sme barrier

A Study on Major Barriers of

SMEs in Bangladesh

ii

Report

on

A Study on Major Barriers of SMEs in Bangladesh

Prepared for:

Dr. Muhammad Shariat Ullah

Associate Professor

Department of Management

Faculty of Business

University of Dhaka

Prepared by:

Masrur Rahman Faraz

ID: 3-15-31-016

Batch: 31

MBA (Evening) Program


Faculty of Business

University of Dhaka

Date of Submission: 04/12/2016

iii

Date: 04 December, 2016

Dr. Muhammad Shariat Ullah


Faculty of Business

University of Dhaka

Subject: Submission of report on Major Barriers of SMEs in Bangladesh.

Dear Sir,

Here is my report on Major Barriers of SMEs in Bangladesh. This report was authorized by you

earlier this semester.

For making the paper, I made a survey & analyzed the data through statistical measures. During

the study, I have gathered valuable knowledge & experience.

Thank you for authorizing this study. I look forward to your kind consideration.

Sincerely,

Masrur Rahman Faraz

ID: 3-15-31-016

iv

Acknowledgement

I would like to specially thank Dr. Muhammad Shariat Ullah for authorizing this study. I

am able to complete it because of his proper guidance and valuable advices. I am grateful for his

continuous support and co-operation throughout the process. I also would like to thank my

classmates for their contributions & suggestions from the start of the study. My fellow

classmates have also provided me with constructive criticism and valuable advices which have

helped us a lot. I also would like to thank the respondents the surveys, who helped me with their

valuable data despite their time constraints & privacy issues.

V

Table of Contents

Fig Title Page

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

2

3

4

4.1

4.2

4.3

5

List of Tables

List of Figure

List of Symbols

Executive Summary

Introduction of the Study

Background of the Study

Problem Statement

Literature Review

Objectives of the Study

Methodology of the Study

Scopes of the Study

Limitations of the Study

Average Sales Volumes & Labor Force Stats of Sample Firms

Major SME Barriers in Bangladesh to Respondents

Relationship of SME Barriers to Average Sales Volume

Hypotheses

Results

Interpretation

Conclusion

Appendix

Bibliography

VI

VI

VII

VIII

1

1

1

1

2

2

3

3

4

5

6

6

7

9

10

11

12

VI

List of Tables

Fig Title Page

2.1

2.2

3.1

4.1

4.2

4.3

Average Sales Volume Descriptive Statistics

Labor Force Descriptive Statistics

Major SME Barriers according to Respondents

Multivariate Regression Analysis-1 of SME Barriers & Average Sales Volume



4

4

5

7

8

9

List of Figure

Fig Title Page

3.1

Major SME Barrier according in opinion of Respondents 5

VII

List of Symbols

GDP - Gross Domestic Production

MNC - Multination Corporation

SME - Small & Medium Enterprises

VIII

Executive Summary

SMEs are heart of any economy. For a developing country like Bangladesh, SME

development is a must. The study investigates 13 major barriers of Bangladeshi SMEs and

relationship with monthly sales. The study uses descriptive statistics to define average volumes

& labor force usage, and multivariate regression analyses to find relationship between the

barriers & sales. The study found negative relations of access to finance, access to land &

inadequately educated workforce with sales, among which- inadequately educated workforce is

statistically significant. The model is statistically highly significant.

1

1. Introduction of the Study

SMEs are heart of any economy. In a developing nation like Bangladesh, SMEs play a

crucial role in national industrialization and economic growth. SMEs are large in aggregate size,

and thus have significant capacity for employment generation and technological innovation &

development. SMEs challenge the established trends and bring variations in the market and

create more choices for the consumers, checking the oligopoly of large businesses & MNCs.

SMEs possesses immense potential for GDP growth and employment creation. SME

development is a must for our transformation into a self-sustaining economy.

1.1. Background of the Study

SMEs employ about 85% of the industrial employment in Bangladesh, contributing to

about 25% of the total GDP. But a majority of the SMEs stop in one year or so. Many of

them continue for longer periods, but they face both internal & external problems.

1.2. Problem Statement

What are the major barriers to SMEs of Bangladesh?

1.3. Literature Review

Although SMEs have different definitions in different countries, their role in economic

development is recognized by all countries. “SME contributes 25% of GDP in Bangladesh and employs 75% - 85% of the workforce in the industrial sector” (Cocoro Limited, 2015).

As per the Industrial Policy 2010 released by Bangladesh Bank,

Medium Industry is defined as manufacturing enterprises with either the value

(replacement cost) of fixed assets (excluding land and building) between Tk. 100

million - Tk. 300 million, or with between 100 - 250 workers and services

enterprises with fixed assets between Tk. 10 million - Tk. 150 million, or with

between 50 and 100 workers.

Small Industry is defined as enterprises with either the value of fixed assets

between Tk. 5 million - Tk. 100 million, or with between 25 - 99 workers and

services enterprises with value of fixed assets between Tk. half a million - Tk. 10

million, or with between 10 - 25 workers.

As per the International Journal of SME Development, “…83.33% of (SMEs) did not get the financial support from any financial institutions as for not matching their

requirement” (Hasan & Hossain, 2014). “…banks can differentiate interest rate up to 3% considering comparative risk elements involved among borrowers in same lending category”

(Bangladesh Bank, 2010). Although access to finance is the main problem in Bangladesh for

2

SMEs, “But this is not the only obstacle SMEs face… The common constraints for SMEs typically include financing, overcoming institutional, legal and administrative barriers and

accessing network support… Many of the constraints have been found to have negative effects, but access to finance and electricity seem to be the main constraints” (Khandker, 2014).

1.4. Objectives of the Study

1. To analyze Average Sales Volumes & Labor Force used in SMEs of Bangladesh

2. To analyze the major barriers to SMEs of Bangladesh

3. To analyze the relationship of SME Barriers to Average Sales Volume

1.5. Methodology of the Study:

Data source is Primary, a survey done on social media & through telephone. Convenient

sampling method was used for selecting samples. Sample size was 16.

For analyzing the Average Sales Volume & Labor Force used, descriptive statistics is

used, such as- mean, median, mode, standard deviation, range etc.

In the study, there are one Dependent Variable, Log of Average Sales Volume

(Monthly) and 14 Independent Variables – 13 barriers & additionally, Log of Labor Force.

The barriers were measured using dummy variables, value of 1 for the most severe constraint

in each response and others 0. For the other two variables, interval level data are used

(transformed from originally ratio level data – Average Sales Volume & Labor Force).

The regression model used here for Multivariate Regression Analysis is:

y = b0 + b1x1 + b2x2 + b3x3 + b4x4 + b5x5 + b6x6 + b7x7 + b8x8 + b9x9 + b10x10 + b11x11 +

b12x12 + b13x13 + LF

Here,

y = Log of Average Sales Volume (Monthly) of the firm

L = Log of Labor Force used by the firm

b0 = Constant

b1, … , b13, F = Coefficients

x1 = Access to finance

x2 = Access to land

3

x3 = Business licensing and permits

x4 = Corruption

x5 = Customs and trade regulations

x6 = Crime

x7 = Electricity

x8 = Inadequately educated workforce

x9 = Political instability

x10 = Practices of competitors

x11 = Tax administration

x12 = Tax rates

x13 = Transport

1.6. Scopes of the Study

The source of data is primary. The survey was done on social media & through

telephone. Convenient sampling method was used for selecting samples. The Questionnaire

was structured. Only barriers, which are external to the business, are considered here.

1.7. Limitations of the Study

For reliable t-values, a sample size of at least 120 is required. But the survey was done

on only 16 persons. Also many of the respondents didn’t want to share their employee

numbers, in those cases – an estimated number via observation was used. Also there are

internal barriers such as business plan, marketing strategy, management structure etc. as well,

which were not considered in the study. If a greater sample size with probability methods

was possible, the survey would have yielded more reliable results.

4

2. Average Sales Volumes & Labor Force Stats of Sample Firms

Descriptive Statistics of Average Sales Volumes of the sample firms are shown below:

Mean 32,14,063

Standard Error 24,72,928

Median 2,00,000

Mode 2,00,000

Standard Deviation 98,91,711

Range 3,99,95,000

Minimum 5,000

Maximum 4,00,00,000

Sum 5,14,25,000

Count 16

Table-2.1: Average Sales Volume Descriptive Statistics

Descriptive Statistics of Labor Force used in the sample firms are shown below:

Mean 18.50

Standard Error 4.95

Median 11

Mode 3

Standard Deviation 19.79

Range 69

Minimum 1

Maximum 70

Sum 296

Count 16

Table-2.2: Labor Force Descriptive Statistics

5

3. Major SME Barriers in Bangladesh to Respondents

According to the survey conducted, the respondents chose the most severe barriers to their

opinion as follows:

Major Barriers Responses

Access to finance 6

Access to land 2

Business licensing and permits 0

Corruption 1

Crime 1

Customs and trade regulations 1

Electricity 0

Inadequately educated workforce 4

Political instability 0

Practices of competitors 1

Tax administration 0

Tax rates 0

Transport 0

Other 0

Table-3.1: Major SME Barriers according to Respondents

Fig-3.1: Major SME Barrier according in opinion of Respondents

38%

25%

13%

6%

6%

6% 6%

Access to finance

Inadequately educated

workforceAccess to land

Corruption

Crime

Customs and trade

regulationsPractices of

competitors

6

4. Relationship of SME Barriers to Average Sales Volume

4.1. Hypotheses:

There are several hypotheses to be tested in the analysis. They are as follows:

H1: There is negative relation of lack of access to finance with average sales volume

H2: There is negative relation of lack of access to land with average sales volume

H3: There is negative relation of business licensing and permit problems with average

sales volume

H4: There is negative relation of corruption with average sales volume

H5: There is negative relation of crime with average sales volume

H6: There is negative relation of customs and trade regulations problems with average

sales volume

H7: There is negative relation of Electricity problems with average sales volume

H8: There is negative relation of inadequately educated workforce with average sales

volume

H9: There is negative relation of political instability with average sales volume

H10: There is negative relation of practices of competitors with average sales volume

H11: There is negative relation of complications with tax administration with average

sales volume

H12: There is negative relation of tax rates with average sales volume

H13: There is negative relation of transport problems with average sales volume

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4.2. Results:

The result of the multivariate regression analysis can be shown as follows:

Regression Statistics Multiple R 0.98 R Square 0.96 Adjusted R Square 0.22 Standard Error 0.51 Observations 16

ANOVA

df SS MS F Significance

F

Regression 14 12.97 0.93 3.90 0.38

Residual 2 0.51 0.26 Total 16 13.48

Coefficients Standard

Error t Stat P-value

Constant 3.83 0.63 6.06 0.03 Log of Labor Force 1.87 0.38 4.92 0.04 Access to finance -0.21 0.55 -0.38 0.74 Access to land -0.07 0.63 -0.12 0.92 Business licensing and permits 0 0 65535 #NUM! Corruption 0 0 65535 #NUM! Customs and trade regulations 0.08 0.72 0.11 #NUM! Crime 0.95 0.81 1.17 0.36 Electricity 0 0 65535 #NUM! Inadequately educated

workforce -0.76 0.59 -1.29 0.33 Political instability 0 0 65535 #NUM! Practices of competitors -0.13 0.81 -0.16 0.88 Transport 0 0 65535 #NUM! Tax rate 0 0 65535 #NUM! Tax administration 0 0 65535 #NUM!

Table-4.1: Multivariate Regression Analysis-1 of SME Barriers & Average Sales Volume

8

There are some of the p-values & t-values showing error, as there were 6 barriers with

no responses. Eliminating Business licensing and permits, Electricity, Political instability,

Tax administration, Tax rates, Transport; we find:

Regression Statistics Multiple R 0.92 R Square 0.84 Adjusted R Square 0.58 Standard Error 0.52 Observations 16

ANOVA

df SS MS F Significance

F

Regression 8 11.35 1.42 6.08 0.01

Residual 8 2.13 0.27 Total 16 13.48

Coefficients Standard

Error t Stat P-value

Constant 3.83 0.65 5.93 0.000 Log of Labor Force 1.87 0.39 4.81 0.001 Access to finance -0.21 0.56 -0.37 0.722 Access to land -0.07 0.64 -0.11 0.912 Corruption 0 0 65535 #NUM! Customs and trade regulations 0.95 0.83 1.14 #NUM! Crime 0.08 0.73 0.11 0.916 Inadequately educated

workforce -0.76 0.60 -1.26 0.242 Practices of competitors -0.13 0.83 -0.16 0.877


Still 2 of the p-values and 1 t-value error remaining. This is happening because of

inadequate data of some variables. Eliminating Corruption, Customs and trade regulations,

Crime, Practices of competitors – as they got only 1 response, we get:

9

Regression Statistics

Multiple R 0.89

R Square 0.79

Adjusted R Square 0.72

Standard Error 0.50

Observations 16

ANOVA

df SS MS F Significance F

Regression 4 10.68 2.67 10.47 0.001

Residual 11 2.80 0.25

Total 15 13.48

Coefficients Standard Error t Stat P-value

Constant 4.12 0.29 13.99 0.00

Log of Labor Force 1.73 0.30 5.72 0.00

Access to finance -0.37 0.35 -1.06 0.31

Access to land -0.19 0.50 -0.38 0.71

Inadequately educated workforce -0.86 0.45 -1.90 0.08


So H1, H2, H8 are accepted, rest rejected. The regression model finally stands like this:

y = 4.12 + 1.73L – 0.37x1 – 0.19x2 – 0.86x8

4.3. Interpretation:

There are negative relations for access to finance, access to land & inadequately

educated workforce with log of sales.

For each business facing access to finance problems, the log of sales is 0.37 low.

For each business facing access to land problems, the log of sales is 0.19 low.

For each business having inadequately educated workforce, the log of sales is

0.86 low. This barrier is statistically significant at < 10% level.

However, it cannot be said that the coefficients of the barriers are very correct, as

none of the t-values of the barriers are more than 1.96.

Electricity & Political instability didn’t get any response, as they are no longer

problems to Bangladeshi SMEs in recent times.

The model explains 79% of the variations, as per the R square value.

The model is statistically highly significant (at < 0.1% level), as per the F-value.

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5. Conclusion

In the study, we made a survey about monthly sales volumes of SMEs & their most sever

barriers. The study analyzed the relationship between 13 different barriers with sales volumes.

The study found negative relations of access to finance, access to land & inadequately educated

workforce with sales, among which inadequately educated workforce is statistically significant.

The model is statistically highly significant. However, for future studies, it is also recommended

to include internal constraint factors like- business plan, market research, business location,

business sector, management structure etc. as well.

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Appendix

Survey Questionnaire

1. What is the average sales volume (monthly) of your firm?

2. What is the number of employees/labors in your firm?

3. In your opinion, what is the most severe constraint for doing business in Bangladesh?

o Access to finance

o Access to land

o Business licensing and permits

o Corruption

o Crime

o Customs and trade regulations

o Electricity

o Inadequately educated workforce

o Political instability

o Practices of competitors

o Tax administration

o Tax rates

o Transport

o Other

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Bibliography

Bangladesh Bank. (2010). Bangladesh Bank. Retrieved October 16, 2016, from BankInfo:

http://bankinfobd.com/page/bangladesh-bank

Cocoro Limited. (2015). Great Opportunity with 6 Million SMEs. Retrieved October 16, 2016,

from Bangland: https://www.jica.go.jp/bangladesh/bangland/en/report/679.html

Hasan, M. M., & Hossain, M. R. (2014). Development of Tourism Industry through SME: A

Study on Comilla. International Journal of SME Development, 1(1), 60-76.

Khandker, A. (2014). Constraints and Challenges of SME Development in the Developing

Countries: A Case Study of India, Pakistan and Bangladesh. International Journal of

SME Development, 1(1), 88-117.

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