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  • 1. Policy BriefStrategies for Entrepreneurship Development in Bangladesh: Unleashing the Potentials of SMEs Prepared by: Khondaker Golam Moazzem Senior Research Fellow, CPD 28 July 2008 CENTRE FOR POLICY DIALOGUE (CPD) B A N G L A D E S a c i v i l s o c i e t y t h i n k - t a n k House 40/C, Road 11, Dhanmondi R/A, Dhaka 1209 Tel: 9141734, 9141703, 9145090; Fax: 8130951 E-mail: cpd@bdonline.com; Website: www.cpd-bangladesh.org
  • 2. Contents1. Introduction 22. Literature Review 33. SMEs in Bangladesh: Composition, Trends, Policies and Institutions 6 Composition Trends Gross Output, Value Added and Profitability Policies for the Development of SMEs in Bangladesh Institutional Set Up for SME Development4. Major Challenges Confronting SMEs 165. Entrepreneurship Development in Bangladesh 216. Actions to be Taken for Entrepreneurship Development 26 Actions to be Taken at Domestic Level Actions to be Taken at Regional Level Actions to be Taken at International Level7. Conclusion 32 1
  • 3. 1. IntroductionThe economic development of Bangladesh in the last three decades is the resultant effectof structural change in the economy leading towards considerable growth of themanufacturing and service sectors, various reforms of domestic economic policies,changes in international policies, and in this process the emergence of a group ofentrepreneurs. During this period, GDP growth doubled from a mere 3.7% in the 1980s tomore than 6% after 2000, with Bangladesh now ranked 33rd out of 191 countries (in termsof GDP). However, because of its huge population (150,448,340), Bangladesh is ranked8th out of 191 countries (in terms of population), and is consequently regarded as one ofthe poorer countries (150th out of 191 countries in terms of per capita GDP). On its pathtowards economic reform, the economy has gradually been liberalized over the last threedecades, and it has been integrated into the global economy - in 2007, the degree ofopenness (international trade as % of GDP) reached 43.3% compared to 16.8% in 1991and 13.5% in 1981. The degree of global integration, as measured through the externalsector including FDI and debt accounts in relation to GDP, was 55.6% in 2007 comparedto 21.2% in 1981. Global market forces therefore affect most economic activity, whichneeds to be taken into consideration when formulating policies and action plans.Against the backdrop of a huge population, an abundance of low and semi-skilledworkers, and large-scale unemployment, the government’s major development objectiveis to create more employment in order to secure incomes and thereby reduce poverty.Because of the structure of small and medium enterprises (SMEs) in Bangladesh, whichare mainly labor-intensive and low-skill, the development of SMEs is considered to bethe most effective contribution to the eradication of poverty. 1 According to BBS, therewere about 78,300 SMEs operating in Bangladesh in 2003, in which roughly 3.5 millionworkers were employed. However, despite their broad dissemination, SMEs in1 According to SME Policy 2005, an enterprise with capital (replacement of plant, machineries etc. andassociated technical services excluding land and building) up to Tk.15 million (about US$215,000) isregarded as a small enterprise, and with capital up to Tk.100 million (US$1,433,000) as a mediumenterprise. In the case of non-manufacturing units, enterprises with less than 25 workers are considered tobe small, while those employing between 25-100 workers are considered to be medium sized enterprises. Inview of reducing the variations in operational definitions applied by other organizations including banks,the government has recently announced a new definition for all operational purposes. 2
  • 4. Bangladesh could not fulfill the critical role of entrepreneurship development and therebycontribute to the faster industrialization of the country. The objectives of this policy briefare to identify the major challenges confronted by SMEs; to explore possibleexplanations for entrepreneurship development in the case of successful SMEs; andsuggest an action plan for unleashing the potential of SMEs.2. Literature reviewSmall and Medium-sized Enterprises (SMEs) play a pivotal role in terms of economicgrowth, employment generation, and industrialization (e.g. through entrepreneurshipdevelopment). Although the role of SMEs varies at different stages of economicdevelopment, their role is particularly important in developing countries and LDCs. Beck,Kunt, and Levine (2005) have found a strong correlation between SME development andGDP per capita, but the relationship between growth and the overall businessenvironment for SMEs overshadows the former relationship.SMEs need low capital investment per unit of output and give rise to greateropportunities for direct or indirect employment. In a positive environment, SMEs offersustainable business solutions that simultaneously fight poverty and accelerate economicgrowth (Agbeibor, 2006). In developing countries, SMEs traditionally play an importantrole with respect to poverty alleviation, while at the same time contributing significantlyto economic growth as the development initiatives targeted at them create jobs andincrease productivity (Agbeibor, 2006).2 For developing countries or LDCs, the problemof rural unemployment, which results in an unhealthy rural-urban migration, can besolved through SME development in rural areas.3 Rural SMEs generate significantlymore jobs than urban SMEs. This indicates a different relationship between SME growthand employment generation in different geographical environments (North andSmallbone, 1996).2 SMEs are also considered as the backbone of the European economy and are the best potential source ofjob creation and economic growth (Verheugen, 2006). In Japan, some 70 per cent of Japanese workers areemployed by SMEs and half the total value added in Japan is generated by SMEs (Lichiro, 2006).3 Carl Liedholm, Michael McPherson and Anyinna Chuta (1994) showed that the percentage of job growthcoming from enterprise expansion in rural areas is significantly higher than that of urban areas in Africa. 3
  • 5. Small and Medium-sized Enterprises are the seeds for a vital entrepreneurial economy. Inmany economies, SMEs nurture large-scale industrialization through entrepreneurshipdevelopment. One of the hypotheses on the role of SMEs in the course of economicdevelopment is their vertical and horizontal expansion over time in large-scaleindustrialization by fostering entrepreneurship (Juneja, 2000).Global experiences show that an efficient SME sector is conducive to fast industrialgrowth (Hill, 2001). Llyod (2002) analyzed the South African SME sector over the 1980to 2000 period and found that expanded small businesses were playing an increasinglyimportant role in the manufacturing, construction and trade sectors in South Africa, buttheir role was declining in the agriculture, transport and storage sectors.However, the poor performance of SMEs in terms of growth, product diversity, andexpansion of markets, indicates that SMEs could not reach the expected level. Moreimportantly, unlike in many economies, SMEs in the current environment lack thecapacity to nurture the process of large-scale industrialization through vertical andhorizontal expansion by fostering entrepreneurship (Hal Hill, 2001). It is extremelyimportant to analyze the possible reasons for this lack of entrepreneurship developmentthrough SMEs and investigate successful entrepreneurs and the possible causes of theirsuccess in order to provide policy suggestions for the development of the sector.Although SMEs play a vital role in any economy, they are very vulnerable to the effectsof globalization in the absence of some economic criteria. For example, under theavalanche of low priced Chinese product’s imported in Japanese, Korean and Taiwanesemarkets, the SMEs of these countries adopted different strategies: some firms relocatedplants to the Chinese mainland, some exited the market, others protected their market byswitching to more capital intensive technology so as to produce more differentiated high-tech products (Croix, 2006). These countries have the capacity to overcome theirvulnerabilities by adopting different strategies while developing and least developedcountries often lack the capabilities to facilitate such transformations. 4
  • 6. The degree of vulnerability is very high in most developing countries and LDCs in theabsence of sound business environments and the existence of weak business strategies.Moreover, SMEs in developing countries are vulnerable to international trade due to theircomparatively low productivity and lack of competitiveness (Deshaies and Julien, 1994).The countries that are better prepared in terms of solid business environments andstrategies can reap the benefits of globalization by scaling up their SMEs to large-scaleindustries.One of the positive implications of globalization on SME expansion in developingcountries and LDCs is the possibility of FDI inflows and soaring export opportunities:there is a powerful relationship between internationalization and SMEs. In investigatingthe linkage between internationalization and SME growth, Lu and Beamish (2002)examined the impact of exporting products and FDI on SME growth. They came to theconclusion that FDI is more effective for SME growth. In India, a very big economy witha large number of consumers, trade liberalization and investment liberalization gave animpetus to the development of SMEs, which in turn led the Indian economy towardslarge-scale industrialization. Juneja (2000) further demonstrates that small industrygrowth rates have increased rapidly compared to the growth rate of the total industrialsector of India since 1991. Juneja also shows how Maruti–Suzuki’s capacity building inIndia’s automobile industry attracted FDI from Japan, South Korea, Germany, UK, andUSA. 5
  • 7. 3. SMEs in Bangladesh: Composition, Trends, Policies and Institutions3.1 Composition: According to BBS Census of Enterprises, 2001/2003, there were some78,440 SMEs in Bangladesh, which comprises 93% of all industrial units, and theseenterprises employed about 3.5 million workers (i.e. 44% of all industrial workers).Among these enterprises, 60% of the units were in urban areas and 40% in rural areas.4However, urban enterprises employ relatively more workers compared to ruralenterprises (Figure 1). Liedholm, Mcpherson and Chuta (1994) showed that thepercentage of job growth coming from enterprise expansion in rural areas of Africa issignificantly higher than that of urban areas. Because of low levels of job growth in ruralenterprises in Bangladesh, rural SMEs have a lesser impact on the reduction of rural-urban migration.According to SEDF (2006), food, textile and clothing units accounted for over 60% ofregistered SMEs (Figure 2). In rural areas, textile manufacturing, food, tobacco, andbanking (especially by NGOs) covered the major share of small enterprises, while inurban areas the major share of small enterprises were found in transport and banking(Figure 3). Within the medium enterprise category, non-metallic mineral products andtextile constituted the major share of rural enterprises, whereas textile, banking, and foodand beverage that of urban enterprises. However, SMEs have undergone significantstructural changes overtime in terms of product composition, degree of capitalization andmarket penetration in order to adjust to changes in technology, market demand andmarket access brought about by globalization and market liberalization (Ahmed, 2001,ADB 2001). Industries such as light engineering, readymade garments, printing andpublishing, wood and wood products, plastic products, electrical goods, electronics,artificial jewellery, wooden and steel furniture, television and radio assembling, andsoaps and detergents have emerged as major industries in recent years.4 Average employment per establishment for small enterprises was 17-20 workers, while for mediumenterprises the range was 65-69 workers. 6
  • 8. A total of 103,858 micro-, small-, medium-, and large enterprises were headed by femaleentrepreneurs, of which 71 per cent were located in rural areas. Most of these are microenterprises where less than 10 workers are employed. It appears that most of the ruralbased female-headed enterprises operated at small scale. In proportionate terms, theseenterprises constituted 3 per cent of total enterprises in the country. Womenentrepreneurs are found in self-employment, enterprise ownership, manufacturing, familytrade, agricultural activities, subcontracting, partners in businesses, traders, contractors,and large and medium industry owners. Despite many barriers, women entrepreneurswere found to take on work and entrepreneurial challenges in a male-dominated,competitive and complex economic and business environment. Figure 1 Figure: Share of Different Types of Units and Employment under Different Categories % of total number of units 100 % of total employment 80 Percentage 60 40 20 0 Medium Medium Medium Small Small Small Large Large Large Total Total Urban Rural TotalSource: BBS Census of Enterprises, 2001/2003 7
  • 9. Figure 2 Share of Units and Em ploym ent in Different Types of Enterprises Figure: Education/Healthcare 90 Various personal services 80 70 Mining & Manufacture 60 Fabricated goods, electrical and 50 means of transport % Non-metallic mineral products 40 30 Chemicals & Plastics 20 10 Wood, leather & Paper printing 0 Ready-to-w ear apparels Textile Manufacturing Food and Tobacco Small M edium Large FigureFigure: Share of Units and Em ploym ent in Different Types of Enterprises 3 Education/Healthcare 90 Various personal services 80 70 Mining & Manufacture 60 Fabricated goods, electrical and 50 means of transport % Non-metallic mineral products 40 30 Chemicals & Plastics 20 10 Wood, leather & Paper printing 0 Ready-to-w ear apparels Textile Manufacturing Food and Tobacco Small M edium LargeSource: BBS Census of Enterprises, 2001/2003 8
  • 10. Real EstateFigure 4 Proportionate share of SME Units Located in Rural and Urban Areas Figure: Finance & Banking Transport & Comm.. 120 Eateries 100 Trade 80 Construction Utility services % 60 Mfg. transport equipment 40 Electrical equipments 20 Fabricated products Non-metallic mineral 0 products Proportion of Proportion of Proportion of Proportion of Chemicals & plastics small medium small medium enterprises enterprises enterprises enterprises Paper & printing in the total in the total in the total in the total Tanning, etc Rural enterprise Urban enterprise Wood products Source: BBS Census of Enterprises, 2001/2003 3.2 Trends: The comparative dynamics of growth of establishments between 1986 and 2003 for different enterprise categories in urban and rural areas reveal that small and medium enterprises grew at a relatively slower pace than large enterprises. However employment growth for small enterprises evolved at a relatively higher rate (Table 1 and 2). Interestingly, medium enterprises were being marginalized both in terms of employment and the number of establishments. The number of small enterprise establishments and employment increased simultaneously while medium and large enterprise growth rates for these two indicators did not evolve at the same pace, to the extent that in large enterprises employment growth in rural areas was negative. This indicates that there is an agglomeration in the number of establishments and employment in urban areas. A huge number of enterprises established during and after the 1990s were mainly in wholesale and retail trade, manufacturing, hotels and restaurants, health and social work. This implies that a large number of enterprises established during this period emerged in 9
  • 11. the period of faster trade liberalization as well as in the regime of quota phase out under the Agreement of Textile and Clothing (ATC). Table 1: Changes in the number of establishments between 1986 and 2003 1986 2001 and 2003 Growth Rate Total Urban Rural Total Urban Rural Total Urban Rural Small (10-49 persons) 46909 25361 21548 72935 39127 33808 2.7 2.9 2.7 Medium (50-99 persons) 2409 1520 889 3266 2193 1073 1.9 2.5 1.1 Large (100+ persons) 2299 1648 651 3689 2930 759 2.9 3.9 0.9 Total 51617 28529 23088 79890 44250 35640 2.7 3.0 2.6 Source: BBS, Economic Census 2001 and 2003, National Report Table 2: Changes in the number of permanent employment between 1986 and 2003 1986 2001 and 2003 Growth Rate Total Urban Rural Total Urban Rural Total Urban RuralSmall (10-49 persons) 778761 430956 347805 1304935 725378 579557 3.2 3.5 3.0Medium (50-99 persons) 163900 103147 60753 221123 150350 70773 1.9 2.5 0.9Large (100+ persons) 949114 698387 250727 1314428 1082979 231449 2.0 3.0 -0.5Total 1891775 1232490 659285 2840486 1958707 881779 2.5 3.1 1.7Source: BBS, Economic Census 2001 and 2003, National Report It has to be underlined that enterprise growth differs according to sectors. Between 2002 and 2006, although the total number of enterprises and total employment increased irrespective of enterprise size, their performance varied widely from sector to sector (Table 3). The increase in the number of small-scale enterprises was substantially higher than that of medium and large-scale enterprises due to growth in specific economic activities such as education. In contrast, growth in the number of establishments of small- scale enterprises was negative in sectors like trade, transport and manufacturing, while medium size enterprises performed well only in the manufacturing sector. It can therefore be deduced that different factors are responsible for the growth of different types of enterprises under different categories. 10
  • 12. Table 3: Change between 2002 and 2006 in number of establishments and Total Person Employed Sectors No. of establishments in 2005/2006 Total persons employed in 2005/2006 Small Medium Large Total Small Medium Large Total (10-49 (100+ (10+ (10-49 (50-99 (100+ (10+ workers) workers) workers) workers) workers) workers) workers)Mining 6 -9 -9 -12 269 -529 -1279 -1539Manufacturing -248 481 615 848 -5172 32592 281660 309080Electricity 25 41 17 83 615 3293 3918 7826Construction -172 -18 -57 -247 -3922 -1331 -15230 -20483Trade -2436 -54 5 -2485 -39568 -3696 -4047 -47311Eateries -306 -10 -14 -330 -7207 -715 -2104 -10026Transports -428 -17 -2 -447 -6967 -1326 -16834 -25127Bank, Insurance 752 5 3 760 9931 38 -15782 -5813Real estate -19 -17 3 -33 -628 -1177 -3684 -5489Education 6809 198 36 7043 121009 12409 -3386 130032Health -17 98 37 118 -2572 8409 -2908 2929Personal service -720 -75 -34 -829 -14313 -4703 -20172 -39188All BSIC groups 3246 623 600 4469 51475 43264 200152 294891 Source: Bangladesh Bureau of Statistics, 2004; BBS Business Registry, 2006 3.3 Gross Output, Value Added and Profitability: Comparison of gross output, value added, and profitability between small, medium and large enterprises points to different scenarios (Table 4). Large enterprises - because of the capital-intensive nature of production - ensure higher value added in the percentage of gross output compared to that of medium and small enterprises. However, value added per worker in small enterprises is much higher than in medium and large enterprises. The same is true when looking at gross profit per worker and gross profit as a percentage of gross output. Small size enterprises are found to perform better than medium size ones. This could be one of the reasons behind the higher growth of small enterprises compared to medium enterprises. However, the overall performance of SMEs in Bangladesh in terms of productivity and efficiency is much lower compared to countries like India and China. According to Rahman, Debapriya and Moazzem (2007), the productivity of readymade garment units (US$1563 in 2005) was found to be lower than that of China (US$5000 in 2001) and 11
  • 13. India (US$2600 in 1998). Under the dynamics of increased global market competition, it is challenging for small firms in Bangladesh to remain competitive. Table 4: Gross output, value added, and average profitability, SMEs vs. large firms, 2005 (Tk. millions)Indicator variables Small firms Medium firms SMEs Large firms All firmsGross output (GO) 23801 34034 26892 183541 135067 (55.1) (83.8) (63.7) (73.3) (61.0)Value added (VA) 3642 5337 4185 36080 26112 (46.7) (84.5) (56.8) (51.5) (43.5) VA as % of GO 15.3 15.7 15.5 19.6 19.3 VA per worker 106.3 76.4 96.7 94.65 96.3 (Tk. 000s) (54.7) (91.1) (57.9) (57.3) (57.6)Gross profit (GP) 2430 2497.5 2452 16058 11806 (33.4) (46.1) (36.6) (2954) (25.88) GP per worker 66.6 33.2 55.9 43.7 47.5 (Tk. 000s) (35.9) (44.0) (35.2) (28.8) (30.9) GP as % of GO 10.2 7.33 9.08 8.74 8.74 Source: Bangladesh Enterprise Institute’s Enterprise Survey, data from 6th round 3.4 Policies for the Development of SMEs in Bangladesh SME Policy 2005: The major objectives of the SME policy are to embed the strategies of this policy into those of the Poverty Reduction Strategy Paper (PRSP); encourage FDI in SMEs; establish physical and ICT networks of infrastructure and institutional delivery mechanisms; re-orient the existing fiscal, regulatory and governmental support institutions; take measures for creating avenues to mobilize debt without collaterals; harness information and communication technologies; internet protocol (IP)-based infrastructure and electronic governance. This policy provides directions for SME development in the short, medium and long- term. On top of the establishment of a government sponsored ‘SME Foundation’ that will cater to the needs of SMEs over the medium term and beyond (see 3.5 below), it will act as a pivotal platform for the delivery of all planning, developmental activities, financing, 12
  • 14. awareness-raising, evaluation and advocacy services. The SME policy has identifiedeleven booster sectors with a list to be reviewed every three years: electronics andelectrical, software development, light engineering and metal-working, agro-processing/agro-business/plantation-agriculture/specialist-farming/tissue-culture andrelated businesses, leather making and leather goods, knitwear and RMGs, plastics andother synthetics, healthcare and diagnostics, educational services,pharmaceuticals/cosmetics/toiletries, fashion-rich personal effects, wear and consumptiongoods.In its tactical plan of action, the SME policy provides direction on strategic skillupgrading, the establishment of an enabling business environment, fostering supply chainfor technopreneurship, developing an SME webportal, establishing a virtual SME front-office, access to information on export-oriented SMEs, development of a high-performance communications backbone, and international technology-exchangeprograms.Industrial Policy 2005: Under the industrial policy, fiscal incentives are offered to allcategories of enterprises irrespective of the size of the manufacturing/service units.Industries will enjoy tax holiday facilities for a period of 5 to 8 years depending on thelocations. As an alternative to tax holidays, industrial enterprises receive depreciation atthe rate of 100 per cent in the first year. If these facilities cannot be provided, then areduced rate of taxation will be considered. Export oriented industries will have importfacilities without any duty. Imported machinery and spare parts are exempted frompayment of VAT. Duty structures of imported raw materials, intermediate goods andfinished goods are set at gradually escalating rates. The activities of the Equity andEntrepreneurship Fund (EEF) will be intensified to give priority to entrepreneurs ofunder-developed areas and entrepreneurs of the BSCIC industrial units in receiving loansfrom this fund. Special facilities will be provided to 31 industries marked as “thrustsectors”. Industrial enterprises registered with the Board of Investment need not pay anytransfer fee or tax to purchase land for setting up new industries or to transform an 13
  • 15. industry into a limited company provided that no changes can be made in the ownershipstructure after that transfer.It is frequently argued that the incentives and facilities for different enterprises asmentioned in these policies are often inadequately provided to the enterprises. The scopeof these facilities, especially financial facilities, needs to increase to cover as manyenterprises as possible.3.5 Institutional Set Up for SME DevelopmentSME Foundation: The SME Foundation is acting as a pivotal platform for the deliveryof all planning, developmental activities, financing, awareness-raising, evaluation andadvocacy services. It is a limited company licensed by the Ministry of Industry as a non-profit organization. In its action plan for 2007-08 the following activities are listed:research, policy advocacy, gender equality, database and ICT Development, credit wholeselling program, business support services, technology development, extension anddiffusion, as well as public- private partnership initiatives.Bangladesh Small & Cottage Industries Corporation (BSCIC): BSCIC is also acting asa state-run policy coordinator, service developer and distributor of facilities in the SMEsector. A major responsibility of the Corporation is to mobilize policy support for animprovement in the economic environment, particularly to the benefit of SMEs. Itsservices include inputs in the areas of land development (estate building), technologytransfer, credit rationing, training, and design development. Unfortunately, the BSCICcould not perform as expected although its achievement in physical terms, particularly inestate building over the past 40 years, is impressive. Eighty-one percent of the developedplots (7069 out of 8763) had been allotted to entrepreneurs as of October 2003. But only2495 i.e. 30% of the plots have been used for actual industry building. There has been asubstantial waste of public money in idle investments in BSCIC.Bangladesh Industrial Technical Assistance Center (BITAC): BITAC was set up by thegovernment as an autonomous body under the Ministry of Industries. Its mandate is to: 14
  • 16. (a) train industrial personnel to upgrade their skills; (b) render technical advice toindustries; (c) disseminate modern know-how and improved techniques among industrialpersonnel; (d) manufacture and supply spare parts, tools and machines; and (e) developequipments tools and processes. Since its birth BITAC has played an important butlimited role by facilitating the transfer of technology to the country’s industrial sector anddeveloping human resources through its skill development training programs. However, ithas suffered from a chronic paucity of funds necessary for conducting training andmodernization.Bangladesh Council for Scientific & Industrial Research (BCSIR): BCSIR has alsoremained an underutilized organization in spite of its potential. Its regionalestablishments in Chittagong and Rajshahi should have been fully used to undertakeresearch in locally available materials, which can be used as inputs by SMEs.Other Institutions: Over the years a number of semi governmental and private sectorinstitutions have become active in the SME area. Bodies such as the NASCIB, BASICBank, MIDAS, CARITAS, WEAB, and BWCCI, to name a few, are some of theorganizations that have emerged in the private sector and are contributing to thepromotion and development of the SMEs. 15
  • 17. 4. Major Challenges Confronting SMEsThe country’s SMEs confront various types of structural, managerial, financial,infrastructural, marketing, and social problems (Table 5). The extent of the problemsfaced by SMEs differs according to their size, location, and market linkage. Some of theproblems such as financial, infrastructural, and political unrest are considered to be acuteas they have a substantial impact on business activity and hinder their competitivety. Table 5: Different types of problems faced by SMEs Nature of problems Frequency Percentage Poor transportation facilities 50 83 Lack of entrepreneurship education and training 40 66 Financial assistance 35 58 Hartal (strikes) 60 100 Law and order situation 50 83 Bureaucracy 45 75 Lack of control of corruption 50 83 Lack of adequate investment 50 83 Lack of government support and assistance 35 58 Lack of research and development 50 83 Inadequate information 50 83 Inability to forecast demand 40 66 Frequent power failure 60 100 Inadequate telecommunication services 50 83 Fear of failure 50 83 Lack of technology 45 75 Source: Chowdhury, 2007a) Lack of Sufficient Financial Support: Small entrepreneurs require various types offinancial support to cover their expenses, such as “initial capital” to cover preliminaryexpenses, “working capital” to cover running expenses, “reserve capital” to meetexpenses not only for unexpected contingencies but also for personal and familymaintenance. In most cases, these enterprises receive ‘working capital’ from the financialinstitutions, but ‘start up capital’, which is crucial to cover preliminary expenses, is often 16
  • 18. not supported by financial institutions. Various policies such as the SME policy orIndustrial Policy do not give any guidelines regarding the financial coverage required tomeet the initial expenses and unexpected requirements.Although the government has tried to enhance support for SMEs by providing creditthrough different banks and other institutions including the recently established ‘SMEFoundation’, the coverage of these support programs is found to be inadequate. In thebudget of FY2008, the government has allocated an endowment fund of Tk.100 crore forthe SME Foundation to provide credit to SMEs through private commercial banks underthe Foundation’s credit wholesaling program. The government has continued allocatingresources in the fiscal year FY2009 (Tk.100 crore) to support SMEs. The SMERefinancing Scheme of Bangladesh Bank has been allocated Tk.500 crore, up fromTk.300 crore the previous year. The allocation of EEF in the FY2009 has been targeted atIT related industries; in FY2008 the EEF allocation was targeted at agro-based industries.A total of Tk.469.6 crore has been disbursed as of April 2008 in 215 agro-based projectsand 34 IT related projects (Bangladesh Bank, 2008). Major projects included fishhatchery (93), shrimp hatchery (50), software development (32) and poultry and fish feedprojects (18). However, the EEF covered only about 38.1 per cent of the total cost of theprojects. This needs to be increased to provide adequate support to the eligible businessactivities. Thus far, 82 projects have received full financial support, while another 145projects received partial support costs of projects. 22 projects did not claim for support.Poor legal and regulatory framework: Although various policies in support of SMEs arecurrently in operation, there is a problem of ambiguity, non-transparency, andinconsistency in these policies, which ultimately reduces entrepreneurs’ confidence in thelegal and regulatory framework of the country. For example, there is a lot of disparity inthe definition of SMEs between the different operational agencies: SMEs as defined inthe SME policy emanating from the government differs from the one disclosed by thecommercial banks in their guidelines to provide credit, and the World Bank has its owndefinition. For the sake of clarification, the government has announced a new definitionand revised the existing one. According to the new definition, an enterprise with either 17
  • 19. capital (replacement of plant, machineries etc. and associated technical servicesexcluding land and building) within the range of Tk.50,000 to Tk.15 million (aboutUS$215,000) or total employment of 50 is regarded as a small enterprise. On the otherhand, enterprises with either capital of up to Tk.200 million (US$2,866,000) oremployment of 150 are regarded as medium enterprises. In the case of non-manufacturing units, enterprises with fewer workers than 25 or with capital of Tk.50,000to Tk.5,000,000 are considered to be small, while those with employment between 25-50workers or with capital of Tk.5,000,000 to Tk.100,000,000 are considered to be mediumsized enterprises. Besides, inconsistencies in enforcing laws, bureaucratic interpretationof rules, lack of firm political commitment, lack of accountability, hooliganism andpolitical brinkmanship, lack of rule of law, and lack of control over corruption, offers aneloquent list revealing how poor the legal and regulatory framework is, and how badlythe development of SMEs is hindered in the country.Poor infrastructure: Poor physical infrastructure increases the cost of production andreduces the competitiveness of SME products. Major problems related to infrastructureinclude frequent power failures and poor transport facilities, which seriously hamper thesmooth production and delivery of products. Small enterprises suffer more from frequentpower failures because of lesser captive power generation facilities in their productionunits. According to Rahman, Bhattacharya and Moazzem (2007), the profitability ofreadymade garments declines (although not significantly), due to poor power supplyconditions.Lack of skilled workers: In order to enhance productivity and manufacture high endproducts, entrepreneurs often demand an adequate supply of skilled workers. An upgradeof technologies, important for manufacturing better products, always requires skilledworkers. Huge public investment is necessary to develop human resources. A number ofpublic and private initiatives were undertaken in order to upgrade workers’ skill. Thegovernment allocated Tk.50 crore in the 2007 national budget for skilled developmenttraining of garment workers. The Bangladesh Garment Manufacturers and Exporters 18
  • 20. Association (BGMEA) also took the initiative of training workers and supplying them tovarious factories.Political unrest: Political structures remain confrontational in the country. Personal andpolitical enmity between rivals, frequent hartal (strikes), and the lack of respect forelementary principles of democratic governance have become the principalcharacteristics of the country’s political system. A series of prolonged hartal affect thesocio-economic and political conditions of the country. The average cost of hartal duringthe 1990s to the Bangladesh economy was 3-4 percent of GDP (UNDP, 2005). Thesesyndromes have given birth to a culture of corruption, bribery, hooliganism, andbrinkmanship, and discourage the development of entrepreneurial talent and initiative inthe country through the non-adherence of any rule of law. Under the present caretakerregime, such political practice is largely inexistent.Absence of a favorable social/cultural environment: The concept of entrepreneurship isnot native to every culture or society. Starting a business requires courage: the courage toassume the risks of putting money into ideas and the courage to take a leap into anunknown future. Throughout the world millions of entrepreneurs display such courage.But the fear of failure produced by the highly volatile socio-politico-economic conditionsof Bangladesh has deepened into the minds of potential entrepreneurs. Consequently,new and energetic entrepreneurs are not emerging in the market. The traditional andcultural values of the country tend to keep women inside family homes while womenshoulder the burden of the poverty (Chowdhury, 2007). The SME policy of the countryneeds to work on building awareness at the socio-cultural level to develop a favourableenvironment for creating new entrepreneurs.Poor quality and standards: Bangladesh has limited capacity to ensure the quality ofproducts and services to consumers not only in the domestic market but also ininternational markets. There is no national quality policy or adequate support system thatprovide assistance to all enterprises to understand the principles of quality and to developquality consciousness in business behavior. Currently, the Bangladesh Standards and 19
  • 21. Testing Institution (BSTI) formulates national standards for industrial, food, andchemical products. However, BSTI lacks credibility and importers from North Americaand Europe do not accept the certificates it issues (Haque, 2003).Inefficient marketing practices: SMEs in Bangladesh, especially the small enterprises,do not have enough marketing capabilities or networks. An overwhelming majority ofsmall firms do not have resources to invest in marketing. Export-oriented SMEs havevery little marketing activities and most of them try to survive by linking up withmultinational buyers or setting up subcontracting relationships with them. In the domesticmarket, SMEs are confronted with cheap imports and are hard pressed to hold on to theirmarket share. On top of this, a lack of resources and skills make it difficult for SMEs totake advantage of market promotional activities.Lack of entrepreneurship and management skills: Many owner-managers andentrepreneurs often lack wider managerial skills, which hinders their long-term success.Strategic planning, medium to long-term vision, marketing, commitment to quality,knowledge of quality systems, communicating in foreign languages, cash-flowmanagement, and information technology are a few critical elements of managementrequired to meet the challenges of the market economy, especially in the global marketenvironment.Challenges faced by women entrepreneurs: Women are handicapped in the currentcentralized wholesale market set-up controlled by men. Home-based womenentrepreneurs suffer from a lack of access to inputs and services like credit, inputsupplies, markets and new technology that could increase their productivity. Womenoften lack the legal knowledge to protect their industries and often fall victim to illegalthreats or criminal offences. Due to the lack of market facilities, women do not get theproper prices for their products, which are under priced by the customers or wholesalerswho order their products. Bank loan procedures are not that easy because of bureaucraticobstacles. Commitment based problems are yet further challenges that women 20
  • 22. entrepreneurs face. The absence of advisory help and a lack of patience are also ahindrance to woman entrepreneurship.5. Entrepreneurship Development in BangladeshDespite all the constraints and challenges mentioned in the previous section, there areSMEs in all sectors that manage to overcome these problems successfully and operateefficiently. The reasons for their success are manifold: the successful exploration ofmarkets at the bottom of the pyramid, access to financial support on favorable terms andconditions, the use of marketing techniques to tap into domestic and internationalmarkets, and the extensive application of modern technology. The factors contributingtowards the success of very small enterprises are different to those of relatively biggerenterprises. Beyond the reasons mentioned above, a major factor for the successfuloperation of any enterprise is entrepreneurship.A significantly high rate of growth attained in sectors like readymade garments, agro-based & agro-processing industry, pharmaceuticals, telecommunication (mobiletelephony), computer, software & ICT goods, poultry industry, leather goods, ceramicsand tourism, indicate that there are enterprises which can provide exemplary evidence ofsuccessful entrepreneurship. A short list of these enterprises include: Pran Group, Nestle,BRAC, Grameen Danone Foods Ltd in agro processing; Dohatec, Cell Bazaar in ICT;Bengal Travels and Tours in tourism; Grameen Phone in telecommunications; Map Agroand Waste Concern in waste management. On top of these examples, there are manyenterprises that operate successfully in urban and rural areas and can provide guidance toother enterprises with respect to entrepreneurship and operational aspects.In this context, social entrepreneurship is emerging as an innovative approach for dealingwith complex social needs (Johnson, 2000). The term social entrepreneurship is used torefer to the rapidly growing number of organizations that have created models forefficiently catering to basic human needs that existing markets and institutions havefailed to satisfy (Seelos and Mair, 2005). Researches like Seelos and Mair (2005) and 21
  • 23. Alvord, Brown and Letts (2002) have mentioned Grameen Bank and BRAC ofBangladesh as renowned examples of ‘social entrepreneurship’. Grameen Bank wasestablished in 1983 on principles of faith, hope and togetherness. Starting with only 5people, Grameen bank had 7.24 million borrowers (97 percent of whom are women) as ofJuly 2007. Grameen Bank provides services in 79,152 villages, covering more than 94percent of the total villages in Bangladesh with its 2452 branches. Its loan recovery rate is98%. The Grameen Bank model is now applied in projects in 58 countries (including theUS, Canada, France, The Netherlands and Norway). Grameen phone, established by Dr.Mohammad Yunus, is the largest phone company in Bangladesh.BRAC today protects and provides for the livelihoods of 100 million of the 141 millionpeople living in Bangladesh. The BRAC Non Formal Primary Schools were establishedin 1985 to take education to poor, rural students, especially girls who have either droppedout or are left out of the formal educational system. It has several initiatives such asBRAC Industries Ltd. (Cold Storage), BRAC BDMail Network Ltd. (Internet ServiceProvider), BRAC Services Ltd. (Hospitality), BRAC Concord Lands Ltd. (Land andHousing), Delta BRAC Housing Finance Corp. (Housing Finance), BRAC University(Tertiary Education), BRAC Bank (Small & Medium Enterprise, Finance & Banking),BRAC Tea Companies (Tea Plantation & Production), Documenta TM Ltd. (SoftwareDevelopment). It has commercial enterprises such as Aarong Shops, Printing Press, andDairy & Food Project. It also has different programs supporting enterprises: PoultryFarms & Hatcheries, Feed Mills, Prawn Hatcheries, Fish Hatcheries Seed ProcessingCentres, Seed Production Farms, Sericulture, Silk Reeling Centres, Grainages, Nurseries,Bull Station, Iodized Salt Industry, all of which generate job opportunities and liftindividuals out of poverty.In contrast to the usual assumptions on entrepreneur perceptions regarding the BOP suchas a low level of profitability, the low level of affordability of poor consumers, the lack ofcapacity to utilize new technologies, less viability, the lack of scope forcommercialization, or the minor interest of management personnel to work with theseventures, successful entrepreneurs rate these markets with high businesses potential 22
  • 24. rather than simply humanitarian activities. These firms, unlike other firms, endeavor tobreak the negative assumptions surrounding the BOP and to solve major structural,financial and management challenges while embarking on initiatives to develop theirmarkets.CPD has conducted a rapid assessment of a number of successful enterprises, which wasreported at different times in the national Daily Prothom Alo as “Saturday’s SpecialFeature” (Table 6). Most of the enterprises reported in the national daily, are small-scaleoperations and are located in rural and peri-urban areas. These enterprises haveestablished their businesses with small amounts of capital and a number of these SMEsare still facing shortages of capital. The majority of these enterprises are targeting theBOP market, which indicates the availability of the market at the domestic level. Most ofthese enterprises have plans to expand their operations through the development of newtechnologies and new markets. Some of the major reasons behind the success of theseenterprises, as reported by the entrepreneurs, are hard work and devotion, new designs,customer focused work, good quality, technical skill, and reasonable prices.When looking at enterprises that operate at larger scale, the success originates from adifferent set of factors. Firstly, the management of these firms is highly professional asthey are managed and operated by a set of skilled professionals. They are either locally orinternationally appointed and they have experience in market operations at the BOP level:the optimization of profits, the management of risks originating at that level, and thecreation of branding at the local level. Secondly, the ownership of these firms is ofdifferent types depending on the nature of participation and allocation of resources.Thirdly, these firms set their strategic objectives by keeping in mind the social needswhich help to create a good reputation with financiers, suppliers and customers. Forexample, one of the strategic objectives set by these firms is to ensure the generation ofmore employment to reduce national poverty, which helps them garner the confidence offinanciers who like to focus on social issues. These types of strategies also help firms togain the confidence of customers, who are attracted to the social commitment ofbusinesses. By taking this approach, firms get access to various tangible and intangible 23
  • 25. resources that help them operate businesses at low cost. For example, these firms getaccess to low cost funds from local and international financial organizations with the aimof using this business development for employment generation and poverty alleviation. 24
  • 26. Table 6: Sample Case Studies on Successful SMEsCase Name of Male/Female Type of Products Major Source of Major problems Major problems faced at Major factors for Plan for No owner Entrepreneur business produced Market capital to at the time of present success expansion and initiate business initiation development Abdur Male Electronics I.P.S Domestic Taking loan Capital, family Lack of capital Curiosity about Develop a 1 Rahim Tk 10,000 assistance electronics & hard system for I.P.S labour which will run by solar energy Abdul Kader Male Foundry Threshing Domestic 1.Lack of high technology Initiating 2 Golap Machine 2.Increased price of scrap foundry using 3.No assistance from Govt. gas instead of coal. Amir Male Foundry Threshing Domestic Father’s 1.Lack of high technology Hard labour and Initiating 3 Hossain Machine workshop 2.Increased price of scrap wisdom foundry using 3. No assistance from Govt. gas instead of 4. Lack of electricity coal. Shaheda Female Sewing Cap Internation Only a niddle as 4 Begum al own capital Manjulika Female Weaving Clothings & Domestic Own savings Capital & raw Exporting Hard work 5 household items Tk. 500 material Aesha Hanif Female Designing & Cloths, Domestic 1. Every single piece Reach out to the 6 making cloths handicrafts, is unique in market outside home made food, design, there is no Bangladesh, home accessories duplication mainly to 2. Involvement of expatriate family members Bangladeshis Ms. Sayeda Female Designing & Sarees, Salwar, Domestic A sewing Capital & She does not have distribution 1. Customer focused To establish a Anowara making Kameez, Panjabi, machine family system. work training institute Begum readymade Fotua, Children assistance 2. Good quality 7 garments wear, Bed sheets 3. Reasonable price 4.Technical skill 5. Inspiration of relatives Source: Daily Prothom Alo, Different Issues. 25
  • 27. Fourthly, successful SMEs usually try to develop new business ideas, which differ fromtraditional ideas. New ideas can be developed in manufacturing, business operations, themarketing of products, and management techniques. Entrepreneurs can be cautious aboutthe selection of agents to whom they rely upon for various kinds of services. They arecareful about providing additional services or products for the customers in order to gettheir confidence and satisfaction. It is also important to have good networks withdifferent stakeholders, including government, as this helps entrepreneurs gather varioustypes of tangible and intangible resources at low cost, which favors the development ofan enterprise.It appears that foreign firms are more and more interested in the BOP of developingcountries, mainly to find a way out of fierce competition in the markets of developedcountries under liberalized trade regimes. Various joint venture initiatives, whichcombine the resources and management of foreign firms with the market information andreputation of local firms, could create successful ventures for the BOP market. A numberof examples already exist, such as Grameen Phone - a joint venture between GrameenTelecom, Bangladesh, and Telenor, Norway; Waste Concern - a foreign led initiativewith support from Map Agro. These ventures can be looked at from the angle of ‘socialentrepreneurship’. The success of these enterprises resides in their capacity to overcomesignificant hurdles in order to serve the poor and build resources and capabilities toachieve social objectives. 26
  • 28. 6. Actions to be taken for Entrepreneurship Development6.1 Actions to be taken at the domestic levela) Special SME Development Fund: Access to resources, especially financial resources,is one of the major requirements to develop successful SMEs in the country. Improvedaccess would help develop better products/services, disseminate new technicalskills/knowledge and improve management techniques. Financial resources should beoffered at a reduced price, which would help small entrepreneurs invest in thedevelopment of new products and ideas. Without these resources it is difficult to pursuesuch innovations. Financial resources are required not only for the financing of workingcapital requirements, but also for ‘start up’ capital. There is an absence in the market offinancial instruments such as ‘venture capital’, which could favorably provide resourcesto innovative products and new ideas. The funding of SMEs by Bangladesh Bank underEEF seems inadequate and requires wider coverage at a higher scale. Commercial banklending operations at the SME level need to be widened. The initiative of the SMEFoundation through ‘credit wholesaling’ should focus on these issues while financingcommercial banks in order to provide credit to enterprises. Women-led SMEs need moreattention as women entrepreneurs face various types of hurdles in securing loans frombanks. A number of commercial banks have opened windows for women entrepreneurs,mainly in their urban branches. These are commendable initiatives but they need to beextended to sub-urban and rural areas.b) Develop New Ideas, New Products, and New Services: There is always a demandfor new products/services if those products meet the demand of the customer. This meansthat entrepreneurs should focus on ‘customer satisfaction’ when developing newproducts. Investment in ‘R&D’ is of great importance when looking at productdevelopment, process improvement, or technology upgrading. Resources should beallocated on preferential terms and conditions to enterprises for investment in ‘R&D’.However, for the many enterprises that are not yet ready to take on large-scale investmentin ‘R&D’ (especially SMEs), public and private sector institutions such as BCSIR,BSCIC, or BITAC could assume the initiative to develop new products and processes thatcould be sold commercially. Various private sector based associations could embark on 27
  • 29. initiatives with private and public universities/research organizations for productdevelopment or process improvement.c) Encourage FDI in the SME sector: Foreign investment needs to be encouraged,especially in areas such as new product and process developments, new managementtechniques, and new services. FDI should be encouraged in developing diversifiedproducts and services with better management and marketing techniques. In view of theincreased competition in developed country markets, foreign firms are interested ininvesting and exploring the BOP markets of developing countries. Bangladesh could beconsidered a potential option for them.d) Setting strategic goals: Successful SMEs usually set strategic goals in view of gettingsupport from the government and other organizations. These goals usually target thesocial needs of the country in which the firm operates its businesses. One of the country’smajor social needs is to create new jobs in order to ensure income for more citizens.These strategic objectives help firms convince organizations under their network of theircommitment to society and encourage the latter to take positive decisions in favour ofsmall enterprises.e) Develop networks with important market agents: Successful firms working invalue chains usually maintain a good network, which in many cases reduces transactioncosts and market risks while ensuring financial and other tangible and intangibleresources if required. These networks are not limited to production agents. They extendto various business-related agents such as government agencies. Through these networksfirms may get access to various types of critically important resources.f) Develop local product standards: In order to improve the standards of local products,a strict application of standards needs to be ensured. Without this local products cannotbe accepted in international markets. Local testing laboratories, with their existingfacilities, can hardly ensure a proper level of product standards. The improvement oflocal testing laboratories is therefore required. Bangladesh should work jointly with 28
  • 30. South Asian countries in order to develop a harmonized standard system for theirproducts. To this end, the mutual recognition of standards is required. In cases where theimprovement of standardization is required, the government should allocate sufficientfunds to improve the testing system at the Bangladesh Standard & Testing Institute(BSTI).g) Improve banking rules and regulations: Banking regulations are not alwaysconsidered to be favourable to entrepreneurs, especially those who operate small-scalebusinesses. Firstly, small-scale businesses face relatively higher interest burdens againsttheir loan, although banks argue that there are higher risks involved in the financing ofSMEs. Secondly, small businesses, in most instances, do not follow formal accountingpractices, which makes it difficult for banks to assess the financial condition of thesebusinesses. Hence bank officials are often reluctant to make the extra effort to formalizethe accounting practices of these business units for the provision of credit. Thirdly, it ismore difficult for women entrepreneurs to get credit from banks. Fourthly, entrepreneursoften cannot obtain credit from the international market due to some restraints in bankingrules and regulations. In order to ease the problems and constraints confronted by SMEs,adequate attention and support is required from financial institutions.h) Disseminate the Information of Successful Enterprises: New and potentialentrepreneurs are often constrained by a lack of access to adequate information onsuccessful enterprises, possible means for overcoming various challenges, or factorscontributing to the success of these enterprises. Such information should be disseminatedthrough different channels including print and electronic media, information services, andNGOs. This information could encourage potential entrepreneurs to understand markets,value chains, production techniques, and marketing mechanisms, thereby preparing themto take on new challenges.6.2 Actions to be taken at the regional leveli) Improve the custom services: The government has undertaken various initiatives toreduce different types of hassles faced by entrepreneurs in the export and import of 29
  • 31. goods. The number of forms required for export and import has been substantiallyreduced, which has brought down the overall time for processing customs relatedactivities. Under the policy of trade liberalization, the government has substantiallyreduced tariff rates from as high as 350% in 1991 to 25% in 2008. The number of taxslabs has declined from 15 in 1993 to 4 in 2008. These initiatives have substantiallyimproved the customs system in the country. Yet despite these improvements, additionalcharges have been collected on the import of goods in the form of supplementary duty orregulatory duty. The automated customs system, which was initiated a few years earlier,has yet to be fully operational. In this context, Bangladesh can learn lessons from Ghana,which has developed its customs system within a shorter time period (two years) byembarking on effective customs reform measures.j) Enhance Regional Trading Arrangements: Although South Asian countries signedthe SAFTA accord in 2006 there is no noticeable improvement in intra-regional trade andinvestment within the region. It is argued that long negative lists that include membercountries’ major exportable products hamper the basic drive towards enhanced intra-regional trade. South Asian countries should immediately reduce the number of productsfrom these negative lists in order to sustain the momentum towards increased trade. Thereare a number of potential export areas in which Bangladesh has a comparative advantageover other South Asian countries. In certain products Bangladesh enjoys uniquepotentiality, while other Bangladesh products have complementarity with neighboringcountries. The government has to make the effort to attract more FDI from South Asiancountries by offering them the comparative advantage of the country. Trade facilitatingmeasures, especially in border customs points, need to be improved. Shade facilities toload goods, truck parking facilities, laboratory testing facilities (especially for perishableitems) need to be provided and ensured at the border points.Under the SAFTA accord Bangladesh is currently enjoying duty free market access for anumber of products, but most of these products are not major exportable items. India hasprovided a tariff rate quota (TRQ) facility to Bangladesh for clothing products under theS&D treatment facility. Under the TRQ arrangement 8 million pieces of readymade 30
  • 32. garments will be exported to India every year. In spite of these arrangements, Bangladeshis facing various types of non-tariff barriers in the export of products to the Indianmarket. These are mostly technical barriers that are related to standards, quality, andsanitary and phyto-sanitary requirements. The mutual recognition of standards couldreduce the barriers to trade. India is currently in a situation of integration with ASEANand partial integration with China, where Bangladesh is perceived as a regional hub fortrade and investment.k) Energy cooperation between South Asian Countries: In view of the growingdemand for energy in the country, Bangladesh should put a strong emphasis on thedevelopment of domestic energy resources, especially gas and electricity. However, inconsideration of the country’s long-term energy security, the government should laystress on regional cooperation in energy resources; essentially the development ofresources and supply through a regional grid. A regional power grid could be establishedin which additional amounts of electricity could be generated by and for membercountries. Energy generation in Nepal and Bhutan, for example, could be transferred ontoa regional grid for consumption in other countries like Bangladesh.6.3 Actions to be taken at the international levell) Get SMEs voice heard at the international level: There should be one-voice forSMEs, which should be heard at international forums in order to get support from theinternational community. The responsibility of raising the voice of SMEs is not only thatof government, but also that of major stakeholders including various associations andinstitutions. The expectations of SMEs should be properly articulated and their demandsand challenges should be accumulated. National trade policy debates should ensure thatentrepreneur representatives are heard as inclusively as possible. It is important to createmechanisms that ensure SME participation in national and international policy-makingprocesses so that the local and international communities hear their voices. 31
  • 33. m) Improve the image of the country: In order to help increase the inward flow ofinvestments,5 international efforts could be taken to raise the image of the country byhighlighting the country’s potential, its achievements in human development, GINIindex, stable growth, and the development of the readymade garment sector for example.Run a promotional campaign (like “Incredible India” & “Malaysia truly Asia”),underlying the dynamism, reliability, resilience of the Bangladeshi people, which couldinclude testimonies of managers (both locals and expatriates) praising their Bangladeshiemployees, and interviews of enlightened Bangladeshi individuals.n) Harness foreign aid towards SME promotion: In order to promote development andassociated business opportunities “…larger aid project should focus on supporting theeconomic reforms, laws and policies that will stimulate development from the bottom up.It is therefore in the interest of entrepreneurs that aid organizations themselves take amore entrepreneurial approach to development ….” (Global Entrepreneurship Monitor,2007 Executive Report, p. 49)o) Encourage policy coherence: One effective tool towards fostering an enablingenvironment is to highlight the issue of trade facilitation in the WTO negotiations. Withthe gradual liberalization of the trade regime, the development of trade facilitation couldbe the most important mechanism for countries to enhance their trade. The outcome oftrade negotiations at the WTO has to be coherent with other international policies,especially foreign aid. It is important to ensure a unified donor approach for initiatives inspecific sectors.5 Anecdote of a billionaire from HK approached by a Bangladeshi Diplomat to invest in the country whopublicly declared that a lot should be done to improve the national image of Bangladesh which is onlylinked to poverty, corruption and natural disasters. 32
  • 34. 7. ConclusionThe development of SMEs is to be considered a major policy objective of thegovernment. Unfortunately, the goals and targets related to SME development asmentioned in the policy document (the first Poverty Reduction Strategy Paper) were notachieved because of various limitations and constraints including financial,administrative, monitoring, and the commitment of donors. The challenges confronted bySMEs are not new. They are well known by all stakeholders including the governmentand international development partners. Because of various limitations, the growth ofSMEs has been relatively slow compared to that of large-scale enterprises. However,there are successful enterprises that have achieved commendable progress in differentsectors over the years by overcoming all the challenges and limitations. The reasons fortheir success according to entrepreneurs who operate small businesses are hard work,product development, marketing, and customer based operations. During the period ofinitial establishment entrepreneurs were constrained by small amounts of capital. Thescarcity of capital was also found to be a problem for these enterprises when theyembarked on expanding or upgrading their ventures. In the case of relatively largeenterprises, success depends on the positive outcome of a complex web of relationshipsbetween different factors. The factors include: the pattern of ownership based on astrategic partnership in terms of sharing resources; know-how on the one hand andsharing market information and the reputation of the local firm on the other; access totangible and intangible resources including financial support; setting strategic objectivesin relation to the social commitment of the firm; special skills in accessing and workingwith the poor, mainly those working in management positions; providing complementaryservices beyond major services; the identification of new products and processes in orderto mark a differentiation with the products and processes available in the market; goodnetworks with government and other agencies in order to garner the support of tangibleand intangible resources. It seems that enterprises need to clearly assess theirshortcomings in the case of network development, taking joint initiatives to reap thebenefits of strategic components or the development of new products and processes. 33
  • 35. At the regional level, the government should work on developing customs services,especially the simplification of customs documents and a reduction in the number offorms. Trade facilitation measures at the border point needs to be improved in order tospeed up the process of bilateral trade between Bangladesh and India. There are a numberof potential export areas where Bangladesh has comparative advantage over other SouthAsian countries. In some products Bangladesh enjoys unique potentiality, while in otherproducts Bangladesh has complementarity with other countries. The government has totake the initiative to attract more FDI from South Asian countries by exploiting thecomparative advantage of the country. In order to secure the long-term sustainability ofthe energy sector, the government should take the initiative, along with other regionalpartners, to develop a regional grid that will ensure electricity supply for the industrialsector’s growing demand. Entrepreneurs should express their concerns and expectationsin one voice, which should be heard at the international level in order to ensure a bettercommitment of the international community towards the development of the country’sSMEs. There needs to be a harmonization of national and international policies on tradeand investment in developing countries, as well as development initiatives in order toguarantee more effective results. 34
  • 36. ReferencesAhmed, M.U. et al (2001) Impediments to Rapid Industrial Growth in Bangladesh, Report Prepared for FBCCI, Dhaka.ADB (2002). Bangladesh: Strategic Issues and Potential Response, Small and Medium Enterprise Development and Export Expansion, Asian Development Bank, Dhaka.ADB (2001) Technical Assistance for Expanding the Strategy for SME Development in the East ASEAN Growth Area. Asian Development Bank.Bangladesh Bank (2008) Equity and Entrepreneurship Fund (EEF): A Note.Bangladesh Bureau of Statistics (BBS). Economic Census 2001 and 2003, National Report.Beck, Thorsten; Asli Demirguc-Kunt and Ross Levine (2005) “SMEs, Growth, and Poverty: Cross-Country Evidence”, Journal of Economic Growth, Volume 10, Issue 3, pages 199-229.Carl Liedholm, Michael McPherson, Anyinna Chuta (1994) “Small Enterprise Employment Growth in Rural Africa,” American Journal of Agricultural Economics, Vol. 76, No. 5, Proceedings Issue, December, pages 1177-1182.Chowdhury, Mohammed S. (2007). “Overcoming Entrepreneurship Development Constraints: the Case of Bangladesh”. Journal of Enterprising Communities: People and Places in the Global Economy, Vol. 1 No. 3, 2007 pp. 240-251, Emerald Group Publishing Limited.David North and David Smallbone (1996) Employment Generation in Manufacturing SMEs in Contrasting External Conditions, available at www.usasbe.org/knowledge/proceedings/1997/P151Smallbone.Global Entrepreneurship Monitor, 2007 Executive Report, p. 49Harvie (2004) in “East Asian SME capacity Building, competitiveness and Market Opportunities in a Global Economy” School of Economics and Information Systems, University of Wollongong, NSW, Australia.Hill Hal (2001) “Small and Medium Enterprises in Indonesia: Old Policy Challenges for a New Administration,” Asian Survey, Mar. – Apr., Volume 41, pages 248 – 270.Juneja J. S. (2000) “TNC-SME Co-operation: The Experience of India,” TNC-SME Linkages for Development, UNCTAD X Special Roundtable, pages 85-98. 35
  • 37. Laurent Deshaies, Andre Joyal, Pierre-Andre Julien (1994) “SMEs and International Competition: Free Trade Agreement or Globalization?” Journal of Small Business Management, Vol. 32.Liedholm, Carl; Michael McPherson and Anyinna Chuta (1994) “Small Enterprise Employment Growth in Rural Africa”, American Journal of Agricultural Economics: Volume 76, Number 5, December.Lloyd H. R. (2002) “Small and Medium Enterprises (SMEs): Instruments of Economic Growth and Development in a South African Regional Dispensation”, European Regional Science Association.North, David; David Smallbone (1996) “Small Business Development in Remote Rural Areas: the Example of Mature Manufacturing Firms in North England,” Journal of Rural Studies, Vol. 12, No. 2, pages 151-167.Rahman, Mustafizur, Debapriya Bhattacharya and Khondaker Golam Moazzem (2007). Bangladesh Apparel Sector in Post MFA Era: A Study in the Ongoing Restructuring Process. Centre for Policy Dialogue (CPD).Sumner J. La Croix (2006) “Globalization and SMEs: A Comment on Three Asian Experiences,” RePEc, February.Uesugi Lichiro (2006) “SME Financing in Japan: What We Have Found,” Research and Review, available at http://www.rieti.go.jp/en/papers/research-review/029.htmlVerheugen, Günter (2006) Financing European Enterprise in Addressing the SME Conference on 27 April,Winfred, Agbeibor Jr. (2006) “Pro-poor Economic Growth: Role of Small and Medium Sized Enterprises,” Journal of Asian Economics, February, pp. 35 – 40.7 36

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