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Firms Growth and Barriers to Growth Among SMEs

1. Introduction
Behind the glitz and glamour of the big business empires the main driver of economy resides in the shape of Small and medium Enterprises (SMEs). This notion is supported by the fact that SMEs constitute nearly 90% of all Pakistani enterprises, while absorbing 80% of the nonagricultural labor force in addition to contributing 40% in annual Pakistani GDP. (SMEDA- state of SMEs in Pakistan website) Small Scale Enterprises including enterprises conducting business informally are thought to act as a solution for a number of undeveloped world ailments, including unemployment, less growth, inequality and lack of development. (http://www.gcu.edu.pk/publications/vc-sme.pdf ) SMEs play an important role in assisting government in employment generation and reduces the burden on government. Their unit cost of person employment is low as compared to large enterprises. SME sector also plays a critical role in development of the country through eradication of inequality by virtue of fair and equitable distribution of wealth by regional dispersion of economic activities and by increasing rate of rural industrialization by connecting it with the more developed urban sector. Entrepreneurship is an indispensable characteristic of developed countries. In Pakistans Journey from developing to developed country SMEs role is also pivotal in creation of entrepreneurial culture as it requires less input and is relatively easy to build and manage and helps Pakistani people to rely less on others help. From its very beginnings Pakistan have been fighting with the problem of trade balance, SMEs also can help in this regard as it uses mostly indigenous raw materials. (http://www.smebank.org/SME%20Sector.htm) In backward rejoins of the country like our geographical area of study SMEs role is much magnified and important then in developed areas as SME sector dominates here with regard to employment and serving the need of the population. SMEs Policy (2005) propose a unified legal definition defining SME according to either assets of the SME (not including Building and land) or number of employees [SMEDA, 2005].

Different definitions are presented for each small and medium enterprise [table 3]. For the sake of this study we would be using the benchmark of employees in the range of 10 to 50. The purpose of this study is to help government and entrepreneurs to develop the SME sector by virtue of identifying the barriers to SME growth in the geographical area of Sukkur. To find out whether Does gender of entrepreneurs affect SME Growth in geographical area of Sukkur? Is the Gibrats Law valid for SMEs in geographical area of Sukkur? Does the legal form of ownership have any effect on SME Growth in geographical area of Sukkur? Does use of different form of energy affect SME Growth in geographical area of Sukkur? Does exporting SMEs in geographical area of Sukkur grow more than non exporting ones? Does location (urban/rural) matter for SME Growth in geographical area of Sukkur? Does type of industry (manufacturing/merchandising/service) matter for SME Growth in geographical area of Sukkur? Does type of technical knowhow matter for SME Growth in geographical area of Sukkur?

According to Gibrats Law which suggests that firms growth is independent of firms size, we come to know from the research of Sven-Olov Daunfeldt and Niklas Elert (2011) of Swedish firms that Gibrats Law does hold for small firms but not for the larger firms because small firms seek to grow more in their initial stages to achieve MES (minimum efficient scale) to make them able to survive in the market. Apart from manufacturing firms, Audretsch, Klomp and Thurik (2004) concluded that there may be having relationship between size and growth of the manufacturing firm but it is not having any relation with the firms providing services. As Alex Coad and Jaganaddha Pawan Tamvada, (2011) clearly concluded in the research of Indian SMEs that female entrepreneurs faces more difficulty in finding of raw materials for their business processes and also proposed that female entrepreneurs lacked in social interaction with comparison to male entrepreneurs. Due to having cultural resemblances with India and Pakistan we hypothesized that female entrepreneurs also faced such situations in our study too. Urbanized SMEs found to be more successful than rural SMEs, as Alex Coad and Jaganaddha Pawan Tamvada (2011) also find that vicinity of firms have great influence on the

growth of the firms. Firms working in urban areas have more opportunities than rural ones which makes them able to grow faster than rural ones. Jane W. Lu and Paul W. Beamish, (2006) with Joachim Wagner (2007) come to conclusion that lots of factors influence the growth of firms and looking separately every factor may leads to biased but they found about exporting of products which having a direct impact towards firm growth and make firms to grow more. This research makes us enable to assume if SMEs selling their products or providing services to other countries achieve higher growth than those who are not doing so. In section 2 well explore the related literature for the article. Section 3 will explore the data and descriptive statistics for the paper. Section 4,5 and 6 will explore the methodology, conclusion and limitations for our research.

2.

Literature Review
As Pakistan is moving towards development more concern is arising on woman

participation and access to business, question is whether having females as board members enhance firm performance or not? As we look into the prior research on the topic we find no such effect to be present Antonio Mnguez-Vera and Adina Martin,(2011) and negative effect on growth Alex Coad and Jaganaddha Pawan Tamvada (2011). One of the important factors related to conduct of business by woman in islamic countries is observing hijab/parda, but does it give advantage in terms of networking oppoprtunities? Yes is the answer provided by John C. McIntosh and Samia Islam (2010). In addressing specific gender needs of women entrepreneurs, efforts must be sensitive to firms having potential as well as aspirations for attaining growth. Marina Della-Giusta and Chiristine UK (2006). Exports are not just important for any country but are also source of expansion and learning for SMEs. Exporting results in increase in productivity for SMEs. Johannes Van Biesebroeck and Jane W. Lu and Paul W. Beamish (2006) but it is not necessary that it will be Joachim Wagner (2007). When measuring firms performance it should be accepted that it is multi dimensional factor and these factors should be treated separately Jane W. Lu and Paul W. Beamish (2006). Having executive board members with international business exposure and foreign language skills, increases international entrepreneurship orientation and foreign market

knowledge, which, in turn, enhance the propensity to export. Dirk Michael Boehe, (2009) SMEs that perform well in exports (high export orientation) and are successful exporters perform better when considering sales, export sales increase when compared against low export orientation SMEs. Sharmistha Bagchi-Sen , (1990). *Galina An and Keith E. Maskus (2009) researched on two standards to increase exports MRAs (Mutual Recognition Agreements) and Standard Alignment of products such as ISO 9000. They concluded that for developed countries both standards associated to increase exports of the firms while for developing countries MRAs have significantly positive but Standard Alignment of products is insignificant. Firm growth is affected by its ability to finance and take risks this in turn depends upon its legal ownership status. Therefore it is imperative to take this into consideration while studying growth. Ownership style, industry of the firm and legal identity of the firm are one of the most important variables in relation to firms Gustavsson, (2002) In Asia where people believe collectivism family ownership is abundant, especially in Hindu community. Family ownership places restrictions in long-term goal setting of business John L.Ward, (1988). In Pakistan where the society is of consumerist style retail accounts for a good share of SMEs. Retail system is found to provide growth opportunities, while supermarket sourcing blocks growth. Our economy is moving its focus from agriculture and industrial base to service sector. Service firms size has no growth relationship with the firms while manufacturing firms may have it D.B. Audretsch, L. Klomp, Santarelli and A.R.Thurik (2004). taking assets as a size of the firms Manufacturing firms have positive growth rate than in larger firms. J.O.S. Wilson and J.E. Morris (2000). Firms with government sector as their main customer grow and survive more. Henrik Hansen, John Rand & Finn Tarp, (2008) Age and size of SMEs are mostly present in studies on SME growth, many researchers have studied and provided their view about how they affect growth. In this domain one important law is known as Gibrats law , the size of a firm and its growth rate are independent. It fails in case of small,newly established manufacturing concerns David B. Audretscha, Enrico Santarellib and Marco Vivarellic (1999) and is also contradicted by Jan Bentzen, Erik Strjer growth Davidsson, Kirchhoff, Hatemi-J and

Madsen and Valdemar Smith (2011) while size and age factors of firms are proposed to increases firms ability to survive. Takehiko Yasuda (2005). Size is important for firm's growth, smaller firms have less opportunities for turnover growth. they also found that micro-firms (i.e. firms having employee strength of less than 10) are less likely grow positively Piergiuseppe Morone & Giuseppina Testa (2008). When studing old and new SMEs Age and size pose restriction on the growth of new SMEs, while being unimportant in case old SMEs growth Paulo Macas Nunes, Marco Goncalves and Zelia Serrasqueiro (2011), larger firms size grow larger while small firms remain smaller due to may be risk aversion and this may cause to not find any middle size firm Tybout (2000); Sleuwaegen and Goedhuys (2002). In addition to all this Virtuous cycle is considered to be incorporated in relation of size and productivity while Productivity increases size which then increases size in return. BeeYan Aw (2002). By analyzing factors responsible for firms growth in Slovenia on econometric basis in addition to providing evidence for negative effect of institutional and financial barriers on growth concluded that firms size effects growth in a negative way. Will Bartlett and Vladimir Bukvi (2001) When analyzing relationship between size and growth,it is considerd to be non linear infact inverted U shaped Celeste Amorim Varum and Vera Catarina Rocha*(2011). Crisis situation can greatly effect the growth and even survival of the firm, growth of the SMEs during the Crisis period SMEs are better than larger firms during Crisis, SMEs are more flexible than larger firms Albert Berry, Edgard Rodriguez and Henry Sandee (2001). High-growth firms differ from the other moderate-growth firms or declining firms on the basis of their small size, high availability of excess resources and scarce financial resources. Ana M. Moreno a and Jos C. Casillas *(2007). There is broad level of industrial aggregation in terms of profitability. While the interaction effect is only significant for micro firms. Further it clear shows the interaction between firm and industry. Vicky Bamiatzi and Graham Hall (2009). Hannu Littunen and Timo Tohmo (2003) concluded that opportunities for growth are equal for new firms no matter what their area is. Cooperation in R&D SMEs have negative advantage, may be because of less human resources and weak management skills. Hyunbae Chun, Sung-Bae Mun Chun and mun (2010). In considering the differences between small, medium and large enterprises, medium enterprises need to be studyied in a way different and independent from the others. Lucio Cassia and Alessandra Colombelli (2009). Geographical positioning is

important for firms by virtue of proximity to their customers and suppliers. In making location decision cost of building and making plant ready to function is relatively less important when compared to labor costs. Yang Li and Jin-Li Hu (2002). In small firms the gap regarding supply of finance may cause business owners to take financial decision, the findings showed that profitability most significantly determines growth John Watson (2006). In their study for finding the forces behind high growth manufacturing SME's ,found that high growth firms are more inclined towards sales rather innovativeness. Nicholas ORegan, Abby Ghobadian and David Gallear (2006). Firms that are collaborating with foreign firms are more ICT advanced and that difficulty arising from difference in language and factors related to certain sectors affect the adoption of ICT technologies. Kaushalesh Lal (2008)

Entrepreneurial SCM (Supply Chain Management) competence have indirect impact on firm performance as a possible answer for the question to find the link between SMEs abilities and performance. Chin-Chun Hsua, Keah Choon Tana, Tritos Laosirihongthongb and G.Keong Leonga (2010) The paradox in the SMEs food processors industry, as by in a way that retail food system is a source of opportunities while also being highly significant restrictions on growth SME food processors. Charles Mather (2005) Use of internet makes reaching for business knowledge easy. It provides opportunity to offer flexible offerings and ability to quickly response. Andrew J. Frew, (2000) SMEs finds young managers think and plan for long term as compared to older ones, support for careful selective investment in information technology (IT), might prove helpful. James Forman-Peck, Gerry Markepeace and Brian Margan, (2005).

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Websites. http://www.financeworld.pk/449/2011/03/03/banking/lending-towardssme-sector-needed-to-be-increased/ http://siteresources.worldbank.org/PAKISTANEXTN/Resources/2930511147261112833/Session-3-2.pdf