A More Proactive Competitive Strategy for SMEs
— V. Bhardwaj
According to the Central Statistical Office (CSO), which conducts a census of small establishments employing less than 10 persons every five years, the contribution of the small units to value added is only 20% in 2007 compared to 18% in 2002. The structure of the Small and Medium Enterprises’ contribution to the economy has remained more or less the same.
The 2007 census indicates that the sector comprised 91,979 small establishments, had a workforce of 208,797 and generated a gross output worth Rs 42.1 bn. Accordingly, the sector accounted for 41% of the total employment. As in 2002, wholesale and retail trade, repair of motor vehicles, motorcycles, personal and household goods, is the most important activity among the small units.
The biggest change is in the following sectors — construction and hotels and restaurants. These activities were riding on favourable global trends, rupee depreciation, air access liberalization, IRS and the construction of new hotels. The alarming trend was in the manufacturing sector; its contribution to value added has been decreasing and there were few new entrants joining that sector. Though there are small firms that are producing goods of high value for exports — food products, garments, printing items, leather and jewellery of internationally competitive design, they seem to be the exceptions in the SME sector. Most of the improvement in the ease of doing business seems to have solely encouraged investment in tabagies and minor food processing (personal and household goods), restaurants and in construction (mason-builders).
Why is that we do not have more successes in the sector? Why is it that we do not have more SME entrepreneurs joining the league of high quality product exporters?
SMEs seem to be perennially faced with requests such as finance, skilled labour, technology, R&D and training facilities. Bank lending against security is hard to come by and bureaucracy continues to pose other impediments to their growth. The SME sector also has problems to survive, thrive and move into exports. It continues to be constrained by lack of finance and financial instruments, high rates of interest and high rentals, short reimbursement periods, and a lack commercial and industrial space. The Small and Medium Enterprises that have recently taken advantage of the new opportunities in the regional markets are particularly extremely vulnerable to this exchange rate volatility because of their low resource base and the lack of support from financial institutions.
It seems that we have totally lost sight of a sector which is the future and the answer to our pressing needs in terms of job creation, especially the importance of creating an environment and building an infrastructure which would have allowed SMEs to risk capital at reasonable rates. We believe that the whole SME sector needs a beefing up in terms of a more proactive competitive strategy to enable the sector to upgrade itself, become internationally competitive and secure its share of regional and world trade.
First of all the strategy needs a two-pronged approach:
First: A short-term (1-year) strategy that will help to consolidate, restructure and modernize the competitive niches identified in the different sectors and benchmarked to international standards. The short-term focus will be competency development, quality and export promotion. Some of these niches need to be detailed out for some sectors, especially in tourism, financial services, ICT and the knowledge industry — for e.g. cultural and eco-based activities in both the upper and middle-segment of the tourism market, e-entertainment and animation in ICT, distance learning and consultancy services in the knowledge industry and tax, insurance and trust administration in the financial services sector.)
Second: A medium- to long-term strategy to identify new growth poles or niches, create new capacities and competencies, capture inter- and intra-sectoral linkages and higher value-addition, to provide new vehicles for investment and finance, foster innovation and capacity diversification and for export expansion.
This competitive strategy, it is suggested, will have as main pillars innovation and technology, export expansion and diversification, training, finance and promotion of international strategic partnerships. In the tourism industry, the gradual process of democratisation of the sector will open up opportunities for the different market segments with greater benefits accruing to local residents, different sectors and groups especially the lower income groups, SMEs and low-skilled operators. The sector policies will have to be formulated such that they reflect the new thinking that the benefits from tourism activity should be spread more evenly throughout the society.
The democratisation of the sector will mean a policy orientation that does not focus uniquely on the up-market segment but also on the low-to-middle segments. Such policies that redefine the sector and its parameters to be more inclusive will offer us enormous possibilities to revitalize the agricultural and rural economy, support the sustainable development of rural areas, develop community-based tourism with a cultural content, agricultural tourism ecolodges, family owned hotels, guest houses, eco accommodation, traditional organic and authentic products and Mauritian cuisine, environmentally friendly hotels, green holidays, sports clubs providing services.
Innovation and Technology: As proposed by Professor John Mathews, Macquarie Graduate School of Management, in the Country Economic Memorandum: Managing Change In a Changing World, 2007, we need a technology strategy to address specific needs of innovation and technology diffusion. As part of this strategy he had proposed that existing public research institutes (MSIRI, MOI, AREU, FARC, AFRC-Albion) be consolidated into one publicly funded Mauritius Industrial Technology Research Institute (MITRI). MITRI would be patterned along the Taiwan, South Africa and Singapore technology research institutes. MITRI will scour the world for cutting technologies and use its own laboratory facilities to assess their appropriateness to local conditions and build pilot versions to demonstrate them to prospective investors. The experience of these institutions grouped under MITRI will be an asset in tapping the promising research areas like sugar-based technology (for plastics, polymers and for medicinal purposes), renewable energy technologies, seafood and ocean resources.
Export expansion and diversification: The proposal in the 2006/07 budget of setting up Trading Houses in COMESA and SADC regions which “would provide a shop front, warehousing facilities, marketing services, selling bulk and breaking bulk and taking orders for Mauritian products” will have to be re-examined in the context of the new competitive strategy for the SME sector. Export market information requires urgent attention. Given that our institutions will have to think more globally in international relations, marketing and investment options, Entreprise Mauritius and BOI could secure trade offices in key markets by being based in the Mauritian missions abroad. This will enable global knowledge acquisition-acquiring crucial market knowledge, finding the right people, firm and institution, building the contacts for insightful information and leads. It will also influence the ways our business sells and markets our brand, builds relationships, secures resources and negotiates the best deals and partnerships for our industrial and SME sector.
Training: Undercapacity exists in several sectors and the training system is not suitably aligned to the required skills for both the short- and long-term. Rapid action is needed to ease the current skills gaps coupled with longer-term planning for better matching of skills with the needs of the job market. This can only come from an alignment of the training and educational institutions to the country’s strategic focus on practical skills. There is a need for practical and dedicated programmes that will not only support product and process innovation and improve production processes but also build capacities by providing regular on-the-job training as well as better access to information and counselling.
Finance: Appropriate finance schemes and vehicles should be worked out with the financial institutions. We may also consider some of the proposals of the Commonwealth Secretariat team of G. Wignaraja and Sue O’Neil in their 1999 study of the SME sector, namely
– create an Export Development Fund to subsidize the cost of foreign trade fair participation, contact promotion programmes, marketing studies and other marketing efforts of SMEs; and
– encourage the creation of credit unions in SME associations.
Other suggestions are the setting up of Credit Guarantee Companies for long-term investments and the collaterisation of loans as project finance. The functional roles and responsibilities of each service provider should be clearly defined to enhance delivery, minimize overlap, and maximize coordination and synergies.
Promotion of international and strategic partnerships: Significant opportunities exist for Mauritius to leverage its close ties with the regional blocs such as SADC and COMESA and the emerging powerhouses, India and China, to mount joint ventures in Africa. “Mauritius will thus need to steer its policies in a direction that will be advantageous to its growth and development but only if it has a properly tuned and consistent new trade, regional and global strategy which is part and parcel of our responses to the global challenges and new developments.”
The import profile of Africa shows that there is large demand in the region for milled rice, milled wheat, pharmaceuticals, frozen fish, cotton yarn, concentrated milk, small parts of machinery, processed foods, auto components, soya bean oil, electronic components, etc. Partnership with India and China will allow Mauritian SMEs to gear themselves in terms of technology and manufacturing skills to address these business opportunities and the new ones like electric cars, solar power and wind power. EM and BOI will have to refocus their FDI strategies to promote such international and strategic partnerships.