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Contribution of small and medium enterprise to the economic development of Rwanda

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par Valens NYANDWI
Universite Nationale du Rwanda - Licence 2013

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2.7. The importance roles of SMEs in the economy

The importance and potential contribution of the SME sector are supported by both theoretical and empirical arguments and evidence. We turn first to the former. Part of the contribution of the SME sector both to the overall total factor productivity (efficiency, as usually defined) of an economy and to employment generation and distributional equality comes by virtue of its pattern of technology choice.

SME technology tends to be intermediate between the highly labor intensive technologies of micro enterprise, which as a result achieve only low average labor productivity, and the highly capital intensive technologies of large firms which thereby achieve high labor productivity, but use more capital per worker than is available for the economy as a whole.

Given this correlation between size and capital intensity, it becomes a foregone conclusion that an economy that applies a high share of its capital to a small group of workers must necessarily have, as the other side of the coin, a large informal or microenterprise sector that uses very little capital (the bit not used by the large-scale sector) with the large amount of labor not employed by the large firms.

Its intermediate technology characteristic is what gives the SME sector a special role (together with small-scale agriculture) in the generation of adequate or decent employment. When most jobs are in the micro enterprise sector, too many of them are destined to be low productivity and hence low income in character. SME firms can be substantially more productive, so in terms of the potential to generate «decent» jobs this sector competes with large private firms and the government, but it has the advantage of being able to generate many more such jobs for a modest input of capital. The key mechanism in generating decent employment in most developing countries involves the expansion of this sector fast enough to absorb people previously unemployed (a few) or engaged in low productivity informal sector jobs.

In a globalizing world it is naturally important that as many major categories of firms as possible have the capacity to compete in world markets. The importance of an efficient collaboration between large firms and SMEs through subcontracting is at its peak in outward oriented countries especially those competing in international markets in products involving a good deal of labor. Being able to rely of efficient low-cost subcontractors can substantially increase the competitiveness of the large exporters, and has been an important factor underpinning the successes of Japan, Taiwan and Korea( Palma and Gabriel, January 2005).

On the empirical side, some features are common to nearly all SME sectors. The most important positive features have, naturally, gone with those cases where SMEs have made the biggest positive contribution. Broad empirical evidence highlighting the importance of SMEs includes the facts that:

Broad empirical evidence highlighting the importance of SMEs includes the facts that:

· The most successful developing country over the last 50 years, Taiwan, is built on a dynamic SME sector. This has produced both (for its time) record breaking growth and a quite low level of inequality, by comparative standards.

The experience of Korea, Taiwan's partner among the Asian Tigers and a more or less equally fast grower, has provided the laboratory to illustrate another point-inequality can fall significantly when the weight of the SME sector rises quickly, as it did for a period after the mid-1970s in Korea.

Colombia's golden age of growth, from the late 1960s through the 1970s, coincided with very fast expansion of the manufacturing SME sector and with an apparent decline in urban inequality.

· SMEs tend to use medium-sophistication technology, which is approximately consistent with the factor endowment ratios in most developing countries.

· Many firms «grow into» or «grow out of» the SME size range, with both of these transitions having something positive to be said for them.

· The SME size range is where many important entrepreneurs and firms of the future get their start.

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