Research Question: The relationship between the development of SMES and economic growth
General Objective: To determine the relationship between SMEs development and economic growth
To find out the problems and challenges facing SMEs in Cambodia.
To determine the role and importance of developing SMEs in a country.
To find out the role of the government and the policies it has implemented to promote the SMEs.
Hypothesis of the study:
i. There is a significant relationship between the development of SMEs and employment in the country.
ii. There is a significant relationship between the GDP and the development of SMEs.
iii. There is a significant relation between entrepreneurship culture and the development of SMEs.
iv. There is no significant association between the development of SMEs and business creation and diversification of firms in the industry.
The significance of the study: The research is important because it addresses the issue of Small and Medium Enterprises in depth, a subject that has been a concern to many nations. It also discusses the role of the enterprises in economic development and outlines some of the challenges that the firms have been facing. The study is important because it also gives the recommendations that can be implemented to establish a well-functioning SMEs system. When the recommendations are well implemented, an economy will be assured that it will generate significant benefits from the industry.
Scope and limitations of the study: The paper analyzes the SMEs industry in Cambodia, an Asian country. It covers the developments that have encountered in the sector and the role of the government in the elaboration of those firms. It addresses the significant policies, rules and regulations that have been implemented to control and monitor the development of those businesses. The research, however, has various challenges and limitations. Access to data and information about the economy of Cambodia is limited and challenging. The statistics on the operations of the firms is also not accessible because most of the business in the industry has not been registered.
Literature Reviews and Corporate Reviews:
The assessments on recent economic growth point out that the rate of growth of countries is substantially determined by their ability of the nations to integrate with the economy of the world through trade and investments. The growth is also influenced by the capacity of those countries to maintain sustainable sound money and government finance and lastly, their ability to implement and avail an institutional environment that can favor the enforcement of contracts and the establishment of property rights. The advancement of globalization the transition and developing countries and their enterprises are subjected to challenges for strengthening their institutional and human capacities for the purpose of taking advantage of the opportunities of trade and investments. The government of Cambodia has made policies in finance and commerce area, and its focus has been on the Small and Medium Enterprises (SMEs).
Small and Medium Enterprises play a primary role in the transition and development of economies. The economy of Cambodia accounts for more than 90% SME of all the firms, and they are a major source of employment and also generate a significant export and domestic earnings. The development of SMEs, therefore, becomes an essential instrument that is used to reduce the level of poverty in the country. The emergence of globalization and trade liberalization has presented opportunities for the development of economic growth as well as challenges for the SMEs. A small part of the SME sector currently can identify and exploit the opportunities and solve the problems and problem efficiently. The majorities of the SMEs in Cambodia have been less able or unable to use globalization benefits and are under pressure from the cheaper imports and foreign competition. The role that SMEs play in the economic growth is high, but their small size constrains their access to finance, setting up the process, poor state of infrastructure and lack of an effective institutional structure. The government should, therefore, remove these constraints to get all the benefits of SMEs in an economy. The state should create a holistic environment that favors the development of SMES and should establish a functional macro and micro institutional levels.
Independent Variables & Dependent Variables: The dependent variables in the research include the growth and development SMEs, the level of employment, the diversification of the businesses in the industry, the entrepreneurship culture in the country, and the development of infrastructure. The independent variable, on another hand, is the size of the enterprises (SMEs).
Data Presentation and Analysis: Tables, graphs, and figures have been used to present the data and findings of the research. The data analysis technique used in the research is regression which has been used to estimate the relationships between the variables.
Regression Model: The model employed in the research is Y =f(X, β), where X is the independent variable, Y the dependent variable, and β is the unknown parameter (s). The model relates Y to a function of X and β.
Hypothesis Testing: The Z-score is used to test the hypothesis because the variables used in the research are equal or more than thirty
The recent pursuit of economic growth has made the countries recognize that the SME sector is the main driving force for economic growth because it provides employment opportunities and entrepreneurship resources. However, the attempts to explore and explain empirically the roles played by the SMEs in the economic growth and development of a nation are still ambiguous. The ambiguity can be attributed to the fact that economists have ignored the industrial structure of the economy and its impact when examining the economic progress of a country per se.
The analysis of the development of Small and Medium Enterprises and their influence on the growth of the economy has been a concern of many researchers. It is also an ongoing debate and is based on two issues; their survival and continued development especially in the course of economic development and the importance of the promotion programs that are done by the government. This report, therefore, provides a detailed analysis of the role that the SMEs play in the development and growth of the economy of Cambodia. The paper analyzes the influence the enterprises has on the poor and the local markets they have created.
The definition of SMEs
The exact definition of SME had not been found in Cambodia until the year 2005 when a general and official definition was first mentioned in the development framework of SMEs. The structure defined SMEs based on two main criteria, the number of the employees in the firms and the total assets that the organization has excluding land.
The definition of Cambodian SME
Micro Less than ten employees
Small Between 11-50 employees
Medium Between 51-100 employees
Large Over 100 employees
Determined by Assets, excluding land
Micro Less than US$50,000
Small Between US$50-250,000
Medium Between US$250-500,000
Large Over US$500,000
The definition of the given can be applied in all the SMEs in the country, including the entire industry and the servicing and trading sectors as well (Olusegun, Adebayo, 2012).
The SME Sector in Cambodia
Between the year 1998 and 2007, Cambodia experienced an economic growth with an average GDP of 9.8% per annum and from 2004 to 2007, the growth was above 10%. The four sectors that led to the growth were the garments, tourism, agriculture, and construction. The four economic pillars give a significant opportunity for the SMEs to provide services of the supply chain in each sector. The performance of the economy deteriorated sharply in the year 2008 due to the global financial crisis. Cambodia was shielded from the impact of the crisis because it had a developed financial sector. The Royal Government of Cambodia, therefore, recognized that the development of SMEs was significant for the continued sustained economic growth in the country and created an enabling environment for the development of private sectors. The holistic environment was designed to promote economic growth, create employment opportunities, poverty reduction and for the maintenance of sustainable economic development. The SMEs sector dominates the economy of Cambodia, and it terms of the number of firms it has 99% and gives 45% employment to the citizens.
The Small and Medium Enterprises operate almost entirely in the informal sector and are licensed to work at the provincial and the municipal level and, therefore, regulated by the local authorities. The data from the Ministry of Industry, Mines and Energy (MIME) on SME statistics shows that in the year 2007, the country had 31,149 small industrial developments, and each of them had at least 50 employees; the number grew by 26% from the year 1999. The beverage, food and tobacco manufacturers are the largest SMEs in the country. The report from the Ministry of Economy and Finance (MoEF) and the department of tax reveals that there are 55466 SMEs and in the year 2007, only 14324 of the SMEs were registered formally as limited liability companies. It is noteworthy that most of the enterprises are unregistered with the Ministry of Commerce (MoC) and they operate using the permits they obtain from other ministries and departments at the local level. The number of registered has, however, increased in the last few years and the trend is bound to continue because the country is getting integrated into the SEAN and global economy.
Despite the importance of the sector of Small and Medium Enterprises regarding employment and economic growth, the small entrepreneurs continue to face challenges. The access to finance is the greatest challenge for the SMWs in Cambodia, and this reports will focus on the SME sector and the importance it has to the economy of the country.
The Development Framework of SME in Cambodia
When the small and medium enterprise sub-committee was created in Cambodia, the development framework was also formed. The structure indicated the first effort of the Cambodian government to focus on the promotion of the development and growth of the SMEs in the country. The thirteen rectangular strategy is used by the development framework to advance the small and medium enterprises in the country. The development framework is considered to be a strategy that is medium-term in nature, and it has two stages. The first phase is meant to create an enabling business environment that is conducive to the development and working of the enterprises. It has the responsibility for establishing and putting in place all the pillars that encourage the proper functioning of the firms and the industry. It was implemented to run from the year 2005 to 2007. The second stage of the framework, on the other hand, was implemented to operate from the year 2008 to 2010 and was meant to enhance and expand the business environment. It was also supposed to give assistance to the SMEs in the integration of the firms to the international networks.
The primary objective of the development program is to reduce the cost of the production and the operation expenses of the businesses by the use four main approaches. First, they establish the impacts of the relations between the small and medium enterprises. They ensure that the effects of the legislations on the firms are reduced and that the laws that are implemented conform to the needs of the business. Secondly, the framework has the responsibility of making recommendations for the streaming requirements of the regulations. The sector needs laws to govern the operation of the firms in the industry. The rules are proposed by the enterprise with an objective that they reduce the cost incurred by the organizations. The framework also provides a channel that is used by the private sector to challenge the decision made by the government. The state may implement policies that are not favorable to the industry, and it is the duty of the development framework to coordinate and bring the parties together so that they have an agreement. The framework, therefore, ensures that the decisions made will meet and cater for the interests of the enterprises and that they are harmonized with the objectives of those organizations. Lastly, the development framework makes reforms on the legal and the regulations and also proposes the recommendations that help in reducing the risks and uncertainties that the SMEs face. The enterprises are confronted with numerous challenges, and the duty of the board is to ensure that these risks are reduced. The problems that the firms encounter have affected their operations and have also made some of them to be closed down. The development framework is, therefore, charged with the responsibility of ensuring that the firms are risk-free.
The development of SMEs and its influence on economic growth
Small and medium-sized enterprises (SMEs) are considered to be the world's most robust and innovative engine for the increased world trade and growth. The implementation of SME and the development of entrepreneurship was introduced into the formulation and growth landscape in the late 1940s; with the introduction of the policies that targeted their events like subsidized credits, grants, and special tax treatment. The plans worked together to ensure that the enterprises are developed and that they continue existing. When the policies were implemented, most governments reported positive feedbacks about the potential that the enterprises have in the development of the economy.
Small and Medium Enterprises have created employment opportunities in the country. Many people have secured jobs with the firms and with the jobs, the employees' level of income has increased. The increase in the income standards of the citizens enhances the GDP of the nation. The jobs are available to those who are not educated because their skills and experience are what is required. The small and medium enterprises cover a parentage of 56% of the firms in the Cambodia and give a range of 50%-98% employment opportunities. The least number of the employees that the business have is ten, and they can go up to fifty employees. The firms have been seen to empower women who manage some of the enterprises, especially the family-owned businesses. The creation of these opportunities ensures that most of the citizens take part in the economic development of the country (Sothy, Sovatha, 2009).
The graph below illustrates the percentage of employees in the levels of their income
The SMEs improve the levels of business creation in Cambodia. Many people are motivated to set up their businesses and it, therefore, promotes entrepreneurship in the country. Self-employment is vital to the economy of a country because it reduces the level of dependence on government aids. The needs and requirement of the limited markets are met by the entrepreneurs and are also flexible to the problems and challenges that are in the markets. The small and medium businesses are resilient because they have a little chain of command. They can, therefore, make quick decisions on whether to change the products for the purpose of meeting the needs of the customers. The enterprises are also able to develop personal relationships with the consumers, and this is important because they can get the views of the consumers about their product and make quick changes when there is a need. The small businesses created improves the innovation and creativity of the industry in which they operate. New ideas are essential for an economy because they ensure that changes are effected in the production and promotion of new products. The industry and firms that operate in it remain competitive because the new ideas make them out do their rivals.
The SMEs diversify the economic growth of the organization and the country because they increase the number of businesses that are carried on in the state. A country with many SMEs has a broad range of sources of income and does not depend on a few firms. The state can, therefore, generate revenue from many enterprises and the tax collected will be high because it will be sourced from many businesses. When the government relies on the income from few firms, the poor performance of the organizations will affect and reduce the tax collected; and the state will be unable to develop the infrastructure of the country. The government can plan and implement its development policies quickly because it will be assured of the funds necessary for the projects.
The SMEs are also crucial in the promotion of the firm’s agglomeration and industrialization. The Small and Medium Enterprises have maintained their important role because they are more flexible than the large corporations, and they are as important as the large companies. In order to industrialize the economy, the small and medium enterprises are required to create firm agglomeration in the country and during the process, the SMEs provide supplement and support to the industrialization of the country. The industrialization of the Cambodia has been improved by the firms because they have stretched their operations. The large companies that are in the country began as small businesses and their growth to become global companies has motivated the other upcoming enterprises. Small businesses put up their resources to use; with the aim of developing and improving their market share and profitability.
In Cambodia, the SMEs are considered as the dynamic force behind the development of private sectors. Like the other countries in Asia, the SME in Cambodia promotes industrialization, innovation, entrepreneurship, diversification of the economy and also reduces poverty and inequality. The sector has therefore been targeted by the Royal Government of Cambodia for a decade. The Cambodian government has set up and implemented policies to develop the industry and to take it to a higher level. These systems ensure that an environment is created for the enterprises that are conducive to their operation and survival. The policies concentrate on the enhancement of the sector and at the same time, they improve the business regulatory environment. The firms in the industry, however, face common challenges like low technology, limited access to finance, low compliance with the regulations, poor management, inadequate information about the market, both domestically and internationally. Getting access to the market and understanding the information and demands of the customers is crucial. It is, therefore, important for the firm to get access to the market (Sok, Phyra et al. 2011).
General Policies and Mechanism for Cambodia SMEs development
Small and Medium Enterprises has been a concern for the Royal Government of Cambodia for s decade, and it was mentioned in the National Poverty Reduction Strategies in the year 2002. The development has also been stated in the Rectangular Strategy Phase I and Phase II in the year 2003 and 2008. The development of SMEs is considered as the key factor that promotes the development of the private sector in the country and also generates employment opportunities. There are various ministries and agencies, local and international NGOs that have supported the strategy and a committee called the Steering Committee on Private Sector Development has been put up by the government to look into the SMEs sector. The committee is made up of three main sub-steering committee. The sub-steering Committee on Investment Climate and the PPI that is chaired by the Ministry of Economy and Finance, the Committee on Trade Facilitation that is headed by the Ministry of Commerce and lastly, the committee on the SMEs that is chaired by the Ministry of Industry, Mines, and Energy. The government has set a mechanism called the Government-Private Sector that is supposed to enhance a mutual understanding and a close relationship between the private and public sector. Through the mechanism, the sectors can have a direct meeting, consult and discuss the issues affecting them and those pertaining the daily business and the impact of the policies of the government on the private sector. The government can as well get feedback about the efficiency and effectiveness of the established policies.
The Prime Minister chairs the meeting, and the forum is held twice a year and is broadcasted live in the Television and the issues that are discussed in the forum result from the discussions that are made between the sub-steering committee, the G-PSF, and the private sector development. The SME sub-committee has identified and proposed four that have not received appropriate support: access to the markets, business development services, the linkages to the value chains, legal and other businesses and lastly, the competitive quality human resources and technology. The professional associations and government ministries that offer business development services to the SMEs reach a few firms (one percent) as compared to the Sri Lanka where fifteen percent and in Thailand where eleven percent of the SMEs receive the services (Shariff, Noor et al. 2010).
Activities that support the SMEs in Cambodia
The sub-committee of SME has recognized that there is the lack of supportive activates towards the improvement of the capabilities of Small and Medium Enterprises. The committee has considered four key activities that give assistance to the Small and Medium-sized enterprises. The first is the Business Development Services (BDS) that aids in the development of new and the sustaining the existing enterprises. However, a few BDS have been seen to be provided by the Cambodian public sector, and there have been several alerts from many parties to improve the services of the board. The chamber of commerce also provides various BDS to the Small and Medium Enterprises, but the scope has been seen to be limited. The number of the firms that receive the services are also few, making the strategy look like it has failed to carry out the tasks for which it was formed.
The access to the market also supports the activities of the SME and the organizations like the media, public bodies, and NGOs provide information regarding the marketing, both international and the domestic market. Information about the operations of the market are necessary for the identification of challenges and meeting them before they start affecting the activities of the firm. They provide an important role because the SMEs face the challenge of getting adequate information. The information from the government in the form of newsletters are not reliable and are therefore not used widely by the Cambodian SMEs. The upgrading of technology and the improvement of the human resource in the country has also provided support to the SMEs. Initially, the small and medium enterprises were using the outdated technology which limited the performance of the sector. The staff was also not educated, and they had little skills and experience. When the technology was upgraded, the efficiency of the production process improved and the employees in the sector were also trained. The mechanisms have forever been used in the country and through the activities, the government has supported the SMEs, and their presence has been felt in the development of the economy. Lastly, the linkages between the sector and the external market have been created, and the notion that the Cambodian SMEs are oriented in the domestic has been eliminated. The links are relevant to the sector because they help in creating formal contracts with the large enterprises and the government as well as themselves. Initially, the linkages were weak, and most of the firms relied on their personal relationships.
Challenges of SME development in Cambodia
The role that is played by the SMEs in Cambodia is important to the economic growth of the country. However, the sector faces various challenges and problems and the research that have been conducted on these challenges is limited. The marketing strategies and the management of the enterprises has a positive and significant contribution to the increase of the profit margin of the firms.
The possibility of the organization to access finance is limited. Most people in Cambodia live in the rural areas and therefore depend on agricultural activities and the operations of the informal sector organizations. The banking industry has however not reached the degree of sophistication, and the weakness makes it complicated for the firms to access finance from the banks. With the limited funds in their rich, the companies' operations are limited and their performance if therefore affected. The marketing strategies of the firms are affected because the funds that are used to promote the products become unavailable. The innovation and invention capability of the SMEs is also affected when the firms do not have adequate capitalization. They can have new ideas, but the finance to support their implementation may be unavailable, thus limiting their growth.
The SMEs in Cambodia are also affected by the constraints of the legal and regulatory activities. The enterprises and the NGOs complain that the procedures for registering the SMEs are not transparent and that they are highly complicated. The judicial proceedings that are followed when dealing with commercial disputes are not appealing, and the courts are unfair and biased. The cost of transporting the products across the border is also high, and this makes their products be consumed locally. The products of the company face unfair competition as a result of smuggling. The formal organizations make efforts to follow the procedures and that they complete the requirement for importing their production inputs. The cost of the manufacture of the products become high, but some commodities cross the border and present stiff competition in the local market of Cambodia (Peter, 2008).
The evidence that is obtained from the economically developed countries of Asia proves that the Small and Medium Enterprises (SMEs) have a great potential in driving an equitable and sustainable growth of the economy. When the entrepreneurs are presented with the right conditions and a favorable environment, they can begin and grow Small and Medium Enterprises. The firms can, therefore, make a profit and create employment opportunities despite their background. The small and medium enterprises help in driving the progress of industries and further improve the ability of the country to deal with the challenges in the market and also to identify the breeding grounds of innovation and invention. The expansion of globalization has made the small and medium enterprises in Cambodia to face increased competition in the international market. The firms are forced to improve the quality of and efficiency of their products to survive the standards of the global market and competition.
Many barriers prevent the SMEs of Cambodia from competing with the imports from well-developed nations because the development of the enterprises has not been enhanced in the country. The Cambodia government, however, formed the small and medium enterprise Sub-committee and also developed and created the SME development framework in the year 2004. Through the framework, the government made its first attempt to find out the barriers and challenges faced by the SMEs and also to implement specific policies and legislation that promoted the development of the SMEs in the country. The government identified three main barriers that hindered the growth of the enterprises, and they included the weakness in the legal and regulatory framework, limited access to finance by the SMEs and the lack of supportive activities on the operations of the firms in the sector.
The government has implemented various policies to overcome the obstacles that the small and medium enterprises have faced towards their development. The government of Cambodia has implemented that application of these policies in the industry because they improve the business environment of the country. The policies that the government has implemented have provided proof that the development of the small and medium sector is possible and that when they are entirely incorporated in the business structure, they can develop the economy. The SMEs in Cambodia have grown both in their number and their sizes as well since the 1990s and the government should continue removing the barriers for the purpose of maintaining the trend. When the state develops a system that rewards and gives protection to the works and activities of the entrepreneurs, the investment in the human and the physical capital is improved; and the competitive strength of the enterprises of the country is also improved.
The long run impact of activities of small and medium enterprises; result in the increased revenue generation through taxation that makes it possible for the government to improve the infrastructure. They also create employment opportunities for many people, and the living standards of the citizens are improved. The gross domestic product of the country is developed, and the state is, therefore, presented with the ability to improve the economy of the country. The enterprises have also incorporated the spirit of entrepreneurship in the economy of the country, making the people self-employed. When the citizens are independent, their reliance on the aids of the government and the non-governmental bodies reduces. The funds can, therefore, be channeled to other activities that promote the growth of the economy.
The role that the SMEs play in the development of the economy is significant and they should therefore not be left on their own. They should get support from both the government and private sectors because when left to operate on their own, the full benefits that they bring to the economy of the country cannot be achieved. The firms have not gained the momentum that can enable them to work on their strategies effectively. When they are accorded support by the society, the business can develop rapidly, and the economy of the country will be improved significantly.
The state should ensure that the firms get access to finance easily. The organizations face a challenge of obtaining the funds for their operations and a move to make them get the resources necessary for their development and expansion can make their operations efficient. The inadequacy of the resources has limited the activities of the firms, and their production level has been low as compared to the organizations that have access to finance. The profitability of the businesses is reduced when it produces little goods there is, therefore, a necessity for the firms to produce more goods at affordable prices. The financial institutions should be encouraged to have a look at the sector and increase its outreach by giving more businesses loans and other financial assistance. The institutions should also be to increase their investments in the small and medium enterprises (Ung, Luyna, et al. 2010).
The government should subsidize the cost of production of the firms and their industries. With the subsidized production costs, the organizations will be able to manufacture products that are of high quality at low prices. The consumption of the goods domestically will be improved because they will meet the needs of the customers and at the same time, the firms will be competitive in the global market. The state should also encourage the innovation of the future businesses by appreciating them and implementing their new ideas. The incorporation of the ideas in the policies that are made by the state will make it possible for the firms to continue developing because they will be motivated. The government should also approve the graduation organizations in the informal sectors to the formal sector. The state should also carry out campaigns to educate the citizens and advise them to consume the products of the local enterprises. The campaign will help n reducing the competition that the firms face in the domestic markets. The Cambodian government should enter into agreements with other countries and carry out promotional activities in the global market that will improve the consumption of the products globally.
The policy makers should identify more information and mechanisms that support the SMEs to encourage the involvement of those firms in the growing economies. The information is crucial for the growth of the businesses and the information given by the state should be reliable. The current support mechanisms that are in the country should be furnished and frequently reviewed to ensure that they provide the necessary support to the firms. The state should also find opportunities that are focused on reducing the red tape and the regulations on the investment and international trade. The extended procedures that are followed during registration should be shortened to make the process easier and faster.
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