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SMEs Drive Economic Growth & Development: Lessons From East Asia

By Christopher Burke

Small and Medium-Sized Enterprises (SMEs) are critical drivers of economic growth.  SMEs are usually more efficient, flexible and dynamic than larger enterprises. Smaller enterprises can be more innovative and responsive to market needs and generally enjoy closer relationships with clients.

Definitions of SMEs vary around the world.  While the African Union Commission (AUC) defines SMEs as enterprises with less than 250 employees and an annual turnover of less than US$50 million, Uganda’s Ministry of Trade, Industry and Cooperatives defines considers businesses with less 100 employees and an annual turnover below UGX360 million (US$96,000).

Economic powerhouses across East Asia including Japan, South Korea and Taiwan recognized and actively promoted SMEs as a strategy to achieve economic growth and development.  Many of the large business conglomerates or Chaebol as they are called in South Korea started as very small family owned enterprises. Samsung was founded as a grocery trading company dealing in noodles and LG Electronics, named Lucky GoldStar until 1995, started as a small enterprise producing toothpaste.

Although external perceptions of Japan’s corporate landscape are dominated by big names such as Toyota, Honda, Sony and Toshiba; however, over 93 percent of companies in Japan are actually classified as micro-enterprises with less than 10 employees according to the Small and Medium Enterprise Agency of Japan. As prominent development economist E. F. Schumacher proclaimed–small is beautiful!

East Africa’s economy is booming.  In February this year, the Africa Development Bank announced economic growth projections for the region approaching 5 percent growth for the 2023-2024 financial year. Only marginally behind projections of 5.3 percent growth in East Asia and substantially higher than 1.3 percent predicted by the IMF for advanced economies in Europe and North America for the same period.  While access to credit, lack of infrastructure and challenges associated with bureaucracy and corruption continue to present serious challenges to economic growth and development—opportunities abound.

A key to East Asia’s economic success has been access to markets in North America and Europe. More can be done to strengthen East Africa’s access to global markets; however, the 2021 African Continental Free Trade Area (AfCFTA) connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion and represents the largest free trade area since the formation of the World Trade Organisation (WTO).

Developments in communication and to some extent transportation technology have disrupted divisions between centre and peripheries and contributed to leveling the playing field in some sectors.  Access to technology and information have altered traditional development trajectories.  Economies in general and SMEs in particular are no longer bound so tightly to traditional trajectories of primary industry, secondary to tertiary sectors.  SMEs can foster economic growth in strategic areas, contributing to the development of new products, most especially services, contribute to job creation and reduce poverty and socioeconomic inequalities.

Governments across East Africa have followed East Asia with the implementation of policies to promote business and economic growth by streamlining business registration processes to reduce bureaucracy and make it easier for SMEs to start and flourish.  The World Bank has implemented a series of initiatives in Uganda and across East Africa under the Ease of Doing Business program over the past two decades and registered some notable successes.

A core difference between East Asia and East Africa is the level of skilled human capital. Skilled personnel are vital for SMEs to innovate, compete and grow. Societies across East Asia have traditionally attached great importance to education as a key to success and social mobility.  Education is not accorded the same priority in East Africa.  While the salience education is slowly gaining prominence in response to modernization and growing inequalities and government recognize the importance of education and training programs to develop skilled human capital even where they do not have adequate resources to address gaps.

Key challenge to SMEs globally comprise access to technology, information and finance. Many East Asian governments established financing programs to provide loans and guarantees to SMEs.  More is to be done to develop policies that support SME growth including tax incentives, subsidies and facilitating access to financing investment. An array of state sponsored initiatives such as the Youth Livelihood Programme (YLP), Uganda Women Enterprises Program (UWEP), Parish Development Model (PDM), Uganda Development Corporation (UDC) and Uganda Industrial Research Institute (UIRI) provide support in the form of financial, technical, training, advocacy, mentorship, research, information, networking and financial assistance to SMEs.

The private sector is playing an increasing role to foster the development of SMEs with a growing number of initiatives across the country. The Stanbic Business Incubator Limited (SBIL) skills entrepreneurs through training and mentorship programs, and also supports them with access finance, markets and networking opportunities to SMEs with at least 5 employees.  Other private sector initiatives comprise Enterprise Uganda: Uganda Entrepreneurs’ Federation (UEF), Business Development Centre Uganda (BDC-U) and the Africa Women Innovation and Entrepreneurship Forum (AWIEF).

SMEs have played a critical role in the economic development of East Asia. They have been a significant source of employment, make sizable contribution to GDP, stimulate innovation and technology transfer, and benefit from strong support from the government, business networks, and partnerships, and access to finance.

The author is the managing director at WMC Africa, a communications and advisory agency in Kampala, Uganda.  He has over 25 years’ experience working issues associated with development, communications, governance and peace-building in Asia and Africa.

 

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