History, Definition and Concepts of SMEs

Small business flourished in almost all ancient cultures.

 The Egyptians,
 Arabs,
 Babylonians,
 Jews,
 Greeks and
 Romans contained a substantial population of small business.

The History
 Small business was discovered about more than 4000 years ago.
 HAMMURABI, the king of Babylon introduced the first 300 business laws.
 These laws known as Code of HAMMURABI.

Definitions of SMEs
According to US Small Industries
“A business qualifies a small if does not dominate its industry and less than 100 employees”.
United Kingdom small firms were defined
“Entities having less than 200 employees. It should be run by its owner and should have a
relatively small share of its market”.
In France, Small Business was defined as
“A company with less than 10 employees, representing over 90 percent of all businesses and
employing one sixth of the total work force”.

A generalized definition small and medium size firms.

 Small: Among 10 to 35 employees and productive assets ranging 2 to 20 million.
 Medium: Among 36 to 99 employees and productive assets range of rupees 20 to 40
million.
According to Clifford Baum small business as one that is:
 Actively managed by its owner
 Highly personalized
 Largely local in its area of operation
 Relatively small in size within the industry and
 Largely dependent on the internal resources of capital to finance its growth.

According to the Committee for Economic Development (CED), is an independent,

non-profit, non-partisan think tank based in Washington, DC,
A business is small if it meets two or more of the following criteria.
 Management of firm is independent in the sense that owners themselves are managers.
 Capital is supplied by ownership and is held by an individual or a small group.
 Area of operation is local.
 The size of the firm in the industry is small as compared to the highest unit in its field.

Characteristics of Small Business

1. Privately held small business is again subdivided into two categories.
 Very small where chief worker is the owner like jewelry shops, shoe stores and grocery
shops etc.
 The Large Small business where the proprietor mainly directs the work of its employees.
2. No or few managements layers
3. Style of management is personalized the owner has first-hand knowledge of every move in
the business at all levels he is the main decision maker.
4. Limited resources: a small business is unlikely to have sufficient resources to dominate the
market.
5. Independence: the owner has ultimate authority and effective control
6. Scope of operations: small enterprises serve a limited segment of local or regional market.
7. Scale of operation: they occupy a limited share of given market.
8. Labor: they are low in capital and high in labor, as they cannot afford capital-intensive
machinery.
9. Technological innovation if available small business does well
10. Specialized skills: The small enterprises normally have specialized skills for certain specific
clients.
11. The small business does well in small, isolated, overlooked and imperfect market.
12. Small business does well in developing markets as it can easily absorb the changes.
13. Small business survives well in a bad business condition due to having quick and clever
capability of bringing changes in cost and labor.

Kinds Small Business

1. Retailing: It’s a traditional business where normally the owner is the boss and owner
2. Services: such as legal and accounting, courier services and beauty parlors etc.
3. Construction activity
4. Whole sale business.
5. Financing, insurance and real estate.
6. Transportation communication and public utilities.
7. Manufacturing

Large vs. Small Business

1. They foster changes differently:
 small business fosters changes through a cycle of birth and death
 whereas the large business cycle changes through expansion and contraction.
2. The risk, reward and investment decisions are assessed differently: in case of small business
it is personal while in the cases of large business it is made by the employee managers without
livelihood stake.
3. Their economic power is different: the small business is in no position to influence its
immediate economic involvement but big business does.
4. They utilize different resources in the economy: small business may use secondary
resources but the big business use most of the primary resources
5. They serve different markets in the economy: small business serves markets which big
business does not wish or cannot serve.

Relationship between small and big businesses:

1. Influence of Big on Small:
Large companies can significantly affect small businesses. For instance, if a big company decides
to change its product, small companies that supply parts for that product will be impacted.
2. Stability of Small Businesses:
Small businesses tend to be more resilient to economic problems. They can usually adjust to
changes without too much trouble because they are more independent and flexible.
3. Job Subcontracting:
Big businesses sometimes outsource work to small businesses. For example, a car manufacturer
might give the job of making seat covers to a smaller company.
4. Purchase Subcontracting:
Here, small businesses buy materials and make parts for larger businesses. Imagine a small
company that makes batteries for a big electronics brand.
5. Complementary Products:
Small businesses produce items that complement the products of larger ones. A small company
might make phone cases that are sold alongside phones from a big tech company.
6. Merchandising or Commercial Trading:
Small businesses manufacture products that large companies brand and sell under their own
names. A small appliance maker might make blenders that a large retail brand sells as its own.
7. Maintenance and Repair Services:
Large companies often contract small businesses for maintenance and repair because it's more
cost-effective. A small local firm might be hired to maintain the air conditioning units of a big
office building.
8. Social Benefits:
Small businesses contribute to society by creating jobs and spreading out the economic gains.
This can lead to a more balanced and fair distribution of wealth and opportunities in different
areas.
The regional Concepts of SME’s
 Countries have widely different definitions of SME’s for example, in India; the criteria
for determining SME status are based on investment while
 In South Africa; SME eligibility depends on the number of employees and turn over.

There are three parameters that are generally accepted in defining SME’s in most countries,
these are:
1. Number of workers employed which is the most widely used criteria
2. The level of capital investments or assets
3. The volume of production or business turnover.

The regional Concepts of SMEs from Pakistan perspective

Pakistan does not have a single definition of Small and Medium Enterprises.
Various Government agencies, e.g.,
State Bank of Pakistan (SBP),
Federal Bureau of Statistics (FBS),
Provincial Labour Depts., etc. use their own definition.
Absence of a single SME definition makes it difficult to identify target firms, align development
programs, collect data and monitor progress.

GoP may adopt a single SME Definition that is accepted by all public and private agencies.
SME definition is as follows:
“SME: employment size should be to up to 250 and paid up capital up to Rs. 25 million and
annual sales up to Rs. 250 million”
The Government’s Effort towards SME Development
 The Government of Pakistan keeping in view the importance of SME’s has adopted multi
pronged approaches at the regional, sub regional and national levels.
 Initiatives at the national and sub regional levels include efforts to strengthen economic
integration and cooperation.
 The Government of Pakistan is taking a number of measures for private sector
development including liberalization of economy, investment promotion; export
facilitation, financial sector reforms, capital market reforms and creation of a conducive
business environment.
 SMEs led private sector growth strategy is also in line with the lessons learned in the 60s
industrialization process during which although GDP growth rates of 6.0+ were achieved
but the skewed income distribution resulted in rising poverty.

SME Development – Recent Steps by the Government

 In the recent past Small & Medium Enterprises Development Authority (SMEDA) stands
out as a significant step towards GoP commitment to SME development.
 SMEDA works under the Federal Ministry of Industries and Production and it was
established in October 1998 to take on the challenge of developing Small & Medium
Enterprises (SMEs) in Pakistan.

SME definition defined by SMEDA

Micro:
• Less than 10 people employed
• Productive assets limit of 2 million rupees.
Small:
• Between 10-35 people employed.
• Productive assets limit of 20 million.
Medium:
• Between 36-99 people employed
• Productive assets limit of 40 million.
Others Institutions defined the definitions of SME
Definitions by Provincial Level Institutions
a) Punjab Small Industries Corporation (PSIC):
b) Sindh Small Industry Corporation (SSIC):
c) Small Industries Development Board (SIDB)
d) Directorate of Industries Balochistan (DIB) These organizations defined the small
industries as under:
“An industrial undertaking with fixed investments up to 20 million excluding the cost of
land and no limit of people employed”

Definition by Small Business Finance Corporation (SBFC)

Small:
• No limit of people employed.
• Productive assets limit of 20 million
Medium:
• No limit of people employed.
• Productive assets limit of rupees 100 million.

According to The State Bank of Pakistan

 MICRO: The State Bank’s federal credit scheme (small loan scheme) for micro and small
scale enterprises, defined their target group in year 1972 –1973 as enterprise with
assets of less than rupees one million (excluding the cost of land and building). This limit
was redefined in the year 1992 and increased to rupees 20 million.
 SMALL: Assets up to rupees 20 million (excluding the cost of land and building)

Youth Investment Promotion Scheme (YIPS)

 According to the concept paper on SME’s in Pakistan, developed by YIPS, small-scale
industry was defined as industrial enterprise with fixed assets of up to rupees 10 million
(Excluding the cost of land and building).
Impact entrepreneurship has on small and medium-sized industries
(SMEs).

1. Vital Role of Entrepreneurship:

Entrepreneurship is extremely important in SMEs. Entrepreneurs are often the main source of
energy, vision, and strategic direction for these companies. They are the ones who start
businesses, introduce new products, and open up new markets.
2. Innovation:
Entrepreneurs in SMEs are responsible for a significant amount of innovation. They are the ones
who come up with new ideas and turn them into products or services. Their ability to innovate
is not just about creating something entirely new; it's also about improving existing products,
processes, and services to better meet customer needs.
3. Courage and Risk Management:
Starting and running a business comes with a lot of uncertainties. Entrepreneurs must have the
courage to take risks, such as investing in new technologies or entering untested markets. They
face the possibility of failure but are driven by the potential for success.
4. Leadership:
Entrepreneurs also act as leaders. They are not just managers of the business; they inspire their
teams, set goals, and push through adversity. They have a vision for the company and the
ability to motivate others to work towards that vision.
5. Impact on Innovation:
Entrepreneurs have been responsible for over seventy percent of new innovations, which
indicates a very high contribution to the advancement of industries. Companies like Microsoft,
Yahoo, and Linux are cited as examples where entrepreneurial leadership and willingness to
innovate have led to substantial advancements in technology and business models.

In essence, entrepreneurship injects vitality into SMEs, fostering an environment where

innovation thrives, risks are managed, and leadership drives the company forward. This
dynamic leads to significant contributions to the economy and society as a whole, as
demonstrated by the success stories of major companies that started as SMEs.
Definitions-Entrepreneur and Entrepreneurship
Entrepreneur: is an owner or manager of a business enterprise who takes risks or makes money
through risk and initiative.
The famous economist Joseph Schumpeter defined the theory of entrepreneurship with a new
perspective and regarded the entrepreneur as an innovator who has the potential of doing
things in a new way.
Entrepreneurship: The act of being an entrepreneur, which can be defined as "one who
undertakes innovations, finance and business acumen in an effort to transform innovations
into economic goods".
According to Frank H. Knight (1921) and Peter Drucker (1970) entrepreneurship is about taking
risk.
Entrepreneurship was defined by Cole (1959), “a purposeful activity (including an integrated
sequence of decisions) of an individual or group of associated individuals who undertake to
initiate, or organize a profit oriented business unit for the production or distribution of
economic goods or services”.
In the year 1959 her Bison and Meyers replaced the terms with “management” and
“organization” for entrepreneurship.
According to Reggie Aggarwal and Mark Esposito; Entrepreneurship is a way of life. It is a
driving force that compels you to do more, move faster, and go farther than anyone else, even
in the face of high risk and uncertain outcomes.

Types/Kinds of entrepreneurs
1. Intrapreneur:
An intrapreneur is someone who operates within a larger company and takes on
entrepreneurial ventures. They are innovative and take on projects that can lead to new
products or business models within the company. For instance, an employee at a tech firm who
develops a new app that the company adopts is acting as an intrapreneur.
2. Corporate Cast Off:
This type of entrepreneur starts their own business after being laid off or leaving the corporate
world. They use their skills and experience to create a new venture. An example is a former
corporate manager who starts their own consulting firm.
3. Sole Entrepreneur:
Also known as a "solo-preneur," this individual starts and runs their business independently,
often working alone or with very few employees. A freelance graphic designer or an
independent software developer can be considered sole entrepreneurs.
4. Network Entrepreneur:
These entrepreneurs leverage their social networks to develop and grow their businesses. They
might use connections from previous jobs, schools, or professional organizations to find new
opportunities. A business consultant who gets clients through referrals is using their network
effectively.
5. Family Entrepreneur:
Family entrepreneurs are individuals who manage and control a family-owned business. They
often inherit the business and are responsible for its continuation and growth. An example
could be a third-generation owner of a family restaurant.
6. Opportunity Entrepreneur:
These entrepreneurs start a business to take advantage of a specific opportunity they've
identified in the market. For example, someone who starts an online tutoring service after
noticing the increasing demand for remote learning solutions.
7. Necessity Entrepreneur:
Necessity entrepreneurs start their businesses because they need a source of income and might
have few other options, such as someone who opens a home-based bakery after losing their
job.
8. Social Entrepreneur:
Social entrepreneurs are motivated by the desire to solve social problems and make the world a
better place. They aim to be profitable, but their primary goal is social impact. An example is
the founder of a non-profit that employs homeless individuals to manufacture goods.
9. Young Entrepreneurs:
Young entrepreneurs are individuals, often teenagers, who start a business venture at an early
age. This could be a high school student starting a lawn mowing service or a tech-savvy
teenager creating a new app.
10. Women Entrepreneurs:
Women who start and manage their own businesses. They are breaking barriers in industries
traditionally dominated by men. An example could be a woman who starts a successful e-
commerce platform.
11. Part-Time Entrepreneur:
These entrepreneurs run their businesses on a part-time basis, balancing it with other
commitments. An example might be a professional who starts a side business on weekends.
12. Hybrid Entrepreneur:
Hybrid entrepreneurs aim to make a profit while also seeking to have a positive social or
environmental impact. They might start a company that offers eco-friendly products.
13. Serial Entrepreneur:
Serial entrepreneurs start several businesses, one after another, often moving on to a new
venture soon after the previous one becomes self-sustaining. An example is an individual who
has started multiple tech startups.
14. Co-preneurs:
These are teams or partnerships of entrepreneurs who come together to start a business. They
collaborate and share the workload as well as the profits. Two friends starting a marketing
agency together can be considered co-preneurs.
15. Affinity/Minority Entrepreneur:
These entrepreneurs often start businesses that serve or represent minority groups, or they
may focus on diversifying industries. An example is an entrepreneur from an underrepresented
community who starts a cultural food market.
16. Immigrant Entrepreneur:
Immigrant entrepreneurs are individuals who start a business in a new country, often bringing
new ideas and cultural products. An example is an immigrant who opens an ethnic restaurant
featuring dishes from their home country

Functions of an entrepreneur in an enterprise

1. Planning:
Planning is the process of setting goals, defining actions to achieve those goals, and mobilizing
resources to execute the actions. An entrepreneur must plan for all aspects of the business,
from day-to-day operations to long-term strategic direction. This includes market research,
business model design, financial forecasting, and setting clear, measurable objectives.
2. Risk Management:
Entrepreneurs must identify, evaluate, and prioritize risks to minimize, monitor, and control the
probability or impact of unfortunate events. This involves analyzing market risks, financial risks,
compliance risks, and operational risks, then developing strategies to manage them, such as
purchasing insurance, diversifying income streams, and creating contingency plans.
3. Organization Building:
Building an organization involves creating a structured group of people working together to
achieve common goals. Entrepreneurs establish the business's legal structure, hire staff,
develop a company culture, and set up systems and processes that enable the business to
function effectively and efficiently.
4. Managing:
Managing entails directing and controlling a group of one or more people or entities for the
purpose of coordinating and harmonizing the group toward accomplishing a goal.
Entrepreneurs must manage resources, lead teams, oversee projects, and ensure that the
business is operating in line with its strategic plan.
5. Decision Making:
Decision-making is a core function of entrepreneurship. Entrepreneurs must make numerous
decisions about product lines, market opportunities, partnerships, investments, and
operational changes. They need to analyze information, consider the potential outcomes, and
make choices that will benefit the business.
6. Innovation (Factor, Product, and Market):
Entrepreneurs drive innovation in three key areas:
- Factor Innovation: Finding new ways to improve the production process, reduce costs, or
enhance the quality of goods or services.
- Product Innovation: Developing new products or improving existing ones to better meet
customer needs and stay ahead of competitors.
- Market Innovation: Identifying new markets or creating new ways to reach customers, such
as through digital marketing or e-commerce platforms.
7. Leading:
Entrepreneurs must lead their organizations, providing vision, inspiration, and guidance. They
set the tone for the company culture, motivate employees, and represent the business to
external stakeholders. Effective leadership involves communicating clearly, setting an example,
and being the driving force behind the business’s mission and values
8. Managing Growth:
As a business expands, entrepreneurs must manage growth strategically to ensure sustainable
success. This involves scaling up operations, entering new markets, managing increased staff,
and maintaining the quality of products or services. Managing growth requires careful planning
and the ability to adjust strategies as the business evolves.

Characteristics of entrepreneurs
1. Creativity: This refers to the ability to think outside the box and come up with new and
original ideas. For example, Sara Blakely used creativity when she founded Spanx,
transforming the hosiery industry with a novel idea for shapewear.
2. Innovation: This is the practical implementation of creative ideas into new products,
services, or processes. Steve Jobs, for example, was known for his innovative approach
at Apple, leading to groundbreaking products like the iPhone.
3. Idea Generation: The process of coming up with new concepts or solutions. Mark
Zuckerberg's creation of Facebook started with the idea generation phase, looking for a
way to connect college students.
4. Risk Taking: Willingness to engage in a venture with uncertain outcomes. Richard
Branson exemplifies risk-taking with his commercial space flight venture, Virgin Galactic.
5. Independence/Freedom/Autonomy: Entrepreneurs often want the freedom to make
decisions and lead their ventures without external constraints. Anita Roddick showcased
this when she developed The Body Shop, driven by her personal values and independent
vision.
6. Entrepreneurial Alertness: The ability to notice and be ready to exploit new business
opportunities. Jeff Bezos displayed entrepreneurial alertness when he capitalized on the
potential of the internet by launching Amazon as an online bookstore.
7. Optimism: Keeping a positive outlook and believing in the successful outcome of the
business. Howard Schultz remained optimistic about the potential of Starbucks, even
when the company was just a single coffee shop in Seattle.
8. Commitment & Motivation/Inspiration: Entrepreneurs are often deeply committed to
their business and motivated by a vision or personal goals. Elon Musk's commitment to
SpaceX and Tesla shows his dedication to his vision of sustainable energy and space
exploration.
9. Persistence: The ability to keep going despite challenges and setbacks. J.K. Rowling's
persistence in submitting her manuscript for "Harry Potter" to multiple publishers
before getting accepted illustrates this trait.
10. Self-Efficacy: Belief in one's ability to succeed and take on challenges. Oprah Winfrey's
confidence in her abilities led her to create a media empire and become a significant
cultural influence.
Qualities of an Entrepreneur
1. Good Mental Ability
2. Human Relationship Ability
3. Communication Ability
4. Technical Knowledge
5. Decision Making Ability
6. Conceptual Ability

Small Entrepreneurs in Pakistan and Role of SME in Global and

Regional Level
Salient Features of Small Entrepreneurs in Pakistan
1. Single Owner Entrepreneur
He works with his own hands, combines the entrepreneur function of initiating the business
making investments, taking decisions and performing managerial functions.
2. Age Pattern
The mean age of entrepreneur was found to be 42 years and of their enterprises 12 years. It is
comparable to the Korean age pattern (46).
3. Educational Level
Differing from industry to industry 60% have school education and 30% have college or better
education only 10% have professional or graduation level
4. Social Background
Caste played an important role in certain industries and on the other hand heritage is
dominant. But overall, it is much diversified.
5. Sizes and Investment
Majority started in a small way with less than 10 workers and 1/2 to 2/3 of the firms started
with less than 50,000 investments.
6. Growth
The growth was fast in case of small firms than in large firms.
7. Profitability
Rate of profit is higher in case of small industries in comparison with the large industries.
Role of SMEs in a Developing Economy
In the last ten years, a key suggestion for helping small and medium-sized businesses grow has
been to focus on the advantages of forming groups. This idea is about how these small
businesses can work together locally and regionally to save costs and expand their range of
products or services.
Unemployment and under employment are the prevailing economic diseases in most of the
Asian countries and they are result of a fundamentally disproportionate relationship between
population and the use of available land resources.
Rapid and continuing increase of population, in the last half century have led to a situation in
which there are far too many people engaged in agriculture this situation is further aggravated
by an antiquated system of land tenures, by poor standards of health and malnutrition by the
use of primitive and inefficient techniques on small un-Economical holdings and by an uncertain
climate for rains, weather changes etc.
The classical remedies suggested for tackling the problem of poverty and underemployment,
large scale industrialization is perhaps the most important.
Under the circumstances, the problem of unemployment and underemployment can be tackled
by the expansion and modernization of the existing small and medium-scale industries and the
introduction of new industries capable of raising the level of production and improving the
present depressed standard of living.
The large-scale industry has been slow to develop and has succeeded to a very limited extent
in absorbing the surplus population of the countryside. SMEs are still the most extensive tools
for controlling unemployment.
 In Ceylon (Sri Lanka) as early as in 1949 nearly 286,000 persons were engaged in small
industries.
 In China in 1949 approximately 10 million workers were responsible for 80% of the total
industrial output by working in SMEs.
 In India more than twenty-five million people are engaged in cottage and small industry.
The importance of the SME sector as the cornerstone of most economies is widely. This is not
only borne out by the number of SMEs (almost 90% of the total number of businesses across
the world), but also by their significant role in creating employment opportunities. The roles of
SMEs are vital to the emergence of healthy private sectors, especially in poorer countries.
Role of SMEs in Pakistan
SME sector is the backbone of Pakistan’s economy. There are approximately 3.2 million
business enterprises in Pakistan. Enterprises employing up to 99 persons constitute over 90% of
all private enterprises in the industrial sector and employ nearly 78% of the non-agriculture
labour force. They contribute over 30% to the GDP and account 25% of exports of
manufactured goods besides sharing 35% in manufacturing value added.
Promotion of SMEs has therefore been the center piece of Government’s strategy for
economic revival, poverty alleviation and employment generation. To this end, the logical first
step was the formulation of a comprehensive SME Policy reflecting the viewpoints of multiple
stakeholders.
The SME sector also provides both rural and urban women to utilize their vocational skills while
staying within residential premises. In urban areas, many female entrepreneurs have
introduced product lines uniqueness has created a strong demand in the market.