EDPRS: The future of small and medium enterprises

BY GODFREY NTAGUNGIRA The development of competitive and resilient SME’s forms an integral component of the initiatives for Rwanda to achieve sustainable economic growth and middle income country status by 2020. The challenges posed by increased liberalization, new entrants to the market and technological developments require SMEs to raise efficiency levels, strengthen inter-firm linkages and respond timely to market changes. In EDPRS framework Rwanda is experiencing the winds of greater integration into the global economy which provides opportunities for SMEs to participate in both regional and international supply chains. SMEs in the manufacturing sector In the EDPRS framework the government is focusing on harnessing the potential of SMEs in the services sector. The contribution of SMEs to the national economy will be enhanced in sub-sectors such as logistics, distributive trade, professional and business services, and back office services. In addition, SMEs will be encouraged to be involved in high value-adding manufacturing-related services, such as designing and packaging. The government places more emphasis on the creation of a more conducive business environment, together with a more cohesive policy and supportive regulatory and institutional framework, to stimulate vibrant entrepreneurial activities, including the expansion and diversification of existing firms and the creation of new firms in potential areas of growth. Policy and regulatory support will be targeted at promoting the development of dynamic, innovative, entrepreneurial and competitive firms, able to compete in an open market. This article covers the profile and performance of SMEs, including their contribution to the economy, and the institutional support for SMEs, trends and challenges in the development of SMEs, including access to market and upgrading the human capital, and strategic thrusts and future directions in the development of SMEs, including enhancing the competitiveness of SMEs and the potential growth areas for the development of the SMEs in the manufacturing and services sectors. Profile SMEs in Rwanda are defined as enterprises with full-time employees not exceeding 100 or annual sales turnover not exceeding Rwf 50 million or Net Investment not exceeding Rwf 75 Million. These SMEs are further categorised into medium-sized companies, small enterprises and micro-enterprises. Basing on recent study, 2008 indicates that as at June 2008, there were more than 2,500 establishments in the Manufacturing Sector of which 95% of them were in the SME Category accounting for more than 80% of the employment in the Manufacturing services and more than 30% of the total manufacturing output of the country. This goes far to indicate that the SME category of enterprises in the Country, particularly in the manufacturing sector must be a critical component of the industry growth strategy. SMEs contribution to the economy SMEs are important suppliers and service providers to leading industries. In addition, a large number of SMEs are also producers of finished goods and services. Current Policies and programmes of the Government of Rwanda are contributing towards the further development of SMEs, creating a progressively expanding and efficient supply base to the larger corporations. Collectively, the SMEs are contributing to the growth of the manufacturing, services and agriculture sectors, as well as ICT services, in terms of output, value added, employment and exports. Manufacturing output Based on the 2008 IMP Study that covered 2,556 SME’s in 28 out of 30 districts in Rwanda, the mean annual output by SMEs in the Manufacturing Sector as at 2008 is approximately Rwf 1,050,000 accounting for less than 30 per cent of the total manufacturing output of the entities surveyed). The Government has also introduced various programmes aimed at equipping and facilitating SMEs to promote their products and services in both the domestic and export markets. The programmes and activities have been created to provide an avenue for SMEs to exhibit and showcase their products and services, aimed at initiating linkages and networking with MNCs and large corporations. ICT infrastructureMore than 70% of the Rwandan Private Sector is comprised of Small and Medium Enterprises, the majority of which are based in rural areas that are characterized by remoteness, acute lack of business information and poor Information and Communication Infrastructure which have retarded private sector growth. There is therefore an urgent need to deploy appropriate ICT infrastructure which will mitigate the barrier to market entry hence boosting Private sector development. Impediments to the SMEs development While the contribution of SMEs in the manufacturing sector is high and viewed as increasing, inherent structural weaknesses prevent the full realisation of their potential. Generally, SMEs are faced with shortage of technical and professional expertise, due to their inability to attract and retain suitable talents. This constraint has led to the limited utilisation of technology and involvement in R&D activities. SMEs, in general, are also not professionally managed, due to the lack of managerial expertise. They lack awareness on the importance of adopting best business practices and quality management systems, such as financial management and customer focused activities. As a result, SMEs are unable to compete effectively in the market, nor take advantage of market opportunities, created by new technological developments and process improvements. Inability to explore market opportunities SMEs are less able to capitalise on market opportunities brought about by regionalisation and globalisation, as a result of their limited technical and financial capabilities. Due to the limitation in domestic market expansion, there is a need for SMEs to explore potential export markets. Although some have ventured into overseas markets, the number is still limited. Challenges The business and operating environment will become more challenging to SMEs during the Vision2020 period. The challenges include: a. Changing regional and international market environment.b. Competition from emerging economies.c. Advancements in technology.d. Global business trends.e. Nurturing innovative and resilient SMEs.f. Access to markets.g. Access to financing.h. Enhancing human capital.i. Adopting best business practices.j. Harnessing the potential of SMEs in the services sector andk. Formulating a more cohesive policy and institutional framework. Competition from emerging economies Domestic SMEs have to be able to compete with other low cost producers in the East African Community owing to the Country’s membership to the bloc. To have the competitive advantage over regional SME’s, Rwandan SMEs need to move away from low wage, labour-intensive activities to higher value-added activities. Conformance to standards and certification is essential for SMEs to sustain both domestic and export market shares. Adoption of quality management systems, such as Good Manufacturing Practices (GMP), good agricultural practices and good regulatory practices. Advancements in technology Advancements in technology worldwide have resulted in the shortening of product life cycles. SMEs need to undertake continuous upgrading of existing products and processes, and be involved in R&D and product innovation, to remain competitive. However, SMEs are often constrained by their limited resources in R&D. While programmes and support measures by the Government have assisted some SMEs in improving their products and processes, and moving up the value chain, there is still a lack of a critical mass of SMEs undertaking R&D activities. SMEs need to acquire appropriate technologies by leveraging on the resources and expertise of research institutes, universities and specialised Government institutions through closer collaboration with these institutions to take advantage of opportunities arising from the dissemination and commercialisation of research findings on technologies and products. Global business Trends In a competitive market environment, SMEs need to have the agility to respond to fast changing market requirements. SMEs therefore need to adopt a regional and global outlook in their business operations to make them more resilient in the market. The need to undertake business operations on a 24 hour 7 day basis will pose both a challenge and opportunity for those SMEs undertaking their operations on a global scale. Nurturing innovative and resilient SMEs Nurturing innovative and resilient enterprises is important in sustaining Rwanda’s competitive advantage. Enterprises can both grow and expand by themselves or through mergers, and/or strategic alliances. Nevertheless there is a need for institutional support and a conducive environment which encourages entrepreneurial growth. To be successful in nurturing a vibrant entrepreneurial and innovative community, Rwanda has adopted an education system which incorporates entrepreneur related programmes at secondary school and tertiary levels to promote creativity and innovation among students at an early stage. At the tertiary level, the education systems have included programmes which encourage the establishment of incubation centres and start-up ventures. Special emphasis shall also be directed towards hastening the growth of start-up companies and micro-enterprises in specific high growth areas. Access to market Majority of SMEs in Rwanda are dependant on the domestic market with a minority number of manufacturers in the SME category exporting their outputs. In effort to gain access to export markets, Greater coordination among relevant agencies will further strengthen the implementation and improve the effectiveness of market development programmes. Present initiatives will need to be repackaged to reflect changing market conditions and the special needs of the SMEs. Programmes on capacity building, especially in marketing and business development skills, will need to be further strengthened to enable SMEs to expand and diversify their market coverage. Enhancing human capital SMEs, in general, face a shortage of skills and technical knowledge to upgrade and improve their business and manufacturing operations. The application of leading technologies requires workers in SMEs to be equipped with appropriate competencies and knowledge. SMEs are also faced with the inability to attract qualified and technically skilled workers, due to limited financial capacity. Many innovative SMEs are managed and owned by technopreneurs and intrapreneurs who have acquired technical and business skills while working for MNCs and GLCs. Dedicated programmes will need to be introduced to encourage the creation of more technopreneurs and intrapreneurs.innovations to support SMEs which are already operating as, or have the potential to become own brand manufacturers (OBMs). Global business trends There is an increasing worldwide trend among large manufacturers, particularly MNCs, to outsource non-core activities along the value chain to other specialized companies, as part of the global consolidation and rationalisation process to remain competitive. This has created opportunities for SMEs, as MNCs continue to seek for sources of supplies which are more competitive. However, SMEs need to be innovative to be able to participate in the regional and global supply chains. In a competitive market environment, SMEs need to have the agility to respond to fast changing market requirements. SMEs therefore need to adopt a regional and global outlook in their business operations to make them more resilient in the market. The need to undertake business operations on a 24 hour 7 days basis will pose both a challenge and opportunity for those SMEs undertaking their operations on a global scale. Nurturing innovations Nurturing innovative and resilient enterprises is important in sustaining Rwanda’s competitive advantage. Enterprises can both grow and expand by themselves or through mergers, and/or strategic alliances. Nevertheless, there is a need for institutional support and advantageous environment, which encourages entrepreneurial activities, including:i. Adopting a cohesive policy and regulatory framework.ii. Close collaboration between entrepreneurs and research institutes, and financiers.To become regionally and globally competitive, SMEs will be encouraged to move up the value chain. Examples include the following:• SMEs in furniture to move into designing, branding and patenting; and• SMEs in the food industry to diversify into the production of targeted products. Specialisation in core competencies to develop market niches SMEs will be encouraged to specialise in products and services which leverage upon their core competencies to create and develop market niches, both domestically and regionally. They will also be encouraged to acquire expertise to effectively market their products and services. Greater collaborative efforts will be undertaken between technical and development agencies to improve and strengthen the core technological competencies and capabilities of SMEs. Customer-driven approach SMEs will be encouraged to adopt a more customer-driven approach in business operations, through programmes on customer relationship management, to enhance their customer relationship skills. Focus will be given on efforts to enable SMEs to acquire better understanding on market structure and customer demands, which will provide them with insights on the market needs. Strengthening inter-firm linkages Increased outsourcing and off-shoring activities by large firms and MNCs provide opportunities for the greater participation of SMEs in the global market. Inter-firm linkages among SMEs and between SMEs and large corporations, as well as MNCs, will be intensified and strengthened to enable SMEs to become reliable and competitive suppliers. The Government policy of according preference to using and procuring local products and services will be continued. The private sector will also be encouraged to source their inputs, parts and components, as well as services, from domestic suppliers. Adapting to best business practices SMEs will be encouraged to adopt best business and management practices, such as supply chain management, customer relationship management and enterprise resource planning, to gain competitive edge. They will also be encouraged to benchmark against their peers and competitors to improve performance. Training programmes will be designed, in collaboration with industry associations and chambers of commerce, to encourage the participation of SMEs in benchmarking programmes. During the Plan period, the special needs of the different categories of SMEs, namely, micro, small and medium enterprises, will be addressed. In line with the aim to make SMEs more competitive, financial support for SMEs will be market-driven and based on performance Adoption and application of advanced technologies The adoption and application of advanced technologies, including ICT, will contribute towards the creation of SMEs which are competitive and able to respond in a timely manner to market demands and changes. High priority will be given to efforts to strengthen the technological capacities and capabilities of SMEs to meet the challenges of increasing competition. Strategies will be directed at encouraging and enabling SMEs to acquire technologies which will enable them to move up the value chain. Enhancing the human capital of small and medium enterprises Developing human resources is vital in driving growth through technology and innovation, as well as enabling SMEs to move up the value chain. To bridge the gaps in the human resource development of SMEs, existing programmes on skills upgrading and the acquisition of core competencies and specialized knowledge will be continued and enhanced. Young University trained graduates will also be encouraged to venture into SME related activities, to apply their acquired Entrepreneurial skills and knowledge. Policy and regulatory framework A systemic approach to catalyse the growth of new entrepreneurs and SMEs will be adopted to achieve a higher rate of success among businesses. Programmes on SMEs, especially in the services sector, will focus more on the developmental aspects, including meeting specific targets and requirements of the SMEs. The implementation of these programmes will be more coordinated. The Government will plan and offer industrial sites and special parks for SMEs at affordable rates. Regulations and procedures will be reviewed to make these more business-friendly, which will result in faster processing and decision making. Other support programmes for SMEs will include provision of assistance in the registration and patenting of IPs. Ends

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EDPRS: The future of small and medium enterprises