Yamini Sequeira reports on a recent conference and the urgent need for SMEs to go digital

Insights into conquering challenges as well as building successful small and medium scale enterprises (SMEs) were aplenty at the Business Conference for SMEs, which took place in Singapore in mid-August.

Sri Lanka has more than one million registered SMEs, each employing three people on average but scaling up remains a challenge. Meanwhile, SMEs in Singapore account for 99 percent of overall enterprises and hire 67 percent of the city state’s workforce. Like in Sri Lanka, Singaporean SMEs often struggle with high business costs, financing problems and low profit margins due to intense competition.

Early this year, the Singaporean government announced that supporting enterprises to innovate is the key thrust of the nation’s 2018 budget, and that its ‘SME Go Digital Programme’ will allocate US$ 1.7 billion to build digital capabilities of SMEs across the retail landscape, food services, logistics, cleaning, the wholesale trade and security firms.

Beside access to funds, a clutch of attractive tax incentives, grants for innovation and other supporting measures are being planned to prepare Singapore’s SMEs to go digital.

International industry experts have predicted that Singapore will be the primary regional SME innovation hub in the next five years. A study by Accenture forecasts that by 2020, the digital economy will raise for US$ 24.6 trillion a year or a quarter of global GDP.

Going ahead, success for SMEs will hinge on whether they can survive the digital transformation and thrive.

At the conference, a Singaporean government minister noted that SMEs are in the best position to adopt new technologies “as they are agile and adaptable, combining a high-risk appetite with a culture of experimentation.” He added that SMEs rather than Multinational Corporations (MNCs) can make decisions and adopt digital solutions relatively quickly and painlessly.

One of the reasons for pushing SMEs to go digital is that they stand to gain the most from the digital economy. For example, the growth of e-commerce means that sellers of goods and services even from small nations like Singapore can penetrate regional markets without needing to invest heavily in physical facilities abroad.

By going digital, SMEs will be aligned to changing consumer trends to shop online, which will only increase with the next generation. Equally important is the need to prepare working people for the digital onslaught by ensuring that they have the right skills to thrive in the digital age.

The advent of new technologies such as the Internet of Things (IoT), virtual reality, AI and data analytics are also part and parcel of the mix, which makes the task of digitisation a minefield of sorts. Perhaps this is where the government can support the SME sector with the technical resources it needs to chart a blueprint for its digitisation.

Sri Lanka has placed an emphasis on SMEs being the main driver of economic growth. However, these enterprises have to surmount an array of challenges before they can even dream of going digital. Many of the SMEs have no previous experience dealing with formal financial institutions such as banks; and many are led by women or based in rural areas.

Academic experts have identified three stages for SMEs – viz. factor, efficiency  and innovation driven stages. Developing SMEs could also provide solutions to the challenges of job creation, economic diversification and inclusive growth in the country.

In order to move beyond the efficiency driven stage to innovation, it is necessary to promote the latter so that the country can reach the technological frontier and thereby transform itself into a knowledge based economy. Sri Lanka needs to see a rise in entrepreneurial activity through an environment that’s conducive to entrepreneurship and supportive of SME development.

Even though SMEs account for around 45 percent of Sri Lanka’s GDP and provide about half the country’s jobs, access to finance remains a major challenge for small and medium scale enterprises. Some three in 10 of local enterprises cite this as being a major deterrent to their growth and development – and this is one of the highest percentages among ADB’s developing member nations after Afghanistan, Mongolia and Nepal.

SMEs must realise that going digital is not an option but a necessity. While digitisation may disrupt business operations initially, it will sustain growth in the long run. At the same time, the government must establish a conducive framework that encourages entrepreneurship.

The Asian Development Bank has approved US$ 75 million in additional financing to continue its assistance for SME development because the sector is vital for economic growth and job creation in Sri Lanka.

ADB’s Principal Finance Specialist Don Lambert says that “SMEs have the potential to reduce regional inequalities in Sri Lanka given that they are more widespread throughout the country than larger enterprises, which are mainly based in the [commercial] capital Colombo.”