SIDBI - Inception Report - Economic Scenario and MSME Status

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March 2010

Indian Council for Research on International Economic Relations (ICRIER)

BACKGROUND PAPER ON ECONOMIC SCENARIO AND


SIDBI MSME STATUS IN SELECT COUNTRIES
ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

Table of Contents

1. Introduction............................................................................................................................................3
2. Economic Scenario................................................................................................................................5
China..........................................................................................................................................................7

Italy............................................................................................................................................................9

Malaysia...................................................................................................................................................11

Philippines................................................................................................................................................13

Russia.......................................................................................................................................................15

South Africa.............................................................................................................................................17

South Korea.............................................................................................................................................19

Turkey......................................................................................................................................................21

Brazil........................................................................................................................................................22

3. Definition of MSMEs..........................................................................................................................24
4. Status of MSME Sector.......................................................................................................................29
China........................................................................................................................................................29

Italy..........................................................................................................................................................33

Malaysia...................................................................................................................................................35

Philippines................................................................................................................................................37

Russia.......................................................................................................................................................41

South Africa.............................................................................................................................................43

South Korea.............................................................................................................................................45

Turkey......................................................................................................................................................47

Brazil........................................................................................................................................................49

Sample Questions for SIDBI Team Visits to Select Countries....................................................................50


Annexure......................................................................................................................................................57

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

1. Introduction
Micro, Small and Medium Enterprises (MSMEs) play a significant role in all economies and are
the key drivers of economic growth and innovation, and generators of employment and income.
They also contribute significantly to industrial production and exports. In developing countries
across Asia, SMEs (i) make up 80%–90% of all enterprises, (ii) provide over 60% of the
private sector jobs, (iii) generate over 30%–40% of total employment, and (iv) contribute
about 50% of sales or value added1. In addition, SMEs play a major role in serving the $5
trillion market for goods and services to the 4 billion people at the base of the economic
pyramid2. Because of their significant contribution, development of SME sector has been a core
element in each country’s strategy to foster economic growth, employment and poverty
alleviation.

In India, the MSME sector constitutes 95% of all enterprises and plays a pivotal role in the
overall industrial economy with 45% contribution towards manufacturing output and 40%
towards total exports. It employs a total of 60 million people spread over 26 million
enterprises3 and the labour intensity in the MSME sector is estimated to be almost 4 times higher
than the large enterprises. However, despite playing a strategic role, the MSME sector suffers
from various problems. The MSMEs have a long way to go and still lack the spark and luster, as
compared to MSMEs in other major developing economies of the world. The recent global
economic slowdown has further exposed the weaknesses of the MSME sector, more particularly
the exporting firms.

Therefore, it is necessary to find effective ways of addressing these concerns, in line with
global best practices. The MSME policies vary greatly from country to country, depending on a
country’s economic philosophy, availability of labour and raw materials, comparative
international trade advantages, level of economic development, capacity to absorb external
shocks, etc. With this perspective, it is necessary to document different MSME policies of select
foreign countries (China, Italy, Malaysia, Philippines, Russia, South Africa, South Korea, Turkey

1
Asian Association of Management Organization Report—SMEs in Asian Region: Harnessing the Growth Potential
2
Creating opportunities for small businesses, International Finance Corporation (IFC), World Bank Group
3
Quick Results of 4th MSME Census, Ministry of MSME, GoI
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

and Russia) with similar economic conditions as India and where MSME sector is a dominant
player. An in-depth analysis of these policies in areas of monetary and credit policies, fiscal
policies, institutional support, marketing policies, promotional and development policies, labour
laws and exit policy etc. need to be done, to suggest a comprehensive policy framework to
Government, benefiting the Indian MSME sector.

This background paper is an attempt to analyse and examine the economic scenario and status of
the MSME sector in these select countries. The paper goes further to review the existing
literature as well as empirical studies in order to identify the major role of MSMEs, their
contribution to economy, their geographical and sectoral distribution, and development of the
MSME sector in these countries. The paper would serve as an input towards developing the
understanding of the SIDBI teams, going to visit these countries, to study their MSME sector in
further detail.

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

2. Economic Scenario
The recent global economic slowdown, which started in the United States and rapidly spread to
other major developed and developing economies of the world, has had a significant impact on
the economic growth of these countries. In 2009, the world output declined by 0.8 percent as
compared to a growth of 3.0 percent in 2008. However, with improved policy reforms and
rebound in market sentiments, the economies have started to expand again and conditions have
started to improve. Emerging and developing economies are generally further ahead on the road
to recovery, led by resurgence in Asia. According to IMF projections, in 2010 the world
output is forecast to expand by about 4 percent, with advanced economies projected to
grow at 1.25 percent and emerging economies by 5 percent. World trade volume (goods
and services), which declined by 12.3 percent in 2009 has begin to pickup and is projected
to grow at 5.8 percent in 20104.

According to World Bank report on Global Economic Prospects 2010, released in January 2010,
Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent this year
and 3.2 percent in 2011. Global GDP, which declined by 2.2 percent in 2009, is expected to
grow 2.7 percent this year and 3.2 percent in 2011. Developing countries will as usual see
higher growth rates, at a combined 5.2 percent this year, but will be plagued by shortages of
financing and investment that will handicap their progress. Rich countries will grow more
slowly, by 1.8 percent in 2010, as fragile financial markets and anemic private demand crimp job
creation and investment, the report says. World trade volumes, which fell by a staggering 14.4
percent in 2009, are projected to expand by 4.3 and 6.2 percent this year and in 2011.

In the paragraphs to follow, we discuss the economic scenario in the select countries in detail.
Table 1 lists the economic indicators of the select countries in comparison with India, for last 3
years.
Year Brazil China Italy India Malay Philipp Russia South South Turkey
sia ines Africa Korea
GDP 2007 5.7 13.0 1.6 9.4 6.2 7.1 8.1 5.1 5.1 4.7
Growth 2008 5.1 9.6 -1.0 7.3 4.6 3.8 5.6 3.7 2.2 0.9

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World Economic Outlook, International Monetary Fund (IMF), October 2009
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

Rate in
%age at
2009 -0.3# 8.7 -3 6.5# -1.7 0.994* -9.0 -1.8 0.2 -6.5
constant
prices
GDP at 2007 1333.5 3382 2117 1101 186.1 144.04 1294.3 283.381 1049 649.12
current 2008 1612.5 4327 2313 1206.6 221.6 166.90 1676.5 276.764 929 729.98
prices (US$ 158.70
2009 1481* 4910 2053 NA 207.3* NA NA 1190.58 593.53
Billions) *
GNI Per 2007 9510 5430 30190 2740 13230 3660 5800 9460 21695 12970
Capita, PPP
2008 10070 6020 30250 2960 13740 3900 7530 9780 19231 13770
(US$)
Exports 2007 160.6 1218.0 492.3 126.41 158.7 50.466 317.6 59.15 371.5 107.272
(US$ 2008 197.9 1428.5 493.8 163.13 176.4 49.078 355.5 76.19 422.0 132.027
Billions) 2009 153 1201.7 492 185.29 198.9 38.335 471.6 86.12 363.5 102.165
Imports 2007 120.6 955.8 504 185.73 127.3 55.514 171.5 61.53 356.8 170.063
(US$ 2008 173 1133.1 509.3 251.65 139.1 56.746 223.4 81.89 435.2 201.964
Billions) 2009 127.6 1005.6 500 303.69 154.7 43.004 302 90.57 323 140.775
Trade 2007 40 262.2 -11.7 -59.32 31.4 -5.048 146.1 -2.38 15 -62.79
Balance 2008 24.9 295.5 -15.5 -88.52 37.3 -7.669 132.1 -5.7 -13.5 -69.93
(US$ 169.6
2009 25.4 196.1 -8 -118.4 44.2 -4.669 -4.45 40.5 -38.62
Billions)
FDI 2007 34.585 83.521 40.2 19.15 8.4 2.9 55.07 5.68 2.62 22.029
(US$ 2008 45.05 108.31 17.03 33.03 8.05 1.52 27.02 9 7.6 18.18
Billions) 2009 25.94 NA NA 27.10 5.7 3.2 15.9 NA NA NA
Foreign 2007 180.33 1530 70.5 276.25 101 22.97 474 29.80 262.22 73.3
Exchange 2008 206.8 1950 94.33 255.24 92 37.55 426.5 37.41 201.2 73.66
Reserves
(US$ 2009 239 2399 105.3 283.52 96.67 45.03 437.7 40.5 269.99 74.82
Billions)
Table 1: Economic Indicators of Select Countries in Comparison with India
*IMF Staff Estimates, World Economic Outlook 2009 Database, #The Economist Intelligence Unit Forecast/Estimate, In case of India: Exports
and Imports figures are for the period April-March of the corresponding year
Source: Press Releases by NBSC (China), Weekly Statistical Supplements by RBI (India), FDI Statistics by DIPP (India), IMF: World
Economic Outlook Database (October 2009), Key Development Data Statistics by World Bank, Economic Indicators by Central Bank of Brazil,
Statistics South Africa, CIA- The World Factbook, World Investment Report (2009), The Central Bank of the Russian Federation, Federal State
Statistics Service (Russia)

China
China is a communist state. China's economy during the past 30 years has changed from a
centrally planned system that was largely closed to international trade to a more market-
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

oriented economy that has a rapidly growing private sector and is a major player in the global
economy. The economy of the People's Republic of China is the third largest and fastest
developing in the world, with a nominal GDP of US$ 4.91 trillion and growing at 8.7
percent in 2009. China's foreign exchange reserves are the largest in the world. China is also the
leading FDI recipient in the world with inflows touching US$ 92.4 billion in 2008.

China considered as the world’s factory, accounts for a round 8% of the total
manufacturing output in the world and ranks third worldwide in industrial output.
Industry and construction account for 49.2% of China's GDP. China is the largest producer of
steel in the world and the steel industry has been rapidly increasing its steel production. Major
industries in China include mining and ore processing, iron and steel, aluminum, coal,
machinery, armaments, textiles and apparel, petroleum, cement, chemical, fertilizers, food
processing, automobiles and other transportation equipment including rail cars and locomotives,
ships and aircraft; consumer products including footwear, toys, and electronics,
telecommunications and information technology.

China is the largest trading nation in the world and the largest exporter and second largest
importer of goods. The total value of imports and exports for year 2009 reached US$ 2,207.3
billion, a drop of 13.9 percent over that in the previous year. The total value of exports for the
whole year was US$ 1,201.7 billion, down by 16.0 percent; that of the imports was US$ 1,005.6
billion, down by 11.2 percent, with a trade surplus of US$ 196.1 billion 5. About 80 percent of
China's exports consist of manufactured goods, most of which are textiles and electronic
equipment, with agricultural products and chemicals constituting the remainder. Out of the five
busiest ports in the world, three are in China. United States, European Union and Japan are the
largest trading partners of China.
The global financial crisis has serious impacts with reduction in demand for Chinese
exports for the first time in many years. One impact was that GDP growth declined
dramatically. According to statistical data from National Bureau of Statistics (NBS), the GDP

5
Press Releases, National Bureau of Statistics of China, 21st January 2010
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

growth rate in 2007 was 11.9% and quickly dropped to 9.0% in 2008. GDP grew at 6.1% in the
first quarter of 2009, the worst performance in the PRC economy since 2002.

The financial crisis also caused export growth to drop sharply. In 2007, the PRC’s exports
increased 23.5% over the previous year. In 2008, the PRC’s imports and exports in foreign trade
totaled US$2.56 trillion, an increase of 17.8% year on year. However, the export growth rate in
December 2008 was -2.8%, the first of its kind in 10 years. Factory closures and layoffs in
southern China increased as the unemployment rate climbed.

The government vowed to continue reforming the economy and emphasized the need to increase
domestic consumption in order to make China less dependent on foreign exports for GDP growth
in the future. On November 10, 2008, China announced a historic $586 billion stimulus
package aimed at encouraging growth and domestic consumption in ten areas of Chinese
society ranging from infrastructure investment to environmental protection and disaster
rebuilding. Prior to this China had also instituted cuts in interest rates, set aside funds for
infrastructure construction, and instituted measures to boost real estate sales. It has also
announced greater rebates on taxes charged to exporters.

China also focused on increased industrial restructuring and greater support to export-oriented
companies and farmers. The crisis forced China to look at fixing the many of its financial
weaknesses such as its many non-performing loans, its antiquated banking system, and its
reliance on U.S. trade.

With a strong growth of 8.7 percent in 2009, the Chinese economy is expected to expand at
a faster pace in 2010. Goldman Sachs Group Inc. forecasts growth of 11.4 percent, while
Merrill forecasts 10.1 percent growth and Capital Economics Ltd. sees a 10 percent growth
in 2010.

Italy
Italy, which is located partly on the European Continent and partly on the Italian
Peninsula in Southern Europe, has a republic type of government and belongs to the Group of
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

Eight (G8) industrialized nations and is a member of European Union and OECD. Italy was the
seventh-largest economy in the world in 2008 with a GDP of US$ 2.3 trillion. Italy has a
diversified industrial economy, which is divided into a developed industrial north, dominated by
private companies, and a less-developed, welfare-dependent, agricultural south, with high
unemployment. The Italian economy is driven in large part by the manufacture of high-quality
consumer goods produced by small and medium-sized enterprises, many of them family-owned.
Italy is a developed country, and, according to The Economist, has the world's 8th highest quality
of life. According to the World Bank, Italy has high levels of freedom for investments, business
and trade.

Services account for 71.3% of the GDP, with tourism as the most profitable sector of Italy’s
economy. Italy is the fifth major tourist destination and the fourth highest tourist earner in the
world. Industry accounts for 26.7% while agriculture accounts for only 2% of the GDP. Italy is
the world's fifth largest industrial goods producer with a US$381 billion output in 2008.
Main industries are tourism, commerce, communications, chemicals, machinery, car
manufacture, food, textiles, clothing, footwear and ceramics.

The country exports and produces the highest level of wine, exporting over 1,793 tonnes. Italy
has the world's 6th highest exports. Italy's major exports are precision machinery, motor
vehicles (utilitaries, luxury vehicles, motorcycles, and scooters), chemicals and electric goods,
but the country's more famous exports are in the fields of food and clothing. Italy's closest trade
ties are with the other countries of the European Union, with whom it conducts about 59% of its
total trade.

The financial crisis had a serious impact on Italy’s economy, with GDP growing at only 1.6
percent in 2007 and declining by 1 percent in 2008. The contraction was largely due to a 3.7
percent fall in exports, a three percent fall in investment and a 0.5 percent fall in consumption.
Amid the economic crisis, Italians have had to change their lifestyles, cutting expenditure on
such things as gifts, restaurants, entertainment and holidays.

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

The Italian government adopted a series of measures to combat the global financial crisis. The
measures include granting state aid to troubled banks, also through buying stakes in the banks,
guaranteeing new bank loans, increasing the amount of liquidity in the market and making it
easier for banks to lend money to each other at lower rates. In March 2009, the government
approved a program of public projects to boost investment in infrastructure. The government has
also helped families pay their mortgages and buy durable goods. A tax amnesty program
implemented in late 2009 to repatriate untaxed assets held abroad has netted the federal
government more than $135 billion.

In 2010, Italy’s economy is expected to expand faster as exports outpace slower growth in
household demand. The Italian government has predicted a growth of 1.1 percent for 2010
and 2 percent for 2011 and 2012.

Malaysia
Malaysia, with a republic type of government, is a growing and relatively open state-
oriented market economy with a GDP of US$ 221 billion in 2008 . Malaysia was successful in
diversifying its economy from dependence on exports of raw materials to expansion in

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

manufacturing, services, and tourism. According to IMF estimates, the GDP of the country is
estimated to decline by 3.6 percent in 2009.

Malaysia industrial sector accounts for 48.1 percent of total GDP or 63.4 billion US dollars. The
industrial output is ranked 32nd in the world. The industrial sector is regulated and promoted by
Malaysia Industrial Development Authority. Major industries in Malaysia are rubber and palm
oil processing and manufacturing, light manufacturing industry, tourism, electronics, tin mining
and smelting, logging and processing timber.

International trade plays a large role in Malaysia’s economy. At one time, it was the largest
producer of tin, rubber and palm oil in the world. Major export items include electronic
equipment, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber,
textiles, chemicals. Major exporting partners are Singapore 14.7%, US 12.5%, Japan 10.8%,
China 9.5%, Thailand 4.8%, Hong Kong 4.3% (2008). Major imports were electrical and
electronic products, chemicals and chemical products, machinery, appliances and parts, iron and
steel products, etc.

In the first quarter of 2009, Malaysia also joined the growing list of countries hit by the global
turmoil. Malaysia’s GDP grew at 4.6 per cent in 2008 - down from 6.3 per cent in 2007.
Malaysia held USD 85 billion in foreign exchange reserves as of the end of February 2009, down
from USD 111 billion a year before. Malaysia’s exports recorded double-digit declines in the
final quarter of 2008 and the first quarter of 2009. Export-oriented industries, particularly the
electrical and electronics were badly hit. The services sector also registered a mild decline in the
first quarter of 2009, in line with the lack lustre performance of trade-related activities. The
economic downturn affected labour demand, as reflected in higher retrenchments and lower
vacancies.

The central bank’s healthy foreign exchange reserves and its well-developed regulatory regime
limited Malaysia's exposure to riskier financial instruments and the global financial crisis.
Nevertheless, decreasing worldwide demand for consumer goods hurt Malaysia's exports and
economic growth in 2009, although both began showing signs of recovery late in the year.
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

Facing the global financial crisis, the Malaysian government announced various measures since
November 2008 to address the impact, including introductions of strategies to stimulate and
facilitate investment, trade and further liberalization of manufacturing related services.

In January 2009, the government announced a fiscal stimulus package of RM 7 billion (US
$1.96 billion or 1 per cent of the GDP) which will go toward the promotion of strategic
industries, small-scale projects such as village roads and school repairs, and education and skill
training programmes. In March 2009, the government unveiled a second and much larger
stimulus package of RM 60 billion (US $16.2 billion or 8.6 per cent of the GDP) to be
implemented over 2009 and 2010.

The government has also urged entrepreneurs and manufacturers to take several steps such as
analyzing their products with regard to production, quality and pricing, seeking new markets like
China, India and West Asia as well as restructuring product manufacturing to be more creative,
value-added and of better quality.

IMF projects Malaysia’s growth rate to decline by 3.6 percent in 2009. However, it is
expected that growth rate will improve in 2010. The driving force for Malaysia’s GDP growth
would be support from Asian countries, especially India and China.

Philippines
Philippines has a republic government. The economy of the Philippines is the 5th largest
economy in South East Asia and has a mixed economic system, and one of the newly

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

industrialized emerging market economies of the world. The country posted a GDP growth rate
of 7.1% in 2007, which slowed to 3.8% in 2008 as a result of the global financial crisis.

In 2008, the contribution of agriculture to GDP was at 14.7%, of industry at 31.6%, of services at
53.7%. As a newly industrialized nation, the Philippines is still an economy with a large
agricultural sector, however services are beginning to dominate. Much of the industrial sector is
based around manufacturing electronics and other high-tech components, usually from American
corporations.

Important sectors of the Philippine economy include agriculture and industry, particularly
food processing, textiles and garments, and electronics and automobile parts. Major
industries include electronics assembly, garments, footwear, pharmaceuticals, chemicals, wood
products, food processing, petroleum refining and fishing. The country is rich with mineral and
thermal energy resources. In 2003, it produced 1931 MW of electricity from geothermal sources
(27% of total electricity production).

The country exports stood at US$ 49 billion against imports of US$ 56.7 billion in 2008. Major
export commodities are semiconductors and electronic products, transport equipment, garments,
copper products, petroleum products, coconut oil, fruits. Top exports partners are
China 25.7%, United States 12.7%, Japan 12.4%, Hong Kong 8.7%, Singapore 6.9%, Malaysia
4.4% (2008). Major import commodities are electronic products, mineral fuels, machinery and
transport equipment, iron and steel, textile fabrics, grains, chemicals and plastic.

Philippines was also been affected by the global economic downturn. The global turmoil had
dampened demand in Japan, the United States and Western Europe -- large markets for
Philippine export goods, services and migrant workers. As these markets contracted, so did the
demand for Philippine labor. Several companies reported either laying off workers or cutting
working hours as the crisis reduced demand for Philippine exports. The Philippine Labor
Department reported that by March 2009, 40,000 workers were retrenched, 33,000 workers are

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

experiencing shorter working hours while over 5,400 overseas Filipino workers were displaced
because of the crisis.

However, Philippines has weathered the global recession better than its regional peers, due
to lower dependence on exports and higher levels of domestic consumption, fueled by large
remittances from four-to five-million overseas Filipino workers. Strong
macroeconomic fundamentals combined with the 330-billion-peso (about 6.84 billion U.S.
dollars) stimulus package also supported recovery.

The Philippine GDP is expected to expand at 3.7 percent to 4.4 percent in 2009. Easing of
inflation will boost consumption and keep the economy afloat. The stimulus package -- the bulk
of which will be used to build infrastructures -- will create 800,000 new jobs.

Russia
Russia has undergone significant changes since the collapse of the Soviet Union, moving
from a globally-isolated, centrally-planned economy to a more market-based and globally-

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

integrated economy. Russia has a federal (Federation) form of government. The economy of
Russia is the eighth largest economy in the world by nominal value and the sixth
largest by purchasing power parity (PPP). The percentage contribution of agriculture, industry,
and services to total GDP was 4.7 percent, 37.6 percent and 57.7 percent, respectively in 2008.

Russian industry is primarily split between globally-competitive commodity producers - Russia


in 2009 became the world's largest exporter of both oil and natural gas and is also the third
largest exporter of steel and primary aluminum - and other less competitive heavy industries that
remain dependent on the Russian domestic market. Russia has an abundance of natural gas oil,
coal, and precious metals. It is also rich in agriculture. Major industries in Russia are
coal, oil, gas, chemicals, and metals; all forms of machine building from rolling mills to high-
performance aircraft and space vehicles; defense industries including radar, missile production,
and advanced electronic components, shipbuilding; road and rail transportation equipment;
communications equipment; agricultural machinery, tractors, and construction equipment;
electric power generating and transmitting equipment; medical and scientific instruments;
consumer durables, textiles and foodstuffs.

Prior to the global financial crisis, the oil and gas sector generated more than 60 per cent of
Russia’s export revenues, and accounted for 30 per cent of all foreign direct investment (FDI) in
the country. Major exports of Russia are mineral fuels, metals, precious stones, machinery,
vehicles and transport equipment, chemical products and rubber.

The Russian economy, however, was one of the hardest hit by the 2008-09 global economic
crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied
on dried up. The impact on Russia has been accentuated by its structural vulnerabilities:
dependence on the oil and gas sector, a narrow industrial base and limited small and medium-
size enterprise sector. Early labor market and poverty impacts have been severe. Many
infrastructure projects had been put on hold amid deepening financial crisis. Various companies
experienced a slump in demand for their products and had to lay off workers or delayed salaries.

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

Russia's early fiscal policy response to the crisis has been larger than that of many other G-20
countries and greater than the internationally recommended 2 percent of GDP. The Central Bank
of Russia spent one-third of its $600 billion international reserves, the world's third largest, in
late 2008 to slow the devaluation of the ruble. The government also devoted $200 billion in a
rescue plan to increase liquidity in the banking sector and aid Russian firms unable to roll over
large foreign debts coming due. The economic decline appears to have bottomed out in mid-2009
and by the second half of the year there were signs that the economy was growing, albeit slowly.

Improvement is expected in 2010, with IMF projecting growth of 3.6 percent compared to
de-growth of 9 percent in 2009. Citigroup Inc. forecasts the pace of Russian economic
growth to 6.2 percent this year as consumer spending accelerates. Real GDP levels in Russia
will reach the pre-crisis high only at the end of the third quarter of 2012.

South Africa
South Africa, the economic powerhouse of Africa, is a middle-income, emerging market
with an abundant supply of natural resources; well-developed financial, legal, communications,
energy, and transport sectors; a stock exchange that is 17th largest in the world; and modern
infrastructure supporting an efficient distribution of goods to major urban centers throughout the
region. South Africa's transportation infrastructure is among the best in Africa, supporting both
domestic and regional needs.

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

South Africa’s GDP grew by 3.7 percent in 2008 and is expected decline by 1.8 percent in
2009. South Africa boasts an abundance of mineral resources, with nearly 90% of the
platinum metals on Earth, 80% of the manganese, 73% of the chrome, 45% of the
vanadium and 41% of the gold.

As a major mining country, South Africa's strengths include a high level of technical and
production expertise as well as comprehensive research and development activities. It is also a
world leader of new technologies, such as a ground-breaking process that converts low-grade
superfine iron ore into high-quality iron units.

Mining is the leading industry in South Africa, with precious metals contributing 65% to the
country's mineral export earnings. Other major industries include automobile
assembly, metalworking, machinery, textiles, iron and steel, chemicals, fertilizer, foodstuffs
and commercial ship repair.

Major export commodities include gold, diamonds, other metals and minerals, machinery and
equipment. Top countries of exporting are Japan 11.1%, US 11.1%, Germany 8%, UK 6.8%,
China 6%, Netherlands 5.2% (2008). Major imports commodities are machinery, foodstuffs and
equipment, chemicals, petroleum products and scientific instruments.

As a result of the economic crisis, GDP figures for the last quarter of 2008 came in negative (-
1.8% seasonally adjusted and annualized), with manufacturing falling by 21.8%. The automobile
industry (a large employer and the main contributor to international trade tax revenues) was
down over 30% year-on-year; indeed, overall job creation is slowed down and jobs were shed in
some sectors. Mining production also fell, as global commodity prices declined. Consumer
expenditure declined credit extension to the private sector slowed down, and housing prices
dropped.

South Africa's government has taken a number of steps to see the country through the
global economic crisis. These include a R2.4-billion worker layoff training scheme, R6-

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

billion in support for struggling firms, measures to root out customs fraud, and debt
restructuring help for consumers. Key areas in respect of distressed sectors have been
addressed, including support for distressed companies in the automotive sector, a rescue package
for the clothing and textiles industry, and increased incentives for the manufacture of capital
equipment, transport equipment and fabricated metal products linked to South Africa's
infrastructure development programme.

South Africa's gross domestic product (GDP) grew by 3.2% in the fourth quarter of 2009.
The combination of a recovery in consumer demand, ongoing robust public sector spending, an
end to the cycle of destocking, moderate export gains and the 2010 FIFA World Cup, could
combine to generate a surprisingly robust acceleration in growth during the middle quarters of
2010, ending the year with an overall growth of over 3%.

South Korea
South Korea, with a republic type of government, is recognized as a high-income
economy by the World Bank, with a GDP of US$ 929 trillion in 2008. South Korea has
achieved an incredible record of growth and global integration to become a high-tech
industrialized economy. The economy of South Korea is a developed, largely free-market
economy that is the fourth largest in Asia and 15th largest in the world.

The country is considered the world’s most innovative major economy, the world's
largest shipbuilder and one of the top five automobile makers in the world. It is home to
many well known global conglomerates such as Samsung, Hyundai-Kia, LG and SK. Major

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industries include electronics, automobile production, chemicals, shipbuilding, steel, textiles,


clothing, footwear and food processing. The contribution of agriculture to GDP is estimated at
3.0%, of industry at 39.5% and of services at 57.6%.

South Korea's economy relies heavily on exports and imports for sustenance and is the
world's eighth largest exporter and tenth largest importer. South Korea tends to be a net exporter
of assembled products and a net consumer of components (both domestic and imported from
other Asian manufacturers). Main exporting partners are the People's Republic of
China 25.5%, U.S.10.9% and Japan 6.4%, while main importing partners are The People's
Republic of China 19.2%, Japan 15.1%, U.S. 8.8% and Saudi Arabia 6.1%.

As the global financial crisis of 2008 has led to a financial collapse and economic decline in
the G7 and European economies, Korea has also been hit by the crisis. As of early February
2009, the Korean Won had fallen 31% in value vs. the US Dollar in the past year. The Korean
economy shrank 3.4% year over year in the fourth quarter of 2008, and the benchmark stock
index lost almost 41% of its value for 2008.

The government came up with a set of preemptive policies to prevent further economic
worsening. The government launched various schemes, including job creation schemes,
expansionary fiscal spending, corporate restructuring and welfare enhancement for low income
earners. In the third quarter of 2009, the economy began to recover, in large part due to export
growth, low interest rates, and an expansionary fiscal policy. Korea’s 2009 economic growth
stood at 0.2%.

In 2010, the central bank of Korea forecasts growth of 4.6 percent while the government
tips 5 percent. The IMF has projected growth of 4.5 percent, while OECD projects growth
of 4.4 percent for 2010.

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Turkey
The economy of Turkey is largely dominated by modern industries and the services sector. In
recent years, Turkey had a rapidly growing private sector, yet the state still plays a major role
in industry, banking, transport, and communications.

Turkey’s GDP grew by only 0.8 percent in 2008 and is estimated to decline by 6.5 percent
in 2009. The contribution of Agriculture to GDP was 8.5%, of industry 28.6%, and services
62.9% in 2008. The country is among the world's leading producers of agricultural products;
textiles; motor vehicles, ships and other transportation equipment; construction materials;
consumer electronics and home appliances. The largest industrial sector is textiles and
clothing, which accounts for one-third of industrial employment.

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Major export commodities are textiles, foodstuffs, metal manufactures, transport equipment,
electronics and home appliances while major import commodities are machinery, chemicals,
semi-finished goods, fuels and transport equipment. Main exporting partners are
Germany 11.2%, United Kingdom 8.1%, Italy 7%, France 5.6%, Russia 4.4% and Spain 4.3%.
Main importing partners are Russia 13.8%, Germany 10.3%, China 7.8%, Italy 5.9%, United
States 4.8% and France 4.6%.

Like many economies, Turkey has been affected by the global financial crisis. In 2009, the
Turkish Government introduced various economic stimulus measures to reduce the impact of the
financial crisis such as temporary tax cuts on automobiles, home appliances and housing.

Turkey's financial markets and banking system also weathered the 2009 global financial crisis
and did not suffer significant declines due to banking reforms implemented during the country's
own financial crisis in 2001. Economic fundamentals are sound, but the Turkish economy may
be faced with more negative economic indicators in 2010 as the global economic slowdown
continues to curb demand for Turkish exports. According to the IMF’s World Economic
Outlook, Turkey’s economy is expected to grow 3.7 percent in 2010.

Brazil
Brazil, the largest country in South America, has moderately free markets and an inward-
oriented economy, with GDP of US$ 1.612 trillion in 2008, the eighth largest in the world.
Brazil underwent more than half a century of populist and military government until 1985, when
the military regime peacefully ceded power to civilian. Brazil has a federal republic government
and is a member of diverse economic organizations, such as Mercosul, SACN, G8+5, G20 and
the Cairns Group.

Brazil’s economy grew at 5.1 percent in 2008. However, IMF estimates the growth to decline by
0.6 percent in 2009. The service sector is the largest component of GDP at 66.8%, followed by
the industrial sector at 29.7% (2007). Agriculture represents 3.5% of GDP (2008). The owner of
a sophisticated technological sector, Brazil develops projects that range from
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ICRIER Background Paper on Economic Scenario and MSME
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submarines to aircraft and is involved in space research: the country possesses a satellite
launching center and was the only country in the Southern Hemisphere to integrate the team
responsible for the construction of the International Space Station (ISS). It is also a pioneer in
many fields, including ethanol production. Brazilian labor force is estimated at 100.77 million of
which 10% is occupied in agriculture, 19% in the industry sector and 71% in the service sector.
Brazil is one of the world's leading producers of hydroelectric power, with a current
capacity of about 108,000 megawatts. Existing hydroelectric power provides 80% of the
nation's electricity.

Brazil trades regularly with over one hundred nations, with 74% of exports represented
by manufactured or semi-manufactured goods. Brazil’s diverse industries range from
automobiles and parts, other machinery and equipment, steel, textiles, shoes, cement,
lumber, iron ore, tin, and petrochemicals to computers, aircraft, and consumer
durables. Brazil's main trade partners in 2008 were: Mercosul and Latin America (25.9% of
trade), EU (23.4%), Asia (18.9%), the United States (14.0%), and others (17.8%). Large iron and
manganese reserves are important sources of industrial raw materials and export earnings.

After record growth in 2007 and 2008, the onset of the global financial crisis hit Brazil in
September 2008. Brazil's currency and its stock market - Bovespa - saw huge swings as foreign
investors pulled out of Brazil. Brazil experienced two quarters of recession, as global
demand for Brazil's commodity-based exports dwindled and external credit dried up.
Brazil's problems stem from international factors – a lack of credit and collapsing demand abroad
for exports of its meat, iron ore, and airplanes – not from domestic financial shenanigans or
government mismanagement. Autoworkers, construction workers, and others in Brazil – about
750,000 in all were jobless during November 2008 to April 2009. The stock market had
plummeted nearly 50 percent by April 2009 since peaking in August 2008. The country's
currency, the real, has lost about a third of its value versus the dollar, making imports that much
more expensive for retailers.

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However, Brazil was one of the first emerging markets to begin a recovery. Consumer and
investor confidence revived and GDP growth returned to positive in the second quarter, 2009.
During the crisis, Brazilian policymakers eased reserve requirements, freeing up about 100
billion reais to help funnel more cash into lenders. With inflation tamed, the Central Bank of
Brazil brimming with dollars, and businesses increasingly competitive on a global stage,
Brazilian officials expects growth of 5% for 2010. The government is spending billions of
dollars to create construction jobs and has reduced sales taxes to stimulate sales of new vehicles.
Brazil is benefiting today from putting its economic house in order during the past 15 years.

3. Definition of MSMEs
The term MSME covers a wide range of definitions and measures, varying from country to
country as different countries adopt different criteria - such as employment, sales or investment,
assets, balance sheet total- for defining micro, small and medium enterprises. Even the definition
of an MSME on the basis of a specific criterion is not uniform across countries. However, the
most common definitional basis used is employment, and here again, there is variation in
defining the upper and lower size limit of an MSME. For instance, a specific country may define
an MSME to be an enterprise with less than 500 employees while another country may define the
cut-off to be 250 employees.

In India, according to the Micro Small and Medium Enterprises Development Act (MSMED),
2006 the manufacturing and service enterprises are defined as a micro, small or medium
enterprise based on the criterion of investment in plant and machinery and investment in
equipment respectively, as detailed in Table 2.

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Table 2: Definition of MSMEs in India

Manufacturing Sector

Enterprises Investment in plant and machinery (original cost excluding land and
building and the items specified by the then ministry of small scale
industries, vide its notification No. S. O. 1722 (E) dated 5 October,
2006)

Micro enterprises does not exceed Rs. 25 Lakh

Small enterprises More than Rs. 25 Lakh and less than Rs. 5 Crore

Medium enterprises More than Rs. 5 Crore and less than Rs. 10 Crore

Service Sector

Enterprises Investment in equipments

Micro enterprises does not exceed Rs. 10 Lakh

Small enterprises More than Rs. 10 Lakh and less than Rs. 2 Crore

Medium enterprises More than Rs. 2 Crore and less than Rs. 5 Crore

As evident from the MSME definitions given in Table 3 and 4, employment is considered as a
mandatory criterion for defining MSMEs in the select countries of study. Comparison of the
definition in the select countries shows that apart from being defined as micro, small or
medium, enterprises are also defined under a fourth category, as small enterprises in South
Africa and small businesses in South Korea. In case of China and South Africa, the MSME
definition various across various industry sectors and are based on employment, turnover and
gross assets. The MSME definitions followed in the select countries are discussed in detail in
the annexure.

Table 3: Definition of MSMEs in Brazil, China, Italy and Malaysia

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Brazil Brazil China Italy Malaysia Malaysia

Variation Industry Trade and Varies All Manufacturing Services,


Services across (including Primary
Industry Agro-Based) & Agriculture and
MRS* ICT*

Governing SME European


Law Promotion Commission
Law SME
definition
user guide

Definition Employmen Employmen Employme Employment, Sales Turnover Sales Turnover


Criteria t t nt, and Annual OR Employment OR Employment
Revenue Turnover OR
and Total Annual
Assets Balance
Sheet Total

Micro < = 19 <=9 NA Employment Sales Turnover Sales Turnover <


employees employees < 10, and < RM250,000 RM200,000 OR
Annual OR Full-time Full-time
Turnover <= Employees < 5 Employees < 5
€ 2 Million
OR Total
Sales
Turnover <=
€ 2 Million

Small 19 < 9< Employm Employment RM 2,50,000 < RM 2,00,000 <


Employees Employees ent < 300, < 50, and Sales Turnover Sales Turnover <
< 100 < 50 Annual Annual < RM 10 RM 1 Million
Revenue < Turnover <= Million OR 5 < OR 5 < Full-time
RMB30 € 10 Million Full-time Employees < 19
Million, OR Total Employees < 50
Assets < Sales
RMB40 Turnover <=
Million € 10 Million

Medium 99 < 49 < Employm Employment RM 10 Million RM 1 Million <

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Brazil Brazil China Italy Malaysia Malaysia

Variation Industry Trade and Varies All Manufacturing Services,


Services across (including Primary
Industry Agro-Based) & Agriculture and
MRS* ICT*

Employees Employees ent < < 250, and < Sales Sales Turnover <
< 500 < 100 2000, Annual Turnover < RM RM 5 Million
Annual Turnover <= 25 Million OR OR 20 < Full-
Revenue < € 50 Million 51 < Full-time time Employees
RMB300 OR Total Employees < < 50
Million, Sales 150
Assets < Turnover <=
RMB400 € 43 Million
Million

Table 4: Definition of MSMEs in Philippines, South Africa, South Korea and Turkey

Size of Philippines Russia South Africa South Korea Turkey


Enterprise

Type of All All Varies across Manufacturing All


Industry Industry

Governing Defined by National Small Article 2 of European


Law SMED Businesses Act Framework Act Commission
Council 1996 on SMEs and SME definition
Article 3 of user guide
Enforcement
Decree of the Act

Definition Employment Employment and Employment, Employment, Employment,


Criteria or Total Earnings Total Turnover Capital and and Annual
Assets and Total Gross Sales Turnover or
Assets Annual Balance
Sheet Total

Micro Total Assets 0-15 employees Employment Less than 10 Employment <
< and earnings less fewer than 5, 10, and Annual
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Size of Philippines Russia South Africa South Korea Turkey


Enterprise

Type of All All Varies across Manufacturing All


Industry Industry

P3,000,000 than 60 million Annual Turnover Employees Turnover <= € 2


OR rubles Less than Million OR
Employees R150,000 and Total Sales
<9 Total Assets Turnover <= € 2
Less than Million
R100,000

Very NA NA Employment Small Businesses NA


Small/ fewer than 10 to have Less than
20, Annual 50 Employees
Small Turnover Less
Businesses than R200,000 to
R500,000 and
Total Assets
Less than
R150,000 to
R500,000
Small P3,000,00 < 15-100 employees Employment Less than 300 Employment <
Total Assets and earnings fewer than 50, workers and 50, and Annual
< between 60 to 400 Annual Turnover Capital Turnover <= €
P15,000,000 million rubles Less than R2 worth $8M or 10 Million OR
OR 10 < Million to less Total Sales
Employees R25 Million and Turnover <= €
< 100 Total Assets 10 Million
Less than R2
Million to R4.5
Million
Medium P15,000,000 100-250 Employment Employment <
< Total employees and fewer than 100 250, and Annual
Assets < earnings to Turnover <= €
P100,000,00 between 400 200, Annual 50 Million OR
0 OR 100 < million to 1 Turnover Less Total Sales
Employees billion rubles than R4 Million Turnover <= €
to
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ICRIER Background Paper on Economic Scenario and MSME
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Size of Philippines Russia South Africa South Korea Turkey


Enterprise

Type of All All Varies across Manufacturing All


Industry Industry

< 200 R50 Million and 43 Million


Total Assets
Less than R2
Million to
R18 Million

4. Status of MSME Sector

China
SMEs are playing an increasingly large role in the PRC economy. In 2008, SMEs accounted for
58.5% of the PRC’s gross domestic product (GDP), 74.7% of industrial new value added,
58.9% of sales, 46.2% of tax revenue, and 62.3% of the total export values. In addition, 65%
of patent technologies, 75% of technological innovation, and 82% of new products were
developed by SMEs. Meanwhile, in 2008 the number of SMEs in the PRC reached over 42
million (around 38 million were macro-small private enterprises). SMEs accounted for 99% of

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ICRIER Background Paper on Economic Scenario and MSME
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all business enterprises in the PRC, employing 75% of urban dwellers and over 75% of the
laborers transferred from rural areas.

Chinese SMEs are mainly concentrated in the manufacturing, wholesale and retail sector
accounting for 45.4%, 35.6% and 94% of the sales revenue respectively in the industry to which
they belong6.

According to the Second National Census conducted by China’s National Bureau of Statistics in
2002, the number of SMEs in east coast China including 10 provinces and municipalities had a
share of 62.6%, middle part of china including 9 provinces and autonomous regions was 24.5%
and west China including 15 provinces and autonomous regions was 12.9%.

Recognizing the significant role played by SMEs in Chinese economy, the government
attaches great importance to SMEs. On Jan. 1st, 2003, the Promotion Law on SMEs became
effective. In Feb. 2005, the State Council issued Several Opinions on encouraging, supporting
and guiding the development of self-employed and private economy and other non-public sectors
of the economy. It was stated in the outline of the 11 th five-year plan that the SME Growth
Project will be carried out. Meanwhile, the State Council approved and established the National
Leading Group for promoting SMEs headed by Ministry of Industry and Information
Technology and constituted 14 ministries including the Ministry of Finance, the Ministry of
Science and Technology and the Ministry of Agriculture. The Leading Group is strengthening
the overall coordination, organization and guiding of SMEs. The external environment for SMEs
has been strengthening, and financing service of SMEs service system for SMEs has been
improving.

The most significant driver in China’s rapid and spectacular SME growth has been the economic
reforms and policy initiatives taken by the governments at all levels. Chinese government has
laid special thrust on making cheap and easy availability of finance to SMEs, enhancing export
competitiveness of SMEs, developing human capital, promoting industry-institute linkages,

6
P S Deodhar and Chunmei Rao, “SMEs in China”, India China Economic and Cultural Council, 2009
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increasing investment in R&D, improving labour laws etc. Some of the significant policy
initiatives of Chinese government are listed below:

 A series of polices have been issued by the People’s Bank of China and China Banking
Regulatory Commission to guide and encourage financial institutions of the banking sector to
improve financing services for SMEs, and accelerate the innovation of financial products and
services for SMEs.

 Relevant policies for the promotion of SME credit guarantee system have been formulated,
exempting qualified credit guarantee agencies for the turnover tax, greatly driving their
development. By the end of 2006, there were 3300 SME credit guarantee agencies providing
guarantee services for 38,000 SMEs and for loan RMB 55 billion in total.

 For direct financing, the SMEs Board on Shenzhen Stock Exchange has been opened and
Share Transfer System of Securities Companies in Zhongguancun, Beijing has been set up.

 China actively supports the development of training programs, entrepreneurship,


mentoring, and service agencies handling administrative matters for SMEs. Intermediary
service agencies are encouraged to provide business startup services. At present, there are
over 500 technology incubators established across the country, which have incubated a large
number of technology SMEs.

 For expanding employment opportunities, the National People’s Congress passed the
Employment Promotion Law, defining the government’s responsibilities in promoting
employment and improving relevant policies for employment promotion.

 China launched the Fund for SME International Market Development in 2000 to support
SMEs to participate in overseas exhibitions and fairs. The China International SME Fair
has been held annually since 2003, providing a platform for SMEs to develop market and
strengthen trade and economic cooperation.
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 According to the Government Procurement Law and other laws and regulations, efforts have
been made to continuously raise the proportion of SME products and services in government
procurement.

 China actively encourages and supports SMEs to build linkage with universities and
research institutes by jointly setting up labs and R&D centers and through joint or
commissioned R&D. Various technology intermediary agencies have been developing
rapidly, including SME service centers, productivity centers, technology consulting
organizations, and technology exchange markets.

 China has laid special emphasis on education and training and on improving the human
quality of SMEs. The SME Galaxy Training Program has been in implementation since
2003, and it offers training in business administration, safe production, industrial policies and
etc.

 China has constructed vast information networks and provides all sorts of free information
service for SMEs. The government established China SMEs Information Portal and its
branch websites in various provinces and municipalities, providing information services for
SMEs regarding policy, regulation, market and cooperative opportunities. The government
has also guided large IT companies such as China Mobile, China Netcom, and China Post to
provide SMEs with IT solutions.

China has also witnessed rapid growth of industrial clusters since the initiation of reform and
opening-up, playing a vital role in regional economic growth and industrial development.
Chinese industrial clusters exist in most traditional industries, including textile, apparel, leather,
hardware, arts and crafts, and enjoy fast development in such high-tech and emerging sectors as
information technology, bio-engineering, new materials, and the cultural creative industry.
Chinese industrial clusters demonstrate three features, which make them significant and relevant
for the study. These features are:

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 Small Products but Big Markets: The products from industrial clusters can be as small as
buttons and zippers, but they take a large share in domestic and overseas markets. For
example, the number of lighters produced in Wenzhou City, Zhejiang Province account
for 80% of the domestic market and 30% of the international market.
 Small Enterprises but Large-Scale Cooperation: Within the clusters there are many
SMEs with a high level of specialization and collaboration. For instance, the socks
clusters in Zhuji City, Zhejiang Province consist of over 3,600 enterprises, forming a
network of sophisticated division of labor and collaboration.
 Small Clusters but Great Achievements: The development of industrial clusters expands
employment, steps up the industrialization and urbanization in the underdeveloped
regions, and enhances regional and industrial competitiveness. For example, in 2006, 40
industrial clusters located in the western Sichuan Province created about 400,000 job
opportunities, promoting local economic and social development.

Italy
Italy is among the world leaders in the SME cluster development model, and is the leading
shoe manufacturing country in the EU with a 40% world market share. The relative
importance of SMEs for the Italian economy exceeds by far the EU average, as illustrated by a
considerably above-EU-average share of persons employed and value added accounted for by
SMEs. The contribution of Italian SMEs to total value added and employment is 70.9%
and 80.3% respectively compared to EU average of 57.9% of total value added and 67.1% of
employment. It should be noted, that this elevated importance is mainly due to the micro
enterprises, while medium enterprises are, in fact, underrepresented vis-à-vis the EU average 7.

7
SME Fact Sheet- Italy, European Commission, 2009
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Italy has 3,818,745 SMEs, which is equivalent to 99.9% of the total enterprises in Italy. It
includes 3,615,729 (94.6%) Micro, 183,662 (4.8%) Small and 19,354 (0.5%) Medium
enterprises.

Italian SME's are renowned for producing world class products, may it be eye glass frames to
high fashion designing, textiles and garments, gems and jewelery, leather products (shoes &
hand bags in particular), granite, ceramics, glass metallurgical industry, soaps & cosmetics,
transportation, machine tools, engineering goods, food processing industry, drugs and chemicals,
domestic appliances, auto components etc.

More than 80% of the productive unit and the 85% of employees in industrial activities are
concentrated in the central and northern region of Italy. The four larger regions of the North
(Piedmont, Lombardy, Veneto, and Emilia Romagna) together represent nearly 70% of total
Italian exports; while Northern region and Central regions as a whole reach a share of 86%.

The main export sectors characterized by the dominance of SME's are the following;

 Industrial and agricultural machinery (17% of the total export)


 Textile & apparel (12.2%)

 Leather & footwear (5.4%)

 Electric appliances & material (8.4%)

 Metal products (5%)

 Non-metallic mineral products (4.2%)

 Food and beverages (4.7%)

The above-said sectors present a very articulated structure of different niches and segments of
specialization, in many of which the Italian firms may boast very high shares and a leadership
position the global market.

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The interesting aspect about the SMEs in Italy is that they are found in cluster or "distretti
industriali" or industrial districts. These industrial districts are inter-connected firms in a
particular geographical concentrated location, specialized suppliers, service providers and firms
in related/associated industries, all working in tandem with one scope- Success. What the firms
have in common is that they work in the same geographical area and all contribute to a system
that produces goods that are characteristic of the district. Cooperation, complimentary to each
other, commonality and competition are the features of how the clusters work in Italy.

According to a study by Prof. Humphery and Schmitz (University of Sussex), titled "Principles
for Promoting Clusters and Networks of SME's", the success of Italian SME's is due to:
 Sectoral specialization
 Predominance of small and medium level firms

 Close inter-firm collaboration

 Inter-firm competition based on innovation

 Presence of a socio-cultural identity which facilitates trust

 Active self-help organizations

 Supportive regional and municipal government

 External economies (skilled labour, cost reduction, learning)

 Proximity economies (face-to-face contact, information exchange)

 Synergy elements (imitation, interaction & co-operation)

Malaysia
Malaysian SMEs are a vital component of the country’s economic development. According to
SMIDEC (2002), SMEs accounted for 93.8 per cent of companies in the manufacturing sector.
They contribute 27.3 per cent of total manufacturing output, 25.8 per cent to value-added
production, own 27.6 per cent of fixed assets, and provide employment for about 56% of
the total workforce. In addition, value added products from SMEs are expected to be worth RM
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120 billion — or 50 per cent of total production — in the manufacturing sector by 2020. The
target is to raise the contribution of SMEs to GDP from 32% in 2005 to 37% in 2010, exports
from 19% to 22% and employment to 57% in 20108.

SMEs in Malaysia account for 99.2 percent or 518,996 of total establishments in the three (3)
key economic sectors, namely manufacturing, services and agriculture 9. Most of the SMEs
predominate in the services sector, accounting for 86.5 percent of the total establishments. Their
presence in the manufacturing and agriculture sectors are only 7.3 percent and 6.2 percent
respectively. SMEs in Malaysia are concentrated in the textile and apparel, food and beverages,
metals and metals products and wood and wood products sectors.

Employment generated by SMEs was approximately 3.0 million workers (65.1 percent) of the
total employment of 4.6 million engaged in the three (3) main sectors. The services sector
employed the largest number, 2.2 million, followed by the manufacturing sector, 740,438 and
agriculture sector, 131,130. Full-time employees totaled 2.3 million workers (76.5 percent) while
self-employed workers made up 16.7 percent and part-time workers, the remainder (6.8 percent).

SMEs are mainly concentrated in the Central Region (Federal Territory Kuala Lumpur and
Selangor), accounting for 37.1 percent. Johor was next with 10.4 percent, followed by Perak with
7.3 percent while Perlis registered only 1.1 percent of the total establishments. The rest of the
states accounted for less than 44.1 percent.
Women participation in the work force of SMEs in 2003 was 1,121,687 or 36.8 percent of total
employment. Specifically, the involvement of women entrepreneurs in SMEs, by using working
proprietors and active business partners as a proxy, indicated 30.3 percent participation.

The Malaysian Government’s commitment to, and concern for, the development of SMEs can be
seen in the second Industrial Master Plan (IMP2), which ended in 2005, which is followed by the
Third Industrial Mater Plan (IMP3) 2006–2020, to coincide with the country’s vision for 2020

8
Annual Report, National SME Development Council, 2008
9
Normah Mohammed Aris, “SMEs: Building Blocks for Economic Growth”, 2007
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(MITI, 2005). The Malaysian Government has implemented various policies and strategies under
these plans.

The National SME Development Council, chaired by the Prime Minister of Malaysia, was set
up in August 2004. This Council represents the highest-level policy making body to chart the
direction and strategies for the development of SMEs. It brings together 15 Ministries and more
than 60 Government Agencies to work together towards a common goal of developing resilient
and competitive SMEs of global standards. Among the initiatives announced include the
formulation of targeted strategies for the development of SMEs across all sectors; the adoption of
specific and standard definition for SMEs according to economic activity; the establishment and
maintenance of a comprehensive National SME database and the expansion of development
support programmes and facilities to enhance access to financing and accessibility of markets for
export. The Council has established a Central Coordinating Agency to spearhead SME
development. The Small and Medium Industries Development Corporation (SMIDEC), which
has been chosen to assume the role of the Central Coordinating Agency, has been re-branded as
SME Corporation Malaysia (SME Corp. Malaysia). SME Corp. Malaysia is expected to serve as
a central reference point for all SME matters. As the Secretariat to the Council, SME Corp.
Malaysia will coordinate, monitor and undertake impact study on SME policies and programmes
across all economic sectors.

Philippines
In the last five years, the MSME sector in Philippines accounted for about 99.7% of the
registered businesses in the country by which 70% of the labor force earn a living and
around 30% of the total sales and value added in the manufacturing come from MSMEs as
well10.

10
MSME Statistics, Department of Trade and Industry, Philippines
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ICRIER Background Paper on Economic Scenario and MSME
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According to Department of Trade and Industry, as of 2006 count, there are 783,065 business
enterprises operating in the Philippines. Of these, 99.7% (780,469) are micro, small, and medium
enterprises (MSMEs) and the remaining 0.3% (2,596) are large enterprises. Of the total number
of MSMEs, 92% (720,191) are micro enterprises, 7.3% (57,439) are small enterprises, and 0.4%
(2,839) are medium enterprises.

This indicates that MSMEs contributed almost 70% of the total jobs generated by all types of
business establishments that year. Of these, 33.5% or 1,667,824 jobs were generated by micro
enterprises; 25.7% or 1,279,018 by small enterprises; and 7.6% or 381,013 by medium
enterprises.

Majority of the 780,469 MSMEs in operation in 2006 are in the wholesale and retail trade
industries with 391,215 business establishments; followed by manufacturing with 116,361;
hotels and restaurants with 97,926; real estate, renting, and business activities with 45,293; and
other community, social, and personal services with 44,658. These industries accounted for about
89.1% of the total number of SME establishments. Top 5 sub-industries in the manufacturing
sector in terms of MSME establishments in 2006:
 Food products and beverages, 55,007 establishments
 Wearing apparel, 15,623 establishments
 Fabricated metal products except machinery and equipment, 12,986 establishments
 Furniture, 7,188 establishments
 Other non-metallic mineral products, 5,143 establishments
These sub-industries accounted for 82.4% of the total number of MSMEs in the manufacturing
sector.

Majority of the MSMEs in operation in 2006 can be found in the National Capital Region
(NCR), with 194,549 business establishments; Region 4-A (CALABARZON) with 113,581;
Region 3 (Central Luzon) with 84,175; Region 6 (Western Visayas) with 46,195; and Region 1
(Ilocos) with 44,085. These top five (5) locations accounted for about 61.8% of the total number
of MSME establishments in the country.
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ICRIER Background Paper on Economic Scenario and MSME
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MSMEs account for 25% of the country’s total exports revenue. It is also estimated that 60%
of all exporters in the country belong to the MSME category. MSMEs are able to contribute in
exports through subcontracting arrangement with large firms, or as suppliers to exporting
companies.

The statutory foundation for SME development in the Philippines is set by the Magna Carta for
Small Enterprises (Republic Act No. 6977 amended by RA 8289, RA 9178. This law provides
the basic policies for SME promotion, indicates the definition of SMEs and directs the
institutional framework for the SME promotion system. Among its provisions are the creation of
the SMED Council and the Small Business Guarantee and Finance Corporation; the stipulation
of a mandatory lending quota for financial institutions at 6% of their funds for lending to small
enterprises and 2% to medium enterprises and the setting up of four guiding principles for SME
development – minimum set of rules and simplification of procedures and requirements,
encouragement of private sector participation, coordination of government efforts for coherence
of objectives and decentralization. RA 9178 known as the Barangay Micro Business Enterprises
Law which amended RA 6977 supports eligible micro-enterprises and the informal sector
through incentives for local government registered barangay micro-enterprises, exemptions from
income tax, reduction in local taxes, exemptions from payment of minimum wages, financial
support from government financial institutions and technology assistance from government
agencies.
Special incentives for enterprises, including SMEs, have been made available by legislation to
promote business activities. These include: a.) exemption from corporate income taxes (4-8
years), national and local taxes, duties and taxes on machineries, spare parts, materials and
supplies, tax credits for imports and import substitution of capital equipment and for breeding
stock and genetic materials under the following laws-RA 7916, RA 7227, Special Economic
Zones Act and Clark and Subic Special Economic and Freeport Zone, b.) exemption from value-
added tax for certain export industries, excise taxes on locally produced products and lowered
taxes on spirits made from indigenous materials (RA 8224, Tax Reform Act), c.) Incentives for
preferred areas of investments included in the Investment Priorities Plan (E.O. 226, Omnibus

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ICRIER Background Paper on Economic Scenario and MSME
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Investment Code), d.) Incentives for specified locations such as the Registered Economic Zones
(RA 7916), Less Developed Areas (RA 7844), and those granted by local government units
under the Local Government Code, e.) Incentives for investors for tax and duty exemptions, loan
assistance and technical support for starting-up and improved SME technologies (RA 7459,
Investors and Invention Incentives Act).

The institutional framework is in place at the national and local levels. At the national level,
the SMED Council formulates SME promotion policies and provides guidance on implementing
SME programs. It is a multi-agency group of 8 representatives concerned government agencies
and 4 representatives from the private sector. The government agencies represented are- the
National Economic Development Authority, Departments of Trade and Industry, Labor and
Employment, Science and Technology, Agriculture, Environment and Natural Resources, the
Small Business Guarantee and Finance Corporation (SBGFC) and the Monetary Board of the
Bangko Sentral ng Pilipinas (Central Bank). The private sector members represent the country’s
three major geographic areas of Luzon, Visayas and Mindanao and the private banking sector.
The Secretary of the Department of Trade and Industry (DTI) is the chairperson of the SMED
Council and DTI’s Bureau of Small and Medium Enterprises Development (BSMED) serves as
secretariat.

The Department of Trade and Industry is responsible for developing and regulating business
enterprises (other government agencies are involved in specific cases i.e. Securities and
Exchange Commission, local governments, etc.). There is an SME core group at DTI which
coordinates all SME services. This group is composed of the BSMED (initiates and coordinates
specific SME policies, programs and projects), the SBGFC (financing services), the Philippine
Trade Training Center (development and implementation of SME training and learning
activities), the Product Development and Design Center of the Philippines (product development
initiatives and design programs) and the Cottage Industry Technology Center (technologies).

At the local level, the regional and provincial offices of DTI provide services to SMEs. Other
government line agencies also implement programs catering to SMEs. These are the Department
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

of Science and Technology, Department of Labor and Employment, Department of Agriculture,


Department of Environment and Natural Resources, the Department of Interior and Local
Government and the local government units. SME private sector entities consist of the chambers
of commerce, professional organizations, business sector organizations, and various associations
of micro, small and medium enterprises, cooperatives and other non-governmental organizations.

Russia
The portion of Russia's GDP generated by small and medium enterprises (SMEs) is
estimated at 13-17%11. The contribution of Small and medium business in Russia with up to
250 employees to the overall indicators for all enterprises in Russia in 2003 was-

 SMEs share in total number of enterprises - 94%


 SMEs share in total employment - 49%
 Market Share (SMEs' share in total sales revenue) - 47%

Another widely used SME sector development indicator is the number of enterprises with up to
250 employees per 1,000 of economically active population. In 2003 this indicator amounted to
118 enterprises and IEs per 1,000 of economically active population in Russia.
11
SMEs in Russia and China: A Comparison (http://www.acg.ru/english/news2.phtml?m=2866)
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ICRIER Background Paper on Economic Scenario and MSME
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The employment growth rate in this sector is 8 times higher than in the rest of the Russian
economy. In October of 2007, there were 1.1 million officially registered small businesses
and 3.5 million individually registered entrepreneurs. The annual growth rate in SME capital
investment is estimated at least 30%.

Unfortunately, the government's plans to actually help SMEs are not quite as specific. The
government, according to a new law, pledges to grant "equal consideration" to companies when
distributing support programs (though what the support programs will be is not stated), and
offers to let representatives from the SME sector participate in the legislative process and
government projects that will affect SMEs. It has also pledged tax credits, loosened
accounting rules, and assistance with property, financial support, IT support, consultation,
and more.

Major emphasis is made on easing entry into the Russian market, on the limiting government
inspections, and on doing away with many product certifications. Instead of obtaining numerous
permits, entrepreneurs will simply need to declare (by submitting the proper documentation) to
various federal agencies that they are conducting business and operating legally. This new
procedure will apply to specific industries such as retail, food, hotel, transportation, consumer
services.

Planned inspections by government agencies will be limited in occurrence to once every


three years. Inspections of small businesses will additionally be limited to fifteen hours, and for
medium-sized businesses – no more than seventy hours. Repeat inspections will only be allowed
with a special approval by the Prosecutor General.

Currently, Russia regulates nearly 85% of all products on the market (August, 2008). The new
legislation pledges to limit certification to only those products that could "harm life, health, or
the environment" if not properly regulated.

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ICRIER Background Paper on Economic Scenario and MSME
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In terms of institutional support, in the city of Moscow, the Moscow City Department of Small
business Support of and Promotion works for realization of the Moscow City Government policy
related to the issues of development and the state support of small business in territory of
Moscow.

SME Support Infrastructure in City of Moscow

South Africa
According to recent estimates by the Department of Trade and Industry (DTI), small businesses
represent 98 % of the total number of firms. They employ 50% and 60% of the formally
employed labour force, and up to 75% if we include all informal activities and self-employment
categories in the total and contribute approximately 42% to the total wage-bill. Small firms,
overall, account for 35% of GDP. 87% of ‘survivalist’ micro-entrepreneurs are black, mostly
unregistered and not eligible for Government programs. 41% of SMMEs are owned by women.

According to the various available statistics, it can probably be said that there are between 1.6
and 3 million SMMEs in South Africa. Micro enterprises represent between 1.2 and 2.8 million
businesses, i.e. between 69% and 80% of all SMMEs. The gender imbalance is relatively less,
with 74.7% of formal sector employers or self-employed and 46.2% in the informal sector being

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ICRIER Background Paper on Economic Scenario and MSME
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male. The latter low ratio signals the important role of women in the informal sector. About
76.5% of informal enterprises run by women are in the trade sector, compared to 58.4% in the
case of men.

Wholesale/retail, construction and transport are the three largest and fastest growing small
business sectors. 43% of the enterprises are in the trade, retail, and hotel and restaurants sector
while 12% are in agriculture and forestry, 11.1% in social and personal services, 10% in
manufacturing, 9.1% in construction, 6.9% in financial and business services and 5.2% in
transport, storage and communications.

57.9% of total SMMEs are concentrated in the major urban provinces of Gauteng, Western Cape
and KwaZulu-Natal and 42.1% of the enterprises are located in the major rural provinces.
(Ntsika, 2000)

The SMME development strategy in South Africa has postulated the establishment of a number
of important national organisations – the National Small Business Council, a Small Business
Development Agency (SBDA, later called Ntsika Enterprise Development Agency, or just
Ntsika), a finance agency (later called Khula Enterprise Finance) and a national grid of “local
service centers” (which became known as Local Business Service Centers or LBSCs), as well as
a set of “Provincial Small Enterprise Desks” within the respective provincial governments.

Ntsika was established as a new entity under the 1996 National Small Business Act, with its
initial responsibilities focused on the (“wholesale”) supply or facilitation of small enterprise
support in the spheres of information, marketing and procurement, export facilitation, research
and training.

Khula was also established in 1996, initially with the primary role of taking over and expanding
the credit-guarantee programme which the SBDC managed on behalf of the banking sector’s
loans-to-small-enterprises initiative. As a logical extension to this “wholesale” function, Khula

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ICRIER Background Paper on Economic Scenario and MSME
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soon started to fund micro finance focused retail-finance institutions and (increasingly)
developed other specialized small enterprise financing schemes.

South Korea
South Korean SMEs account for 99.9% of all enterprises, 88.4% of all employees, 50.8% of
value added in manufacturing and 48.7% in output produced in manufacturing 12. Every
day in Korea, new start-ups are launched. Annually, the pattern of 1 million business start-ups
and 0.8 million closures is repeated. Korea's SME ecosystem is dynamic.

With continuous innovation in technology and management, innovative SMEs (venture


businesses, inno-biz and management-innovative businesses) have higher added value than
ordinary businesses. Inno-biz means technologically innovative businesses.

Korean SMEs play a pivotal role in the national economy, accounting for 99.9% of all
enterprises (3 million SMEs). Micro-enterprises are an underlying force in the national economy,
accounting
for 88.4% of all enterprises (2.67 million), and 41.5% of all employees (516,000 persons) as of
12
National Statistics Office, Korea, 2007
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ICRIER Background Paper on Economic Scenario and MSME
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late 2007. The Korean government set up the Micro-enterprise Assistance Center in 1999 as a
professional organization dedicated to providing counseling, advice and information on the start-
up and improvement of business.

28.4% of enterprises are in wholesale and retail sector, 20% in accommodation and
restaurants, 11.3% in transportation, 11.1% in manufacturing, 9.3% in repair and other
individual services, 3.3% in real estate and rental and 3.1% in construction.

In 2008, exports by Korean SMEs totaled US$ 130.52 billion compared with exports of US$
118.77 billion in 2007. Major commodities of SME exports are electronics and electrical,
machinery, chemicals, textiles, steel and metal. Overseas investment by Korean SMEs in 2009
totaled US$ 5.7 billion against investment of US$ 5.88 billion in 2008.

The Korean government lays special emphasis on development of micro enterprises and
traditional markets. Various assistance programs micro-enterprises help micro enterprises
develop and pursue diverse business activities. The Small and Medium Business
Administration (SMBA) of South Korea (SMBA) had established a dedicated micro-
business development office on Dec. 28, 2005, a professional institution- Micro-enterprise
Promotion Agency in April 2006, and also strengthened the function of the micro-
enterprise assistance center.

The SMBA has established a 'commercial complex information system' to assist micro-
enterprises' start-up activities and their managerial stability, and is operating a five-stage start-up
package program aimed at linking education and funding to encourage start-up activities. The
purpose of these measures is to enhance the success rate of start-ups.

The government strives to revitalize traditional markets by holding national market fairs and
regional product expos, and by promoting best practices of traditional markets. As a self-help
organization, the Market Merchant Association runs a joint purchasing/sales and online

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ICRIER Background Paper on Economic Scenario and MSME
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shopping-mall business to reduce transaction costs. It has also established an information


network between production markets with regional specialties and consumption markets in cities.

SMBA's policy direction for 2009 focused on supporting SMEs to overcome the economic crisis
at home and abroad. Moreover, it aimed at translating the crisis into new opportunities. SMBA's
policy package under the slogan, “Beyond Crisis, Toward New Take-off” focused on early
execution of budget and combating financial bottleneck, emergency management stabilization
support for small merchants and industrialists, creating job opportunities and utilization of idle
manpower, expanding public purchase to create new demand and preparation for re-takeoff.

Turkey
According to the most recent estimates, the SME sector in Turkey, including services,
accounted in 2000 for: 99.8% of the total number of enterprises, 76.7% of total
employment, 38% of capital investment, 26.5% of value added, roughly 10% of exports
and 5% of bank credit13.

A very large share of SMEs is in the trade, crafts and industry sectors and only a small share of
SMEs is in the manufacturing sector. As of 31 January 2003, there are more than 2.76 million
registered trade and craft enterprises, in trade and industry sector the number of enterprises is
estimated at 1.2 million. According to SIS data, on 1 January 2001 there were around 210 000
SMEs (1-250 workers) in the manufacturing sector (99.6% of the total number of manufacturing
firms). Manufacturing sector SMEs are broken down across industries as follows: metallic
goods: 26.1%, textiles, clothing and leather goods: 25.6%, wood and furniture: 24.3%, food and
drink: 12.7%, paper: 3.9%, other sectors: 7.4%.
13
Small and Medium-sized Enterprises in Turkey: Issues and Concerns, Organisation for Economic Co-operation
and Development (OECD), 2004
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ICRIER Background Paper on Economic Scenario and MSME
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SMEs in Turkey are concentrated in the coastal regions along the Marmara and Aegean Seas,
with 38% and 17% of the enterprises, respectively, and in Central Anatolia, with 16%. The
Mediterranean coastal region (11%), the Black Sea region (9%), south-eastern Anatolia (6%) and
eastern Anatolia have far less organised formal economic activity.

Through the choices Turkey has made in recent years to begin a process of international
integration geared towards Europe, it has embarked upon a variety of economic policies and
medium- and long-term economic strategies that affect SMEs either directly or indirectly
because of their prominent position in the economy. This process began in the 1960s and was
reinforced by the general opening of the Turkish economy in the 1980s. At the same time the
Turkish government developed a specific SME policy and created SEGEM (Industrial Training
and Development Centre) and KÜSGET (Small Industry Development Organisation), which,
later on, were united under the umbrella of KOSGEB (Small and Medium Industry Development
Organisation) in 1990, as a major instrument for the execution of these policies.

A very important step was the creation of the Customs Union with the European Union in 1996
which strongly intensified the influence of international competition on Turkish industry,
especially SMEs. The first SME Action Plan was introduced at that time, but it was not
implemented owing to lack of funding. Following the acceptance of Turkey’s application for
membership in the European Union, the policy of support for SMEs was coordinated with that of
the EU in order to enable Turkish SMEs, inter alia, to sustain competition with their counterparts
in the EU and in other applicant countries. Creating a business environment conducive to
entrepreneurship and the development of innovative SMEs has been high on the European Union
policy agenda, and stressed in the Lisbon European summit in 2000 as part of a broader strategy
for economic growth. The Turkish government signed the European Charter for Small
Enterprises in 2002 and agreed to take concrete steps to develop policies and programmes for
SMEs. Turkey participates in the Multi-annual Programme for Enterprise and Entrepreneurship,
in addition to the BEST (Business Environment Simplification Taskforce) Programme. Along
these lines, the Turkish government also adopted the Bologna Charter in 2000, together with

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ICRIER Background Paper on Economic Scenario and MSME
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other OECD countries and non-OECD economies, to promote bilateral and multilateral
initiatives to foster global SME partner-ships.

A range of policy initiatives in the 8th Five-year Development Plan (2001-05) aims to improve
the productivity of Turkish SMEs and enhance their international competitiveness. Based on
international best practices, the plan calls for raising product quality and enhancing the
innovation and technology capacity of small business through collaboration with universities,
introduction of new financing instruments, such as risk capital, and modern management
techniques. Partnerships with foreign companies will also be encouraged in order to develop
SMEs export capabilities. A new approach to improve and expand service delivery to SMEs will
be to create joint centers at local level, synergy focal points, between KOSGEB and the Union of
Chambers of Commerce, Industry, Maritime Trade and Commodity Exchanges of Turkey
(TOBB).

Brazil

According to estimates, the MSMEs represent about 98 percent of the 3.6 million
enterprises in Brazil. These firms account for 43 percent of the GDP and employ about 60
percent of the total workforce. Together, the micro and small companies responded in 2002 by
99.2% the total number of formal enterprises, for 57.2% of total employment and 26.0% payroll.
The number of medium-sized companies in 2002 was 23,652 units accounting for 2,700,103
jobs.

Majority of the enterprises are located in the southeast, south and northeast regions of Brazil.
The involvement of small firms is higher in commercial and service activities.

Exports by MSMEs reached a record high of U.S. $ 2.1 billion in 2007, up 12.4% from the
previous year and cumulative growth of 11.4% pa over the last five years. Manufactured
products accounted for 81.7% of its exports in 2007, while the commodities and semi-
manufactured goods accounted for 11.7% and 4.6% of sales, respectively.

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ICRIER Background Paper on Economic Scenario and MSME
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In Brazil, SEBRAE, a private non-profit organisation, supports the development of small sized
business activity. Established in 1972, SEBRAE works in cooperation with the Brazilian
Government, being the Ministry of Development, Industry and Trade part of the National
Deliberative Council. Through its Innovation and Technology Unit, it facilitates technology
access to SMEs, providing them with technical solutions, enhancing their innovative capacity
and giving added value to their products and services.

Sample Questions for SIDBI Team Visits to Select Countries

Chapter 1: Overall Economic Philosophy

An analysis of economic policies of different countries will be made. This will help in setting the
background on which MSME policies are made. The economic policy may vary from capitalism
to communism, be mixed economy with government occupying commanding heights. Further,
what is the development stage of the economy, what is the growth strategy of the economy-
export oriented, trade based, technology/innovation based, domestic demand based etc. This
growth strategy ultimately decides the shape of MSME policies in a country. Hence, it is very
important to understand the underlying economic philosophy, before analyzing and drawing any
meaningful conclusion on the MSME policies of the MSME policies of respective economies
with reference to India. Hence, it is necessary to have set of common objective and subjective type of
macroeconomic questions which need to be answered. The sample questions are given below:

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ICRIER Background Paper on Economic Scenario and MSME
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To whom questions Sample questions


need to be asked

Planning 1. Economic philosophy of the country- Is it capitalism, communism or


Commission mixed economy?

2. If mixed economy, does public sector have a commanding height.


The share of government in national income in historical trend?

3. What is the level of economic reforms? Is the economy still driven


by government or private sector or on public-private partnership
basis?

4. Is the economy consumption oriented or investment oriented? What


are the levels of savings and investment? If the investments are
higher than savings, is the balance met by fiscal deficit or capital
accounts deficit?

5. What is the contribution of various sectors of the economy vis-à-vis


agriculture, industry and services sectors towards GDP, to know the
developmental stage of the economy?

6. Is the economy close or open? What is the extent of openness?

7. What is the extent of current account convertibility? Is it a free trade


economy?

8. The systematic structure in policy making- major policies by federal


or state governments?

Planning 9. The historical development of MSME sector?


Commission, 10. SWOT Analysis of the MSME sector?
Ministry of MSME
11. Is the MSME sector government promoted or self sustained?
and other related
Ministries 12. Level of energy efficiency and environment pollution?

13. What are the regular and fiscal policy measures for MSMEs in terms
of:

- Interest subsidy/any other budget subsidy


- Special fiscal package for MSME sector in backward regions
- Infrastructure development
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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

To whom questions Sample questions


need to be asked

- Technology upgradation
- Government procurement policies/purchase price preference
policies
- Marketing assistance
- Product reservation
- Export incentives
- Any other support measures

14. Role of MSMEs in financial inclusion. How far are government


policies supporting them?

Financial Crisis

15. How the financial crisis has affected the overall economy and the
MSME sector in particular?

16. What stimulus measures were provided?

17. How the MSME sector has survived?

Chapter 2: Monetary and Credit Policies

This chapter will first analyse the monetary policy approach- whether directed credit system,
inflation targeting meaning complete autonomy of monetary policy which is purely market
based, relationship between monetary policy and fiscal policy, whether monetary policy is
dominated by monetarism or Keynesianism or based on rational expectations, what is the type of
monetary policy transmission mechanism, through money supply or interest rate, any fixed credit
target etc. Special emphasis will be laid on priority sector lending targets/systems in select
countries, if any.

The chapter will also discuss issues on MSME policies relating to risk capital/venture capital,
interest subvention, micro finance/unorganized sector, equity/primary capital market, credit
guarantee etc. Special thrust will be laid on MSME policies on MSME sickness, rehabilitation
and any related budgeting support.

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ICRIER Background Paper on Economic Scenario and MSME
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The chapter will also focus on the kind, degree and direction of financial reforms for MSME sector and
more importantly, the monetary measures taken during the period of recent economic crisis and what
has been the impact of these measures on MSME sector of respective countries. Any specific MSME
related credit/monetary policies will also be captured. A special section will be devoted to monetary
policy for unorganized sector, that is, financial inclusion.

To whom questions Sample questions


need to be asked

Central Bank, Apex 18. Overall monetary stance of the central bank?
bank for MSMEs 19. Specific monetary policy approach towards MSME sector- Is it
directed or competitive credit market?

20. Specific monetary and credit policy measures

- Any priority sector lending


- Any interest rate cap
- Any interest rate subvention
- Policy to venture/risk capital
- Policy towards sickness/NPA/rehabilitation of sick MSMEs

21. What are the penalty measures if the MSME sector lending targets
are not met?

22. What are the monetary policy measures towards financial inclusion,
with special reference to unorganised sector?

23. How the central bank has helped the MSME sector during financial
crisis?

24. Specific capital market related policies for MSMEs?

25. Policies/issues regarding financial innovations in the MSME sector?

26. Monetary policies in relation to BASEL II norms for MSME sector?

27. How the issue of delayed payments in tackled?

Chapter 3: Financial Institutions

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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

The chapter will study the structure of financial system for MSME credit, role and functions of banks/FIs
in select countries. A comparative study of SIDBI type MSME focused FIs will be made in terms of their
range of functions and activities, any specific government regulatory practices, their sources of funds,
whether from market or from government, existing status whether still DFIs, transited to
banks/universal banks etc.

To whom questions Sample questions


need to be asked

Apex bank for 28. Analysis of financial support structure/system for MSMEs?
MSMEs, DFIs
29. Study the working and functions of apex MSME banks in terms of
credit and non-credit activities?

30. Study the supporting role of institutions providing credit rating,


credit guarantee, assets reconstructions etc. and the policies for the
same?

31. The institutional role of DFIs, impact of financial reforms, the


process of their transformations and are DFIs still on government
support or surviving on their own? Have the developmental
functions got strengthened or diluted over time? Here clarity is
required regarding supporting policy measures by government and
central bank towards DFIs.

Chapter 5: Labour Laws

This chapter will discuss the labour laws for the MSME sector. It is generally understood that in
small enterprises, hiring and firing is common but as the enterprise grows and becomes
registered and organised, the laws become stringent on some countries. We will also document if
there is any social security system in the MSME sector.

Chapter 6: Exit Policy


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ICRIER Background Paper on Economic Scenario and MSME
March, 2010 Status in Select Countries

We propose to the study the exit policies for MSMEs, if any, in select countries. This chapter will
highlight insolvency code, winding up procedure for MSMEs in case of sickness and otherwise, if there is
nay second law like SARFAESI, what is the removal/rehabilitation package, system, policies and
procedures.

To whom questions Sample questions


need to be asked

Concerned Ministry 32. Any specific Labour Laws for MSMEs?


for MSME sector, 33. Any exit policy/insolvency policy for MSMEs? Include the winding
Industry up policy measures for MSMEs.
Associations 34. What are the recovery measures once the MSME becomes bad
debt/insolvent?

35. Any similar policy/Act like Limited Liability Partnership Act etc.?

Chapter 7: Marketing Policies

Marketing support is very important for the MSME sector in any country. We will study the purchase,
procurement and price preference policies of select countries and their compliance with WTO laws,
MSME product reservation policies, excise tax limit of turnover of MSMEs, how delayed payments of
government purchases are tackled, what are the incentives given to MSMEs to market their products
abroad, export promotion measures, attend exhibitions in foreign soils etc.

To whom questions Sample questions


need to be asked

Ministry of MSME, 36. Mention in detail supporting structures for facilitating marketing of
Other concerned MSME policies?

Ministries, MSME 37. What are the supportive policy measures for marketing of MSME
Support Institutions, products, both within the country and in foreign markets?

Industry 38. Role of government in MSME sector marketing?


Associations 39. Are the government incentives to MSMEs consistent with WTO
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ICRIER Background Paper on Economic Scenario and MSME
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To whom questions Sample questions


need to be asked

norms?

40. How frequently anti-dumping measures are introduced to protect


MSME products?

Chapter 8: Promotional and Developmental Policies

This chapter will analyse the extant policies for the promotion and development of MSME sector in the
areas of entrepreneurship, skill up gradation, development of linkages between industry and
academic/technical/research institutes, development of MSME infrastructure and the related monetary
and fiscal support, cluster development policies etc.

To whom questions Sample questions


need to be asked

Ministry of MSMEs, 41. What are the promotional and development measures for MSME
DFIS, MSME sector, sector specific?

Support Institutions, 42. Specific measures for promoting entrepreneurship?


Industry - Specific to women
Associations - Specific to minorities

43. Specific measures for skill upgradation/vocational training?

44. What are the facilitating measures for strengthening the process if
ancillarisation- linking MSME with large purchases?

45. Any specific policies for cluster development?

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ICRIER Background Paper on Economic Scenario and MSME
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Annexure
SME Definition in China

In China, criteria for SME definition were designed in accordance with the SME Promotion Law.
Major elements of consideration cover the payrolls, revenue and total assets of enterprises,
applicable to industrial sectors (including mining, manufacturing, power, gas and water utilities),
construction, transportation and posts, wholesale and retail, and hotels and restaurants (Table 5).

Table 5: SME Definition in China


Category of Industries Definition

Small (Industrial) <300 employees, or annual revenue <30 million RMB, or assets
<40 million.

Medium (Industrial) 300-2000 employees, annual revenue 30 million – 300 million


RMB, assets < 400 million RMB. All other industrial units with
lesser levels, classified as small enterprises.

Medium sized enterprises 600-3000 employees, with annual revenue 30 to 300 million
in Construction RMB, and assets 40 to 400 million RMB. All other units with
lesser values, classifies as small enterprises.

Medium sized enterprises 100-500 employees, or with annual revenue 10 to 150 million
in Retail Trade RMB. All other units with lesser values, classifies as small
enterprises.

Medium sized enterprises 100-200 employees or with annual revenue 30 to 300 million
in Whole Sale Sector Trade RMB. All other units with lesser values, classifies as small
enterprises.

Medium sized enterprises 500-3000 employees, or with annual revenue 30 to 300 million
in Transport Sector RMB. All other units with lesser values, classifies as small
enterprises.

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ICRIER Background Paper on Economic Scenario and MSME
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Category of Industries Definition

Medium sized enterprises 400 to 1000 employees, or with annual revenue 30 to 300 million
in Delivery Services Sector RMB. All other units with lesser values, classifies as small
enterprises.

Medium sized enterprises 400-800 employees, or with annual revenue > 30 but less than
Hotels & Restaurants 150 million RMB. All other units with lesser values, classifies as
small enterprises.

MSME Definition in Malaysia

Malaysian MSMEs can be grouped into the three categories of Micro, Small, or Medium on
basis of either the numbers of people a business employs or on the total sales or revenue
generated by a business in a year. The definitions apply to agriculture, manufacturing and
manufacturing-related services and the services sector (Table 6 and 7).

Table 6: MSME Definition in Malaysia (On basis of Number of Employees)


Primary Agriculture Manufacturing (including Services Sector
Agro-Based) & MRS* (including ICT**)
Micro Less than 5 employees Less than 5 employees Less than 5 employees
Small Between 5 & 19 Between 5 & 50 employees Between 5 & 19
employees employees
Medium Between 20 & 50 Between 51 & 150 Between 20 & 50
employees employees employees
*MRS: Manufacturing-Related Services, ** ICT: Information and Communications Technology

Table 7: MSME Definition in Malaysia (On basis of Annual Sales Turnover)


Primary Agriculture Manufacturing (including Services Sector
Agro-Based) & MRS* (including ICT**)
Micro Less than RM200,000 Less than RM250,000 Less than RM200,000

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ICRIER Background Paper on Economic Scenario and MSME
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Primary Agriculture Manufacturing (including Services Sector


Agro-Based) & MRS* (including ICT**)
Small Between RM200,000 & Between RM250,000 & less Between RM200,000 &
less than RM1 million than RM10 million less than RM1 million
Medium Between RM1 million & Between RM10 million & Between RM1 million &
RM5 million RM25 million RM5 million
*MRS: Manufacturing-Related Services
** ICT: Information and Communications Technology

MSME Definition in Philippines

In Philippines, MSMEs are defined by the Small and Medium Enterprise Development (SMED)
Council as any business activity/enterprise engaged in industry, agri-business/services, whether
single proprietorship, cooperative, partnership, or corporation whose total assets, inclusive of
those arising from loans but exclusive of the land on which the particular business entity's office,
plant and equipment are situated, must have value falling under the following categories:

By Asset Size*
Micro: Up to P3,000,000
Small: P3,000,001 - P15,000,000
Medium: P15,000,001 - P100,000,000
Large: above P100,000,000

Alternatively, MSMEs may also be categorized based on the number of employees:


Micro: 1 - 9 employees
Small: 10 -- 99 employees
Medium: 100 -- 199 employees
Large: More than 200 employees

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ICRIER Background Paper on Economic Scenario and MSME
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MSME Definition in Russia

Russian legislation and state statistics deal with the following size categories of economic
entities:
 Small entrepreneurship entities;
 Medium-sized and large enterprises.

Small entrepreneurship entities are defined in the Federal Law no. 88-FZ "On state support of
small entrepreneurship in the Russian Federation" of June 14, 1995 to include:
 individual entrepreneurs (IEs);
 farm enterprises (FEs);
 small enterprises registered as legal entities (SEs) that meet the following two requirements:
 The state property of the Russian Federation or its subjects, the municipal property, and the
property of non-governmental or religious organizations, charities or other foundations
may not exceed 25% of the charter capital. The share belonging to one or several legal
entities that are not small entrepreneurship entities may not exceed 25% either;
 the average number of employees does not exceed:
- 100 in industrial production, civil engineering or transport;
- 60 in agriculture, science or engineering;
- 30 in retail trade or consumer services;
- 50 in other sectors or types of business.

A recent law establishes specific criteria that a business must meet to be considered an SME
(2008). The first is that the government, foreign companies, and non-SME companies
collectively own no more than 25% of the company. Second, the company must employ fewer
than 250 workers and earn less than one billion rubles per year. The earnings requirement is to be
reconsidered every five years. The law also makes divisions within the classification of SME:
company with 0 – 15 employees, earning less than sixty million rubles is "micro;" those with 15-
100 employees and between sixty million and four hundred million rubles are "small;" and those
between that mark and the maximum are "medium."

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ICRIER Background Paper on Economic Scenario and MSME
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MSME Definition in Italy and Turkey

In case of Italy and Turkey, according to the European Commission SME definition user guide,
the category of micro, small and medium-sized enterprises consists of enterprises which employ
fewer than 250 persons and which have either an annual turnover not exceeding 50 million euro,
or an annual balance sheet total not exceeding 43 million euro. Small enterprises are defined as
enterprises which employ fewer than 50 persons and whose annual turnover or annual balance
sheet total does not exceed 10 million euro. Micro enterprises are defined as enterprises which
employ fewer than 10 persons and whose annual turnover or annual balance sheet total does not
exceed 2 million euro (Table 8).

Table 8: MSME Definition in Italy and Turkey


Type of Enterprise Headcount Annual Turnover Annual Balance
Sheet Total
Medium <250 <= € 50 Million <= € 43 Million
Small <50 <= € 10 Million <= € 10 Million
Micro <10 <= € 2 Million <= € 2 Million

SMMEs Definition in South Africa

In South Africa, according to the National Small Businesses Act 1996, ‘small business’ means a
separate and distinct business entity, including cooperative enterprises and non-governmental
organisations, managed by one owner or more which, including its branches or subsidiaries, if
any, is predominantly carried on in any sector or subsector of the economy and which can be
classified as a micro-, a very small, a small or a medium enterprise by satisfying the criteria
mentioned in Table 9 opposite the smallest relevant size of the enterprise. The MSMEs are
defined on basis of employment, total turnover and gross assets value, with minimum and
maximum limits varying across industries.

Table 9: MSME Definition in South Africa

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ICRIER Background Paper on Economic Scenario and MSME
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Sector or Size of Total full-time Total turnover Total gross asset


subsector enterprise employment value
Agriculture Medium 100 R5m R5
Small 50 R3m R3m
Very Small 10 R0.50m R0.50m
Micro 5 R0.20m R0.10m
Mining and Medium 200 R39m R23m
Quarrying Small 50 R10m R6m
Very Small 20 R4m R2m
Micro 5 R0.20m R0.10m
Manufacturing Medium 200 R51m R19m
Small 50 R13m R5m
Very Small 20 R5m R2m
Micro 5 R0.20m R0.10m
Electricity, Gas Medium 200 R51m R5m
and Water Small 50 R13m R5m
Very Small 20 R5.10m R1.90m
Micro 5 R0.20m R0.10m
Construction Medium 200 R26m R5m
Small 50 R6m R1m
Very Small 20 R3m R0.50m
Micro 5 R0.20m R0.10m
Retail and Motor Medium 200 R39m R6m
Trade and Repair Small 50 R19m R3m
Services Very Small 20 R4m R0.60m
Micro 5 R0.20m R0.10m
Wholesale Trade, Medium 200 R64m R10m
Commercial Small 50 R32m R5m
Agents and Allied Very Small 20 R6m R0.60m

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Sector or Size of Total full-time Total turnover Total gross asset


subsector enterprise employment value
Services Micro 5 R0.20m R0.10m
Transport, Medium 200 R26m R6m
Storage and Small 50 R13m R3m
Communications Very Small 20 R3m R0.60m
Micro 5 R0.20m R0.10m
Finance and Medium 200 R26m R5m
Business Services Small 50 R13m R3m
Very Small 20 R3m R0.50m
Micro 5 R0.20m R0.10m
Community, Medium 200 R13m R6m
Social and Small 50 R6m R3m
Personal Services Very Small 20 R1m R0.60m
Micro 5 R0.20m R0.10m
Source: Schedule 1 to the National Small Business Act of 1996, as revised by the National Small
Business Amendment Bill of March 2003

MSME Definition in South Korea

In South Korea, SMEs are defined according to the Article 2 of Framework Act on SMEs and
Article 3 of Enforcement Decree of the Act and for Micro-enterprises, Article 2 of the Act of
Special Measures on Assisting Small Business and Micro-enterprises is applicable. The
definition varies across sectors, as given in Table 10.

Table 10: SME Definition in South Korea

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ICRIER Background Paper on Economic Scenario and MSME
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Sector SMEs Small Micro-


Businesses enterprises

No. of Capital No. of workers


workers and Sales

Manufacturing Less Capital Less Less


than 300 worth than 50 than 10
$8M or
less

Mining, construction and Less Capital Less Less


transportation than 300 worth than 50 than 10
$3M or
less

Large general retail stores, hotel, recreational Less Sales Less Less
condominium operation, communications, than 300 worth than 10 than 5
information processing and other computer- $30M or
related industries, engineering service, less
hospital and broadcasting

Seed and seedling production, fishing, Less Sales Less Less


electrical, gas and waterworks, medical and than 200 worth than 10 than 5
orthopaedic products, wholesales, fuel and $20M or
related products wholesales, mail order sale, less
door-to-door sale, tour agency, warehouses
and transportation-related service,
professional, science and technology service,
business support service, movie, amusement
and theme park operation

Wholesale and product intermediation, Less Sales Less Less

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Sector SMEs Small Micro-


Businesses enterprises

No. of Capital No. of workers


workers and Sales

machinery equipment rent for industrial use, than 100 $10M or than 10 than 5
R&D for natural science, public less
performance, news provision, botanical
garden, zoo and natural parks, waste water
treatment, waste disposal and cleaning
related service

Other sectors Less Sales Less Less


than 50 worth than 10 than 5
$5M or
less

MSME Definition in Brazil

In Brazil, different criteria and thresholds are used for defining MSMEs for different legal, fiscal
and international trade purposes. The Statute of 1999, the criterion used to conceptualize micro
and small business is the annual gross revenue. In addition to the criteria adopted in the Statute,
SEBRAE also uses the concept of employees in enterprises. It is considered a micro firm those
with up to 19 employees for the industrial field and up to 9 employees for the service providers;
small firms hold from 20 to 99 employees in the industrial field and from 10 to 49 for service
providers; medium firms hold from a 100 to 499 employees in the industrial field and from 50 to
99 for service providers. For tax regulation and credit concession purposes, the firm's
classification is based on its revenue. Micro firms hold operating revenue up to R$ 700 thousand;
up to 6 million are small firms and up to 35 million are medium.

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ICRIER Background Paper on Economic Scenario and MSME
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The Status of Micro and Small Enterprise in 1999, the criterion used to conceptualize micro and
small enterprises is the annual gross revenue, whose values have been updated by Decree No.
5028/2004 of 31 March 2004, are as follows:

- Microenterprise: annual gross revenue equal to or less than $ 433,755.14 (four hundred and
thirty-three thousand seven hundred and fifty-five dollars and fourteen cents);

- Small Businesses: annual revenue exceeding U.S. $ 433,755.14 and less than or equal to $
2,133,222.00 (two million one hundred thirty-three thousand, two hundred twenty-two real).

Currently, these criteria are adopted in various credit programs of the federal government in
support of SMEs. It is important to emphasize that the simplified system of taxation - SIMPLE,
which is a law of a strictly tax, adopts a different criterion to frame micro and small
business. Limits as prescribed in the Provisional Measure 275/05 are:

- Microenterprise: annual gross revenue equal to or less than R $ 240,000.00 (two hundred and
forty thousand reais);

- Small Businesses: annual revenue of more than R $ 240,000.00 (two hundred and forty
thousand reais) and less than or equal to $ 2,400,000.00 (two million four hundred thousand
reais).

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