Micro and Small and Medium Enterprises in Nepal: -Ways to Grow and Globalize- By Shanker M.Singh

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1 Micro and Small and Medium Enterprises in Nepal: -Ways to Grow and Globalize- By Shanker M.Singh In most developing countries in general and the LDCs like Nepal in particular the private sector is made up mainly of small businesses. While foreign investment is important, the majority of investment in developing countries comes from domestic sources. Most Micro and Small Enterprises (MSEs) operate informally, outside the official regulated systems. Many are highly transient, their owners moving from one business to another, often in farm or trade-based activities. Many MSEs are owned by women, providing essential income to poor households. Informal businesses account for over half the economic activity in many developing countries.8 This informality brings some short-term benefits, but often prevents such businesses from accessing resources, information and markets, and undermines their incentive to invest in the skills of their employees. Small and Medium-sized Enterprises (SMEs) are often considered the heart of a developing country s entrepreneurship the source of most of its new employment and productive investment, and the basis for its growth and elimination of poverty. While there is a lively debate about the economic potential of SMEs, there is no doubt that SMEs face severe constraints which affect them more seriously than larger businesses. They operate in business environments where there are unnecessary costs, numerous procedural barriers, and little access to 1

2 resources, finance and services. These constraints limit their potential to invest, innovate, and improve productivity. SMEs are the backbone of the Nepalese economy since it contributes percent amount to form the overall economy. The 98 percent of Nepalese trade, business, commerce and industry and 89 percent of the employment are covered by the SMEs and the SMEs related trade. Background: After the year 1990, the situation of SMEs has seen a series of change in numbers, policies, products and publicity. The open economic policy adapted by the developed, developing and the least developed countries has brought effective impacts in small and medium enterprises. SMEs and the products of SMEs in Nepal are interrelated. The small and medium enterprises significantly contribute towards economic capacity of the countries and are crucial for poverty reduction through employment and income opportunities. Most SMEs can only insufficiently utilize their market opportunities. They have no access to information on market developments, prices, exports and financial possibilities. In spite of the advances in information and communication technology that established the basic technical preconditions for access to information and knowledge, many SMEs especially in peripheral regions can hardly avail of this progress. The range of information offered by service providers in these regions are not attuned to SMEs' needs. 2

3 In the particular context of Nepal and SAARC Region, the SMEs play an important role in the national economy and for the generation of employment, and for poverty reduction as well. After the signing of the SAFTA agreement there is a provision of Rules of Origin, Technical Assistance, Revenue Compensation Mechanism but the SAFTA Agreement does not cover the services sector. Service sectors which are growing by almost 300 percent globally should also focus on the services sector. The SMEs of this sector are also affected by the non pre-valance of service agreement even within the SAARC Region. Then countries of this region can immensely benefit in the service sector like tele-communication, ICT, tourism, financial sector, etc. The countries of this region should have a vision for SMEs development and techno entrepreneurship where the countries of this region can cooperate and collaborate among each other for the mutual benefit of the countries of this region. In SAFTA Agreement special mention should be mentioned about the product of micro enterprises and or the production from the small scale industries (SSI) which employ less than 5 workers and have the capital outlay of less than one lakh or so. Special custom duty waiver for genuine SMEs should be considered. The economic reform in the early 1990s in Nepal pulled the attention of the private and joint investment to seek the financial sector. As a result, there was a row of commercial banks, financial organizations and cooperatives to invest in the SMEs. A joint study for the possibilities of joining should be taken into consideration. SAARC as the regional forum could facilitate the functioning of the SMEs of the regions and the donor countries could also help in promoting SMEs for their start, survival and growth. Small and medium enterprises of 3

4 member states of SAARC should increasingly utilize the intra regional network of relevant business information services. The information offer of selected service providers (chambers, association, and enterprises) should also be improved. The service providers have to adjust their information products and establish a regional network that meets the specific needs of SMEs benefiting at least 40,000 small and medium enterprises in the SAARC region. The promotion of the regional network will bring about impulses for regional economic and social integration. In line with national and regional development strategies, the strategies towards poverty reduction of individual member countries should underline the importance of private sector promotion. Moreover, SAARC has decided on the implementation of a free trade zone to broaden regional economic integration In the absence of a coherent policy framework for enterprise development, globalization and the opening of domestic markets as part of liberalization policies has had an adverse impact on the enterprise structure in many developing countries and LDCs. In particular, the products of SMEs are continually loosing ground in terms of their competitiveness. So the focus of these products from collection from each producers should be focused to the niche markets. The twin processes of globalization and liberalization, combined with rapid advancement in information and communication technologies, are creating new dynamics of production, enterprise development and international competition. The new government in Nepal which has been established after the establishment of Loktantra-the outcome of the People's Movement, should show concern about promoting SMEs. It can also help achieve a more equitable distribution of the benefits of economic growth and thereby help 4

5 alleviate some of the problems associated with uneven income distribution thereby helping in social and economic transformation within the enterprises sector in the economy, the vast majority of entrepreneurs are informal micro and small enterprises. Major constraints of MSEs and SMEs are unavailability of market. At present, geographical distribution of export assistance is not adequate. So, the product of SMEs at remote has no opportunity to gain access to international market. Therefore, measures need to be taken for enhancing the rural SMEs access to international market. The policy bias in favor of the larger businesses and against smaller businesses have created void in which growing enterprises find difficulties. Such problem in policy design should be solved through appropriate measures. Business Membership Organization (BMO) seem to exist only in urban areas but the SME development these organizations need to penetrate their activities at spatially strategic places. To Grow and Globalize, the SMEs Nepal must: Strengthen the cooperation between government and the people, Work without unwanted blocks from the government side, Run, workshops, training to enable the local skills, Adapt information technology or e-commerce, Involve private sector SMEs, SME experts to prepare plan on SMEs, Encourage the business persons to invest in SMEs, Help the SMEs with Information technology to make website, Decrease tax on the import of information technology and business related technology, Run integrated project on the joint finance, Reform laws or by laws on SMEs push forward the SMEs, Make effective laws on transfer of information tools, Adopt widely the positive aspects of open economy. In Nepal agriculture provides only seasonal employment for the rural population, which constitutes 88 percent of the total population. Poverty 5

6 reduction has been the foremost development objective in Nepal since it embarked on planned development effort almost half a century ago. Given the country's geopolitical condition and small economic scale, the SMEs have been the backbone of the country's off-farm economic scenario spanning throughout three ecological regions. Hence, off-season and off-farm activities such as weaving, knitting, basketing, teashop and roadside shops complement rural income. In addition, informal rural micro enterprises supply goods and services to local manufacturers using traditional technologies. Furthermore, the SMEs in Nepal, the main categories among others are: food packaging, textile, beads, painting-fabricated and boutique, packaging, garment and tailoring, animal husbandry, carpet and pashmina weaving, cash crop farming, handicraft-bamboo, wood, metal, clay, knitting, ceramics etc. Studies show that the lack of resolution, government will and political stability in Nepal has been the discouraging factors for the development of SMEs in Nepal. Establishment of SMEs is easier in Nepal, since the SMEs are based on the agricultural products. However the distribution of the SMEs products in Nepal has been difficult work due to the lack of transportation. The export of the SMEs production is more difficult because the farmers have to toil a lot to bring the goods for shipment. The landlocked condition has added more problems to the export of Nepalese goods in foreign markets. 6