A study on the role of small – scale industries in An emerging economy of Sri Lanka
A study on the role of small – scale industries in
An emerging economy of Sri Lanka
Under supervision of
Ministry of Traditional Industries and Small Enterprise Development
With an impressive history of small firm development policy, in post-Independence Sri
Lanka SMEs dominate the industrial scenario through its contribution to generation of employment
and income as also tackling the problem of regional disparities. The Micro, Small and Medium
Enterprise (MSME) is considered as one of the most important sectors in Sri Lanka which crafts
greater contribution to the growth and social development of the country. According to the Mahinda
Chintana – vision for the future, compared to large scale industries SMEs contribute more to the
Sri Lankan economy since they have a more even geographic distribution and they function as
nurseries for large scale industries in developing their creativity and innovativeness. Further, SME
clustering is crucial to addressing social and economic objectives, the achievement of which can
make them more competitive in the global economy; generating and spreading innovations; creating
employment; and distributing broad-based income and welfare. The role of small-scale industries in
the economic development of Sri Lanka in recent years is critically analyzed in this paper. Various
factors affecting the growth and development of small-scale industries and the problem faced by this
vital sector of Sri Lankan economy is examined. The contribution of small-scale industries in
employment growth, production, export promotion and other economic indicators are discussed.
Conclusions drawn from the analysis of the data suggest that the various policy initiatives taken by
the Government of Sri Lanka since independence have helped this sector to grow considerably.
Some of the policies of the Government of Sri Lanka may, however, not be very helpful in
increasing the efficiency of units in this sector as number of non-viable units is increasing steadily.
1.1 Strategic importance of SMEs
The SME sector has gained consideration in almost all the countries as the backbone of the economy.
An increased number of SMEs in a country will bring more flexibility to the society and the
economy and might facilitate technological innovation, as well as provide significant opportunities
for the development of new ideas and skills.
“The objective is to use local raw material for raising production with the help of local skills. The
other advantages of small-scale units are that these units need short gestation period in establishment,
are less dependent on imported raw material and machinery and help in meeting a substantial part of
demand for consumer goods. These units also help in solving the problem of regional disparities in
economic growth” (Gyan Prakash, 1991).
1.2 SMEs in Sri Lanka at a glance
Sri Lanka, known as the “Pearl of Indian Ocean” has a remarkable trade history in its development
path. Earlier it was the hub for vendors and traders from different countries around the world. The
main economic sectors of the country are tourism, tea export, apparel, textile, rice production and
other agricultural products.
Sri Lanka is an emerging economy with a population of more than twenty million. Out of the total
population, nearly 17% - 22% (department of census 2010/2011) of the population lives below the
poverty line and 65% of the population is dependent on the agriculture sector for employment. In
order to achieve an economic viability in the precise industrial globalization, Sri Lanka depends on
the balanced growth of economy in the fields of agriculture and industry. Since the growth of agro –
based opportunities are limited; the Government of Sri Lanka under the Mahinda Chintana planned
a growth to encourage alternative industries. As a result, the Government of Sri Lanka identified the
Micro, Small and Medium Enterprise (MSME) sector, traditional industries and handicraft sectors as
important strategic sectors for promoting economic and social development. The main basis for the
choice of SMEs is its low cost and high benefit operation.
Rural area development is one of the foremost targets of the government of Sri Lanka. The
government recognizes the importance of the Small and Medium Enterprises (SME) and
Microfinance sectors in achieving its targets and as a result several performances of development
projects and programmes are implemented by the government via the Ministry of Traditional
Industries and Small Enterprise Development
2. The scope and function of SMEs
In Sri Lanka, the SME sector has grown rapidly over the years. The SME sector comprises of about
79,304 establishments, employs around 1,509,330 workers in the non – agri cultural (Census of
Industry – listing operation 2003, Census of Trade and Services - Listing Operation 2003) and
contributes about 20.8% to the GDP.
The Mahinda Chintana policy vision has given greater prominence to the SMEs in Sri Lanka and
their development. In the scheme the government has focused on priority to youth, small and
medium scale entrepreneurs, handicraft villages & skills exchange programs and a helping hand for
the Self Reliant.
Presently, SMEs account for more than 80- 90% per cent of the total number of enterprises with
significant contribution to the total employment in Sri Lanka. The data available from the Ministry of
Traditional Industries and Small Enterprise Development (2012) indicates that there has been an
excellent growth in small- scale industries in Sri Lanka in recent years. Further, The SME sector also
provides opportunities for women and youth to participate in the economic development of the
3. The government support for MSME analysis in Sri Lanka
If SMEs are said to be the backbone of the country‟s economy, the tribute is absolutely to the
government of Sri Lanka. Under the government‟s supervision, the Ministry of Traditional Industries
and Small Enterprise Development which is mandated to facilitate support and encourage on same
strengthening performs its operations successfully with the intention of developing SMEs.
In 2012, the ministry has developed a strategic plan (2012 – 2016) which focuses on the following
strategies in relation to SMEs;
Development of Entrepreneurship and Cottage Industry
Development of Industrial Production Villages and Enterprise Villages
Development and Upgrading of SMEs
Strengthening the Handicraft Sector
Linking Handicraft and SMEs with Tourism Sector
Reactivation of the Elephant Pass Saltern
Rehabilitation and Modernization of Fishnet Factories
Strengthening and Development of Palmyrah Sector
It is apparent to the government that the SME sector is the nursery for even the large scale industries.
The government strongly believes it as the platform for the development of creativity and
innovations. Thus the government gives more priority for the rural area development in its plans.
The SME industrial estate programme is a strategy to promote rural industries by providing space
with infrastructure facilities and other extension support to attract SMEs. The Government offers
managerial and technical guidance and training services for SMEs. The management of the industrial
estates is vested with the Industrial Development Board (IDB). Under the strategic plan it has been
proposed to strengthen the five major industrial estates such as, Gampaha, Kandy, Kalutara,
Kurunegala & Colombo, which are also known as “The Super Five”, with modern infrastructure
facilities to serve the SME sector more efficiently and effectively;
Further, the Ministry of Traditional Industries and its agencies have identified selected clusters to
focus their operations. The Industrial Development Board (IDB) has identified the following 15
clusters as foremost operational areas to work on MSMEs;
1 Machinery and Equipment
2 Electronic and Electrical Appliances
3 Food and Beverages
4 Footwear, Leather and Allied Products
5 Light engineering and Engineering Industries
6 Wood and Wooden based Products
7 Coir and Fibre Based Products
8 Printing Papers and Paper Pulp Based Products
9 Rubber and Plastic Based Products
10 Building and Building Material Based Products
11 Readymade Garments and Allied Industries
12 Kithul and Palmyrah Based Products
13 Minerals and Chemical Based Industries
14 Self-Employment sector
15 Other Products and Services
4. SMEs contribution to the emerging Wonder of Asia
Many researchers (e.g. Moktan, 2007; Agarwal, 2006; Bala Suramanya, 2005; Mintoo, 2004;
Amaratunge, 2003; Gamage, 2003) have revealed that the future economic developments of the
South Asian emerging economies depend mainly on improvement to their countries‟ SME sector.
Hence the governments of the emerging economies in the South Asian region provide more support
in attempt to secure sustainable growth during this era, for which a typical example would be the
Mahinda Chintanaya in Sri Lanka.
The Mahinda Chintana – Vision for the future mainly endeavors the agricultural and industrial
development of the country through its programmes and projects. The estimated investment on such
programmes and projects for the years 2013 and 2014 amount to Rs.1, 124 million and Rs.1, 752
million respectively (Strategic plan 2012 – 2016). Apart from this the modernized machine usage,
speedy adoption to modern technologies, implementation of skill development programs & projects
and so forth divulges the rapid escalation of the country‟s SME sector. Yet the people in rural areas
are encouraged and they engage in Small scale business activities with interest.
The development of SME sector in Sri Lanka clearly reflects the country‟s overall development
progress and ensures undoubtedly the possibility of Sri Lanka to become the Wonder of Asia within
the next couple of decades.
5. Ministry’s Contribution On SME’s Development
Traditional industries, small medium enterprises and handicraft sectors are the key drivers of the
rural economy as they contribute not only to the economic growth but also to the poverty
reduction and social development. The Ministry of Traditional Industries and Small Enterprise
Development works communally with the Ministry of Economic Development, Ministry of Industry
and Commerce, Ministry of Technology and Research, Ministry of Youth Affairs and Skills
Development, Ministry of State Resources and Enterprise Development and the 16 agencies and
institutions that come under these Ministries to fortify the economic development of Sri Lanka
through promoting SMEs in the country. The Ministry‟s development strategy is implemented
through Industrial Development Board (IDB), National Crafts Councils (NCC), National Design
Centre (NDC), Palmyrah Development Board and North Sea Limited. And also they plan to
strengthen the cottage industry through the “Divi Neguma” national programme.in this regard
District level Technology showcase and awareness programs were accompanied in 24 Districts. The
ministry strongly believes that a sound planning effective implementation and rigorous monitoring
and evaluation as fundamental pillars for development effectiveness. They are confident that their
efforts will contribute to the achievement of the national ambition of making Sri Lanka a “Wonder of
Asia “as a set of Mahinda Chinthana.
6. The Conclusion
A vibrant SME sector plays a pivotal role in the growth of the Sri Lankan economy. The historical
role of SMEs in creating ample opportunities for employment for the majority of the population has
become the prominent and vital source of development. The SMEs give value for resource
utilization through industrial development based on the raw material which includes rubber, leather
etc... and special focus for neglected resources like coir and clay and have contributed many
innovative ideas and technological breakthroughs to society as well. Thus a strong SME sector is
considered to be the „backbone‟, „lifeblood‟ or the „engine‟ of the economies irrespective of their
level of development.
The strategic plans developed by the government of Sri Lanka in line with the Mahinda Chintana –
Vision for the future are the basis for the development of SMEs in Sri Lanka. Implementation of the
different strategies requires policy direction, leadership and commitment at all levels of the
Government. The Ministry strongly believes that the implementation of these strategies which are
closely aligned to the “Mahinda Chintana – Vision for the Future” will significantly contribute to
uplift the traditional industries and small enterprise sector as a dynamic and vibrant sector of the
economy. Recognizing this importance, the governments increasingly promote and support SMEs as
part of their overall national development strategies. Through this it is crystal-clear that the “Pearl of
Indian Ocean” will sparkle more vividly as a victorious nation within a decade or two.
Ministry of Traditional Industries and Small Enterprise Development (MTISED),
Performance 2012. www.tisedmin.gov.lk.
Annual report 2012.Ministry of Traditional industry and small enterprise development, Sri
Strategic plan 2012-2016, Ministry of Traditional industry and small enterprise development,
Alex Bryson .Policy studies Institute and centre for Economic performance, Lorenzo
cappellari –Universita del piemonte orientale and universita cattolica- Claudio Lucifora
Universita cattolica octhober 2002. SME and contribution to HDI development
Ministry of Traditional Industries and Small Enterprise Development official website,
IDB official website of Sri Lanka www.idb.gov.lk
Central Bank Report of Sri Lanka www.centralbank.lk