not appreciate the importance of finance, marketing or indeed professional management and do not invest in them, to their peril.
€¢ Finance - Both the availability and cost of debt and equity are often the most significant impediments to SME development. Information opacity and structural weakness of SMEs make them unattractive to traditional sources of finance and the Muscat stock exchange's current minimum capital regulations place the capital markets out of the reach of most SMEs.
€¢ Lack of entrepreneurship - Oman had a tradition of entrepreneurship, however, with the newfound prosperity there is a perception, reportedly confirmed by an academic survey conducted by SQU, that some of this spirit of entrepreneurship has been replaced by a notion of ‘entitlement.' The problem is aggravated by a shortage of ‘role models' and of training. Consequently, young entrepreneurs have unrealistic expectations, which lead to poor contingency planning and failure.
€¢ Barriers to entry - The business sector in Oman is often perceived as a big boys club. Who you know often determines where the order goes and how soon you get paid. In such a situation, orders and timely payments go to the established players with new, small players facing inordinate barriers.
A Call to Action: Oman is admirably placed to develop a vibrant, productive SME sector, with most of the enabling factors in place. These comprise a young and educated population; the development of technical, vocational and tertiary institutions across the country; excellent infrastructure; world-class logistics; the development of industrial clusters across the country and above all, the emphasis placed on SME development by the government and the Public Authority for Small and Medium Enterprises. Piecemeal solutions at bridging the ‘missing middle' have been unsuccessful and an integrated, comprehensive solution of adequate scale is required. The SME Development Fund (under formation), being established in the private sector with support from the government, aims to provide this comprehensive solution, with the cooperation of all stakeholders
Raphael Parambi
Raphael Parambi is chief executive officer of the National Company for Projects & Management, which is implementing the SME Development Fund, capitalised at RO100mn and aimed at financing and supporting the
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