Innovation and Economic Development A Case of Small and Medium Enterprises in Pakistan

• Author: QAZI ABDUL SUBHAN TAHIR MAHMOOD and ABDUL SATTAR

Abstract. In various economies the innovations are quite important for economic growth and development. Due to its significant importance for growth and development this study empirically examines the impact of process innovation prevailing in Small and Medium Enterprises (SMEs) on economic development of Pakistan over a period of 1980-2013. The analysis reveals that both process innovation and economic development are positively related with each other.

Keywords: Process innovation SME growth Economic development

1. INTRODUCTION

   The land of Pakistan is abundant with natural resources like coal gas oil and gold with a very strategic location; relatively cheap land for setting up industries with a market of around 177 million people. Being an agrarian economy Pakistan's growth rate of GDP is about 3.6 percent during 2012- 13. The agriculture sector grew by an estimated growth of 3.3 percent against a target of 4.0 percent in the same period. The large-scale manufacturing sector grew by 2.8 percent against the target of 2.5 percent. Moreover the manufacturing sector contributes 13.2 percent in GDP along with Large Scale Manufacturing (LSM) by 13.3 percent and with involvement of SME sector by 7.6 percent. The services sector has 57.7 percent share in GDP in the same time period with 3.7 percent growth rate compared to 1.6 percent in 2008-09. Pakistan's total labour force is about 57.24 million out of which an estimated 3.4 million labourers are unemployed.

   The agriculture sector remains the predominant source of employment catering for approximately 45.1 percent of the total employment in Pakistan. The manufacturing sector employs 13.7 percent trade 16.2 percent and services 10.8 percent in total employment respectively (Pakistan Economic Survey 2012-13).

   Innovation is the process of making changes large and small radical and incremental to products processes and services that results in the introduction of something new for the organization that adds value to customers and contributes to the knowledge store of the organization" (Sullivan 2009).

   To introduce the process innovation in SME sector of Pakistan it requires less capital as compare to large-scale industries and there is an immense need to restructure the industrial sector. It is general presumption that those economies which are at initial stages of their development the process innovation is more suitable for their economic revival because the product as well as incremental innovations are only possible when there is a rigorous development industrial sector (Bhalla 1987).

   In Pakistan around 87% of industrial sector consists of small and medium enterprises and it has ample opportunities for its process innovations and development. Moreover this sector also has effect on income distribution tax revenue employment and efficient utilization of resources. These enterprises are employing up to 99 persons constitute over 90 percent of all private enterprises in the industrial sector and employ nearly 78 percent of the non-agriculture labour force. They contribute over 30 percent to GDP and account 25 percent of exports of manufactured goods with sharing of 35 percent in manufacturing value added. Due to its significance promotion of SME has become a focal point of government policies for economic revival poverty alleviation and employment generation.

   There are also some hidden and apparent obstacles in the path of growth of small and medium enterprises in Pakistan. The most important are politi- cal instability law and order situation financial constraints energy crisis taxation problems labour issues regulatory reforms lack of coordination and regular information exchange mechanism among institutions etc.

   Due to importance of process innovation in SME sector the present study empirically examines the effect of process innovation on development of SME sector with its impact on economic development of Pakistan over a given period of time. The results reveal that both are positively related with each other and also have significant effect on economic development. To achieve these objectives log linear regression model has been used to ensure the effects of process innovation on SME growth and its subsequent effects on economic development of Pakistan.

   The rest of study is organized as: after introduction in section I the relevant review of literature is discussed in section II. The methodology and data description is discussed in section III and discussion on results is made in section IV. Final section concludes the study with appropriate policy recommendations.

2. REVIEW OF LITERATURE

   The small and medium enterprises are considered as backbone for domestic resource mobilization. Several studies have examine the need and importance of process innovation for SME sector with its significant impact on economic development either through product innovation or process innovation (Ohashi 2007; Soriano and Dobon 2009) to strengthen the concerned economies. With the help of new technology innovative ideas and through hiring expertise an entrepreneur can achieve economies of scale with the expansion of their businesses. The product innovation cannot be possible without process innovation.

   Kalantaridis (1999) has analyzed innovativeness in SMEs sector in two ways. Firstly success cases of local innovation systems at the expense of less successful areas which are thus in greater need of policy intervention. This study aspires to address this gap in the literature by focusing on the experience of an area (Bedfordshire) characterized by low levels of innovative activity. Secondly the search for the factors that accommodate or hinder innovation concentrated heavily at the macro-level. Consequently any policy recommendations failed to distinguish between SMEs according to the extent and nature of their previous involvement in innovation.

   Kharbanda (2000) emphasizes on cluster development for the promotion of SME sector through process innovation in India. According to his research small and medium sector constitutes approximately 80 percent of industrial enterprises in Indian economy. India has nearly three million SMEs which account for almost 50 per cent of industrial output and 42 percent of India's total exports. Along with SMEs significance the author has shown main problems and their impediments with the help of process innovation. For that purpose a conducive and appropriate policy environment is required to promote SME sector which will result in indigenous industrialization and self-reliance of the country.

   Motohashi (2001) utilizes process innovation to up lift the performances of traditional SMEs and proposed a pro-competition policy to induce entrepreneurships and process innovation in SMEs. The government has made an amendment in SME basic Law on supporting business innovations...