Common Characteristics of SMEs

(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of entrepreneurs; in many
cases; leveraging on a skill set. There are other SMEs being set up purely as a means of earning
livelihood. These includes many trading and retail establishments while most countries continue
SMEs to manufacturing services, others adopt a broader definition and include retailing as well.
(b) Greater operational flexibility
The direct involvement of owner(s), coupled with flat hierarchical structures and less number of
people ensure that there is greater operational flexibility. Decision making such as changes in price
mix or product mix in response to market conditions is faster.
(c) Low cost of production
SMEs have lower overheads. This translates to lower cost of production, least upto limited volumes.
(d) High propensity to adopt technology
Traditionally SMEs have shown a propensity of being able to adopt and internalize the technology
being used by them.
(e) High capacity to innovate export:
SMEs skill in innovation, improvisation and reverse engineering are legendary. By being able to
meet niche requirements, they are also able to capture export markets where volumes are not huge.
(f) High employment orientation:
SMEs are usually the prime drives of jobs, in some cases creating up to 80%. Jobs SMEs tend to be
labour intensive per se and are able to generate more jobs for every unit of investment, compared to
their bigger counterparts.
(g) Reduction of regional imbalances
Unlike large industries where divisibility of operations is more difficult, SMEs enjoy the flexibility of
location. Thus, any country, SMEs can be found spread virtually right across, even through some
specific location s emerge as clusters.
SMEs in India

India has a vibrant SME sector that plays an important role in sustaining economic growth,
increasing trade, generating employment and creating new entrepreneurship in India. In keeping in
view its importance, the promotion and development of SMEs has been an important plank in our
policy for industrial development and a well-structured programme of support has been pursued in
successive five-year plans for. SMEs in India have recorded a sustained growth during last five
decades. The number of SMEs in India is estimated to be around 13 million while the estimated
employment provided by this sector is over 31 million. The SME sector accounts for about 45 per
cent of the manufacturing output and over 40 per cent of the national exports of the country.
Figure 1.1
SMEs In India
[pic]
(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdf last accessed on 26 Nov, 2009)
India embarked on the path of opening up its economy and integrating it with the global economy in
1991. The liberalization of economy, while offering tremendous opportunities for the growth and
development of Indian industry including SMEs, has also thrown up new challenges in terms of
fierce competition. The very rules which provide increased access for our products in the global
markets also put domestic industry under increased competition from other countries. In todays
world, access on a global basis to modern technology, capital resources and markets have become
the most critical determinants of international competitiveness.
Defining SMEs
In India, the enterprises have been classified broadly into two categories:
(i) Manufacturing; and
(ii) Those engaged in providing/rendering of services.
Both categories of enterprises have been further classified into micro, small and medium enterprises
based on their investment in plant and machinery (for manufacturing enterprises) or on equipments
(in case of enterprises providing or rendering services). The classification on basis of investment is
as under:
Table 1.1
Classification Of Micro, Small And Medium Enterprises

|Classification |Investment Ceiling for Plant, Machinery or Equipments |

| |Manufacturing Enterprises |Service Enterprises |
|Micro |Upto Rs.25 lakh |Upto Rs.10 lakh |
|Small |Above Rs.25 lakh & upto Rs.5 crore |Above Rs.10 lakh & upto Rs.2 crore |
|Medium |Above Rs.5 crore & upto Rs.10 crore |Above Rs.2 crore & upto Rs.5 crore |
Table 1.2
Classification Of Micro, Small And Medium Enterprises Before 2nd October, 2006
|Classification |Investment Ceiling For Plant, Machinery Or Equipments*@ |
| |Manufacturing Enterprises |Service Enterprises |
|Micro |Upto Rs.25 lakh |Upto Rs.10 lakh |
|Small |Above Rs.25 lakh & upto Rs.1 crore |Not defined |
|Medium |Not defined |Not defined |
(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdf last accessed on 26 Nov, 2009)
While calculating the investment in plant and machinery/equipment referred to above, the original
price thereof shall be taken into account, irrespective of whether the plant and machinery/equipment
are new or second hand. In case of imported machinery/equipment, the following duty/charges/costs
shall be included in calculating their value:
Import Duty (not to include miscellaneous expenses such as transportation from the port to the site
of the factory, demurrage paid at the port);
Shipping Charges;
Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the following plant &
machinery/equipments etc would be excluded:;
Equipments such as tools, jigs, dies, moulds, and spare parts for maintenance and the cost of
consumable stores;
Installation of plant &machinery;

 Research and development and pollution control equipments;

Power generation set and extra transformer installed by the enterprises as per the Regulations of
the State Electricity Board;
Bank charges and Service Charges paid to the National Small Industries Corporation or the State
Small Industries Corporation;
Procurement or Installation of cables, wiring bus bars, electrical control panels (not mounted on
individual machines)
Oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing
electrical power to the plant and machinery or for safety measures;
Gas producer plants;
Transportation charges (other than sales tax or value-added tax and excise duty) for indigenous
machinery from the place of their manufacture to the site of the enterprise);
Charges paid for technical know-how for erection of plant machinery;
Such storage tanks which store raw materials and finished products only and are not linked with
the manufacturing process;
Fire-fighting equipment; and
Such other items as may be specified, by notification from time to time.
In case of Service Enterprises, the original cost to exclude furniture, fittings and other items not
directly related to the services rendered. Land and Building would also not be included while
computing the machinery/equipments cost.
SME would be meant to include Micro Small and Medium Enterprises (MSMEs). The above
definitions of Micro, Small and Medium Enterprises would be in place of the existing definitions of
Small & Medium Industries and SSSBEs/Tiny Enterprises.
Micro Enterprises would include Tiny Industries also.
Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs).