Background and Introduction
Key Issues and Challenges for SMEs in Bhutan
Conclusion and Recommendation
Although SMEs were recognized by the government of Bhutan as the engine of economic growth of the country and having placed high priority in the 5-years plans and the manifestos of the elected governments its ultimate purpose of easing unemployment issues and alleviating poverty are far from being satisfactorily met. According to data of 2012, 56.17% of the total registered cottage and small enterprises in the country remaining inactive is a major concern. Considering this high rate, it is important to identify the causes of failure and explore for strategies to mitigate them.
This paper provides a comprehensive review of factors affecting the growth and development of SMEs in Bhutan. As far as possible regional literatures have been referred to analyze the challenges Bhutanese SMEs currently face. It is hoped that some suggestions made during the analysis of each of the factors/key challenges become useful indicators and guidelines for the government, and other relevant stakeholders and SMEs themselves to enhance growth of Bhutanese SMEs. It is hoped that case studies on successful SMEs entrepreneurs in Bhutan are studied to take as role models for entrepreneurial development in Bhutan. The ultimate success and effectiveness of the national SME program in turning the Bhutanese transition economy into one of the vibrant one in the region will depend on the level of commitment and the degree of cooperation between all these organizations including the SME itself.
The methodology used for this paper to collect holistic information of the SME in the Bhutan is through publications and papers. All the information in this paper is secondary statistical data from publications of different government agencies as well as international organizations. In addition, research papers on SMEs in the neighboring countries were referred to.
Background and Introduction
Small and Medium Enterprises are cornerstone of economies. And it constitutes a larger share of enterprises in most developed and developing countries. They are major sources of income, revenue and employment.
The SMEs play dominant role in the Bhutanese economy of the country by making up over 85% of all business firms. In lowincome countries such as Bhutan, the vast majority of firms are micro and smallscale, existing alongside a very few largescale enterprises. SME forms the base for private sectorled growth. Understanding current status and practice of SME development management in Bhutan is expected to support the meeting the national challenges of poverty alleviation, unemployment and rural urban migration.
Bhutan has experienced tremendous socio economic development since the inception of the first Five Year Plan (FYP) in 1961 with steady gross domestic product (GDP) growth averaging 7% per annum since the 1980s and it further grew at about 8.9% since 2005.
However, despite the strong economic growth, youth unemployment and poverty in Bhutan remain a social and economic issue. Poverty in rural and urban areas of Bhutan is 16.7% and 1.8% respectively according to the Poverty Analysis Report of 2012. Young people in Bhutan account for 16.7% of the economically active population but constitute close to half of those unemployed. During the 11 FYP (2013-2018), approximately 120,000 jobs seekers will be entering the labour market. Out of this, 60 percent will be those with education qualifications of Class X and higher. While this presents an opportunity of a large number of educated job seekers, creating jobs that meets the aspirations of these qualified youth will be a major challenge for Bhutan.
The government identified poverty reduction as the main development priority in the 10th FYP (2008-2013) and one of the key strategies that were identified to support the achievement of the goal was private sector development. Private sector in Bhutan consists of micro, small and medium enterprises (MSMEs) and they face a number of developmental constraints. The government has emphasized on the expansion and growth of a vibrant MSMEs in the 10th FYP to encourage diversification of economic activity to broaden the economic base, generate the much needed employment opportunities and sustainable economic growth. The role of SMEs in modern economy as stated by Savlovsch & Bobu (2011) are that SMEs are launchers of new ideas, they serve as engine of economic growth, source of jobs. Like in most countries, the cottage and small enterprises (CSE) play a pivotal role in the overall industrial economy of Bhutan. CSEs in Bhutan account for more than 90% of the total number of industrial enterprises (MoEA, 2011).
However, as in other countries SMEs in Bhutan experience high production cost because it is labor intensive, nonstandard quality of products, almost lack of innovation, poor management skills of entrepreneurs, shortage of capital, insufficient market information hinder effective competition. Bhutanese’s small entrepreneurs face many constraints in doing business. The Enterprise Survey, 2011 which surveyed more than 500 industries (cottage, small and medium industries) identified some of the major constraints to be; access to finance, hiring of foreign workers, transport infrastructure and low skills among workers.
The sustainable growth of cottage and small industry is vital to achieving poverty alleviation, employment generation and economic development of Bhutan. The cottage and small industry constitutes more than 95.84 % of the total industry in Bhutan. According to the statistical report by (NSB, 2012), in 2011 there were 22,776 industrial firms, of which 133 were large, 220 mediums, 2,649 small and 19,774 cottage industries. Savlovsch & Robu (2011) states that statistics in almost all of the countries show that SMEs are absolutely predominant in the economy, representing more than 99% of all the companies, having substantial influence on obtaining the gross domestic product and the supply of jobs. According to Cuong, et al., (2011), SMEs play a vital role in creating jobs, maintaining high mobility of the labor market, and narrow development gaps among localities. Cornescu & Ionescu, (n.d) also agrees that the development of SMEs increase competition, decrease the big company’s monopolistic role, increase exports and generate economic and social alternatives. They are drivers of competitiveness and innovation in many economic sectors and impact directly on employment, equitable opportunities for income and wealth generation, balanced regional development and poverty reduction (RGOB, 2012). The improved standard of living and quality public services in northern rural areas of Vietnam has been significantly attributed to its dynamic SMEs (Cuong, et. al., 2011).
The governments of Bhutan’s initiatives to foster development through SMEs have been focused since the early 1990s through development of enterprises. The elected governments have developing support packages, monitoring projects and providing timely intervention for SMEs in their manifestos. To this effect the Cottage, Small and Medium Industry (CSMI) Policy 2012 was adopted by the government to provide a clear direction for the development of cottage, small and medium industry; to prepare them for the opportunities and challenges of globalization; to ensure that they play an increasing role in fostering economic development; to generate employment and support equitable distribution of income and bring about balanced regional development.
About 85 percent of Bhutanese industries are small and micro industries dealing in agro products, textiles and handicrafts and large numbers of such industries are located in urban areas. While development of such industries are important in view of Bhutan’s desire to develop clean green manufacturing industries with high potential for employment and for promoting broad based inclusive growth, they are constrained by lack of access to capital, technology, markets and labour resulting in low volume, high cost and inferior quality products.
The official enterprises classification in Bhutan is based on two quantitative criteria – number of people employed in enterprises and initial capital invested. Following the enterprises classification method, cottage enterprises are those with (1-4 employees and investment less than Nu. 1 million), small enterprises (5-19 employees and investment between Nu. 1-10 million). In 2012, of the 29,820 registered cottage and small enterprises in the country only 13,068 were active. 97.95% of the registered enterprises were started as sole proprietorship, with very minimal partnership and companies. Most of these source finance from internally generated funds or through informal borrowing from friends and family.
Despite government’s efforts to recognize and ease challenges for SMEs through, commitments to private sector development in the country’s 5-year plans, SME sector remains weak. Given the weakness and the huge and varied challenges faced by SMEs there is an urgent need to strengthen networking with other stakeholders and developing supporting industries to enhance competitiveness of SMEs. In this paper, SME has been limited to cottage and small industries.