Editor's Column

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This Blog is written by Sonali Priyadarsani | Column Editor

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INTRODUCTION

Public administration is like any other agency run in the public interest. In a general sense, the term public administration is primarily concerned with the general administration of the nation as a whole. In some exceptional cases, the public administration may be concerned with a specific section of society. But an administration that aims at the public’s common benefit in general terms is public administration. A well-functioning public administration and the public sector provide conditions for the growth of private enterprises through establishing an efficient and reasonable infrastructure through the modernization of communications networks, information technology systems for citizens and companies, through providing technical assistance to territorial self-governing authorities and by promoting investment in the public interest. Public administration consists of having the administration’s work done by integrating the people’s efforts to work together to fulfil their set tasks, such as coordinating, directing, and monitoring the activities of thousands, even millions of employees, so that some harmony and efficiency can result from their efforts. Holding important roles as visionaries in politics, research and the finance industry, the responsibilities of public officials include strengthening health care and education systems; seeking equity and social justice; fostering business and economic expansion; and supporting community development and environmental preservation etc. Their role in the disciple of promoting small businesses through its local branches is of foremost importance.

A small business – in production, factory expenditure and machinery is more than 25 lakh but does not exceed 5 crore rupees; and in the service sector, there are more than 10 lakh rupees but the small business does not exceed two crore rupees. By promoting these small businesses India can implement Public Administration as a tool for social reform and development in the world and as a governance instrument.

CHALLENGES FACED BY SMALL ENTERPRISES

SMEs are facing challenges from increased competition, the need to respond to rapidly evolving consumer demand, technological change, and awareness, innovation, and creativity capability constraints. For many SMEs, but, due to factors related to their limited size, their ability is often not completely realised:

i. Lack of capital (finance , technology, skilled labour, access to markets and knowledge on the market);

ii. Lack of economies of magnitude and scope;

iii. Higher cost of transactions compared to large businesses;

iv. Lack of networks, which can lead to a lack of expertise, know-how and information

Domestic and foreign business experience;

v. Increased competition and concentration on the market from large multinational corporations

Globalization-induced businesses and economic integration;

vi. Inability to compete with larger corporations with respect to R&D spending and

(product , process, and organisation) innovation;

vii. They are subject to “churning” and instability; and

viii. Lack of passion for entrepreneurship and capacity.

Furthermore, many small companies find that they are placed at a competitive disadvantage by their geographical isolation. Despite these significant barriers, many economies remain heavily dependent on small and medium-sized enterprises, especially in terms of generating jobs. Despite their perceived shortcomings, the process of globalisation and regional integration has not been swept away by SMEs, but rather their position and participation has changed and grown, allowing many to remain competitive internationally and to be an important source of job creation collectively. This section will address four major challenges facing small and medium-sized enterprises: (i) difficulty accessing finance; (ii) lack of information infrastructure for small and medium-sized enterprises; (iii) low levels of business R&D in the SME business sector; and (iv) inadequate use of information technology for small and medium-sized enterprises.

• Difficulty in accessing Finance: Depending on the size of the company, the level of difficulty in raising money: the difficulties faced by small and medium-sized companies is relatively difficult in comparison to large businesses. Data points below zero show that it is difficult for businesses to raise funds from either banks or the stock market. Compared to large businesses, small and medium-sized companies tend to face a more challenging situation when it comes to raising capital. Many banks choose to devote their capital, rather than to SMEs, to large enterprises. The explanation is that there is a lower risk of default for large companies and their financial statements are transparent. However, SMEs are riskier, mostly from the lender’s point of view, and do not have precise accounting details.

• Lack of Information Infrastructure for SMEs– The financial industry intrinsically deals with knowledge. Nevertheless, there is an issue of asymmetric knowledge between vendors and fund requesters in general. To remedy this problem, information technology is essential. Many major corporations list their stock market shares and issue bond market securities. Therefore, capital market institutional information exchange schemes will promote access to a broad range of information required to estimate the creditworthiness of large companies. Most SMEs, however, do not have any link with the capital markets. Borrowers can be closely and constantly observed by financial institutions, although it is expensive to do so for small loan borrowers. The information asymmetry problem is compounded by the lack of information infrastructure for SMEs. In collateral-based lending, the availability of collateral is the best way to reduce the risk premium in loan formulations for SMEs and financial institutions. However, several governments have increased policy-based funding for SMEs following the implementation of the Basel Capital Agreement to alleviate the constraints on SME finance as an urgent countermeasure. In this situation, effective and lower-cost credit risk assessment tools for SME financing, in particular for transaction-based lending, were essential. A robust information system is required to resolve the severe credit restrictions on SMEs in order to comply with risk management requirements.

• Low Levels of Business Research and Development in SME Sector– A significant engine of innovation and economic growth is business enterprise spending on research and development (BERD). BERD strength has increased dramatically over the last decade in many Asian economies, such as the Republic of Korea, the People’s Republic of China, and India. Nevertheless, it has slowed or not increased substantially in many other Asian economies. The Research & Development of an economy is normally focused on a small number of large corporations. However, in some economies, small and medium-sized companies account for a large proportion of the overall Research & Development effort of businesses. This may be due to a relatively large number of small and medium-sized enterprises ( SMEs) or small and medium-sized enterprises that carry out a large amount of Research & Development (such as specialised R&D units that are part of a larger group). In some Asian economies, the share of small and medium-sized enterprises ( SMEs) in the total BERD is poor, with Japan accounting for just 5%; this is one of the important reasons behind Japan’s slowing economic growth. However, as in Estonia and New Zealand (OECD 2013), when we look at economies in many non-Asian developing economies, this ratio is more than two-thirds. In domestic Research & Development, foreign-controlled affiliates also play a significant role. When looking at Japanese data, however, they accounted for only 6.3 percent in 2009–2010. That ratio is poor in many other Asian economies. But this is a broad ratio when we look at non-Asian developed economies, such as 70 percent in Ireland (OECD 2013).

• Insufficient usage of information technology in small and medium-sized companies– Information technology has been rapidly evolving. In recent years, household ownership of cell phones, laptops and tablet computers has also spread rapidly. Therefore, more customers have come to prefer internet purchases to over-the-counter purchases and the demand for individuals in e-commerce is rising. SMEs were, however, unable to make adequate use of such resources. The majority of small companies do not have websites of their own. In Japan, for example, through mobile phone ownership of households reached more than 90% and internet users reached 90.58% of the population in 2014 (World Bank 2016), SMEs selling goods and receiving orders from their own websites accounted for just 10% of the total and less than 10% have their own online shops or market their products on internet shopping sites (METI).

EXISTING LAWS & PROVISIONS IN DIFFERENT NATIONS TO HELP THE SMALL ENTREPRENEURS GROW

Many nations, such as Japan, used to have full credit guarantee programmes covering 100% of borrowers’ default costs (Uesugi, Kasai, and Yamashiro 2006). The Government of Japan recently updated the credit guarantee programme and introduced the partial credit guarantee because there was a moral hazard to the complete guarantee. If the government pays 100% of the default costs of SMEs and bears the entire risk, then borrowers’ financial health does not need to be tracked and assessed by lending institutions because their risk is protected by the government. It could also increase the amount of non-performing loans in the banking sector and reduce the competitiveness of the banking sector in a reserve of the public. An ideal case can therefore be a partial credit guarantee scheme.

Money from the Credit Guarantee Scheme comes from the national government (from the Ministry of Finance to the Ministry of Economy, Trade, and Industry) and from local governments as well. The national government grants direct subsidies to CGCs grants compensation assets to the Japan Federation of Credit Guarantee Companies (JFG) and offers compensation to CGCs in the event of losses. The Japan Finance Corporation (JFC) also offers credit insurance funds to the national government, and Japan Finance Corporation uses these funds to ensure the contracts. On the other hand, CGCs who offer donations and loans to them are also supporters of local governments. Nearly 3.8 million SMEs were active in Japan in 2013, of which 37.9 per cent (1.46 million) were guaranteed by CGCs. In Japan, there are 51 CGCs, one for each prefecture and one for each of the Nagoya, Yokohama, Kawasaki, and Gifu cities. Their gross liabilities stood at approximately ¥30 trillion at the end of 2013.

For organisations that use Research & Development (either internally developed or externally acquired) and for those that are not involved in Research & Development, collaboration is a key vector in innovation-related information flows. In all economies for which data are available, Research & Development active firms appear to collaborate more frequently on innovation than non-Research & Development \ active firms, although both types of firms have comparable rates of collaboration in the Republic of Korea (manufacturing only) and Australia. Collaboration trends vary in terms of the features of the partners. A significant source of knowledge transfer for large companies is cooperation with higher education or public research institutions. In most countries, these companies are typically two to three times more likely to participate in this form of operation than Small & Medium Enterprises. More than half of all creative major corporations in Finland, Slovenia, Austria and Hungary, but less than one in ten in Mexico and Australia, operate together with these organisations. Collaboration with other market participants, in particular, is more common. The manufacturers and consumers. Suppliers play a key role among large corporations as supply chains become increasingly interconnected, whereas consumer cooperation in Finland, the United Kingdom, the Republic of Korea, South Africa and Iceland is equally or more important, a possible sign of the growing importance of user-driven innovation.

Credit guarantee schemes have been broadly developed in Asia. As a partial guarantee scheme, India introduced the Credit Guarantee Fund Scheme for Micro and Small Enterprises in 2000; it protects 75% of the credit applied (ADB 2015). Indonesia launched the People’s Business Credit Scheme (Kredit Usaha Rakyat) in 2007, a public credit guarantee scheme for micro and small and medium-sized enterprises ( MSMEs) that guarantees 70 percent-80 percent of the credit applied. Under the Damu Entrepreneurship Growth Fund, Kazakhstan has a partial credit guarantee scheme for SMEs (up to 70 percent). The Republic of Korea makes loan guarantees available to SMEs predominantly through two credit guarantee institutions: the Korea Credit Guarantee Fund and the Korea Technology Fund Corporation for Finance. The Credit Guarantee Corporation in Malaysia offers SME Promises. A regional bank (Bank South Pacific) offers partial credit guarantees for SMEs in Papua New Guinea (50 percent of the credit used).

REMEDIES OR PROVISIONS TO DEAL WITH THESE CHALLENGES

• Diversifying channels of financing– This section discusses three different ways of easing the financing of SMEs through the creation of government credit guarantee schemes, private SME lenders, and home town investment trust funds to finance risky SMEs and start-ups. Given the importance of small and medium-sized enterprises ( SMEs) to Asia’s national economies, it is important to find ways to provide them with stable financing. SMEs, however, usually have serious difficulties raising funds. The under-supply of credit to small and medium-sized enterprises is mainly due to asymmetric knowledge, high default risk, and a lack of collateral. Compared with large businesses, SMEs have more problems accessing finance. In particular, lending institutions tend to increase the flow of funds to the latter market, because the aforementioned reasons for this category are lower. Different government and donor programmes have arisen in developed as well as developing and emerging economies to resolve this issue, and the Credit Guarantee Scheme (CGS) has been established. A mechanism to decrease the supply-demand gap in SME finance is the public credit guarantee system.

There is a clear example in Japan of the establishment of specialised private banks, called shinkin banks, for SME financing. Shinkin banks are cooperative deposit-taking banks that specialise in financing SMEs within a country. Shinkin banks are covered by deposit insurance, much like city banks and regional banks, and are subject to capital adequacy standards and other banking legislation and supervision. However, shinkin banks, unlike city banks or regional banks, make loans primarily to member SMEs that capitalise on shinkin banks. They can make loans to non-member SMEs, but the share of loans to non-member SMEs must be limited to less than 20 per cent. They may, on the other hand, accept deposits from everybody.

There are three primary benefits of a hometown investment trust fund. Second, by lowering information asymmetry, it leads to financial market stability. Individual households and businesses have direct access to information on borrowing firms , especially the small and medium-sized companies to which they lend. Second, it represents a reliable source of venture capital. Project oriented, the fund is. By getting to know the borrowers and their ventures, companies and households decide to invest. The fund distributes risk in this way, but not so that it makes risk intractable, which has been the issue with the model of “originate and distribute.” Third, it leads to economic recovery by linking businesses and households with small and medium-sized enterprises worthy of their encouragement. It also provides job opportunities for SMEs as well as for small and medium enterprises  as well as for the pool of financial institution pensioners who can help determine the projects.

• SME Database Creation and Credit Risk Analysis of SMEs– Given the importance of small and medium-sized enterprises ( SMEs) to several dimensions of Asian economic activity, more efforts need to be made to give them access to finance. Their financial and non-financial accounts are often difficult to evaluate, but Japan’s Credit Risk Database (CRD) demonstrates how, on the basis of financial and non-financial data, SMEs can be classified. A large amount of data is included in the CRD that can be used by statistical analysis to score SMEs. Scoring models are used by Member Financial Institutions to determine creditworthiness, verify the validity of internal rating systems, and match loan pricing with credit risk. In addition, the CRD Association offers advisory services to support the management of small and medium-sized enterprises on the premise that if small and medium-sized enterprises are better handled, this would reduce the credit risk for member financial institutions and reinforce SME business operations. In order to help them facilitate implementation, advisory services have also been provided to member financial institutions. Credit ratings reflect the current financial creditworthiness of issuers such as governments, companies and financial institutions and are the opinions expressed in terms of ordinary measures. These ratings are issued by credit rating agencies, such as Fitch Ratings, Moody’s, and Standard and Poor’s, and can be seen as a detailed assessment of the capacity of an issuer to fulfil its financial obligations in full and on time. They, therefore, play a key role in providing financial planning knowledge to investors in financial markets.

• Research & Development Tax Incentives– Asian governments should contribute to business R&D by tax incentives, in addition to offering grants, contracts, and loans. In many Asian economies, this is what is taking place. For example, as a percentage of GDP, the Government of the Republic of Korea offered one of the most aggregated support incentives for business R&D. Efficient tax subsidy rates should be influenced by the characteristics of the company and should differ according to the form of company and its maturity. Among the Asian economies, Japan and the Republic of Korea handle small and medium-sized businesses more generously than large companies. Some countries allow businesses to benefit from tax benefits when, in the current era, they are not successful enough to use them, but few do so important variety. Australia offers 40 percent or 45 percent of qualifying R&D expenditure with a tax credit, with any excess refundable to SMEs.

• Utilizing SMEs’ knowledge– In order to teach new sales methods using the Internet, national governments can provide close mentoring style support to SMEs and small businesses acting as “primary care doctors” in each area through municipalities that are nationally, or through business and industry societies and chambers of commerce and industry. In Japan, the government planned the Extensive Small and Medium Enterprises from April 2013, help centres will be set up in 47 prefectures nationwide. With the goal of further improving the support structure for small and medium-sized enterprises and small businesses. The three purposes of these centres are: I providing detailed and specialised business advice that cannot be adequately handled by established support organisations, (ii) providing support through the organisation of expert teams optimised for unique business issues, and (iii) creating suitable support organisations (one-stop services).

POSSIBLE SOLUTIONS TO PROMOTE GROWTH AND CREATION OF SMALL BUSINESS IN INDIA

While public enterprises are important to the Indian economy, the rate of return on investment in capital is very poor. The Government of India has therefore taken many steps to boost the overall performance of public corporations. The Indian Government launched an Industrial Policy in July 1991 to help improve the portfolio and improve the efficiency of India’s public enterprises. The Indian economy’s privatisation, liberalisation, and globalisation were clearly emphasised. The public sector’s position has also been refined. In addition, nine central public enterprises (BHEL, BPCL, GAIL, HPCL, IOC, MTNL, NTPC, ONGC, and SAIL) were established as ‘Navratnas’ in July 1997, granting them autonomy for Investment in Capital, enter into cooperative undertakings, and to collect funds from the domestic and foreign markets, etc.

In October 1997, 45 ‘Miniratnas’ was also named by the government, and increased autonomy and financial power delegation were granted. The government has concentrated over the years on reviving sick and chronically loss-making businesses. These enterprises are aided by the Board for Industrial and Financial Reconstruction (BIFR) and prepare suitable restoration or recovery packages. A Board for the Rehabilitation of Public Sector Enterprises (BRPSE) has also been set up by the Indian Government to advise it on plans to restructure or restart sick and loss-making units alongside those for disinvestment or sale or closure. As of 30 March 2006, the BRPSE had made recommendations to 31 central public sector firms. Of these, 15 cases were accepted by the government as revival plans.

CONCLUSION

SMEs face challenges arising from increased competition, the need to respond to rapidly evolving consumer demand, technological change, and awareness, innovation, and creativity capability constraints. However, for many small and medium-sized companies, their potential is often not fully realised due to factors related to their small scale: lack of capital (finance , technology, skilled labour, market access and market knowledge); lack of economies of scale and scale; higher transaction costs compared to large enterprises; lack of networks that can lead to a lack of knowledge, know-how and domestic experience. This paper presented ways to mitigate the four major challenges that SMEs face:

1. The creation of I government credit guarantee schemes, (ii) private SME lenders, and (iii) home-town investment trust funds to finance risky SMEs and start-ups are three separate forms of easing SME financing companies.

2. Another obstacle for SMEs is the scarcity of SME databases. It is also difficult to determine their financial and non-financial accounts. We have provided an example of the Credit Risk Database (CRD) in Japan as a potential solution for other Asian economies, which demonstrates how SMEs can be classified on the basis of financial and non-financial data. The CRD contains a large quantity of data that can be used by statistical analysis to rank SMEs.

3. A lack of R&D investment is the third major challenge of SME growth. We have provided a number of solutions to alleviate this issue. Besides, the Asian governments should contribute to business R&D by tax incentives by supplying grants, contracts, and loans. In many Asian economies, this is already occurring. For organisations that use R&D (either internally developed or externally acquired) and for those that are not involved in R&D, collaboration is a key vector in innovation-related information flows.

4. The last big obstacle for the growth of small and medium-sized enterprises ( SME) is the inadequate use of knowledge sales technology. It is possible for national governments to be allowed to via the national municipalities, or through the communities of trade and industry and the chambers of commerce and industry provide SMEs and small businesses with close mentoring-style help to teach them how to use information technology in their business.

REFERENCES

(1) Arráiz, I., M. Meléndez, and R. Stucchi. 2014. Partial Credit Guarantees and Firm Performance: Evidence from Colombia. Small Business Economics. 43 (3). 711–724.

(2) Asian Development Bank (ADB). 2014. Asia SME Finance Monitor 2013. Manila: Asian Development Bank.

(3) Asian Development Bank (ADB). 2015. Asia SME Finance Monitor 2014. Manila: Asian Development Bank.

(4) Bank of Japan. 2014. Financial System Report October 2014. Tokyo: Bank of Japan.

(5) Deloitte. 2014. 2014 Global Survey of R&D Tax Incentives. London: Deloitte Touche Tohmatsu Limited.

(6) Harvie, C. and T. Charoenrat. 2015. SMEs and the Rise of Global Value Chains. In Integrating SMEs into Global Value Chains: Challenges and Policy Actions in Asia. 1–26. Manila and Tokyo: Asian Development Bank and Asian Development Bank Institute.

(7) Huang, Z., H. Chen, C. J. Hsu, W. H. Chen, and S. Wu. 2004. Credit Rating Analysis with Support Vector Machines and Neural Networks: A Market Comparative Study. Decision Support Systems. 37 (4). 543–558.

(8) Hosono, K., K. Sakai, and K. Tsuru. 2006. Consolidation of Cooperative Banks (Shinkin) in Japan: Motives and Consequences. RIETI Discussion Paper Series 06-E-034. Tokyo: Research Institute of Economy, Trade and Industry.

(9) Japan Federation of Credit Guarantee Corporations. 2014. Credit Guarantee System in Japan. Tokyo: Japan Federation of Credit Guarantee Corporations.

(10) Kuwahara, S., N. Yoshino, M. Sagara, and F. Taghizadeh-Hesary. 2015. Role of the Credit Risk Database in Developing SMEs in Japan: Lessons for the Rest of Asia. ADBI Working Paper 547. Tokyo: Asian Development Bank Institute.