LO-2 - Assess the impact of small businesses on the economy

LO-2.1- Interpret and assess relevant data and statistics to illustrate how micro and
small businesses impact on the Economy.

Before starting our interpretations and assessments of data to illustrate the impact that
micro and small businesses may have on the economy we may better explain what
economic indicators mean and are like: A general knowledge about the Economy tells us
that it is on the basis of supply and demand of various goods and services that various
other activities are dependent including exchange rates, inflation rates, un-employment or
employment rates, consumer price indexes, interest rates, balance of trade, gross domestic
product etc.

The first thing any business activity aims at doing is to start adding value to any or all the
factors of production. For example if someone starts a micro business like buying and
selling of fruits and vegetables which would fall under the trading category of a business
activity what happens is that oranges and bananas and guavas are being bought by the
micro entrepreneur from a market close by and are being sold from a market place where
there are supposed to be buyers for these fruits so in the process capital gets involved for
purchases, the place or arrangement for sale of the fruits and the labor that gets paid from
the margins from sale of fruits. How these effect the economy in any way? It is a very
interesting supply chain that needs to be studied to understand this phenomenon. Starting
from the farmer who grew these fruits, the middlemen who bought them and transported
them to the wholesaler and the retailer who is the micro entrepreneur himself or herself
the series of events and activities constitute the economic activities and how the supply
and demands for any goods or services are created and how prices are fixed and how
employment opportunities are created and so on.

No coming to the first part of the task we first need to find out as to where can we find such
data that could be interpreted for the micro and small businesses impacting the economy
and in what ways? Economic indicators of all countries are usually calculated by their
respective government to see how their governments are performing and in order to set
policy guidelines their calculation and availability is very much necessary to fine tune the
overall administrative policies including monetary and fiscal policies. Every year the
governments announce their budgetary allocations for different revenue and expenditure
streams and after interpretation and assessment of the available data such a task is made
more easy and effective. Imports and exports are monitored to see balance of trade,
monetary policies are assessed through the activities of the financial or banking and non-
banking sector and most of these are constructed upon the basis of goods and services
being produced by any country during a given time frame.

Different Apex Institutions or Organizations are responsible to collect and compile data of
various sorts and for the purpose of Micro and Small businesses the data in Pakistan can be
searched primarily from SBP, SMEDA and PMN Websites.

Micro Businesses:

Micro Businesses are those businesses that create self-employment opportunities for the
entrepreneurs with very meager or little capital and resources. These businesses are very
helpful in alleviating poverty at the grass roots level in any developing or underdeveloped
economy and are a focus of the development finance Institutions that wish to contribute
towards the socio-economic uplift of the people. Several renowned examples in the world
show and prove that micro businesses have the capacity of getting started with as low as
less than even Rs.5000 and can graduate into micro enterprises that can offer employment
opportunities upto 5 people. “The success stories of the micro-businesses can be quite
compelling. Giving people the opportunity to work hard with reasonable resources so they
can change their lives is what sector provides. With so many people still waiting for this
opportunity, the micro business sector will look to continue growing in the years and
decades to come”.

Poverty in Pakistan has fallen dramatically, independent bodies supported estimates of a

considerable fall in the statistic by the 2007-08 when it was estimated that 17.2% of the
total population lived below the poverty line. The declining trend in poverty as seen in the
country during the 1970s and 1980s was reversed in the 1990s by poor federal policies
and rampant corruption. This phenomenon has been referred to as the "poverty bomb". In
2001, the government was assisted by the International Monetary Fund(IMF) in preparing
the Interim Poverty Reduction Strategy Paper that suggests guidelines to reduce poverty in
the country. According to a report sub mitted by Ministry of Planning and Development in
the National Assembly of Pakistan, about 29.5% Pakistani lived below the poverty line
which translates into 55 million people. As of 2016, Pakistan's Human Development
Index (HDI) is 0.550, lower than that of nearby Bangladesh's 0.579, which was formerly a
part of the country itself. Pakistan's HDI is lowest in South Asia.
Wealth distribution in Pakistan is slightly varied, with the top 10% of the population
earning 27.6% and the bottom 10% earning only 4.1% of the income. According to
the United Nations Human Development Report, Pakistan's human development indicators,
especially those for women, fall significantly below those of countries with comparable
levels of per-capita income. Pakistan also has a higher infant mortality rate (88 per 1000)
than the South Asian average (83 per 1000). As of 2017, the Asian Development
Bank reports that there are approximately 210 million people living in Pakistan. In 2011,
12.4% of Pakistanis live below in Pakistan's definition of poverty. Statistics vary due to the
definition of poverty. According to the World Bank, poverty in Pakistan fell from 64.3% in
2002 to 29.5% in 2014. Pakistan has made substantial progress in reducing poverty giving
it the second lowest headcount poverty rate in South Asia. AidData cites the World Bank
and states that overall "Pakistan has done well in converting economic growth into poverty
reduction.

SME 's contributes to over 55% of GDP and over 65% of total employment in high-income
countries. SME 's and informal enterprises, account for over 60% of GDP and over 70% of
total employment in low-income countries, while they contribute over 95% of total
employment and about 70% of GDP in middle-income countries.

Small Businesses:
Entrepreneurs occupy a central position in a market economy as it is the entrepreneurs
who act as the spark plug in the economy’s engine, activating and stimulating all economic
activity. The economic success of nations worldwide is the result of encouraging and
rewarding the entrepreneurial instinct. A society is prosperous only to the degree to which
it rewards and encourages entrepreneurial activity because it is the entrepreneurs and
their activities that are critical determinant if the level of success, prosperity, growth and
opportunity in the economy.

Small business constitutes a major force in the economy. There are more than twenty-
seven million small businesses in the US and they generate about 50 percent of their gross
domestic product (GDP).The millions of individuals who have started businesses in the
United States have shaped the business world as we know it today. In particular, small
businesses create jobs, spark innovation and provide opportunities for many people
including women and minorities to achieve financial success and independence. They
complement the economic activity of large organizations by providing them with
components, services, and distribution of their products.

Micro, Small and Medium Enterprises (MSME’s) account for 99.7 per cent of all enterprises
in the world. MSME’s have a significant role to play in boosting economic growth, poverty
reduction and social inclusion across the globe. MSME’s are vital for a number of reasons.
MSME’s create wealth: formal MSME’s account for 16 per cent of GDP in low income
countries and 51 per cent of GDP of high income countries whereas the informal
enterprises account for 47 per cent of the GDP of low income and 13 per cent of GDP of
high income countries. MSME’s are labor-intensive, generating jobs, thereby increasing the
‘‘real incomes and standards of living of many people. In this way, they can increase the
social and economic participation of women, youth and minorities”. MSME’s employ 78 per
cent of the labor force in low income countries and 66 per cent of the labor force in high
income countries. MSME’s act as a ‘useful bridge head between the informal economy of
family enterprise and the formalized corporate sector.

World over, half to two-third of all businesses are MSME’s in many regions this proportion
is much higher. MSME’s are capable of creating jobs with least amount of capital and in
dispersed locations which makes MSME’s attractive to policy makers. However they remain
as heterogeneous group, in different organizational structure ranging from proprietorship
to corporate, engages in factories to service organizational activities and with different
definitions in different countries and in some countries they differ from industry to
industry. (http://blog.pakistaneconomist.com/2018/02/19/micro-small-medium-
enterprises-engine-growth-prosperity/)

LO-2.2- Explain the importance of small businesses and business start-ups to the
growth of the social economy.

Before I attempt to signify the importance of small businesses and start-ups to the growth
of social economy I would like to clarify my conception of the term “Social Economy”.
Society is made up of individuals and we are termed as social animals. We as homo-sapiens
have this inherent tendency to live in groups of which the first building block is the family
itself. Let us take the example of a family and analyze what are the positive effects of family
members being supportive to each other and who are all contributing in one way or the
other in earning for the wellbeing of the family. The simple fact remains that the more the
economic well being the more is the social wellbeing. In case the family income is good they
would have better homes to stay in, better clothes and facilities, better educational and
medical facilities and so on and lower the income or economic well being the lower all the
living standards.

Now applying the same example in the context of a Country it can be easily seen that
societies that have better economic conditions have better social conditions for its
members. So just as it was given in LO-2.1 that Small businesses are instrumental in
generation of employment opportunities and contribution towards GDP/Economy the
same is the case with social economy. Social economy may also be referred to as the third
sector, sometimes and an explanation of this is that there is the government or public
sector having the public entrepreneurs and then there is the private sector with all the
other entrepreneur types including the Corporate Entrepreneurs and when we talk about
Social Entrepreneur they usually bring to mind the Social Sector or the Third sector that
can be termed as non-government organizations/NGO’s etc but they are not limited to just
that.

Social Economy in this context comprises of all the business, whether government or
private sector as well as third sector that contribute towards the wellbeing and
development of the society. We can notice thing in particular while looking at start-ups and
their contribution to the society. Start-ups usually bring with them the most innovative
ways to solve problems. Whether they succeed or not is another question but innovation
through start-ups sometimes serves as a tool for so many social benefits. Let us take the
example of Grameen Bank in Bangladesh that ultimately got its founder Muhammad
Younas a Nobel Prize. This started off as a little personal initiative by the founder outside
his University to encourage and help people weave baskets and utilize a very small amount
of capital into a business and pay back after making their profits. This small idea
introduced the world with microfinance that employs group based lending and cross
guarantees through community based organizations. This start-up was replicated
throughout the world to be employed by government as well as private sector to help
alleviate poverty which can be considered as a root cause for poverty.

Sometimes when business or social organizations are not concerned only about the
financial outcome the start-ups like facebook starting from the dormitory rooms of a
university and internet starting from the military utilization lead towards revolutionizing
how things work these days. Technology can now help as a basic source of every type of
knowledge, connectivity can allow people feel to be close to each other while being
thousands of kilometers apart, its like a genies lamp that the cell phone with it’s
connectivity and apps can bring you food or even anything you shop online and its
delivered through e-commerce. Every start-up this has a great potential and capacity to
contribute towards the social economy.

LO-2.3 Evaluate the differences small, medium and large businesses make to the
economy, applying relevant data and statistics.

In 2.1 we have already evaluated how small businesses contribute towards the economy by
sparking innovation, creating job opportunities and supporting larger businesses and the
data and statistics that were available showed that most of the employment opportunities
are created through small businesses while the major contribution towards the GDP is also
through small businesses. So in this task we will not be repeating all that we know about
small businesses but we will lay the major emphasis on medium and large scale industries.

Industrialization brings with different facets of economic activity. Many a times the
Industrial Units are established with the help of machinery and equipment imported from
many other Countries and have a direct impact upon the National Exchequer in terms of
foreign exchange moving out and similarly the raw material being utilized could also be
adding to import bills while many assembly lines are fed by parts and components
imported from abroad. In underdeveloped or developing countries like Pakistan the
highest import bills are in terms of machinery and equipment as well as transport
machinery. On the other hand it’s not necessarily so but large scale Industrial Units like
those of textile in Pakistan contribute a lot towards exports as well. Internationally the
exports of several Countries like Japan, Taiwan, Korea, China, USA, etc totally outnumber
the imports in terms of large scale industrial contributions towards the economy.

Another facet of the large businesses is the number of people that they can employ as a
single unit and the amount of GST and other taxes they contribute towards the revenues of
the Country thereby having a direct impact upon the economy. Large Industrial Units may
include ventures like Car manufacturing or assembling units, pharmaceutical industries,
cement plants, textile units, etc. On the services side the large business houses can include
services like financial services which can be termed as one large sector in it as there are
Commercial Banks, Development Banks, Non-Banking financial institutions, and financial
institutions that contribute a lot towards the economy in terms of the capital they channel
for investments and subsequent growth of the economy. The Banks themselves can be of
large or medium or small scale as we can see in the example of micro finance Institutions in
Pakistan that can be established from local, regional or national levels. Similarly
educational organizations can vary in small medium or large scale and can range from a
prep school to a University awarding doctorate degrees.

When defining large businesses it is again no one definition that can be followed because
anything falling in the category beyond small or medium can be considered large and vary
from country to country.

LO-2.4 Critically examine how small businesses have an impact on different levels of
the economy (local, regional, national) and in an international context.

For the purpose of this task I will critically examine a small business as to how it has an
impact on different levels of the economy. Multigrain is doing the following in each context:

Local Regional National International

Procurement of
Supply chain of Contribution Purchase of Chinese
grains from local grains from regional towards GDP Equipment
market agriculturists
Employment of
Purchase of Contribution Purchase of Packing
workers from
regionally towards material imported
amongst local people
manufactured employment. from abroad
machinery,
equipment and tools
Supply of goods to Transporters Contribution
local retailers business towards
opportunity taxes/National
Revenue
Income generation Middlemen who Production of
opportunities for procure grains Fertilizers for
Advertising and directly from farming activity
Promotion farmers
Self Employment of
Entrepreneur and its
impact upon society

Discuss More.