An Export Strategy for Small and Medium
Enterprises in Egypt
October 2005
Table of Contents
List of Abbreviations
List of Tables
4
7
Introduction
Chapter One: Literature Review on International Experiences
Experiences from Other Countries
Lessons learned from other Countries Experiences
11
12
14
17
19
23
27
31
47
50
Chapter Two: Literature Review and Current Status of M/SMEs
in Egypt
51
Exogenous Factors
54
Canada’s Experience
China’s Experience
India’s Experience
United Kingdom’s Experience
Jordan’s Experience
South Africa’s Experience
Globalization & Free Trade
54
Macroeconomic Environment
55
Endogenous Factors
64
Conclusion
65
Chapter Three: M/SMEs in Egypt based on the Survey Analysis
65
Section One: Introduction:
65
Section Two: Field of Business And Foreign Trade
Section Three: the Success Criteria
72
76
Section Four: the Main Features of Exports
81
Section Five: Institutional Environment and Incentive Structures
82
2
Section Six: Major Obstacles Facing Exportation and Recommended
Policies
Summary and conclusion
87
92
Chapter Four: Legislative and Institutional Framework
First: Legislations related to Commercial Enterprises
Second: Legislations related to Industrial Enterprises
Third: Legislations related to touristic activities
Fourth: Legislations related to agriculture and reclamation activities
Fifth: Legislations related to food production
Sixth: Legislations related to "hazardous activities"
Seventh: Critical Problems: Procedural Complications
99
99
101
102
103
104
104
105
Chapter Five: Comparative Advantage of M/SMEs
Conclusion and Policy Implications
Chapter Six: Roadmap for Enhancing the Exports of Egyptian
M/SMEs
106
115
References
124
115
3
LIST OF ABBREVIATIONS
ACI
Amman Chamber of Industry
ACWF
All China Women’s Federation
ARI
Agro and Rural Industries
BL
Business Link
CBE
Central Bank of Egypt
CCG
Caisse Centrale de Garantie
CMPE
Centre Marocain de Promotion des Exportations
COTUNACE
Compagnie Tunisienne pour I’ assurance du commerce exterieur
CSBFA
Canada Small Business Financing Act
CVS
Corporate Venturing Scheme
DA
Delegated Authority Program
DTI
Department of Trade and Industry
ECGC
Egyptian Credit Guarantee Company
ECGP
Export Credit Guarantee Program
EDBE
Export Development Bank of Egypt
EDC
Export Development Corporation
EJADA
The Euro-Jordanian Action for the Development of Enterprise
EMIA
Export Marketing Assistance Services
EPs
Export Promoters
ETCs
Economic and Trade Commissions
ETO
Electronic Trading Opportunity Service
GBPM
Groupment Professionnel des Banques du Maroc
GLIEX
Small Business Export Credit Guarantee
GOE
Government of Egypt
ICBC
Industrial and Commercial Bank of China
IDC
Industrial Development Corporation
IMP
Industrial Modernization Program
IT
Information Technology
ITA
International Trade Administration
ITCs
Innovation & Technology Counselors
4
JBIC
Japan Bank for International Cooperation
JEDCO
Jordan Export Development & Commercial Centers Corporation
JLGC
Jordan Loan Guarantee Corporation
K-EXIM
Export- Import Bank of Korea
KEIC
Korean Export Insurance Corporation
KVIC
Khadi and Village Industries Commission
L/C
Letter of Credit
LEDU
Local Economic Development Unit
MAC
Manufacturing Advisory Centers
MDA
Market Development Assistance Project
MENA
Middle East North Africa region
MOF
Ministry of Finance
MOFT
Ministry of Foreign Trade
MOFTEC
Ministry of Foreign Trade and Economic Cooperation
MOFTI
Ministry of Foreign Trade and Industry
MOI
Ministry of Investment
M/M/SMEs
Micro / Small and Medium Enterprises
MTC
Manufacturing Technology Centre
NAFTA
North American Free Trade Area
NEXI
Nippon Export and Investment Insurance
NGOs
Non Governmental organizations
NSBC
National Small Business Council
OECD
Organization for Economic Co-operation and Development
PBOC
People’s Bank of China
PDIs
previously disadvantaged individuals
PLP
Priority Lending Program
PSBC
Provincial Small Business Councils
QAC
Quality Assurance Centre
RBI
Reserve Bank of India
RTOs
Research & Technology Organizations
RVCF
Regional venture capital scheme
SBS
Small Business Service
SET
science, engineering and technology
SFD
Social Fund for Development
5
SIDBI
Small Industries Development Bank of India
SIDO
Small Industries Development Organization
M/SMEs
Small and Medium Enterprises
SMEDP
Small and Medium Enterprise Development Program
SMIC
Small and Medium Industries Centre
SMMEs
small, micro and medium enterprises
SPC
State Planning Commission
SSI
Small Scale Industries
TIC
Trade Information Center
TISA
Trade and Investment South Africa
VSI
Village and Small Industries
WTO
World Trade Organization
6
List of Tables
Table 1: The Relative Importance of M/SMEs in Selected Countries
12
Table 2: Assessment of M/SMEs development and export-support policies
in selected countries
35
Table 3: A Summary of the Assessment of M/SMEs development and
export-support policies in selected countries
44
Table 4: Number of M/M/SMEs operating in Non-Agricultural economic
activities
51
Table 5: Proposed Sample Design
65
Table 6: The geographical distribution of the sample
66
Table 7: The Legal Status of The Firms
66
Table 8: The firms’ distribution according to Ownership
67
Table 9: The M/SMEs distributed according to Gender of Owner/ Manager
and Number of Workers
67
Table 10: The M/SMEs distributed according to Gender of Owner/
Manager and Value of Capital
68
Table 11: the Distribution of M/SMEs according to the Capital’s Value
68
Table 12: The Distribution of M/SMEs according to the present value of
the fixed assets
69
Table 13: The distribution of M/SMEs according to the Number of
Workers
69
7
Table 14: the distribution of the M/SMEs according to Location
70
Table 15: the Distribution of the Manufacturing M/SMEs according to the
Industries
71
Table 16: The Share of Exports to Total Production
Table 17: The Channels of Exporting
72
72
Table 18: The direction of change in Exports during the last 5 years
73
Table 19: Factors Determining Exports
74
Table 20: The Share of the Intermediate Inputs and Semi-Produced
Products To Value of Total Production
75
Table 21: Assessment of the quality of the Egyptian products in the same
Industry
76
Table 22: Self-Assessment of the quality of the M/SMEs Products
77
Table 23: Arrangements Pursued to Enhance Exports
77
8
Table 24: The Logistic Regression Results
78
Table 25: The Areas of Needed Intervention by the Government to help
Promote exportation
80
Table 26: The most important two agencies, which help exporting activities
81
Table 27: Evaluation of the Existing Structure of Support Organizations
82
Table 28: The Services Derived From the Support Organizations
85
Table 29: Factors Affecting exports negatively
85
Table 30: Severity or simplicity of export-related procedures
86
Table 31: Do you see any positive developments in the Drawback
regulations over the last five years?
88
Table 32: Does Temporary Release Impact Your Exporting Capacity?
88
Table 33: Would the latest tariff changes impact your exporting capacity?
89
Table 34: As Small And Medium Enterprises, Do You Get Any Services
From Any Domestic Or Foreign Institutions In The Following Areas?
89
9
Table 35 : Main Obstacles by Sector
94
Table 36 :Main Obstacles by Capital
95
Table 37 : Main Obstacles by Industry
96
Table 38: Egyptian M/SMEs’ percentage of total non-oil exports, their
competitive situations, revealed comparative advantage and industry
concentration percentage, 2000
106
Table 39: Revealed Comparative Advantage for Egyptian Exports of Services
113
10
Introduction:
This strategy is the first of its kind in Egypt. Its evolution arose from the rising importance
of exports and M/SMEs as two important pillars of growth. In fact, the Egyptian economy
has faced low percentage of exports to GDP and a sluggish growth rate of non oil exports in
absolute terms especially when compared to its comparators in the Middle East North Africa
(MENA) region. This weak performance of Egyptian non oil exports has affected the
Egyptian economy negatively and has hindered the initiatives to adopt sustainable economic
growth. Due to such lax performance of Egyptian non oil exports, several initiatives have
been undertaken by the Government of Egypt (GOE) in the last few years to accelerate the
growth of Egyptian non oil exports including adoption of new laws and regulations,
establishing a Ministry of Foreign Trade (MOFT) and then the Ministry of Foreign Trade
and Industry (MFTI), and improving the business environment in many ways. Similarly,
Small and Medium Enterprises (M/SMEs) are considered one of the main pillars of growth
in Egypt, however they are not fully utilized due to several impediments which hinder them
from contributing effectively to the Egyptian economy in general and exports in specific.
This strategy aims at tackling the two problems simultaneously by providing an overview of
how to promote M/SMEs Egyptian exports in a sustainable matter.
The strategy starts in Chapter One by providing a review of the literature on the
international experience of promoting exports of M/SMEs in several countries, including
both developed and developing countries. The aim is to draw relevant lessons from the
international experience in this regard. In Chapter Two the strategy provides an overview of
the Egyptian M/SMEs with special focus on the problems that affect their exporting
performance. In Chapter Three the results of a survey on 214 M/SMEs in Egypt designed
specifically for this strategy (183 in manufacturing and 31 in services) and the problems they
face in exporting are presented. Chapter Four presents the legislative and institutional
framework that governs M/SMEs in Egypt including the different agencies and donors that
deal with M/SMEs in Egypt. Chapter Five presents the results of data analysis trying to
identify the comparative advantage of M/SMEs in Egypt. Chapter Six builds on all the
information and conclusions arising from the different parts of the strategy and provides a
roadmap for enhancing M/SMEs Egyptian exports.
The strategy depends on different methodologies to arrive at its suggested
recommendations. In the first instance, lessons learned from international experience are
drawn, then after analyzing the Egyptian environment for M/SMEs depending on desk work
and sample survey analysis, a review of the legislative framework governing M/SMEs is
undertaken. This is complemented by undertaking data analysis to identify the comparative
advantage of M/SMEs. In other words, several approaches are used to arrive at the required
recommendations needed to be adopted to enhance M/SMEs’ exports in Egypt. The
adoption of several approaches to arrive at the suggested roadmap enriches the strategy and
ensures that policy recommendations are based on solid foundations arising from in-depth
analysis.
11
Chapter One: Literature Review on International
Experiences:
Introduction:
The main argument for favoring M/SMEs in developing countries is that they are
increasingly playing a strategic role in economic growth and development through their
contribution to the creation of wealth, employment and income generation (see Table 1).
There are advantages of M/SMEs, such as, having flexibility in adapting to different
work environments and changing product designs, strong personal relations and, a
limited amount of paper work. Such advantages enable M/SMEs to adapt easily to the
changing environment than large enterprises.
Table 1: The Relative Importance of M/SMEs in Selected Countries
Country
Export as % of
GDP 1999
M/SMEs as %
of all
enterprises
% workforce
employed by
M/SMEs
% of SME
exports in total
exports
Egypt
USA
Japan
Canada
Korea
Taiwan
Indonesia
Thailand
Malaysia
Singapore
Philippines
4*
10.8
10.4
43.3
42.1
42.1
35.0
57.0
121.7
135.0
51.3
99.0**
96.0
98.8
98.0
99.0
97.8
97.0
95.8
84.0
91.5
99.5
40.0**
69.0
77.6
66.0
69.0
78.4
42.0
18.1
40.0
51.8
66.2
4***
33.3
13.5
Na
43.0
56.0
10.6
10.0
15.0
16.0
Na
Na = not available
Source: Charles Harvie and Boon- Chye Lee (2001)
* Calculated from World Bank, World Development Indicators, 2003
** El Mahdi, Alia. 2002. “The Labor Absorption Capacity of the Informal Sector in
Egypt” in Assad, Ragui (ed.), The labor Market in the Era of Economic Reform, Cairo: ERF
***Ministry of Finance .2004. Enhancing Competitiveness for M/SMEs in Egypt
:General Framework and Action Plan ,August
M/SMEs are currently facing the challenge of increased competition as a result of new
open markets . In such a context the ability to export is becoming a critical factor in the
development and long term survival of many M/SMEs. M/SMEs have been traditionally
considered as weak contributors to internationalization1 because of financial and
The literature on the internationalization process of M/SMEs has been reviewed in a number of
studies (see for example, Anderson, 1993;Leonidoua and Katsikeas,1996). The term “internalization”
1
12
management constraints (Oviatt and Mc Dougall,1994). Some studies have demonstrated
that firm size and export intensity – as measured by the ratio of exports to sales- are not
correlated ( Moen,1999; Zucchella,2001) . This implies that M/SMEs can play a
significant role in the exporting process provided that they are placed in an enabling
environment and provided with a proper incentives scheme.
Factors Inhibiting M/SMEs’ Exports:
Ramswami and Yang (1990) point out that there are four sources of export barriers that
affect firms’ export performance: export knowledge, internal resource constraints,
procedural barriers and, exogenous variables (such as those related to foreign markets
conditions) ( Ortega,2003) .
First of all, export knowledge barriers refer to the lack of information and knowledge
about aspects related to export activity. The lack of knowledge about foreign markets
constitutes a barrier to increased commitment to international activity within the firm.
Bilkey and Tesar (1977) found that firms starting export activity face difficulties in
identifying opportunities in foreign markets. Another major source of perceived difficulty
lies in the general lack of knowledge of potential foreign markets in the firm’s sector. Many
M/SMEs do not know which countries or regions they should consider, how their products
should be adapted to the specific requirements of those markets, and what are the efforts
required to make the necessary changes.
Second, internal resource constraints refer to the need of a firm to possess a series of
resources in order to be able to initiate export activity. This type of barriers is relevant, as it
has been highlighted as one of the main reasons why many firms, particularly M/SMEs,
prefer to cling on to a domestically oriented strategy (Bilkey, 1978). In particular, the
following aspects have been underlined as internal resource barriers: Lack of financial
resources regarding the difficulty of obtaining the necessary funds required to initiate or
finance export operations, the need to use honoring letters of credit , lack of personnel to
devote time to export activities and, lack of production capacity (Bauerschmidt et al., 1985).
Furthermore, a firm requires a series of external support resources such as banks prepared to
foster firms’ international activities (Groke and Kreidle, 1967 cited in Ortega, 2003) or local
trading firms that enable indirect export operations of manufactures ( Bilkey,1978; Keng and
Jiuan, 1989).
Third, any company interested in exporting is faced with a series of procedural barriers
and obstacles pertaining to the activity itself and which could have their origins either in the
firm’s domestic market or in foreign markets. Among procedural barriers highlighted are the
following aspects of export activity: red tape and documentation , import tariffs, non-tariff
barriers, such as the establishment of various quality control and safety standards which
occasionally involve the need to adapt products to the requirements of the different foreign
markets (Keng and Jiuan, 1989); transportation and distribution difficulties in foreign
markets and; the difficulty of funding a trustworthy distributor in the target country
(Bauerschmidt et al., 1985)
is used in the same context as that defined by Welch and Luostarinen (1988) as “ the process of
increasing involvement in international markets”.
13
The exogenous barriers have their origins in the uncertainty of international markets, largely
due to the activities of other players in the market – such as competitors, foreign
governments, supply and demand –meaning that this type of variables transcend the control
of exporting companies.
In addition, the technical aspects of export payments are perceived to be a major difficulty
by many M/SMEs. They perceived distance and the more impersonal nature of export
contacts as factors that would increase the probability of collection difficulties and they were
unable to accept the level of risk that this implied. Also, obtaining information on relevant
legal aspects of international trade represents a major barrier to exportation of M/SMEs.
We aim in this chapter to provide an overview of the international experiences by surveying
the policies and rules and regulations adopted in a number of countries towards
enhancement of M/SMEs in general and towards developing their export capabilities in
specific.
To undertake this mission we reviewed the experience of six countries in details in addition
to another set of countries which have not been reviewed as detailed as the first six. The
surveyed countries’ experiences include Canada, China, India, United Kingdom, Jordan, and
South Africa. In each country experience we focus first on the definition of M/SMEs, and
then move to discuss what specific rules and regulations are available in those countries that
deal with M/SMEs. We provide an overview of the institutional environment for M/SMEs
in each of the countries studied where the focus is based on how activities related to
M/SMEs, whether undertaken by the government or non governmental agencies are
coordinated. Finally we address the financial policies adopted to enhance M/SMEs and we
focus on export policies designed specifically for M/SMEs.
Canada’s Experience
1. Definition:
For statistical purposes, small firms are defined as those employing less than 100 employees
in the manufacturing sector and less than 50 employees in the services sector. The mediumsized firms employ 100 to 500 employees. It should be noted that assistance programs
(governmental and non governmental) include additional restrictive criteria to identify their
beneficiaries among the M/SMEs. Such criteria use the number of employees and/or
financial revenues to identify the beneficiaries. Following this definition, M/SMEs in Canada
were estimated to be around 2 million in year 2000 with 93% of these businesses having less
than 20 employees, and 88% having less than 10 employees. Canada’s small enterprises were
responsible for 55% of total employment and 43% of private sector GDP. (IDRC, 2001)
2. Rules and Regulations devoted to enhance the role of M/SMEs in general:
In Canada there are several rules and regulations used to enhance M/SMEs in general. For
example, there exists the Canada Small Business Financing Act, under whose auspices the
Federal Government small business loan guarantee program has been initiated (see below in
the section related to finance policies of M/SMEs).(CSBF-Industry Canada, 2005)
3. Institutional Environment for M/SMEs:
There is no single organization in the Federal Government that is devoted to undertake
policies related to M/SMEs. On the contrary, the institutional rules governing M/SMEs
14
environment are decentralized among different governmental organizations which report to
the Minister of Industry. However, there exists “Industry Canada” which is responsible for
drawing a national strategy for the development of M/SMEs in Canada after undertaking the
necessary research; however its role remains advisory. In addition, there are several
governmental regional development agencies focusing on M/SMEs which undertake joint
activities with provincial governments and community-based organizations.
There exists a number of NGOs whose main mandate is to help and support M/SMEs.
Their core functions are to provide financial and management support for viable small
business development in their communities and to assist community economic development
activity more generally. The Federal Government provides financial support to such NGOs.
There are no direct subsidies provided by the Federal government to M/SMEs, but rather to
NGOs that support the development of M/SMEs. ( Your Guide to Government of Canada
Services and Support for Small Business -Industry Canada , 2005)
4. Finance Policies for M/SMEs in general:
There are no preferential loans rates provided for M/SMEs, however there are specific
banks and institutions which devote their efforts to help M/SMEs and meet their needs
including the Business Development Bank of Canada. There is an intention to provide more
services that address M/SMEs requirements. For example, in the area of debt financing
focus has been on the expansion of the government loan guarantee programs to include
leasing, improvement of micro-credit facilities, and improved access to credit in rural areas.
Financial policies include the provision of small business owners with a tax relief where they
receive a tax exemption on the first $500,000 of capital gains on the sale of their business,
while, under certain conditions, investors can receive exemptions on capital gains from
investments in public markets which are re-invested into qualifying M/SMEs. Tax measures
are a significant component of the Federal Government’s assistance to M/SMEs. (IDRC,
2001)
Moreover, the Canada Small Business Financing Act (CSBFA) is intended to be selffinancing and provides guarantees to chartered banks, credit unions and many other
qualified private sector financial institutions to assist them in making term loans to small
businesses. The purpose of such loans is to finance up to 90% of the purchase or
improvement of fixed assets, including real property, leasehold improvements, and new or
used equipment. Loans of up to $250,000 are provided under the program with loan losses
being shared so that lenders absorb 15 percent of the losses while the government absorbs
the remaining 85 percent.
Finally, the government has implemented a Special Small Business Accounts Receivable Insurance
policy which includes easy application and reduced administration and which was used by
over half of all short-term insurance customers in 2001. (Small Business Canada, 2005)
5. Export Policies for M/SMEs:
There are no specific policies devoted to the enhancement of M/SMEs exports, nevertheless
there are programs (e.g. Program for Export Market Development) which allow preferential
tax treatment for the low income tax brackets which help M/SMEs due to the small size of
their operations.
15
In addition, the Export Development Corporation (EDC) which is wholly-owned by the
government is devoted exclusively to providing trade finance services to support Canadian
exporters and investors in international markets. It helps these businesses assess their longterm market potential and manage the increased complexity and risk. It has developed a
number of programs, many in partnership with other financial institutions, to service the
particular needs of M/SMEs and nearly 90 per cent of its clients are smaller companies.
EDC has publicly committed itself to encouraging Canadian small firms to be actively
engaged in exporting. However, there is no preferential treatment provided for M/SMEs,
but rather special efforts are geared towards meeting their needs.
EDC has established two teams to support small firms: (1) the Emerging Exporters Team
delivers short-term insurance services through a specialized underwriting center which can
grant buyer credit approvals immediately over the phone, fax or the Internet; and (2) the
Small Business Financial Solutions Team which delivers medium- and long-term products and
services, including buyer credit financing, contract bonding and pre-shipment financing.
In addition, EDC has several “umbrella type” short-term credit insurance policies with
selected banks and financial intermediaries that provide cover for receivables that are
discounted by the bank or financial intermediary and which are extensively used by SME
exporters.
Two other EDC programs -- Export Ease and Export Ease Plus -- combine EDC insurance
with private invoice and collection services. Moreover, Canada initiated Export Protect, which
offers SME exporters on-line short-term cover for specific transactions up to CAD 250,000
for a risk-based fee, and Export Check, which provides M/SMEs with an on-line insurability
opinion on foreign buyers. There are also export finance medium and long-term products
specially designed for M/SMEs. It has a simplified buyer credit process, which is a simplified
loan document for quick-turnaround for M/SMEs, and provides Pre-shipment Financing
Guarantees for small firms. (EDC, 2005)
There are several other organizations, institutions, and systems devoted for the enhancement
of Canadian exports in general, nevertheless, none devote special or dedicated services for
M/SMEs. This is not to say, that M/SMEs are not considered in the plans and activities for
such organizations. On the contrary, M/SMEs are devoted special attention by putting
more emphasis on the services that are mostly needed by M/SMEs to enhance their exports,
however they are shared by M/SMEs and large corporations. For example, export facilities
in terms of information access are given priority to lessen the transaction costs of accessing
such information. Although the information will benefit both large and small firms, the cost
of obtaining them for M/SMEs is definitely higher than for large corporations. Hence,
efforts are devoted to make such services available.
In summary, government policies and programs for small business development are
undertaken in a commercial manner and whenever possible, in partnership with other public
and private sector SME stakeholders, and NGOs. The line of thinking in enhancing exports
of M/SMEs in Canada depends mainly on enacting a number of policies that serve both
large and M/SMEs, however with the main focus that M/SMEs can benefit more from it.
16
China’s Experience
1. Definition:
China’s definition of M/SMEs is based on production capacity and original value of fixed
assets reflected in the output of goods which are rather complicated criteria. Several attempts
are undertaken to simplify the definition of M/SMEs adopting criteria based on sales
revenue and total assets. In practice, M/SMEs are defined as all enterprises other than those
identified as large enterprises by the state. In December 2000 it was reported that China had
39.8 million public and private sector M/SMEs, of which 21% were medium and small ones
and 79% were micro businesses which had less than 8 employees. In the industrial sector,
the 460,000 M/SMEs accounted for 98% of all enterprises, and represented 69.8% of the
sector’s employment, 48% of total assets, 57% of turnover, and 43% of tax revenue. It was
also reported that M/SMEs provide 75% of the total jobs in China. (IDRC, 2001)
2. Rules and Regulations devoted to enhance the role of M/SMEs in general:
Notwithstanding the recent liberalization of the business environment for M/SMEs, the lack
of broadly-based legislative, regulatory, program and service measures to support enterprise
creation and development is a particularly critical issue, given the importance of the private
and mixed enterprise sector, and particularly micro-businesses and M/SMEs, as providing
the receptor capacity for much of the surplus labor in China.
Two key recent pieces of legislation for M/SMEs have been the Amendments to the
Constitution of the People's Republic of China passed in March 1999, which clarify that the
private sector is an important component of the socialism market economy, and the issuance
by the State Council in August 2000 of the Policies on Encouraging the Promoting
M/SMEs' Development which leads to the development of detailed policies and program
approaches to support SME development.
Local governments are also going through institutional restructuring guided by the principle
of separating government administration from enterprise management. This resulted in more
equitable treatment of M/SMEs regardless of their ownership, business types and location,
increased transparency of the formulation and implementation of policies, laws and
regulations, and reduced cost for access to government information and public services.
Moreover, several key issues that hinder the development of M/SMEs including property
rights and clear rule of law have been addressed in the new Small Business Law.
Finally, the draft bill on the Comprehensive SME Promotion Law includes several legal
benchmarks needed for the development of M/SMEs. It includes a clear definition for
M/SMEs, and addresses a number of other key issues including: establishing a
comprehensive SME administrative organization under the State Council; the government's
financial support to M/SMEs; establishing a government policy bank to lead SME financing
initiatives; defining SME financing allocations at other state-owned banks; developing the
SME credit guarantee system including counter guarantees; establishing community-based
service systems with some cost recovery; clarifying the legal status of such community based
SME development organizations; providing interest-free loans for technical innovation;
ensuring the right of M/SMEs to participate in government procurement, and developing
strategic partnerships between large enterprises and M/SMEs.
17
3. Institutional environment for M/SMEs:
Like the Canadian case, there is no special governmental organization responsible for
M/SMEs. The Ministry of Commerce (MOFCOM), formerly known as The Ministry of
Foreign Trade and Economic Cooperation (MOFTEC) sets strategic goals for national
economic development; formulates and oversees the implementation of sectoral programs,
regulations, and annual plans for industry, transportation, commerce and trade; provides
coordinated solutions to major economic problems; fosters the development of markets; and
helps balance domestic and international trade.
Its State Enterprise Reform and SME Departments are responsible respectively for
development of rules and regulations for the establishment of a modern state enterprise
system, including pilot projects, and for the development of the SME sector in China.
MOFCOM acts as the main coordinator for M/SMEs programs as it chairs the National
Leading Group for SME Promotion and Development which includes several ministries
related to M/SMEs. Policy oriented research related to M/SMEs is undertaken by the State
Planning Commission (SPC) which is the lead organization responsible for China’s
economic and social development. The Ministry of Finance is an active partner of
MOFCOM in developing policy frameworks for SME financing. In addition, the People’s
Bank of China (PBOC) works closely with MOFCOM on financial institution support for
enterprise development.
There are a number of NGOs as All China Women’s Federation (ACWF) (see below in the
finance policies section) which provide services to M/SMEs. Moreover, a number of
international donor organizations are active in promoting M/SMEs development in China.
There are several regional activities devoted to the development of M/SMEs coordinated by
provincial and municipal Economic and Trade Commissions (ETCs). Moreover,
community-based SME support systems have been developed in selected demonstration
cities with the objective of establishing a nation-wide community-based SME support
system. The regulations for community-based systems are developed by the local
government and designed to respond to local needs and conditions. In addition to being
community-based, it is intended that these initiatives will be led by the private sector and will
rely heavily on mutual assistance between enterprises in accordance with the market rules.
4. Finance Policies for M/SMEs in general:
In general, and after the opening up of the Chinese economy, several attempts to upgrade
the financial system have been undertaken, however no special programs or activities
designed by banks have been set to meet the needs of M/SMEs, nevertheless several
initiatives are taking place. For example, the PBOC now requires the commercial banks to
establish special departments to lend to small businesses. Despite their general caution with
respect to SME financing, there are some encouraging signs that, with the support of the
authorities, the banks are slowly starting to focus on M/SMEs as a viable market segment.
Some state commercial banks are actually becoming quite active in the field. For example,
the Industrial and Commercial Bank of China (ICBC) at Changchun has implemented a
specific strategy to gain significant SME market share particularly among fast-growing
M/SMEs which are commonly referred to as “small giants” in China. The strategy involves
organizational restructuring, new procedures to enhance the products and services and speed
up loan authorizations for M/SMEs, and heavy marketing expenditures. As part of this
strategy the ICBC is acting as the bank of choice for the local credit guarantee fund and
18
provides the required office accommodation and some staff for the fund. Moreover, the
SME Policy Bank proposed under the SME Promotion Law is expected to play a key role in
providing leadership to the financial community in developing and providing much needed
financial products and services for China’s M/SMEs.
Regarding pilot credit guarantee schemes, there are several pilot projects. The goals of the
pilot credit guarantee initiatives are to test varying approaches to providing improved access
to capital, and raising the credibility and reducing the borrowing difficulties of M/SMEs in
urban centers across China. The pilot SME credit guarantee program has been operating
since early 1999 and pilots have been established in more than 100 cities in 31 provinces,
autonomous regions and municipalities. The government provides the major funding for the
SME credit guarantee organizations, and shares the risks with financial institutions such as
state commercial banks and private sector investors.
On the other hand, there are several NGOs that play an important role in improving the
finance conditions for M/SMEs. For example, the All China Women’s Federation (ACWF)
is originally a “mass organization” providing the communist party with a means to reach and
mobilize women. Many of the provincial and local branches of the ACWF have created
innovative and pro-active programs to deal with gender issues, including microfinance for
women entrepreneurs, technical training, and job placement. (ACWF, 2005)
5. Export Policies for M/SMEs:
There are no special export policies devoted for the promotion of M/SMEs. However, a
special exports credit package is provided for exporting firms comprising many of China’s
rural M/SMEs. In addition, China is working to boost high-tech exports and hence the
government is providing high-tech enterprises with export credit guarantees and export
insurance, and launches annual high tech fairs. M/SMEs, which comprise the great majority
of China’s hi-tech businesses, are major beneficiaries of these initiatives.
To summarize, Chinese M/SMEs are facing several obstacles which are currently addressed
by specific rules and regulations. Policies devoted to promote M/SMEs exports remain
humble and in probably on pilot basis. It is rather safe to argue that there is no
comprehensive strategy devoted for M/SMEs export promotion.
India’s Experience
1. Definition:
In India there are no specific definitions for M/SMEs. Enterprise definitions focus on the
concept of small scale industrial enterprises. The primary definitions used by the Ministry of
Small Scale Industries and Agro and Rural Industries (SSI and ARI) are as follows: For Small
Scale Industrial Undertakings, and Ancillary Industrial Undertakings supplying not less than
50 per cent of their production or services to industrial undertakings, the investment ceiling
should not exceed 10 million rupees. For Small Scale (Industry-related) Service and Business
Enterprises rendering industry-related service/business the investment ceiling is 500,000
rupees in fixed assets, excluding land and building. For Export-Oriented Units, which export
at least 30 per cent of their annual production within three years of production start, the
fixed assets investment ceiling is 30 million rupees.
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The term Small Scale Industry has different meanings for different agencies. For example,
the government’s Planning Commission views the entire Village and Small Industries (VSI)
sector as a part of the SSI sector. The National Sample Survey Organization, which is part of
the government’s Central Statistical Organization, defines the entire industry sector in terms
of organized and unorganized segments, as well as in terms of industrial enterprises run by
households and non-households. The Central Excise Department, on the other hand,
distinguishes SSIs on the basis of the annual turnover of the units (up to a maximum limit of
30 million rupees). The number of small-scale industries exceeds 3 million units, supplying
more than 40% of the total manufacturing sector output. (Updates on Indian Taxation &
Corporate Laws, 2005)
2. Rules and Regulations devoted to enhance the role of M/SMEs in general:
There are no specific rules and regulations devoted to help M/SMEs in India. However,
there are intentions from the central government to develop unified comprehensive
legislation for M/SMEs to establish a clear and level playing field for it with other sizes of
enterprises in the economy.
To protect the interests of M/SMEs and to improve their viability, more than 800 items are
currently reserved for exclusive manufacture in the M/SMEs sector. (However, there is no
regulation or restriction on marketing the reserved items by large industries.) The reservation
of products for exclusive manufacture by M/SMEs, is reviewed regularly. Moreover, under
the Government Stores Purchase Program the M/SMEs which have got necessary
capabilities in terms of finance as well as technology for providing goods to various
Government Agencies are registered. (IDRC, 2001)
3. Institutional environment for M/SMEs:
In India there exists a special ministry for M/SMEs. The Ministry of Small Scale Industries
and Agro and Rural Industries (SSI & ARI).. The Ministry is responsible for policy
formulation, promotion, development and protection of small scale industries. It also
monitors the implementation of these policies and ensures their effective implementation.
SSI &ARI designs and implements the policies through its field organizations for promotion
and growth of small and tiny enterprises, village and coir industries. The Ministry also
performs policy advocacy on behalf of the Small Scale Industries (SSI) sector with other
stakeholder Ministries/Departments such as Finance, Commerce, Law, Labor and
Environment so as to ensure due consideration for M/SMEs in their respective policies.
There is also the Small Industries Development Organization (SIDO) which assists the
Ministry in the formulation and implementation of policies and programs for the promotion
and development of the Small Scale Sector. It liaises with central and state government
departments and agencies, financial institutions and other key small scale sector
intermediaries, encourages capital and technology flows, and provides a comprehensive
range of common facilities, technology and competitiveness support services, and marketing
assistance through a network of more than 70 Small Industries Institutes, Extension Centers,
Testing Centers, Production Centre and Field Testing Stations.
In addition to having a special ministry devoted to undertake the responsibility of promoting
M/SMEs, coordination between SSI & ARI takes place via different mechanisms. For
example, the Small Scale Industries Board is an advisory body constituted by the
Government to facilitate co-ordination and inter-institutional linkages for the development
20
of the sector, and to provide advice on all issues pertaining to the SSI sector. The Minister of
SSI & ARI, is the Chairman of the Board which comprises different related ministries,
experts, and NGOs.
India is characterized by having a web of institutions which are established to develop
M/SMEs. Besides the SSI & ARI and SIDO, there exist several NGOs and governmental
organizations whose main responsibility is helping M/SMEs whether in facilitating their
financial needs, exports’ promotion, or training requirements. Associations which are more
closely focused on small business issues include: the World Association for Small & Medium
Enterprises; the Federation of Associations of Small Industries of India; the Consortium of
Women Entrepreneurs of India; Laghu Udyog Bharati; and the Indian Council of Small
Industries.
There are a number of regional organizations. For example there is the Khadi and Village
Industries Commission (KVIC) which is a statutory organization responsible for planning,
promoting, organizing and assisting in the implementation of programs for the development
of Khadi (handloom) and village industries, including those based on minerals, forestry,
agricultural, polymers and chemicals, textiles, services, engineering and non-conventional
energy.
There are a number of training institutions spread regionally that help in upgrading the skills
of M/SMEs. International donor organizations participate heavily with the government
institutions to help upgrade the M/SMEs. (KVIC,2005)
4. Finance Policies for M/SMEs in general:
India has several financial schemes that aim at serving the M/SMEs. The main financial
institution is the Small Industries Development Bank of India (SIDBI) which serves as the
principal financial institution for promotion, financing and development of Indian industry
and services in the small scale sector where individual business investment in plant and
machinery does not exceed Rs.10 million. SIDBI focuses on plugging gaps in the financial
marketplace and offers a wide range of financial products either directly or indirectly through
nearly 900 primary lending institutions including commercial banks and State-level financial
institutions having over 65,000 outlets throughout India. Its financial products and services
address micro financing, debt financing for purchases, lines of credit, refinancing, factoring,
credit guarantees and venture capital. It also undertakes focused initiatives in partnership
with the Government of India, NGOs, technical / management institutions, international
agencies and industry associations. These have involved such initiatives as incubation
partnerships, a Technology Bureau for Small Enterprises, and the establishment of a private
sector commercial bank (IDBI Bank Ltd.). .
In addition, the single window scheme of SIDBI is also being extended to all districts. There
is also The Export-Import Bank of India: which is government-owned, and entered in
partnership with the EU to promote joint ventures between Indian and European countries.
A division for advisory and training services provides information and support to help
improve prospects for securing business in projects funded by multilateral agencies, and
promotes Indian consulting exports.
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The government plays a direct and important role in making finance available for M/SMEs.
In this context the Ministry of SSI and ARI has established the following policy priorities:
implementing an effective Credit Guarantee Scheme; earmarking the flow of bank credit to
micro, tiny and small enterprises; establishing a scheme for the credit rating of small scale
units; exploring possibilities for the securitization of guaranteed loans; assessing
opportunities to strengthen viable State Financial Corporations; and promoting venture
capital funds and factoring services, focused exclusively on the M/SMEs sector.
Moreover, in the 1999-2000 Budget the government announced a new Credit Insurance
Scheme for providing adequate comfort to the banks to improve the flow of investment
credit to M/SMEs, particularly tiny units, and exporters. In order to ensure that credit is
made available to all segments of the M/SMEs sector, the Reserve Bank of India (RBI) has
issued instructions that, out of the funds normally available for the M/SMEs sector, 40 per
cent be given to units with investment in plant and machinery up to Rs. 5 lakhs, 20 per cent
to units with investment between Rs. 5 lakhs and Rs. 25 lakhs and the remaining 40 per cent
for other units. Banks have also been asked to operationalize more specialized M/SMEs
branches.
SIDBI operates the National Equity Fund Scheme under which equity support is provided
for projects up to Rs 15 lakh and 25% of total project capitalization. The equity support
takes the form of “soft loans” and assists small entrepreneurs in setting up new projects in
tiny/small scale sector and the rehabilitation of potentially viable sick SSI units irrespective
of the location (except for units in Metropolitan areas).
The Margin Money Scheme operated by KVIC and delivered through selected national
commercial banks and regional rural banks, provides a minimum of 25% of the project cost
for financing viable village industry projects with special concessions for such groups as exservice people, minorities, women, the handicapped, and particular geographic areas. (KVIC,
2005).
5. Export Policies for M/SMEs:
The government provides export assistance by organizing exhibitions, trade fairs and buyerseller meetings in foreign countries, assisting small scale units to get samples from foreign
buyers to develop counter samples, and provides pre-shipment and post-shipment credit
facilities.
The government has also established a Software Technology Park Complex under the
Software Technology Park of India to provide infrastructure facilities for small scale
software exporting businesses. The Software Technology Park helps the startup and
development of small scale businesses focused on exporting 100% of their software
products. (IDRC, 2001)
To coordinate ongoing developments with regard to the World Trade Organization (WTO)
requirements, the Office of DC (SSI) has established a cell to disseminate information to
M/SMEs regarding recent WTO developments. This cell also organizes WTO Sensitization
and Seminars, Workshops.
22
United Kingdom’s Experience
1. Definition:
There is no single definition for small businesses in the UK, but in the Small Business
Service (SBS) they are defined according to the number of employees they have. Micro
businesses are those with 0-9 employees, small businesses have 10-49 employees, mediumsized businesses have 50-249 employees, and large businesses 250+ employees.
Across government, it is most usual to measure size according to numbers of full-time
employees or their equivalent. However in determining company size, the Companies Act of
1985 provides a range of three primary criteria (turnover, balance sheet total, and
employees), and requires at least two of the criteria to be met. As in many of the case studies
mentioned above, in practice, schemes which are nominally targeted at small firms adopt a
variety of working definitions depending on their particular objectives.
The M/SMEs represent 99.8 per cent of the business population. There are 25,000 medium
sized businesses accounting for over half the UK’s economic activity, 56 per cent of private
sector jobs, and 52 per cent of business turnover (excluding financial services). The
approximately 3.66 million businesses with less than 50 employees provided 44% of the UK
non-government employment and 37% of turnover. (IDRC, 2001)
2. Rules and Regulations devoted to enhance the role of M/SMEs in general:
There are no specific policies for small business in the area of general government
procurement. However, Small Business Services (SBS) (see below for what is SBS) assists
small businesses by providing information, guidance and facilitation in identifying and
bidding on government procurement opportunities. (Small Business Service, 2005)
3. Institutional environment for M/SMEs:
There is no specific ministry responsible for M/SMEs like the case of India. However,
M/SMEs fall within the responsibility of the Department of Trade and Industry (DTI) and
SBS (which is an agency that was established in 2000, and reports through DTI). It is
charged with championing the development of small businesses, and has a mandate to
operate across all central government departments. It has a comprehensive span of
responsibilities including financing, business and information support services, research and
communications, regulatory burden, and local delivery networks. Its role is advisory. The
SBS consults with a broad range of associations which represent the interests of small
businesses including the Chamber of Commerce, the Confederation of British Industry, the
Forum for Private Business, and the Federation of Small Businesses.
Moreover, there is the Small Business Council (SBC) which is an advisory private sector
body with twenty members. The SBC provides an independent source of advice for the
Chief Executive of the SBS on the needs of M/SMEs and also reports to the Secretary of
State for Trade and Industry on the effects of government policy on small business.
The SBS manages a national network of Business Link services throughout England which
are run by 45 local providers. Business Link is the SBS service delivery system across the
country and provides independent and impartial business advice, information and a range of
services to help small firms and those trying to start up new businesses. Each of the Business
Link local providers has a dedicated team of Business Advisors whose role is to provide long
term business support to its clients. All of these services are available throughout the UK.
23
While the service in England is branded as Business Link, equivalent services are provided
by Small Business Gateways in lowland Scotland, the Business Information Source in
highland Scotland, the Business Connect offices in Wales, and LEDU - the Local Economic
Development Unit - for Northern Ireland.
There are a number of institutions involved in the training and upgrading of skills of
M/SMEs’ employees. In addition, there are a number of new initiatives that have been
designed to provide training for M/SMEs which include: Small Firms Training Initiatives; Skills
for Small and; Small Firms Training Challenge .
Moreover, there are special services tailored for specific M/SMEs which include:
Services for technology-based M/SMEs:
The Smart Scheme –re-introduced April 1997- provides grants to M/SMEs for pre-competitive
feasibility studies into innovative technology and for development up to pre-production
prototype stage of new products and processes. It combines previous SMART SPUR
schemes and the innovation element of regional enterprises. Grants award are made on a
competitive basis.
Innovation & Technology Counselors (ITCs) – As part of the business links service, networks of
local advisors coordinate the use of local sources of innovation support by business links’
clients. Approximately 70 ITCs were in place in 1997. The impact is difficult to assess from
the information available, but will depend largely on the quality of the innovation support
available from the local Research & Technology Organization (RTOs) or other services to
which they refer their clients.
Focus Technical – A £6 million program launched in 1995, initially for 3 years, is an attempt to
address this last problem. The program aims to assist RTOs to extend their technological
products and services to better meet needs of M/SMEs, and to improve RTOs networking
capabilities with other business support organizations so as to direct innovation and
technology services to M/SMEs.
Business Incubators – are special estates to create a nurturing, instructive and supportive
environment for “fast track” small companies, providing access to a range of business skills,
training and finance. Incubator directors are directly involved in selecting companies and
assessing these companies’ success in growing and graduating from the incubator. The
Enterprise Panel, a treasury-established working party, reported a positive potential for
developing more incubators as a means of promoting development of high-tech and
innovative M/SMEs, at least 50 incubator-type projects exist in the UK. (UK Business
Incubation ,2005)
4. Finance Policies for M/SMEs in general:
The UK government considers favorable tax treatment for M/SMEs. Small businesses in
the UK benefit from preferential corporate taxes in the following manner. The starting rate
for businesses with net income up to £10,000 is 10%, the small companies' rate for net
income between £50,000 and £300,000 is 20%, and there is progressive marginal relief
between the two categories. This compares to the main corporate tax rate of 30%.
The government also seeks to influence the enterprise environment, which entails capital
markets, advisory services and the science, engineering and technology (SET) base. Some
24
general support for M/SMEs is found in recent attempts to modify and simplify various
statutory and financial systems. Business rates, income tax, national insurance and VAT
systems have been adjusted, as have regulations governing audits and accounts. The
government has also sought to reduce the obligations of M/SMEs in respect of labor rights.
In general however, the delivery of significant fiscal concessions subsidies to M/SMEs in the
UK has been felt to conflict with wider economic policy objectives. As a result, public
support to M/SMEs aimed at reducing barriers in areas such as access to capital markets,
business advisory services and technological developments.
The Business Link (BL) program has been established since 1992. This is intended to
provide single points of easy access for M/SMEs to an integrated range of business support
services. Government support to BL is worth £ 120 million. The national BL network
currently has over 200 outlets and achieves significant coverage. In any quarter, around 35
percent of firms between 50-200 employees are using BL services, although the proportion
is less for the more numerous smaller firms. Client firms get personal business advisors,
access to counselors specializing in export development, design and innovation and
technology, and other services such as loan guarantees.
In addition to the aforementioned activities, there exist special schemes designed for
M/SMEs finance which include the following:
Small Firms Loan Guarantee Scheme: This scheme guarantees loans from the banks and other
financial institutions for small firms that have viable business proposals but who have tried
and failed to get a conventional loan because of a lack of security. Loans are available for
periods between 2 and 10 years on sums from £5,000 to £100,000.. SBS guarantees 70% of
the loan (85% if a business has been trading for more than 2 years). In return for the
guarantee the borrower pays SBS a premium of 1.5% per year on the outstanding amount of
the loan. The premium is reduced to 0.5% if the loan is taken at a fixed rate of interest. The
commercial aspects of the loan are established between the borrower and the lender.
The scheme is available to UK companies with an annual turnover no more than £1.5m, or
£5m if they are a manufacturer. Many business activities are eligible but there are a number
of exclusions. Loans are available for most business purposes although there are some
restrictions. (DTI, 2005)
The Corporate Venturing Scheme (CVS): The CVS provides tax relief to encourage corporate
investment in minority shareholdings in small higher-risk trading companies. The intention is
both to increase the supply of venture capital to such companies and to encourage the
establishment of wider corporate venturing relationships.
The tax relief available to the investing company includes relief against corporation tax at 20
per cent of the amount subscribed for new full-risk ordinary shares of unquoted small higher
risk trading companies, provided that those shares are held for a minimum of three years;
deferral of corporation tax on any chargeable gains on disposal of corporate venturing
investments reinvested in a new shareholding qualifying for investment relief; and relief
against income for any capital losses on disposal of corporate venturing investments, net of
any investment relief retained after the disposal.
Regional venture capital schemes (RVCFs): RVCFs are being set up to address the lack of
provision of equity funding for investment in the "equity gap" range for M/SMEs. There
25
will be at least one RVCF in each English region specializing in the provision of small-scale
equity (<£500,000) to businesses with growth potential.
5. Export Policies for M/SMEs:
In the UK, it is estimated that there are over 100,000 active exporters and of these
approximately 10 percent are extremely small firms. Businesses having less than 500
employees are eligible for grants of up to 50% to cover export development expenditures.
There are also Export Promoters (EPs) who are business executives seconded to Trade and
Investment Partners UK. (this is the main export promotion agency in the U.K.). They help
M/SMEs and larger companies to win business around the world. They are available for free
consultations and can offer practical exporting advice, information on specific opportunities
in markets and sectors.
There is a special Exports Credit package for M/SMEs targeting export markets outside
Western Europe and North America. This includes improved and streamlined versions of
guidelines on existing products as well as new features designed with the smaller exporter in
mind.
There are several other export promotion schemes; however none of them is confined
specifically to M/SMEs. Rather, they benefit the whole community of exporters with an
indirect positive impact on M/SMEs. Among the most important programs is the Export
Explorer. The Export Explorer component is an integrated package of help and advice that
enables M/SMEs to experience new and accessible export markets at minimal cost.
Participating in Export Explorer costs £99 and includes hands-on help and support
provided by Trade and Investment Partners UK, plus briefings, information and
administration. Travel and accommodation are extra. Export Explorer comes in three tailormade packages.
The first package targets first time exporters or those with minimal experience. It offers an
opportunity for general export training and export counseling before the visit, a visit to
specific European countries to experience working in a potential export market, and followup advice on the next steps.
The second package is aimed at those companies that are more experienced in the exporting
field, are looking to develop further into more difficult markets and have little or no
experience of the country to be visited. The package offers counseling before the visit
including a focused session that tackles issues of direct relevance to the market being
targeted, a visit to one area within France, Germany or Spain with a view to developing
contacts that Trade Partners UK staff overseas have identified, and follow-up counseling to
discuss next steps.
The third package enables first time exporters with minimal experience to visit a key trade
fair in Western Europe as part of a group. They are briefed on the trade fair prior to the
visit. During the visit they can assess the market in relation to the competition without the
cost of having to exhibit. On return they are offered advice on the next steps. The
component for Support for Exhibitions and Seminars Abroad capitalizes on overseas trade
fairs being one of the most effective ways for firms to test markets, attract customers,
appoint agents or distributors, meet wholesalers, carry out research and make sales. The
26
support which is provided is designed to help firms gain initial exposure in new markets and
is not intended as a continuing subsidy. (IDRC, 2001)
Jordan’s Experience:
1. Definition:
At present in Jordan there is no unique and official definition of M/SMEs. Regarding
specific policies designed and implemented to support the SME sector, usually each
institution uses its own definition, mainly based on the number of employees:
1. JEDCO (Jordan Export Development & Commercial Centers Corporation)
defines M/SMEs as follows:
ƒ Small Enterprise: 1-10 workers;
ƒ Medium Enterprise: 10-24 workers.
2. The Jordanian Department of Statistics adopts the following classification:
ƒ Small Enterprise: 1-4 workers;
ƒ Medium Enterprise: 5-19 workers;
ƒ Large Enterprise: > 20 workers.
3. For the Amman Chamber of Industry the definition is the following:
ƒ Small Enterprise: 1-9 workers
ƒ Medium Enterprise: 10-99 employees.
According to the latest published data of the Jordanian Department of Statistics, the
percentage of establishments employing four workers and less stood at 91.8 percent. Adding
medium-scale establishments that employ 5-19 workers, the percentage of M/SMEs in
Jordan rises to 98.5 percent employing around 64.2 percent of the workforce. (Di Tommaso
et al., 2001)
1. Institutional environment for M/SMEs:
In Jordan there are no institutions with the specific and unique aim of assisting M/SMEs.
The only exception is the newly-established Department for SME development within the
Ministry of Industry and Trade. It is at the very beginning of its activity.
a) The Ministry of Industry and Trade
It is the main body responsible for company registration and industrial licensing. Recently
the activity of the Ministry in support of SME development is increasing. Apart from the
new above-mentioned SME department, the Industrial Directorate of the Ministry is the
counterpart of a 4-year USAID program (US $15 million) to improve the growth and
survival rate of industrial M/SMEs and to increase the rate of start-ups. The program
consists of providing technical assistance to M/SMEs in design, quality control, marketing,
management, information, environment management systems. The program includes the
establishment of the following centers:
ƒ Small and Medium Industries Centre (SMIC): assistance in product design
and development and technology improvement; provision of practical
technical and managerial training; assistance in developing new markets;
ƒ Manufacturing Technology Centre (MTC): help M/SMEs to upgrade the
technology through business partnerships with US companies, identification
of technology needs, assistance in technology adaptation and provision of
specialized training and computer databases;
ƒ Quality Assurance Centre (QAC): promotion of the awareness of M/SMEs
on the crucial role of quality for competitiveness.
27
b) The Amman Chamber of Industry(ACI)
It has the main aim to act as a forum for the views and opinions of Jordan’s industrial sector,
with the objective of promoting economic development in the country. Regarding the
specific policy of ACI in support of SME development, in 1998 it established a department
for M/SMEs with the aim to give support to M/SMEs in marketing, export, advice and
guidance, financial and legal matters, industrial management and technical consultancy.
c) Jordan Export Development & Commercial Centers Corporation (JEDCO)
It was established in 1972 as Jordan Commercial Centers Corporation (JCCC) and it became
JEDCO in 1992. It is supervised by a Board of Directors chaired by the Minister of Industry
and Trade, Secretary General of Ministries, and members of the private sectors’
organizations. It is led by a general manager appointed by the Board of Directors. Its
objective is to develop, increase and promote exports of Jordanian goods and services
worldwide. It also provides technical assistance to export-oriented M/SMEs.
JEDCO’s main activity is export and marketing promotion. M/SMEs are not really
benefiting from this promotion activity, since most of them are not exporters, but JEDCO
can be included in the group of institutions supporting SME development because it is also
implementing some programs specifically devoted to M/SMEs. For example during 19921993 a pilot project was executed – called Market Development Assistance Project (MDA) –
in order to assist Jordanian firms to upgrade their capabilities. Within the MDA Project a
component was related to the provision of cash grants to export-oriented M/SMEs in order
to help them to develop their export potential. 124 firms benefited from this component.
Another component of MDA was aimed at providing cash grants to finance the
developmental and promotional activities of the private sector organizations concerned with
the development of export-oriented M/SMEs (11 organizations benefited from it). In 19941996 a second phase started, building on the success of the first one, to continue to support
M/SMEs and to develop new sectors with high potential for growth. In this phase especially,
technical assistance was provided in order to enable Jordanian firms to acquire the ISO 9000
certificate that helps them to penetrate export markets.
In addition, in 1994 JEDCO established an information centre and it is now in the process
to establish a design centre to provide direct services and consultancy to M/SMEs in
product design. The centre will also provide training courses to upgrade the technical skills
of workers. Finally JEDCO will also establish a packaging centre in cooperation with
international bodies to provide services and consultancy to the Jordanian packaging sector.
(Di Tommaso et al., 2001)
2. Finance Policies for M/SMEs in general:
The source of starting capital for M/SMEs is often the owner's savings, personal credit
cards, home equity loans and funds from friends and family. As a general trend, M/SMEs
struggle to access bank credits, as commercial banks are reluctant to provide loans to small
firms.
This situation has led to the development of an SME culture that is unfamiliar with the
financial sector, whereby M/SMEs are afraid of the banking environment and trust between
both parties is absent. Hence, the prevalent situation limits and impedes the ability of
Jordanian businesses to grow and expand. However, some new initiatives have started to
take place to help overcome this problem.
Jordan Loan Guarantee Corporation (JLGC): In light of the above stated obstacles, the Jordan
Loan Guarantee Corporation (JLGC) tries to moderate the negative ramifications of what is
28
considered the largest impediment faced by M/SMEs when accessing finance: the high
perceived risk on the part of banks from lending to such firms thereby leading to high
collateral requirements. In line with its aim of supporting the activities of M/SMEs and
export sectors, JLGC guarantees loans for M/SMEs, as a partial coverage of the loan risks,
thereby enabling them to increase their participation in the economic and social
development of the Kingdom. The guarantees given by JLGC can also be used to cover the
risks involved in export credit.
JLGC’s primary objective is to provide guarantees to Jordanian financial institutions that
extend working capital and fixed asset loans to Jordanian companies. Its current focus is to
provide guarantees in order to encourage financial institutions to extend loans to finance
projects undertaken by M/SMEs.
JLGC extends its guarantee to cover 75% of the outstanding balance of loans granted by the
bank plus accrued interest. Loans eligible for the guarantee cover include loans to industrial,
agricultural, and industrial service projects; loans to service projects undertaken by doctors,
lawyers, engineers, and consultants; and loans to small and medium-scale projects whose
number of employees does not exceed 50. Loans not eligible for coverage include consumer
purchasing and sales transactions, loans granted to the trade sector that depends on imports,
and loans granted to existing credit portfolios of financial institutions. The maximum
amount of a loan eligible for 75% cover is JD 40,000. The level of guarantee is reduced to
50% for eligible loans between JD 40,000 and JD 100,000. Eligible loans may be extended
for up to 6 years. JLGC and the banks negotiate a guarantee ceiling, which reflects the level
of guarantees the bank estimates it will require during a particular time period. The bank
pays a fee to JLGC equal to 1.5% of its ceiling amount. Guarantee fees are one of two
sources of revenue, the other being revenue generated from capital invested.
Another program- The Euro-Jordanian Action for the Development of Enterprise (EJADA)- was
launched on July 3, 2001 through a Memorandum of Understanding signed between the
Jordanian Government and the European Union, in which JLGC became responsible for the
financial component of the Program. The Program is intended to help modernize Jordanian
industries so as to enable them to become more competitive locally & internationally in
anticipation of Jordan's accession to the WTO, NAFTA, & Euro-Med. Partnership. A six
million Euros guarantee fund was set up at JLGC to increase the accessibility of commercial
bank finance to M/SMEs. According to the guarantee contract between JLGC and
participating banks, JLGC guarantees 70% of loans of up to JD 430,000 & the commercial
bank retains 30%. Maturity period ranges between three and eight years including a
maximum grace period of two years. The participating bank is charged a guarantee fee of up
to 1.5% on the guaranteed portion of the loan. Enterprise owner's equity must not be less
than 25 % of the value of the investment.
JLGC tries to accommodate and cater for both the demand and the varying needs of the
business community in Jordan, which are identified through the development of the tools
and means required for the successful integration of the JLGC work with the local
community. In this regard, JLGC introduced and improvised a wide range of new services
and program to cater for market requirements and bankers’ needs, such as the Personal
Computer Guarantee Program, the Housing Loan Guarantee Program, and Land Purchase
Loan Guarantee Program. (JLGC, 2003).
29
3. Export Policies for M/SMEs:
JLGC remains the main actor in the field of export promotion and support. Despite the fact
that JLGC has no focused attention on helping M/SMEs, it has developed a number of
programs as identified above to help them. In the field of export policies, it has been the
main player as shown below; however, none of its programs are specifically devoted to help
M/SMEs in their exporting activity. JLGC has developed 2 Export Credit Guarantee
Program which are:
(1) Insurance Product One: Pre-shipment Loan Guarantee
In 1997, the JLGC launched one part of the Export Credit Guarantee Program (ECGP), the
Pre-shipment Loan Guarantee. This product was intended to facilitate the expansion of
Jordanian exports by encouraging banks to lend to small and medium-sized businesses that
have export opportunities but insufficient funds to buy or produce the goods for export.
The Pre-shipment Loan Guarantee provides an indemnification to a lender of up to 75% of
the unpaid outstanding loan balance on a single guaranteed loan up to a maximum of JD
100,000. It is possible for a single borrower to have aggregate guaranteed loans outstanding
of up to JD 250,000 but the guaranteed amount cannot exceed JD 75,000. It also covers up
to 75% of the unpaid accrued interest outstanding up to 180 days. The price of the guarantee
is 1.5% per annum of the amount of the loan principal guaranteed. The loan maturity and
hence the guarantee, should normally be for a year or less. The loan must be in local
currency, meet the lending bank’s general credit criteria for such loans, and carry the bank’s
then applicable interest rate.
Since incremental export sales often put pressure on a company’s working capital
requirements just when credit lines are fully extended and all available collateral is already
pledged. The JLGC pre-shipment guarantee is intended to make up for this shortfall, reduce
the risk to the lender, and allow the transaction to go forward. It increases the lender’s ability
to serve a growing portfolio of export loan transactions. These transactions typically offer
banks added incremental fee income and opportunities for exchange profits as well. Other
advantages accrue where export transactions are financed. Access to the Central Bank of
Jordan’s rediscount program is such an advantage. Under this regulation, export orders
evidenced by export letters of credit, allow the bank to fund up to 75% of the face amount
of the credit at 1% below the current discount rate, and then on-lend the funds at a 2.5%
spread. Two other advantages that must be included in the pricing of these loans are the
exclusion of JLGC guaranteed loans from the statutory 2% bad debt reserve requirement
and the reduction of the applicable risk-based capital-to-asset ratio from 100% to 20%.
Recent experience with the Pre-shipment Loan Guarantee has shown that the average loan
guaranteed was around JD 80,000 for an average period of 60 days. In addition, the loan
default rate has been near .2% of all loans covered. Recently a total of 20 loans were covered
for a total of JD 1.6 million.
(2) Insurance Product Two: Post-shipment Loan Guarantee
In 1997 also, the JLGC launched its Post-shipment Export Credit Guarantee Program. Like
its Pre-shipment program, this product is intended to facilitate the expansion of Jordanian
exports by encouraging banks to lend to businesses that have export opportunities. Its
purpose is also to provide the exporter the opportunity to extend competitive trade terms to
his clients in new markets. The guarantee is available for all exporters regardless of size and
covers the risk of non-payment by the foreign buyer because of commercial risks.
30
The Post-shipment Loan Guarantee is a “whole turnover” arrangement. That is, the
guarantee covers all eligible export receivables. It provides indemnification against nonpayment to the guaranteed party of up to 85% of the net invoice value of each shipment and
up to a maximum credit limit determined per buyer. It also covers the refusal of the buyer to
accept the goods so long as the exporter fulfills the prearranged sales agreement. The
guarantee expiration date matches the trade terms and can be for no more than 180 days.
In January 1998, the JLGC entered into a reinsurance agreement with a French Export
Credit Agency to reinsure 80% of the amount of the Post-shipment contract. This
arrangement enabled JLGC to insure much larger contracts then it could on its own given its
limited capitalization. It also provided JLGC with underwriting, buyer credit history
reporting, and collection services which it did not possess at the time. Under the terms of
the agreement, the risk and fee income would be split on a 80/20 basis and in return for the
contract, the French ECA would provide JLGC 32% of its share of the fee income as a
commission. The French ECG would also provide JLGC with buyer credit limits (usually
between JD 500,000 and JD 2,000,000) and fee levels (usually between .5% and 2%).
Currently JLGC covers 1% of exports from Jordan at an average fee of 1% of the contract.
With the addition of political risk coverage, JLGC hopes to increase its coverage to 5% of
the national exports if reinsured only through the French ECA, and 10% of the national
exports if reinsured through the government. Previous experience has proven that the buyer
default rates due to commercial reasons is about 1%, and between 10% to 30% of the claims
are normally recovered. There is no adequate prediction method for political risk claims.
Advantages that accrue to banks under the Pre-shipment Loan Guarantee Program also
accrue to those guaranteed by the Post-shipment guarantee. Thus, access to the Central Bank
rediscount program is even more beneficial to the bank. Current regulations allow for export
orders (evidenced by promissory notes and trade acceptances) to permit bank funding of up
to 90% of the export credit. As with other JLGC guaranteed loans, the rediscount rate is at
1% below the current discount rate, lending at a 2.5% spread. (JLGC, 2003)
South Africa’s Experience
1. Definition:
The National Small Business Act of 1996 identified four different categories of SMME
(small, medium and micro enterprises) classes i.e. micro, very small, small and medium.
These are differentiated by sector, and then by the number of full-time employees, the value
of annual turnover, and total gross asset value (excluding fixed property). While turnover
and gross asset criteria vary significantly by sector, there is a great deal of commonality with
respect to the employment criteria. Employment criteria for the manufacturing, construction
and utility sectors are as follows: micro (5); very small (20); small (50); and medium (200). In
the service industries, these employment criteria are: micro (5); very small (10); small (50);
and medium (100).
Given South Africa’s history of previously disadvantaged individuals (PDIs), a differentiation
is also made between emerging and established SMMEs. The former term refers to firms
which are owned and managed by PDI entrepreneurs while the latter refers to white-owned
and –managed firms. Most emerging SMMEs are assumed to be informal and most
established ones formal, although these categories do overlap. (IDRC, 2001).
31
2. Rules and Regulations devoted to enhance the role of M/SMEs in general:
There are no special laws and regulations devoted for M/SMEs in South Africa. A number
of specific policies and regulations are now being considered. For example, the government
has established an affirmative or targeted procurement strategy designed to assist SMMEs
owned by PDIs. This was developed by the Ministries of Finance and Public Works.
3. Institutional environment for M/SMEs:
There is no specific ministry responsible for M/SMEs. However, M/SMEs fall within the
mandate of the Department of Trade and Industry (DTI). Within the national government
the DTI is the coordinating body for all policies related to the small business sector and for
all SMME support programs directly or indirectly assisted by the government. It is also
responsible for the coordination of small business strategies pursued by the provincial
governments within the national policy framework. DTI directly administers some specific
programs targeted to smaller businesses such as the SMME development program which
provides investment grants to qualifying businesses and a wide variety of technology and
export assistance services. However it relies primarily on the Ntsika Enterprise Promotion
Agency and Khula Finance Limited which act as intermediaries to address SMME needs for
improved access to business development and financial support services respectively. The
DTI Centre for Small Business Promotion is responsible for the implementation of the
National Small Business Promotion Strategy which was published in 1995 and has resulted
in the creation of a National Institutional Framework to provide an enabling environment
for small, micro and medium enterprises (SMMEs) in South Africa.
Ntsika reports through DTI but has a private sector-led Board with some public sector
members. Its mandate is to promote the development of SMMEs, work with all stakeholders
to ensure an enabling environment for SMMEs, assist the development of effective SMME
services and a related delivery network, achieve a coordinated approach to implementation
of the National Small Business Strategy, and promote an entrepreneurial culture. To fulfill
this mandate Ntsika engages in SMME management and entrepreneurship training, provides
extensive developmental and support services to SMME service providers, assists the
development of a national network of SMME service providers, undertakes research,
identifies priorities, and designs interventions in partnership with relevant stakeholders, and
provides access to technology, and appropriate skills transfers and support services to
SMMEs.
Manufacturing Advisory Centers (MAC) is a program intended to provide high quality
advisory and information services to new and existing SMMEs, to assist in improving their
quality, competitiveness and productivity. A National Program Coordinating Office
(NAMAC) has been established as a Trust to coordinate, facilitate, monitor and evaluate the
activities of the pilot MACs. On behalf of DTI, it also manages the BRAIN program - a
national business information service for all individuals and small businesses.
NGOs and other organizations as the chambers of commerce take in consideration the
representation of SMMEs. The National Small Business Act of 1996 provided for the
establishment of a National Small Business Council (NSBC) and the establishment of a
Provincial Small Business Councils (PSBC) for each province. The councils are intended to
provide assistance to DTI in the development of the national small business-support
32
framework and an effective sounding board for small business interests and concerns. The
councils are autonomous of government and consultative in nature, but operate in close
interaction with relevant central and provincial government departments. Membership is
structured to include representatives of business, NGOs active in the SMMEs sphere, and,
for the national council, provincial government representatives. Moreover, international
organizations are active players in the area of helping SMMEs. (South African Chamber of
Business, 1999)
4. Finance Policies for M/SMEs in general:
In general, existing evidence indicates that the majority of SMMEs finance their initial capital
requirements through private savings from individuals and family as well as retained
earnings. A smaller proportion of SMMEs rely on formal credit such as bank loans.
However, there are continuous efforts undertaken by the government to increase the
availability of finance for M/SMEs. For example there exists the Khula Enterprise Finance
Limited (Khula) where the government focus is on developing financial support programs
for SMMEs. In addition, Khula provides assistance such as startup capital, working capital
and loan guarantees to retail financial intermediaries, other financial intermediaries and
NGOs to enable them to improve their financing services for SMMEs. It also provides
direct financing services to SMMEs in areas such as equity loans. It undertakes joint activities
with other organizations. For example there exists the Sizanani Scheme which is an activity
of the Banking Council, with the assistance of Khula and the Kellog Foundation, has
initiated the Sizani scheme which provides guaranteed loans of R10,000 to R50,000 to startups, and existing manufacturing, retail and service SMMEs.
The program is designed to respond to the fact that commercial banks find that loans below
R50 000 are very costly to administer. Moreover there is the Danida Business to Business
Program which is a program delivered by Khula, supported by Denmark, and is intended to
develop and strengthen business opportunities and create jobs for eligible entrepreneurs
from previously disadvantaged communities. The program addresses expenses connected
with the transfer of management, business skills and technology from Danish to South
African companies and it provides access to financing for the SA company. A 100% Khula
Guarantee to an RFI can be considered for loans aimed exclusively at the procurement of
shares, purchasing of machinery and capital equipment essential for the business to succeed.
There exists also the Khula Equity Fund which is an equity program designed to provide
funding to SMMEs that need to expand their activities, enter into joint ventures, re-capitalize
the company, and those who want to buy out the existing shareholders. It is accessible to
viable companies with a net asset value of not less than R500,000 which can demonstrate an
adequate rate of return from the investment.
Moreover there is the Industrial Development Corporation (IDC) which is a self-financing
state-owned development finance institution which provides finance for different
manufacturing organizations that benefit M/SMEs and they represent 88% of its clients.
Finally, there is the Small and Medium Enterprise Development Program (SMEDP) which is
an incentive program delivered by DTI and designed to assist business start-up and
expansion. The Establishment Grant component of the program provides an investment
grant for two years on approved qualifying assets with the possibility of further assistance in
the third year depending on the ratio of payroll to total manufacturing cost. The grant is
33
calculated as a percentage of the investment made, with the percentage declining from a
maximum of 10% for the first R5 million of the investment to 1% over R75 million. This
incentive is also tax exempt. There are no specific tax treatments for M/SMEs in South
Africa. (IDRC, 2001)
5. Export Policies for M/SMEs:
A number of SMMEs in South Africa are engaged in exporting. The available data show that
14% of SMMEs are exporters. While export assistance for all sizes of business is led by
DTI’s Trade and Investment South Africa (TISA) division, there is a broad stakeholder
partnership which is addressing the development of SMMEs’ trade capacity in a holistic
manner. Moreover, TISA has a special program devoted to help M/SMEs in exporting.
There are no specific policies adopted to enhance exports of M/SMEs, however most of the
existing organizations try to address the needs of M/SMEs. For example, the Export
Marketing Assistance Services (EMIA) assists businesses with advice on regulatory issues,
dealing with the bureaucratic approval process, export readiness and referrals, capacitybuilding through product development, and the provision of an electronic trade
documentation system. It also assists with logistics by helping shipper-supplier relationshipbuilding, focused infrastructure development, streamlining supply chains and encouraging
collaboration. It has a call centre or help desk which is the first point of contact for
exporters and prospective exporters to assist with registration, general information on export
markets, access to research services, referrals to other support services, advice on how to
prepare for trade missions, etc. EMIA also provides financial assistance to exporters
through its Export Marketing and Investment Assistance Schemes to offset a portion of
their costs in developing new export markets through primary export market research, trade
missions and exhibitions. The activities of EMIA should help M/SMEs as they are the ones
that are in need of such type of assistance.
There exists only one specific activity specially designed to address the needs of M/SMEs
who are exporters at the same time. This is the Trade and Investment Development
Program (TIDP) which is funded by the European Union and delivered by Ntsika and is
designed to help small businesses in South Africa to develop their ability to compete in the
international marketplace. The program is divided into three tracks: Track One provides
training courses and seminars to help businesses which need advice and training pertaining
to competing in the international market place; Track Two provides technical assistance to
selected businesses on product and market development issues to enable the firm to
maximize its export opportunities; Track Three is an international partnership program
which utilizes networking events to facilitate partnerships and business opportunities
between South African SMME's and their European Union counterparts.
Tables 2 and 3 provide a summary of the main policies adopted in the countries reviewed.
34
Table 2: Assessment of M/SMEs development and export-support policies in selected countries
M/SMEs characteristics
Canada
China
India
UK
Jordan
Differentiated by
sector, the
number of fulltime employees,
the value of
annual turnover,
and total gross
asset value.
• No single
definition for
small businesses.
Definition
Those employing less than
100 employees in the
manufacturing sector and
less than 50 employees in
the services sector. The
medium-sized firms
employ more than 100 up
to 500 employees
Based on
production capacity
and original value
of fixed assets
reflected in the
output of goods .In
practice, all
enterprises other
than those
identified as large
enterprises by the
state.
• The Small
Business Service
(SBS) define
M/SMEs
according to the
number of
employees:
No specific
definitions since it
has different
meanings for
different agencies
1. Micro
businesses: 0-9
employees.
2. Small
businesses: 1 049 employees.
3. Medium-sized
businesses:
50-249
employees.
4. Large
businesses: 250+
employees.
South Africa
there is no unique
and official
definition of
M/SMEs since it
has different
meanings for
different agencies
Employment
criteria for the
manufacturing,
construction and
utility sectors are:
1. Micro (5).
2. Very small
(20).
3. Small (50).
4. Medium (200).
In the service
industries, these
employment
criteria are:
1. Micro (5).
2. Very small
(10).
3. Small (50).
4. Medium (100).
35
M/SMEs characteristics
Canada
• No single
organization
devoted to
undertake policies
related to M/SMEs.
M/SMEs-support
institutions
• .There exists a
number of NGOs
who help and
support M/SMEs
by providing
financial and
management
support for viable
small business
development
China
India
• No special
governmental
organization
responsible for
M/SMEs.
• There exists a
special
ministry for
M/SMEs. The
Ministry of
Small Scale
Industries and
Agro and Rural
Industries (SSI
& ARI).
• The National
Reform
Development
Commission,
Enterprise
Reform and
SME
Departments
are responsible
for the
development of
the SME sector
in China.
• There are a
number of
NGOs as All
China
Women’s
Federation
(ACWF)
• There are
several
regional
activities
devoted to the
• There is also
the Small
Industries
Development
Organization
(SIDO) which
assists the
Ministry in the
formulation
and
implementation
of policies and
programs for
the promotion
and
development of
the Small Scale
Sector.
• India is
characterized
by having a
UK
• There is no
specific ministry
devoted for
M/SMEs
However,
M/SMEs fall
within the
responsibility of
the Department
of Trade and
Industry (DTI)
where the Small
Business Services
(SBS) was
established with a
comprehensive
span of
responsibilities
including
financing,
business and
information
support services,
research and
communications,
regulatory
burden, and local
delivery
networks.
However, its role
is advisory
•
Jordan
• There are no
institutions
with the
specific and
unique aim of
assisting
M/SMEs. The
only exception
is the newlyestablished
Department for
SME
development
within the
Ministry of
Industry and
Trade
South Africa
• Manufacturing
Advisory Centers
(MAC) is a
program intended
to provide high
quality advisory
and information
services to new
and existing
SMMEs, to assist
in improving
their quality,
competitiveness
and productivity.
•
NGOs and
other
organizatio
ns as the
chambers
of
commerce
take in
considerati
on the
representati
on of
M/SMEs.
there are
36
M/SMEs characteristics
Canada
China
India
development of
M/SMEs
coordinated by
provincial and
municipal
affiliates of
MOFCOM.
web of
institutions
which are
established to
develop
M/SMEs.
UK
•
•
There are
number of
regional
organizations
for M/SMEs
support
There are a
number of
training
institutions
spread
regionally that
help in
upgrading the
skills of
M/SMEs.
South Africa
special services
tailored for
specific
M/SMEs
which include:
o
•
Jordan
The Smart
Scheme
o Innovation &
Technology
Counselors
(ITCs)
o Focus Technical
program
o
Business
Incubators
International
donor
organizations
participate
heavily with
the government
institutions to
help upgrade
37
M/SMEs characteristics
Canada
China
India
UK
Jordan
South Africa
the M/SMEs
• There are no
preferential rate
loans provided for
M/SMEs.
• There are specific
banks and
institutions which
devote their efforts
to support
M/SMEs.
Direct
Policies
Financing
• There are several
tax exemption
schemes for
M/SMEs.
• Canada Small
Business Financing
Act (CSBFA)
provides
guarantees to
chartered banks,
credit unions and
many other
qualified private
sector financial
institutions to assist
M/SMEs in making
term loans to small
• No special
programs or
activities
designed by
banks have
been set to
meet the
needs of
M/SMEs.
• There are
several
pilot credit
guarantee
programs.
• There are
several
financial
schemes
that aim at
serving the
M/SMEs.
The main
financial
institution
is the Small
Industries
Developme
nt Bank of
India
(SIDBI)
which
serves as
the
principal
financial
institution
for
promotion,
financing
and
developme
nt of Indian
industry
and
• The UK
government
considers
favorable tax
treatment for
M/SMEs.
• Small businesses
in the UK benefit
from preferential
corporate taxes
• The Business
Link (BL)
program is
intended to
provide single
points of easy
access for
M/SMEs to an
integrated range
of business
support services
• No special
programs or
activities
designed by
banks have
been set to
meet the needs
of M/SMEs
• There are no
specific tax
treatment for
M/SMEs in
South Africa
• The majority of
SMMEs finance
their initial
capital
requirements
through private
savings from
individuals and
family as well as
retained earnings.
A smaller
proportion of
SMMEs rely on
formal credit
such as bank
loans.
• The Small and
Medium
Enterprise
Development
Program
(SMEDP) which
is an incentive
38
M/SMEs characteristics
Canada
China
businesses.
•
M/SMEs’
Export
Policies
There are no
specific
policies
devoted to
the
enhancemen
t of
M/SMEs
exports
India
UK
Jordan
South Africa
program
delivered by DTI
and designed to
assist business
start-up and
expansion.
services in
the small
scale sector
where
individual
business
investment
in plant and
machinery
does not
exceed
Rs.10
million.
• There are
no special
export
policies
devoted for
the
promotion
of
M/SMEs.
• The
government
has
established
a Software
Technology
Park
Complex to
provide
infrastructu
re facilities
for small
scale
software
exporting
businesses.
This helps
the startup
and
•
Trade Partners
UK is the main
export
promotion
agency in the
U.K.
• There is a
special Exports
Credit package
for M/SMEs
targeting
export markets
outside
Western
Europe and
North America.
There are no
special export
policies devoted
for the promotion
of M/SMEs.
•
There are no
specific
policies
adopted to
enhance
exports of
M/SMEs,
however
most of the
existing
organizations
try to address
the needs of
M/SMEs.
•
There exists
only one
specific
activity
39
M/SMEs characteristics
Canada
China
India
developme
nt of small
scale
businesses
focused on
exporting
100% of
their
software
products.
UK
Jordan
South Africa
specially
designed to
address the
needs of
M/SMEs
who are
exporters at
the same
time. This is
the Trade
and
Investment
Development
Program
(TIDP)
which is
funded by
the European
Union and
delivered by
Ntsika and is
designed to
help small
businesses in
South Africa
to develop
their ability
to compete
in the
international
marketplace.
40
M/SMEs characteristics
Canada
China
India
UK
•
•
Indirect
Policies
Financing
Financial policies include
the provision of small
business owners with a tax
relief where they receive a
tax exemption on the first
$500,000 of capital gains
on the sale of their
business.
the
People’s
Bank of
China
(PBOC)
requires the
commercial
banks to
establish
special
department
s to lend to
small
businesses
•
There are
several
NGOs that
play an
important
role in
improving
the finance
conditions
for
M/SMEs.
• The Margin
Money Scheme
operated by
Khadi and
• there exist special
Village
schemes designed
Industries
for M/SMEs
Commission
finance which
(KVIC) and
include:
delivered
o Small Firms
through
Loan Guarantee
selected
Scheme
national
o The Corporate
commercial
Venturing
banks and
Scheme (CVS)
regional rural
banks, provides o Regional venture
capital scheme
a minimum of
(RVCF)
25% of the
project cost for
financing
viable village
industry
projects
•
Jordan
South Africa
The Jordan
Loan
Guarantee
Corporation
’s (JLGC)
objective is
to provide
guarantees
to
Jordanian
financial
institutions
that extend
working
capital and
fixed asset
loans to
Jordanian
companies
mainly
M/SMEs.
The Industrial
Development
Corporation (IDC)
which is a selffinancing stateowned
development
finance institution
provides finance
for different
manufacturing
organizations
which benefit
M/SMEs which
represent 88% of
its clients.
JLGC
extends its
guarantee
to cover
75% of the
outstanding
balance of
loans
granted by
the bank
plus
accrued
interest.
41
M/SMEs characteristics
Canada
•
M/SMEs’
Export
Policies
There are
several
organizations,
institutions,
and systems
devoted for the
enhancement
of Canadian
exports in
general,
nevertheless,
none devote
special or
dedicated
services for
M/SMEs.
• The Export
Development
Corporation (EDC)
which is whollyowned by the
government is
devoted
exclusively to
providing trade
finance services to
support Canadian
exporters and
investors in
international
markets.
China
• Special
exports
credit
package is
provided
for
exporting
firms
comprising
many of
China’s
rural
M/SMEs.
• the
government
is providing
high-tech
M/SMEs
enterprises
with export
credit
guarantees
and export
insurance
India
• The government
provides export
assistance by
organizing
Exhibitions, Trade
Fairs and BuyerSeller meetings in
foreign countries,
assisting small
scale units to get
samples from
foreign buyers to
develop counter
samples, and
provides preshipment and postshipment credit
facilities
•
To
coordinate
ongoing
developments
with regard to
the WTO, the
Office of DC
(SSI) has
established a
cell to
disseminate
information to
M/SMEs
regarding
recent WTO
developments.
This cell also
organizes WTO
Sensitization
and Seminars,
Workshops.
UK
Jordan
• Businesses
having less
than 500
employees are
eligible for
grants of up
to 50% to
cover export
development
expenditures
• There are
Export
Promoters
(EPs) who are
business
executives
who help
M/SMEs and
larger
companies to
win business
around the
world.
• The Export
Explorer
component is
an integrated
package of
help and
advice that
enables
M/SMEs to
experience
new and
accessible
export
markets at
minimal cost
•
JLGC
remains the
main actor
in the field
of export
promotion
and support
• JLGC has
developed 2
Export Credit
Guarantee
Program
which are:
• Insurance
Product One:
Pre-shipment
Loan
Guarantee
Insurance
Product
•
South Africa
•
the Export
Marketing
Assistance Services
(EMIA) assists
businesses with
advice on
regulatory issues,
dealing with the
bureaucratic
approval process,
export readiness
and referrals along
with other services
Two: Postshipment Loan
Guarantee
42
M/SMEs characteristics
Rules and Regulations
Canada
There are several rules and
regulations used to
enhance M/SMEs in
general
China
There is a lack of
broadly-based
legislative,
regulatory,
program and
service measures to
support enterprise
creation and
development.
nevertheless,
several laws are
being passed
aiming to develop
M/SMEs (e.g.
SME Promotion
Law)
India
UK
Jordan
South Africa
There are no
specific rules and
regulations devoted
to help M/SMEs in
India
There do not appear
to be any set-aside or
quota polices for
small business in the
area of general
government
procurement.
However, Small
Business Services
(SBS) does assist
small businesses by
providing
information,
guidance and
facilitation in
identifying and
bidding on
government
procurement
opportunities.
There are no
specific rules and
regulations devoted
to help M/SMEs in
Jordan
There are no
special laws and
regulations devoted
for M/SMEs in
South Africa.
43
Table 3: A Summary of the Assessment of M/SMEs development and export-support policies in selected countries
M/SMEs characteristics
Canada
Does it have a specific definition?
;
Does it have a special M/SMEssupport institution(s)?
:
China
India
UK
Jordan
South Africa
;
:
:
:
;
;
;
:
;
:
44
M/SMEs characteristics
Direct Policies
Indirect Policies
Canada
Are there any
exportenhancement
policies or
programs for
M/SMEs ?
Are there any
preferential
financing
policies or
programs
regarding
M/SMEs?
China
India
UK
Jordan
South Africa
;
:
;
:
;
(for small
scale
software
exporting
businesses
only)
;
;
:
:
;
;
;
45
M/SMEs characteristics
Are there any rules and regulations
devoted to enhance M/SMEs?
Canada
China
;
;
India
UK
:
Jordan
:
South Africa
:
:
46
Experiences from Other Countries:
Other countries enhance exports of M/SMEs using different mechanisms. For example, in
Korea, the Korean Export Insurance Corporation (KEIC) has a special interest in
encouraging SME export activities through an article of special treatment for small firms
contained in the Korean Export-Insurance Act (De Silva,2003) The Export- Import Bank of
Korea (K-EXIM) established the SME Export Credit Group in 2002. K-EXIM introduced
generous provisions for export-related loans for smaller firms in 2000. The minimum
lending and transaction amount limits were eased or lifted for direct loans supporting the
export transactions of M/SMEs while the scope of items eligible was extended (OECD,
2004).
Similarly, in the United States, support for M/SMEs stems from the legislative mandate of the
Export-Import Bank (Eximbank). Short-term (up to 180 days) insurance is available from
the US Eximbank, which assumes 95% of the commercial risk and 100% of the political risk
involved in extending credit to the exporter’s overseas customers. This is available to
companies with an average annual export credit sales volume of less than USD 3 million for
the two years prior to application and typically supports spare parts, raw materials and
consumer goods (OECD, 2004).
The US Eximbank leverages its resources by partnering with city and state organizations,
trade associations, lenders and others with knowledge of the local exporting community,
which help the Eximbank to reach many small businesses unaware of the services available
to them. Under the Priority Lending Program (PLP), lenders who have made at least two
transactions under the Working Capital Guarantee Program may submit a complete write-up
of the exporter and transaction and be given a 10-day turnaround on their application
(APEC,2003). The Delegated Authority Program (DA) allows qualified lenders to commit an
Eximbank guarantee without further analysis (OECD, 2004). In addition, foreign market entry
costs insurance is available for domestic manufacturing, services and trading companies in
operation for not less than three years with annual net income from sales not exceeding the
equivalent of USD 50 million ( OECD,2003) The mandate of the US Eximbank requires
that 10% of its budget must be devoted to supporting SME export credits. The International
Trade Administration (ITA) has programs to reach and assist the SME exporter. Some of its
programs include: (1) Informational Services, it gives free information and advice on
international trade from the Trade Information Center (TIC). (2) Counseling at domestic
trade shows and in the TIC. (3) Seminars and workshops on specific industries, markets,
regions and on the variety of tools such as creative export financing. (4) Export Finance
Matchmaker, an interactive database that matches exporters with potential sources of
financing. (5) Statistics for SME Exporters. (6) Websites and 301 Alert service e-mails early
warnings to M/SMEs that register to help them react to potential increases in U.S. import
duties in response to unfair trade practices (ITA, 2004).
Moreover, US. Business Information Offices also helps U.S. SME exporters through Market
Development Cooperator Program, which is a matching awards program that builds public-private
partnerships to encourage SME exports; and Export Trade Certificate of Review, which is a safe
harbor for M/SMEs to collaborate and gain the same advantages available to large-sized
firms without fear of U.S. antitrust laws; and Buy USA. com, which is a way for M/SMEs to
attract new export business (ITA, 2004).
47
In Japan, the Japan Bank for International Cooperation (JBIC) has set up an Advisory and
Consulting Office for M/SMEs which offers advisory and consulting services to support small
firms (OECD, 2004). Nippon Export and Investment Insurance (NEXI) of Japan provides
information on export credits to small firms in the context of international investment
seminars targeted to smaller enterprises. JBIC of Japan offers advisory and consulting
services and organizes lectures, seminars, study meetings and various forums to support
M/SMEs (OECD, 2003).
In Mexico, Mexico Bancomext provides M/SMEs with trade-related information, matchmaking
services, training and valuation services. Mexico allocated USD 3.5 million for SME export
credits in 2001 (MOFT, 2004). Mexico has recently introduced the Small Business Export
Credit Guarantee (GLIEX) (OECD, 2004).
In Turkey, the Turk EXIM bank: is a state-owned bank which provides M/SMEs with short
term working capital finance and is studying a new credit program exclusively for M/SMEs
(MOFT, 2004). It plans in future to emphasize long-term schemes (especially non-funding
facilities i.e. guarantee and insurance) leaving short-term finance for commercial banks.
In addition there exists the Sectoral Foreign Trade Companies Credit Program which assists small
export trading companies in their export financing needs, including subsidized interest rates.
Turkey's Pre-Shipment Export Credit Program specifies that intermediary commercial banks
must disburse at least 30% of their credit limit to exporters with up to 200 employees
(OECD, 2000). The main Bancomext trade financing instruments that are relevant to
M/SMEs are (a) ‘Equipment Financing’ up-to US$250,000, and (b) ‘Short term Financing
for Small Exporters’ up-to US$50,000 -can be secured by export receivables. Bancomext also
offers international project financing, syndicated credits, evaluation services, and other
various types of financing instruments (MOFT, 2004). In Italy, Italy SACE (Export
Guarantees) is a public agency that provides Italian M/SMEs with export guarantees and
insurance, either directly or through intermediary banks. It covers risks related to supplier
credits, buyer credits, production, and payments. It insures companies for repayment of
bonds (bid bonds on tenders) as well as a variety of other political risks associated with
operations in a foreign country (MOFT, 2004).
In Tunisia , there exists the export credit insurance scheme which was set up in 1984 as part
of the government’s export promotion strategy. The scheme is intended to guarantee the
successful outcome of export or export-related transactions by assuming responsibility for
losses arising from commercial or political risk, disasters or any other risk inherent in such
transactions. The main schemes administered by the Compagnie Tunisienne pour
I’assurance du commerce exterieur, COTUNACE, which offers services and products
tailored to the needs of exporters seeking to strengthen their position in traditional markets,
capture new markets or facilitate export-related transactions. The first task of COTUNACE
is, however, to prevent the SME exporter from even starting to do business with a dubious
client. To do this, it uses a risk selection process based on a credit check of the exporter’s
clients using a database on export counterparts that is constantly enhanced and updated. The
insurance coverage for non-payment by the foreign buyer is designed to reassure the
exporter that commercial transactions will not end in failure. If non –payment is due to one
of the risks covered, COTUNACE assumes the ensuing financial responsibility and
compensates the exporter for 85 per cent of the commercial risk and 95 per cent of the non48
commercial risk for small exporters (UNCTAD, 2001). The scheme also covers, for
example, losses arising from non-performance of an export contract, the loss of company
equipment being used to perform a service contract abroad, and losses arising from a
security company being called in. COTUNACE has a wide range of guarantees that can be
of benefit to banks that are financing M/SMEs during the different phases of their export
process. The products are: Short term coverage which includes “pre-shipment credit
insurance and financing”, “insurance against non-performance of a contract” and “export
pre-financing loans guarantee”. Long term coverage which includes “bond insurance” and
“post-shipment credit insurance and financing”. COTUNACE aims to offer these products
to M/SMEs at lower cost to lessen the strain on their budgets so as to allow them to be
competitive in the international market.
In Morocco, recently, and for the first time, political and economic actors are working
together in order to formulate a coherent and unique set of policies in favor of the SME
sector. The objectives of the new set of policies are: to stimulate the creation of new
enterprises; to help the development of the existing ones and; to reduce the mortality rate of
M/SMEs.
The objective for year 2010 is to create 120.000 new M/SMEs that should correspond to 2.4
million new jobs generated. The new strategy in favor of the SME sector is structured
around four main axes: a) general favorable environment; b) performing support system; c)
flexible and suitable financing system; and d) reinforcement of the competitiveness elements.
Three main instruments have been identified to implement this set of policies , namely:
A National Agency for the Promotion of M/SMEs, in charge of mobilizing, coordinating
and evaluating all the actions involved. The agency has representatives from the government,
the business community, financial institutions and, the related NGOs; The National Agency
Council provides advice on all issues related to M/SMEs and evaluates the general policy
framework. The associations working for the promotion and support of M/SMEs are
reinforced and provided with adequate means and juridical status, in order to constitute a
partner for the government in the promotion of the sector.
The institutional framework supporting the role of M/SMEs in export is characterized by a
multiplicity of actors and interventions such as :
The “Caisse Centrale de Garantie”. (CCG).
It is a public entity, created in 1949, but more recently reformed under law. N. 47 – 59. It
is administered by a Board of Directors, in which the private sector is represented by the
GBPM (Groupment Professionnel des Banques du Maroc) and the Federation of Chambers
of Commerce. A cooperation agreement has been signed between the CCG and the
Moroccan banks in 1997. The CCG's main mission is a guarantee scheme for exporters, with
the objective of helping Moroccan enterprises to develop their export performance. In this
case the CCG does not foresee a different procedure and treatment for M/SMEs and large
firms.
The following conditions are applied to the guarantee scheme:
1) Up to 50% of the guarantee is covered by the CCG, while the remainder is
covered by the banks.
2) A fixed commission is charged to all enterprises for the examination of the
project.
49
3) A 0.6% commission is charged yearly to all enterprises.
4) 15 working days are fixed as the deadline for the CCG to process the request
for export guarantee.
(2) Centre Marocain de Promotion des Exportations (CMPE)
It is a public institution created in 1980 by the Ministry of Industry, Commerce and
Handicrafts, with the specific mandate of promoting Moroccan exports and identifying
potential new markets. A special attention is given in this sense to the SME sector, that
often lacks information and skills to penetrate foreign markets and needs support to gain
visibility at the international level.
The CMPE is based in Casablanca and has no regional or international antennae; it is
organized into specific departments.
The activities of the CMPE have been organized into four main axes of intervention,
after the 1990-91 reform of the institution.
The role of CMPE includes the following activities:
1) Dissemination of information on international markets and on the Moroccan
production system, including trade regulations and opportunities.
2) Preparation of monographs on targeted markets, sectoral studies and product
tests on foreign markets.
3) Organization of business missions to international and specialized exhibitions,
site visits for foreign buyers and manufacturers and specific training
programs for Moroccan entrepreneurs.
4) Provision of assistance for the identification of foreign markets, for the
establishment of business contacts between Moroccan exporters and foreign
buyers and the adaptation of products of international standards.
The CMPE established the Trade Point Casablanca in December 1996, under the
direction of the Ministry of Industry, as an additional tool to serve local and foreign traders .
The basic aims of the Trade Point are to raise trade efficiency, to lower business costs, to
connect enterprises to the global trade information system and to expand the participation
of M/SMEs to international trade, Its services include:
•
•
•
•
•
•
•
ETO (Electronic Trading Opportunity Service).
Business information research and development.
Online marketing.
Electronic Catalogue.
Internet Service.
Free site for companies in the Web site.
Co-operation with global trade Point Network.
Lessons learned from other Countries Experiences:
The experience of different countries in dealing with the promotion of exports of M/SMEs
is widely diversified. There is no blue print that is adopted in all countries. Moreover, despite
the fact that in many of the countries studied M/SMEs showed great success, the methods,
policies, and regulations were never common among those countries.
50
Some countries believed firmly in providing direct support for M/SMEs where other had
general institutions which benefited M/SMEs indirectly. Some countries adopted non
distortionary free market policies to enhance M/SMEs while others intentionally adopted
distortionary policies as subsidized loans and interest rates. In most of the cases there was no
special ministry devoted for M/SMEs (with the exception of India), however the
coordination of efforts was in all the cases led by a department that followed one of the
ministries.
The main conclusion of the international review is that success of M/SMEs in the countries
studied was a result of a mixture of policies, programs and regulations that helped to
enhance the role of M/SMEs in general with no specific focus for export policies designed
for M/SMEs. Whenever special efforts or activities were devoted for M/SMEs, they were
mainly concentrated in two main areas: 1) Provision of finance which took different forms
starting from guaranteed schemes for exports to subsidized interest rates and specific loans
schemes designed specifically for M/SMEs, and 2) Making information available whether on
business opportunities abroad or on the required steps of how to export. In the majority of
the cases studied, the export policies adopted were rather general and M/SMEs benefited
from such general policies (with the exception of the UK and some other few countries
which designed special initiatives to enhance exports of M/SMEs as South Korea, Turkey,
and Morocco).
Finally, it is worth noting that the success of M/SMEs in the exporting activities cannot be
solely confined to adopting a certain export strategy that focus on exporting per se. Rather
for the success of exporting activities of M/SMEs a web of successful well designed policies
and regulations that deal with different aspects of M/SMEs development including finance
and institutional setup should be put in place. The finance of M/SMEs has been the major
issue where the different countries concentrated upon to enhance their role in general and in
exporting in specific. Finally, it should be noted that a common theme that has been
identified in all countries is the coordination between the government and the community
participants and NGOs to enhance the role of M/SMEs. This trend is increasing in all
countries and decentralization efforts are taking place to handle the responsibility of
enhancing M/SMEs to non governmental organizations and community based efforts.
Chapter Two: Literature Review and Current Status of
M/SMEs in Egypt
Introduction
After reviewing the international experience of export promotion of M/SMEs, we
devote this chapter to discussing the characteristics of the Egyptian M/SMEs and
undertaking a literature review confined to the Egyptian case. The intention in the beginning
was to devote separate chapters, one for the literature review and one for the current status
of M/SMEs in Egypt. However, due to the relatively new focused attention on M/SMEs in
Egypt, the literature and data available have been scarce. Hence, we merged the two chapters
in this one which combines the two dimensions, literature review and description of the
current status. In many cases, we observe a large number of similarities between the status of
M/SMEs in Egypt when compared to other countries. We divide this chapter into several
sections dealing with the main features of M/SMEs in Egypt (contribution to the economy,
51
size, etc.), exogenous factors affecting the performance of M/SMEs and endogenous
factors. We pinpoint the major policies adopted by the Government of Egypt (GOE) and
other institutions in dealing with M/SMEs and identify the major problems facing M/SMEs
Main Features of M/SMEs in Egypt with Special Focus on Exports Related
Problems
Contribution to the Economy:
The number of enterprises in Egypt classified as M/SMEs is huge. According to the latest
available establishment census which was undertaken in the mid 1990s, M/SMEs account
for about 99% of the nonagricultural private enterprises, where the bulk of enterprises is
concentrated in the micro class (see table 4.). In terms of contribution to value added,
M/SMEs provide 80% of the total value added generated by the private sector. The
contribution of M/SMEs to employment reaches 66% of the total labor force and 75% of
the total non agricultural labor force. Despite the large size of M/SMEs in terms of number
of enterprises and contribution to employment, their contribution to GDP and exports is
minimal reaching less than 1% of GDP and less than 0.5% of manufactured exports
(Lerches, 2001; George and Pinel, 2001).
Structural Features:
1. The Missing Middle: Egypt is one of the countries characterized by the missing middle
syndrome, at least in terms of mid-size enterprises employment. Egyptian manufacturing
enterprises employing 10 – 499 employees have a significantly low share of employment.
75% of employment generated by enterprises with either less than 10 workers (95.4% of
establishments) or more than 500 (0.1% of establishments), with only 25% contributed by
the small (4.4% percent of establishments accounting for 15% of employment) and middle
range (0.3% of establishments employing 10%) (see Table 4.) (CAPMAS, 1996).
Table 4: Number of M/M/SMEs operating in Non-Agricultural economic activities
Item
Total Number of M/SMEs Percent of Private
Sector
Micro (1-4 employees)
Small (5-14 employees)
Medium (15-49 employees)
Large (more than 50 employees)
Total
92.6
6.12
0.91
0.38
100.00
Source: CAPMAS’1996 Establishments Census
Size N
2. Skewed Size Structure: the size structure of enterprises (in terms of number of enterprises) in
Egypt is markedly skewed towards micro enterprises as shown in Table 4.
3. Predominant low capitalization levels: The skewed pattern towards smallness is reflected in the
capitalization patterns of the industrial sector in Egypt. 87% of the total investments made
are below L.E. 2 million in value. This points to the predominance of low capitalization
levels (and hence low technologies) in Egyptian industry. M/SMEs generally utilize a
minimum of capital. A 1999 study showed the average enterprise had a capital of around
52
L.E. 60,000. A more recent study of non-metropolitan Egyptian M/SMEs further revealed
the average total capital (initial capital plus additional capital investments) to be L.E. 45,000
in urban non-metropolitan areas, with rural establishments having one-third of that amount.
(MOF, 2004).
4. Low Contribution to Exports: M/SMEs are generally underperforming when it comes to
exporting. The vast majority of M/SMEs did not even attempt to export. Most of the
M/SMEs are family businesses that were successfully able to expand. Most of the firms are
focusing on the national market, either because of anti export bias or due to the lack of
means and knowledge on exporting (Dijk, M. P. Van, 2001). According to a recent report of
the Industry and Energy Committee of the People's Assembly, Egyptian industry exports
only 6% of its production. The share of M/SMEs in manufactured exports does not exceed
0.5%. (MOFT, 2004). This implies that contribution of M/M/SMEs in Egyptian exports
does not exceed 4%.
5. High Geographical Concentration: M/SMEs are not evenly distributed among Egypt and have
different characteristics. Rural enterprises are generally smaller and have a lower average
value of physical assets than do urban enterprises. There is a relatively high concentration of
M/SMEs in the North. Cairo, Damietta and Sharkia regions have the greatest formation
rates of M/SMEs in Egypt. The high formation ratios in such governorates stems from the
availability of well developed infrastructure (Cairo), and the prevalence of a historical
conducive environment for the growth of a particular industry (Damietta and Sharkia). On
the other hand, governorates like Suez and South Sinai have the lowest formation rates. Such
low formation rates either have to do with the presence of large establishments (Suez) which
absorb a lot of workers, or the dependence on specific service activity where the room for
undertaking manufacturing activities is either not available or not encouraging (South Sinai).
Constraints Facing M/SMEs that affect their Performance:
The performance of the M/SME sector is weak due to a large number of constraints which
affect negatively their competitiveness. Surveys and studies of private sector perceptions
about the business environment in Egypt reveal that there are a number of constraints which
limit the ability of private sector to grow, and adversely affect their efficiency and
competitiveness, in spite of the significant steps taken to improve the business environment
in recent years (Kheir-El-Din, 2003) (People' Assembly, 2003). According to the Egyptian
Center of Economic Studies (ECES) survey2, institutional constraints are more problematic
than economic obstacles to private sector development in Egypt. Small firms are affected
more severely than large enterprises by the institutional constraints. (Fawzy, 1998).
A World Bank study (1992) identified three sets of constraints facing the export sector. The
three sets were classified into those related to penetrating the foreign markets, those related
to the regulatory framework and finally those dealing with supporting services.
Regarding the first set of constraints, dealing with the penetration of foreign markets, they
included difficulties in accessing markets, keeping track of consumer trends, achieving the
needed high standards for products and packaging and identifying business opportunities
2
The survey included 154 private firms.
53
abroad. The second set of constraints, related to the regulatory framework, identified
problems related to administration of the duty drawback system, sales tax refund system,
costs of freight insurance and insurance services in general, customs procedures investigating
the sanitary and phyto-sanitary measures of exports and finally the non tariff barriers
affecting the importing of inputs. The third set of constraints dealt mainly with services that
exporters heavily depend on as transportation, port and maritime services (World Bank,
1994)
Fawzy’s study integrated difficulties in exporting as a constraint in its overall evaluation of
constraints affecting the business community in Egypt. The constraints to exports ranked as
follows, (1) Marketing and distribution companies. (2) Tariffs on imported inputs. (3)
Drawback and temporary admission system. (4) Export procedures. (5) Absence of export
credit. (6) Insurance services. (Fawzy, 1998).
Ghoneim’s study divided the constraints facing Egyptian exports into two main groups. The
first group was impediments facing export promotion agencies, these impediments ranked as
follows: (1) Bureaucracy, (2) Absence of technical staff, (3) Ability to reflect business needs,
(4) Coordination with other agencies in the same field, (5) Funding, (6) Definition of their
role. The second was government policies concerning exports which included: (1) Unofficial
payments to customs officials, (2) Customs procedures related to imported inputs, (3) Tariff
levels on the imported inputs, (4) Laws and regulations concerning imports, (5) Drawback
mechanism , (6) Laws and regulations concerning exports, (7) Customs procedures related to
exports (Ghoneim, 2000).
With increased economic liberalization, it was expected that M/SMEs were be unable to
stand the competition against the imported products in the local market. Based on the
review of the Egyptian M/SMEs available literature, we can classify the constraints that
affect M/SMEs performance negatively into external factors that are outside of the
enterprise’s control (exogenous factors) including globalization and free trade,
macroeconomic factors, the institutional environment and the government policies and
regulations, and factors that are highly subject to the enterprise control (endogenous factors).
The latter include all related aspects of production, technology, finance and management
that directly affect the functioning and the decision making process of the firm.
We will limit our review to the factors influencing competitiveness and the export potential
of M/ SMEs in Egypt. The factors mentioned are in line with the constraints hindering
M/SMEs’ competitiveness in Egypt as pointed out by MOF in its "Enhancing
Competitiveness for SMEs: General Framework & Action Plan" published in 2004.
First: Exogenous Factors:
1- Globalization & Free Trade
The internationalization of markets for sales and purchasing influences every
business. In the globalization arena, the world became a nexus of production and supply
chains characterized by increased specialization and efficiency. International production
undertaken by Transnational Corporations now amounts to more than global trade in goods
and services. Moreover, the world witnessed a growth in trade of unprecedented levels;
faster than world production, and came to account for a steadily increasing part of income to
many industries and countries. Meanwhile, the speed of technological progress and
54
improvements in communications allowed technologies to mature faster and to be
transmitted more quickly across countries (OECD, 2000a).
Michael Porter argues that the four most important exogenous forces that affect the
performance of any enterprise can be divided into four categories: (1) Regulations; (2)
Macroeconomic environment; (3) Consumer preferences and; (4) Technology. Globalization
affects all the four forces in varying degrees, which influences the world trading
environment, which in turn have had great impact on M/SMEs (Bhardwaj, 2003). Therefore,
with increased globalization, accelerated technical change and the growing demand for
higher quality modern products, many traditional M/SMEs, in developing countries face
serious problems of upgrading their capabilities. It is a fact that the continuous liberalization
of markets and their consequent globalization imply that firms from all types, face more and
stiffer competition, both at the local and at the international level. Even modern M/SMEs
in developed countries face very difficult competitive challenges in the emerging setting
(Galdo and Pettersson, 2002).
Egyptian M/SMEs face such “new” threats of globalization. Their problems are exacerbated
by the lack of knowledge, and low capitalization.
2- Macroeconomic Environment
A- Scattered, uncoordinated efforts of M/SMEs
In spite of the government’s repeated emphasis on the importance of the M/SMEs
(MOF, 2004), all policy efforts so far have been scattered, isolated and are often conflicting
with a minimal impact on the M/SMEs as well as on the economic growth of the country
(UNDP, 2003). This served to minimize the benefits that accrued to the Egyptian economy
and its M/SMEs, allowed for market distortions, and contributed to the M/SMEs' loss of
faith in similar development initiatives. One of the main factors contributing to this situation
is the absence of a coherent vision and a general policy framework for M/M/SMEs
development in Egypt that is officially adopted by the government and endorsed by the
various actors (MOFT, 2004), an issue that has been recently dealt with by the issuing of the
Small Enterprises Law in 2004 (Law no 141/2004). In fact the uncoordinated efforts were
dealt with before by allocating a certain percentage of government procurement to M/SMEs
(10%)3. This represents a step toward building such comprehensive vision which still
In August of 2002, the Government of Egypt decided to allocate 10% of its total budget to purchase
goods and services produced by M/SMEs (Prime Ministerial Decree). Together with this significant
achievement, a joint committee of Ministry of Finance and Ministry of Foreign Trade representatives was
appointed in early 2003 upon a decree by the Minister of Foreign Trade (#482 for 2003) with a view
towards ensuring execution of the Prime Ministerial decree, reviewing the tender law governing public
procurement, and mechanisms to incorporate procurement opportunities for M/SMEs.
After holding several meetings, the committee decided at the time that discussions would not be fruitful
without determining the definition for M/M/SMEs. The committee froze its activities until the issuance
of the then draft Small and Micro Enterprise Law.
Recently, after the developments within the Egyptian Government and most significantly, the issuance of
the Small and Micro Enterprise Law 141/2004 where one of the main articles called for the allocation of
at least 10% of government procurement to this sector.
The committee has since been reactivated with a decree from the Minister of Finance (#1431 for 2004)
whereby the committee has expanded to comprise the Ministry of Finance, Social Fund for Development,
Ministry of Foreign Trade & Industry and the Ministry of Investment. Together, members of this
committee meet on a monthly basis in order to discuss, debate and propose measures of reform within
the framework governing public procurement in Egypt in order to ensure access of M/SMEs to public
3
55
remains incomplete due to the absence of other supporting measures and policies needed to
enhance M/SMEs.
Moreover, donor programs focusing on M/SMEs activities have been described to
be numerous and not well coordinated. There is no mapping of prevailing programs in order
to avoid duplication of donor efforts. In addition, some donors allow lending of their funds
at terms and conditions below market level thereby contributing to both the distortion of
market mechanisms as well as fostering bank’s biasness against lending M/SMEs as they
have a better alternative. Final borrowers and NGOs entertaining such subsidized programs
continue to depend on donor funds thereby providing the donors no opportunity to exit
(UNDP, 2003). The lack of coordination was overcome in 2002 by establishing a special
committee for coordinating donors’ efforts regarding M/SMEs. The Donor Sub-Group
comprises donor agencies who work on programs related to M/SME development in Egypt.
A sub-group of the Donor Assistance Group (DAG), The M/SME Donor Sub-Group’s
main objectives are to share information and coordinate between donors in order to
optimize benefits for M/M/SMEs. Since its inception in June 2002, the Sub-Group has
been working on gradually crystallizing its mandate, objectives and activities. The SubGroup is focusing on improving communication, coordination and collaboration in order to
further develop its functions and activities. Currently, the Sub-Group is chaired by CIDA
and co-chaired by the UNDP. The group's objectives are to:
ƒ Mobilize synergy between donors to streamline objectives, avoid duplication of
efforts and optimize benefits for M/M/SMEs
ƒ Information sharing
ƒ Policy dialogue and a forum for coordination
ƒ Optimization of bilateral cooperation
B- Government policies, regulations and administrative systems4.
While regulatory constraints are common for all private businesses in Egypt, they weigh
more heavily against M/SMEs. This is primarily due to the latter’s lack of adequate human
capacity, sufficient institutional mass, as well as its limited ability to tap into the legal and
other pertinent consulting services that large firms can easily access.
Although legal and regulatory constraints vary according to the size and activity, it is a wellknown fact that M/SMEs face significant and numerous problems concerning
establishment and licensing, operation, taxes, registration, export and import permits, and
compliance with the different directives of various governmental entities.
The complexity of the regulatory system is further exacerbated by several other problems.
These include the overlapping jurisdictions across the institutions of government and local
government codes, the lack of coordination among government entities, the inconvenient
location of some of these entities, the low quality of the information available to the officials,
and inadequate filing and record- bookkeeping.
procurement contracts and that the legislative framework is adequately adhered to and reflective of the
significance of M/SMEs in the Egyptian economy.
4
On the institutional constraints see chapter related to the legal review.
56
M/SMEs have to deal with many governmental authorities, starting from obtaining the
various licenses and approvals required for establishing the enterprise from the competent
ministries according to the type of activity; obtaining the required capital; and then obtaining
the operation permission from the local administrative units, and securing funding (see
chapter four more elaboration on the steps required for M/SMEs to start their activities).
In addition, licensing and registration is regulated by more than 100 Presidential, Prime
Ministerial, or Ministerial decrees, let alone those decrees issued by governors on the local
level. It should be noted that this convoluted regulatory setup is managed by some twentyfour government entities (see chapter four). One alarming indicator regarding the cost of
licensing alone is the average key money cost of a licensed shop (payment usually made for
existing tenants to leave), which was estimated by a number of international organizations in
1995 to be 30% higher than in the case of an unlicensed shop. This 30% is in effect the
market value of the costs associated with just the workshop licensing process. Another
empirical study estimated the cost of entry to the legal system of business -according to
current regulations and laws- is around LE 8.300, and the time needed is 372 days involved
127 steps (ECES and ILD, 2004). Such inefficient rules and regulations are sufficient to
drive M/SMEs in the informal sector. The new cabinet which took charge of the
government in 2004 has been trying to streamline the procedures and lessen the
bureaucratic burden on M/SMEs, however it is still a long way to go.
Representatives from several ministries and governmental entities with often
overlapping domains are responsible for monitoring adherence to standards and identifying
violations. For example, ensuring compliance with health and safety laws, regulations and
decrees falls under the supervision of the ministries of Labor, Supply and Internal Trade,
Justice, Culture, Industry, Health, Insurance and Social Affairs, and Religious Trusts. Such
interruptions to the production process results in the waste of management time at the firm
level and constitutes a significant burden to the firm. ILD and ECES estimated the cost of
operation under the legal system to around LE 7.750, and the time needed is 1000 hours
involved 24 steps (ECES and ILD, 2004).
Moreover, M/SMEs face difficulties in gaining access to adequate inputs and export
markets. M/SMEs are particularly affected by over- regulation. All the previous regulation
and administration problems still exist even after the issuing the new Micro and Small
Enterprise Law 141/2004 (though a large number of such regulations are currently discussed
by the related governmental bodies to be relaxed). In a nutshell, the regulation and
administration systems in Egypt are complicated, inconsistent, and costly and prevent the
drawing of a clear-cut M/SMEs development strategy and the creation of a conducive
environment for the M/SMEs to sustainable growth, development and export.
C- Taxes & Inefficient Tax Administration
ƒ High tax rate even for low-income categories, the tax rate is 40% for industry and
32% for services (the draft of new tax law proposed to reduce the tax rate in Egypt
to 20% for both industry and services). Corporate tax rate in 1990s in Egypt was
40%, this rate was relatively high compared with 26.6% in Argentina, 25.6% in
Brazil, 32.5% I China, 36.3% in Israel, 37.5% in Morocco and 35.5% in Turkey (Lee,
Young, Gordon, Roger H. 2004).
57
ƒ
Inefficient system of tax collection leads to tax accumulation for as long as five years.
Thus the amounts accumulated are so high that the small enterprise is unable to pay
them, eventually declares bankruptcy and shuts down. Almost all entrepreneurs
agreed that the tax authority usually arbitrarily estimates taxes, regardless of whether
or not they keep regular books, thus resulting in overestimated taxes. The tax
inspectors, in order to avoid being accused of bribery, provide an estimate that is
dramatically higher than the entrepreneur actually deserves to pay. The sales tax is
another major source of complaints, since it has repercussion on the pricing of their
inputs, as well as their products (MOFT, 2004)5.
D- Weak linkage between large enterprises and M/SMEs:
Networking between M/SMEs and large enterprises is virtually non – existent or
takes place on an extremely limited level, thus depriving the M/SMEs of utilizing the
technical expertise that can be provided - and the market that can be opened up - by large
enterprises.
At the same time, it deprives the national economy of using the existing M/SMEs as
feeding industries for large enterprises, or as industries that are capable of replacing and
increasing number of imports. One of the characteristics of the Egyptian manufacturing
sector is low level of linkages existing between enterprises6. The data show that only 2% of
private industrial production is done in cooperation with other firms (MOFT, 2004).
According to the empirical literature, countries that have a solid base of M/SMEs
and active linkages with large enterprises have achieved high export growth rates.
Conversely, countries that have not been able to develop such a strong base with active
linkage relations have generally suffered from low export growth rates (El-Gamal et al, 2002).
In short, the absence of a competitive M/SMEs sector results in weak competitiveness of
the economy in general. The absence of a strong M/SMEs sector is a major structural
constraint when it comes to industrial competitiveness for several reasons. First, without a
strong M/SMEs supplier base, large manufacturing becomes inflexible and slow to respond
to market trends. Given the weakness of small and medium enterprises, large enterprises are
structurally forced to one or both of the following options, (1) Integrate operations in their
plants, thus preventing themselves from focusing their financial, technical and human
resources on their core competences. (2) Have an unduly high import content (currently
standing at an estimate of 40 to %60).
In addition, the absence of a strong M/SMEs sector reduces the competitive
pressure on larger enterprises, allowing them to remain inefficient. This, in conjunction with
decades of protectionism and import substitution policies resulted in promoting this
inefficiency and lack of competitiveness.
5 Sales tax apply for wholesalers that have annual total sales more than LE 150.000, it not applies for
wholesalers and retailers that have annual total sales less than LE 150.000. In terms of sales tax
collections, there are some privileges for small and micro retailers that have annual total sales less than LE
150.000, because it has been collected by the wholesaler the have annual sales more than LE 150.000. In
terms of sales tax exemptions, all items exempted from sales tax not convenient to M/SMEs.
6 M /SMEs have weak or none linkage with the larger enterprises due to one or more of the following
reasons: (1) the lack of information on how to reach those larger firms. (2) Deteriorating market
conditions to the extent that even larger firms are barely producing to cover themselves, with no extra
demand to distribute to smaller firms. (3) Vertical Integration, there is a conception that larger firms are
vertically integrated with no need for input from M/SMEs.
58
E- Marketing
M/SMEs encounter many marketing related difficulties (NDP, 2003, MOFT, SME, 2002,
MOE, 1998), such as:
- Inefficiency of local marketing channels and networks, marketing channels for small
businesses are very limited. Most M/SMEs are confined to markets that are within their
immediate geographical location. Overall, it is nearly estimated that 56% of all M/SMEs
production are done on an order by order basis with the remaining 44% done on a
continuous basis. M/SMEs suffer from the absence of a competitive network of wholesalers
and trading companies that could introduce their products into domestic and foreign market,
and provide them with pertinent market information. The available marketing and
distribution channels are either government owned or cater to larger businesses.
- In addition, there is a legal prohibition on the operation of foreign owned international
trading houses. The lack of sufficient competition in the current wholesaling and trading
sectors keeps the major actors contended with their current client base mainly composed of
large businesses.
- Another big missed channel for M/SMEs is e-commerce, and the opportunity to use the
power of the Internet to reach the international markets.
- Lack of information about local and foreign markets.
- Insufficiency of resources to employ marketing specialists.
- Poor interrelations between M/SME on one hand and large and foreign enterprises on the
other hand.
- Difficult access to governmental procurement. This issue has been recently tackled under
the new Small Enterprises Law (see previous efforts as discussed in footnote 2); the law no
141/2004 states that “Ministries, attached organs, public authorities, and local administrative
units shall register and keep records of small and micro enterprises willing to deal with them
and shall entitle them to a fair share of at least 10% of total procurement value of goods and
services supplied to them including the execution of construction works (article xii).
Moreover, a joint policy committee comprised of representatives from Ministry of Finance
(MOF), Ministry of Foreign Trade and Industry (MOFTI), Social Fund for Development
(SFD) and Ministry of Investment (MOI) has been formed under the leadership of MOF,
the main task of this committee is to review government procurement policies for M/SMEs
and to agree on actions to be taken by organizations represented on the committee in order
to streamline government procurement for M/SMEs.
- Inability to invest in the field of marketing research and financing marketing promotion.
- Inaccessibility of export channels. A lot of Egyptian M/SMEs do not have a specialized
export agency or house that would be responsible for deciding where, how and when to
market their products abroad.
The Ministry of Foreign Trade has tried to overcome such difficulties by including M/SMEs
interests in the mandate of its different organizations as shown in box 1. In addition, the
M/SMEs policy unit in the Ministry is concerned with drawing the strategic vision for
M/SMEs promotion in Egypt.
59
Box 1. Role of different affiliates of Ministry of Foreign Trade in Enhancing
M/SMEs.
1- International Trade Points
The MOFT is developing International Trade Points systems to provide more services
to small export-oriented investors in all governorates. These services include information
availability, helping in preparation of feasibility study, increasing awareness of ecommerce among small investors, as well as promoting and marketing their exports.
2- The General Authority for International Exhibitions and Fairs
- The MOFT’s work in this field integrates small investors into the Authority’s plan.
They can participate in the exhibitions it organizes or in which it takes part, locally or
abroad, and access information through the Ministry’s quarterly newsletter and its
Web site.
- M/SMEs also enjoy preferential treatment with regard to display facilities at local
and international fairs, and benefit from discounts reaching 50%. In this way, the
Authority is helping them market their products locally and abroad.
- The authority encourages SMEs to participate in exhibitions without rent through
entities like SFD and the Ministry of Local Development.
3- Commercial Representation
The Commercial Representation in the Ministry has provided the following services to
small investors:
- Cooperation protocols between Egypt and other countries have led to the exchange
of experience in SME support and development.
- Consultation between the Social Fund for Development (SFD) and commercial
representation offices on the establishment of trading houses that will serve as
permanent fairs for small investors’ products. SFD loans will encourage them to
export and increase their marketing efforts on international markets.
- The MOFT organizes regular study tours for stakeholders concerned with SME
development, such as the SFD and the Ministries of Finance and Industry. These
tours are an opportunity to learn from SME development elsewhere, and have
covered such countries as Greece, Portugal, and Canada.
- Commercial representation missions prepare reports on the local application of
international SME development experience.
- Commercial representation offices also work to include small local investors in
promotion missions, conferences, seminars, and workshops held at home and
overseas.
- Commercial representation offices in 13 countries are also conducting research into
international SME success stories, and working to adapt such experience to our
economic and social conditions.
- Increasing M/SMEs participation in the international exhibitions by affording free
spaces in these exhibitions.
- Commercial Representation helps the training of the small investors, through the last
three years it afford 250 training opportunities outside.
- The MOFT also promotes SME representation on joint business councils (the
Egyptian-American and Egyptian-British Presidential Councils).
60
4- The Foreign Trade Policy Sector:
The Foreign Trade Policy Sector performs the following duties:
- Representing small business owners on Commodity Councils to recognize the
problems facing this sector and work to solve them.
- It also helps formulate the SME Export Promotion Strategy, studying marketing
opportunities and providing information on markets.
5- The General Authority for Export and Import Control:
This Authority helps M/SMEs in the following ways:
- Technical guidance to small exporters on export advantages and packaging
techniques.
- Information on procedures to obtain export or import registers for the import of
production requirements.
- Guidance on the roles of different monitoring entities and the examination of
exported goods.
- A special unit within the Authority offers information and rapid solutions to
problems facing small exporters.
- A cooperation protocol between the Authority and the SFD will train small
exporters, upgrade information systems and develop laboratories to upgrade
performance further.
F- Un-competitively priced inputs:
High quality production inputs are not easily available to M/SMEs. In order to obtain these
inputs, M/SMEs have to compete with export markets (in case these inputs or portions of
them are exported), as well as with larger firms (for the remaining-or portions of these
inputs). Moreover, tariffs imposed on high quality imported inputs, as well as the lengthy
sophisticated import procedures place M/SMEs in a less competitive position (MOFT,
2002). M/SMEs in some sectors cannot export or compete internationally because of the
relatively higher prices of their production inputs which render them uncompetitive vis-à-vis
their competitors.
G-Finance
Financial services constitute a major component in M/SMEs development efforts.
Most of M/SMEs suffer from insufficient access to reasonable financing services in order to
cover their needs of operating, fixed capitals and exporting on continuous bases, M/SMEs
that have received funds from banks represent only 5% of total Egyptian M/SMEs. The
restricted M/SMEs’ access to banks produced an absurd financial intermediary structure
within the Egyptian economy, 1.2%of the private enterprises enjoy access to banks, whereas
98.8%of the private sector enterprises –accounting for 66%of total private sector
employment –are excluded from the formal banking sector and may obtain loans from small
NGOs or other informal sources or have no access at all (UNDP, 2003). There is an
estimated M/SMEs’ credit gap of 1,475,000 M/SMEs’ borrowers requiring US$371 million
in micro financing.
The majority of the financial sector institutions are not well equipped to serve the
M/SMEs needs and nature. The limited scope of finance efforts and programs in the
banking sector, coupled with M/SMEs reliance on donor and external funding, make the
61
formal banking sector insufficient to meet the needs of M/SMEs whether in the short-term
or in the long-term (MOFT, 2002, NDP, 2003, MOF, 2004).
In the context of competitiveness, other sources of finance like long-term and
medium term credit, venture capital and leasing, gain particular importance. These stem
from the fact that such forms of finance allow the entrepreneur to upgrade his/her
equipment and expand the enterprise operations. Nearly all entrepreneurs lack awareness of
non-credit financial services and mechanisms that can assist them in expanding their
businesses. Apart from the fact that venture capital is virtually absent from Egypt, we can
breakdown M/SMEs financial problems to two main categories (1) General financial
constraints. (2) Export Financial Constraints
General financial constraints
First of all, it must be clear, there was no shortage of funds within commercial banks,
but that banks felt the credit risks were much higher (due to absence of collateral) if dealing
with M/SMEs. But due partly to the new recent governmental interest for M/SMEs
development, some banks have become ‘politically’ motivated to search the possibility and
potential of expanding their markets through the provision of credit to medium and small
enterprises (UNDP, 2003).
The main financial constraints facing M/SMEs are:
1- One of the main problems for commercial banks is in having the institutional capacity to
be able to investigate or to reach this target group. The majority of banks, especially
commercial banks conduct their business through a number of branches that are usually
located in the major cities only and do not have the sufficient trained staff or systems
required to track the different sized loans, which would emerge from a shift in policy
(UNDP, 2003).
2- M/SMEs business loans are not yet a key bank function, therefore not promoted because
current operational and administrative costs for case-by-case SME loans exceed any profit
potential – no systems or models have yet been pursued whereby SME lending can be
profitable MOFT, 2002a).
3- The banking sector is still reluctant to lend M/SMEs, because of the high risk associated
with lending them (due to the absence of collateral) and the relatively high costs of keeping
accounts for them at least from the banks perspective (El Gamal, M. et.al, 2000).
4- Subsidized M/SMEs funding programs7 with interest rates below market levels create
unrealistic and unsustainable dependencies whereby funds quickly deplete and M/SMEs are
sheltered from realistic market forces.
5- Banks, non-bank credit institutions and to a limited extent also leasing companies would
usually be the suitable lending organizations within the formal financial sector to satisfy
SMEs' finance needs. Non-bank credit institutions are prohibited from collecting savings but
otherwise would have an institutional set up similar to banks and operate along comparable
prudential regulations.
6- Non-bank credit institutions are not permitted in Egypt. Moreover, saving collection
would be denied to any corporation, which is not a licensed bank, yet as a consequence of
above calamity .Central Bank of Egypt (CBE) tightened its approval policy. Since then only
Several M/SME lending programs sponsored by national and international entities offer loans below
market interest rates – though initially attractive to M/SME’s,
7
62
leasing companies were licensed in 1997 by a special leasing law facilitated by the World
Bank (UNDP, 2003).
Export Financial Constraints
Beside all finance constraints that face M/SMEs in general, there are specific
constraints facing M/SMEs’ exports in Egypt. M/SMEs export finance encounters various
problems; many firms had opportunities to export but could not produce on a larger scale,
due to lack of finance. According to the MOFT survey8 in 20049; financial constraints facing
M/SMEs’ export can be classified as follows:
ƒ Some banks have a minimum size credit policy (especially the joint venture banks).
ƒ Some banks are willing to provide pre-shipment short-term financing to first-time
exporters and only if they were existing producers. Same with post-shipment finance
instruments like discounting.
ƒ Most banks require an export Letter of Credit (L/C) as a condition for providing shortterm pre-shipment finance, meanwhile, some banks might require additional mortgage of
fixed assets by some clients.
ƒ Exporters sometimes find difficulty obtaining L/Cs because the foreign importers want
to avoid incurring the costs of opening an L/C, and in particular, they are reluctant to
open it.
ƒ Upfront before the exporter starts manufacturing the goods i.e. would rather postpone
incurring the L/C costs until the goods are ready for shipment.
ƒ High cost of finance.
ƒ (EDBE) Export Development Bank of Egypt’s volume of business has significantly
increased, but its export finance portfolio appears to be falling in absolute terms not only
as a percentage of a total portfolio.
ƒ The resources of the Egyptian Credit Guarantee Company of Egypt (ECGC) are
limited, it cannot guarantee transactions in certain countries unless it has a government
backup guarantee, its procedures are to be difficult to understand, and its insurance
coverage mostly relate to post-shipment stage.
ƒ Egypt is not making adequate use of the services of regional trade programs and the
bank utilization of the services of domestic and regional programs10 was very weak, due
to inadequate export business in general, inadequate bank and exporter awareness of
their services, and unacceptable bank guarantees and/or country risk.
ƒ Credit for market development and product development is provided in other countries
but not in Egypt support is provided by MOFT for exhibitions expenses (but this is
unsustainable and cannot cover all exporters’ needs)
ƒ Counter trade is not applicable to M/SMEs.
ƒ Buyback agreements are not possible through M/SMEs, as they lack the necessary
negotiation skills.
The sample was eight banks, including four public banks, two specialized development banks and joint
venture banks.
9 MOFT (2004), SME Access to Export Finance in Egypt
10 Such as Islamic development Bank, Inter-Arab Investment Guarantee Corporation and Islamic
Corporation for investment Insurance and Export Credit
10 Such as: International Trade Point, EXPOLINK, and Export Promotion Center, etc..
8
63
ƒ Consignment exports are too risky11.
ƒ Most banks do not use the factoring and forfeiting instruments, which are highly limited
in Egypt.
ƒ M/SMEs do not benefit from duty draw back system as they act as indirect importers
due to small volume of operations they undertake.
ƒ The financial leasing law is not yet implemented/ no authority in charge/ system not yet
established/ inadequate number of leasing firms/ costs too high.
ƒ Industry-specific constraints: banks avoid financing the information technology (IT)
sector because of its intangible nature –the bulk of working capital needs are for
payment of wages, which banks avoid financing.
ƒ Many of the M/SMEs lack the necessary awareness of export business and the export
finance products and instruments.
ƒ Lack of financing for the marketing activities e.g. exhibitions, catalogs, etc
ƒ Many of the M/SMEs do not know about the export credit insurance mechanism or
about ECGE altogether and most M/SMEs heard of ECGE’s exhibition coverage
insurance policy. Moreover, they were not familiar with the new export law.
Second: Endogenous Factors
Competitiveness of the M/SMEs sector is limited due to some factories related to
these enterprises themselves:
- Lack of skilled labor: Labor constraints include inter alia the lack of skills in basic
technical skills, business management, accounting, book keeping and the lack of accessible
consulting and support services. In addition, with a relatively low level of educational
attainment (only 9% of small and micro entrepreneurs have university degrees). M/SMEs
are not likely to appreciate the value of these skills (MOFT, SME, 2002).
- Lack of market information: Nearly two-thirds of small businesses consider the lack of
market information to be a very severe constraint. M/SMEs lack the capacity, and their
owners lack the education (only 9% are believed to have attained a university degree) to tap
sources of relevant information (new products, consumer trends, technological
developments, etc.) (MOFT, 2002; MOFT, 2004).
- Lack of modern equipment and technology: Given their poor access to equipment,
M/SMEs lack any quality control and product standardization. These position M/SMEs’
products to be less competitive in the national and international markets (MOFT, 2002).
Where there is an apparent lag in technological upgrading of machinery as well as production
processes. The latest technology in the vast majority of cases investigated dated back to the
1970s or earlier. This seems to be in line with the general condition of current general
technological capacity of the Egyptian industry (Djeflat, 2002, p. 15). There is also an
extremely low level of utilization of computers in general. (MOF, 2004).
Consignment is an arrangement where goods are shipped to an importer without the exporter giving up
ownership. The importer acts as agent for the exporter in arranging sale to third parties. Upon sale of
goods, the importer deducts the selling commission and remits the balance of sale proceeds to the
exporter. Consignment is useful when the importer lacks -or is not willing to place at risk- the funds to
purchase the goods outright, but is still able to provide the exporter with a valuable distribution channel.
They were available at half of the interviewed banks, but some would not provide it to first-time
exporters. They said it is too risky and needs strong collateral.
11
64
- Inferior Quality: The main determinant in the decision to export or not is quality, the
quality of Egyptian M/SMEs is not acceptable to foreign markets; SME-products lack
quality competitiveness in foreign markets.
- Lack of Awareness. M/SMEs are not aware of the specification and/or modifications
needed in the product to be marketed internationally.
- Many of M/SMEs are not familiar with regional trade programs and the organizations that
provide export services.
Conclusion
M/SMEs in Egypt are facing many challenges in the rapid economic changes in the world
economy and international trade under the globalization process. These challenges are not
only the competition in the foreign markets but also the surviving and competition in the
local market. To succeed in the new world economic changes, there are commitments and
collective efforts that need to be addressed by the different stakeholders in the society to
revive the role of M/SMEs and increase their ability to export. The government has started
recently to pay increased attention to the important role played by M/SMEs in the economy,
however it still lacks a comprehensive vision. There are several pillars required for the
success of M/SMEs both in the internal and external markets, which have multi-dimensions.
Some of such pillars have already been tackled in previous studies as MOF, 2004. Our aim
in the action plan is to provide this comprehensive view on how to enhance the role of
M/SMEs in the Egyptian economy in general and in the exporting activity in specific.
Chapter Three: M/SMEs in Egypt based on the Survey
Analysis
Section One: Introduction:
Methodology
In an attempt to understand the way M/SMEs function and take the decision to export, and
the kind of obstacles they have to deal with and the type of support they get, we had to
implement a survey of SMEs working in the manufacturing and service sectors. The choice
of location was based primarily on cluster areas where exporting M/SMEs could be
detected.
Initially the sample was to include 200 enterprises, 100 of non-exporting enterprises and the
other half were to be export enterprises. The research team decided to split the sample into
175 manufacturing enterprises and the rest would be service enterprises. However, we
encountered several problems during the listing and sampling operations. We ended up
having 183 manufacturing enterprises (73 exporting and 110 non-exporting enterprises) and
31 service enterprises (9 exporting and 22 non-exporting).
Sample Design:
The sample was designed to include 200 small and medium enterprise units, covering 100
exporting units and 100 non-exporting units:
Manufacturing units with (5 to 99 workers): 170 units.
IT: 30 units.
The enterprises were selected from industrial clusters in 8 governorates representing urban
governorates, Lower Egypt and Upper Egypt. The geographic distribution of the
enterprises was as follows:
65
Table 5: Proposed Sample Design
Governorate
Place
Giza
6 October City
Kalubia
Shobra El-Khimah
Sharkia
10 Ramadan
Alex
Borg El-Arab
Damietta
Qism Rabea’
Fayoum
Kom Aoshim
Menia
El-Menia El-Gedidah
Cairo
Total
Number of units
40
20
40
25
25
10
10
30
200
The sample was designed in this way to achieve the objectives of the study. These
objectives are to:
ƒ Detect exporting obstacles.
ƒ Detect the factors which may help the enterprises to be able to export their
output.
A random sample of units was selected from lists of exporting and non-exporting
enterprises in each cluster.
Field Work: The field work lasted for two weeks in November 2004.
Final Sample:
Although the sample was designed to interview 100 exporting units, the field work team
succeeded in interviewing only 82 exporting units. The number of completed interviews
was 214 distributed as follows:
183 manufacturing units with 73 of them exporting units, and
31 services units with 9 of them exporting units.
In the following parts we will try to describe firstly the characteristics of the sample;
secondly, we will discuss the economic activities undertaken by the enterprises and the
export content; thirdly, we will discuss the determinants of success within the enterprises;
fourthly, we will identify the main features of the exports and the determinants of exports
growth; fifthly, the institutional environment and incentive structures in the Egyptian
market will be presented; and finally, the last section will deal with the major obstacles
facing exports and the policy recommendations from the small entrepreneurs perspectives.
All through the following presentation we will be referring mostly to the manufacturing
enterprise data, unless the service sample proves otherwise.
Section one: The legal status and firm description:
Location:
Before we start describing the main features of the sample, it is important to explain the 183
manufacturing enterprises were selected from 9 governorates as the following table shows:
66
Table 6: The geographical distribution of the sample
Governorate
Cairo
Alex.
Damietta
Sharkia
Kalubia
Giza
Beni Sweif
Al Fayoum
Al Menia
Total
Frequency
23
19
25
40
18
36
5
10
7
183
Percent
12.57
10.38
13.66
21.86
9.84
19.67
2.73
5.46
3.83
100
As can be seen, there is a relatively large percentage of firms that are situated in Sharkia and
Giza governorates, which is due to the industrial cities of 10th of Ramadan and 6th
October which are located there. The highest percentage of exporting small firms are
concentrated in theses two cities. On the other hand, the service SMEs are basically
concentrated in Cairo (67%) Alexandria (20%) and El Giza (13%).
The Legal Status:
Due to the small scale nature of the SMEs in the sample, more than 50% of the enterprises
are “person’s enterprises” as can be shown from the following table. However, there are
still 22% of the companies that acquired the simple liability partnership status and the same
percentages of firms are Joined Stock Companies. The last two types of enterprises are
relatively larger (medium-size enterprises).
Table 7: The Legal Status Of The Firms
Sole Proprietorship
Partnership
Simple Liability Partnership
Public Enterprise
Joint Stock
Simple Liability By Shares
Limited Liability
Total
Frequency
46
49
41
1
41
1
4
183
Percent
25.14
26.78
22.4
0.55
22.4
0.55
2.19
100
As to the sector to which the enterprises belong, data show that the overwhelming majority
of SMEs (90%) are private domestic companies that are owned by the Egyptians. The share
of foreign-owned enterprises is quite limited (4.4%). The joined Egyptian-Foreign
companies do not exceed 5% of the total number of the manufacturing enterprises in the
sample. If we look at the service enterprises we notice that all of them are Egyptian-owned
private sector enterprises.
With regards to the SMEs that contain foreign partnership, data indicate that the share of
foreign equity is in the range of 25% to 49% of total capital.
67
Table 8: The firms’ distribution according to Ownership
Frequency
Percent
Public
1
0.55
Private Domestic
165
90.16
Private Foreign
8
4.37
Private Joint- Domestic- Foreign
9
4.92
Total
183
100
The role of foreign partners is not limited to providing finance; in fact in 55% of the cases
the foreign partner plays a major role in the management of the firm and in the provision of
technical assistance.
Gender and entrepreneurship:
Previous empirical research indicates that female ownership or management of
manufacturing or service activities is quite limited to 2.3%, 12% respectively of all MSEs.
The overwhelming majority of the female owned SMEs (93%) are in the size category less
than 3 workers. Accordingly, it was rather difficult to find M/SMEs owned or run by
females, not to mention ones that are export oriented.
In this study, only 9 female entrepreneurs were found, and 4 of them were exporters. The
following tables will summarize two basic features of the comparisons between male and
female owned enterprises, namely, the size of the enterprise, measured according to the
number of workers and the value of capital:
Table 9: The M/SMEs distributed according to Gender of Owner/ Manager and
Number of Workers
Number of workers
Male
Female
1-9
٢٦,٤
٥٥,٦
10-24
٢٤,١
-
25-49
٢١,٣
٢٢,٢
50-74
١٤,٤
١١,١
٧٥ +
١٣,٨
١١,١
Total
١٠٠
١٠٠
Number
١٧٤
٩
68
Table 10: The M/SMEs distributed according to Gender of Owner/ Manager and
Value of Capital
Value of capital (1000)
Male
Female
1 – 49
١٤,٩
١١,١
50-99
١٢,٧
٢٢,٣
100-199
١٦,١
٣٣,٣
200-499
١٠,٣
١١,١
500-999
٧,٥
-
1000-4999
٢١,٣
-
5000-9999
٦,٣
-
10000-19999
٩,٢
٢٢,٢
20000-
١,٧
-
Total
١٠٠
١٠٠
Number
١٧٤
٩
The two previous tables indicate that the female owned M/SMEs are relatively smaller,
especially in terms of number of workers. There is no special concentration of female
owned enterprises in certain economic activities, as the nine enterprises are almost
distributed along the different activities.
Size of the enterprise according to capital and labor:
Since our sample include small-and medium-size enterprises, the size of the firms varies
tremendously where capital and labor are concerned. The following table will summarize
the size distribution of the manufacturing SMEs according to capital.
Table 11: the Distribution of M/SMEs according to the Capital’s Value
Size of Capital in LE
Goods
Services
(1000)
Frequency
Percent Frequency
Percent
Less than 50
27
14.8
3
9.7
50 - >100
24
13.1
4
12.9
100- >200
31
16.9
2
6.5
200->500
19
10.4
3
9.7
500 ->1,000
13
7.1
3
9.7
1,000 ->5,000
37
20.2
11
35.5
5,000 ->10,000
11
6.0
4
12.9
10,000 ->20,000
18
9.8
1
3.2
NA
3
1.6
Total
183
100
31
100
69
By looking at the previous table one realizes that the highest frequency of SMEs is
concentrated in the capital size category of LE 1 million.-to less than LE 5 million. The
same could be said about the service enterprises where 35% of them are concentrated in
this category. There are no apparent differences between the size structure of the
manufacturing and service SMEs.
As to the present value of the fixed capital of the firms (excluding land and buildings) data
indicate that around 40% of SMEs have fixed assets with the value of LE 1 million and
above, while this percentage goes down to 26% in case of the service enterprises.
Table 12: The Distribution of M/SMEs according to the present value of the fixed
assets
PV of Fixed Assets LE (1000)
Goods
Services
Frequency
Percent
Frequency
Percent
Less than 50
40
21.9
7
22.6
50 - >100
15
8.2
8
25.8
100- >200
17
9.3
4
12.9
200->500
14
7.7
2
6.5
500 ->1,000
26
14.2
2
6.5
1,000 ->5,000
44
24.0
8
25.8
5,000 ->10,000
5
2.7
10,000 ->20,000
15
8.2
NA
7
3.8
Total
183
100
31
100
The difference in the present value of fixed assets between manufacturing and service
enterprises could be explained by the fact that manufacturing enterprises tend to use more
machinery and equipments compared to service enterprises.
The same difference in the size structure between the two types of activities could be
witnessed when we look at the distribution of enterprises according to the number of
workers. The following table shows the main features of SMEs in both sectors:
Table 13: The distribution of M/SMEs according to the Number of Workers
Number of workers
Goods
Services
Frequency
Percent
Frequency
Percent
Lo – 9
51
27.9
16
51.6
10- 24
42
23.0
11
35.5
25- 49
39
21.3
4
12.9
50- 74
26
14.2
75+
25
13.7
Total
183
100
31
100
70
Whereas the majority of workers in the service SMEs are concentrated in the 1-9 workers
category, the highest frequency of manufacturing enterprises is concentrated in the 10-24
workers category and above.
The degree of permanence of workers in the firm does not vary between the
manufacturing and service activities, since permanent workers represent 67% of workers in
the first and 69% in the second group of enterprises. The temporary and seasonal workers’
share in total workers are similar in the two groups as well12. The percentage of permanent
workers in the sample is higher than their share in the M/SMEs in Egypt, where permanent
workers do not exceed 54% of the total workers population. The difference could be due to
the larger-scale nature of the sample.
Though the overall shares of workers do not differ between the two groups, the differences
exist within each group, according to industry. Whereas, the furniture, medical appliances,
and leather enterprises include the highest percentage of permanent workers, the chemical,
construction and sponge producing enterprises hire around 50 % of their workers on a
temporary or seasonal basis.
In the field of service activities one can notice that the enterprises working in businessmen
service provision, and educational and cultural services hire all their employees on a
permanent basis.
As to the structure of workers according to their functions (Upper Management,
management, services, production or technical workers), there is a distinct difference
between the two groups. The manufacturing enterprises include a higher percentage of
technical and production workers (45%), the service enterprises include more upper
management and management employees (54%).13
Date of Establishment and Enterprise Location:
It was revealed that despite the existence of a small percentage of enterprises that were
established before 1950, the great majority of enterprises were established since the
beginning of the 1990s especially in the manufacturing sector.
One of the main objectives of this survey was to understand whether the locations of the
SME within certain vicinity affect its ability to produce, exchange knowledge and export or
not. Thus, it was important to look at the distribution of enterprises according to their
location. We distinguish between cluster communities, industrial zones and all cities.
Table 14: the distribution of the M/SMEs according to Location
Location
Goods
Cluster
12
13
services
Frequency
Percent
Frequency
Percent
51
27.87
21
67.7
See Statistical Appendix.
See Statistical Appendix.
71
Location
Goods
services
Frequency
Percent
Frequency
Percent
Industrial Zone
112
61.2
2
6.5
Old cities
20
10.93
8
25.8
Total
183
100
31
100
Data in the previous table indicates that the highest frequencies of manufacturing
enterprises are located in industrial zones, whereas the highest frequency of service SMEs
are located in cluster communities.
Section Two: Field of Business And Foreign Trade:
This section will deal with two main issues: (a) the economic activities pursued by the SMEs
and the export content; and (b) direction of exports in the present and plans for the future.
1-The Economic Activities pursued by the SMEs and the Export Content:
The samples of SMEs that operate in manufacturing activities are distributed among
different industries as can be shown in the following table. The food, furniture, textiles, and
metal and mechanical industries, respectively are considered the main sectors of economic
activities.
Table 15: the Distribution of the Manufacturing M/SMEs according to the
Industries
Industry
Frequency
Percent
Food Ind.
37
20.22
Wood & Metal
30
16.39
Plastics
14
7.65
Paper Production
10
5.46
Textiles
30
16.39
Electrical & Engineering
9
4.92
Mechanical and Metal
29
15.85
Building Materials
4
2.19
Chemical & Pharmaceutical
13
7.1
Medical tools
1
0.55
Leather Products
1
0.55
Others
5
2.73
Total
183
100
Where services are concerned, tourism represents the highest concentration of service
activities (68%) followed in importance by IT companies (13%).
72
As has been mentioned before, within the manufacturing activities only 40% of the SMEs
were exporting firms, while this percentage was reduced to 29% in the service SMEs. The
question was to what extent were exports a major component in total sales/product. The
following table reflects the distribution of export companies according to the share of
exports to the value of products.
Table 16: The Share of Exports to Total Production
% of exports
Frequency
Lo -9
9
10-24
17
25-49
16
50-74
22
75+
8
Total
72
Percent
12.5
23.6
22.2
30.6
11.1
100
It is evident that within the exporting SMEs, the highest percentage of them (31%) was
exporting 50%-75% of their production. It can also be seen that a small percentage (11%)
of the SMEs were exporting more than 75% of their production. Similar results have been
witnessed in service enterprises.
When we cross-tabulate the different exporting enterprises according to the shares of
exports to the total production and the economic activity they are engaged in, it becomes
evident that certain enterprises (22 enterprises) export more than 50% of their products.
These enterprises are primarily operating in the furniture, textile and food industries.14
As to the service activities, tourism and hotels seem to rank highest where exports are
concerned. The share of exports of SMEs operating in the areas of communication and IT
and education is in the range of 10% to 25% of the value of their production.
As to the mechanism of exporting, it was important to understand how the export process
was conducted. Did the small enterprise deal directly with its clients abroad or did they
resort to agent companies that would act as a link between the domestic company and the
foreign clients? The following table shows how the process of exportation was conducted.
Table 17: The Channels of Exporting
Item
14
Goods
Services
Frequency
Percent
Frequency
Percent
Direct Contact to
Importer
57
78.08
5
55.6
Agent /Local Co.
14
19.18
1
11.1
See statistical appendix tables 1 and 2.
73
Item
Goods
Services
Frequency
Percent
Frequency
Percent
2
2.74
1
11.1
Exhibitions
1
11.1
Internet
1
11.1
31
100
Foreign broker/
foreign Co
Total
73
100
As can be seen, the majority of manufacturing SMEs have direct connections with the
foreign clients; whereas 22% of manufacturing SMEs used intermediaries in theirs export
operations. The majority of intermediaries were basically domestic companies working in
the field of marketing exports.
In the case of service enterprises it was different, because 11% (one company) of
enterprises resorted to e-commerce and another company made use of international
exhibitions in their marketing tactics, while 22% (two companies) used national or
international marketing companies and the rest of service-exporting SMEs relied on direct
contact with the clients.
In the cases where companies relied on marketing intermediaries the evaluation of their
services showed that they were highly appreciative, and the entrepreneurs stated that they
had almost no problems with the intermediaries.
In this context the idea of establishing Trading Houses in Egypt was raised to the
entrepreneurs to check whether it would be an acceptable intermediary that could help
boosting their exports. 75% of the exporting SMEs expressed their conviction with such an
idea and commented that a trading house would be useful to them for several reasons:
ƒ Promoting, marketing and exporting their products;
ƒ Signing contracts with the importing companies;
ƒ Importing production inputs;
ƒ Acting as intermediaries with financial institutions to acquire the necessary loans;
2) Direction of exports in the present and plans for the future:
One of the major objectives of economic reform is to encourage the private firms to
become more internationally competitive by exploring new market territories and expanding
their market scope. Since the share of M/SMEs in total manufacturing exports is quite
limited, one of our main concerns when this research was undertaken was to understand
74
what made the small firm export, how their performance changed over the past few years,
and what were their future export strategies and plans.
Table 18: The direction of change in Exports during the last 5 years
Status
Goods
Services
Frequency
Percent
Frequency
Percent
Change
31
42.47
6
66.7
Increase
19
26.03
2
22.2
decrease
12
16.43
4
44.4
No Change
42
57.53
3
33.3
Total
73
100
9
100
ƒ
Data show that 43% of the M/M/SMEs (67% of Service M/SMEs) experienced
changes in their exports during the last five years. Whereas the majority of change was in
the direction of growth in the case of the M/M/SMEs, the opposite happened in the
service producing M/SMEs. Among the manufacturing enterprises 19 companies
succeeded in increasing their exports during the last five years. These enterprises were
primarily concentrated in food production, furniture, plastics, paper products,
building materials and electrical appliances industries. Whereas, in the service
activities only two enterprises, in the fields of IT and communications, managed to
increase their exports during the last five years. However, it has to be mentioned that
twelve of the manufacturing SMEs and four of the service SMEs experienced a drop in
the value of their exports during the last five years.
ƒ
The data collectors reported that the entrepreneurs revealed that the overvalued
exchange rate of the Egyptian Pound made the prices of their products higher, and they
assumed that the current devaluation will help them recover. As to the exporters who
enjoyed increase in their products it was mentioned that the quality of the products
mattered a lot in determining their ability to compete and export (See the following
table).
However, where export plans are concerned all exporting M/SMEs indicated that they plan
to expand their export territories and venture into new export countries. The Arab and
African countries are primary targets for the M/SMEs in the sample.
The manufacturing entrepreneurs stated that the most crucial factor that affected their
ability to export was the product’s quality, while the service exporters indicated that the
price of the service was a more significant factor in determining the value of exports.
As to the way prices were set, the most common method was “cost +” approach.
75
Table 19: Factors Determining Exports
Factors
Goods
Services
Frequency
Percent
Frequency
Percent
Price
14
19.18
4
44.4
Quality
47
64.38
3
33.3
Packaging
3
4.11
Convenient Choices
7
9.59
Marketing Strategy
2
2.74
2
22.2
Total
73
100
9
100
One of the features of the M/SMEs in the sample was the difference between the firms
with respect to the share of intermediate inputs domestic and imported to the value of
production, since the manufacturing M/SMEs depend more heavily on them in the
production process. This dependence on intermediate and especially imported production
inputs explains the complaints and suggestions of the entrepreneurs where imports are
related.
Table 20: The Share of the Intermediate Inputs and Semi-Produced Products to
Value of Total Production
Goods
Services
%
Frequency
Percent
Frequency
Percent
Lo -9
61
33.3
27
87.1
10-24
34
18.6
3
9.7
25-49
31
16.9
1
3.2
50-74
32
17.5
75+
25
13.7
Total
183
100
31
100
Section Three: the Success Criteria:
One of the main issues that were of interest and concern to us as a research team, was to
understand the extent to which exporting and non-exporting SMEs comply to international
standards of quality, develop their products and are capable to market their products. In
order to assess these three important components, several questions were posed to give us
an idea about:
a)
Quality control issues and how they are dealt with;
b)
Marketing strategies and arrangements to raise exports;
c)
Research and Development and their purposes;
76
In the following part we will try to shed light on the previous issues and following that, we
will try to see whether having quality control, R&D, and marketing departments, among
other things, matter to the SMEs capability to export or not.
Firstly, Quality Control:
Data reveal that whereas 54% of the manufacturing SMEs have quality control
departments, this percentage does not exceed 29% in the service departments. The number
of persons working in the department does not usually exceed ten workers.
Quality control and monitoring are crucial to most of M/SMEs. Whenever, the M/SMEs
encounter complaints with regards the quality of their goods and services, they are checked
by the manager personally or by the concerned employees. However, there is only limited
reliance on international companies to certify the SMEs products, as it does not happen in
more than 9% of the enterprises in the sample.
Again, the exporting entrepreneurs stated that the quality of the product and its
improvement to meet international standards is their first objective. Improving the
packaging quality and design of their products is the second most important factor that is
considered when they take the decision to export.
Beside those two factors affecting the ability to export, there are other factors that are
considered, such as the quality of inputs, the innovation and punctuality in delivery. In
addition, exporting enterprises stated that having a R&D department in the enterprise helps
in expanding the lines of production, improving the products quality and introducing new
products. They also stress the importance of cooperation with the Egyptian General
Organization for Standards and Quality Control, understanding the specification of the
client’s demand, and the improvement and modernization of the production technology. A
number of enterprises (30% for manufacturing enterprises and 52% in case of service
enterprises) indicated that cooperating with the Egyptian Federation of Industries, the
Chamber of Commerce, the Egyptian Exporters Associations, the IMP, is helpful in
simplifying the procedures of exporting and importing.
Despite the efforts paid by the different above mentioned organizations when the
entrepreneurs were asked about their opinion of the Egyptian products in the same industry
they work in, only 25% of them were convinced that the quality of the products were of
excellent standards. The following table summarizes the opinion of the entrepreneurs with
regards the products.
Table 21: Assessment of the quality of the Egyptian products in the same Industry
Quality
Excellent
Goods
Services
Frequency
Percent
Frequency
Percent
47
25.68
8
12.9
77
Quality
Goods
Services
Frequency
Percent
Frequency
Percent
Good
98
53.55
17
45.2
Fair
16
8.74
4
29.0
Should be
improved
22
12.02
2
12.9
Total
183
100
31
100
However, when they were asked to assess the quality of their own products, they indicated
differently. Whereas 50% of the manufacturers believed that they produced top quality
products, this percentage did not exceed 26% for the service providers.
Table 22: Self-Assessment of the quality of the M/SMEs Products
Quality
Goods
Services
Frequency
Percent
Frequency
Percent
Excellent
89
48.63
8
25.8
Good
82
44.81
17
54.8
Fair
8
4.37
4
12.9
Should be improved
4
2.19
2
6.5
Total
183
100
31
100
Secondly, Marketing Strategies:
The majority of SMEs (61%) do not have marketing departments. The factors behind the
lack of such departments could be the small scale of operations and the limited finance.
This result confirms the fact that was previously mentioned with regards the need to have
Trading Houses as a means of increasing their capacities to market their products.
When the entrepreneurs were asked to reveal the kind of marketing strategies they resort to
increase their exports, their answers were as follows: The highest frequency of
entrepreneurs relied on product catalogues, participating in exhibitions (domestic and
international) and websites on the internet to promote their products. In addition, getting in
touch with international agencies, having meetings with foreign businessmen, participating
78
in official delegations and in businessmen associations were among the policies that were
adopted by the entrepreneurs to market their goods.
The entrepreneurs varied in the arrangements they follow to increase their exports. The
following table summarizes the most important arrangements taken by the exporters to
increase their exports.
Table 23: Arrangements Pursued to Enhance Exports
Item
Increasing the number of marketing personnel
More out-reach activities (Trade fairs/ Business delegations)
Improving the quality of our products
Changing the designs of our products to fit consumers’ taste.
Reducing the export prices
Venturing into new markets
Private Marketing Agencies
Sending products samples
Studying the foreign market
N.A
Total
Frequency
10
26
32
17
13
2
1
1
1
110
213
Percent
4.69
12.21
15.02
7.98
6.10
0.94
0.47
0.47
0.47
51.64
100
It is clear to us that raising the quality of product is a top factor, followed in importance by
international activities (such as exhibitions and businessmen delegations), reducing the
export prices and increasing the number of personnel working in the marketing
departments.
Only 11% of the companies resort to independent marketing agencies to do the advertising
and promote products.
Thirdly, Research and Development:
Where Research and Development is concerned, only a limited number of SMEs (22% of
manufacturing enterprises) had R&D department. Despite the fact that 64 of the
enterprises acknowledged the importance of having such a department, as they help in
developing the existing and new products as well as adding new production lines, the role
of such departments is still limited and the number of personnel working in it- not to
mention their qualifications- is rather modest.
To sum up, the small and medium size enterprises still need a real boost to develop their
capacities to export. More work has to be done in the areas of quality control, marketing
and research and development. The room of improvement is extensive. Providing support
services in these areas could have a substantial impact on SMEs.
In an attempt to evaluate the factors that play a major role in distinguishing
exporting and non-exporting SMEs, several variables were used and a logistic
regression model was implemented.
Ln [ P (Yi=1) / 1-P (Yi=1)] = B0 +B1X1+B2X2+……BpXp
B1= Getting business services from national and international organizations.
B2= Having quality Control Department
B3= Having a Marketing Department.
79
Where,
Ln= the natural logarithm to the base e (e=2.7182)
P= the probability to export
B0= the constant
B1-Bp= the regression coefficient of all the independent variables
X1-Xp= Independent variables
Yi= the dependent variable (export/non-exporting firm)
=1 if the firm is exporting, =0 if the firm is non-exporting
1/1+eZ= the probability to export
Z= the linear regression equation
The equation has been implemented on all M/SMEs in the sample. The results of the
equation are reflected in the following table:
Table 24: The Logistic Regression Results
Variables
Regression
Coefficient
Standard
Error
Odds Ratio
Probability
Marketing
Dept.
0.6443*
0.3645
1.9046
0.656
0.1885
1.4738
0.596
1.8832
0.653
Business
Services
0.3878*
Quality
Control Dept.
0.6329*
0.3615
Constant
0.1221**
0.2677
* *Significant at 99% confidence level * Significant at 95% confidence level.
As can be seen, there are three variables that significantly matter in the distinction between
exporting and non-exporting enterprises.
Having a Quality Control Department is a variable that matters in ascertaining that the
exported products meet international standards.
Having a marketing department has proved to be a significant factor in promoting
exports.
The Business Service Index, which includes getting: technology, marketing, financial,
training, and match-making services, has proven to be one of the contributing factors of
success in exporting.
Due to the strong correlation between some of the independent variables that were to be
included in the Logistic Regression Model, some of the independent variables were
excluded. The excluded variables-each on its own-had a significant impact on the firm’s
ability to export. The two main variables were having a Research and Development
Department and having strong communications infrastructure.
According to the previous analysis, the existence of the three major departments (QCD,
Marketing Dept. and R&DD) as well as the provision of the different business services and
80
the availability of modern communication services matter a lot in the export promotion
process of SMEs.
Section Four: the Main Features of Exports
When we discussed the main elements that describe the exports of the small and medium
sized enterprises in the sample, several issues were raised. As we already know that from a
sample of 183 enterprises, only 73 enterprises (40%) did export. Although it was intended at
the beginning of the survey planning, that we would have two groups of enterprises
(exporting and non-exporting) the reality defied the intention. It was quite a difficult task to
find exporting M/SMEs.
Within the group of exporting firms only 22 M/SMEs succeeded in adding new products to
their range of exported goods during the last five years. The main factors behind this group
of entrepreneurs’ drive to venture with new products were: (a) the need to expand the
market scope (50%) and (b) identifying growing demand on new products in the foreign
markets (45%).
The decision to export is usually based on taking into consideration certain factors the most
relevant of which were: (a) developing the designs of the products to meet international
standards and the tastes of consumers abroad, and (b) using modern technologies in
production and packaging. The majority of the exporting entrepreneurs believed that
introducing new products, opening up new markets and keeping eye on the quality of
exported products were the key elements to competitiveness in the international markets.
When the whole group of entrepreneurs was asked to list the most important hindrances to
the development of new export products, they enumerated a number of factors such as:
The modest technology that is used by the small firms does not help them produce quality
standardized products. New technology is rather costly and unaffordable.
The shortage in innovative experienced engineers and technicians is another important
reason;
The limited investments in research and development, which is linked to the modest
finance, lack of fiscal incentives, inaccessibility to technical support services, is an additional
hindering factor;
The shortage in skillful labor that is well trained is an additional inhibiting factor;
Beside the previous factors a list of other less relevant reasons was mentioned such as: the
customs tariff rates, the company’s policy that is more domestic market oriented the limited
production capacity, bureaucracy, the business environment, etc.
Table 25: The Areas of Needed Intervention by the Government to help Promote
exportation.
Frequency
Percent
Credit/ funding
28
23.73
Technology
19
16.10
Approaching foreign customers
20
16.95
Technical assistance
3
2.54
Training opportunities
4
3.39
Data and information
24
20.34
81
Ease of procedures
New markets
Limited Taxes
N.A
Total
Frequency
5
2
1
12
118
Percent
4.24
1.69
0.85
10.17
100
Among the group of M/SMEs in the sample 49% stated that they were satisfied with the
government’s services to exporters, while the rest of them declared their dissatisfaction.
The reasoning of the second dissatisfied group was based on the following facts:
(a) the prevalence of red tape and bureaucracy in all formal government offices, where the
permits were issued (32%);
(b) the non-existence of any government support services (27%);
(c) the excessive tax rates (21%);
(d) the expensive customs clearance costs and its slow process (13.5%);
(e) beside the previous factors a number of other factors were cited: such as the lack of
knowledge of the foreign markets’ needs, the difficulty of traveling abroad to market their
products, lack of finance, and lack of executive trained personnel, etc.
Another aspect of possible support was resorting to universities and institutes for technical
assistance and securing expertise. However, this venue of technical assistance proved to be
of negligible importance to M/SMEs. Only 2.7% of the enterprises in the sample made use
of these facilities. Faculties of engineering in Cairo and Alexandria universities, the institute
of professional training, were among the most important sources of providing support. The
main kind of requested assistance by the M/SMEs were scientific support in the areas of
adding production lines or developing existing or new products. One of the enterprises
asked for research on certain technical issues or scientific bulletins, another sought training
of some of its workers on certain production techniques.
Section Five: Institutional Environment and Incentive Structures:
Literature on M/SMEs tends to stress upon the role of the institutional set-up in the
creation, development and expansion of capabilities of the M/SMEs. The complex,
inefficient, discouraging, bureaucratic and costly institutional framework were usually cited
as the reasons behind informality of the majority of M/SMEs, their tendencies to remain
small and invisible, their inability to develop their products, and thus their reluctance to
venture into new wider markets.
Since understanding the environment in which M/SMEs operate, is of great impact on
their performance, several questions were posed in the questionnaire form, which help in
describing how the entrepreneurs feel with regards their surroundings.
The first question concentrated on the main incentives required by the government to
promote exports. The answers revealed several suggestions, which are ranked according to
their importance (in descending order of the percentage of M/SMEs):
ƒ the need of tax deductions that are proportionate to the increases in exports
proceeds/ value (43%);
ƒ the provision of more detailed information of the international market’s needs on
the different goods (39%);
ƒ Lowering the customs tariff rates on imported production imports (32%);
ƒ Lowering the loan’s interest rates to M/SMEs (26%);
82
ƒ Subsidizing research and development activities (15%);
ƒ Offering specialized export credit guarantees (14%);
ƒ Besides the previous suggestions some additional propositions were stated:
ƒ Simplification of export procedures.
ƒ Lowering the prices of raw materials;
ƒ Providing access to high quality raw materials and intermediate products;
ƒ Easier access to industrial land in new cities;
When the entrepreneurs were asked to list the most important ministries and public
agencies in supporting exports, they ranked them as follows:
Table 26: The most important two agencies, which help exporting activities
Frequency
Percent
Ministry of Foreign Trade
22
22.22
Investment Authority
16
16.16
Ministry of Industry
14
14.14
Egyptian Company for Guaranteeing Exports
5
5.05
Ministry of Finance
4
4.04
Ministry of Supplies & Trade
4
4.04
Ministry of Health
4
4.04
Egyptian Bank for Exports Development-EBED
3
3.03
Commercial offices
2
2.02
Banks Sector
1
1.01
N.A
24
24.24
Total
99
100
It is obvious that three main players in supporting export promotion were the ministries of
Foreign Trade and Industry as well as the General Organization for Investment. It is clear
that a substantial part of the entrepreneurs acknowledged the role of some public agencies,
but still 13% of enterprises expressed negative opinions, and revealed that no export
support was made available to them through of these agencies and ministries. In an attempt
to assess the impact of the existing structure of organizations and agencies working in the
area of promoting exports, the entrepreneurs were to determine whether they used those
agencies or not; and in case they did, how do they evaluate these services.
83
Which of the
following
agencies
benefited you,
and how did
you find their
assistance?
a. benefited from it
1-No help at all
2-Could improve
3-Reasonable
4-Useful
5-Very useful
Total
(1+2) Neg. role
If you benefited from its assistance:
(4+5) Pos. role
Table 27: Evaluation of the Existing Structure of Support Organizations
Center for
Export
Development
12.3
-
-
77.8
11.1
11.1
100
0
22.2
5.5
-
-
50
50
-
100
0
50
12.3
11.1
-
55.6
11.1
22.2
100
11.1
33.3
42.5
-
16.1
29
32.3
22.6
100
16.1
54.9
5.5
-
-
-
100
-
100
0
100
17.8
-
-
38.5
53.8
7.7
100
0
61.5
Egyptian
Exporters’
Association
Egyptian Bank
for Export
DevelopmentEBED
Banking sector
(commercial
banks)
Egyptian
Company for
Guaranteeing
Exports- ECGE
Commercial
attachés
b. How do you find its assistance?
International
Trade PointsITPs
General
Authority for
International
Exhibitions &
Markets
International
Executive
Services
Company-IESC
19.2
-
7.1
42.9
42.9
7.1
100
7.1
50
35.6
3.8
3.8
19.2
42.4
30.8
100
7.6
73.2
1.4
-
-
-
100
-
100
0
100
Center for
Quality
Assurance
9.6
14.3
28.6
57.1
-
100
14.3
57.1
84
1-No help at all
2-Could improve
3-Reasonable
4-Useful
5-Very useful
Total
(1+2) Neg. role
(4+5) Pos. role
Which of the
following
agencies
benefited you,
and how did
you find their
assistance?
a. benefited from it
If you benefited from its assistance:
Federation of
Chambers of
Commerce
63
23.9
8.7
32.6
28.3
6.5
100
32.6
34.8
Federation of
Egyptians Ind.
37
7.4
3.7
40.8
37
11.1
100
11.1
48.1
28.8
4.8
-
19
61.9
14.3
100
4.8
76.2
1.4
-
-
100
-
-
100
0
0
1.4
-
-
-
100
-
100
0
100
28.8
4.8
-
9.5
47.6
38.1
100
4.8
85.7
GOEIC
43.8
3.1
3.1
18.8
50
25
100
6.2
75
Industry
Modernization
Program-IMP
12.3
11.2
22.2
22.2
22.2
22.2
100
33.4
44.4
Organization of
Intellectual
Property Rights
Protection-IPR
5.5
-
-
25
50
25
100
0
75
General
Authority for
Free-Zones &
Investment
(GAFI)
Social Fund for
DevelopmentSFD
Credit
Guarantees
Company- CGC
Egyptian
General
Organization
for Standards
and Quality
Control
b. How do you find its assistance?
The list of agencies includes a large number of active organizations. However, the degree of
utilization of their services by the entrepreneurs in the sample varies. Data reveal that the
Federation of Chamber of Commerce is by far the most widely used agency. The main
factor behind the importance of this agency is that the registration of the establishment is
obtained from it.
85
The General organization for Export and Import control, the banking sector, the Egyptian
Federation of Industries, the General Organization for Exhibitions, and International
Markets are considered the most widely used by exporters.
Nevertheless, when it comes to evaluating the services, the ranking changes. The leading
position has been given to the Egyptian Company for Guaranteeing Exports, the
International Service Executive Corporation, the Credit Guarantee Company, and the
Egyptian General Organization for Standards and Quality Control.
A number of other entities were also recognized as helpful, such as the Export Promotion
Center and Expo-Link.
However, when it comes to the entities with more negative evaluation the Industry
Modernization Program and the Egyptian Federation of Industries are on top of the list.
They are followed by the banking sector and the Quality Assurance Center.
Box 2: A brief look on the Role of IMP
The IMP is a national initiative jointly funded by the Government of Egypt and the
European Union to help develop international competitiveness in the private manufacturing
sector, so that it can benefit from new opportunities arising from exposure to global
markets, and the progressive introduction of free trade with the markets of the European
Union. Its overall strategic vision is to help industrial enterprises to modernize their
companies so that they become internationally competitive on a sustainable basis.
The IMP is actively involved in working with companies, including M/SMEs, to raise their
global competitiveness, focusing on developing their export orientation. This is achieved
through integration and cooperation with beneficiaries and partners (such as Technology
Centers, Business Associations, R&D Institutions, Governmental Institutions, etc…). The
IMP through its delivery of interrelated business support activities, can help companies to
upgrade their operations and improve their ability to compete effectively and efficiently
both in local and foreign markets. As a key part of this process, companies can be helped to
develop their export potential and meet international challenges.
Beneficiaries:
• Private Manufacturing Sector/ SMEs
• Business Representative Organizations, Service and Support Institutions.
• Governmental Institutions especially the Ministry of Foreign Trade and Industry
and the Federation of the Egyptian Industries.
Eligibility for Small and Medium Enterprises (M/SMEs)
• Be an enterprise of more than ten full-time employees.
• Operate in the industry or industry related service sectors.
• Be privately owned or with majority private share.
• Be commercially registered in Egypt.
• Show potential for growth.
Cost Share
SME ‘s cost share 15% to 30% of the total service cost.
As to the most important services accrued from these organizations, the entrepreneurs
mentioned that participating in exhibitions, offering market domestic and international
information, helping in securing finance and match making between small and large firms,
and domestic and international companies.
86
Table 28: The Services Derived From the Support Organizations
Service
Frequency
Market information
20
Exhibitions
29
Matchmaking with foreign customers
13
Credit & finance
16
Seminars
5
Ease of Export procedures
7
Origin Certif.
1
Ease of Draw Back
2
N.A
9
Total
102
Percent
19.61
28.43
12.75
15.69
4.90
6.86
0.98
1.96
8.82
100
Nevertheless these agencies suffer from some drawbacks which limit their efficiency and
their outreach capacities. The widespread bureaucracy has been cited as the most negative
factor that characterizes them. Other reasons were enumerated such as the lack of
coordination amongst the service providers, leads to duplication, negligence of new aspects
of assistance, and concentration on similar easier targets. Furthermore, the limited access to
finance and the inability to respond to the businessmen needs have been also considered
some of the main constraints of the support agencies.
Table 29: Factors Affecting exports negatively
Constraints
Lack of qualified labor
Lack of coordination with other institutions with similar goals
Bureaucracy
Inability to respond to business requirements
Lack of funding
Others
N.A
Total
Frequency
14
33
43
19
25
3
10
147
Percent
9.52
22.45
29.25
12.93
17.01
2.04
6.80
100
Section Six: Major Obstacles Facing Exportation and Recommended Policies
In the last part, we attempted to seek the opinion of the exporters with regards, several
export related issues:
- The export procedures and process
- The recent developments in foreign trade policies
- The services provided by the domestic and international service providers and an
evaluation of the most useful agencies to the M/SMEs.
- Suggestions to increase exports
Firstly, the export procedures and process
To ensure in-depth knowledge of the procedures that really affect the process either
positively or negatively, a list of the major steps taken by the exporter was presented, and
the entrepreneurs were asked to state whether such steps represented obstacles or were
easily (time and cost) implemented.
87
The following table summarizes the evaluation of the respondents of the different export
procedures:
Pos. performance
Neg. performance*
9.6
12.3
31.5
21.9
100
34.3
53.4
Current exchange rates
28.8
4.1
15.1
35.6
16.4
100
32.9
52
Sales tax on components of exportable goods
35.6
2.7
13.7
24.7
23.3
100
38.3
48
Costs of air cargo
45.3
4.1
16.4
20.5
13.7
100
49.4
34.2
Export credits
47.9
6.8
13.7
23.4
8.2
100
54.7
31.6
Costs of land transportation
47.9
6.8
15.1
19.2
11
100
54.7
30.2
Costs of marital cargo
41.1
8.2
21.9
19.2
9.6
100
49.3
28.8
Administrative costs
41.2
17.8
12.3
21.9
6.8
100
59
28.7
Pricing estimates of imported goods
50.7
13.7
17.8
11
6.8
100
64.4
17.8
Quality and costs of domestic transportation
58.9
5.5
20.5
13.7
1.4
100
64.4
15.1
Too many examination procedures
42.5
19.2
26
5.5
6.8
100
61.7
12.3
Reimbursement of customs- DRAWBACK
82.2
4.1
4.1
5.5
4.1
100
86.3
9.6
Environmental standards
72.5
19.2
5.5
1.4
1.4
100
91.7
2.8
Some Obstacles on
competitiveness
24.7
Existing obstacles
don’t influence
competitiveness
Bureaucratic impediments for exports
Export Obstacles and their degree of
severity/simplicity
No obstacles
Total
Obstacles do
influence
competitiveness
Too much obstacles
that force us to give
up exporting totally
Table 30: Severity or simplicity of export-related procedures
88
Total
Pos. performance
Neg. performance*
Some Obstacles on
competitiveness
Obstacles do
influence
competitiveness
Too much obstacles
that force us to give
up exporting totally
Existing obstacles
don’t influence
competitiveness
76.8
16.4
6.8
-
-
100
93.2
0
Average Total
49.7
9.9
14.4
16.7
9.4
100
59.6
26.0
No obstacles
Trade marks
Export Obstacles and their degree of
severity/simplicity
*The negative performance has been ranked following a descending order to show the severity of export
related constraints
Looking at the previous table reveals several points:
1. The majority of enterprises (60%) were in general satisfied with the export
procedures.
2. The trade mark registration and environmental standards were among the easiest
steps.
3. The drawback system, the evaluation of the value of imported goods, and the costs
of domestic transportation are also considered as relatively unproblematic
procedures.
4. As to the factors that were considered of negative impact by around 50 % of the
exporters they included on top of the list: the slow tedious paperwork bureaucracy15.
The complaint of the long time needed to complete export procedures is still
dominant constraint. In addition, the current exchange rate policy is affecting
negatively the exports due to the unavailability of foreign currencies in some
instances, and the difficulties in predicting the price of the Egyptian Pound. Both
factors affect negatively the investment and export plans. Furthermore, the
imposition of Value-added taxes on imported raw materials which are used as
components in the export goods is considered as one of the main obstacles that
affect the export prices and make Egyptian products less competitive in the
international market.
5. In addition to the previously mentioned obstacles there are a number of other
sources of constraints such as the high costs of the air, land and sea freight. and the
limited export credit to M/SMEs.
6. The impact of cumbersome procedures was not uniform; there were significant
differences according to size and to economic activities. The classification of
problems according to the size of enterprises reveals one important fact, namely,
that the burden of procedures is less felt by the larger enterprises compared to
smaller ones. Table 36 confirms this trend, as on the average smaller firms have
more complaints of the different export-related procedures..
7. As to the weight of problems according to the different industries, table 37 shows
that the furniture industry suffers most from the export procedures especially, the
bureaucracy, the administrative costs, the transportation cost(air, maritime, or land
15
This includes all related customs clearance procedures and duty drawback mechanism
89
freight), export credit insufficiency. Other industries have similar complaints,
though less intense.
8. In addition, contrary to the expected, foreign enterprises suffer less than joint
companies or totally national owned enterprises.16
Secondly, the recent developments in foreign trade policies
In this part we try to find out whether the positive developments in the Drawback system,
the temporary release of imported inputs, and the recent tariff reductions have affected the
export process of the M/SMEs positively or not.
(a)
the drawback system: i.e. the reimbursement of the customs on imported goods that
go as components in the exported products has been appreciated by 4% of the exporters,
while the rest of them did not feel the same way.
(b)
The few respondents that felt the positive change of the system stated that the time
required to reimburse has decreased.
(c)
As to the remaining group (96%), it felt that drawback system was still inefficient,
and the reimbursement process is lengthy, requires a lot of paper work and permits from
the customs authority, the tax authority, and the Industrial Control agency. In some
instances they resort to filing law suits to retrieve their deposited money back.
Table 31: Do you see any positive developments in the Drawback regulations over
the last five years?
Frequency
Percent
Yes
3
4.11
No
70
95.89
Total
73
100
As to the temporary release system, the majority of respondents (88%) either expressed
that it was ineffective (59%) or of little impact (29%).
Table 32: Does Temporary Release Impact Your Exporting Capacity?
Frequency
Percent
Has a great impact
9
12.33
Limited impact
21
28.77
No impact
43
58.9
Total
73
100
And finally the recent changes in the customs tariff rates that led to substantial tax cuts
were to be investigated. The next table summarizes the answers to one basic question: Did
the new customs tariff reductions affect your exports?
Table 33: Would the latest tariff changes impact your exporting capacity?
Frequency
Percent
Has a great impact
14
19.18
Limited impact
23
31.51
No impact
Total
16
36
73
49.32
100
See Table 35.
90
While half of the exporters stated that it did not affect their exports, around one fifth of
them felt quite differently, as they believed it affected positively and substantially their
exports.
However, when they were asked about the future impact of such tariff reductions on their
enterprises, they listed several positive outcome such as:
1-lower production costs, which could lead to opening up of new markets;
2-lower raw materials’ costs, which will reduce the consumer prices eventually;
3-lower costs will lead to achieving more profitability.
The same group of the exporters (20%) also indicated that the present changes are quite
sufficient to encourage exports. Nevertheless, the rest of entrepreneurs indicated that a lot
of policy changes are required to help support exports, and they include: a comprehensive
tax reform that reduces the tax rates on M/SMEs, abolishment of bureaucracy, drastic
reform of the customs authority, as well as making information available to the exporters.
Thirdly, The services provided by the domestic and international service providers and an
evaluation of the most useful agencies to the M/SMEs.
The present organizations that operate in the area of supporting M/SMEs are supposed to
be offering them various services. Thus the question was whether they received such
services or not.
Table 34: As Small And Medium Enterprises, Do You Get Any Services From Any
Domestic Or Foreign Institutions In The Following Areas?
Yes
No
Total
Technology provision
Marketing
Finance (loans, credits)
Training
Matchmaking with
customers
Frequency
18
165
183
Percent
9.84
90.16
100
Frequency
11
172
183
Percent
6.01
93.99
100
Frequency
27
156
183
Percent
14.75
85.25
100
Frequency
21
162
183
Percent
11.48
88.52
100
Frequency
23
160
183
Percent
12.57
87.43
100
It is obvious that only a limited number of the M/SMEs received financial and nonfinancial business support services. Financial and match-making services are ranked on top
of the ladder of assistance offered to M/SMEs, while training and technical assistance
follow them in the degree of outreach. Marketing services need to be more strengthened
and expanded.
91
The most useful organizations to M/SMEs proved again to be the Egyptian Federation of
Chambers of Commerce, the Egyptian Federation of Industries and the Banking sector, and
followed in importance by the Ministry of Industry and GAFI, the SFD and the General
authority for Export and Import Control respectively. As to the service, M/SMEs answers
revealed that the Ministry of Tourism, the Ministry of Communications were the most
helpful entities to their activities.
Fourthly, Suggestions to increase exports
At the end the entrepreneurs were asked to express their opinions with regards the kind of
change they deem necessary to help increase exports.
The responses varied but we will try to classify them into four main categories according to
their importance (in descending order):
¾ Reducing tax rates, customs tariffs, sales taxes and export fees and in some cases the
respondents suggested total tax and customs exemptions.
¾ Restructuring the customs authority -especially in the ports- and simplification of
the administrative procedures in those offices.
¾ Reducing the costs of raw materials and granting better access to better quality
production inputs. Such changes would ensure producing higher quality goods that
are competitive in the international markets.
¾ Getting rid of the bureaucracy, by simplifying the procedures, making the rules and
conditions of transactions more transparent, and by reducing the value judgment
power of the government employees.
¾ Making information on international markets, their needs and tastes available to
M/SMEs at reasonable costs.
¾ Commercial banks have to be motivated to become more involved in M/SMEs
lending. And loans should be offered with encouraging terms of lending.
¾ Linking M/SMEs with research institutions, in a way that helps improve the
product’s quality and venturing into new manufacturing territories.
¾ Technical progress in the Egyptian manufacturing sector in general could have
positive influence on M/SMEs, as more technically advanced machinery will be
offered in the market at low costs.
Summary and conclusion
At the end it has to be mentioned that despite the obstacles and difficulties the M/SMEs
have to deal with on a daily basis, there is great potential for improvement. Data revealed
that around 40% of the M/SMEs in the sample were export enterprises. One third of this
segment, are M/SMEs that export more than half of their production. There is apparent
potential in certain industries such as furniture, textiles, and food industries. The potential is
measured in terms of their ability to increase their exports during the last five years, the
percentage of exports to total production, and their future export plans and expansion
prospects. The Arab and African markets are the main targeted export markets.
Statistical analysis also revealed that the SME becomes more competent in the exports
markets when it has a Quality Control department, Marketing Department and when they
receive real and substantial business services.
At the end it maybe useful to state in the end the main findings based on the suggestions of
the entrepreneurs, which are in line with other previous studies as MOF, 2004.
92
ƒ
What kind of changes are needed by the M/SMEs to increase their export
potential?
Fiscal Policies are required to act as conducive tools to M/SMEs. Several changes are
requested in this respect such as reducing tax rates, customs tariffs, sales taxes and export
fees. Though the customs tax reductions which were initiated in July 2004 and amended in
December 2004 were acting in the suggested direction, the respondents were asking for
more reductions especially for the imported raw materials and semi-finished inputs.
There is also a general consensus among the entrepreneurs that the GST is rather high and
prohibitive. It affects their ability to increase sales internally and thus increase the scale of
their production and reduce the marginal costs and prices of their products. There is need
to look into the level of the GST and to reduce it.
Another request is the restructuring of the customs authority -especially in the ports- and
the simplification of the administrative procedures in those offices. The bureaucracy and
bribes are still widespread among the employees of these crucial authorities and hinder the
fast flow of exports and imports. Getting rid of the bureaucracy, by simplifying the
procedures, making the rules and conditions of transactions more transparent and by
reducing the value judgment power of the government employees are imperative for the
export-import growth.
Accessibility to Information: is one of the most pressing requests of M/SMEs. Export
promotion can not be accomplished without having information both on domestic
producers and international markets.
As to the domestic producers, meetings with the entrepreneurs indicated that the lack of
knowledge about the large and major domestic producers of raw materials and production
inputs leads to the acquisition of lower grades production inputs sometimes and affects the
quality of the final products. Thus establishing stronger Information-Pathways and Linkages
within the domestic market is essential to M/SMEs.
The same applies to the international markets, as the shortage in information works in two
ways:
Information on the producers markets in the international markets. The producers
markets include the specialized machinery and equipments producers, and the raw materials
and semi-finished products produced abroad. The lack of necessary information limits the
possibilities of acquiring best production inputs at lowest prices to M/SMEs.
Information on the international consumers/ producers needs of the different
products: Gaining such information could be helpful in directing M/SMEs to expand
their production and exports in the directions indicated by the international profile of needs
and tastes.
Information could be strengthened by several means :
1-Creating more vigorous links between M/SMEs business associations and the counterpart
import associations and the macro-importers in the main markets;
93
2-Establishing Trading Houses whose role would be to bridge the existing gap between the
domestic producers and the international markets; and act as exporters of the domestic
products on one hand, and importers of raw materials on the other hand.
3-Establishing Information Stores/ Offices in cluster communities, where the spread of
knowledge and information could be easier done. These IF could act as a liaison between
the producers in a certain industry and the Trading Houses on one hand, and the
international specialized markets on the other hand.
4-Helping the M/SMEs have their own web-sites on the internet, where they could start
directly exporting through more reliance on E-commerce.
Technical Assistance: Until now the technical guidance to M/SMEs is the most
ineffective business service. Regardless of the existence of such programs, empirical results
reveal that their ability to reach out and interfere in a helpful and effective way is quite
limited.
The IMP has proved to be one of the least supportive, despite its nature as a program
intended to help the M/SMEs upgrade their production capabilities and raise their
technological efficiency and support them to become more competitive in face of the
globalization wave.
In addition, the Business Support Service Centers or providers were not even mentioned by
any of the entrepreneurs.
Linking M/SMEs with research institutions, in a way that helps improve the product’s
quality and venturing into new manufacturing territories is also done on a very limited scale
by very few M/SMEs.
Strengthening the link between universities and research institutes on one hand and the
M/SMEs on the other hand is needed. Establishing specialized technical business centers
that could connect specialized research / university departments with certain industries is a
basic requirement to improve the productive efficiency of the M/SMEs and introduce them
to new innovative production ideas. However, this link has not to be restricted to M/SMEs,
but should also encompass larger enterprises. Technical progress in the Egyptian
manufacturing sector in general could have positive influence on M/SMEs, as more
technically advanced machinery will be offered in the market at low costs.
Access to finance: is still another major impediment especially where the smaller sized
enterprises are concerned. Data indicate that as the firm size increases the complaint of this
constraint becomes less excessive, though it does not disappear altogether. More efforts
have to be paid to directing more credit to export companies, especially with ongoing excess
deposits in the banking sector.
94
Table 35 : Main Obstacles by Sector
Sector
Main Obstacles
Public
Private
Domestic
Private
Foreign
Joint domestic foreign Comp.
Too many examination procedures
-
56.5
71.4
66.7
Pricing estimates of imported goods
-
50
42.9
66.7
Bureaucratic impediments for
exports
-
75.8
71.4
100
Export credits
100
54.8
-
100
Costs of air cargo
-
59.7
28.6
33.3
Costs of marital cargo
-
62.9
28.6
66.7
Costs of land transportation
-
56.5
28.6
33.3
Trade marks
-
27.4
-
-
Environmental standards
-
30.6
14.3
-
Administrative costs
-
61.3
57.1
33.3
-
48.4
-
-
-
67.7
57.1
33.3
Current exchange rates
100
69.4
71.4
100
Reimbursement of customsDRAWBACK
-
12.9
57.1
33.3
51.5
33.67142857
45.23571429
Quality and costs of domestic
transportation
Sales tax on components of
exportable goods
Average Total
95
Table 36 :Main Obstacles by Capital
Main Obstacles
Capital in LE '1000
2005001000100-199
499
999
4999
50009999
10000200000
56.3
37.5
36.4
20
43.8
25
54.5
50
100
62.5
87.5
72.7
42.9
50
60
37.5
37.5
45.5
90
78.6
50
60
37.5
37.5
36.4
40
90
50
50
80
56.3
75
36.4
Costs of land transportation
60
100
42.9
50
60
37.5
37.5
45.5
Trade marks
40
60
28.6
25
-
6.3
12.5
18.2
Environmental standards
40
60
35.7
25
20
12.5
25
9.1
Administrative costs
Quality and costs of domestic
transportation
Sales tax on components of
exportable goods
Current exchange rates
Reimbursement of customsDRAWBACK
Average Total
60
100
57.1
50
60
50
75
27.3
40
100
50
50
40
18.8
12.5
27.3
60
100
78.6
50
60
56.3
50
45.5
60
100
71.4
50
80
68.8
62.5
63.6
-
10
14.3
-
-
31.3
25
27.3
50
85
53
41
47
41
43
39
<50
50-99
Too many examination procedures
60
100
71.4
50
20
Pricing estimates of imported goods
Bureaucratic impediments for
exports
Export credits
60
80
57.1
25
80
100
64.3
60
100
Costs of air cargo
40
Costs of marital cargo
96
Table 37 : Main Obstacles by Industry
Main Obstacles
Too many
examination
procedures
Pricing
estimates of
imported goods
Bureaucratic
impediments
for exports
Export credits
Costs of air
cargo
Costs of marital
cargo
Costs of land
transportation
Trade marks
Environmental
standards
Administrative
costs
Quality and
costs of
domestic
transportation
Sales tax on
components of
Wood &
Food
Textiles
Furniture Plastics
Ind.
&RMC
Ind.
Electrical & Metallic &
Chemicals &
Construction
Leather Sponge
Engineering Mechanical
Pharmaceutical
Ind.
Ind.
Ind.
Ind.
Ind.
Ind.
66.7
87.5
40
77.8
-
28.6
33.3
25
100
-
38.1
75
40
55.6
50
57.1
66.7
-
100
-
76.2
100
100
33.3
50
85.7
66.7
50
100
100
38.1
100
60
33.3
50
57.1
66.7
-
-
-
28.6
100
60
66.7
50
42.9
-
25
100
100
57.1
93.8
60
33.3
75
42.9
33.3
25
-
100
47.6
100
40
11.1
75
42.9
33.3
-
-
100
19
62.5
20
11.1
-
14.3
-
-
-
-
28.6
56.3
20
22.2
-
14.3
33.3
-
-
-
61.9
100
40
44.4
50
28.6
33.3
-
100
100
38.1
87.5
20
22.2
25
14.3
33.3
-
-
100
52.4
93.8
80
66.7
50
57.1
66.7
25
-
100
97
Main Obstacles
exportable
goods
Current
exchange rates
Reimbursement
of customsDRAWBACK
Average Total
Wood &
Food
Textiles
Furniture Plastics
Ind.
&RMC
Ind.
Electrical & Metallic &
Chemicals &
Construction
Leather Sponge
Engineering Mechanical
Pharmaceutical
Ind.
Ind.
Ind.
Ind.
Ind.
Ind.
57.1
100
80
66.7
75
71.4
66.7
25
100
100
28.6
-
20
11.1
25
28.6
-
25
100
-
46
83
49
40
41
42
38
14
50
57
98
Chapter Four: Legislative and Institutional Framework:
The institutional setup that governs the M/SMEs is complex. There are several laws and
regulations that govern M/SMEs. Law141/2004 has consolidated a large number of steps
that M/SMEs had to consider before when practicing their activities. Moreover, the new law
has assigned the Social Fund for Development (SFD) with the responsibility of overseeing
M/SMEs and coordinating all the activities of other governmental and non governmental
organizations in dealing with M/SMEs. Below is an overview of the laws and regulations
that govern M/SMEs in different fields. The following section describes and counts the
documents required for establishing a firm. We then provide a review of the different
agencies that deal with M/SMEs.
Law 141/2004 on Development of Small Enterprises
This law consists of 18 articles, and is divided into 4 parts. The first part includes the
definitions mentioned in the law, while the second tackles the legal steps of establishing
small enterprise and how to deal with local or foreign institutions. The third part is about the
procedures of financing small and micro enterprises, and finally the fourth part is discussing
benefits or advantages allocated for small enterprises according to this law.
The executive decree of Law 141/2004 was issued by the Prime Minister (Decree number
1241/2004). It consists of 22 articles. The executive decree largely recognizes the core role
of the SFD, and its exclusive responsibility to endorse the law and guarantee that it brings its
expected benefits to small enterprises in more details. It also lays down the procedures of
establishing these enterprises and how to become eligible to obtain funds from the SFD.
One of the most important features of the law is that it encourages the SFD to re-lend small
enterprises loans at a lower than the market (subsidized) rate, and allows the state budget to
compensate the SFD with the difference. This aims to help enterprises while starting up
their activities.
Procedures Of Licensing, Monitoring And Inspection
First: Legislations related to Commercial Enterprises
1- Licensing Procedures/ steps
Licensing Procedures/ steps
Governing Law/ legislation
Registration
Holding companies or limited companies
Article 48 of decree no. 1 for the year 1883
register at second degree court where their
on the commercial law
enterprises are located
Article 21,22 of law no. 114 for the year 1946
Registering in the registrar
on organizing the procedures of registrar
Getting permission from the Chamber of
Article 3 of law no. 34 for the year 1976 on
Commerce to register in the registrar
commercial file
Registering in the Commercial Registrar
Article 2 of law no. 34 for the year 1976 on
commercial file
99
Licensing Procedures/ steps
Issuing tax file and deciding taxing status
Getting location license from the district.
This step should be followed either to
establish a new location or to change the old
one. The request should be presented to the
concerned department according to the legal
procedures
Preparing the location according to licensing
conditions: Electricity company, water and
water waste, telecommunication, and natural
gas.
Medical examination for the labors/ workers
before their employment by the General
Authority of Health Insurance according to
fees mentioned in a ministerial decree of the
Minister of Man power
Sending copies of the contracts of the
employers to the concerned civil insurance
bureau
Informing the National Authority of Civil
Insurance with the data of the employers and
their wages according to its applications
Informing Tax Department of employers'
salaries
Presenting sample no. 9 of the unified
taxation in its right time
2- Follow up and inspection
Inspection
Tax Department
Labor Bureau
Insurance Bureau
Governing Law/ legislation
Article 5, 15, 96 of law no. 157 for the year
1981 on tax law
Article 1, 6 of law no. 106 for the year 1976
on building law
Unified labor law
Decrees of the Minister of Man Power
Unified labor law
Article 128, 151 of law no. 79 for the year
1975 on civil insurance law
Article 57 of law no. 157 for the year 1981
on income taxation law
Article 4 of the Minister of Finance no.
82/164 on issuing the executive regulations
of income taxation law
Governing Law/ legislation
Article 192 of law no. 157 for the year 1981
on income taxation law. The employers of
the department are inspecting to what extent
the procedures of the law is applied
According to the unified law, police officers
are concerned with inspecting work locations
Article 152 of law no. 79 for the year 1975
on civil insurance law.
The concerned employers of Insurance
Authority have the power to inspect to what
extent the law is applied
100
Second: Legislations related to Industrial Enterprises
1- Licensing Procedures/ steps
Licensing Procedures/ steps
Issuing license from the Minister of Industry
after the agreement of the concerned
committee
Registering in the industrial file as a
condition to deal with governmental bodies
Issuing a statement of a bank registered in
the Egyptian Central Bank saying that it
deposited 20% of the capital in cash for joint
companies or limited companies as a
condition to the license
Issuing a license from General Authority of
Investment and Free Zones according to the
legal procedures
Submitting the papers of the license with the
needed data prepared by the Egyptian
Environmental Affairs Agency (EEAA) in
cooperation with the concerned management
authority
Submitting location tax for factories and labs
according to the legal procedures
Submitting a request to the Egyptian
Authority for standardization to decide the
standards of the industrial products
Registering the trade mark of the product
according to the procedures of the industrial
register
Submitting a written request to the authority
of the concerned free zone when there is a
need to enter goods, chemicals, parts and
local or foreign goods into the free zone till
using it in the productive process and
returning it again without any need to follow
the rules of importing
Submitting a request to the department
supervising the General Authority for Roads
and Bridges or local management units
according to the specializations of each
Governing Law/ legislation
Article 1 of law no. 21 for the year 1958 on
reconstructing industry
Article 2, 4 of law no. 24 for the year 1977
on the industrial file (according to the
procedures of the executive regulations,
article 1 of the decree of the minister of
industry no. 437 for the year 1992 on
amending the executive regulation of the
industrial file law)
Article 5 of the executive regulations of the
law on investment issued by the decree of
the prime minister no. 2108 for the year
1997
Article 8 of the executive regulations of the
law on investment
Article 12 of the decree of the prime minister
no. 338 for the year 1995 on issuing the
executive regulation of the environmental
law
Article 10 of law no. 56 for the year 1954 on
location/ building taxes
Article 1 of law no. 2 for the year 1957 on
standardization
The second book of intellectual property
rights law no. 82 for the year 2002
Article 45 the executive regulation of the law
on investment
Article 6 of law no. 84 for the year 1968 on
public roads
101
Licensing Procedures/ steps
Keeping a private file for environmental
affairs to be followed up by EEAA
2- Follow up and inspection
Inspection
License department of the concerned district
Industry General Authority
Tax Authority
Labor Bureau
Insurance Bureau
EEAA
Governing Law/ legislation
Article 22 of law no. 4 for the year 1994.
Article 17,18 of the executive regulation of
the same law
Governing Law/ legislation
Article 22 of law no. 453 for the year 1954
on industrial and trade shops
Article 12 of law no. 21 for the year 1958 on
reconstructing and encouraging industry and
its amendment
Article 192 of law no. 157 for the year 1981
on income tax
The unified labor law
Article 152 of law no. 79 for the year 1975
on civil insurance law
Article 102 of law no. 4 for the year 1994 on
environmental law
Third: Legislations related to tourism activities
1- Licensing Procedures/ steps
a- For firms working in tourism sector
Licensing Procedures/ steps
Governing Law/ legislation
Presenting a request for a license from the Article 3 of law no. 38 for the year 1977 on
ministry of tourism
restructuring touristic companies, amended
by law no. 118 for the year 1983 & article no
1 of the decree of the minister of tourism no.
222 for the year 1983 dealing with the
executive regulations of the law
Getting an agreement from the ministry of Article 3 of the law on restructuring touristic
defense when dealing with military areas or companies
borders
b- For hotels and restaurants
Licensing Procedures/ steps
Governing Law/ legislation
Presenting a request for a license from the Article 4 of law no. 371 for the year 1956 on
department of license of the hotels and public shops
restaurants, ministry of tourism
Article no. 2 of law no. 1 for the year 1973
on hotels and restaurants.
Article 1 of the decree of the ministry of
tourism no. 74 /181 on the conditions and
regulations of issuing licenses for hotels and
restaurants
Paying annual fees on inspection
Article 9 of the law on public shops
Preparing files, according to the sample Article 28 of the law on public shops
102
Licensing Procedures/ steps
signed by the ministry of interior, containing
full data of the guests and the dates of their
check in and out.
c- For Souvenir shops
Licensing Procedures/ steps
Presenting a request for a license from the
ministry of tourism
Put special mark on the shop according to
what the minister of tourism agree
Preparing files, according to the sample
signed by the ministry of interior, containing
full data of the guests and the dates of their
check in and out
2- Follow up and inspection
Inspection
License department of the concerned district
Industry General Authority
Tax Authority
Labor Bureau
Insurance Bureau
EEAA
Department of regulations and licenses
Ministry of tourism
Governing Law/ legislation
Governing Law/ legislation
Article 1 of law no. 1 for the year 1992 on
Souvenir shops
Article 3 of law no. 1 for the year 1992 on
Souvenir shops
Article 7 of law no. 1 for the year 1992 on
Souvenir shops
Governing Law/ legislation
Article 22 of law no. 453 for the year 1954
on industrial and trade shops
Article 12 of law no. 21 for the year 1958 on
reconstructing and encouraging industry and
its amendment
Article 192 of law no. 157 for the year 1981
on income tax
The unified labor law
Article 152 of law no. 79 for the year 1975
on civil insurance law
Article 102 of law no. 4 for the year 1994 on
environmental law
Article 41 of law no. 371 on public shops.
Article 41 of law no. 372 for the year 1956
on parks.
Article 30 of law no. 38 for the year 1997 on
reconstructing touristic companies.
Article 5/7 of law no. 1 for the year 1992 on
souvenir shops and touristic goods.
Fourth: Legislations related to agriculture and reclamation activities
1Licensing Procedures/ steps
Licensing Procedures/ steps
Governing Law/ legislation
Following the instructions of the general Article 10 of law no. 143 for the year 1981
authority for agricultural development
on desert lands.
Decree no 82/198 on the executive
regulations of the law
Issuing a license from the ministry of Article 9 of the law no. 12 for the year 1984
irrigation for the workings of irrigation.
on irrigation
103
Licensing Procedures/ steps
Issuing a license from the ministry of
agriculture when dealing with fruit farms
Issuing a license from the General Authority
of Investment and Free Zones according to
the legal instructions
Presenting a request for custom exemption
for reclamation lands
2- Follow up and inspection
Inspection
Ministry of Water Resources and Irrigation
Ministry of Agriculture
Governing Law/ legislation
Article 8 of the law no. 53 for the year 1966
on agriculture
Article 8 of the executive regulations of the
law on investment encouragement
Article 23 of the law on investment
encouragement
Governing Law/ legislation
Article 5/d of law no. 12 for the year 1984
on irrigation
Article 77 of law no. 53 for the year 1966 on
agriculture
Fifth: Legislations related to food production
1Licensing Procedures/ steps
Licensing Procedures/ steps
Governing Law/ legislation
Issuing licenses for bakeries and rice
Law no. 95 for the year 1945 on food
factories from the food supplies directorate
supplies
Attaching health certificate from the
exporting country.
Following the listed legal regulations of the
Article 13 of the law no. 10 for the year 1966
Ministry of Food Supply and Ministry of
on food exporting oversight
Health on imported food
Issuing health certificate from the directorate
where the factory is located
Projects dealing with food trade are under
Article 4 of law no. 68 for the year 1949 on
the oversight of specialists of the ministries
trade organization
of food supply, interior and health.
For food exporting, the general authority for
oversight on exports and imports should
Article 5 of law no. 155 for the year 2002 on
examine and supervise the exported
exporting development
products.
2- Follow up and inspection
Inspection
Ministry of Food Supplies
Ministries of Health, Trade and Food
Supplies
Governing Law/ legislation
Article 4 of law no. 68 for the year 1949
Article 4 of law no. 68 for the year 1949
Sixth: Legislations related to "hazardous activities"
1Licensing Procedures/ steps
Licensing Procedures/ steps
Governing Law/ legislation
These activities need the same procedures Article no. 2 of law no. 453 for the year 1954
followed by other activities. Adding to this, it on produce and trade shops and other
also needs an additional procedures hazardous activities
104
Licensing Procedures/ steps
Governing Law/ legislation
according to its Hazardous item as a license
from the local assemblies and should be
submitted to routine inspection
As for animal food factories, it needs Article 115 of the law no. 53 for the year
another license from the Ministry of 1966 on agriculture.
Agriculture.
2- Follow up and inspection
Inspection
Governing Law/ legislation
Department of licensing of the concerned
district
Article 22 of law no. 453 for the year 1949
on industry and trade shops
General Authority of Industry
Article 12 of law no. 21 for the year 1958
Ministry of Agriculture
Article 116 of law no. 53 for the year 1966
Seventh: Critical Problems: Procedural Complications
Check list of procedures, documents, and steps need to be followed
No. of
Procedures/
Authority
Procedure/
LE
Duration/ day
Steps
Steps
Registering the
Registrar Bureau
date of the
4
4.80
2
rental contract
in the registrar
Phase I:
Registering the
Commercial
1
1
contract of the
registrar
enterprise
152 if the capital
is 100.000,
Phase II:
adding to the
Registration in
Commercial
fees of
the Commercial
Unit of the
6
publishing it in
2
Unit of the
Primary court
the official
court
newspaper in a
cost of LE 100200
Steps of issuing
Tax department
Tax File
6
15
Registering in
Commercial
The
Commercial
2
0.003% of the
capital per year
2
105
Procedures/
Steps
Authority
Chamber
Chamber
Issuing
commercial file
Commercial
Registrar
Issuing Social
Insurance
Folder
Social Insurance
department
Issuing license
from the district
Shop license of
the district
No. of
Procedure/
Steps
LE
Duration/ day
4
44 for individual
activity
56 for enterprise
if the capital is
between 100010.000
2
3-4
15 for job
owner and for
the labor
7
9
See the Annex
120
Linking the law and the executive regulation
The law empowered the Prime Minister to issue the executive decree and further elaborate
on its principles and objectives. The executive decree has added some key responsibilities
and liabilities to the SFD. This is revealed as follows:
The law assigns the SFD to undertake specific assignments, including identifying and
informing small enterprises about investment opportunities, preparation of feasibility studies
to help small entrepreneurs, advising on markets and prices of equipment and machineries,
providing manuals on how to deal with accounts and auditors, explaining risks facing small
enterprises, helping small enterprises to get access to local and external exhibitions, and,
assisting them in getting the know how in production and marketing.
The executive decree includes as well the fact that the SFD shall put together an annual plan
to raise the awareness of the public on small enterprises, reviews and consults on bills
affecting them, and supports the creation of competent marketing agencies to help small
enterprises emerge and develop.
One point that might be raised about the interface between the law and the executive decree
is that the latter empowers the SFD to request banks and funding agencies to report to it on
their activities in the area of small enterprises, in order to have better coordination in this
area. However, neither the law nor the executive decree entails legal actions against those
who fail short to abide by the law. Yet, it provides a precautionary act in such cases, i.e. via
the intervention of the Central Bank.
Chapter Five: Comparative Advantage of M/SMEs:
To identify the potential of M/SMEs in exports we undertook an exercise that followed a
number of concrete steps. First, we tried to identify the sectors that have the highest
106
M/SMEs concentration. This was mainly based on a report undertaken by ERF for MOFT
in 2002 which included a table that had the percentages of workers and enterprises of
different sizes classified by sectors. We were not able to use CAPMAS data as we found out
that there were some discrepancies in the data provided. The sectors with the highest
M/SMEs concentration (using enterprises which included between 1-50 workers) were
identified and included wood products including furniture, textiles and ready made garments,
leather products, and processed food and beverages. We then calculated the percentage of
such sectors in total non-oil-exports where we found that it reached around 30% in the year
2000. The highest contributing sectors to total non-oil-exports were textiles and ready made
garments, and processed food and beverages, whereas wood industry and leather products
had very minor contribution (See Table 32).
Table 38: Egyptian M/SMEs’ percentage of total non-oil exports, their competitive
situations, revealed comparative advantage and industry concentration percentage,
2000
Concentration
% from
% (according to
Total
Competitive
ComCod
ComNam
number of
Egyptian
RCA
Situations
M/SMEs
non-oil
enterprises)
Exports
Wood MFG
635
634
99.9 %
Wood
manufactures,
n.e.s.
Veneers,
plywood,
reconstituted
wood, etc.
Total
0.05%
0.046592
No
Rising stars
0.02%
0.105308
No
Retreats
0.07%
Textiles and
Clothing
Clothing
99.7%
Textiles
97.9%
Average
Concentration
98.8%
651
Textile yarn
5.66%
5.668012
Yes
Retreats
658
Made-up articles,
wholly or chiefly
of textile mat.
3.52%
7.041981
Yes
Rising stars
107
ComCod
ComNam
659
Floor coverings,
etc.
652
653
657
655
656
654
Concentration
% (according to
number of
M/SMEs
enterprises)
Cotton fabrics,
woven
Fabrics, woven,
of man-made
fibers
Special textile
fabrics and
related products
Knitted or
crocheted fabrics
Tulles, lace,
embroidery,
ribbons,
trimmings, etc.
Textile fabrics,
woven, not
cotton or manmade fiber
Total
% from
Total
Egyptian
non-oil
Exports
RCA
Competitive
Situations
3.30%
12.72319
Yes
Declining
stars
1.26%
2.329907
Yes
Retreats
0.83%
1.133881
Yes
Declining
stars
0.11%
0.218408
No
Declining
stars
0.09%
0.253808
No
Rising stars
0.05%
0.368137
No
Declining
stars
0.01%
0.060621
No
Declining
stars
14.84%
Leather MFG.
99.5%
611
Leather
0.98%
2.420615
Yes
Declining
stars
612
Manufactures of
leather, parts of
footwear, etc.
0.03%
0.196914
No
Retreats
5.45452
Yes
Declining
stars
Total
054
1.01%
Food
Processing and
Beverages
Vegetables, fresh,
chilled, frozen or
simply preserved
99.3%
4.06%
108
ComCod
057
098
ComNam
Fruit and nuts
(not oil nuts)
fresh or dried
Edible products
and preparations,
n.e.s.
Concentration
% (according to
number of
M/SMEs
enterprises)
% from
Total
Egyptian
non-oil
Exports
RCA
Competitive
Situations
2.40%
2.599338
Yes
Declining
stars
1.48%
3.170357
Yes
Rising stars
042
Rice
1.03%
6.311271
Yes
Declining
stars
061
Sugar and honey
0.84%
2.900235
Yes
Declining
stars
0.70%
3.804047
Yes
Declining
stars
0.61%
1.001046
Yes
Declining
stars
0.37%
0.914763
No
Declining
stars
0.34%
4.360064
Yes
Retreats
0.10%
0.879308
No
Rising stars
0.09%
0.669835
No
Rising stars
0.09%
0.301535
No
Retreats
0.08%
0.212953
No
Declining
stars
0.07%
0.139995
No
Missed
opportunities
056
081
058
075
062
111
024
071
048
Vegetables, roots
and tubers,
prepared or
preserved
Feeding stuff for
animals (excl.
unmilled cereals)
Fruit, preserved
and fruit
preparations
Spices
Sugar
confectionery
(except
chocolate), other
sugar prep.
Non-alcoholic
beverages n.e.s.
Cheese and curd
Coffee and coffee
substitutes
Cereal
preparations and
preparations of
flour, starch
109
Concentration
% (according to
number of
M/SMEs
enterprises)
% from
Total
Egyptian
non-oil
Exports
RCA
Competitive
Situations
ComCod
ComNam
036
Crustaceans and
molluses,
whether in shell
or not
0.06%
0.107455
No
Declining
stars
074
Tea and mat#
0.06%
0.886569
No
Declining
stars
0.05%
0.272036
No
Retreats
0.05%
0.061525
No
Retreats
0.04%
0.033254
No
Retreats
0.02%
0.277894
No
Declining
stars
0.02%
0.066478
No
Declining
stars
073
034
011
035
044
Chocolate, other
food preparations
containing cocoa,
n.e.s.
Fish, fresh (live
or dead), chilled,
dried or frozen
Meat and edible
meat offals, fresh,
chilled or frozen
Fish, dried, salted
or in brine;
smoked fish
Maize (corn),
unmilled
001
Live animals
chiefly for food
0.02%
0.071442
No
Retreats
023
Butter
0.01%
0.140885
No
Retreats
0.01%
0.007835
No
Retreats
0.01%
0.018973
No
Declining
stars
0.01%
0.014307
No
Declining
stars
0.00%
0.091842
No
Rising stars
0.00%
0.069923
No
Retreats
112
037
022
091
045
Alcoholic
beverages
Fish, crustaceans
and molluses,
prepared or
preserved, n.e.s.
Milk and cream
Margarine and
shortening
Cereals, unmilled
(other than
wheat, rice,
110
ComCod
ComNam
Concentration
% (according to
number of
M/SMEs
enterprises)
% from
Total
Egyptian
non-oil
Exports
RCA
Competitive
Situations
0.00%
0.011011
No
Retreats
0.00%
0.002651
No
Retreats
0.00%
0.030782
No
Declining
stars
barley, maize
014
041
046
Meat and edible
meat offals,
prepared or
preserved, n.e.s.
Wheat (including
spelt) and meslin,
unmilled
Meal and flour of
wheat and flour
of meslin
072
Cocoa
0.00%
0.002456
No
Declining
stars
047
Other cereal
meals and flours
0.00%
0.031003
No
Retreats
Total
12.72%
Source: TradeCAN database, 2002.
The next step was going much deeper in analysis by identifying the sub sectors or products
that enjoy a comparative advantage. We depended on the conventional measure of
measuring comparative advantage which is the revealed comparative advantage indicator
(RCA)17.
Hence, in the wood industry, we had two sub sectors at the 3 SITC (Standard International
Trade Classification) digit level and both did not enjoy a comparative advantage. In textiles
and ready made garments sector we had 9 sub sectors where 5 enjoyed an RCA greater
than 1, implying that they have comparative advantage, and 4 did not.
In the leather industry, we had two sub sectors with 1 enjoying an RCA and the other not.
Finally in the processed food and beverages sector we had 23 sub sectors with non
enjoying RCA larger than 1. The processed food and beverages industry included some pure
agricultural products that did not pass by any processing activity but due to the inability to
The RCA measures the export of a specific product divided by total country’s exports divided further
by total world exports of those specific products and then divided by total all world exports. If the RCA is
greater than 1, then this implies that the country enjoys a comparative advantage in that product. If RCA
is less than 1 then this implies that the country does not enjoy an RCA. A higher value of RCA does not
imply a better comparative advantage.
17
111
separate it from its sub sector they were included (e.g. vegetables fresh and frozen where the
fresh are non-processed and the frozen are processed).
In many cases, analysis of where the exports’ potential of a certain country lies depend
mainly on this indicator, which although provides an insight on the potential export
capabilities of a certain country, it does not necessarily reveal all such potential, for a simple
reason which is that it does not take into consideration the import demand on that product.
Besides, the RCA is subject to other limitations including ignoring the influence of dominant
export product (although we have counted for this issue by excluding the oil from our
calculations) and the impact of government policies (including subsidies and taxes) on
affecting the RCA. For example, a country can have no comparative advantage in a
particular product but because the government is providing subsidies for that specific
product, its exports increased and acquired an RCA (e.g. the case of wheat produced in Saudi
Arabia which is produced at a very high cost). The same applies where taxes and red tape
measures may affect negatively the exportation of a certain product to the extent that the
country loses that RCA it used to acquire. Hence we depended on a complementary criterion
which identify whether there is a growing import demand on the product or declining
demand.
The database we relied on divides exports into four categories namely; Rising Stars: which
enjoy an increasing share in total non-oil-exports as well as increasing import demand;
Declining Stars: which enjoy an increasing share in total non-oil-exports but rather a declining
import demand; Missed Opportunities which enjoy an increasing import demand but a declining
share in total non-oil-exports, and Retreats which suffer from declining share in total non-oilexports and decreasing import demand. We calculated our figures for the period 1995 to
2000 having 1995 as our base year.
Using criterion, the RCA and the aforementioned classification (Rising Stars, Declining
Stars, Missed Opportunities, and Retreats), we can identify the sub sectors or products
where the M/SMEs, based on their high concentration of their enterprises can excel. The
best situation for M/SMEs is in the products that enjoy both an RCA and being a rising star,
where the products that do not enjoy an RCA and suffer from being declining stars or
retreats should be avoided. The products that are classified as rising stars or missed
opportunities represent niches for M/SMEs where they can export more although Egypt
does not enjoy an overall RCA in that product. Such products simply means that with
increased efforts from the government to increase production and exports and by providing
the right incentives for M/SMEs as well as large enterprises, Egypt can acquire RCA in the
future. Hence, such type of products or sub sectors should not be neglected or not devoted
the attention needed to promote them. On the contrary, there should be more attention
devoted to such products to reach the same level of other products acting as rising stars
and/or enjoying RCAs greater than 1.
Based on both criterion, in the wood industry we find that although there is no product that
has RCA there is wood manufactures (SITC 635) that acts as a rising star and hence there is
great potential for M/SMEs in this sector which should be complemented by additional
efforts from the government to enhance exports in that field. On the contrary, veneers,
plywood, reconstituted wood (SITC 634) are classified as retreats and hence the M/SMEs
should avoid concentrating on such products as there is no increasing import demand on
112
them. In the leather products we find that leather (SITC 611) enjoys a RCA, however it is
classified as declining star which means that the room for further exporting is not promising
as the import demand is not growing. Leather manufactures and parts of footwear (SITC
612) are declining stars and do not enjoy RCA, which implies that M/SMEs should divert
away from them.
In textiles and ready made garments sector we find that made-up articles, wholly or chiefly
of textile (SITC 658) enjoys the advantages of being both a rising star and RCA. Moreover,
knitted or crocheted fabrics (SITC 655) has a good opportunity to expand since there is
growing import demand despite the fact that it does not enjoy an RCA. Other sub sectors or
products of textiles and ready made garments do not have an optimistic future in exports,
even though some of them might be enjoying RCA because there is no growing import
demand on them.
In the food processing and beverages sector, edible products and preparations (SITC 098) is
among the products that enjoy both an RCA and the status of rising stars. Other sectors as
sugar confectionery (except chocolate), other sugar prep (SITC 062, non-alcoholic beverages
(111) and margarine (091) are among the sectors that have great prospects for exports
although they do not enjoy RCA. Finally, cereal preparations and preparations of flour,
starch (SITC 048) is among the sub sectors that have not been given the required attention
as there is growing import demand for it but it suffers from a decreasing share in total non
oil exports. Those are the sectors that M/SMEs should focus their efforts on, with support
of the government and other organizations (whether civil society or international donors) to
focus upon.
It is worth noting that such conclusions reached on where the M/SMEs can have a potential
for export expansion have some limitations which can alter the results we reached. Among
such limitations, is the fact that this exercise is undertaken on a global basis and not on a
regional basis. Hence, in many cases declining stars on a global basis might be negatively
affected by protectionist attitude of importing countries which can bias the results if they
constitute the highest shares in imports. For example, in the case of processed food and
beverages, and textiles and ready made garments some products might appear as declining
stars due to the protectionist attitude of the EU and US which are the largest trading
partners for Egypt. This protectionist attitude affects negatively the import demand of the
EU and/or the US in general (and not confined to Egypt). This can result in a negative
impact on exporters who reduce their exports, if they are focused on those markets which
result in a product appearing as a declining star on global basis and loses its RCA if it used to
acquire one (this is even confirmed by the appearance of only 2 products among 32 products
classified as rising stars among the processed food and beverages sector and non enjoying a
RCA despite the fact that this sector constitutes a high share of total non oil Egyptian
exports).
However, it should be noted that a product might be a declining star or a retreat in the EU
and/or US but a rising star in Japan and/or African and/or Arab countries. However, due to
the limited amount of products exported to such markets, the indicators identified above
might lead to us o a wrong conclusion. To get out of this dilemma, a regional analysis has to
be repeated for each of the products identified above which is one of the recommendations
that come out of this strategy.
113
The market intelligence or monitoring the demand in different importing markets is an issue
that requires more efforts from the capable institutions of doing this job in Egypt (whether
governmental or non governmental).
Another limitation that should be taken in consideration is the level of disaggregation where
we used a SITC 3 digit level which can change completely if we applied a more disaggregated
level using SITC 4 digit level where the number of products jump from 47 items to 140
items and hence the analysis can change completely. A final limitation is the time dimension
and the sensitivity of our analysis to this important factor. We confined our analysis to the
period 1995 as our base year and 2000 as the final year. It should be noted that we are
dealing with dynamic and not static variables and hence the RCA which reflects the
comparative advantage and the classification we used can change by time.
To conclude, it should be noted that the analysis we provided should be undertaken on a
frequent and more detailed basis to arrive at an updated picture of the where the Egyptian
exports should be promoted and the niches in which M/SMEs can participate can be
identified.
There is no equivalent database that allows us to undertake the same analysis for services,
and hence we were not able to identify the comparative advantage of M/SMEs in services,
but we were able to identify the comparative advantage of Egypt in services in general as
shown in Table 39. The conclusion of the survey undertaken and presented in Section Three
where Egypt enjoys comparative advantage in tourism (shown in table under travel) and
used to enjoy comparative advantage in other business services which includes a number of
services dealt with in the survey. The promotion of M/SMEs in such sectors should help to
promote the Egyptian exports in such fields.
Table 39: Revealed Comparative Advantage for Egyptian Exports of Services
1995
1996
1997
1998
1999
2000
2001
Transport
1.57
1.28
1.20
1.43
1.31
1.24
1.36
Travel
0.97
1.07
1.27
1.03
1.33
1.46
1.49
Communications
1.30
1.15
0.97
1.26
1.18
1.53
1.26
Construction
0.00
Computer
and
information
0.01
services
Insurance
0.07
0.05
0.28
0.22
0.50
0.52
0.79
0.01
0.04
0.06
0.04
0.11
0.10
0.18
0.21
0.25
0.49
0.17
0.06
0.22
0.16
0.10
0.15
0.17
0.09
0.14
0.12
0.13
0.12
0.14
0.10
0.12
0.09
1.01
1.27
1.06
1.27
1.01
0.97
0.87
0.03
0.09
0.12
0.12
0.16
0.11
0.15
Financial services
Royalties
and
license fees
Other
business
services
Personal, cultural
and recreational
114
1995
1996
1997
1998
1999
2000
2001
0.76
0.43
0.96
services
Government
0.98
0.56
0.88
1.13
services n.i.e.
Source: UNCTAD Handbook of Statistics, on-line, 2002
Conclusion and Policy Implications:
Based on the statistical analysis undertaken, we recommend that sectors that enjoy a high
concentration level of M/SMEs should be focused upon as priority areas for government
and non-government institutions in order to enhance exports of M/SMEs. The sectors
differed in terms of acquiring a comparative advantage but as mentioned above the concept
of comparative advantage is dynamic and changes rapidly. Moreover, the level of aggregation
used might hide potential sub sectors that enjoy a comparative advantage.
In a nutshell, the statistical analysis confirmed the survey analysis in terms of the sectors that
should be focused upon as they have high concentration of M/SMEs. The statistical analysis
provided more details on the prospects of the exports of such sectors, which as revealed
differed substantially and can still differ again if analysis is undertaken on a more
disaggregated level and if current adopted policies are altered. Industrial data in general are
scarce and not highly detailed if compared with trade data, hence there is a great need for
establishing a market intelligence unit. Such a unit could help in developing a M/SMEs
industrial map and in the same time enhance the matchmaking process of M/SMEs with
both larger domestic producers (here as M/SMEs in fact can act as indirect exporters) and
foreign importers. The intelligence unit should adopt a sectoral approach in analyzing the
different industries and suggesting sector specific recommendations. As has been
demonstrated by the survey analysis different sectors have different problems and therefore
policy actions need to be sector tailored rather than one “straight jacket fits all” type of
policy.
Chapter Six: Roadmap for Enhancing the Exports of
Egyptian M/SMEs
Introduction/Background:
As is clear from the title, this chapter is meant to give a logical overview of the steps and
approaches to be adopted for achieving the target of enhancing the exports of Egyptian
M/SMEs over one year. Based upon the survey conducted, and intensive literature review
(international and national) and analyses described in previous chapters of the study, one
way of categorizing recommendations for the enhancement of the exports of M/SMEs is
relating them to the inhibiting factors for exports of these enterprises. This is the method
chosen for providing the policy recommendations in this chapter.
115
Based on the results obtained we can classify the factors inhibiting M/SMEs exports as
shown in the following figure:
Factors Inhibiting M/SMEs’ Exports
Access to information
Access to Finance
Technical assistance
Fiscal policies
Procedural barriers
We build our strategy for export promotion of Egyptian M/SMEs on such classification
where we tackle the different issues related to each of the aforementioned constraints in a
more elaborative way and we provide a detailed action plan for each activity. The following
policy actions include short (less than one year) and medium (one to three years) term
programs to enhance M/SMEs’ export promotion.
116
Policy Issue 1:
Ensuring Sustainability and Continuity for the Development of A Comprehensive SME
Export Enhancement Strategy and its Continuous Updating
In order to ensure the sustainability and development of the role of M/SMEs in exports, to
ensure the continuous flow of information (tackling the inhibiting factor related to access to
information), and lessen the burden of the cumbersome bureaucratic procedures (inhibiting
factor related to procedural barriers) an appropriate institutional setup has to be established.
The notion in this respect is that a joint steering committee involving the important
governmental and non-governmental stakeholders would be created. The main objectives of
this committee are to set the general policies for export promotion of M/SMEs in Egypt. In
support of such steering committee an executive secretariat is to be established to undertake
the following mandate:
1) Monitoring the implementation of the different suggested policies
2) Developing performance criteria to assess the impact of policies adopted on
M/SMEs
3) Preparing a publicity campaign to attract new M/SMEs that have a potential
to export
Action Plan:
Activity
Establishing a
steering
committee to
activate
the
strategy
and
monitor
its
development
(compromised
of
different
stakeholders)
Establishing a
secretariat
devoted
for
following-up
and
the
implementation
of the strategy
Benchmarkin
g and setting
moving and
flexible
targets for the
short
and
medium terms
M/SMEs
exports
promotion and
developing
strategies for
other years
Increasing
awareness and
publicity of the
strategy
Responsible
Implementing
Body
Cabinet
of
Ministers,
SDF, MOF,
MFTI,
representatives
of
major
M/SMEs and
export related
NGOs
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q 11
Q12
SDF
in
coordination
with M/SMEs
policy units in
MOF
and
MFTI
Secretariat
under
the
supervision of
the
steering
committee
Secretariat in
cooperation
with
MOF,
media
and
Ministry
of
Information
117
Activity
Measuring the
results
obtained after
adoption of the
strategy
and
modifying
it
according
to
the advantages
and
disadvantages
revealed during
the first year of
implementation
Responsible
Implementing
Body
Secretariat
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q 11
Q12
118
Policy Issue 2:
Improving the Business Environment for M/SMEs (coordination of efforts of different
contributors to M/SMEs development, governmental procedures and regulations, taxes and
its administration)
The main aim of this component is to improve the business environment for M/SMEs,
which this study as well as other studies (e.g. MOF, 2004) has shown it to be among the
most constraining factors for M/SMEs engaged in export activities or for M/SMEs with
potentials to export. This will help to overcome the inhibiting factors related to: procedural
barriers, the access to finance, problems associated with fiscal policies, and access to
information.
The improvement of business climate entails taking several measures:
1) The One-stop-shops should be spread across all governorates with branches
at the district levels
2) The procedures of tax and customs’ administration should be drastically
simplified to reduce both the cost and time of operations
3) Access to information seems to be one of the major constraints confronting
M/SMEs. The lack of information is witnessed both on the domestic and
international levels. The establishment of a central market intelligence unit
with branches on governorate levels is essential to provide M/SMEs and
especially exporting units with the necessary information regarding inputs
and markets
Action Plan:
Activity
Establishing
effective one
stop shops in
all
governorates
Restructuring
taxes
and
customs
authorities
(currently
undergoing
under MOF)
Improving
the
availability of
business
opportunities
in
general
and export
specific
opportunities
in specific
Responsible
Implementing
Body
SDF
in
coordination
with General
Authority of
Investment,
other related
governmental
organizations,
and
municipalities
MOF
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q11
Q12
Market
intelligence
Unit under the
auspices
of
MFTI
in
coordination
with
Federation of
Egyptian
Industries and
business
associations
119
Policy Issue 3
Enhancing the technical capabilities of exporting M/SMEs in order to be able to promote
their products worldwide. with special focus on promising sectors (e.g. furniture, ready made
garments, leather, food and beverages)
The study has revealed in its literature review for Egyptian M/SMEs that they lack the
necessary capabilities that enable them to be competitively engaged in exporting (see Chapter
2).
Several actions are recommended in this respect:
1. Establishing local export oriented Trading Houses with the main objective of
identifying M/SMEs with potential export capabilities, suggesting
modifications on the quality or range of products to meet international
demand requirements. Such export oriented Trading Houses should be in
continuous contact and coordination with the Commercial Representation
Offices abroad. Moreover, such Trading Houses should undertake the role of
identifying the best business opportunities that arise following the conclusion
of new regional trade agreements and should undertake a review of all the
existing regional trade agreements to maximize the benefits of M/SMEs
from utilizing such trade agreements based on the analysis provided in this
study (Chapters 3 and 5).
2. Strengthening the role of Business Resource Centers in linking M/SMEs
with Technological Centers and highly specialized University research
centers.
Action Plan:
Activity
Providing
technical
assistance
to
meet
exports
requirements
Providing
technical
assistance
to
upgrade
the
quality
of
existing products
and
introduce
new
products’
ideas
Responsible
Implementing
Body
New
established
local export
oriented
trading
houses under
the auspices
of MFTI in
collaboration
with SFD and
Chamber of
Commerce
Business
Resource
Centers
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q 10
Q 11
120
Q12
Activity
Enhancing
linkages between
M/SMEs
and
Technology
Centers affiliated
to MFTI and
SFD
Enhancing
linkages between
M/SMEs
and
Research Centers
and Universities
Responsible
Implementing
Body
Business
Resource
Centers
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q 10
Q 11
Business
Resource
Centers
121
Q12
Policy Issue 4
• Improved access to export finance
Until now the access of M/SMEs to finance in general and export finance in specific has
been quite minimal as the study has identified in chapters 2 and 3 and in order to overcome
the inhibiting factor related to access to finance. Several constraints that exist in the banking
sector especially the excessive need for collaterals, limit the possibilities of M/SMEs
benefiting from different sources of finance. A complete restructuring and strengthening of
the role of the financial institutions in providing finance to M/SMEs at commercial rate is a
necessity, without which export promotion would be hindered. It is therefore suggested that
the experiences of both Banque du Caire and National Bank of Egypt be studied thoroughly
to be replicated in other banks.
Action Plan:
Activity
Responsible
Implementing
Body
Evaluating the
National Bank of
Egypt and Bank
du
Caire
experience
in
M/SMEs finance
Designing a new
program focused
on
export
finance
for
M/SMEs
Establishing
specialized units
for
M/SMEs
export finance in
3-4 banks
Secretariat
Increasing
the
outreach of the
banks
to
M/SMEs
Targeted
commercial
banks
and
Post Offices
using
the
facilities
of
Business
Resource
Centers,
NGOs
and
SFD offices
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q 10
Q 11
Q12
Export
Development
bank
in
cooperation
with SFD
Central Bank
and SFD
122
Policy Issue 5
Promoting SME Cluster Communities in Promising Sectors (e.g. furniture, ready made
garments, leather, food and beverages)
The survey data as shown in Chapter 3 revealed that M/SMEs operating in cluster
communities have a high potential to export and some of them are regarded as promising
enterprises. Since the number of industrial M/SMEs is quite large to be included in one
program it is therefore suggested that the targeting policy should start by focusing on
specific cluster communities where the revealed comparative advantage of M/SMEs is highly
visible (e.g. furniture, ready made garments, leather, food and beverages). Such a policy could
have positive spill-over effects on M/SMEs in surrounding geographical areas.
Action Plan:
Activity
Responsible
Implementing
Body
Identifying
existing
clusters and
evaluating
their
performance
Specifying
the clusters
that need to
be
promoted
based
on
enhancing
exports as
an ultimate
goal
Increasing
the linkages
between
such clusters
and
large
enterprises
Research
Centers
in
collaboration
with Business
Resource
Centers
Business
Resource
Centers and
Local export
oriented
trading
houses
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q 10
Q11
Q12
Local export
oriented
trading
houses
in
collaboration
with business
associations
123
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